BANKING AND FINANCIAL LAW

Rafael A. Morales
CASE DOCTRINES
I.

The Philippine Financial System

A. Certain Constituents
3. Universal and Commercial Banks
(b) Certain Basic Units
(i) Regular Banking Unit (RBU)
Fidelity Savings and Mortgage Bank vs. Cenzon
(1990) insolvents bank liability to pay interest on
bank deposits
- It is settled jurisprudence that a banking institution
which has been declared insolvent and subsequently
ordered closed by the CB cannot be held liable to
pay interest on bank deposits which accrued during
the period when the bank is actually closed and nonoperational.
o What enables the bank to pay stipulated
interest on money deposited with it is that thru
the other aspects of its operation it is able to
generate funds to cover the payment of such
interest.
o All who deposit money in banks are aware of
such
a
simple
economic
proposition.
Consequently, it should be deemed read into
every contract of deposit with a bank that the
obligation to pay interest on the deposit ceases
the moment the operation of the bank is
completely suspended by the duly constituted
authority, the CB. (OBM vs. Tapia)
(ii) Foreign Currency Deposit Unit (FCDU)
Cancio vs. CA (1987) While clearing through the
pre-boarding area in the airport, Mrs. Cancios dollars
were found to be concealed inside 2 carton boxes for
local chocolates. No CB authority nor certificates of

withdrawal were presented; only FC bank book and

withdrawal cards were surrendered.
- Under Section 5 of RA 6426 (Foreign Currency
Deposit Act), the transferability abroad of foreign
currency deposits is unrestricted. Only one
exception is provided for therein, which is, any
restriction from the contract between the depositor
and the bank. Neither is the CB authority required
for the transferability abroad of FCDs.
Salvacion vs. Central Bank (1997) transient raped
12-yr old girl. Civil liability to be satisfied by
garnishment of foreigners FCD account
- The application of the law depends on the extent of
its justice. Obviously, the FCD made by a transient
or tourist is not the kind of deposit encouraged by
PDs 1034 and 1035 and given incentives and
protection by said laws because such depositor stays
only for a few days in the country and, therefore,
will maintain his deposit in the bank only for a short
time. Hence, the dollar deposits of Mr. Bartelli is not
entitled to the protection of Section 113 of the CB
Circular 960 against attachment, garnishment or
other court processes.
o Reasons for exemption of FCDs from
garnishment to assure the development and
speedy growth of the FCD System and Offshore
Banking system; to encourage the inflow of
FCDs
GSIS vs. CA (2011) subpoena for production of
bank ledger and other documents related to and FCD
account; RA 1405 vs. RA 6426
- There is not conflict between RA 1405 and RA 6426.
RA 1405 covers all deposits in the Philippines and no
distinction was made between domestic and foreign
deposits. Thus, RA 1405 is a law of general
application. On the other hand, RA 6426 is a special
law especially designed for FCDs in the Philippines.
- For FCDs, the applicable law here is RA 6426.

(c) Degree of Diligence

Simex International vs. CA (1990) Depositorcorporation sought damages from bank for the
dishonor of its several checks
- The banking system is an indispensable institution in
the modern world and plays a vital role in the
economic life of every civilized nation In every
case, the depositor expects the bank to treat his
account with utmost fidelity, whether such
account consists only of a few hundred pesos or
millions. The bank must record every single
transaction accurately, down to the last centavo, and
as promptly as possible A blunder on the part of
the bank, such as the dishonor of a check without
good reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps
civil and criminal litigation.
- The bank is affected with public interest and
because of the nature of its functions, the bank is
under obligation to treat the accounts of its
depositors with meticulous care, always having
in mind the fiduciary nature of their
relationship
BPI vs. IAC (1992) money for joint account
deposited to husbands personal account
- Cited Simex vs. CA
BPI vs. CA (2000) accommodation; passbook
clearance
- Cited the obligation of a bank, under Simex vs. CA,
to treat the account of its depositors with meticulous
care, always having in mind the fiduciary nature of
their relationship AND added as such, in dealing
with its depositors, a bank should exercise its
functions not only with the diligence of a good father
of a family but it should do so with the highest
degree of care.
Consolidated Bank and Trust Corp. vs. CA (2003)
teller #6 returned passbook to an impostor

- The law imposes on banks high standards in view

of the fiduciary nature of banking. Section 2 of RA
8791 (GBL) declares that the State recognizes the
fiduciary nature of banking that requires high
standards of integrity and performance.
- Cited Simex. This fiduciary relationship means that
the banks obligation to observe high standards of
integrity and performance is deemed written into
every deposit agreement between a bank and its
depositor. The fiduciary nature of banking requires
banks to assume a degree of diligence higher than
that of a good father of a family. used high
standard of diligence
Phil. Banking Corp. vs. CA (2004) offsetting of
bank deposits and loan obligations with the bank
- Section 2 of the GBL expressly imposes the
fiduciary duty on banks when it declares that the
State recognized the fiduciary nature on banking
that requires high standards of integrity and
performance.
- Cited Simex and Consolidated higher degree of
diligence than that of a good father of a family
Samsung Construction Company vs. Far East
Bank (2004) forged check vouched for by assistant
accountant
- Cited Westmont Bank vs. Ong: Banks have the
obligation to treat their clients account with
meticulously and with the highest degree of care,
considering
the
fiduciary
nature
of
their
relationship. The diligence required is more than
that of a good father of a family.
- extraordinary diligence
Heirs of Eduardo Manlapat vs. CA (2005) OCT of
land obtained from mortgagee bank to secure two
TCTs
- Banks, their business being impressed with public
interest, are expected to exercise more care and
prudence than private individuals in their dealings,
even those involving registered lands. The highest

degree of diligence is expected, and high standards

of integrity and performance are even required of it.
PNB vs. Pike (2005) entertainer in Japan lost PNB
passbook allegedly signed withdrawal slips for one
Joy
- Though its employees may be the ones negligent, a
banks liability as an obligor is not merely vicarious
but primary, as banks are expected to exercise the
highest degree of diligence in the selection and
supervision of their employees.
- Cited Consolidated but used highest.
Cadiz vs. CA (2005) 3 bank employees terminated
for their involvement in certain anomalous transactions
in the bank
- The bank must not only exercise high standards of
integrity and performance, it must also ensure that
its employees do likewise because this is the only
way to ensure that the bank will comply with its
fiduciary duty.
Far East Bank and Trust Company vs. Pacilan, Jr.
(2005) current account immediately closed for
improper handling
- No bad faith for banks acceptance of deposits the
day following the closure of account due to improper
handling only simple negligence by its personnel
Citibank, N.A. vs. Cabamongan (2006) pretermination of FC time deposits by impostor
- Used highest degree of diligence citing 2000 BPI
vs. CA
Citibank, N.A. vs. Sabeniano (2006) money
market placements, remittances of dollar accounts
from Citibank-Geneva, declarations of pledge
- Cited Simex
(d) Systemic Risk: Certain Prudential Measures
(vii) Equity Investment Limits
Agan, Jr. vs. PIATCO (2003) Security Bank cannot
invest the entire amount of its net worth in a single

undertaking or enterprise, whether allied or nonallied, in accordance with the provisions of RA 337
- Note: 15% pa ang limit dito for any one enterprise
- Sir: Wrongly applied manual for UBs. CB and
Security Bank, and hence, could not invest in nonallied enterprises such as an airport.
II.

Certain Financial Transactions and Documents

A. Loan Transactions
1. Analysis of Parts of a Loan Agreement
(a)
Terms of Loan
Dio vs. Japor (2005) While a stipulated rate of
interest may it technically and necessarily be usurious,
usury now being legally inexistent in our jurisdiction,
nonetheless, said rate may be equitably reduced
should the same be found to be iniquitous,
unconscionable, and exorbitant, and hence, contrary to
morals, if not against the law.
Consolidated Bank and Trust Corp. vs. CA (2001)
A stipulation ostensibly signifying an agreement to
any increase or decrease in the interest rate, without
more, cannot be accepted by the SC as valid for it
leaves solely to the creditor the determination of what
interest rate to charge against the outstanding loan.
Macalinao vs. BPI (2009) SC reduced interest rate
and penalty charges pursuant to Article 1229 of the
Civil Code.
(g) Events of Default
China Banking Corp. vs. CA (2005) The maturity
date of the PN in this case is not controlling as far as
accrual of COA is concerned. The date for computing
when prescription of action for collection begins to set
in is properly a function related to the date of actual
demand by the PN holder for payment by the obligorbank.
Mondragon Leisure vs. CA (2005) Here, the bank
was given four alternative remedies, under the
Omnibus Agreement, as a consequence of default

terminate, accelerate payment, foreclose collaterals,

setoff
4. Other Issues
(d) Truth-in-Lending Act (RA 3765)
DBP vs. Arcilla, Jr. (2005) If the borrower is not
duly informed of the data required by the law prior to
the consummation of the availment or draw-down, the
lender will have no right to collect such charge or
increases thereof, even if stipulated in the PN.
HOWEVER, such failure shall not affect the validity or
enforceability of any contract or transaction.
- Financial charges are amply disclosed if stated in
the PN.
BPI vs. Yu (2010) [Banks can collect even if not
ACTUALLY disclosed in disclosure statement.] Cited
DBP vs. Arcilla, Jr.
B. Deposit Transactions
1. Savings, Current and Time Deposits
(c) Secrecy of Bank Deposit
RA 1405, as amended: The Law on Secrecy of
Bank Deposits
Ejercito vs. Sandiganbayan (2006) RA 1405 is
broad enough to cover trust accounts.
- An examination of RA 1405 shows that the term
deposits used therein is to be understood broadly
and not limited only to accounts which give rise to a
creditor-debtor relationship between the depositor
and the bank. If the money deposited under an
account may be used by banks for authorized loans
to third persons, then such account, regardless of
whether it creates a debtor-creditor relationship,
falls under the category of accounts which the law
precisely seeks to protect for the purpose of
boosting the economic development of the country.
RA 6426, as amended: Foreign Currency Deposits
Act

China Banking Corp. vs. CA (2006) The only

exception to the secrecy of FCDs is in the case of a
written permission of the depositor.
3. Survivorship Issue
Ana Rivera vs. Peoples Bank and Trust Company
(1942) A survivorship agreement is valid in this
jurisdiction. It is an aleatory contract supported by
lawful consideration.
- Although the survivorship agreement is not per se
contrary to law, its operation or effect may be
violative of the law used as a mere cloak to hide an
inofficious donation, to transfer property in fraud of
creditors, or to defeat the legitime of a forced heir.
Vitug vs. CA (1990) The validity of a survivorship
agreement seems debatable by reason of its survivortake-all feature, but in reality, that contract imposed a
mere obligation with a term, the term being death.
Such agreements are permitted by the CC.
BIR Ruling No. 010-2003
C. Deposit Substitute Activities
D. Letters of Credit
Feati Bank and Trust Company vs. CA (1990)
Commercial transactions involving letters of credit are
governed by the rule of strict compliance the
documents tendered must strictly conform to the terms
of the L/C. When a bank accepts a faulty tender, it acts
on its own risk and may not thereafter recover from
the buyer or issuing bank the money paid to the
beneficiary.
Transfield Philippines, Inc. vs. Luzon Hydro Corp.
(2004) L/C as financial device developed to satisfy
the irreconcilable interest of sellers and buyers;
Independence Principle; observance of UCP justified
by Art. 2 of the Code of Commerce
PNB vs. Pineda (1991) An L/C-T/R arrangement is
endowed with its own distinctive features and
characteristics. Under that set-up, a bank extends a

loan covered by the L/C, with the T/R as security for

the loan. In other words, the transaction involves a
loan feature represented by the L/C, and a security
feature represented by the T/R.