SPCL (Divina)

Professor: Dean Nilo T. Divina

Transcribers:

Marc Roby de Chavez (MARX) Mon Cristhoper Pasia (MON)

Special Commercial Laws Notes by MARX and MON What is a letter of credit? Any arrangement however named of described, whereby a bank acting upon the request of its client or in its own behalf, agrees to pay another, against a stipulated documents provided that the terms of the credit are complied with. The definition of letter of credit based on the National Chamber of Commerce Can there ever be a letter of credit were there is no sale setting? Yes, Let say a debtor wants to obtain a loan from creditor, the creditor is willing to lend money to the debtor under the condition that there is a security arrangement issued by a bank. So the creditor is comfortable with any collateral coming from the debtor; the creditor is not comfortable with any guaranty agreement that would be executed by an ordinary person; he wants a security coming from a bank. So in that case, there is a letter of credit issued in favor of the creditor. It is a non-sale setting. It is a contract of loan, then the bank issues a letter of credit. So it is not correct to say then that the letter of credit always presupposes for a sale setting. Commercial letter of credit conforms to sale setting. The transaction underlying the letter of credit is sale. Standby letter of credit conforms to non-sale setting. The transaction underlying the letter of credit is non-sale. Example of Commercial Letter of credit Buyer is a company based in the Philippines, it wants to purchase equipment from a company based in Japan. Only this company based in Japan has the capability or technical knowhow to manufacture this equipment that the Buyer needs for his business. The only problem is they reside in different jurisdiction the Buyer is on the Philippines the seller is in abroad. If the buyer advance payment there is a possibility that he will not get the equipment, on the other hand if the seller causes the shipment of the equipment there is a possibility that the buyer may not pay. In that case there is a risk on the part of either the buyer or the seller. Through a letter of credit we can solve the deadlock. So the buyer will apply with the Issuing Bank to issue a letter of credit in favor of the seller, now the beneficiary of the letter of credit, so the buyer, now called the applicant of the letter of credit will apply to the issuing bank a letter of credit. We he makes an application he pays a certain deposit, before the bank can be induced or encourage to issue an undertaking to pay in favor of a beneficiary, the buyer-applicant pays a certain amount representing a certain percentage of the total obligation to be incurred under the letter of credit, it is called a marginal 1|P a g e

deposit. Buyer-applicant pays 30% of the total obligation and pay fees and commission to the issuing bank. Of course, the bank will not issue a letter of credit without an income, there is a gain and the gain or income comes in the form of payment of commission and interest charges on the obligation to be paid in favor of the seller-beneficiary later on. As the buyer applicant pays the marginal deposit and agrees on the terms and conditions that the issuing bank may impose, the issuing bank will now undertake to pay the sellerbeneficiary for issuing a letter of credit. The undertaking to pay by the issuing bank is conditioned on submission of certain stipulated documents, that why earlier in our definition “Any arrangement however named of described, whereby a bank acting upon the request of its client or in its own behalf, agrees to pay another, against a stipulated documents” which means the obligation of the issuing bank to pay, the commitment of the issuing bank to pay the beneficiary is on the condition or against the stipulated document meaning on the condition that the sellerbeneficiary will submit certain stipulated documents. This documents stipulated by the parties usually are the shipping documents, the same documents to show that the sellerbeneficiary has complied with his obligation under the contract of sale with the buyer and the same documents that the buyer-applicant will need later on to obtain delivery of the equipment. The shipping documents are the Bill of lading (issued by a common carrier acknowledging receipt of the goods with the obligation to deliver the same to the consignee), sale invoices (contains the description of the equipment, the purchase price) and a draft to be drawn by the issuing bank etc. once the document have been defined or verified, these documents are submitted to the issuing bank, upon receipt of the issuing bank of those documents, the issuing bank will pay the seller-beneficiary. The issuing bank will release the documents of title to the buyerapplicant, so the buyer-applicant will be able to obtain delivery of equipment from the common carrier or the customs as the case may be. But the issuing bank will not just release the documents, it has to be reimburse by the buyerapplicant of the total amount paid under the letter of credit. So the issuing bank pays $10,000.00 and the buyer-applicant paid only 30%. The issuing bank has to be reimburse the remaining balance and other charges. Once the charges and reimbursement are effected, then the issuing bank will now release the documents in favor of the buyer. By the receipt of such documents the buyer will go to the common carrier or the customs as the case may be, present such documents and made delivery of the equipments. The buyer got the equipment, the seller got paid, and the issuing bank got the business. Example of stand-by letter of credit Debtor would like to obtain a loan from a creditor on the amount of Php 5M. the creditor will issue the money to the

Special Commercial Laws Notes by MARX and MON debtor on the condition that the debtor will have to procure a security arrangement to be issued by a bank. So the creditor is not comfortable in granting a loan to the debtor with any security, at the same time the creditor is not comfortable granting loan to the debtor simply on the strength of its mortgage on his properties or the creditor is not comfortable granting loan to the debtor with a guaranty agreement to be signed by a third party. So the creditor will only be comforted in granting a loan to the debtor in a security arrangement comes from a bank, the bank is presumably with resources or with the ability to pay the debtor’s obligation. So the debtor now procures a standby letter of credit in favor of the creditor, he pays the marginal deposit and agrees with the commission. The issuing bank will now open the letter of credit in favor of the creditor. Undertaking to pay the creditor upon submission of the stipulated documents. In standby letter of credits the documents to be submitted are documents showing that the obligor did not perform his obligation under the contract supporting the letter of credit. In a commercial letter of credit, the documents submitted by the seller-beneficiary are documents showing that he has taken the required steps to comply with his obligations under the contract of sale. So by shipping that equipment he obtained the bill of lading, so he has taken the positive steps to comply with his obligation. In a standby letter of credit the documents submitted by the creditor that the debtor did not perform his obligation under the contract that supports the letter of credit. So, it is either a certificate of non-payment or certificate of default or certificate of non-performance. So once the documents has been submitted and identified and documents have been submitted by the creditor, such creditor can now draw on the standby letter of credit. The payment is made by the issuing bank to the creditor, then the bank must be reimburse from the debtor. So, whatever is the amount paid to the creditor plus the charges and the commission. A letter of credit by itself does not come into operation without a contract supporting it. It is not a contract that can stand on its own, it needs a supporting contract. In a commercial letter of credit it is a sale in standby letter of credit, it is a non-sale transaction. If we remove the issuing bank, what we’ll have is a promise to pay made by the buyer in favor of the seller to pay the purchase price without the issuing bank. By introducing the issuing bank, the promise to pay by the buyer is substituted by the promise to pay made by the bank. The bank is presumably with resources, the seller finds comfort in dealing with the bank not just with the buyer.

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Without the issuing bank in the equation, what we have is a promise to pay by debtor to the creditor, in a standby letter of credit, by introducing an issuing bank in the equation, the promise to pay by the debtor is substituted by a better promise to pay made by the issuing bank. In both cases, whether commercial or standby letter of credit, they conform or fits the definition of letter of credit. Who are the parties to the letter of credit? • Applicant • Beneficiary • Issuing bank When we say in the definition “against stipulated documents” what does it mean? What is the condition that these stipulated are submitted? Provided that the terms of the credit are complied with Who are the parties to the letter of credit? (Basic Parties) • Applicant/Account party – he may be a buyer, importer or obligor. The person who procures the opening of letter of credit and who agrees to reimburse the issuing bank any and all amount should be paid under the letter of credit once the issuing bank is compelled to pay because the beneficiary is able to submit the document stipulated. • Issuing Bank – the one that undertakes to pay the beneficiary upon submission of the beneficiary of these stipulated documents and compliance with the terms of the credit • Beneficiary – the one titled to payment from the issuing bank upon his submission of the document stipulated and compliance with the terms of the credit. Other Party Correspondent Bank of the issuing bank Why do we need a Correspondent Bank? If the account party is in the Philippines, the beneficiary is in abroad. How will the beneficiary know that there is a letter of credit, if the bank is Philippine based? In payment time, how will the beneficiary be paid? Thru a Correspondent Bank of the issuing bank Kinds of Correspondent Bank • Advising/Notifying Bank – is not liable to pay the beneficiary; it does not have any contractual relations with the beneficiary. Its only obligation is to determine the apparent authenticity of the letter of credit; to check if at first glance that the same is genuine or valid. If at first glance the letter of credit

Special Commercial Laws Notes by MARX and MON

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if genuine, the advising/notifying bank notifies the beneficiary of the letter of credit; transmit the letter of credit in favor of the beneficiary so that the beneficiary can cause shipment of the equipment.

Who will give the order to pay to the issuing bank or confirming bank as the drawee of the draft? The one liable to pay. So the drawer and the payee can be both the seller-beneficiary

Paying Bank – is an agent of the issuing bank for the purpose of making payment to the beneficiary. Usually an issuing bank has a bank account in Tokyo, let’s say BDO has an account in the Bank of Tokyo. Bank of Tokyo may be a paying bank. BDO will instruct Bank of Tokyo to pay the beneficiary, debit the account of BDO then credit the account to the beneficiary. The Paying Bank collects fees from the issuing bank. Is it possible for an advising bank and the paying bank to be the same bank? Yes

What will the payee do on the draft? On maturity, the payee may present the draft to the drawee. The drawee accepts and pays.

Confirming Bank – Why is it called confirming bank? Because it lends credence to a letter of credit issued by a lesser known bank as if it is the one who issued the letter of credit. Let’s say BDO in the Philippines is the largest bank in Philippines but BDO in Japan is small. So BDO in Japan is a lesser-known bank in Japan. So why will the beneficiary agree on a letter of credit to be issued by a lesser-known bank? A confirming bank may come into the equation. That confirming bank lends credence to the letter of credit issued by a lesser-known bank as of it is the one that issued the letter of credit. Which means the beneficiary, instead of going directly to the issuing bank, may just present the documents to the confirming bank, and the confirming bank will be the one to pay the beneficiary. Once the confirming bank pays the beneficiary it will claim reimbursement from the issuing bank and collect also its own fees. If there is a confirming bank, the letter of credit becomes more expensive because there are more fees to be paid.

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Negotiating Bank – the moment that the mode of payment of the letter of credit is a draft/bill of exchange, draft drawn by the beneficiary against either the issuing bank or confirming bank, pay to the order of myself at sight the amount of $10,000. Once a draft is accepted by the issuing bank, it becomes liable. If the drawee does not accept, there is no liability. In a letter of credit the issuing bank or confirming bank is the drawee bank, the one ordered to pay by the beneficiary.

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What if the draft is payable 60 days after sight? Upon acceptance by the drawee, it is not yet due for payment. That the payee will have to wait for 60 more days upon acceptance by the drawee If it is a user’s draft, the payee may not want to wait for 60 days, what will the payee-beneficiary do? He may have the option to negotiate the draft into somebody else. So if the payeebeneficiary negotiates that draft to a bank (XYZ bank). This bank is known as the negotiating bank. The bank that buys the drafts drawn against the issuing bank or confirming bank is the negotiating bank In negotiable instruments law, if you have a draft, the drawer address the drawee to pay the payee. The payee has 2 options: present the instrument for acceptance or negotiate. If he payee negotiate, the holder, the one who pays the instrument, becomes the owner and the owner now has 2 options: present the instrument for acceptance or negotiate Why will a bank by the draft? Because it will buy it with a discount. So if the draft is valued of $10,000.00, the bank will only buy it for $9500.00. So the payee gets the $9500.00 without waiting for 60 days. The entire $10,000.00 will be collected by XYZ bank on maturity from the issuing or confirming bank. So as far the as the payee is concerned, he need not to wait for maturity. The waiting will be done by the negotiating bank, but the same earns the difference between the face value of the instrument and the actual value it paid to the payee-beneficiary. What are the 3 distinct relationship arising from a letter of credit? • Issuing Bank and the applicant – relationship is governed by the terms of the application and

Special Commercial Laws Notes by MARX and MON

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agreement for the issuance of the letter-credit by the bank Issuing Bank and beneficiary – relationship is governed by the terms of the letter of credit issued by the bank Applicant and the beneficiary – relationship is governed by the law on sales. They agree on the terms and conditions of the sale

Is the contract between the applicant and beneficiary independent from the contract between the issuing bank and the applicant? Yes, they are inter-connected or related but they are independent and separate from one another Let’s say that the buyer-applicant and the seller-beneficiary agreed to enter into a contract of sale and the object of the sale refers to a dye stuff. A letter of credit has been opened procured by the buyer in favor of the seller. The seller presented the document to the issuing bank and the issuing bank pays the seller. Then the documents were returned to the buyer-applicant, the buyer-applicant presented the document to the common carrier and obtained the shipment. When the buyer opened the goods, what was delivered were not dye stuff. Can the buyer refuse to reimburse the issuing bank? No, in this case, the object did not conform on what was agreed upon by the buyer and the seller, there is a breach of contract. The buyer cannot refuse to reimburse the issuing bank despite the breach of contract by the seller. This is the DOCTRINE OF INDEPENDENCE Doctrine of Independence Under this doctrine, the obligation of the issuing bank to pay the beneficiary does not depend on the fulfillment or non-fulfillment of the contract supporting the letter of credit. If it is a commercial letter of credit, the obligation if the issuing bank to pay the beneficiary is not affected by any breach of contract by the seller to the buyer because the contract between the issuing bank and beneficiary is separate and distinct from the contract between the seller and the buyer. The SC held that banks deals with documents, they don’t deal with goods. The issuing bank has no obligation to check the object, the quantity or quality of the goods. The bank needs not to verify or go beyond the four corners of the document. The issuing bank will determine the documents to be submitted, where the stipulated documents tendered faithfully. If the documents were submitted, the issuing pays the seller. 4|P a g e

The right of the issuing bank to reimbursement the buy from the buyer applicant does not depend on the fulfillment or non-fulfillment of the contract. It depends on whether or not the issuing bank was compelled to pay beneficiary because the latter submitted the documents stipulated. It is not part and it will never be a part of the contract between the issuing bank and the buyer that the bank will investigate whether the goods conformed to the goods ordered. What are remedies of the buyer in case the goods did not conformed to the goods ordered? File an action for breach of contract against the seller. The remedy of the buyer is based on the law on contracts and not based on the principles of letter of credit Let’s say the buyer and seller in a commercial letter of credit entered into a contract of sale for a delivery of certain object. They stipulated that the buyer will procure the opening of a letter of credit in favor of the seller. The buyer, however, was not able to obtain a letter of credit with a bank. In the stipulation that the buyer will procure a letter of credit but failed to do so prevent the consummation of the contract of sale? Is the non-opening of the letter of credit is at least a resolutory condition that extinguished the contract of sale? In Reliance Commodities, Inc vs Daewoo Industrial, the contract of sale between the seller and the buyer is separate, distinct and independent from the opening of the letter of credit because it is a matter between the buyer and the issuing bank. A contract of sale is perfected by mere consent and such nature of a contract of sale is not affected by the nonopening of a letter of credit Letter of Credit in a non-sale setting or a STAND-BY LETTER OF CREDIT Let’s say the debtor obtained a loan from a creditor for 5 million pesos secured by a stand-by letter of credit issued by ABC bank. Let’s say the debtor made a partial payment of 2.5 million out of 5 million obligation. The issuing bank is committed to pay the creditor the amount of 5 million upon the submission of the stipulated documents. The debtor failed to pay. The creditor tendered the documents stipulated (promissory note, certificated of non-payment). Can the issuing bank deduct the partial payment made by the debtor in determining the amount of his liability to the creditor? The contract of loan is independent from the contract between the debtor and the bank and the bank with the creditor-beneficiary. The amount of liability by the bank to the beneficiary is 5M under

Special Commercial Laws Notes by MARX and MON the letter of credit. The only amount that the issuing bank may recover from the debtor is 5M under their own relationship. But to prevent unjust enrichment at the expense of another, the SC said that the excess payment may be recovered by the debtor from the creditor. What are the kinds of letter of credit? • Irrevocable letter of credit – A letter of credit wherein the terms and the undertakings of the issuing bank cannot be amended or altered or revoked without the consent of the beneficiary • Revocable letter of credit – can be amended, altered or revoked even without the consent of the beneficiary • Standby letter of credit – non-sale setting • Commercial letter of credit – the principal transaction is a sale or importation setting • Confirmed letter of credit - the liability of the confirming bank is primary • Non-confirmed letter of credit SPCL2 Can we say that the obligation of the issuing bank in a letter of credit is similar to a guarantor particularly to stand-by letter of credit? No, the obligation in a letter of credit is primary and solidary while in a case of a guarantor, it is subsidiary. In a contract of guarantee, the guarantor’s obligation is merely collateral and it arises only upon the default of the person primarily liable; a letter of credit is an engagement by a bank or other person made at the request How about a surety? The issuing bank has to pay even there is no default payment Let’s say between the debtor and the creditor, there are issues of overpayment, capacity, minority or defenses which are personal to the debtor. While these defenses are being determined, can the creditor made the surety liable? No

Does the fraud refers to the performance of the contract? What kind of fraud that is contemplated with the fraud exemption principle to prevent the beneficiary from collecting on the letter of credit? Fraud in relation with the independent purpose or character of the letter of credit, not fraud in the performance of the obligation or contract supporting the letter of credit. Because if it is fraud in the performance of the contract, under the doctrine of independence, it is not a bar for the beneficiary to collect from the issuing bank. Example: the Letter of credit requires submission of the Bill of Lading but the submitted document was a spurious bill of lading. Doctrine of Strict Compliance It requires that the document to be submitted or tendered by the beneficiary conforms strictly, faithfully and absolutely with the document stipulated such that if there is a discrepancy between the document stipulated and the document tendered, the beneficiary is not entitled to payment. Supposing that the document required is submitted by the beneficiary is a document that is within the power of the applicant to issue, but the applicant refuses to issue despite having received the shipment, will the document of strict complaince still bars the beneficiary in collecting the letter of credit? It matters not that the submission of the documents are unfair, unjust or inequitable, the point is, it requires that the document stipulated must be the document to be submitted, otherwise, the issuing bank is not liable or the beneficiary is not entitled to payment The SC said in various cases that in Sec 2 of the code of Commerce that in the absence of any particular law in the Code of Commerce, commercial transactions shall be governed by the usages and customs generally observed

How about in letter of credit transaction, if the issues are personal to the debtor, can the issuing bank be held liable? No, for as long as the stipulated documents are submitted.

What are the requisites in order to have a basis to enjoin the beneficiary from drawing or collecting under the letter of credit? (fraud exemption rule) There must be fraud in relation with the independent purpose or character of the letter of credit

Is there an exception to the Doctrine of Independence? Fraud exemption rule

Long definition of Letter of Credit: (international chamber of commerce sec 2) 5|P a g e

Special Commercial Laws Notes by MARX and MON Any arrangement, however named or described, whereby a bank, acting upon the request of his client or on his own behalf agrees to: • Pay a third party to the order of the beneficiary • Accept draft drawn by the beneficiary • Authorize another bank to pay the beneficiary • Authorize another bank to accept a draft drawn by the beneficiary • To negotiate against stipulated documents provided that the terms of the letter of credit are complied with TRUST RECEIPTS LAW (PD 115) Trust Receipt Transaction – any transaction between the entruster and the entrustee, whereby the entruster who owns or holds absolute title or security interest over specified goods, documents or instruments releases the same to the possession of the entrustee, who in turn, binds himself to the designated goods, documents or instruments with the obligation to turn over the proceeds to the entrustor to the extent of the entrustee’s obligation to him, or if unsold, to return the said goods, documents, or instruments to the entrustor Who are the parties in a trust receipt transaction? • Entruster • entrustee Describe the rights of the entruster over the goods, documents or instrument He has absolute title or security interest over the goods Think of a trust receipt similar to a chattel mortgage. In trust receipts transaction, the goods are held in trust for the benefit of the entruster. By express provision of law, the entrustee has the obligation to hold the goods, documents, or instruments in trust for the entruster and if he sells the goods, he must account for and deliver the same proceeds in favor of the entruster. Or, if he did not sell the goods, he must return the same to the entruster, otherwise, he is liable for the crime of estafa under section 13 of PD 115 in relation to section 315 of the RPC. In a letter of credit transaction, the issuing bank pays the beneficiary. The issuing bank release the shipping document to the buyer only after the buyer reimburse the issuing bank of the amount paid under the letter of credit. In a trust receipt transaction, the Bank may release the goods, despite non-payment yet to the Bank. But subject to the execution by the buyer, now the entrustee of a trust receipt agreement, whereby he hold the goods, documents or instruments in trust. If he sells, he must deliver the proceeds. If he did not 6|P a g e

sell, he must return the goods, documents or instruments, otherwise there is a crime committed. From an issuing bank, it becomes the entruster and the buyer becomes the entrustee, he is able to receive the goods even though he does not pay in full, in time the obligation is converted from mere civil to criminal. In Bank of Commerce vs Serrano, the SC distinguished between trust receipt and letter of credit. The liability of the buyer-importer to reimburse the issuing bank is civil in nature, even he does not pay, there is no crime committed. In a trust receipt transaction, it is true that the bank may release the goods even though it is not pay in full, but there are concomitant obligation to be performed by the entrustee such that he did not performed such obligation, there is a crime committed. The issuing bank finds comfort in issuing the goods or documents to the buyer-importer even though he did not pay in full yet of the amount advanced by the bank for the importation on shipment of the goods. The basic obligation of the buyer-importer, now the entrustee, is to pay. The bank advanced the money, the bank lent the funds to enable the buyer to acquire the goods. Basically, it is the money of the bank because the bank paid the beneficiary, even though it has not been paid in full by the buyer. What is the basic obligation of the buyer? To pay the amount advanced by the bank. If the entrustee does not pay and he sold the goods but he did not deliver the proceeds, a crime is committed. Or, he did not pay the obligation, not able to sell the goods but he did not return the goods, then a crime of estafa is committed. If he is able to pay the obligation to the bank, then both civil and criminal obligation are extinguished. Are there any other obligation imposed upon the entrustee? • The obligation to insure the goods • The obligation to keep the goods separate and distinct from other properties • The obligation to observe the terms and conditions of the agreement But only the obligations to deliver the proceeds or return the goods if not sold will give rise to criminal liability. A and B are engaged in the business of exporting sea crafts. They need shells to be able to create sea crafts. They purchased shells to the supplier secured by a letter of credit issued by ABC bank. A and B could not pay their obligation to the Bank, they decided to return the shells but the bank is not

Special Commercial Laws Notes by MARX and MON interested in the shells, did not accept the return. So bank did not receive the return of the goods. A and B consigned the goods in court but the consequence is, a complaint for estafa was filed against A and B, but it was dismissed because the goods are consigned in court. Can the Bank file a separate civil action to enforce the civil liability of A and B? In the case of Vintola vs IBAA, the action will prosper because a trust receipt transaction has 2 features: • Loan feature • Security Feature Loan feature is brought about by the fact that the bank financed the cost of acquisition or importation. The bank lent the money to enable the buyer to obtain the goods that he wants to purchase. Security feature lies on the goods itself, the goods are held under a trust for the benefit of the entruster. If they are sold, the proceeds must be accounted for and delivered to the entruster. If they are not sold, the goods must be returned to the entruster, otherwise the crime of estafa is committed. Basically, for as long as the loan is not paid, the civil liability remains. The return of the goods will only have a bearing on the criminal liability of the entrustee not on the civil liability. For as long as the load advanced by the bank is not paid, the civil obligation remains. The return of the goods will only extinguished the criminal liability but not the civil liability, the loan is yet to be paid. When is the civil liability be extinguished? Only when the goods are sold and the proceeds will be applied for the payment of the obligation Who is the owner under the trust receipt transaction? Entrustee, the entrustor is merely a holder of a security title Can he mortgage the goods? In ___ vs Prudential bank, the SC said that the entrustee cannot mortgage the goods under trust receipt transaction because one of the requisites of the mortgage under Art 2085 the civil code is that the mortgagor be the absolute owner of the thing mortgage or has freedom of disposal

Does the entrustee have absolute ownership on the property? No, because the property is held in trust for the benefit of the entruster. He does not have freedom of disposal, therefore, he cannot mortgage the goods. The inclusion of goods under trust receipt transaction in a mortgage is void and the ensuing foreclosure sale is likewise null and void The entrustee cannot mortgage but he can sell. If the entrustee is the owner and the object is lost, suppose to be there is no more liability. But under the trust receipt law, the loss of the goods will not extinguish the civil liability of the entrustee. (Section 10) In one case, the SC said that the owner of the goods is the entruster (in vintola case, it is the entrustee). The SC clarified that it is an artificial concept or notion meant to protect its interest over the goods. A entered into a contract with ABC to renovate the cemetery in Cebu. After entering into the contract, A purchased supplies from a construction supplier. The following day, he went to a bank, got a loan to pay off his construction supplier. The bank asked him to sign a trust receipt agreement. A was not able to pay his obligation to the bank. The bank filed a criminal case for estafa against A. is he liable? Is that a trust receipt transaction just because the parties signed a trust receipt agreement? Can we say that the bank financed the goods? It is not a trust receipt agreement but an ordinary loan because when A signed the trust receipt agreement, he is already the owner of the goods. The bank did not financed the goods. It is the nature of the transaction that determined whether the transaction is a trust receipt transaction, not the nomenclature or name of the agreement. If the supposed entrustee was already the owner of the goods before he signs the trust receipt agreement even though he is not in possession of the goods, it is not a trust receipt transaction as contemplated by law even though the parties have signed a trust receipt agreement. If the offense is committed by a corporation, can you held the officers liable criminally? Yes, but only those responsible for the violation. Only those who signed the resolution Under section 13 of PD 115, if the offense is committed x x x x If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers,

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Special Commercial Laws Notes by MARX and MON employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.

What about an agent of the corporation, it was violated by the corporation thru an agent. Who is liable civilly? The agent who signed in behalf of the corporation or the corporation? Corporation is liable civilly Who is criminally liable? In the case of Ong vs CA, it was the agent who is criminally liable because he is a person responsible for the offense Can we file a criminal case against the corporation? It depends, if the penalty is imprisonment, we cannot file a criminal case, but if the penalty is a fine or forfeiture or revocation of the corporation’s franchise, then we can What are the defenses that can be invoked to negate criminal liability? • The entrustee has fulfilled his obligation, that is, he had surrendered the proceeds or returned the goods to the entruster (delivery of the proceeds up to the extent owing to the entruster will extinguish the civil liability; partial delivery will not extinguish civil liability), (return of the goods do not extinguish civil liability, it has to be sold and apply the proceeds) • The transaction is only a loan and not a trust receipt transaction as contemplated by law (it does not extinguish civil liability) • The goods or documents subject of the trust receipt was not delivered or received by the entrustee (it does not extinguished civil liability) • When the entruster cancels the agreement and takes possession of the goods and eventually sells the said goods. Mere repossession of goods will extinguish criminal liability (it does not extinguish the civil liability) • Loss of goods due to fortuitous event or force majeure; (it does not extinguish civil liability) • If there is compromise agreement before the filing of the criminal case in court, there is novation changing the relationship from trust to creditor-debtor relationship (it extinguish civil liability if it covers the extinguishment of civil liability) SPCL4 What is a TRUST RECEIPTS TRANSACTION? It is a transaction between two parties (the entruster and the entrustee). The entruster, who has absolute title or security interest over the goods, documents or instruments, releases the same to 8|P a g e

the entrustee, but subject to the execution by the entrustee of an agreement whereby he undertakes to hold the goods, documents or instruments in trust for the entruster. In case he sells the goods, documents or instruments to deliver the proceeds to the entruster up to the extent of the amount owing to the entruster, or return the goods if not sold. Otherwise, he commits the crime of estafa. Think of trust receipt transaction as basically a loan secured by chattel mortgage. Same concept except that the goods are held in trust for the benefit of the entruster and if the goods are sold there is a corresponding obligation to deliver the sale proceeds or if unsold to return the goods otherwise there is a crime of estafa under Sec 13 of PD 115 in relation to Art 315 of the RPC. The basic obligation of the entrustee is to pay the obligation. So the bank financed, lend money, advanced to funds to finance the acquisition or purchase of goods under trust receipts. So there is money out insofar as the bank is concerned. The security of the bank lies with the goods themselves, such that if the goods are sold the sale proceeds must be delivered to the entruster, or if not the same must be returned to the entruster. If the obligation is paid, if the loan advanced by the bank is paid then the obligation is extinguished or there is no obligation to talk about. If it is only when the entrustee does not pay the obligation that what he does with goods becomes critical insofar as his liability is concerned. If he does not pay and sells the goods, he must deliver the proceeds up to the full amount owing to the entruster. If he does not pay and did not sell the goods, he must return the goods to the entruster. This is clear in the case of Allied Bank vs DOLE. If the only obligation of the entrustee is to sell and deliver the proceeds or return the goods if not sold it would seem, based on the literal interpretation, PD 115 will only apply if the goods are for sale or intended for resale because there is too much emphasis on selling. This is not true according to the SC in the case of Allied Bank vs DOLE. Allied Bank vs DOLE The object of the TR Transaction refers to a dolomite nozzle, which obviously is not for sale. It is a part of an equipment that manufactures the product. So when you purchase a dolomite nozzle you do not

Special Commercial Laws Notes by MARX and MON intend to sell it. You intend to use it. So the criminal sanction under PD 115 applies even if that object is not for sale or resale. So how can the entrustee comply with the obligation to deliver the sale proceeds or return the goods if not sold if it is not for sale anyway? The SC the criminal sanction under PD 115 encompasses the basic obligation to pay. So if that obligation is not fulfilled then criminal liability is also present. That is why we clarify that it is only when the entrustee is able to pay that the obligation is extinguished. And it is only when the entrustee failed to pay that what he does to the goods as a security becomes important to determine the nature and extent of his liablity. What are the other obligations imposed by law upon the entrustee? 1. to insure the goods against theft, pilferage, fire and other natural calamities 2. keep the goods separate and distinct from his other properties 3. to Observe the other terms and conditions of the agreement, like if the agreement prohibits that the goods be transferred to other location then such must be respected. But, only the obligation to deliver the sale proceeds or return the goods if not sold will give rise to criminal liability in case the loan is not paid. The rest of the obligations will not give rise of to criminal liability. The gravamen of the offense or the core of the offense is the failure to pay matched with the failure to deliver the sale proceeds or return the goods if not sold. In cases of Vintola vs IBAA and Rosario Textile Mills vs ___ the SC explained the nature of TR Transaction. It has a loan feature and a security feature. The loan feature brought about by the fact of the bank lend the money to finance the acquistion. And security feature because the goods are held in trust for the benefit of the entruster. Vintola vs IBAA This involves purchase of pucca shells secured by a LC and trust receipts. The loan advanced by the bank to purchase the pucca shells were not paid prompting the filing of a criminal complaint by the bank against the Vintolas. 9|P a g e

The Vintolas tendered the return the of the goods in court but obviously rejected by the IBBA. The Vintolas were forced to consign to goods in court. The consignation will result in acquittal, but not in the extinguishment of the civil liability, because for as long as the loan is not paid the civil obligation remains. So the return of the goods will only address the criminal liability, but unless the goods are sold and proceeds are applied to the obligation, the civil liability remains. So in the case of Vintola vs IBAA that the acquittal of the entrustee in the criminal case which impliedly includes the civil case does not preclude or is not a bar to the filing of a separate civil action in court of the civil liability of the entrustee. In Vintola vs IBBA acquittal first then separate civil action. In Sarmiento vs CA, it is simultaneous filing. May a criminal action proceed indecently of a civil action? Can they go hand in hand - criminal action for estafa, civil action to recover the obligation or enforce civil liability? The SC said yes, because the criminal action is based on ex delicto, violation of PD 115 as a law and the civil action is based on ex contractu, violation of the terms and conditions of the agreement itself. Rosario Textile Mills vs Homebankers Trust In this case the goods were not accepted by the entrustee because they did not conform with the specifications. The goods were stored in a bodega. While in the bodega they were destroyed by fire. So without the receipt of the goods by the entrustee. Does that extinguish the civil obligation of the entrustee? The goods were lost without actual receipt by the entrustee The SC said, citing the two features – loan and security features, the loss of the goods regardless of the cause of the loss, whether due to force majeure or not, and the period of the loss will not extinguish the civil obligation of the entrustee up to the extent owing to the entruster. For as long as the loan is not paid the civil obligation remains. Who is the real owner of the goods under TR? If it is the entrustee how come he cannot mortgage? As we saw in the case of DBP vs Prudential Bank (475 SCRA) touching on the issue of whether or not the entrustee can mortgage the goods under TR.

Special Commercial Laws Notes by MARX and MON

The SC said,''No, because one of the elements of a valid mortgage under Art 2085 of the Civil Code is that the mortgagor must be the absolute owner of the property mortgaged, or must have freedom of disposal which is not present in this case of a TR transaction, where the goods are simply held in trust.'' But anytime he can sell, this is one case where not being the owner he could sell but with the corresponding obligation to deliver the sale proceeds to the the entruster. If the entruster is the owner, however, how come the principle of res perit domino will not apply against him? If he is the owner the loss of the goods would have its effect against the entruster. If he is the owner then he will bear the risk of loss. But that is not so. The loss does not in any way impair the obligation of the entrustee to pay the entruster. In Rosario Textile Mills, the owner is the entruster but only in an artificial concept or notion meant to preserve, protect, and enhance the security interest over the goods. If the facts are similar to DBP, apply DBP. If the issue is whether or not you can mortgage, apply DBP.

of the transaction that determines the rights and obligations of the parties to the transaction. That is what exactly happened in the case of Colinares vs CA. Colinares vs CA A entered into a contract for _ the purchase of two sacks of rice and the following day he obtained loan from a bank to pay-off the two sacks of rice_. The bank made him sign a TR agreement. He did not pay the obligation to the bank. He was charged with the crime estafa. Is there a crime committed? The sequence is: He got a contract today. The following day purchased the supplies and became the owner thereof although on loan. After buying the supplies, went to the bank got a loan to pay-off the supplier. The question is: when he signed the agreement was he in possession and the owner of the goods? Yes. Then if he is in possession of the goods and the owner then that is not a TR transaction, because in a TR transaction the bank should have financed the acquisition of the goods. In this case it is the reverse. It cannot be said that the bank finances because he was an owner at the time that the funds came in. So the funds have been delivered before or simultaneously with the delivery. So it cannot be said that the bank financed the acquisition of the goods which is in keeping with the nature and concept of a TR transaction.

If the issue is whether or not the loss of the goods extinguishes the civil liability apply the case of Rosario Textile Mills. If the issue is whether or not the acquittal of the entrustee will be a bar to the filing of a separate civil action in enforcing the civil liability, apply the case of Vintola vs IBAA or Sarmiento vs CA. Defenses which the entrustee may invoke or raise against the entruster if ever he is charged with violation PD 115 1. It is not a real transaction as contemplated by law. 2. Fulfilment of the terms and conditions of the agreement. 3. Novation or compromise agreement entered into before the filing of the Information in court. 4. Non-delivery of goods. 5. Cancellation of the trust and repossession of the goods. 6. loss of the goods.

Fulfilment of the terms and conditions of the agreement Fulfilment may come in the form of payment or delivery of the sale proceeds or return of the goods. If the obligation is paid on its entirety then criminal and civil liability are extinguished. If it is delivery of the sale proceeds, it depends on how much were the amount delivered. If it corresponds to the full obligation then liability is also extinguished. If it is return of the goods it is also fulfilment. It will only extinguish the criminal but not the civil liability.

It is not a real transaction as contemplated by law This is so in the case of Colinares vs CA and Trust Company vs CA. It is not the name the matters, it is not what the parties call it or designate it, but nature

Novation or compromise agreement entered into before the filing of the Information in court. As you saw in People vs Ong and Pilipinas Bank vs Ong.

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Special Commercial Laws Notes by MARX and MON People vs Ong The compromise agreement, unfortunately, was entered into after the filing of the Information in court. When the prosecution continued the entrustee questioned the continuance of the case because he already entered into a compromise agreement with the entruster.

In criminal law, if it is a violation of special law intent is not necessary. It is the violation of the law that makes it an offense. But in this case the SC said that there is no intent to commit the act. So it is not a question of whether there is intent to violate the law, but there is not intent to commit the act because the reason for the non-payment was brought about by the order coming from the management committee appointed by the SEC.

The SC said the compromise agreement after the filing is not a ground to extinguish criminal liability. Conversely, if the compromise agreement was entered into after the filing of the Information there is novation, it prevents the rising of criminal liability.

Actually, that hair-splitting distinction would not have been necessary because all the SC would have to say is that there was a novation before the filing of the information.

It is not a ground to extinguish criminal liability but it prevents the rising of criminal liability.

In this case the parties converted the TR agreement into a 7 year term loan. They changed the term of the contract. They increased the interest rate. The bank requires a collateral. It is no longer a trust relationship agreement. It is now a creditor-debtor relationship under the loan agreement.

It stops the giving birth of the criminal liability because the basis of criminal liability was converted into a creditor-debtor relationship. A trust if breached will give rise to a criminal liability, but if a trust is converted to a creditor-debtor relationship then the trust element is gone. What you have is simply an obligation to pay under the compromise agreement, if breached would only give rise to a civil liability. Pilipinas Bank vs Ong The entrustee here is the __ corporation. The entrustor is the bank. The entrustee file a petition for suspension of payment with the SEC (At that time the SEC has jurisdiction over petition for suspension of payment. Now it is the RTC acting as a special commercial court). The SEC appointed a management committee that oversaw the operation of the entrustee corporation and forbade the entrustee corporation from making any payment_crisis and difficulties including the obligation under TR. The question is, if you have and order coming from a management committee constituted by the SEC, will there be criminal liability in case you do not pay your obligation under TR or is that prohibition all encompassing to even include payment of the obligation under TR? The SC said that there was no intent to commit the act and therefore there is no criminal liability. The SC had to clarify, despite the malum prohibitum nature of the TR transaction. There is no intent to commit the act therefore there is no criminal liability.

Non-delivery of goods ___ vs CA. The execution of a TR agreement with matching invoice attached to it, does not prove delivery. Just because the prosecution was able to present the TR agreement, the invoices does not prove delivery. The invoices merely contain the description of the goods, quantity and quality does not prove delivery. The prosecution should have presented a document independently of the TR agreement to prove delivery. If there is denial on the part of the entrustee of the receipt of the goods, it behooves upon the prosecution to substantiate delivery by producing or presenting additional documents on top of the TR agreement. Cancellation of the trust and repossession of the goods The entruster, in case of default of the entrustee, may cancel the trust and take possession of the goods. If the entruster cancels the trust, take back possession of the goods, can he still foreclose the mortgage on a property owned or belonging to the entrustee? PNB vs Pineda PNB repossessed the goods under TR and then foreclosed the mortgage constituted to secure the obligation of the TR.

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Special Commercial Laws Notes by MARX and MON Does the repossession per se bar the PNB from foreclosing the mortgage? If the repossession is enough to extinguish the obligation, then PNB would have no basis to foreclose the mortgage.

If the goods are lost without the fault of the entrustee, it is not fair to impute criminal liability against the entrustee. The goods must have been lost due to fraud, deliberately, so that there is a basis to file criminal action.

But repossession per se does not extinguish the civil obligation. For as long as the loan is not paid, the civil obligation remains.

Who has the better right over the goods under TR – is it the entruster or the creditors of the entrustee? Prudential Bank vs NLRC A group of laborers filed a labor complaint against their employer and the employer corporation was also an entrustee to a TR agreement with prudential bank. The laborers obtained judgment against their employer. It became final...levied on the properties of the employer including the goods held under TR.

So it is only when the goods are repossessed, sold, and the proceeds applied to the obligation that the civil liability is extinguished and by that time there is no need to foreclose the mortgage. In the case of South City Homes, we learned that the remedies are there, but it is up to the entruster to determine which remedy to pursue. He may file a criminal case for estafa. He may cancel the trust and take repossession. The option does not belong to anyone but to the entruster.

Prudential Bank asserted its right and ownership over the goods. Who has the better right over the goods held under TR – it is the unpaid laborer or is it the entruster itself? The SC, citing the law, said that the security interest of the entruster is valid and enforceable against the creditors of the entrustee for the duration of the trust receipt agreement. The security interest attaching to the goods, valid and enforceable against the creditors of the entrustee all throughout the duration of the TR agreement. In simple words, the right of the creditor is inferior to the right of the entruster with respect to the goods held under TR

In that case the South City Homes, the surety contended that entruster should have cancelled the trust and take possession. The SC said the law says “may” cancel the trust. It is permissive, not mandatory and the option belongs to the entruster. What happens if the entruster retake possession, sells the goods, apply to proceeds but then there is a deficiency, in the sense that the proceeds of the sale are not enough to cover the obligation secured by the TR? Metrobank vs _ that the deficiency shall be for the account of the entrustee. Keep in mind that the goods are only security, they are not mode of payment. So if the goods are sold, the proceeds generated applied to the loan obligation but that is not enough, then the entrustee should pay for the deficiency. The same way if there is an excess. If any, the excess goes to the entrustee. Loss of the goods The law is clear on the effects of the goods on the civil liability of the entrustee. As pointed in the case of Rosario Textile Mills and the provision of the law itself. But the law is not clear on the effects of the loss on the criminal liability of the entrustee.

The SC pointed out that there is only one person who can defeat right of the entruster- an innocent purchaser for value. The issue of the constitutionality of PD 115 was likewise tackled in the case of People vs ___. The SC said that it is a valid exercise of police power. It is not just a crime against private property. It is a crime against public order. What is penalized is not the non-payment of debt, it not a violation of the constitutional prohibition against imprisonment for nonpayment of debt. What is penalized is the not the non-payment of debt, but the abuse of confidence and the misuse of goods under TR which would destroy and impair the trade and commerce. The case of Metrobank vs ___ tells us that a civil liability arising from a crime cannot be the subject of set-off or compensation under Art 1279 of the civil code.

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Special Commercial Laws Notes by MARX and MON here _ entered into a TR agreement with Metrobank. He failed to pay his obligation to Metrobank. Metrobank commenced criminal proceedings. The defense was that the parties explore a transaction agreement to convert the TR into a loan agreement and in good faith _ deposited about 2.8 M with Metrobank. But, unfortunately, not enough. The agreement was not implemented, did not materialize. Metrobank continued with the prosecution of the case. _ said that no, there was compensation because he deposited 2.8 M _.

person responsible for the violation”. You need not be a director. You need not be an officer. You can be any person for as long as you acted in behalf of the corporation, _ responsible _ for the violation stand to be held criminally liable.

The SC said that there can be no compensation if the debt consisting of a civil liability arises from a crime.

The same cases Ching vs Sec of Justice and Ong vs CA, it was pointed out that you cannot file a criminal case against the corporation if the penalty is imprisonment. Someone has to pay the price. You cannot put behind prison bars the corporation, it being an artificial person and that person is the one responsible for the violation.

Could there conventional or contractual set-off or set-off by agreement? Yes, but it must be stipulated. Metrobank and _ should have agreed expressly that this 2.8 M should be applied to the loan obligation under TR. But it is not.

This is one instance where the one liable criminally is not the one liable civilly. The one liable civilly is the corporation, unless the officer or agent assumes personal liability but criminal liability devolves upon the responsible director, officer or person.

But if the penalty is fine, revocation of franchise, then the corporation may be held criminally. SPCL5

Who is liable in case the offense is committed by a corporation? PD 115 Sec 13 expressly provides now that if the offense is committed by a corporation the criminal liability may be imposed against the director, officer, any person responsible for the violation. Not all the directors or officers of the corporation are to be held liable because the corporation has a personality separate and distinct from the officers. Only those who are responsible for the violation are liable. In market terms, it simply means who signed the agreement. The director or officer who signed the agreement will be the one liable criminally, even though he did not benefit from the transaction, even though the goods were not received by him, even though ____ and all the benefits accrued to the corporation. This is what the SC said in the case of Ching vs Secretary of Justice. It is not a defense that the corporate officer did not receive the goods, did not benefit from the transaction, that everything went to the corporation because the law makes you liable if the offense is committed by your corporation and you are acting in behalf of your corporation. Ong vs CA If mere agent signs the TR in behalf of the corporation, that is enough to make him liable criminally, because the operative word is “any

Chattel Mortgage What is a Chattel Mortgage? An accessory contract whereby a personal property is recorded in the Chattel Mortgage Register to secure the performance of a principal obligation. The concept of a chattel mortgage as a conditional sale under the old chattel mortgage law has been supplanted by the definition of chattel mortgage under Art 2140 of the Civil Code. It is now an accessory contract, no longer a conditional sale. Debtor obtained a loan from a creditor secured by a chattel mortgage on personal property, let's say a car. The car was gutted by fire, completely perished and destroyed. Is the chattel mortgage extinguished? Yes, because there is no more chattel. Is the loan obligation extinguished? No, because of the change of concept from a conditional sale to an accessory contract, chattel mortgage now governed by the principle that the extinguishment of the accessory obligation does not extinguish the principal obligation. But the extinguishment of the principal obligation extinguishes the accessory obligation.

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Special Commercial Laws Notes by MARX and MON Will the lack of registration of the chattel mortgage affect its validity? Will the lack of registration destroy the very definition of a chattel mortgage? All that the SC said in the case of Pilipinas Marble vs IAC (142 SCRA) that lack of registration does not invalidate the chattel mortgage because registration is only necessary to bind 3rd persons. Unrecorded chattel mortgage is still valid between the contracting parties because registration is only rd for the purpose of binding 3 persons.

party by agreement of the parties. Real estate was ruled out mortgage was ruled out because it is not a real property but a personal property. So the board suggested chattel mortgage. It is a personal property because theoretically you can have a valid chattel mortgage on a satellite. A question pops out on how do you foreclose if it is a chattel mortgage? In chattel mortgage you cannot foreclose extrajudicially unless you are in possession of the chattel. You can file an action for replevin to seize possession preparatory to the foreclosure. But, even if you have a replevin how do you bring it up to foreclose it. So chattel mortgage is out of the question.

When you read the case of Pilipinas Marble vs IAC you will realize that the provision cited by the SC in laying that conclusion is a provision applicable to Real Estate Mortgage.

We thought of a deed of trust. A deed of trust in your law on agency, partnership and trust, in trust a dichotomy is created between the legal title and beneficial (equitable) title. Legal title is held by the trustee but for the benefit of the beneficiary. And when the legal title and beneficial title are merged in favor of one person, you have full ownership.

In credit transaction, there is an express provision on Real Estate Mortgage that lack of registration does not invalidate the contract. It is still valid between the contracting parties rd because registration is only for the purpose of binding 3 parties. It is in real estate mortgage. But, there is no counterpart provision in chattel mortgage. In Act 1508, Art 2140 Chapter on Chattel mortgage, none.

So that’s what happened, PLDT conveyed legal title over the satellite in favor of the banks. The banks hold the satellite for the benefit of PLDT itself. So the trustor-beneficiary is PLDT and the legal title is with the bank. So the collection, income of the satellite redound to PLDT, but we have legal title. There was a stipulation that in case of default the legal title and beneficial title shall be merged in favor of the bank. So we do not have to foreclose because automatically we become the owner.

But, just the same the SC court applied the provision on real estate mortgage and held, and there being no different decision, Pilipinas Marble vs IAC will stand that, jurisprudentially, unrecorded chattel mortgage binds the contracting parties, because registration is only for the rd purpose of binding 3 persons. What may be the object of chattel mortgage? Personal property shares of stocks, cars, public or private tugboats, vessels, aircrafts, growing crops, trade, stocks in inventory in a sari-sari department stores, large or small cattle may be subject of chattel mortgage).

Will that violate the principle of pactum commissorium? In credit transaction in the case of Uytong vs CA there are 2 requisites for factum commissorium to a apply: • there must be a pledge, antichresis, mortgage, and • A stipulation that in case of default the creditors become the absolute owner.

vehicles, stocks in store or (animals

How about satellites? They are personal property. They cannot be personal property because they are up there in the sky. Therefore for academic discussion they can be the object of chattel mortgage. We had a transaction when I was still with the bank, the collateral was the Mabuhay satellite owned by PLDT. PLDT want to obtain a loan from |Equitable and other banks]. We were debating, arguing, contemplating, and discussing what type of security arrangement will best capture the transaction in a manner that will best protect the interest of all the creditors. Pledge has been ruled out obviously because rd in pledge the object has to be delivered to the pledgee or 3

A trust is not a pledge, not mortgage, not an antichresis, therefore it is not subject to the rule on pactum commisorium. So that is how we documented the transaction. Validity is different from being able to foreclose. In terms of validity you can have valid chattel mortgage on a satellite because it is a personal property. Do not equate validity with the ability to foreclose easily. While you cannot foreclose

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Special Commercial Laws Notes by MARX and MON rd

extrajudicially, you could foreclose judicially. But still valid object of chattel mortgage.

easy to bind 3 persons even if the object is real property.

Chattel mortgage on stocks in trade of a sari-sari store. Let’s say at any given time all the contents Juan de la Cruz sari-sari store. Juan de la Cruz the proprietor of a sari-sari store, obtains a loan secured by a chattel mortgage on the stocks in trade found in the sari-sari store. These stocks in trade are consumed, replenished. Consumed, being bought and replenished by new products or merchandise. Will the new merchandise or new stock forthcoming form part of the chattel mortgage even though at the time of the execution of the chattel mortgage they were not there? Yes, that is what you call stocks in trade. If so stipulated even though at the time of the execution they were not there.

The point is if it is a real property, it cannot be the object of a chattel mortgage. However, the SC said in the case of Makati Leasing vs Wearever Textile Mills, there can be a valid chattel mortgage on machinery bolted or attached to the ground, even if it is a real property by destination or immobilization. You can have a valid chattel mortgage on a house, even if it is real property by nature. But, that arrangement is only between the parties. It does not bind or prejudice rd innocent 3 persons. In not so kind words, the SC said that if you two want to make a fool of yourselves but don't involve third persons. Don't let that arrangement bind or rd affect 3 persons.

This is to be distinguished from machineries. Machineries cannot be treated the same way as stocks in trade. Let’s say you have a chattel mortgage on machinery and then new machineries are acquired. Will the new machineries form part of the chattel mortgage? No, unless otherwise stipulated. That means when these new properties come and acquired by the mortgagor, you have to sign a new chattel mortgage agreement to cover them, unlike in stocks in trade you don't have to sign any document. You just have to stipulate that replenishment will form part of the chattel mortgage. What about chattel mortgage on machineries, is that valid? Qualify. Machineries which can be transported from one place to another and therefore movable property, in its true sense of the word, by very nature may be a subject of a chattel mortgage. Machineries which are bolted, attached, embedded, fixed to the ground is a real property by immobilization or destination. Can that be the object of chattel mortgage? (machineries which are bolted) By agreement Is that arrangement valid as to third parsons? No. It is valid only between the contracting parties. Why? rd

It cannot bind 3 persons even if you register. Otherwise, it would be easy too

Let’s say a judgment creditor of a debtor. The debtor obtained a loan from creditor C secured by a chattel mortgage on a machinery attached to the ground. That chattel mortgage is valid as between the parties. Can the creditor foreclose? Yes, in case of non-payment, he can foreclose and become the owner of the machinery even though by its very nature it is a real property. But let’s say judgment creditor of D comes with a writ of execution served on D, who has the better right now, the judgment creditor of D or the mortgagee of D? The judgment creditor. That arrangement of a chattel mortgage on a real property does not bind rd innocent 3 persons. No amount of registration can change the fact that a real property cannot be the object of chattel mortgage and rd therefore cannot bind 3 persons. Debtor obtained a loan secured by a chattel mortgage over a house standing on a parcel of land. If the debtor cannot pay, can the creditor foreclose the chattel mortgage over the house? Yes, because a chattel mortgage on a house is valid between the parties. Even though it is a real property it can be a valid object of chattel mortgage between the contracting parties. What if X, a judgment creditor of D. C foreclosed. Is the foreclosure valid and binding against X, the judgment creditor of D? No. X is not bound

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Special Commercial Laws Notes by MARX and MON Can he levy on the house? Yes. A chattel mortgage over the house does not rd bind 3 persons. C after foreclosure sold the house to Y in good faith for value (innocent purchaser for value). Between Y and X who has the better right over the house? The SC said in the case of __ vs David that X has the better right for the simple reason that Y, even though he may be an innocent purchaser for value, simply steps into the shoes of C and therefore acquires the same title, rights and interests that C has over the house subject to the same limitations that C had over the house. The right of C is enforceable only against D, then the right of Y who simply steps into the shoes of C is only valid and enforceable against D. Registration of a Chattel mortgage Where do you register chattel mortgage? You have to register twice. Chattel mortgage registered: • in the place where the property is situated and • in the place where the mortgagee situated Unless the place where the property is located is the same place where the mortgagee resides under Sec 14 of PD 1529 13, 113 and 114 if the amount of the loan exceeds 500K then one registration is sufficient in the place where the property is situated. What about a chattel mortgage over a private motor vehicle? Land Transportation Office (LTO) What about public motor vehicle? Land Transportation Franchise Regulatory Board (LTFRB)

May a chattel mortgage secure future obligations? No. Can it include future debts or obligations? No, What makes it so different from other security arrangements like pledge, antichresis, real estate mortgage, can these secure future debts if so stipulated? Yes Is there any requirement peculiar to chattel mortgage that is not applicable to other types of security arrangements? There should be Affidavit of good faith executed jointly by the mortgagor and the mortgagee under oath. They state that the chattel mortgage secures a valid, just and existing debt and not for the purpose of fraud. That phrase “valid, just and existing debt” refers to debt existing at the time of its execution. Not to debts that may be incurred or obtained in the future. Let’s say Debtor obtained a loan from the creditor in 2004 secured by a chattel mortgage over a personal property for P5M. In 2005, he paid the obligation. In 2006, he obtained another P5M from the creditor. He paid in 2007. In 2008, he another P5M, but this time the loan was not paid. In 2004, the debtor executed a chattel mortgage over personal property that provides “that covers past, present and future obligation, any and all of obligations owing by the mortgagor to the mortgagee whether incurred before during or after the execution of chattel mortgage agreement.” That is the only document signed by the parties. Can the chattel mortgage be foreclosed for the 5M debt incurred in 2008 on the strength of the stipulation in the chattel mortgage agreement that it covers past, present and future obligations, any and all obligations owing by the mortgagor to the mortgagee whether incurred before during or after the execution of chattel mortgage agreement. Is the dragnet clause stipulation (covers everything) void? How do you subject the 2008 loan to the chattel mortgage? Can the mortgagor be compelled by the mortgagee to execute a fresh chattel mortgage contract or amend the existing mortgage contract in 2008 at the time that the loan was actually obtained?

What about chattel mortgage over a vessel, tugboats? MARINA What about Aircraft, helicopters, airplane? Air Transportation Office What is the effect of lack of registration over a chattel mortgage over a private motor vehicle with the LTO? Even if it recorded with the chattel mortgage register, under the Land Transportation Code it has to be registered also with the LTO otherwise it does rd not bind 3 persons.

On what basis can the mortgagor be compelled by the mortgagee to draw the appropriate document whether a new one or an amendment to the existing one so that future debts once actually obtained can be secured by the chattel mortgage? The basis is that stipulation – the dragnet clause.

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Special Commercial Laws Notes by MARX and MON The SC said in China Bank vs CA that pledge, antichresis and real estate mortgage can secure future debts if so stipulated.

That is why the SC said it is not void. It is valid. It amounts to a promise on the part of the mortgagor to execute a fresh chattel mortgage contract or to amend the existing contract at the time the loan is obtained. In either case there must conformably to the provision of the Chattel Mortgage Law. There must be an affidavit of good faith. But the chattel mortgage does not become effective, the only amounts to a promise to sign a new one or the existing one but the security, the chattel mortgage by itself, does not come into play unless you have a formal amendment or a fresh mortgage contract. So there have to be an amendment in 2008 or a fresh mortgage contract, in both cases with affidavit of good faith so that the chattel mortgage can be foreclosed. Let’s change the situation. A loan was incurred in 2004 by B from C for P1M. … in 2005 another P1 M. … in 2008 P3 M and all that the mortgagor signed is a chattel mortgage in 2004 containing a dragnet clause. How much loan is secured by the chattel mortgage? Is it P1 M only the loan exist under the agreement? P1 M only, unless you have an amendment in 2005 and 2008 or a fresh mortgage contract in 2005 or 2008, in both cases with affidavit of good faith, because a chattel mortgage cannot secure future debts. It can only secure debts existing at the time of its execution, unless there is an amendment or a fresh mortgage contract when the loans are actually obtained. This the SC ruling in the case of ACME Shoe rubber vs_ (260 SCRA). If you compare this with a pledge agreement, assuming that the pledge agreement which likewise contains the all encompassing clause/dragnet clause. Can the pledge be foreclosed for the loan in 2008 without a corresponding amendment or a fresh pledge agreement? Yes

Take note of that qualification, “if so stipulated” because unless otherwise stipulated then the pledge can only secure debts existing at the time it of its execution. But, there is nothing wrong with including future debts in the pledge if so stipulated and there is no need to amend or sign a new one. In a recent case, 2007 decision, in credit transaction the extinguishment of the principal obligation extinguishes the accessory obligation. Let’s say you have a loan secured by a real estate mortgage and you paid the loan the mortgage is likewise extinguished. The exception is dragnet clause. So the extinguishment of the principle obligation does not extinguish the accessory obligation if you have a dragnet clause. Which means future debts can be secured, will be secured, are secured by the real estate mortgage. In real estate mortgage, you have various decisions Artadi vs PNB (12 SCRA), Mojica vs CA (201 SCRA), Chinabank vs CA (249 SCRA) , PDCOM vs CA (1995). In real estate mortgage, there are many decisions. What the SC did not realize is that these decisions affect the revenue raising capability of the government. Let’s say that the debtor want to obtain a loan for P1B secured by a real estate mortgage. All that the debtor has to do is to borrow P 10 M only after two months borrow the rest of the remaining amount. What is the significance? Every time you obtain a loan ___ you pay documentary stamp tax. It is about 1.5% of the amount of the loan. And then when you register a real estate mortgage you pay 1.5% of registration fee. So all in all the government collects more or less 3%. So for a 1 B loan, taxing fees that should be earned by the government amounts to 3%. 3% of 1 B is 30 M. st

In this case how much is the loan secured by the pledge agreement, is it 1M or 5M if you have no document signed in 2005 and 2008 just a pledge agreement with a dragnet clause in 2004? P5M. 17 | P a g e

So if you want to save on taxes, 1 borrow 10. You pay doc stamp for the 10. You register mortgage for the 10 after 2 months you borrow 999,999,990 M.

Special Commercial Laws Notes by MARX and MON Do you have to sign a new one? Do you have the amend the existing one? No more, because the SC said a dragnet clause in real estate mortgage is valid. So theoretically. You need not sign a new one. You need not amend the existing one. The subsequent ones are deemed secured by the real estate mortgage.

If it is a pledge there is no right to recover deficiencies. In chattel mortgage there is a right to recover deficiencies, except in certain cases. In pledge, while there is no right to recover deficiencies in the sense that proceeds of the foreclosure should be enough to extinguish the debt or anything beyond that cannot be collected from the pledgor.

So you don't have to pay documentary stamp tax and registration fees on the 999,999,990 M. It is not tax evasion it is tax avoidance. You are just taking advantage of what the SC has laid down in various cases. In the case of Mojica vs CA. The debtor obtained a loan secured by a real estate mortgage. He paid it. Because it has been paid the accessory obligation should be extinguished, because the extinguishment of the principal extinguishes the accessory obligation. After 8 years the debtor obtained another loan from the mortgagee Is that loan secured by the real estate mortgage without any new mortgage agreement signed after 8 years, just because mortgage agreement signed 8 years agree contained a dragnet clause? The SC said, “yes”. That’s 8 years down the road. So any obligation down the road, any future debt now derived are secured by the real estate mortgage if the mortgage agreement contains the so called dragnet or all encompassing clause.

The other side of the coin tells you that a pledge can secure future debts, while a chattel mortgage cannot secure future obligations. So where are you better off now? Is it with pledge which could secure future obligations, but has no right to recover deficiency or is it chattel mortgage where there is a right to recover deficiency but cannot secure future debts? The best thing to do is to say that these agreements may be interpreted or construed as pledge or chattel mortgage at the option of the creditor. Let’s say both elements are present, all the elements of pledge are present, delivered and at the same time all the elements of chattel mortgage are present, you registered with the chattel mortgage register. What do you have now, is it pledge or chattel mortgage? That is why when I was with the bank what I did is to stipulate that this agreement may be construed as a pledge or chattel mortgage at the option of the creditor, at the option of the bank.

In that case the SC said that any party who deals with these properties must inquire from the mortgagee how much is exactly is the amount of loan secured by the mortgage. So if what is annotated at the back of the title is P 1M under real estate mortgage rd agreement between so and so. So any 3 party, any creditor of the debtor other than the mortgagee should as the mortgagee, “Magkano ba talaga ang utang ng mortgagor?” Do not just rely on what is annotated on the title in the title if the mortgage contains the so called dragnet or all encompassing clause.

So at the time of the foreclosure I'm better off considering it as pledge, where I can secure future debts then I will be under pledge. But let’s say the future debts have not been covered by an amendment or fresh mortgage contract, I don't want chattel mortgage. Is that stipulation contrary to public policy? No. There is no question yet. So far it has not been questioned or assailed by the creditor.

Are you better off with pledge or are better off with chattel mortgage? In both cases they involve personal properties. 18 | P a g e

Special Commercial Laws Notes by MARX and MON In a chattel mortgage, if the proceeds of the foreclosure are not enough to satisfy the mortgage debt, the mortgagor is liable to pay the deficiency. And by deficiency we mean anything not covered by the proceeds of the sale. Are there exceptions? What are the cases where the mortgagee has no right to recover the deficiency? 1. In case of chattel mortgage on personal property sold on instalment, if the mortgagor defaults in the payment of the instalment. That is Art 1484 or otherwise known as the Recto Law. 2. Stipulation 3. Accommodation mortgage or 3rd party mortgage as held in __ vs CA 4. In case of extrajudicial foreclosure of chattel mortgage due to the debt of the mortgagor as held in __ vs Roxas and PNB vs CA. What do you mean by accommodation mortgage? A 3rd party mortgaging his property to secure the debt of another. The basis is Art 2085 of the Civil Code. rd

What is the limitation on the liability of the 3 party mortgagor? Up to the extent of the value of the mortgaged property. Not beyond that. In Special proceedings, when the mortgagor dies the mortgagee has two remedies. • Money claim against the estate • Foreclosure of mortgage which can be judicial or extrajudicial When the mortgage files a money claim against the estate, he is deemed to have given up his right over the mortgaged property. He stands in equal footing with the other creditors of the mortgagor. And his rights depend on how preferred he is compared to other creditors based on rules on concurrency and preference of credit. You can always foreclose the chattel mortgage. But in case of extrajudicial foreclosure of the chattel mortgage the SC said there is no right to recover deficiency. In case of personal property sold in instalment, Debtor obtained a loan from the creditor in the amount of P10M payable in 12 equal monthly instalments secured by a chattel mortgage over a personal property. The debtor defaulted in the payment of 3 instalments. As a consequence the mortgagee foreclosed the chattel mortgage. After the

foreclosure there is a deficiency. Is the mortgagor liable to pay the deficiency? Yes. The transaction is not covered by the Recto Law. What is lacking in that example to make it within the coverage of Recto Law? There is no sale of personal property on instalment. What you have is a simple loan secured by a chattel mortgage where the mortgagor is liable to pay deficiency, except in those cases enumerated. Do not be misled by the instalment payment angle of the transaction. There ought to be a chattel mortgage on the same personal property sold on instalment. What are the requisites of Recto Law so that the mortgagee cannot recover the deficiency? • there is a sale of personal property on instalment • A chattel mortgage was constituted over the same property sold in instalment • default in the payment of at least two instalments • among the remedies available to the unpaid vendor. he opted to foreclose the chattel mortgage A and B signed a promissory note as solidary co-makers in favor of ABC Bank. The loan is secured by a chattel mortgage belonging to A. The loan was not paid. The bank foreclosed the mortgage extrajudicially. After foreclosure there was a deficiency.Can the bank enforce the deficiency against A? Yes Against B? Yes. That is ruling of the SC in _ vs Ginhawa. A chattel is only a security and not a mode of payment. If the security is not enough, the mortgagor should be liable such deficiency. And the deficiency can be enforced not only against the mortgagor himself but also against his solidary co-debtors if any. If the mortgagor does not pay his obligation (simple loan secured by a chattel mortgage) what are the remedies available to the mortgagee? • Action for collection or specific performance • Foreclosure Are the remedies alternative or cumulative? Alternative, one bars or excludes the other. Let’s say you have a loan secured by a chattel mortgage. Loan was not paid. The mortgagee instead of foreclosing the chattel mortgage, files an action for collection to enforce payment on the loan agreement. Unfortunately, the lawyer that he engaged is not from UST and the case was dismissed

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Special Commercial Laws Notes by MARX and MON for failure to prosecute, he forgot his SPA during the pre-trial conference. SPA from his client, the mortgagee, authorizing him to appear in the pre-trial conference, to stipulate on issues, admit certain facts and so on. So case dismissed with prejudice. Can he foreclose it the case was dismissed on technicality? The mere filing of the collection case bars the remedy of foreclosure.

These are: • in case extrajudicial foreclosure of a real estate mortgage of a real property under Act 3135 • in case of execution sale of a real property under Rule 39 Rules of Court • in case of judicial foreclosure of real estate mortgage if the mortgagee is a bank or a credit institution

So if you choose to file an action choose an action for collection and unfortunately you did not make it or you lose failed to obtain a favorable judgment then you cannot foreclose the chattel mortgage.

There is no right of redemption in chattel mortgage. So there is no right of redemption whatsoever when it comes to personal property.

Or let’s say you changed your mind and instead you want to drop or abandon the collection case, you cannot anymore foreclose the mortgage, because one remedy bars or necessarily precludes the exercise of the others. Let’s say the property is situated in the Philippines but the action for collection was filed abroad. Does that have the same effect that the mortgagee having filed an action for collection is precluded from foreclosing a property situated in the Philippines? Yes. That is what the SC in one case. The filing of an action for collection regardless of venue, wherever filed in other words, bars the remedy of foreclosure. Let’s say you have loan secured by a real estate mortgage and a chattel mortgage agreement. So you have 2 mortgages – real and chattel. The loan was not paid. So the mortgagee foreclosed the real estate mortgage. After foreclosure of the real estate mortgage there is a deficiency. Can he file an action to recover the deficiency without first foreclosing the chattel mortgage? No. the remedies are alternative not cumulative. So once you chose the remedy of foreclosure, you have to exhaust the remedy of foreclosure. So foreclose both the REM and chattel. And only after foreclosure that you can file an action to recover the deficiency, if any. So you cannot foreclose and sue for the deficiency, without first foreclosing the other (Caltex vs CA). SPCL 6 Is there a right of redemption in chattel mortgage? None, in the sense that there is no right to buy back as a matter of right after the foreclosure. The SC said that there are only 3 cases where there is a right of redemption. And they do not involve personal property. They only pertain to real property.

What right does the law afford the mortgagor in a chattel mortgage before there can be a foreclosure sale? Is there are right available to the mortgagor by which he can stop the foreclosure sale despite the fact that he is already in default? Let’s say he did not pay his obligation. Can the mortgagee foreclose the mortgage the following day or week? Equity of redemption. It is the right of the mortgagor to prevent the sale by paying the debt within 30 days from default. So it is a grace period that the law affords in favor of the mortgagor. Just because the mortgagor defaults either because of non-payment or violation of the agreement does not justify foreclosure right away. It cannot be done in 1 week or couple of weeks. The law says 30 days grace period. Within the 30 days grace period there must be a notice of sale given to the mortgagor. Twin periods you may say – • 30 grace period and • 10 days notice before the sale. If both requirements are complied with and it remains as unpaid obligation, then the mortgagee can now foreclose the mortgage. Let’s compare the remedies available to the mortgagee in a transaction of a loan secured by a chattel mortgage and the rights or remedies available to the unpaid vendor in case of a chattel mortgage on a property sold on installment basis. • foreclosure of the chattel mortgage • rescission of the sale • collection of a sum of money Is rescission available as a remedy in case of loan secured by a chattel mortgage without restitution, (which means to restore the parties to where they are; give me back my money and I'll give you back your property)? No

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Special Commercial Laws Notes by MARX and MON

What is the remedy available to a mortgagee in case of a simple loan secured by a chattel mortgage? • Action for specific performance or collection • Foreclosure of mortgage

If he files an action for collection and he loses the case because of the incompetent handling of the case by his lawyer can he foreclose the mortgage? No. He is precluded because the remedies are alternative and not cumulative.

What are the modes of foreclosure? • Judicial • extrajudicial

So just like in a simple loan secured by a chattel mortgage, the mere filing of the collection case precludes the remedy of foreclosure.

Can the mortgagee foreclose the mortgage extrajudicially if he is not in possession of the chattel? No

So when there is a loans secured by a chattel mortgage on a transaction falling under the Recto Law, the mere filing of a collection case precludes the remedy of foreclosure. Amounting to abandonment or waiver of the right to foreclose the mortgage. Equivalent to giving up the lien over the mortgaged property.

What are the remedies available to the mortgagee in case the mortgagor does not give up possession of the chattel? • Apply for a writ of replevin to seize possession of the chattel preparatory to the foreclosure. • Judicial foreclosure How do you compare it then with the remedies available to the unpaid vendor in case of chattel mortgage on a property sold on installment where the mortgagor defaulted in the payment of at least 2 installments? What are the remedies available in that case? • Action for specific performance or collection • Cancellation (rescission) • foreclosure Illustration: Let’s say that D wants to buy a Toyota Lexus. D was to shell out P4M. He wants to pay 1M first and the balance over a period of 16 months payable in 16 equal monthly installments. He purchased the car from Toyota Cars. He paid 1M down payment and the balance of 3M covered by a promissory note payable in 16 monthly installments. To secure the payment of the balance of the purchase price, D constituted a chattel mortgage on the same Toyota Lexus. D was paying the monthly amortization for 5 months or 6 months or so. Then he started losing his clients. The law office floundered. He defaulted in the payment of at least 3 installments. And at the time that he is in default, let’s say that the unpaid obligation is 2M principal and 100K interest and 50K attorney’s fees. Under the Recto Law what are the remedies available to the unpaid vendor? • Action to enforce payment of the loan or action for collection • Cancellation or Rescission • Foreclosure

nd

2 remedy is cancellation. Cancellation means? Rescission of the contract. This means the return of the vehicle and the return of the payment. Can the mortgagee or unpaid vendor forfeit the previous payment? Yes. So when you talk about cancellation, basically it refers to the right of the unpaid vendor to seize back, get back, obtain possession, recover, reposses the personal property sold on installment and return the purchase price, unless forfeiture is authorized. And 99.9% forfeiture is the norm. I haven't seen a case where the unpaid vendor returns the money. He always forfeits the partial payments and the of course is a valid stipulation because the mortgagorclient is using of the vehicle anyways. That is why forfeiture may be authorized, if so stipulated. So get back the vehicle, return the payment unless forfeiture is allowed. rd

3 remedy is Foreclosure If the mortgagee opts to foreclose or the unpaid vendor opts to foreclose that is it for him. He cannot recover any unpaid claim. During the auction sale, he can only take the price equivalent to let us say 1.5 he cannot recover the balance. Or if the car sells only 2M he cannot recover the unpaid claims. The term “unpaid claim” includes interests and attorneys fees related to the promissory note. So what cannot be recovered is not just the principal, not just the interest but also the attorney’s fees related to the promissory note that was not

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Special Commercial Laws Notes by MARX and MON paid. That is if the unpaid vendor opts to foreclose the chattel mortgage.

particular property. So he cannot enforce any additional security for that by the buyer.

If among the remedies available to him he opted to foreclose then that is the consequence. He is limited to the particular property sold on installment. He cannot recover beyond such property. He cannot enforce any other security put up by the mortgagor.

If there is additional mortgage, like in this case the Ford Expedition, that Ford Expedition is free, released from the mortgage brought about by the foreclosure of the chattel mortgage on the thing sold on installment.

So insofar that law is concerned, the foreclosure of the chattel mortgage on the very thing sold on installment wipes out or extinguishes the obligation of the mortgagor notwithstanding any stipulation to the contrary. Any stipulation to the contrary in fact is null and void.

Let’s reverse the process, let’s say the company creditor is aware, his counsel is a pride of UST and the lawyer advised that if you foreclosed mortgage on the Lexus, you cannot foreclose any other security. So let’s try to outsmart the system. You foreclose first mortgage on the expedition, the one not on installment. After foreclosure there was a deficiency. Can the unpaid vendor mortgagee foreclose the Lexus? nd No. The foreclosure of the 2 vehicle amounts to an action for specific performance. Therefore, he cannot foreclose the mortgage because the filing of an action for specific performance is tantamount to a waiver of the right to foreclose.

That is the concept or the essence of the Recto Law. That is why before you apply the principle that the unpaid vendor or mortgagee cannot recover any unpaid claim you have to make sure that all the elements are present: • there must be a sale of personal property on installment • chattel mortgage was constituted on the same property sold on installment • default in the payment of at least 2 installment • Among the remedies available to the unpaid vendor he opted to foreclose If all these elements are present there is no right to recover the deficiency. Illustration: Let’s say on top of the Toyota Lexus, the debtor D also furnished the creditor car company additional collateral in the form a chattel mortgage over a Ford Expedition owned by D. Now, there are two collateral the Lexus sold on installment and the ford expedition. The Lexus sold on installment and the Ford Expedition not sold on installment but subject of a chattel mortgage. D defaulted in 2 installment. Toyota Lexus opted to foreclose the chattel mortgage on the Lexus and there is a deficiency or unpaid claim because what was recovered during the sale was less than 2.150 M. Can he foreclose the Expedition? No. The foreclosure of the chattel mortgage on the thing sold on installment completely wipes out or extinguishes the obligation of the buyer. So if it is tantamount to the extinguishment of the obligation what is the basis the mortgagee to foreclose the other mortgage? There is none.

nd

Let’s say the foreclosure of the 2 vehicle is an action that is akin to a specific performance and let’s say that there is deficiency. And he filed an action to recover the deficiency. Can he file an action to recover the deficiency? Yes. Let’s say that he obtained a favorable judgment. After obtaining a favorable judgment, it became final and executory. Can he levy of the Lexus? Yes Can he levy on the other properties of the buyer until the debt is paid and satisfied? Yes

This case of __ vs Pilipinas Investment. That is if the mortgagee opts to foreclose, that is it for him. He cannot recover beyond that. He is limited to that 22 | P a g e

This is what the SC said in case of Burdujan vs _ that nd the foreclosure of the 2 mortgage is tantamount to an action for specific performance, and being tantamount to an action for specific performance precludes the remedy of foreclosure because an action for collection is tantamount to a waiver of the right to foreclose. However, being an action for specific performance, if proceeds of the foreclosure are not enough then the unpaid vendor may file an action to recover the deficiency. If he actually obtains judgment, he can levy on the Lexus or any other properties until the debt is paid or satisfied.

Special Commercial Laws Notes by MARX and MON So only when he forecloses the chattel mortgage that he cannot recover any unpaid claim. That he cannot recover the deficiency. But if files an action for specific performance and obtains a favorable judgment, he can levy any and all properties not just the car sold on installment but also any of the properties of the buyer until the debt is paid and satisfied. So that is what we have to consider. Simple Loan In a simple loan secured by a chattel mortgage don't even think about it. Foreclose, because after foreclosure you can support deficiency. And if it a big loan as long as it not unconscionable or shocking to the conscience, so that you can recover whatever is not covered by the security. Let say that you have chattel mortgage over a vehicle. Sell it for 100 k or 150 k. Really low as long as not ridiculously low as to be shocking to the conscience. Because if it is grossly inadequate, as you know in your law on sale, the sale will be invalidated, Art 1474. So when you foreclose it should be low and then you sue for deficiency. As we have seen the mortgagee is entitled to recover deficiency. Transaction falling under the Recto Law If it is a transaction falling under the Recto Law, a chattel mortgage on a property sold on installment. You have to weigh your options. You cannot just foreclose, because you foreclose you cannot recovery any unpaid claim. You are limited to the car or property sold on installment. Now if you file an action for collection or specific performance, you are deemed to have abandoned the mortgage. But, there is no limit on what you can levy. You can even levy any and all properties until the debt is paid and satisfied. So you have to weigh your options. Are you better of filing specific performance where there is no limit on what you can levy? Or are you better of foreclosing the mortgage where you are sure of that particular property but you cannot recover deficiency. It depends on your credit investigation. If he has many creditors you are better of foreclosing, because at least with that you are sure on the vehicle.

If there is no creditor you are better filing an action for specific performance. And when you obtain judgment you can levy on the car on installment and any and all properties until the debt is paid and satisfied. Illustration: Let’s say the mortgagor in a transaction falling under the Recto Law surrenders the vehicle to the mortgagee. On his own volition, he surrendered the vehicle. Is the mortgagee bound to proceed with the foreclosure? No. The voluntary surrender of the object of the mortgage does not amount to foreclosure. What about a mere demand to surrender the property sold on installment? Does that preclude the mortgagee from choosing which remedy he wants to pursue, whether specific collection or foreclosure? Let’s say he made a demand. D surrendered the vehicle. Does that estop him from choosing the remedy of collection? No. So what will stop him from choosing the collection? If possession was acquired by writ, by force of law, can you still file an action for collection? Even if it is not actual foreclosure but just an action for replevin is he already precluded from filing an action for collection or should it be actual foreclosure that should preclude from filing an action for collection? Let’s clarify the concept, a possession was given up voluntarily by the mortgagor so the SC said that at that point the mortgagee-unpaid vendor is still free to choose which remedy he wants to pursue. Either an action for specific performance or foreclosure. The mere demand, likewise, by the mortgagee on the mortgagor to return or surrender the property does not preclude him from choosing an action for collection or foreclosure. At that point he is still free from choosing any other remedy. But, if the possession was acquired by virtue of a writ, by virtue of a court process, like a replevin, the Court said you cannot file an action for collection anymore. So, in some cases, the SC said that it is tantamount to foreclosure in the sense that it precludes him from filing an action for specific performance. So the expectation is when you file an action for replevin to seize possession, it is preparatory to foreclosure. That is why you cannot file an action for collection.

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Special Commercial Laws Notes by MARX and MON Let’s say the mortgagor refuses to give up possession, as a consequence the mortgagee was forced to file an action for replevin. Can the mortgagee recover the cost of repossession and the attorneys fees brought about by the unjust refusal of the mortgagor to surrender possession chattel? Is it not part of the term “unpaid claims” which cannot be recovered anymore because of the foreclosure? Let’s make a distinction between the attorney's fees related to the promissory note that was not paid and attorney's fees because of the refusal of the mortgagor to give up possession. Attorney's fees related to the promissory note which is stipulated in the promissory note which was not paid forms part of the term “unpaid claims” therefore cannot be cannot be recovered anymore by the foreclosure of the chattel mortgage. But if it is attorney's fees incurred by the mortgagee because the mortgagor did not give up possession and he was forced to file an action for replevin, that attorney's fees are not part of the term the “unpaid claim”, therefore can be recovered. How do you apply the proceeds of the foreclosure? • cost, expenses • interest • principal given to the 1st mortgagee • creditors, if any, (other mortgagees or second encumbrancers) • excess, if any, given to the mortgagor Costs and expenses are the first priority. The one who drafted the case must have been lawyers. They make sure that they are paid first. Within what period can there be an action to recover deficiency? The SC said that the mortgagee has 10 years to enforce payment of the deficiency. The period is counted or reckoned from the date the cause of action accrued. But the SC stopped there. We do not know when the cause of action accrued. Is it the date of the signing of the promissory note or the date of the foreclosure? I think it is the date of the foreclosure, because it is the only time you would know if you have a cause of action to recover deficiency.

You wouldn't know at the time of the signing of the promissory note because he may be paying his obligation. SUMMARY A chattel mortgage is an accessory contract whereby personal property is recorded in the Chattel Mortgage Register to secure the performance of a principal obligation. The concept of a chattel mortgage as a conditional sale has been supplanted by the definition of chattel mortgage under the Civil Code. Because the law now treats chattel mortgage as an accessory contract, now it is governed by the rules concerning the principal vis a vis the accessory obligation that the extinguishment of the principal obligation extinguishes the accessory obligation, but not the other way around. Example: A loan secured by a chattel mortgage on a vehicle. The vehicle was destroyed by fire. Because the chattel is an accessory contract, the destruction or loss of chattel extinguishes the mortgage but not the principal obligation. Unrecorded chattel mortgage is valid between the parties rd because registration is necessary only to bind 3 persons. Such that without registration there can be no chattel mortgage, that is not how the SC construed it. Even if registration is part of the definition, you can dispense of registration based on the SC decision and still the chattel mortgage is valid between the contracting parties. Obviously, not against third person unless it is duly registered. So the SC applied the principle of realty to chattel. This is not the only time that the SC applied the principle of realty to chattel. There is one case Cebu International Finance Corporation vs CA penned by CJ Kapunan. S and B entered into a contract for a sale of a vessel. So they signed a deed of sale. 2 copies are prepared. One of the copies contains a marginal note that ownership shall not be transferred to the buyer until there is full payment of the purchase price. That is an understanding between S and B that ownership shall not be transferred to the buyer until there is full payment of the purchase price. B issued post dated checks in favor of the seller to cover the purchase price. What B did, the copy without the marginalization he presented with the MARINA. The Marina cancelled the registration and issued a new one to B. Thereafter, B changed the name of the vessel. After changing the name of the vessel in his own name. B obtained a loan from Cebu International Finance Corporation secured by a chattel mortgage over the vessel. In the meantime,

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Special Commercial Laws Notes by MARX and MON the check that B issued to S bounced. So the seller was not paid. The loan the B obtained from Cebu, also was in default. He did not pay the obligation. He has now to unpaid creditors. The unpaid creditor and the unpaid mortgagee. So the seller initiated replevin to arrest (seize) the vessel, and the chattel mortgagee also instituted foreclosure proceedings to foreclose the mortgage. Who has the better right now over the vessel, the unpaid seller of the mortgagee, Cebu International Finance? A chattel mortgage to secure a loan for the purpose of acquiring, constructing, operating, or maintaining a vessel is a preferred mortgage. And the SC said that the mortgagee has the right to rely on what appears on the 4 corners of the certificate of registration. The certificate of registration shows that the owner is B and there is nothing in the certificate that arouses suspicion then Cebu International Finance need not go beyond what appears on the four corners of the certificate of registration. Here is the catch, while the principle applicable to realty by analogy, you can apply the same to chattel mortgage, because ownership is evidenced by certificate of registration. So the point is that it is not only Filipinas Marble vs CA that the SC applied the principle of realty to chattel mortgage. There is another case, the Cebu International Finance, where the SC applied the principle of realty to chattel mortgage. And rd the principle that a 3 party may rely on the face of the title is a principle on Torrens Title in your Land Registration. That is a principle applicable to realty, not to chattel. But, the SC applied the principle of the realty to chattel just the same. Registration The place where the mortgaged property is situated and the place where the mortgagor resides, unless they are the same place where registration once is sufficient. Special Registrations In case of a: • vessel with MARINA • Private motor vehicle with the LTO • public motor vehicle with the LTFRB • Aircraft, helicopter with the Air Transportation Office

A chattel mortgage over a vehicle registered with the chattel mortgage register but not registered with LTO is not binding rd on 3 persons. Imagine you already registered with the chattel mortgage registered. You have paid the fees already and you have to register again with the LTO. God knows how much you will be or be assessed in registering the mortgage with the LTO. So chattel mortgage is very expensive. Unlike a pledge you don't have to register. You only have to notarize and it depends on how much they will collect. But a pledge is in a public instrument which binds the whole world. No need to register. So you save on fees. Chattel mortgage you have to notarize because you cannot register a non-notarized document. So you have to pay the same notarial fees. And then you have to register. You have to pay ¾ of 1%. And you have to register twice. And when you register with the LTO you pay again. It is so expensive. The problem with pledge, as you know in your credit transaction, in case of foreclosure there is no right to recover deficiency. So in chattel mortgage you have the right to recover deficiency except in four cases, but so expensive. Pledge is inexpensive but there is no right to recover deficiency. So you have to again weigh you options. You can combine the pledge and chattel mortgage in one document and interpret as either depending on what is convenient for you at the time of default as long as all the elements are present. You have chattel mortgage that is registered and at the same time it is delivered to the mortgagee therefore satisfying the elements of pledge. Limitations of a Chattel Mortgage The inherent Limitation of the chattel mortgage that it cannot secure future obligations. You cannot secure debts existing after its execution. Only Debts existing at the time of its execution are covered by the mortgage. Example: ACME Shoe Robber vs NLRC You have a loan secured by a chattel mortgage in 2004. And that loan was paid in the following year.

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Special Commercial Laws Notes by MARX and MON 2005 another loan was obtained. Paid the following year. Another loan was obtained for the same amount. This time the loan was not paid. The mortgagee is banking on a stipulation in the chattel mortgage agreement that it covers past, present and future obligations. So there was only one chattel mortgage agreement signed. The one in 2004 but it contains the dragnet clause, the one that encompasses any and all obligations by the mortgagor to the mortgagee whether incurred before, during or after the execution of the chattel mortgage. The mortgagee contends that the loan in 2008 is secured by the chattel mortgage despite the lack of any additional or new document. The SC said, No, the chattel mortgage only secures an existing debt. The reason is that only a chattel mortgage requires an affidavit of good faith. That affidavit of good faith is a statement under oath by the mortgagor and the mortgagee where they attest that the chattel mortgage secures a valid, just and existing debt and not for the purpose of fraud. The phrase “just and existing debt” can only refer to debts existing at the time of the execution of the chattel mortgage. While that stipulation in chattel mortgage agreement regarding the dragnet clause does not bind the security. It amounts to a promise on the part of the mortgagor to amend the existing mortgage agreement or to execute a fresh mortgage contract. But the security is not put in place until you have a formal amendment or a fresh mortgage contract. So basically when future loans are incurred, you have to supplement or back them up with an amendment with the existing chattel mortgage contract or to execute fresh mortgage contract. In either case conformably to the provisions of the chattel mortgage, which means there must affidavit of good faith. Real property cannot be the object of the chattel mortgage as a general rule, except by estoppel between the parties. Examples: Makati Leasing vs Wearever Textile Mills The issue is whether or not a chattel mortgage over a machinery attached to the ground and therefore immobilized by destination and considered real property by the Civil Code may be the object of chattel mortgage. The SC said, yes, but only as between the parties. It rd does not bind innocent 3 persons. So that

arrangement of chattel mortgage over a machinery which by destination is real property cannot bind third persons. ___ vs David A chattel mortgage over a house is valid between the contracting parties even though it is a real property. Since it is a valid mortgage, the mortgagee can foreclose in case of default. But, even if he has foreclosed the chattel mortgage, it does not bind the judgment creditor of D because rd it does not affect innocent 3 parties. That conclusion will not change even if the mortgagee sold rd the house to a 3 party, an innocent purchaser for value. That innocent purchaser for value has a right inferior compared to the rights of the judgment creditors of D for the simple reason that the innocent purchaser for value simply steps into the shoes of the original mortgagee and acquires only whatever rights, title, or interest that the mortgagee originally had over the house and subject to the same limitations. If the right of the right of the original mortgagee is enforceable only against the mortgagor, the right of the innocent purchaser for value, the assignee of the original mortgagee is also valid and enforceable only against the rd mortgagor. But, that does not prejudice or affect innocent 3 parties, like judgment creditors of the mortgagor. Remedies available to the mortgagor We compared the remedies if it is a loan secured by a chattel mortgage or a chattel mortgage over a property sold installment when there is default in the payment of at least 2 installments. In a simple loan secured by a chattel mortgage the remedies are: • action for specific performance; and • foreclosure When the mortgagee files an action for collection, the mere filing of collection case precludes the filing of foreclosure. And it is not even the rendition of the judgment that will prevent foreclosure but the mere filing of an action for collection. There is one case, Caltex vs IAC, as an exception. What happened was the action for collection was filed and then before the judgment could be rendered, he withdrew the action for collection and then foreclosed the mortgage.

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Special Commercial Laws Notes by MARX and MON The SC said that this is one of a kind. In that case the SC still affirmed that the correct rule that the mere filing of an action for collection bars the remedy of foreclosure.

The SC said the remedy might be right but the manner by which the right was exercised was in bad faith. And for this reason the unpaid vendor may be held liable for damages.

If the mortgagee forecloses, however, he is subject to certain considerations: If he wants to foreclose extrajudicially he has to be in possession of the chattel. He cannot foreclose, under that mode, extrajudicially, unless he is in possession.

On what basis? Under the all encompassing principle on Human Relations, Art 19 of the Civil Code, everyone in the exercise of his rights and in the performance of his duties must act with justice, give to everyone his due, observe honesty and good faith._ of human relations. The one provision that you can quote or cite if you want to sue someone. If you have been aggrieved, you have been prejudice but you do not know your cause of action – Art 19 the abuse of rights principle.

If he is not in possession because the mortgagor refuses to give it up, then the mortgagee can file an action for replevin to seize possession of the chattel preparatory to the foreclosure or extrajudicial foreclosure of mortgage. If there are two mortgages securing the loan and the mortgagee opts to foreclose he has to exhaust the remedy of foreclosure.

you have loan secured by REM and chattel mortgage. The loan was not paid. So the mortgagee foreclosed the REM. After foreclosure there was deficiency.

If it is chattel mortgage on a personal property sold on installments, the remedies are: • action for specific performance; • cancellation; and • foreclosure

The SC held that the mortgagee cannot file an action to recover the deficiency yet. He has to foreclose the remaining chattel mortgage. And only after he foreclosed the both mortgages that he can file an action to recover deficiency if any.

In either case, whether loan secured by a chattel mortgage or chattel mortgage on a property sold on installment, the mere filing of action for collection precludes the remedy of foreclosure.

_ vs Ca,

Is it possible for the mortgagee to be held liable for damages eventhough he has chosen the right remedy? There is one case, Filinvest vs CA, the SC outlined the remedies available to mortgagee: • collection • foreclosure

The difference is on the effect of the foreclosure. If it is simple loan secured by a chattel, after foreclosure there is deficiency, you can sue for deficiency. As held in _ vs Ginhawa.

If it is foreclosure extrajudicially and the mortgagor does not want to give up possession, replevin for the seizure of possesion is there. What is peculiar in this case, the mortgagee/unpaid vendor, filed an action for replevin, seized possession. The problem arose when unpaid vendor-creditor used or employed his own people masquerading as sheriffs. And then after they saw, found the equipment, they cannibalized it beyond recognition. They broke it down to parts beyond recognition. 27 | P a g e

And the right to recover deficiency may be enforced against any one of the solidary co-debtors, if any, and is not limited to the mortgagor for the reason that the chattel mortgage is just a security, not a mode of payment. If the security is not enough, the mortgagor may still be made to account for whatever may have to realize by such security. Moreover, there is nothing in the Chattel Mortgage Law, unlike pledge and Recto Law that precludes the mortgagee to recover the deficiency. If it is a chattel mortgage on a property sold on installment and the mortgagee opts to foreclose then he is bound by the consequences. He cannot

Special Commercial Laws Notes by MARX and MON recover any unpaid claims despite stipulations to the contrary.

Consistent with that principle the SC said, there is no right to enforce any other security put up by the nd buyer. Whether 2 mortgage, or guaranty agreement or a surety agreement, forget about all those things. Once you foreclose that’s it. He is looking at the particular property as the only source of payment, no more no less.

If it is a transaction falling under the Recto Law, its only when the mortgagee actually forecloses or elects the remedy of foreclosure that he is subject to the rule that he cannot recover any unpaid claims. So if he files an action for collection and obtained judgment then he can levy any and all properties of the mortgagor until the debt is paid or satisfied.

And besides when we allowed, the SC said, the unpaid vendor-mortgagee to recover the deficiency against the guarantor, the guarantor after payment will just get reimbursement the payment from the debtor, the buyer. And in effect it is the buyer assuming the deficiency and thereby circumventing Art 1484 of the Civil Code.

Mere demand by the mortgagee to surrender the mortgaged vehicle does not amount to foreclosure. And the voluntary possession given up by the mortgagor likewise does not amount to foreclosure. So voluntary possession, even if accepted by the mortgagee, does not amount, unless the delivery or possession is tantamount to dacion en pago. If it is dacion en pago where there is transfer of ownership as mode of payment then obviously the delivery and transfer of ownership will extinguish the obligation. But delivery per se, transfer of possession per se without the transfer of ownership does not stop or preclude the mortgagee from choosing, either the filing of an action for collection or to foreclose the mortgage. If he forecloses then that’s it, there no right to recover the deficiency. If it a loan or transaction falling under the Recto Law, the foreclosure of the chattel mortgage on thing that is still sold on installment completely wipes out the obligation of the buyer-mortgagor despite stipulation to the contrary. If there is an additional collateral, like a second mortgage, the foreclosure of the chattel mortgage on the thing sold on nd installment precludes the remedy of 2 foreclosure. What if in addition to the chattel mortgage on the property sold installment, the buyer also put up a guaranty in favor of the unpaid vendor in the person of Y, and after two installment payments the mortgagee opted to foreclose and there is an unpaid claim, can he file an action to recover the unpaid claim against the guarantor on the argument that the rd prohibition is limited, directed to the buyer and not to a 3 party? That is the case of Pascual vs _ Motors. Consistent to what is said, that the foreclosure of the chattel mortgage on thing sold on installment completely wipes out the obligation of the buyer mortgagor.

The term “unpaid claim” includes the: • principal • interest • attorney's fees related to the promissory note, or stipulated in the promissory note But, it does not include the attorney's fees or cost of repossession brought about by the unjustified refusal of the mortgagor to give up possession as held in Agustin vs CA. Period available to the mortgagor before foreclosure - 30 days grace period. So the right of the mortgagor to pay the debt within 30 days from default before there can be foreclosure. This is a reprieve given by law to the mortgagor. So the mortgagee cannot foreclose right away after default. He has to give the mortgagor 30 days grace period. That is what you call “equity of redemption”. The right of the mortgagor to prevent the sale by paying the debt within 30 days from default. It is only when he failed the debt that there can be actual foreclosure of chattel mortgage. After foreclosure there is no right of redemption as the SC pointed out there is not right of redemption in personal property. The SC said that there are only 3 cases where there is a right of redemption. And they do not involve personal property. They only pertain to real property. There are only 3: • Extrajudicial foreclosure of Real Estate Mortgage under Act 3135 • Execution sale of a real property under the Rule 39 Rules of Court

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Special Commercial Laws Notes by MARX and MON •

Judicial foreclosure of a real estate mortgage, if the mortgagee is a bank or a credit institution

After foreclosure and there is a deficiency, the SC says that the mortgagee has 10 years to recover the deficiency. The 10 year period is counted from the date that the cause of action accrued, but not clear when exactly is the date. Is the date of the promissory note or the date of foreclosure? We advanced the theory or the opinion that is should be reckoned from the date actual foreclosure because it is the only time that you'll know if there is a deficiency.

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Special Commercial Laws Notes by MARX and MON Any corporation who does these functions and activities without a corresponding license or approval from the SEC can be ousted by way of quo warranto proceedings.

Banking SPCL7 What is a BANK? An entity engaged in the lending of funds obtained from the public in the form of deposits. What are the 3 ELEMENTS to constitute banking? 1) entity is engaged in the lending of funds 2) Funds obtained from the public (means at least 20 depositors). 3) Such funds are in the form of deposits How about the concept of paluwagan? Paluwagan is wherein 19-20 people each one contributing certain amount every week. Entire collection for that week depends on the lasts. Every week the somebody gets the entire collection from every body. If there are more than 20 members, is this a bank? No, because the funds are not obtained in the form of deposits. It is for savings among the members. ABC Co. buys promissory notes of buyers of cash on installment basis and every now and the ABC Co. issues bonds and the bonds’ proceeds are used to finance the purchase of the promissory notes or receivables. Is ABC a bank? No. While bonds may be issued to the public, the funds are not in form of deposits. So there is no banking unless there is deposit taking activity. What is DEPOSIT taking activity? How is deposit defined? The funds given to the bank gives rise to a creditordebtor relationship. Money is given by the depositor to the bank. Ownership is transferred to the bank and the bank is free to use the funds as it pleases. The depositors have the right to demand payment, any time, of the money deposited. Under the old law there is another element – habitually performing banking operations (habituality). This was deleted. If there 3 elements are present it is a bank or engaged in banking therefore it has to obtain a license from the Bangko Sentral ng Pilipinas (BSP) and Securities and Exchange Commission (SEC). So any corporation that lends funds and funds come from the public through deposits it is engaged in banking. But not all corporations can engage in banking, only those authorized by BSP.

As in the case of Republic vs Security Credit & Acceptance Corp. said corporation was authorized by its article of incorporation to lend money or extend credit. But it opened various branches over the country soliciting and accepting deposit accounts from the public. About 69K accounts opened all in all. So you have all elements of banking (lending, obtained from the public, through deposits). But it has no license from the BSP, so the government instituted a quo warranto proceedings to oust the corporation. What are the KINDS OF BANKS? 1) Universal 2) Commercial 3) Thrift 4) Rural Bank 5) Islamic 6) Cooperative, and 7) Other banks that may be classified by the BSP * Rural, Islamic and Cooperative Banks are not part of the Bar Exams so forget about that. But for classification purposes, if it was asked you have to know these classifications and their definitions. * In this course, other than the academic side, you have to choose your bank very carefully otherwise your funds might go to waste especially if your bank collapse. Top 5 Banks in the country (as of 2009) 1. BDO 2. Metro Bank 3. BPI 4. PNB merged with Equitable 5. RCBP What does the “Thrift Bank” include? 1) Savings and Mortgage Banks (like Montedepiedad [now Keppel]) 2) Saving and Loans Associations 3) Private Development Bank (i.e. Planters Bank) caters to small and medium business enterprises What are the DISTINCTIONS between Universal, Commercial and Thrift Banks? As to minimum CAPITAL requirement 1) Universal - 4.950 Billion (It was supposed to be 2 tiered increases. After 1 year is was supposed to be 5.4 Billion, but it got stuck because many banks complained that they could not increase)

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Special Commercial Laws Notes by MARX and MON 2) Commercial – 2.4 Billion 3) Thrift - 325 Million if the head office is in Metro Manila; 52.5 Million if the head office is outside Metro Manila.

What about a FOREIGNER? Is there a limit on the number of share a foreigner can own in bank? Only up to 40%. Foreigners can only own 40% of the bank. This is because a bank is a “nationalized activity.”

SPCL8 If a client wants to set up a bank, how do you answer? Discuss the STRUCTURE OF A BANK A bank can only organize as a stock corporation. They cannot be organize as a non- stock corporation, because a nonstock is not organized for profit. A bank is the obviously organized for profit. A bank is a non-stock non-profit corporation. What does this mean? It has capital stocks divided into shares among the stock holders and authorized to distribute dividends to its members/stock-holders. A bank is supposed to make money because it is organized for profit. It is a stock corporation so it has share-holders. What are the KINDS OF SHARE-HOLDERS/stock-holders? 1) Natural persons a. Filipino b. Foreigner 2) Juridical persons a. corporation or i. may be owned by a Filipino (domestic corporations) ii. or by Foreigners (as in foreign banks) b. partnership

What does NATIONALIZED ACTIVITY mean? It is an activity either wholly or partly reserved for Filipinos. A bank is partly reserved for Filipinos, because Foreigners are allowed to be stock-holders of a bank but not to exceed 40% of the Bank’s capital stocks. What about DOMESTIC CORPORATION? 40% What about foreigners? 40%

FOREIGN

BANK/corporation

owned

by

How do you distinguish the 40% share ownership limit of a natural person who is a Filipino and 40% share limit of a foreigner? 40% share ownership limit for a: 1) FILIPINO natural person is INDIVIDUAL. 2) FOREIGNER is AGGREGATE which means that shares held by “FOREIGNERS” and corporations owned by foreigners shall not exceed 40% of the bank’s capital stocks. So foreign held stocks whether owned by natural persons or corporation cannot exceed 40% of the bank. What about domestic corporations? GENERAL RULE: A corporation may only own 40% of the bank

Is there limit on the number of shares that a person may own in a bank? How much percentage of the capital stock may be owned by 1 person? Under the Old law: 1) Natural person - only up to 20%. 2) Group of persons – up to 30% NEW LAW allows any natural person to own up to 40% of the capital stocks of a bank Can one group of persons or an entire family, under the new law, own the entire bank? Yes, for as long as not one of them own more than 40% (maximum) of the capital shares/stock of the bank (not just 40 shares). 31 | P a g e

EXCEPTIONS 1) In case of wholly owned thrift bank subsidiary of a universal bank – This is because a universal bank can own up to 100% of a thrift bank Examples: • BPI has a subsidiary thrift bank subsidiary in BPI Family Savings Bank; • Metrobank has a thrift bank in PS Bank; • BDO – Equitable Savings Bank.

Special Commercial Laws Notes by MARX and MON If it’s really a bank why is there a need to for a thrift bank? To segregate the business.

Is there an EXCEPTION? (allowable directors) In case of MERGER or CONSOLIDATION law allows 21 directors.

Thrift bank is for retail – car loan, housing loan, consumer loan. Universal bank is for wholesale business.

Although the law does not state at the point of merger or consolidation, objectively speaking, you have to determine how many directors you want the merged bank to have at the time you approve the merger. This is because under corporation law you have to adopt the articles of incorporation of the merged bank/ surviving bank or come up with a new one. So you have to specify in the articles of incorporation of the surviving bank how many directors you want. If you want 21 then you have to indicate in the articles of incorporation.

2) If the shares of a corporation are listed in the stock exchange - it can own up to 60% of the bank. This privilege can be exercised only once. In other words a corporation whose shares are listed can own 60% of 1 bank only. As to the other banks the maximum is still 40%. 3) If the corporation is in existence for 10 years it can own up to 60% of the bank. This privilege can only exercised once What about a FOREIGN BANK? Examples are Bank of America, Standard Charter Bank, Hong Kong Shanghai Bank, City Bank. These are wholly owned by foreigners. Why is this so? Because up to June 30, 2007, there were 10 foreign banks allowed by Foreign Bank Liberalization Law to own a bank in the Philippines up to 100% May a foreigner be elected in the board of a bank? Yes, foreigners can be a director of a bank, BUT only up to the extent of the ACTUAL FOREIGN EQUITY. Note: The law does not state allowable foreign equity but actual foreign equity. What is the difference? The allowable foreign equity is 40%. But if the foreigners only own 20% of a bank then they can be represented to the board only up to 20%. So if you have 15 directors and 20% of the bank is owned by foreigners so 20% of 15 can be reserved/allocated for foreigner (3 board of directors). If they own 40% they can be represented up to 6 board of directors (40% of 15). How many directors are allowed for a bank? Not less than 5 not more than 15 (min of 5, max of 15) and 2 of whom must be independent directors.

Can you have foreigners as officer of a Bank? Can you appoint foreign officers in your Bank? No. Under the Anti-Dummy Law, foreigners cannot be appointed to any executive possession of any corporation engaged in nationalized activity. Since a bank is nationalized you cannot have foreigner occupying executive positions in a bank. You can only appoint them as consultants, advisers but they cannot occupy executive positions. What does a bank do for you? What are the POWERS AND FUNCTIONS of a bank? • extend credit • receive your deposit • foreign exchange • issue letter of credit • purchase promissory notes, bill of exchange or any other evidence of indebtedness Can you buy dollars from SM (shoe mart)? You cannot. You can only exchange your dollar to Peso, BUT you cannot exchanger you Peso for dollar. Because SM is not allowed to engage in foreign exchange. Banks do. You can buy foreign exchange from a bank Remember definition of LC? Any arrangement however named or described whereby a “bank”… A bank can issue Letters of Credit.

Who are INDEPENDENT DIRECTORS? Directors not part of management

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Special Commercial Laws Notes by MARX and MON You have a check drawn from a bank in the PDIC for $1K. If you deposit such foreign check it is still subject to 30 days clearing. You cannot make use of the check unless such check is cleared by the bank where it is drawn against. If you are in dire need of cash and you want the cash right away, can you have the check discounted by a bank? Yes. You can go to the bank and have the bank purchase your check. You don’t have to wait for 30 days. The bank will pay you the value of the check by discount and wait for the proceeds to be cleared. Keep in mind that a bank is also a corporation and as such it can exercise the same powers of a corporation. Whatever a corporation can do a bank can also do. But on top of the ordinary powers of the bank are the powers that a bank can exercise (as mentioned above). In addition to the powers and functions there are SERVICES that A BANK MAY RENDER. What are these? • A bank can make collection and payment for the accounts of its customers • A bank is authorized buy and sell shares and securities in behalf of customer • a bank can act as your investment manager • deposits money for safe keeping purposes • A bank may receive in custody or for safekeeping funds and other valuable objects and can likewise rent out safety deposit boxes • A bank can render other services for as long as they are not incompatible with banking business. Can u make payment of your PhilHealth, PLDT, Bills to a bank? Yes, because a bank can make collection and payment for the accounts of its customers You want to buy shares of stocks but you don’t want to go to a broker, can the bank do this for you? Yes, because a bank is authorized buy and sell shares and securities in behalf of customer

BPI vs IAC Somebody deposited dollars with BPI under a contract of strict deposit. As such the object should not be used by the depository. So this not a regular deposit where funds are given to the bank give rise to creditor-debtor relationship where depositor can withdraw the money anytime. The funds where given to BPI under a contract of strict deposit which is strictly for safekeeping. BPI commingled the funds with the other funds and used it. BPI was held liable for damages because the contract was for a strict deposit. It was not a deposit which will give rise to creditor-debtor relationship under Art 1980. Is the enumeration exclusive? No. The law says that a bank can render other services for as long as they are not incompatible with banking business. Can the Bank be involved in the selling of sweepstakes tickets (proceeds of which are used for charity) to make them socially responsible? The bank sells sweepstakes for a commission. So they help charity at the same time they get extra income. No. BSP said that selling sweepstakes tickets is not compatible with banking business. In renting out safety deposit boxes, what is the nature of the contract for the use of safety deposit boxes? Sia was a stamp collector. He rented safety deposit box in Security Bank Binondo Branch were he stocked his stamp collections. Unfortunately the safety deposit box he rented was at the lowest level. In 1986, a strong typhoon hit Metro Manila. Flood inundated the premises of Security Bank. Water seeped into the safety deposit box and destroyed his precious stamp collections. So he sued Security Bank for damages. Security raised the ff defenses: force majuere and contract for use of safety deposit box is governed by the law on lease. (SIA vs CA)

You have so much money you don’t know where to put it. If you put that in time deposit it will only give gain 50% per annum interest or 7- 8%. If you want to have a yield of more than 7-8%, can you entrust your money in a bank, with it acting as your investment/fund manager hoping that you will get income more than the rate or savings or time deposit? Yes, because a bank can act as your investment manager. Can you deposit your money in a bank for “safe keeping (not to give loan)?” Yes

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If it is governed by the law on lease, the only obligation of the bank is to ensure that the lessee enjoys the possession of the object leased to the exclusion of the others. This is the object of a lease contract. In other words the bank has no obligation to safe-keep, take care, exercise due diligence to safe-keep, preserve the contents of the box. This is because the bank is not supposed to know the contents of the safety deposit box. The bank will only know the contents if you don’t pay rent, because if you don’t pay they can force it open in the presence of a notary public. Since such is the case how can the bank exercise due diligence. It only

Special Commercial Laws Notes by MARX and MON relies on the representation and warranty of the lender that that there is nothing there inflammable, harmful, obnoxious contrary to law, morals public order, public policy. Justice Edgardo Paras was of the opinion that the contract for the use of safety deposit box is governed by the law on lease. SC did not agree with him nor sided with SB said that contract for the use of safety deposit box is a “special kind of deposit.” In other words the bank must exercise the due diligence required of depository in safekeeping or preserving of the object inside the safety deposit box. What is the basis of the SC for this? The Old General Banking Act. This provided that in renting out safety deposit boxes the bank shall act as a depositary. Because the law itself provides for this SC concluded that the contract for the use of safety deposit box is governed by deposits. Is this still the same interpretation under the New Law (General Banking Law of 2000 or RA 8791)? New Law retains the authority of the Bank to rent out safety deposit box but silent on being a depositary. In ordinary it is stipulated – buy and sell of securities the bank shall act as agent; receive in custody documents and funds the bank shall act as depository; investment manager the bank shall act as agent. But when it comes to renting out safety deposit boxes the law is silent unlike in the old law. The new law retained the authority to the bank to rent out safety deposit boxes but deleted any reference to being a depositary. What then is the conclusion? The conclusion should be the contract should be governed by the law on lease. This should be the intention. So there is basis in saying there is that the use of SDB is governed by the Law on Lease but we cannot be categorically make that pronouncement yet because there is no case yet overturning Sia, nor interpreting the changes in the General Banking Law, specifically the authority of the bank to rent out SDB. Atty. Divina: “If there is a case of the same set of facts, then I will invoke the General Banking Law as the controlling principle. But for Bar purposes you have to say both. You have the cite Sia vs CA and the changes in the general banking law and say that it is submitted the given the changes in the General Banking Law the contract of the use of SDB is now governed by contract of lease.”

How does the bank make money? What is the reason why BDO is the No. 1 Bank in the country w/ a capital of P62 B? It is the one with cash because of SM outlets. You cannot have a space a space/ stall/ store in SM unless you agree to the bank of BDO. Your collections should be deposited to BDO. So it is a Tripartite agreement among BDO, SM, and store owner. This is why BDO can grant loans for low interest rates compared to what other banks are offering. Because the deposit stays and interest is low compared to other banks. The bank lends to the public. Where does the bank get the funds to lend to the public? From the public. This is according to our definition that a bank is engaged in lending funds obtained from the public in the form deposits. When the bank receives Juan De la Cruz it pays interest on the deposits. If the account is savings, your ATM the interest rate is 2%, 3% on the deposit. If it is long term, i.e, time deposit the bank pays higher interest. If a bank pays 3% to Juan De la Cruz the bank charge around, use the same funds to Petra Reyes. The bank has to impute the cost of paying Juan De la Cruz for the deposit in lending out to Petra. So 3% (cost of funds) plus. So It has to recover its cost of funds. It has to collect more the 3% from Petra. So if Petra is of full credit the bank charges high interest. There is a danger of non-payment so she will be charge 12%. So this is how a bank makes money. Spread the difference of borrowing and cost of lending. So the bank using your own funds to lend an in the process to earn money or income. If the bank makes a mistake if Petra Reyes is a bad borrower then bank loses everything. The bank pays 3% to Juan but no longer collects from Petra if she does not pay. There is no cash from lending because there is a possibility that you may not pay. Are there LIMITATIONS on the power of a Bank? Yes LIMITATIONS on the power of a Bank • Limitations of a bank to grant loan o Cash loan - single borrower’s limit o Loans against Real estate o Loans against personal property o Loans granted to DOSRI (Directors, Officers, Stockholders, or Related Interest). • Limitations of a bank to invest in equity • Limitations of a bank in acquiring real properties • Limitations of a bank to accept and receive deposits

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Special Commercial Laws Notes by MARX and MON

Limitations of a bank to grant loan • Cash loan - single borrower’s limit • Loans against Real estate • Loans against personal property • Loans granted to DOSRI (Directors, Stockholders, or Related Interest).

No, because the loan against personal property must not exceed 75% of the appraised value of the personal property.

Officers,

What is the SINGLE BORROWER’S LIMIT (SBL)? Let us say the bank has 10 Billion, can the bank lend the entire 10 Billion to Henry Sy? No, because the law provides for a single borrower’s limit. There is a maximum amount of loan a bank may grant to 1 borrower. That is not to exceed 25% of the bank’s net worth (capital). The law says 20% but the law likewise authorizes Central Bank (BSP) to reduce or increase the ceiling. So BSP increased it to 25%. The maximum amount of loan or guaranty that a bank may extend to a borrower is 25% of the bank’s net worth. Net worth means capital So if the bank has 10B, the bank can only loan 2.5B to one borrower. Additional 10% is allowed if the loan is secured by a Letter of Credit and other documents of title. Branches from part of the Bank. It has no separate legal personality from the bank. They all form part of one bank. Loans against real estate must not exceed 75% of the appraised value of the land and 60% of the improvement. Example: You just got married. You find your dream house but you don’t have money. Can the Bank finance the entire cost of the purchase price? NO, because you are supposed to cover the 25%. This it was is called equity. What is your equity in your housing loan? The law says, “loan against real estate must not exceed 75% of the land and 60% of the improvement.

This is why many borrowers befriend the appraiser, because the higher the appraised value the higher the loan value. This is because the loan value depends on the appraisal. Loans granted to DOSRI (Directors, Officers, Stockholders, or Related Interest). What is the RULE? No Director, Officer, Stockholder of the bank, or Related Interests directly or indirectly shall; • borrow money, • obtain a loan, • be an endorser, • surety or guarantor of a loan granted by his bank or • otherwise incur contractual obligations (i.e. buying bank’s property in installment, so there is liability in his part) UNLESS there is compliance with procedural and substantive requirements. PROCEDURAL REQ’Ts a) the transaction must be APPROVED by at least the majority of the entire board excluding the director concerned. Example: If it has 15 directors all of the 8 (does not include the director concerned) must approve the transaction b) reported to the Banko Sentral ng Pilipinas c) entered/RECORDED in the books of the bank/corporation – it must be transparent, not hidden or concealed. SUBSTANTIVE REQUIREMENT Unless Loan is fully secured by collateral, loan must not exceed the book value of the paid in contribution of the director or stockholder and the amount of unencumbered stock deposit

Loans against personal property must not exceed 75% of the appraised value of the personal property. Example: Car Loan. You found you dream car. Can the bank finance the entire cost of the purchase price?

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Explanation (nosebleed): Under the Corporation Law there are Subscribed Shares and Paid-Up Shares. A subscribed 10 M shares, he only paid 25% (2.5 M) this is allowed. The amount of the loan must not exceed the value of your paid-up shares (not the subscribed share) and the amount of your deposit.

Special Commercial Laws Notes by MARX and MON in-laws], children, and spouse) are covered by DOSRI Regulations.

If you have no deposits and the book value of your shares left is insignificant, then your loans need to be secured for the protection of the bank (This is the bottom line).

What about CORPORATIONS? If the corporation is more than 20% owned by the DOS (directors, officers, stock holders) it is considered a related interest.

You have to secure the loan with a collateral because if not you could only borrow up to the book value of your share and the amount of your deposits.

What about PARTNERSHIPS? If the DOS (directors, officers, stock holders) is a partner in the partnership will borrow money in the bank this is considered a DOSRI account therefore subject to regulations.

The bottom line is that Directors, Officers, Stockholders or Related Interest can take advantage of his position to obtain better terms and conditions from his bank. Dealings by the bank with DOSRI must be above forbs and at arms length, because there are many examples where DOSRI will borrow money from their own banks without paying resulting to the collapse of the bank. Examples: Orient Bank. Directors obtained loans for themselves using fictitious names and accounts without going through this processes. This is a crime violating the General Banking Law. A Director or officer is supposed to promote the interest of the bank because you are holding on to public funds. You are not there to raid the bank’s cauffers, get a loan, get extraordinary terms and later run away. This is why the law has made strict for a DOSRI to obtain a law from his bank because of what happened in the past. Who are DIRECTORS? Those elected directly by stockholders

Example: A is the president of ABC Bank. X is the president of XYZ Bank. If A borrows money from ABC Bank- this is DOSRI. If X borrows money from XYZ Bank- this is DOSRI. They have to comply with the requirements Can A borrow money from XYZ Bank using X as agent? Can A borrow money from XYZ Bank using X as agent? Can X borrow money from ABC Bank using A as agent? Are these DOSRI transactions? Yes, because the INDIRECTLY.”

law

says

“DIRECTLY

OR

What about housing loans, car loans granted to officers of a bank? Are these DOSRI Transactions? Under the law Fringe Benefit Programs approved by BSP is no longer subject to DOSRI Regulations. SPCL9

Who are OFFICERS? Those advertised as such by incorporation Who are STOCKHOLDERS? If you own than 1 or 10 shares of stocks are you covered by DOSRI Regulations? No. To be a stock holder for DOSRI purposes you have to own at least 1% of the bank. If you own less than 1% you are nobody hence you are not covered by DOSRI regulations. You may be a stockholder but you are not the one which is covered by DOSRI Regulations. What are RELATED INTERESTS? These are related interest of the Directors, Officers and Stockholder (DOS). What is the RULE? st Only the relatives within the 1 degree of affinity or consanguinity (parents [including

Structure of a Bank A bank is a stock corporation. It can only be organized as a stock corporation. It cannot be organized as a non-stock organization because such is not organized for profit. A bank is organized for profit. It is not a charitable institution. Being a stock corporation it is under the Securities and Exchange Commission (SEC) supervision with respect to being a corporation. There has to be a primary license to be a corporation and that can only come from the SEC. Since it is engaged in banking which is a specialized business, it needs an approval from the Bangko Sentral ng Pilipinas (BSP). All corporations in general has to be approved by the SEC, but only corporations who engaged in banking would have to be approved or obtain a license from the BSP.

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Special Commercial Laws Notes by MARX and MON In this case we may say that there are 2 government agencies exercising supervision over banks: • SEC with respect to its primary franchise as a corporation, and • BSP with respect to all functions, powers, and activities pertaining to its being a bank. Except in merger and consolidation, the law allows 21 directors. Only banks are allowed to have 21 directors in such case. Merger means marriage of 2 corporations – ABC and XYC being one = ABC XYC Consolidation – ABC and XYC equals 123. LIMITATIONS ON THE POWER OF THE BANK TO INVEST IN EQUITY (DISTINCTIONS between Universal, Commercial, and Thrift) Universal Bank can invest in the equity of allied and nonallied. This means that it can be a stockholder of another corporation even though that corporation is not allied or related to the banking.

If ABC wants to invest in 123 and 345 corporations (many corporations)? The limit is 50% Thus: 1 time or Single investment – up to 25% of the bank’s net worth Collective or Aggregate equity investment – up to 50% of the bank’s net worth If the investment is in a non-allied undertaking Example: XYZ is not allied to banking – cargo operation. In addition to or on top of the 25% and 50% limits, the investment by ABC (investor corp) to XYZ (investee corp) must not exceed 35% of the capital stock of XYZ. In other words Universal Bank can only own up to 35% of a non-allied undertaking. It can only be a minority owner, and not a majority owner. The story of how Equitable Bank (EB) purchased the shares of PCI Bank.

Examples of allied/related undertakings: As long as it is about money – foreign exchange, leasing, insurance, money market, investment company

That time the capital of Equitable was only 16 B. It wants to buy the shares of the Lopezes of ABS-CBN and Gokongwie of Universal Robina Corp. They own 72% of PCI Bank. They were selling their share to anyone because they could not get along with each other. They were willing to sell their share for 32 B. So how can a small bank with a capital of 16 B buy a big bank worth 32 B? Equitable Bank invited SSS and GSIS to join the group to purchase the shares of Lopes and Gokongwei. The chairman of Equitable Bank, the owner, was a very close friend of Erap Estrada. Erap Estrada told GSIS and SSS to join Equitable Bank. Each invested 8 B. (8+8 = 16).

What about cargo operations? Not allied to the bank. Commercial and Thrift Bank cannot be a stockholder of this corporation, but a Universal Bank can be (Equitable PCI Bank was at one time a stockholder of PIATCO, before the whole controversy erupted).

How about the limitations on equity investment? EB has a capital of 16 B only. According to the rules they can only invest only up to 4 B in PCI because single is limit is only up to 25%. Collectively, because the bank has other investments, it can only invest 8 B. But Theoretically it can only use 4 B only.

What about amount: of equity investments? Example: ABC has a capital (net worth) of 10 B. How much can it invest in equity in 1 corporation? If it wants to invest in XYZ how much of its capital can be invested? Any bank can invest only up to 25% to invest in 1 corporation. In this case 2.5 B

16 B + 4 B = 20 B only. Therefore it is 20 vs 32. How about the 12 B difference? The shares which cannot be acquired because of equity investment were acquired by EBC Investments, a wholly owned subsidiary of the EB (its investment house).

Commercial and Thrift Bank can invest only in the equity of allied undertakings. This means it can only be a stockholder of another corporation if that corporation is engaged in a business allied or related to the banking. To “invest in equity” - means to be a stockholder of another corporation.

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Special Commercial Laws Notes by MARX and MON Where did EBCI got the money? EB lent it 12 B. EBCI purchased the shares of Lopez and Gokongwei which cannot be purchased by EB because of the rules on equity investments. How will EBCI pay EB? When Equitable Bank merged with PCI, w/ the Equitable Bank as surviving bank, EBCI paid of EB through share of PCI, dacion en pago. EBCI conveyed the shares in PCI back to Equitable Bank. And because the merger resulted into 1 corp only, Equitable Bank merged PCI to become EBPCI, all the rules on equity investment are gone because there is only 1 corporation. A subsidiary has a legal personality separate and distinct from the parent company. Not just because it is wholly owned by the parent does not mean that they’ll be just one. Unless there is a basis to pierce the corporate veil. You can only pierce if the corporate fiction is used for an illegal purpose or end. Atty. Divina argued before the BSP: How can you say that it was organized for unlawful end when the corporation has been in existence even before the transaction came about? BSP cannot say that EBCI was only organized for such purpose because it was organized way long before the transaction with PCI came about.

No, because it is not one of the cases allowed by law by which a bank may acquire real properties. In other words, the authority of the bank to acquire real properties is limited/circumscribed in 4 cases. This strict interpretation is shown in the case of CHINA BANK vs Registry Deeds Manila An official of China Bank was caught misappropriating bank funds. China Bank filed a criminal complaint for qualified theft against the erring official. To settle the civil liability arising from the crime of qualified theft. The bank official conveyed a real property to China Bank. China Bank sought to transfer the ownership over the real property to it with the Registry of st Deeds. Registry of Property refused on the grounds that: 1 nd China Bank was a foreign bank; 2 it is not allowed under the law. Can China Bank demand the ownership of the real property be transferred to it in settlement of the civil liability arising from the crime given the voluntary nature by which the property was conveyed by the offender to the bank? SC: st 1 on the issue of foreign bank. Can a foreign bank acquire real property in the Philippines? No. Only corporations at least 60% owned by Filipinos can acquire private land in the Philippines.

BSP believed their argument which resulted to EBPCI. Such was later on swallowed by BDO. They became part of the merger with BDO. At that time they were thinking what will the name be? Would it be BDO EB PCI or EB PCI BDO? They simply decided to drop off EB PCI completely and retain BDO. This is why we don’t see EB PCI branches anymore. LIMITATIONS ON ACQUIRING REAL PROPERTIES Can the bank acquire real properties for any reason? No, Bank can only acquire real properties only in 4 cases: o Necessary for business (BUSINESS) o Property as may be conveyed to it for the settlement of a debt in the ordinary course of business (DATION). o Property as may be mortgaged to it to secure a debt in good faith (FORECLOSURE) o Property ay may be acquired in execution sale in payment/satisfaction of a debt (EXECUTION) Can a bank buy real property because it is so cheap and it will sell the same after 1 or 2 years to realize uplift in value? 38 | P a g e

How is this statement reconciled with what is seen in the real world wherein so many foreign banks (Hong Kong Shanghai Bank, City Bank, Bank of America, Standard Charter Bank) are granting housing loans which are obviously secured by real estate mortgages? There is no conflict because to be a mortgagee is one thing and to foreclose is another. Under RA 133 a foreigner or foreign bank can be a mortgagee but it cannot foreclose. This is because if it forecloses it becomes the owner. So it is only when the bank forecloses does it become the owner but before the foreclosure it is not ye the owner. So there is no violation if a foreign bank simply grants a loan secured by a mortgaged on the same property. The prohibition comes in when the bank forecloses the mortgage. That is why foreign banks are very careful in granting foreign loans. They only grant housing loans to people / borrowers who

Special Commercial Laws Notes by MARX and MON can really pay, whose net worth is such that there is no way on earth that they will not pay their obligation. But then you cannot be omniscient, you cannot predict what will happen in the future, that even though how careful you are there are in granting housing loans there will be incidents of default.

secured by a mortgage which can be foreclosed in case the loan is not paid. So what is being extinguished is the loan and not the civil liability arising from the crime. LIMITATIONS ON THE POWER ACCEPT/RECEIVE DEPOSITS

This is not prohibited because your rights are assignable. Rights to a PN and mortgage are assignable. They can assign their rights to a Filipino as long as it is not simulated, meaning there is no consideration.

THE

BANK

TO

Basically refer to the laws concerning secrecy of information of bank funds received by the bank in the course of its business.

How do these foreign banks deal with the matter if the mortgagor defaults? They will assign their rights to the promissory notes and the mortgage in favor of a Filipino. So the one who will foreclose is already qualified. Example: The lawyer can buy the property. They will grant loans to their lawyer and the lawyer will be the one who will buy the property mortgage.

OF

Funds whether deposits or other arrangements are privileged and confidential. They cannot be examined, inquired, or looked into in certain cases. Any information about funds or deposits cannot be disclosed because it will violate certain laws and it is also a criminal offense. 3 LAWS CONCERNING SECRECY of Information concerning Bank Funds received in the ordinary course of business. 1. RA 1405 - Covers Philippine currency bank deposits and investment in government securities. 2. RA 6426 - Covers Foreign currency bank deposits. These are Dollars, Euros, etc 3. RA 8791 or the General Banking Law - Covers funds other than deposits and properties in the bank’s possession belonging to a private entity

nd

2 issue: May the real property be conveyed for the settlement of a civil liability arising from a crime? No. The term “debt” refers to loans and similar transactions, because this are the debts incurred in the ordinary course of business of the bank. Civil liability arising from the crime cannot be in the ordinary course of the business. How will the bank recover the money which was taken away from it given these rules? China Bank can lend money to this official and follow the rules in DOSRI because he is an officer. The bank lends the money to the officer in the ordinary course of business. The loans proceeds can be used to settle the civil liability. So civil liability is extinguished since it was paid.

Common denominator to all of these laws: Any information about deposits whether of Philippine or Foreign currency, or funds or property in the bank’s possession is confidential. They cannot be examined inquired and look into. If you have deposit with the bank, the bank cannot be rd disclosed to a 3 party that you have bank deposit, whether Philippine or Foreign currency. If you have a trust fund a bank (which is not a deposit), the bank cannot also disclose it because of this law. Otherwise it will violate your rights and it will give rise to a criminal offense. But the exceptions are different. The cases by which information about Philippine Currency Bank Deposits can be disclosed are different from the cases by which information about Foreign Currency Bank Deposits can be disclosed. The same with funds and properties in bank’s possession.

How will the loan be extinguished? By dacion en pago OR It can be secured by a mortgage. Because this time the loan is granted in the ordinary course of business it can now be extinguished by dacion en pago or be 39 | P a g e

Special Commercial Laws Notes by MARX and MON st

1 Advice: If there is a problem about secrecy of bank deposits you have to ask yourself, is it in Philippine Currency or Foreign Currency? This is because you have to cite the correct/appropriate law. There is only 1 instance when 6426 Foreign Currency Deposits law applies even if the deposits are in Peso. That is in case of Mexican Peso, which is a foreign currency. There is also Peru Peso. That is why it Philippine Currency is used instead of Philippine Peso. Intengan vs CA A couple of City Bank Officials were caught manipulating the account of a client. They siphoned off the accounts to their personal accounts. This was discovered by City Bank. So it filed a criminal complaint against the erring bank officials. In the course of the complaint the bank disclosed the details of the account manipulated. So you cannot support/substantiate your charge against the erring bank official unless you disclose the account manipulated in details. City Bank did so without the consent of the account holder. So the account holder sued City Bank for the violation of RA 1403 for disclosing information about his deposit without his consent.

RA 1405 - Philippine Currency Bank Deposits What do you mean by Bank Deposits in this context? This means funds given to the bank giving to a creditor-debtor relationship. Requisites: • Funds given to the banks • Ownership over the funds is transferred o the bank • The bank is free to use the funds as he pleases • The bank has the obligation to return the money upon demand by the depositor under Art 1980 Civil Code. • Bank Deposits shall be governed by the Law on Loans (Art 1980 Civil Code). • Not contract of strict deposit. Not funds given to the bank for safe-keeping, because if such is the case the applicable law is RA 5791, Funds Other Than Deposits. What does investment in government securities mean? Any investment in security issued or guaranteed by the government is covered. Government securities are Instruments issued or guaranteed by the government. Meaning the payment shall be made or guaranteed by the government. Examples: Treasury Bills, Erap Bonds, Maharlika Bonds (during the FVR’s time), GSIS Civil Trade Treasury Bonds and any obligation of the government evidenced by a debt instrument is covered by 1405.

[Atty. Divina had a similar case. Taking into consideration the Intengan case, they snowflaked the name of the account holder. There was no disclosure because nobody knows who he was.]

The case went all up to the SC. The SC hey wait a minute you guys! The account involved here is not in Philippine Currency. It is a Foreign Currency. Therefore the correct law is not 1405 but RA 6426. Then the SC said that the best legal minds in the country failed to notice a very important/fundamental thing that the account involved is not Philippine Currency but a Foreign Currency therefore the correct law is not 1405 but RA 6426. Case dismissed.

The bank cannot disclose your investment in government securities. Treasury bills are borrowings of the government, they are auction of; there a 3 different tenors – 31 days, 91 days, 182 and 365 days. If you invest for 31 days you will issued with a bond. You cannot buy directly from the National Treasury. You can only buy through banks. Your investment securities are also covered by 1405. Philippine currency deposits are confidential and privileged. They cannot be examined, inquired or looked into.

Can a complaint be filed for the violation of RA 6426? SC said not anymore because the filing of the complaint for the violation of RA 1405 did not suspend the running of the prescriptive period to file a complaint for violation of RA 6426 because these are 2 different kinds/laws. 40 | P a g e

Special Commercial Laws Notes by MARX and MON Example: A has following accounts with a bank, savings, current, trust funds, money market placements. Which of this accounts are covered by RA 1405? Savings, checking accounts (checks/funds withdrawal by the issuant of the check), current accounts (same with checking accounts) - covered How about Trust funds and money market placements? Prior to the case of Ejercito vs Sandiganbayan (Oct 2006), trust funds and money market placements were not covered by RA 1405, because they are not deposits they were instead covered by RA 5791 which covers funds other than deposits. In the case of Ejercito vs Sandiganbayan (involving the Jose Vellarde Account) the SC held that funds invested in the banks are likewise covered by RA 1405. It rationalized that the term “deposits” should be broad enough not just to cover funds given under a contract of loan also funds invested in the bank. So as long as the funds can be used by the bank for loans and similar transactions, either deposited or transacted, can be covered by RA 1405. The SC said citing RA 1405 deposits of whatever nature and kind are confidential and privilege. The phrase “of whatever nature and kind” is broad enough to include not just bank deposits but also all funds invested in the bank. Because of this jurisprudence trust funds are now covered by RA 1405 and likewise by RA 8791. The thing not addressed by SC is this, what exceptions will be applied, exceptions under RA 1405 or that of RA 8791? SC is silent. Trust funds – legal title over the funds is transferred to the bank. These are not covered by PDIC only bank deposits are insured by the PDIC. That is why Trust Fund has a higher yield because it is not a deposit and there is no insurance. The bank will act as a trustee. As such it has legal title over the funds, and it has fiduciary duty with respect to those

accounts. It has to remit, account on how the money was spent or invested by the bank. Example: You have to bank tellers. 2 of them are chatting with each other and one of them made a remark, “You know the account of the public official is almost zero balance. This was overheard by a columnist. The columnist wrote in his column that the account of the public official is almost zero balance. Can he sue the columnist for violation of RA 1405? No because RA 1405 applies only to bank officials not non-bank officials. He can be sued for violation of his right to privacy under the Civil Code. Can the public official sue the seller who made the remark? rd No because it was not a discloser to a 3 party but to a co-employee in the course of her duties as a teller. The teller represents the bank because she is an employee of the bank. What are the EXCEPTIONS or cases wherein the account can be disclosed without violating RA 1405? • Written permission of the account holder • Impeachment • In cases of a court order • The BIR under the tax Code may inquire into the deposits for the purpose of computing the tax due of the estate of a deceased depositor. Because foreign currency are not exempt for estate tax • The BIR under the Tax code may inquire into the bank deposits of a taxpayer who has filed an application for compromise of his tax liability on the ground of financial incapacity • The PCGG under its mandate may have access to bank deposit for the purpose of recovering illegally acquired funds • In case a law is passed repealing or amending RA 6426, it is a mere law, it can easily be modified. SPCL10 rd Regarding the 3 exception that in cases of a court order, such court order only in the following cases: a court order justifies disclosure of bank deposits but such court order must be in the following cases: • The subject matter of litigation is the money deposited • Bribery or dereliction of duty • Prosecution for unexplained wealth • Prosecution for anti-graft and corrupt practices act

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Special Commercial Laws Notes by MARX and MON • • •

exception. Therefore the bank manager can testify without violating the law.

Violation of the anti-money laundering law Violation of the human security act In case of Garnishing

Illustration: Let say the Senate Blue Ribbon Committee is conducting an investigation on the extent of jueteng activities in Pampanga. In aid of legislation, the Senate Blue Ribbon Committee invited persons suspected to be involved in jueteng and subpoenad or issued subpoena duces tecum in various bank of Metro Manila, directing such banks to produce documents or records of the person suspected to be involved in jeteng activities. Supposedly, it is in aid of legislation, can the bank comply without violating Republic Act 1405 (Law on Secrecy of Bank Deposits)? Supposedly introducing factual amendment to the Anti-money Laundering Law presented by the Senate Blue Ribbon Committee. No, because the Senate Blue Ribbon Committee is not a court, it may be a very powerful committee but the fact remain that it is not a court. The Fiscal is conducting an investigation on Violation of B.P 22, to complete the investigation, the Fiscal issued a subpoena to the bank where the check was drawn against to produce related documents and records of the respondent in a criminal case, can the Bank comply without violating the law? No, because the Fiscal is not a court, it has to be a court order

A issued a check for Php1000,000, it was drawn against Allied Bank and such check was deposited with Union Bank. Union Bank undecoded the charged slip. Union Bank only recovers Php1000 from Allied Bank when it should have recovered Php1000,000 for the amount for which the account of A was debited. After 1 year, it was discovered, so Union Bank filed a petition to examine the account of A. Allied Bank opposed the action of the ground that it will violate the right of A under Republic act 1405, which the Union Bank counterargue that it will not because the subject matter of litigation is the account where the money is deposited. Is the money found in the account of A is the subject matter of the litigation? No, because the cause of action of the Union bank is to recover the difference between Php1000,000 and Php1000, it paid Php1000,000 to payee depositor but only got P1000. Union Bank is a collecting Bank, it collects the amount covered by a check from the drawee bank so it can credit the account of the depositor. So the cause of action of the Union bank is to recover the difference between Php1000,000 and Php1000, and not necessarily the funds in the account of A, so it is any money that falls under the difference between Php1000,000 and Php1000. The right to privacy is a right guaranteed by the constitution and if it examines the account of the depositor which do not fall under the exception violates such right to privacy.

The subject matter of litigation is the money deposited A one transfer for $1000, and ended up being remitted to the account paying in the Philippines for $1000,000. So the teller must have overlooked, she misread the instrument, so the account of that the payee was credited was $1000,000. He consulted his lawyer and such lawyer advised to withdraw, spend such money. The payee withdrew the funds, and he deposited such withdrawn amounts to various banks. Thereafter, the Bank discovered the error and filed an action for the reimbursement or return of the money. They ask the court to subpoena ad tefistificandum to compel the bank managers who have certain accounts suspected to be depository of the funds. When one of the Bank managers is suppose to testify, he was opposed by the lawyer of the payee arguing such testimony by invoking Republic Act 1405. Does the testimony violate Republic Act 1405? No, because the subject matter of litigation is the money deposited, the subpoena ad tefistificandum is a court order directing the person involved to testify. Being a court order and being the subject matter of litigation of the money deposited falls within the

Bribery or dereliction of duty Prosecution for unexplained wealth Prosecution for anti-graft and corrupt practices act A special prosecutor was conducting an investigation for violation of unexplained wealth law involving a public official suspected to have an ill-gotten wealth. In the course of the investigation, the special prosecutor issued a subpoena were such public official maintained an account. The Bank opposed citing the R.A 1405, this case went up in the SC. The SC said that when it comes to investigation of unexplained wealth under anti-graft and corrupt practices act, the prosecutor may have access to bank deposits. Although a special prosecutor is not a court, but the SC allowed the examination under the exception on the accounts, documents or records. The SC relied on the Anti-graft and corrupt practices act and unexplained wealth law, in both laws it provided that Bank deposits shall be taken into account in the enforcement of these laws. So, when it comes to anti-graft and corrupt practices act, bribery or dereliction of duty and the unexplained

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Special Commercial Laws Notes by MARX and MON Violation of the anti-money laundering law

wealth law, even a prosecutor may have access to bank deposits Reiterated in the case of Banco Filipino vs Purisima. In such case the subject matter of the case extends to the relatives of the public officials charged with violation of unexplained wealth, then the relatives invoked R.A 1405 saying that they are not public officials so their accounts should not be examined. In case of violation of unexplained wealth law, the right to inquiry into illegally acquired property in such cases extends to cases where such property is concealed by being held or recorded in the name of other persons. Note: in both examples, there is no court order, only an order of subpoena coming from a special prosecutor, why do we lump them under court order, were in these 2 examples there is no court order just a subpoena from a special prosecutor? Because these cases have been modified by the decision in the case of Marquez vs Desierto. Facts: Lourdes Marquez was the branch Manager of Union Bank. In the course of the investigation of the PEA money land scam, the Ombudsman issued a subpoena to Lourdes Marquez for her to produce banks accounts, documents, records or check stags of the public official involve in the investigation. She invoked republic act 1405. But the Ombudsman asserts that they have the right to inquire to Bank deposits if the subject matter of the investigation is violation of anti-graft and corrupt practices act. Union bank argues the right to privacy of its depositors. Held: the SC laid down the elements to enable the Ombudsman to examine bank account deposits. The ombudsman who includes the special prosecutor may examine bank accounts, documents, records only if the following elements are present: (these are the limitations on the power of the Ombudsman to inspect bank, documents records. • There must be a case pending before a competent court • The account to be examine must be specified • The account holder and the bank officer must be informed of the time and date of the examination • The examination must be limited to the account specified

What is Money Laundering? Dirty money made clean, it is a crime whereby the proceeds of an unlawful activity is transacted making it appear that it came from legitimate resources. Example: Kidnapping, if ransom money is taken and deposited in the Bank, then the crime of money laundering is committed independently of the commission of the crime of kidnapping. Because of the anti-money laundering law, that act of making it appear that the funds came from legitimate resources is a crime by itself independently of primary crime. 3 ways for the commission of Money Laundering: • Action- if a person knows that a monetary instrument relates to an unlawful activity and transacts it. • Omission- if a person knows that a monetary instrument relates to an unlawful activity and he fails to perform an act that facilitates the commission of money laundering • Failure to report in the anti-money laundering council. If there is a transaction that is covered by the anti-money laundering law and the bank does not report to the anti-money laundering council, the crime of money laundering itself is committed regardless of good faith or bad faith on the part of the bank. 2 kinds of transaction that is covered by the Anti-money laundering act that must be reported to the AMLA; both transaction must be reported to the Anti-Money laundering council otherwise, the crime is committed • Covered transactions- any transaction involving the amount of more than Php500,000 in one banking day. The Bank to whom the money is deposited must report it to the Anti-money laundering council otherwise it is liable for violation of the Anti-money laundering act • Suspicious transactions- any transaction regardless of amount with any of the following circumstances are present: o There is no underlying legal justification or economic trade Example: a lawyer who has a depositor-client who have $10,000,000 want to deposit such amount to a bank without any answer with questions about its legal justification or economic trade, if such lawyer or depositor-

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Special Commercial Laws Notes by MARX and MON

o

o

o

o

o

client cannot explain the supposed to be money deposited in the bank, the lawyer and the depositor-client can be held liable for violation of anti-money laundering act, because the lawyer perform an act that facilitates money laundering and on the very least the lawyer know that an act or a monetary instrument facilitates in the commission of the anti-money laundering. The client is not properly identified Example: Jose Velarde account Can we open a number account like account #143 or 9? Yes, for as long as the client is properly identified owner of such account. Number account is allowed but not for checking accounts or current account for as long as the owner is identified. The transaction is not commensurate to the financial capacity of the client. Example: a professor without other means of income earning Php20,000 a month, suddenly deposited Php400,000. The transaction is so structured as to prevent reporting to the Anti-money laundering council. Example: a person deposited today Php499,000, the next day Php495,000, after a week Php490,000, so clearly such person tries to avoid the threshold amount. The transaction is deviates from its usual transaction with the bank Example: the person deposits Php50,000 every week since the year 2000, then all of a sudden he made a huge deposit, it becomes a suspicious The transaction engaged of an unlawful activity as defined by AMLA Kidnapping High jacking Arson Murder

o

Any transaction analogous to the foregoingthe enumeration under the law of what constitutes suspicious transaction is not exclusive because any transaction analogous is likewise suspicious Example: a bank in Pampanga, every Monday, Wednesday and Friday, someone wearing maong shorts, and SLEEVELESS SANDO deposits Php30,000 in coins

Who can inquire into the bank deposits in case there is a violation of the Anti-Money laundering law? The anti-money laundering council (AMLA), the bank or other institution will repost covered or suspicious transactions to the AMLA, the AMLA will be the one to inquire whether such funds relates to any unlawful activity, if it does, it will file a petition with the CA to forfeit the funds and request for a freeze order in the meantime. The freeze order is good for 30 days. Republic vs Eufemio Issue: whether the inquiry order may be granted if there is no pending case with any competent court Held: there is no need for the pending case, the AMLA may inquire or ask for a bank inquiry order. However, the bank inquiry order cannot be granted ex parte, it has to be with notice with the depositor. When it comes to freeze order, the AMLA may obtain a freeze order without notice to the account holder because the law says so, freeze order may be obtain ex parte. But when it comes to Bank inquiry order, it has to be with notice to the depositor. A court order is not necessary in any of the following cases, the AMLA may inquire into the bank deposits even without a court order if the duns or proceeds relate to: • High Jacking • Kidnapping • Arson • Murder • Violation of Dangerous Drugs act Violation of the human security act What do we mean by Human Security act? It covers accounts used for terrorism In case of Garnishment In case of Garnishment, any bank disclose any information about bank deposits pursuant to a writ of garnishment, placing the account, garnishing it meaning segregating it from

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the funds of the depositor to answer for a garnishment order, such bank is not liable or there is no violation because when a bank discloses information pursuant to a garnishment, the disclosure is only incidental to the execution of the judgment and it is not the intention of the legislature to place bank deposits beyond the reach of judgment creditor

• •

The BIR under the tax Code may inquire into the deposits for the purpose of computing the tax due of the estate of a deceased depositor. Can the bank disclose to the heirs of the deceased depositors without violating the RA 1405? No, because the law says that the BIR can inquire to the bank deposits not the heirs. The heirs may refer their concern to the BIR. The BIR under the Tax code may inquire into the bank deposits of a taxpayer who has filed an application for compromise of his tax liability on the ground of financial incapacity Under the unclaimed balances law, in case of dormant accounts for which may be escheated in favor of the government, the bank may disclose information about dormant accounts. The Unclaimed Balances Law allows the Government to forfeit deposits without claim or movement for 10 years; it is the obligation of the bank to disclose information about dormant accounts to the National treasurer so that the National Treasurer can initiate escheat proceedings. Such disclosure of the bank does not violate RA 1405. Such forfeiture is based on the Regalian Doctrine The PCGG under its mandate may have access to bank deposit for the purpose of recovering illegally acquired funds In case a law is passed repealing or amending RA 1405, it is a mere law, it can easily be modified. COMPARISON BETWEEN 1405 TO 6426 (Foreign Currency Deposit Act) Under RA 6426 (Foreign Currency Deposit Act) General Rule: Foreign Bank Deposits are privileged and Confidential Exceptions: • Written permission of the depositor • Impeachment • The AMLA may inquire bank deposits • The BIR under the tax Code may inquire into the deposits for the purpose of computing the tax due of the estate of a deceased depositor. Because foreign currency are not exempt for estate tax

The BIR under the Tax code may inquire into the bank deposits of a taxpayer who has filed an application for compromise of his tax liability on the ground of financial incapacity The PCGG under its mandate may have access to bank deposit for the purpose of recovering illegally acquired funds In case a law is passed repealing or amending RA 6426, it is a mere law, it can easily be modified.

General Rule: Foreign currency deposits are exempt from court order, garnishment, and execution Exceptions: • A court order In case of the Anti-Money laundering law because Anti-Money laundering law provides that “notwithstanding 1405, 6426 and 8791, the AMLA may inquire into funds, investments or deposits if there is probable cause that will relate to any unlawful activity under the Anti-Money Laundering Law. • A court order for equitable considerations Example: A 10 year old minor was raped 10 times by an American tourist. But since the American tourist was not in the country anymore the so the Parents claimed for the civil liability arising from the criminal act. In the Garnishment, the American tourist has a bank deposit in China Bank, the parents caused the garnishment of the deposit with China Bank, but China Bank invoked that there in a law that exempts foreign currency deposits from garnishment, execution or court order. The Supreme Court held that foreign currency deposits of a foreigner guilty of a wrong doing can be garnished because RA 6426 was passed to a solitary purpose, to encourage foreign currency deposits but not to benefit a wrong doer. According to the Secretary of Justice, foreign currency deposits are exempt from escheat proceedings because escheat is akin to garnishment, since foreign currency deposits are exempt from garnishment and escheat is a form or specie of garnishment, therefore foreign currency deposits are exempt from escheat proceedings. Being exempt from escheat proceedings, the bank has no authority to disclose to the National Treasurer any information about foreign currency dormant accounts

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Special Commercial Laws Notes by MARX and MON SPCL11 General Banking Law (RA 8791) General Banking Law prohibits disclosure of any information among funds other than deposits as well as properties in the bank’s possession belonging in the private entity. It covers funds other than deposits. Prior to the case of Ejercito vs Sandiganbayan, trust funds are confidential not because of RA 705 but because of RA 8791, but now TRUST FUNDS ARE COVERED BY RA 1405 hence funds other than deposits for as long as their inventory ___ and the banks may use the same for loans or similar transactions are now governed by 2 laws RA 8791 and RA 1405. The Supreme Court did not go beyond explaining what exceptions will apply because under RA 8791 there are 2 exceptions (written permission and court order). There are funds which are not covered by RA 1405, these funds that the bank cannot be use for loans and other similar transactions (take note of the qualification that the SC held in Ejercito vs Sandiganbayan). “Funds which are deposited or invested with the bank which the bank can use for loans and similar transactions” if the bank can use it for loans and similar transactions then it is not covered by RA 1405 but it is governed by RA 8791. Examples of these are funds obtained by the bank for “strict deposit” meaning for safe keeping. Since the bank cannot use these funds for loans, it is not covered by RA 1405 but they are covered by RA 8791. Whether 1405 or 8791 both laws say that it cannot be inquired or looked in to but the problem lies on which exception would apply. 8791 also includes properties belonging to private entity, example of these is the safe deposit box, can the bank disclose information about the contents of the safety deposit box? No, because it will violate 8791 What if the depositor did not pay rents on the safety deposit box? If the depositor is not paying rents, then the Bank will force open the safety deposit box. In case of force opening, the Bank will know the contents of the box, so every time the bank will force open the Box it engages with the services of the notary public to make sure that the owner of the safety deposit box will not put a tag on the contents of Safety deposit box way beyond human imagination.

Can the bank disclose the whereabouts of a client, let say that a bank has 2 clients and one is indebted to the other, can the bank upon the request of the creditor disclose information on the whereabouts of the debtor? This information is not covered by 1405, 6426 or 8791 because it is not funds, but it is covered by the Constitution the right to privacy. Bottom line is that “whatever information we give to the bank is confidential or privilege and can only be disclose in those cases provided by law” What are prohibited transactions under the General Banking Law? • The bank is not allowed or prohibited upon disclosing any information about funds or properties in the bank’s possession without a court order or information to the depositor • Overvaluing the collateral o Example: loan value is dependent on the appraised value; the higher the appraisal the higher the loan. The play there is to convince the appraiser to increase the value. • The bank is not allowed to outsource inherent banking functions. Outsourcing means letting a third party to do function which can be dine in-house. The bank can outsource non-inherent banking functions o Example: inherent functions like tellering; non-inherent banking functions like janitorial services, security etc Which agency exercise supervision over banks? The Security Exchange Commission (SEC) and the Banko Sentral ng Plilipinas (BSP) SEC exercise supervision over banks because a bank is also a corporation, all corporation obtained their primary franchise, or the authority to act as a corporation from the SEC. now such corporation wanted to have a secondary franchise like to engaged in a special business like banking or insurance, it need such franchise to appropriate agency. If it is banking it is the BSP. So any corporation engaged in specialized business needs 2 franchises, primary franchise (to act as a corporation) – SEC; secondary franchise (to act or engaged in a particular business) under supervision of another agency. Theoretically, there is no clash between SEC and BSP in jurisdiction because all that is pertain to corporation is cognizable by the SEC and all that is pertain to banking is cognizable by BSP. Banko Sentral ng Pilipinas is governed by RA 7653 (central bank act of 1993). The old central bank was RA 265.

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Special Commercial Laws Notes by MARX and MON

All obligations of the old central bank are not assumed by the new BSP.

•

What are the objectives of the Banko Sentral ng Pilipinas? • Supervised policy directions in the areas of banking, money and credit • Promote peso stability • Promote price stability • Exercise supervision over banks and quasi-banks Supervised policy directions in the areas of banking, money and credit

•

Currency issued by BSP represents a conditional obligation on the government. The BSP cannot print notes without assets to back it up. The required back up is assets before gold.

•

Which currency is a legal tender? In Obligations and Contract, the debtor can compel the creditor to accept Philippine Currency in payment of a debt when it tenders the right amount. Are coins legal tender? Yes, but only up to certain amount. Php100 – for denominations of Php0.25, Php0.10 and Php0.05; Php1000 – for denominations of Php1.00, Php5.00 and Php10.00 The central bank did not put any cut on the legal tender power of notes What about notes which are defaced, is it a valid legal tender? If the note is defaced by more than 3/5, it is not a legal tender What about notes and coins withdrawn from circulation carrying the signature of the President if such president signature is not incumbent, can it be still a legal tender? Yes, provided within 1 year from recall, for the period of 1 year, it can be exchanged for legal tender notes. 1 year from recall and 1 year for exchange, beyond that period or for 2 years such notes are only for posterity not as a legal tender. Is a cashier’s check a legal tender or manager’s check? A cashier’s check is a check drawn by a bank against itself, the drawer and the drawee itself is the bank. There are conflicting decisions: • A cashier’s check issued by a bank in good standing is as good as cash • A check whether ordinary, manager’s or cashier’s is not a legal tender, it only proves

the affirmative capacity of the obligor to pay his obligation. If there is a mistake (a bank is required to exercise extra-ordinary diligence in the performance of their obligations) on the part of the depositor, it is the obligation of the bank to call the attention of the client and rectify such mistake because the banks are engage in a business that affects public interest. A manager’s check or a cashier’s check is legal tender in the commercial world A cashier’s check is not legal tender, however if the creditor accepts without objection, it becomes legal tender under the principle of estoppel. For the purpose of bar exams- cashier’s check is not legal tender because: o Under section 60 of the Central bank Act, the debtor cannot compel the creditor to accept a check in payment of a debt (by express provision of law) the law makes no distinction as to what check it is. And if the debtor cannot compel the creditor to accept a check in payment of a debt that means that a check is not legal tender. o Civil Code Art 1249

How does BSP exercise supervision over banks and quasibanks? • Issuance of rules and regulations to govern banking business • Imposition of sanction in case of violations of these banking rules and regulations • Conducting audit of banks or examination to determine compliance with these rules and regulations and to inquire insolvency or illiquidity What are the remedies available to the BSP in case a bank violates any banking rules and regulations? • BSP may impose a fine and other administrative sanctions and the fine shall not exceed Php30,000 a day for every violation and Suspension of erring directors and bank officers • Suspension of a quasi-banking privileged or function, Foreign exchange operation, rediscounting facility And Clearing Facility o Quasi-banking- the ability to obtain funds from the public through deposit substitutes o Foreign exchange operation- buys and sells foreign exchange

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Special Commercial Laws Notes by MARX and MON Rediscounting facility- when a borrower issued a promissory to a bank, the bank may negotiate it with the BSP o Clearing Facility- the check will be cleared, people cannot make checking account To appoint a conservator or receiver To close a bank in cases allowed by law o

• •

Appointment of a Conservator or Receiver A conservator is appointed if the bank is illiquid. Illiquid means its assets are not in cash. Example: the bank has an obligation of Php100,000,000.00, it cashed only Php5,000,000.00, but its assets are Php1B, but the assets are real properties. So a bank may have more assets than liabilities but it is not liquid. If the bank is illiquid, it cannot pay its obligation. A receiver is appointed if the bank is insolvent. Insolvency means the assets are less than the liabilities. Cases where the bank may be under a receiver other than insolvency: • Inability to pay debts when it falls due provided that this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community • If the bank violates a cease and desist order issued by BSP • If the bank cannot continue the business without involving probable loss to its depositors or creditors Do conservators or receivers have powers of dominion? No, they only have acts of administration, they cannot sell properties of banks, they cannot approved option to purchase properties, just purely acts of administration Can the BSP close a bank without prior hearing? Yes, because if prior hearing is required then bank run will be the order of the day. The power of BSP to close a bank is a valid exercise of police power. If there is showing of bad faith or grave abuse of discretion, it can be set aside and subject to judicial scrutiny

What are the assets of the banks? • Cash • Properties (real or personal) • Receivables • Collectibles What are the liabilities? • Deposits • Deposit Substitutes • Standing Letter of Credits • Obligations Due to Credits SPCL12 TRUTH IN LENDING LAW HISTORICAL BACKGROUND • The Truth in Lending Law was pass to compliment the then USURY LAW. • The USURY LAW is suspended (not repealed) since 1982 up to the present because Central Bank (CB) lifted the ceiling on interest rate. • A rate of interest is USURIOUS if it in excess of the ceiling set forth by the Bangko Sentral ng Pilipinas (BSP). • In 1982 CB issued Circular 905 lifting the ceiling on interest rate. There being no ceiling in interest rates then there is no usurious rate of interest. • When the Truth in Lending Law was passed the Usury Law was still in place. Under said law the rate of interest is usurious if the interest is more than 12% for secured loans and more than 40% for unsecured loan (no collateral, no mortgages). • Many persons were found to circumvent the usury law by sticking to the ceiling but collecting other items not on their interest but other charges. Since they are not interest then they are not usurious but they jacked up the cost of credit. So this is why the Truth in Lending Law was passed – to compliment the Usury Law. What does the Truth in Lending Law basically provide? What is the ESSENCE of Truth in Lending Law? The law basically imposes upon the creditor an obligation to inform the borrower the true cost of credit.

Can BSP close a bank on the strength of a report by the supervising and examining department without complete notice of such bank? Yes,

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Lay down everything on the table. No hidden charges. No hidden fees. Disclose everything to the borrower - what are fees that he has to pay, charges, interest, damages. Everything disclosed to the borrower so that he can decision whether or not to borrow, obtain a loan or pursue a transaction w/ the creditor.

Special Commercial Laws Notes by MARX and MON If the car has a value of 3M and down payment is 1M, how much is the amount to be financed? 2M. It is payable in 5 years, then 2M plus interest over 5 years. It has to be indicated

Specifically the law REQUIRES THE CREDITOR TO FURNISH the borrower prior to the consummation of the transaction WRITTEN DOCUMENT CONTAINING THE FOLLOWING information: 1. Cost price and delivery price of the property 2. Amount of down payment/Trade in 3. Difference between 1 and 2 4. Charges not incident to the credit which must be itemized 5. Total amount financed 6. Finance charges 7. Finance charged as it bears to the total amount financed or simply the unpaid interest on the outstanding obligation

6.

Finance Charges The interest. How much is the interest? Is it 12%? Is it compounded monthly? Is it in arrears/discounted? Is it compounded? Is it collectible every quarter/semiannually? All of these must be indicted.

Application: A wants to purchase a car on installment basis. The cost of the car is 3M. He made a down payment of P1M. The balance (P2M) is covered by a promissory note payable over 60 mos. (5 yrs to pay). The truth in lending law requires the creditor (the car company) to disclose to the borrower (the buyer to the car) the ff informantion: 1. Cost Price/Delivery Price - How much is the cost or value of the delivery of the car? P3M 2. Amount of Down Payment – P1M; OR “Trade In” (if the borrower wants to trade his old car in exchange for a new car then the trade in value has to be indicated in the document) 3. The Difference bet. 1 and 2 4. Charges not incident to the credit which must be itemized. Are there charges not incident to the credit? Yes. Interest is not incident to the credit. Are there other charges not related to the credit? If there are they must be itemized. Example: Is there handling fee for the transaction? Is there a service fee for the mortgage or registration of the mortgage? Is there a notarial fee? Is there a registration fee?

7.

This is why when you purchase a car on installment basis you are provided with the schedule of the st nd amortization - 1 mo. This much...2 mo. This th much...so forth and so on up to 60 mo. These are disclosed so that the borrower can decide - given the interest of 12% compounded monthly, given the handling fees of so much, the handling fees of so much will I pursue the transaction? So everything disclosed. Nothing hidden. This is basic concept of the truth in lending law. What happens IN CASE these REQUIREMENTS ARE NOT COMPLIED WITH? A purchased a car on installment basis. He paid 30% and the balanced covered by the promissory note secured by a chattel mortgage on the same vehicle. The Promissory note indicates the principal amount, the value of the car 3M, amount of down payment, interest 12% on monthly basis, compounded if it is not paid and “charges which the car company will determine from time to time.” What law is violated in this case? The Truth in Lending Law because the charges must be itemized. It can just simply be said, “from time to time,” or “what the creditor will determine.”

So all the fees or charges not incident/related to the credit must be disclose prior to the transaction. 5.

The Finance charge bears as to the total amount financed OR, simply, what is unpaid interest on the outstanding balance the obligation.

If you give discretion creditor then you are not being clear on the cost of credit.

The Total Amount Financed. The requirement of the law is to itemize the charges which are not incidental to your credit. 49 | P a g e

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In this case there is non-compliance with the Truth in Lending Law. What are the CONSEQUENCES? Does it render the transaction unenforceable? Will it render it void? Does that mean that the borrower need not pay anymore the value of the amortization as they fall due? Does that mean that the car company can get back the credit? Answer: NO. These are not the consequences of non-compliance with the Truth in Lending Law. What then are the EFFECTS? • Charges not disclosed need not be paid and • If paid can be recovered • w/o prejudice to penal sanction that might be imposed against the erring person. There is a penal sanction that attaches to it. It is a crime/offense. It is probationable. Unenforceability and declaration of nullity are not the consequences of non-compliance with the Truth in Lending Law. This is finally made clear by the SC in the case of DBP vs ______ (this is in our supplemental outline) If you want to buy a DVD component. You went to SM Appliance Center and you were able to spot the DVD component that you’ve been looking for. You got it and you got your credit card from your wallet, and then presented it to the sales lady. The sales lady swiped it into the machine. Machine said transaction approved and then you signed the invoices. You pick up 1 for you, 1 for the establishment (SM), another 1 for the card company. Then you got your DVD component. After 1 month you got a billing statement from your card company. It turns out that you have a revolving credit with the card company. You are allowed to pay 36 months with the card company 0 interests for 36 mos. So you are not forced to pay affront. You will pay on installment basis for 36 mos. 0 interest. Billing statement comes; it says “12% interest on the invoice charges and other fees or charges that the card company may determine from time to time.” Did SM Appliance Center Violated that Truth in Lend Law? No because the transaction between SM and the card holder is on cash basis. The installment basis is between the card holder and the card company. If there is anyone required to comply with the Truth in Lending Law it is the card company. The truth in lending law does not apply when there is no “credit component” in the transaction. It does not apply when the transaction is payable in cash.

Supposing 1 of you lends money to your classmate for a gimik/date. Does your classmate need to comply with the Truth in Lending Law by lending X amount of money so that you can have a good date? No. The in Lending only applies to a creditor as defined by law. What does this mean? (creditor) A person who extends credit in the course of business. It does not apply to generic creditor. PNB vs Padilla (1996) In this case a promissory note that stipulates the unbridled authority of the creditor/bank in the case to adjust or change the interest rate every quarter or every month as the banks shall please. SC said any provision in a promissory note or any loan agreement giving not giving the creditor the unbridled discretion to change the interest rate as he pleases despite the advance consent of the borrower violates the principle of “equality of contracts.” If the promissory note signed by the maker indicates that the bank has been empowered to change the interest rate every month, this stipulation is void because it is sole potestative condition left solely to the discretion of the creditor. In other words just because there is a provision in the promissory note, it does not mean that the creditor can adjust or increase the interest rate anytime that he wants. There has to be consent to every subsequent interest increase. st

For the 1 the SC court said that such provision does not only violate the principle of equality of contracts it also violates the Truth in lending Law. This is the case of UCPB vs Spouses Velloso (2007). UCPB vs Spouses Velloso In this case the promissory note signed by the borrower in favor of the bank (UCPB) indicate that the branch manager is authorized to adjust the interest rate every quarter and the interest rate as posted in conspicuous place in the bank premises is the applicable interest rate for the interest period. SC court said that that provision giving UCPB the power to adjust the interest rate is void for being for being a sole potestative condition and more so it violates Truth in Lending Law. So the officer who increase the interest rate without to consent of the client may be charged criminally for the violation of the Truth in Lending Law.

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Special Commercial Laws Notes by MARX and MON

WHEN does the CAUSE of action ACCRUE? Within 1 year from the date the interest or charges not disclosed are supposed to be paid (I’m not sure w/ this transcription, the law provides that the action to recover the penalty may be brought w/in 1 year from the date of occurrence of the violation...). PDIC LAW RA 9302 as amended What is the CONCEPT of the PDIC? PDIC is the insurer of deposits. It insures deposits. Where does PDIC get the premiums? It collects premiums from the “banks.” Not from the depositors/client. It is based on a certain percentage of the total deposits, ¼ - 1%. Every year PDIC collects premium from the bank to insure their deposits dependent on the amount of the all the deposits.

What about TRUST FUND? This is NOT covered by PDIC. This was made even clearer by the Amendatory Law to RA 9302. Why is Trust Fund not included? Because what is covered by the PDIC is only deposits, funds deposited with the bank giving rise to a creditor debtor relationship. So if there is no creditor-debtor relationship then that is not insured with PDIC. If you have P100 K, you want to put your money in the bank. The bank asked you what do you want: savings - low interest but you can withdraw your money any time), time deposit - 30 days, you get 4-5%; you cannot easily withdraw your money; if you preterminate the interest rate will be adjusted trust funds - higher interest rate than savings and time deposit. Why? This is because it is not insured with PDIC. So the bank shall not pay premium for the trust fund.

If the bank collapses, then you can file your claim w/ PDIC. This is the concept of PDIC. It ensures your deposit even without you paying the premium (which is paid by the bank).

It is not included/computed in determining the premiums to be paid by the bank to PDIC. This is the risk, if the bank collapses it is not insured with PDIC. There is a disclaimer when you sign a Trust Agreement saying, “Not Insured with PDIC”

What are the CONDITIONS to make PDIC liable? 1. The bank must have receive deposits 2. The bank became insolvent or closed because of insolvency If the bank is operating in good condition you don’t go to PDIC. You go to the bank to get back your money. You only go to PDIC if the bank has closed because of insolvency. 1st element: The bank receives “deposit.” What does do we mean here by DEPOSIT? Does this include trust funds, fictitious accounts, proceeds of money market? The amendatory law provided fictitious accounts, spurious accounts, dummy accounts, fraudulent accounts are not insured with PDIC. The law made st this clear for the 1 time (this was not in the RA 9302). Like what happened to the case of Legacy (Legacy Insurance, Legacy Motor Vehicles etc). They discovered that there are many deposits are fictitious so they were not honored by the PDIC.

How about FUNDS HELD FOR SAFEKEEPING? NO. It has to be funds giving rise to creditor debtor relationship. The following accounts are COVERED by PDIC • Savings • Current/Checking Account (these are the same) • Dollar Deposits – the new law made it clear Dollar Deposits are covered. You have to convert the same to Philippine Currency at the time of closure of the Bank. Accounts NOT Covered by PDIC • Trust Fund • Money Market Placement - here you buy securities from the bank there is no creditor debtor relationship) PDIC vs CA A made a money market placement with ABC Finance Co (company). The company is supposed to return the principal investment and the interest within 30 days but at the maturity of the placement the company collapsed, it became insolvent. So the company referred A to XYZ Bank (bank) and

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Special Commercial Laws Notes by MARX and MON Affiliate Company of ABC owned and controlled by the same group of stock holders. The bank issued a certificate of deposit in favor of A – 30 days Time Deposit Certificate. On maturity of the time deposit certificate the bank also collapsed. Can A file a claim with PDIC? 1st condition: Did the bank received deposit in this case? No. It is the Finance company which got the money, not the bank. The bank only issued a certificate of deposit to him after being referred to by an affiliate company to the bank, but the bank never received deposit. So nothing was insured with the PDIC. The liability of PDIC is statutory, dependent on the receipt of the bank by the deposit. So if nothing was received so nothing was insured with the PDIC you cannot file claim with PDIC. What is if the CERTIFICATE OF TIME DEPOSIT is NOT NEGOTIABLE, does it matter? It doesn’t matter. What matter is that deposit was received by the bank and the bank became insolvent. COMPUTATIONS: What is the maximum insurance coverage under PDIC? Now it is P500 K (2 years ago it was only 250 K. It was increased because of what happened to Legacy Bank). Because of this increase 98% now of all accounts are insured with PDIC. What does this mean? This means that only 2% have deposits of more than P500 K. The 98% are those whose deposits are 500 K or less. Only 2% of the population of the country have deposited more than 500 K. RULES ON COMPUTATION 1. Individual account is insured separately from joint accounts; BUT 2.

3.

In case of joint accounts the amount of the deposit shall be divided equally between the depositors UNLESS otherwise is stipulated. Example: 50K; A and B, A or B, A and/or B = 250 K each unless otherwise stipulated in the agreement The maximum coverage likewise shall be divided between the depositors.

So 500 K divide also between A and B.

Given these rules how much can a depositor recover from PDIC? • 500 K for his individual account • 500 K for all his joint accounts What if he has so many joint accounts? A and/or B A and/or Father A and/or Mother A and/or Brother A and/or Sister Are all these accounts insured separately from one another? This is the significant amendment in RA 9302, which was carried over in the new amendatory law. “The aggregate share of the depositor in all the joint accounts should be added, and aggregate share of all the joint accounts is insured only up to 500 K.” So the maximum amount you can recover from PDIC is P1M – 500K for you individual account and 500K for you share in all your joint accounts. Example: A has the following accounts with ABC Bank: 1M in his own name (A) 1M A and/or B 1M A and/or C 1M A and/or B For any amount in excess of the insured deposit you cannot recover from PDIC. It can be recovered from the Bank but based on concurrence of preference of credit. So you stand in equal footing with other creditors of the distressed bank. And usually deposit is not a preferred credit EXCEPT the case of Miranda vs CA. Miranda vs CA. The depositor withdrew 5 M and converted to a manager’s check. When it was converted to a manager’s check the bank officials already knew that the bank was insolvent, it got the money and issued the managers check. In transit the bank closed because of insolvency. Under these circumstances the SC said that the deposit is considered a preferred credit. Generally it is not a preferred credit, generally the 500 K cannot be recovered not from PDIC but from the bank depending on the available assets and how many creditors are there – are they preferred or not. Your chances of recovering the entire amount nil, but the chances or you recovering a portion of the 500K depend on how preferred you are viz a viz the other creditors of the distressed bank.

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Special Commercial Laws Notes by MARX and MON Within what period can you file with PDIC? Within 24 mos. from closure. After that PDIC will not be liable but you can still recover from the distressed bank based on the rules concurrence an on preferences of credit.

Does PDIC have the power to examine bank deposits? Under RA 9302 it was not clear it was simply state that PDIC with consent of BSP may examine the books documents and records. It does not say whether this cover deposits.

A and/or B – the amount shall be divided between them: A owns 500K, B owns 500K (no problem) A and/or C – A owns 500K, C owns 500K (no problem) A and/or D - A owns 500K, C owns 500K (no problem) Total account of A is 1.5 M

The amendments made it clear that PDIC has the power to examine deposits of distressed banks.

How much can be recovered? Only 500K. Under the old law these accounts are insured separately, that is why prior RA 9302 the law was easy to circumvent. The 1M cannot be recovered from PDIC but from the distressed bank subject to the rules on concurrence and preference of credit. A has accounts with X branch, Y branch and Z branch of the same bank, are they insured separately? No because they are maintained in the same bank but different branches. So it should be per bank not per branch in computation. What if A has accounts with ABC Bank and XYZ Bank, both banks collapsed how much can he recover? This is not something the law does not contemplate. But it makes sense that the depositor can demand 500 K for his deposit with ABC Bank and 500 K for his deposit with XYZ Bank. What about account maintained with a corporation? Example: A and/or ABC Corp. Who can recover the insurance? It is the corporation unless otherwise stipulated. So don’t you ever maintain an account with a corporation because the presumption it is owned by the corporation unless otherwise stipulated in the contract of deposit.

Does BSP have the power to examined Bank Deposits? Only for the purpose of insuring compliance with the Anti-Money Laundering Law. PDIC, no qualification, can examine bank deposits of a distressed bank. Does PDIC have the power to reduce interest on deposit? PDIC law now empowers the PDIC to reduce the interest rate on any deposit made within 6 mos. prior to closure. So if you are induced by the “offer” of the bank of its high interest rate, think twice because all of these banks have closed in the past and PDIC , any way, has the power to reduce the interest rate to a reasonable level. So what is the point of putting you money in that bank because of the high interest rate if it closes? *Every time a bank offers a very interest rate, it is an indication of poor financial health. For tax purposes if an account is held in a “and/or capacity” can one of the depositor later on withdraw the entire amount without paying taxes? If it A and/or B, 50% owned by A therefore 50% may be withdrawn without paying taxes. What if it is “A and B”? Same. 50% shall be without tax. So if you want to save on taxes make it A or B. So that if B dies you can withdraw the entire deposit.

What about A in trust for B; or Father in trust for son, who can recover the insurance coverage? The account is owned by the Father, he can withdraw it anytime but he earmarked for the credit of his son.

The basis for this should be made in complete trust between A and B because if it turns out to be someone take advantage of the situation the prudence that prompted you to open account in that capacity may be defeated by other important consideration. Just like what happened to the case of City Bank v CA.

The law says that for insurance purposes it is the beneficiary (in whose favour the account is opened), the son, that can claim the insurance coverage not the one opening the account,

City Bank vs CA. Father and/or daughter. The daughter withdrew the entire deposit and transferred everything to her account.

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Special Commercial Laws Notes by MARX and MON Famous moviestar before he was officially declared dead, there was observance of 3 days before he was declared clinical death (organs are no longer working) and physical/legal death (no more part of your body is functioning). During the 3 day period they changed the account from “A and B” to “A or B,” using the thumbmark of the movie actor. Then authenticated by the notary public swearing before his own god that thumbmark was affixed with his free consent or volition. Once the records have been cleansed they declared the movie actor dead. So the wife was able to withdraw all the deposit without being subjected to payment of taxes.

If it is a bulk sale it also has to comply with certain REQUIREMENTS. What are the requirements? 1. The seller must provide the buyer with a “verified” list of creditors so that the buyer can inform the creditors at least 10 days before the sale The list must be verified (under oath), it must include the names, addresses, due dates and amounts owing to each of the creditors of the seller. Is the consent of creditors required in a bulk sale? No but the seller has to give the buyer a list of creditors, under oath, so that the buyer inform these creditors 10 days from sale to enable them to take appropriate measures to protect their interest. So consent is not necessary and it is enough that they are notified.

BULK SALES LAW What is the ESSENCE of the Bulk Sales Law? Any sales in bulk as defined by law must comply with certain requirements. Otherwise the sale shall be deemed in fraud of creditor therefore null and void. 1st It must be a “bulk” sale defined by law nd 2 it must comply with certain requirements

2.

Inventory of goods, properties, merchandise or wares to be sold must be made.

When is a sale considered in bulk? As sale is in bulk in any of the following cases: 1. Sale, transfer, assignment, mortgage not in the ordinary course of business 2. Sale, transfer, assignment, mortgage of all or substantially all of the merchandise, goods or ware (sale of the ASSETS) 3. Sale, transfer, assignment, mortgage of all or substantially all of the business or trade (sale of BUSINESS)

3.

The inventory must also include the cost price or acquisition price of each of the goods to be sold and the amount for which they are to be sold.

4.

List of creditors and the inventory of goods must be filed with the Department of Trade and Industry

How come mortgage is lumped altogether with sale, transfer and assignment when there is no conveyance of ownership in mortgage? Note that even mortgage of all or substantially all of assets or trade of business is also considered a bulk sale. So it is not in the conveyance. Even mortgage is included if it accounts for all or substantially all of the assets or business. What is the gauge to determine if the sale involves “substantially all?” The test is after the sale can continue with his business. Here we can apply by analogy Sec 40 of the Corporation Code regarding the sale of substantially all the assets. It provides that the sale merchandise/assets are considered substantially all if after the sale the seller cannot continue with his business.

If these are not complied with the sale is presumed to be in fraud of creditors therefore null and void. If we have determined that the sale was in bulk. The seller must provide the buyer verified list of creditors Then inventory of goods These must be filed with DTI If these requirements are not complied with it is clear that insofar a B’s Creditors are concerned the sale is void. What about between Sell and Buyer? What are the consequences for non-compliance with the requirements of the Bulk Sales Law? Is the sale also void? There is divergence of views: One view: The sale is also void Another view (better one): The sale is not necessarily void between them but void only as against the creditors because after all the bulk sales law intends to protect the creditors not the seller and the buyer.

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Special Commercial Laws Notes by MARX and MON Why sale not void between the seller and the buyer? Because the law presuppose that if these requirements are not complied with the buyer holds the properties in trust for the creditors with right to demand payment or return of the purchase price plus interest and damages. So if the buyer has to right to obtain the return of the purchase price plus damages and interest, and with the obligation to hold these assets and properties in trust for the creditors, this means the sale is not void between them. This is because a void contract produces no effect, establishes no right, imposes no obligation. A is defendant in a collection case. During the pendency of the collection case he sought the advice of his lawyer on how he can save on estate tax or how his heirs or relatives can save on estate tax upon his death. He was told by his tax lawyer, “Why don’t you set up a corporation by which you can transfer all your properties to that corporation in exchange for shares of stocks. If the transfer is such that you’ll end up controlling the transferee corporation, the transfer, sale or assignment of the properties is not subject to tax.” This is a tax free transaction: When you transfer your assets to a corporation in exchange for shares of stock. If the transferor ends up to be the controlling stock holder of the transferee corporation that transaction is not subject to ____tax and VAT. If A dies the properties are in ABC Corporation. A followed the advice of his lawyer and transferred all his assts to ABC Corp. Then he lost his case. The judgment creditor tried to levy assets, properties of A but could not find any because share of stocks are not registered with the Register of Deeds. Unlike Real properties, all you have to do is to verify with the Register of Deeds what properties are under the name of A. There is no registry of certain stock so you cannot go there you cannot ask the ____ and ask what are the corporations under which A is a stock holder.

____ vs CIA 150 SCRA. Tax avoidance scheme is legitimate and it does not justify the piercing of the corporate of fiction. So the remedy of the creditor is not to pierce the corporate fiction, because the corporation is legitimately and lawfully setup, and it was a Tax avoidance scheme. What then are the remedies available to the creditor? The Bulk Sales Law. Is it a bulk sale? Yes, because all the assets are transferred in favor of ABC. Did A comply with the requirements of the Bulk Sales Law? No list of creditors given to the transferee corporation; No Inventories of goods No filing with the DTI. Therefore the transferee corporation holds the properties in trust for the benefit of the creditor. What is the difference between Tax Avoidance and Tax Evasion? Classic distinction is that Tax Avoidance is legitimate, ethical and moral Tax Evasion is contrary to law, unethical and immoral But when you come to think about it the real distinction between tax avoidance and tax evasion is a “GOOD laywer”. If you have a “GOOD lawyer” tax evasion becomes tax avoidance. But if you have a “VERY LOUSY lawyer” even tax avoidance would end up as tax evasion. What are the CASES wherein Bulk Sales LAW will NOT APPLY? 1. Sale in the ordinary course of business i.e. A is a vegetable grower. 1 bountiful harvest season he was able to harvest vegetables enough to fill up 2 trucks. He loaded his vegetables on his trucks and went to Balintawak and unloaded all the vegetables to the vendors in the market. All of the vegetables were disposed off. Is he required to comply to the Bulk Sales Law because he has sold all his merchandise, goods and wares? No, because it is sale in the ordinary course of business.

Creditor cannot find any of A’s properties what are the remedies available e to him? Can he pierce the corporate veil of ABC Corp on the ground that ABC Corp was set up for the purpose of saving taxes? No. 55 | P a g e

2.

A bulk sale accompanied by the waiver on the part of the creditors. The law is intended to benefit the creditors. It is a right given to the creditors to demand compliance

Special Commercial Laws Notes by MARX and MON with these requirements. But it is a right that can be waived by the creditors for as long as it is in writing and under oath. 3.

Sale by executor, administrator or representative pursuant to a court order.

legal

If you have a document that looks like a warehouse receipt. It tells you where the goods are stored, Charges to be paid, location of the warehouse, quantity of the goods deposited BUT not issued by a warehouseman, what law governs? The Law on Deposit.

When the executor sales property under administration with the courts consent and approval, he need not comply with he need not comply with the bulk sales law requirement; or If a guardian sells the all the properties of his ward by virtue of a court order, there requirements are not necessary to be complied with. 4.

Sale of Properties exempt from execution. This is because if the properties are exempt from execution it cannot be said the creditors are prejudiced.

5.

If X is a warehouseman as defined by law what law governs? Warehouse Receipts Law. It is also a deposit but because it is issued by a warehouseman as defined by the law on deposit it is governed by a special law. What is a “warehouseman?” A warehouseman refers to any person, natural or juridical, lawfully engaged in the business of storing goods for profit.

Sale of a manufacturer. A manufacturer always sells in bulk because if he sells on retail he is not a manufacturer. This is why the manufacturer need not comply with these requirements because it is the essence of his business to sell in bulk.

6.

Example: A deposited sacks of palay with X. If X is not a warehouseman defined by law what law governs the transaction? Law on Deposit.

Sale of a foundry shop. A foundry shop is a “pandayan,” where they shape metals to finished objects like swords. When you sell a foundry shop you don’t sell it in retail you sell the entire thing.

In this case if X is warehouseman and he issued a warehouse receipt, what does that mean? It means that the warehouseman acknowledges the receipt of the goods, And it is bilateral contract in the sense that the warehouseman has the obligation to safekeep and preserve the goods of the goods in his possession using due diligence of a good family, pending the delivery to the depositor or any person entitled to possession and he has the right to be paid storage charges as stipulated in the document.

Warehouse Receipts Law

What about the depositor? The depositor has the right to demand delivery of the goods based on the terms of the warehouse receipt or can assign, negotiate or transfer the warehouse receipt to somebody else. The transferee or assignee, depending on whether he is holder for value or not, can demand delivery of the goods from the warehouseman.

What is a “warehouse receipt?” A warehouse receipt is both an acknowledgment receipt and a bilateral contract between a warehouseman and a depositor.

Is the warehouse receipt a “negotiable instrument”? No, because it does not comply with the requirements of negotiability under Sec 1 of the Negotiable Instruments Law.

When does Warehouse Receipts Law apply? This law only applies if the receipt is issued by a “warehouseman as defined by law.”

1 of, the obligation to pay is not there. It is the obligation to deliver goods, not to pay money

7.

Sale of services. Only sale of goods is covered.

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st

Special Commercial Laws Notes by MARX and MON However, even if it is not a negotiable instrument it can be a “negotiable or non-negotiable document of title.” Is a warehouse receipt a document of title? Yes because it represents title over goods covered by such instrument. What is the test to determine if it is a negotiable document of title? Same test to determine the negotiability of instrument, which means the words, “order or bearer” should be present. If the goods are deliverable to order or bearer then it is a negotiable document of title. If it is deliverable to a specific person it is a nonnegotiable document of title or warehouse receipt. Don’t ever think that a warehouse receipt transaction is limited to goods or commodities or staples, it can be any personal properties (computer, car etc). QUEDANS - If what are deposited to the warehouseman are goods, commodities or staples It is only for goods (does not apply to, i.e., computers) a form of warehouse receipt but limited only to goods, commodities or staples. But you can issue warehouse receipts for all kinds of personal properties deposited to the warehouse.

So these are basic the conditions before a warehouseman may be compelled to deliver: 1. The lien must be paid. This is compose of storage charges and other fees. 2. The receipt must be surrendered or returned to the warehouseman 3. The claimant/depositor must acknowledge the receipt of the goods. st

1 condition: The storage charges have to be paid. The storage charges are “lien” on the property. They follow the property wherever it goes. And for as long as this lien is not satisfied the warehouseman withhold delivery. nd

2 condition: The receipt must be surrendered. If the receipt is no surrendered it may have been negotiated to somebody else. If W delivers to A not in possession of the warehouse receipt, the one who is in possession may claim later on that is why the law makes it a crime for a warehouseman to deliver the goods without the required surrender of the warehouse receipt – to avoid circuitous or multiple claims over the goods in his possession. rd

3 condition: The claimant must acknowledge the receipt of the goods. The receipt issued by W may be negotiable or nonnegotiable warehouse receipt.

B deposited 1000 sacks of sugar with W and W issued a warehouse receipt in favour of B or bearer. What does this mean? This means the W has the obligation to take care/safe-keep good and then deliver the goods to anyone lawfully entitled to possession. Before the warehouseman may be compelled to deliver, what are his rights? 1. He has to be paid storage charges and other fees as may be stipulated in the warehouse receipt. If he is not paid the storage charges, he may withhold delivery of the goods in his possession; OR 2.

When there is an offer pay the lien or the charges but the claimant/depositor doesn’t want surrender the receipt, then the warehouseman cannot be compelled to deliver; OR

3.

If the depositor/claimant doesn’t want to acknowledge the receipt of goods, then the warehouseman cannot be compelled to deliver.

It is negotiable if it deliverable to the “order or bearer” (order of B, B or order, B or bearer, or bearer) If is not negotiable if it is deliverable to specific persons. What if it is negotiable or non-negotiable? There are many advantages conferred by law to a holder of a negotiable warehouse receipt as against a non-negotiable warehouse receipt. What are the advantages of a negotiable warehouse receipt? 1. The goods while in the possession of the warehouseman cannot be garnished or levied on execution UNLESS: • the receipt is surrendered or • the negotiation is enjoined, or • the receipt is impounded by order of court

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Special Commercial Laws Notes by MARX and MON The law provides that the holder of the negotiable warehouse receipt not subject to the unpaid vendor’s lien. So between the unpaid vendor and the holder of the negotiable warehouse receipt, Y, the latter (Y) has the better right. Y can compel W, the warehouseman to deliver the goods to him, even though the buyer-depositor has not yet paid in full the purchase price in favour of the vendor. The holder of the negotiable warehouse receipt acquires the direct obligation of the warehouseman to hold the goods in his favor with or without notice of the negotiation.

Example: D deposited to W 1000 sacks of palay and then D negotiated the receipt in favor of Y. Here comes X a judgment creditor of D. Armed with a writ of execution, he went to the warehouseman and served the writ of execution to deliver to him all the assets properties, goods, merchandise wares owned by D. to whom will W deliver the goods – X, the judgment creditor or to Y, the holder of a negotiable warehouse receipt brought about by the negotiation of B to Y? Y, the holder of the negotiable warehouse receipt. The law provides that the goods while in the possession of the warehouseman cannot be garnished or levied on execution unless the receipt is surrendered or the negotiation is enjoined, or the receipt is impounded by order of court.

3.

Can the warehouseman say, “I have not been told of the negotiation. I have not been informed that the receipt has been negotiation in your favour therefore I am not bound to honor that assignment or negotiation”? NO whoever is the holder of the negotiable warehouse receipt he acquires the direct obligation of the warehouseman to hold the goods in his favor with or without notice of the negotiation of transfer to the warehouseman.

The receipt cannot be surrendered because it is in the possession of Y. The negotiation was not enjoined because of the fact “made in favor of Y.” So if W makes a delivery to the judgment creditor his liable for misdelivery or conversion. So the judgment debtor in this case is not the person entitled to possession. It is the holder of the negotiable warehouse receipt.

SPCL13 Advantages of a Negotiable Warehouse Receipt

What if X got an order, “don’t negotiate,” and stops here? If D could not negotiate then X has a better right. OR what if the court impounds the warehouse receipt and therefore cannot be negotiated to somebody else?’ X has a better right as judgment creditor. BUT if the receipt has been negotiated to the holder for value, that holder for value has a better right than the judgment creditor. If W makes a delivery to the judgment creditor his liable for misdelivery or conversion. 2.

The holder of the negotiable warehouse receipt are not subject to the unpaid vendor’s lien. Example: D purchased 1000 sacks of palay from X, paid 50% and then deposited the same to W. W issued a warehouse receipt to B. B negotiates to Y. X wasn’t paid in full. Who has the better right X or Y? X, the unpaid vendor insists that there is a lien because D hasn’t paid in full the purchase price.

Obviously there are 2 basic parties to warehouse receipt, the number of parties may increase depending whether or not the receipt has been negotiated or assigned. The warehouse man the one who acknowledges the receipt of the goods and has the obligation to safe keep the goods pending delivery to the person lawfully entitled to possession and the depositor or his assignee or any person who acquired the instrument from him either a transferee or a holder for value. Take note the law says that the warehouse man is suppose to deliver to the person lawfully entitled to possession and not necessarily to the depositor so it is not only the case that the depositor is entitled to the delivery, it is to be delivered to the person lawfully entitled to possession. Who is entitled to possession depends on the facts of each case. Example: when there is a warehouse receipt duly negotiated. D negotiates a negotiable warehouse receipt to X and here comes Y, a judgment creditor of D and Y has a writ of execution to serve to the warehouse man and demand the warehouse man to deliver to him all the properties

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Special Commercial Laws Notes by MARX and MON (merchandise, goods and etc) of the depositor (D). In this case who is the person lawfully entitled to possession? It’s X (the holder for value of a negotiable warehouse receipt), not Y (judgment creditor) •

Suppose that the instrument is not negotiated or no negotiation take place, who is the person lawfully entitled to possession? Y (judgment creditor) or D (depositor)? It is Y (judgment creditor) because there is no person whose right is superior to him Suppose there is a negotiable warehouse receipt but Y (judgment Creditor) was able to get a TRO or an injunction to stop the negotiation of the receipt, such that it could not transfer from the depositor to anyone else. In this case who is the person lawfully entitled to possession? It is Y (judgment Creditor) In what cases may the warehouse man not be compelled to make delivery of the goods, what are the cases that will justify in withholding the delivery of the goods? • Non-fulfillment with the conditions set forth in Sec. A par. A of the warehouse receipts law o Conditions: Failure to satisfy warehouse man’s lien Failure to surrender the negotiable warehouse receipt Non-willingness to acknowledge the receipt of the goods • The warehouseman by himself or third person acquires information that the depositor is not the owner of the goods • In case of conflicting claims on the same goods in the possession of the warehouse man o If there are conflicting claims, what are the remedies available to the warehouseman? To file an action for interpleader to compel the conflicting claimants to litigate and prove who has the better rights in the goods in the possession of the warehouse man, so the warehouseman out of prudence should not take sides, he should deliver to the person adjudge by the court as the one entitled to possession. The essence of interpleader is to let the conflicting claimants to litigate and prove to the court who has the better rights over the goods in the possession of the warehouseman. • If the goods is lost • If the goods are hazardous in nature

Example: the object of the deposit is a swine afflicted with flu, so the warehouseman is justified to slaughter the swine and he is not liable for as long as he gives notice to the depositor and the reason is the hazardous nature of the object If the receipt is negotiated back to the warehouseman

Failure to satisfy warehouse man’s lien (condition 1) What is this lien all about? It consist of storage charges (the warehouse man incurs storage charges in performing his obligation to safe keep the goods). Storage charges have to be satisfied first before the warehouseman can be compelled to deliver. So if the claimant is not able to pay or satisfy the lien, then the warehouseman is justified to withhold to deliver. The lien is possessory, it follows the property wherever it goes. The lien consist of storage charges and other fees as may be stipulated in the warehouse receipt. What are the other fees that may be stipulated: Weighing fee Transportation Labor Insurance And other fees as may be indicated in the warehouse receipt What about storage charges whether or not it is stipulated, it forms part of the warehouseman bill, because that is the essence of a warehouse receipt transaction. The warehouseman safe keeps in consideration of payment of storage charge, whether or not stipulated, that is a lien in favor of the warehouseman Failure to surrender the negotiable warehouse receipt (condition 2) It is even an offense for the warehouseman to deliver the goods without requiring to surrender of the warehouse receipt. The warehouseman must require the surrender of the receipt as a condition to deliver. In one case, a farmer deposited sacks of palays with the warehouseman. The warehouseman issued a receipt unfortunately the farmer lost the warehouse receipt. The farmer executes an affidavit of loss to request a replacement but the warehouseman refuse to issue a replacement warehouse receipt. The farmer is in great need of at least 1 sack of rice for sustenance but still the warehouseman refuses to deliver unless he surrenders the instrument. The farmer went to court to order the warehouseman to deliver the sack of palay to the farmer for sustenance. This case

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Special Commercial Laws Notes by MARX and MON Not just because the lien is lost does not mean that payment of the lien or storage charges cannot be enforce in some other ways. So retaining possession is just one of the remedies available to the warehouseman to be paid the lien, but if the lien is lost there are various remedies for which the warehouseman can enforce payment. The remedies are: Judicial remedies Action for collection and other remedies available to the creditor against a debtor based on similar practices and circumstances like Action Pauliana and Action Reinvidicatoria

shows how stringent the warehouseman can be because if he does not requires to surrender the chances are the warehouse receipt is negotiated to somebody else, thereby giving rise to conflicting claims on the property or goods in his possession. One case: It involves PNB and Noah’s Ark Sugar refinery. D purchase sugar from Noah’s Ark and deposited back the sugar to Noah’s Ark for Noah’s Ark issued a negotiable warehouse receipt in favor of D. Noah’s Ark is both manufacturer and warehouseman D obtained a loan from PNB secured by a pledge or assignment of right on the warehouse receipt. The loan was not paid, PNB foreclosed the pledge, after foreclosure PNB was the winning bidder. PNB demanded delivery of sugar from Noah’s ark sugar refinery. Noah’s Ark refinery in defense said it is yet to be paid the purchase of the sugar meaning D did not pay on full the purchase price but was able to negotiate by way of loan or pledge in favor of PNB. First question is “Is Noah’s Ark sugar refinery (warehouseman) justified in withholding the delivery of sugar?” No, the non-payment of the purchase price is not one of the cases that justifies withholding of delivery. It does not matter if the purchase price have not been paid, the warehouse man should delivery to the holder of the warehouse receipt without prejudice to his right to enforce payment of the purchase price against the buyer. Second Question: can the warehouseman collect the lien? the lien of the warehouseman may be enforced judicially or extra-judicially. Extra-judicially by refusing to give back possession. Remember that the lien is possessory in nature, it follows the property wherever it goes, it attaches to the property. Once possession is gone, then the lien is lost. So the first way or mode for you to obtain the lien is to retain the goods, withhold delivery. The lien may be lost: o if possession is given up voluntarily o if the warehouseman refuses without just cause to deliver the goods. In this case, PNB made a bad claim against Noah’s Ark to delivery the goods. Therefore Noah’s Ark is not justified in withholding delivery, so it lost the lien over the goods.

PNB may claim delivery. Noah’s ark lost the lien because the refusal was unjustified but Noah’s Ark can enforce payment of storage charges Third Question: who will pay the storage charges? PNB or the depositor? There is no law that obligates PNB (pledge) to assume the obligation of the D (pledgor) for storage charges. So the D (pledgor) must pay for the storage charges incurred before foreclosure. But after foreclosure when PNB is already the owner, then PNB has to pay the storage charges Negotiable warehouse receipt- if by its terms the goods are deliverable to the order of a specified person or bearer Non-negotiable warehouse receipt- if it is deliverable to a specified person How to negotiate a warehouse receipt, it depends if it is negotiable or non-negotiable • If it is non-negotiable by simple assignment or transfer, the transferee acquiring the same right as the transferor and subject with the same defenses available when it was assigned. • If it is negotiable, it depends on whether deliverable to order or deliverable to bearer. In the same way that a negotiable instrument may be negotiated. o If it is deliverable to order, it can be negotiated by indorsement and delivery. o If it is deliverable to bearer by mere delivery

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Special Commercial Laws Notes by MARX and MON fulfillment of the obligation of the warehouseman. They do not warrant delivery by the warehouseman. Are there cases were they can be held liable? They can be held liable if there is a breach of warranty. By negotiating the warehouse receipt, they (indorsers) assume certain warranties. The warranties are: • They have legal title to the instrument Example: Stolen instrument - liable • The instrument is genuine Example: forged instrument liable • They do not have information that the instrument is worthless Example: If they are aware that the warehouse man is insolvent at the time of negotiation - liable • The goods are mechantable or fit for transaction

D (depositor) deposited a computer with W (warehouseman). W issues a warehouse receipt deliverable to D or bearer. W hand it over the receipt in favor of X (messenger of D). X in breach of faith negotiated the same in favor of Y. who has the better right? Y or D? Y, because it is a negotiable warehouse receipt being deliverable to bearer and being deliverable to bearer it can be negotiated by mere delivery. Y assuming that he had no knowledge of any infirmities of the instrument is entitled to the goods Will the answer be the same is the receipt is deliverable to the order of D? Who has the better right? Y or D? D, because if the receipt is deliverable to the order, how can it be negotiated by indorsement plus delivery. Since there is no indorsement in the part of D, no title was transferred in favor of Y.

Another scenario: D stole hundreds sacks of palay from X. D deposits to W and W issues a warehouse receipt in favor of D. D negotiates to Y (holder for value). Who has the better right in this case between Y and X? If the owner of goods did not deposit the same in the warehouseman, his right cannot be defeated by anyone not even by a holder for value of a negotiable warehouse receipt. D transfer no title. The concept of a holder in course does not apply in warehouse receipt. Distinguish between the first scenario and second scenario First scenario- D, as the lawful owner, deposited and there was a breach in the negotiation of the instrument, that breach in negotiation does not impair the rights or interest of the holder of the negotiable warehouse receipt for as long as he acquires the same for value and in good faith. Second Scenario- the owner did not deposit, the object was stolen. So his rights cannot be defeated by anyone even by the holder of the negotiable warehouse receipt.

W issues a warehouse receipt in favor of D covering some staples. D negotiates it to X. X negotiates it with Y. Y presents the instrument to the warehouseman, warehouseman refuses to deliver, can Y run after D and X? No, because in a warehouse receipt transaction unlike in the negotiation of a negotiable instrument, the intermediate parties or indorsers do not warrant

Whether or not the holder can sue or charge the indorsers of a warehouse receipt? It depends on the nature of the action: • if it is simply an action to enforce delivery or fulfillment of the obligation of the warehouseman, then the indorsers are not liable because they do not warrant fulfillment by the warehouseman of its obligation to deliver the goods • If the action stems from the breach of warranty that the indorsers assumed under the law, then they can be made liable in case there is a breach of warranty What are the cases for which the warehouseman may be held liable? • Failure to exercise due diligence in the preservation and safe keeping of the goods in possession Can the warehouseman exempt himself from the obligation of exercising due diligence to preserve the goods in his possession? No, such stipulation is null and void, it is against public policy • Failure to indicate the word non-negotiable, if it is non-negotiable warehouse receipt • Failure to notify the depositor in case of sale of the goods for being hazardous in nature • Issuance of a receipt not back up with delivery of goods, issuing a receipt without receiving the goods • Issuance of a receipt containing false statement • Failure to require the surrender of the warehouse receipt if it is negotiable

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Special Commercial Laws Notes by MARX and MON Which of the acts or omissions give rise to criminal liability? • Issuance of a receipt not back up with delivery of goods, issuing a receipt without receiving the goods • Issuance of a receipt containing false statement • Failure to require the surrender of the warehouse receipt if it is negotiable The first 3 only give rise to civil liability

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Special Commercial Laws Notes by MARX EXTRA-JUDICIAL FORECLOSURE OF REAL ESTATE MORTGAGE (ACT 3135, as amended) Execution of Loan + REM Agreement (REM – with built-in SPA to sell in case of default)

Default of mortgagor for non-payment or violation of the terms of the loan or REM agreement

Filing of petition for sale with Clerk of Court

Publication/ Posting of notice Jurisdictional Requirements

Foreclosure Sale

Registration of the sale with Registry of Deeds

One year Redemption Period

Foreclosure of REM presupposes there is a loan secured by REM.

Execution of Loan + REM Agreement has to have a built-in SPA to sell in case of default

For instance, if a property is registered in the name of A married to B, can A alone mortgage the property or it has to be both A and B? If there is a proof that the property is acquired during the marriage, then the property is conjugal.

The mortgagee cannot foreclose the mortgage extrajudicially unless there is a Special Power of Attorney (SPA) integrated into the loan or REM agreement empowering the mortgagee to take possession of the property and to sell it in case of default. Without the SPA, the mortgagee cannot go to extrajudicially foreclose the mortgage.

If there is no proof that the property is acquired during the marriage then the property belongs to A alone and the phrase “A married to B” is simply a descriptive of the status of A. Therefore, if there is no proof that the property is acquired during the marriage, then A alone can mortgage the property. If there is a proof that the property is acquired during the marriage, then both A and B must execute. Let say the property is conjugal and only one signs the mortgage agreement, is the mortgage void only in so far as the share of the non-consenting spouse or is it void in its entirety? SC held that the entire mortgage is void.

Default of mortgagor for non-payment or violation of the terms of the loan or REM agreement You cannot talk about foreclosure if the mortgagor pays or fulfills the terms and conditions of REM. Default could be non-payment of violation of the terms of agreement. Violation of the terms and agreement Example: according to the terms of agreement, the mortgagor is not allowed to sell the mortgage property without the consent of the mortgagee. But the mortgagor sold the property without the consent of the mortgagee. Any stipulation prohibiting the mortgagor from selling the mortgage property is null and void because in a mortgage agreement, the mortgagor does not lose ownership to the property and therefore he can exercise acts of dominion including sale or disposition. Is the sale

Consolidation of Title by filing affidavit with Registry of Deeds

Cancellation of Title of Mortgagor and issuance of New Title in favor of Mortgagee

Petition for Writ of Possession

valid despite the stipulation forbidding the mortgagor from selling? SC said that the sale is valid, the sale having been done in violation of the terms and agreement that requires the consent of the mortgagee, the mortgagee may treat the same as a default which justifies foreclosure of the REM. Filing of petition for sale with Clerk of Court It is a petition for sale not an action, therefore not govern by the rules on venue. Where do u file? In the city or municipality where the property is situated regardless of the domicile or residence of the mortgagor or the mortgagee. What if there are various properties? The filing of multiple petitions which divides the jurisdiction, because the properties situated in different places, does not violate the principle of indivisibility of mortgage because the mortgage answers for the entire debt.

Special Commercial Laws Notes by MARX Publication/ Posting Requirements

of

notice

Jurisdictional

week for 3 consecutive weeks unless notice of sale contains an alternative date

What do u publish? The notice of sale once a week for 3 consecutive weeks in the newspaper of general circulation

What do we mean by alternative date? “the sale is set on Oct. 15 OR in case of cancellation or resetting on dec. 30”. If there is an alternative date, there is no need to republish all over again for as long as the sale is within that period

Is personal notice to the mortgagor necessary? No, because publication takes the place of notice to the whole world Except in one case: PNB vs ___. In that case, PNB assume the obligation of notifying the mortgagor, meaning it is embodied in the agreement that notices be given to the mortgagor. Although the law does not require it but if the mortgagee assumes that obligation in the contract, then it is an obligation imposed not by law but by the contract, in which case, noncompliance the foreclosure is null and void What do we mean by newspaper of general circulation? For as long as it caters for the general interest, it is a newspaper of general circulation

What does posting of notice mean? The sheriff will post the notice of sale in a conspicuous place in the city or municipality where the property is located. The law does not say “post it conspicuously” Publication and Posting of notice are Jurisdictional Requirements, absence will invalidate the sale. Foreclosure/Sale How is foreclosure conducted? The requirement is the bidder must tender his bid in cash. If it is the mortgagee, he may not bring cash, he can just apply the bid price against the obligation

What do we mean by “once a week for 3 consecutive weeks?” It means 7 days apart.

Registration of the sale with Registry of Deeds It means the sale is annotated at the back of the title. The 1 year redemption period does not start to run unless the sale is registered.

Let say the mortgagee already published twice rd before the 3 publication, the mortgagor pleaded to the mortgagee that he will pay the obligation. Then the mortgagee cancels the sale, but the mortgagor did not pay. How should the mortgagor publish? It must be republished all over again, once a week for 3 consecutive weeks. Any resetting means republication for once a

General Rule: 1 year from the registration of the sale Exception: elements: • The mortgagor is a juridical person • The mode of foreclosure is extrajudicial • The mortgagee is a bank, quasi-bank or trust entity The redemption period is 3 months from the sale or registration whichever comes earlier. If

the mortgagee did not move in 3 months of the sale the redemption period is terminated by sheer force of law. The one year redemption period still applies: • The mortgagor is a natural person • The mortgagee is not a bank, quasi-bank • The mode of foreclosure is judicial Example: ABC corporation obtained a loan from XYZ bank secured by REM (property of a corporation and the president). The loan was not paid, the bank foreclose the mortgage extrajudically, after 4 months, the president and the corporation want to redeem the property, can they redeem? For the corporation, not any more because 4 months already lapse from the sale For the president, yes, because the president who is a natural person is not covered reducing the redemption period from 1year to 3 mos Assuming that the sale must be registered, then 1 year redemption period. During the redemption period, can the mortgagor execute another mortgage or sell the property? Yes, because he is still the owner of the property. But the sale or mortgage is subordinate to the first mortgagee How much is the redemption price? • If the winning bidder is a bank or quasi-bank – the bidding price is the outstanding obligation under the mortgage agreement plus interest stipulated in the agreement plus expenses and income derived from the property • If the winning bidder is not a bank – the bidding price is the bid price plus 12% interest per annum

Special Commercial Laws Notes by MARX One year Redemption Period Consolidation of Title by filing affidavit with Registry of Deeds Do not file an action in court to obtain title, just file an affidavit of consolidation of title with the Register of deeds of the city or municipality where the property is situated What does the affidavit contains? It contains all the relevant dates • Date of foreclosure • Date of registration If the mortgagor is in possession of the property, file a petition for an issuance of writ of possession. The SC held that the issuance of writ of possession is the ministerial duty of the court, it is prayed for upon the expiration of the redemption period. It is ex parte. The filing of an action to nullify the sale does not suspend the redemption period and the issuance of the writ of possession The only one action that will suspend the redemption period, it is an action to fix the redemption price

Special Commercial Laws Notes by MARX

JUDICIAL FORECLOSURE OF REAL ESTATE MORTGAGE (Rule 68 of the 1997 Rules of Civil Procedure) Complaint with the Court. Include subsequent lien holders, otherwise equity of redemption will not be divested

hearing

judgment

Entry of judgment

90 days 120 days from entry of judgment for mortgagor to pay his debt, as determined by court

Equity of redemption – right of the mortgagor not to be divested of the ownership of the mortgaged property and to stop the foreclosure sale by paying the mortgagee debt within 90-120 days from entry of judgment and even beyond, until finality of order confirming the sale. The one year redemption period for REM’s exists in cases where the mortgagor is an individual or even where the mortgagor is a judicial person if the mortgagee is not a bank, quasi-bank or trust entity where the foreclosure is done judicially. The one year redemption period does not apply to REM constituted by juridical persons in favor of a bank, quasi-bank or trust entity. In such case, the right to redeem can only be exercised until but not after the registration of the certificate of sale or 3 months from foreclosure, whichever is higher

Upon failure to pay, mortgagee to file motion for execution foreclosing mortgage

Execution sale

Mortgagee to file motion for confirmation of sale

Issuance of order confirming the Sale [order is appealable] Wait for finality of the order (appeal)

Equity of Redemption vs Right of redemption Right of redemption is exercised after the sale while equity of redemption is exercised before the sale. E.R is the right of the mortgagor not to be divested of the ownership of the mortgage property by paying the mortgage debt within 90-120 days from entry of judgment. If the mortgagor is able to pay the mortgage debt before such period then there is no foreclosure. There is no right of redemption in judicial foreclosure of REM. There is only equity of redemption except if the mortgagee is bank or credit institution

Registration of the order confirming the sale

Cancellation of the title of the mortgagor/ issuance of new title to the mortgagee

Secure a writ of possession, by motion, from the same court that ordered the foreclosure

If mortgagee/ bidder is bank or credit institution, mortgagor has one more year from registration of order confirming the sale + certificate of sale to redeem the property