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COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 1

Compiled by: Sheena Marie S. Ysit

INTRODUCTION: What are the kinds of LC?

Code of Commerce-laws, merchant,
characteristics Commercial Standby Letters
Letters of Credit of Credit
II. LETTERS OF CREDIT Involve contracts Involve non-sale
a.) Definition/ Concept of sale transactions.
Payable upon Payable upon
What is Letter of Credit (LC)? presentation by certification by the
It is any arrangement, the seller- beneficiary of the
however named or described, beneficiary of applicants NON-
whereby a bank (issuing documents that performance of the
bank), acting at the request show he has agreement.
and on the instructions of a performed his
customer (applicant) or on its contract.
own behalf, binds itself to:
1. Pay to the order of, Is irrevocable letter of credit and
or accept and pay confirmed letter of credit
drafts drawn by a 3rd synonymous?
party An irrevocable letter of credit is
(Beneficiary),or not synonymous with a confirmed
2. Authorize another letter of credit. In an irrevocable
bank to pay or to letter of credit, the issuing bank
accept and pay such may not, without the consent of the
drafts, or beneficiary and the applicant,
3. Authorizes another revoke its undertaking under the
bank to negotiate, letter, whereas, in a confirmed
against stipulated letter of credit, the correspondent
document(s), bank gives an absolute assurance
Provided, the terms and conditions of to the beneficiary that it will
the credit are complied with. (Art. 2, undertake the issuing banks
Uniform Customs & Practice for obligation as its own according to
Documentary Credits.) the terms and condition of the
Note: They are in effect absolute
undertakings to pay the money advanced Can a court order the release to the
or for the amount for which the credit is applicant the proceeds of an
given on the faith of the instrument. irrevocable nature of the letter of
credit without the consent of the
What is the duration of LC? beneficiary?
1. Upon the period fixed No, such order violates the
by the parties; or irrevocable nature of letter of
2. If none is fixed: credit cannot be changed without
a. 6 months from its the consent of the parties,
date if used in the Philippines; particularly the beneficiary
b. 12 months if used thereof changed without the
abroad (Art 572, ibid). consent of the parties,

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

particularly the beneficiary foreign banks, led by Citicorp Intl Ltd.,

thereof. for the issuance of an Irrevocable
Standby Letter of Credit in favor of
b.) Governing Laws MWSS for the full and prompt
The law governing letter of credit performance of Maynilads obligations to
(LC)- It is the Uniform Customs and MWSS as aforestated. Later, the parties
Practice (UCP) for documentary Credits agreed to resolve the issues between
for International Chamber of Commerce them Maynilad is asking for a
governs the Letters of credit mechanism by which it hoped to recover
(Metropolitan Waterworks vs. Daway, the losses it had allegedly incurred and
G.R. No. 160723, July 21, 2004). would be incurring as a result of the
depreciation of the Philippine Peso
Articles 567 to 572 of the Code of against the US Dollar and in filing to get
Commerce on Letters of Credit are what it desired, Maynilad unilaterally
obsolete. However, in the absence of any suspended the payment of the
provision in the Code of Commerce, concession fees] through an amendment
commercial transaction shall be of the Concession Agreement which was
governed by the usages and customs based on the terms set down in MWSS
generally observed. (Sec. 2, Code of Board of Trustees Resolution which
Commerce) provided inter alia for a formula that
CASE: would allow Maynilad to recover foreign
METROPOLITAN WATERWORKS exchange losses it had incurred or would
AND SEWERAGE SYSTEM VS. incur under the terms of the Concession
DAWAY G.R. No. 160732. June 21, Agreement.
However Maynilad served upon MWSS
FACTS: MWSS granted Maynilad a Notice of Event of Termination,
under a Concession Agreement to claiming that MWSS failed to comply
manage, operate, repair, decommission with its obligations under the
and refurbish the existing MWSS water Concession Agreement and its
delivery and sewerage services in the Amendment regarding the adjustment
West Zone Service Area, for which mechanism that would cover Maynilads
Maynilad undertook to pay the foreign exchange losses. Maynilad filed
corresponding concession fees which, a Notice of Early Termination of the
among other things, consisted of concession, which was challenged by
payments of petitioners mostly foreign MWSS. This matter was eventually
loans. brought before the Appeals Panel by
MWSS. the Appeals Panel ruled that
To secure the concessionaires there was no Event of Termination as
performance of its obligations, Maynilad defined under Art. 10.2 (ii) or 10.3 (iii)
was required under Section 6.9 of said of the Concession Agreement and that,
contract to put up a bond, bank therefore, Maynilad should pay the
guarantee or other security acceptable to concession fees that had fallen due.
MWSS. In compliance with this
requirement, Maynilad arranged for a
three-year facility with a number of

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 3
Compiled by: Sheena Marie S. Ysit

The award of the Appeals Panel became with the debtor does not find support in
final. MWSS, thereafter, submitted a jurisprudence.
written notice to Citicorp Intl Ltd, as Letters of credit were developed for the
agent for the participating banks, that by purpose of insuring to a seller payment
virtue of Maynilads failure to perform its of a definite amount upon the
obligations under the Concession presentation of documents and is thus a
Agreement, it was drawing on the commitment by the issuer that the party
Irrevocable Standby Letter of Credit and in whose favor it is issued and who can
thereby demanded payment. collect upon it will have his credit
against the applicant of the letter, duly
paid in the amount specified in the letter
Prior to this, however, Maynilad had
They are in effect absolute undertakings
filed on a petition for rehabilitation
to pay the money advanced or the
before the RTC of Quezon City which
amount for which credit is given on the
resulted in the issuance of the Stay Order
faith of the instrument. They are primary
and the disputed Order of November 27,
obligations and not accessory contracts
and while they are security
arrangements, they are not converted
ISSUE: WON the rehabilitation court thereby into contracts of guaranty. What
sitting as such, act in excess of its distinguishes letters of credit from other
authority or jurisdiction when it enjoined accessory contracts, is the engagement
herein petitioner from seeking the of the issuing bank to pay the seller once
payment of the concession fees from the the draft and other required shipping
banks that issued the Irrevocable documents are presented to it. They are
Standby Letter of Credit in its favor definite undertakings to pay at sight once
the documents stipulated therein are
HELD: The petition presented.
for certiorari is granted. The Order of
November 27, 2003 of the RTC of
The prohibition under Sec 6 (b) of Rule
Quezon City 90, is hereby declared null
4 of the Interim Rules does not apply to
and void and set aside.
herein petitioner as the prohibition is on
YES First, the claim is not one against
the enforcement of claims against
the debtor but against an entity that
guarantors or sureties of the debtors
respondent Maynilad has procured to
whose obligations are not solidary with
answer for its non-performance of
the debtor. The participating banks
certain terms and conditions of the
obligation are solidary with respondent
Concession Agreement, particularly the
Maynilad in that it is a primary, direct,
payment of concession fees.
definite and an absolute undertaking to
Secondly, Sec. 6 (b) of Rule 4 of the
pay and is not conditioned on the prior
Interim Rules does not enjoin the
exhaustion of the debtors assets. These
enforcement of all claims against
are the same characteristics of a surety
guarantors and sureties, but only those
or solidary obligor. And being solidary,
claims against guarantors and sureties
the claims against them can be pursued
who are not solidarily liable with the
separately from and independently of the
debtor. Respondent Maynilads claim
rehabilitation case.
that the banks are not solidarily liable

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

The terms of the Irrevocable Standby respondent acted in excess of his

Letter of Credit do not show that the jurisdiction.
obligations of the banks are not solidary
with those of respondent Maynilad. On
the contrary, it is issued at the request of Is an issuing bank a
and for the account of Maynilad in favor guarantor?
of the MWSS as a bond for the full and No, the concept of guarantee vis-
prompt performance of the obligations a-vis the concept of irrevocable
by the concessionaire under the LC is inconsistent with each
Concession Agreement and herein other. LCs are primary
MWSS is authorized by the banks to obligations and not security
draw on it by the simple act of delivering contracts and while they are
to the agent a written certification security arrangements, they are
substantially in the form of the Letter of not converted thereby into
Credit. contracts of guaranty. (MWSS v.
Hon. Daway, G.R. No. 160732,
Taking into consideration our own
rulings on the nature of letters of credit c.) Nature of Letters of Credit
and the customs and usage developed Nature and purpose of
over the years in the banking and LC
commercial practice of letters of credit, To ensure certainty of
we hold that except when a letter of payment. The seller is
credit specifically stipulates otherwise, assured of payment because
the obligation of the banks issuing letters the bank intervenes and
of credit are solidary with that of the makes the commitment to
person or entity requesting for its pay. This addresses
issuance, the same being a direct, problems arising from
primary, absolute and definite sellers refusal to part with
undertaking to pay the beneficiary upon his goods before being paid
the presentation of the set of documents and the buyers refusal to
required therein. part with his goods before
The public respondent, therefore, being paid and the buyers
exceeded his jurisdiction, in holding that refusal to part with his
he was competent to act on the money before acquiring the
obligation of the banks under the Letter goods thus facilitating
of Credit under the argument that this commercial transaction.
was not a solidary obligation with that of
Essential conditions of
the debtor. Being a solidary obligation,
the letter of credit is excluded from the
jurisdiction of the rehabilitation court The following are essential
conditions of LC:
and therefore in enjoining petitioner
from proceeding against the Standby a.) Issued in favor of a
definite person and not to
Letters of Credit to which it had a clear
right under the law and the terms of said order
Standby Letter of Credit, public

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 5
Compiled by: Sheena Marie S. Ysit

Note: The Uniform Commercial Practice in Benguet and Ilocos. Transfield was
for Documentary Credits allows letters given the sole responsibility for the
of credit to payable to order. design, construction, commissioning,
testing and completion of the Project.
b.) Limited to a fixed or The contract provides for a period for
specified amount or to which the project is to be completed and
one or more amounts, but also allows for the extension of the
with a maximum stated period provided that the extension is
limit. based on justifiable grounds such as
Note: If any of these essential conditions fortuitous event. In order to guarantee
is not present, the instrument is merely performance by Transfield, two stand-by
considered as a letter of letters of credit were required to be
recommendation. opened. During the construction of the
plant, Transfield requested for extension
In case the buyer was not able of time citing typhoon and various
to pay its obligation under the disputes delaying the construction. LHC
letter of credit, can the bank did not give due course to the extension
take possession over the goods of the period prayed for but referred the
covered by the said letter of matter to arbitration committee. Because
credit? of the delay in the construction of the
No. The opening of a Letter of plant, LHC called on the stand-by letters
Credit did not vest ownership of of credit because of default. However,
the goods in the bank in the the demand was objected by Transfield
absence of a trust receipt on the ground that there is still pending
agreement. A letter of credit is a arbitration on their request for extension
mere financial device developed of time.
by merchants as a convenient and
relatively safe mode of dealing Issue: Whether or not LHC can collect
with the sales of goods to satisfy from the letters of credit despite the
the seemingly irreconcilable pending arbitration case
interests of a seller, who refuses to
part with his goods before he is
Held: Transfields argument that any
paid, and a buyer, who wants to
dispute must first be resolved by the
have control of the goods before
parties, whether through negotiations or
paying. (Transfield Philippines,
arbitration, before the beneficiary is
Inc. v. Luzon Hydro Corporation,
entitled to call on the letter of credit in
G.R. No. 146717, Nov. 22, 2004)
essence would convert the letter of credit
CASE: into a mere guarantee.
Transfield Philippines, Inc. v. Luzon
Hydro Corporation, G.R. No. 146717,
Nov. 22, 2004) The independent nature of the letter of
Facts: Transfield Philippines credit may be: (a) independence in toto
(Transfield) entered into a turn-key where the credit is independent from the
contract with Luzon Hydro Corp. justification aspect and is a separate
(LHC).Under the contract, Transfield obligation from the underlying
were to construct a hydro-electric plants agreement like for instance a typical

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

standby; or (b) independence may be condition, packing, delivery, value or

only as to the justification aspect like in existence of the goods represented by
a commercial letter of credit or any documents, or for the good faith or
repayment standby, which is identical acts and/or omissions, solvency,
with the same obligations under the performance or standing of the
underlying agreement. In both cases the consignor, the carriers, or the insurers of
payment may be enjoined if in the light the goods, or any other person
of the purpose of the credit the payment whomsoever.
of the credit would constitute fraudulent
abuse of the credit.
d.) Parties to a Letter of Credit
The parties to a letter of credit
Jurisprudence has laid down a clear The following are the parties
distinction between a letter of credit and to a letter of credit:
a guarantee in that the settlement of a 1. Applicant/Buyer/ Importer-
dispute between the parties is not a pre- procures the letter of credit,
requisite for the release of funds under a purchases the goods and
letter of credit. In other words, the obliges himself to reimburse
argument is incompatible with the very the goods and obliges himself
nature of the letter of credit. If a letter of to reimburse the issuing bank
credit is drawable only after settlement upon receipt of the
of the dispute on the contract entered documents of title.
into by the applicant and the beneficiary, 2. Issuing Bank- One which,
there would be no practical and whether a paying bank or
beneficial use for letters of credit in not, issues the letter of credit
commercial transactions. and undertakes to pay the
seller upon receipt of the
The engagement of the issuing bank is to draft and proper documents
pay the seller or beneficiary of the credit of title from the seller and to
once the draft and the required surrender them to the buyer
documents are presented to it. The so- upon reimbursement.
called independence principle assures 3. Beneficiary/Seller/Exporter
the seller or the beneficiary of prompt In whose favor the instrument
payment independent of any breach of is executed. One who
the main contract and precludes the delivers the documents of
issuing bank from determining whether title and draft to the issuing
the main contract is actually bank to recover payment.
accomplished or not. Under this The number of parties may be
principle, banks assume no liability or increased. Modern letters of credit
responsibility for the form, sufficiency, usually involve bank-to-bank
accuracy, genuineness, falsification or transaction. The following additional
legal effect of any documents, or for the parties parties may be:
general and/or particular conditions
stipulated in the documents or 1. Advising/ Notifying bank- The
superimposed thereon, nor do they correspondent bank (agent) of the
assume any liability or responsibility for issuing bank through which it
the description, quantity, weight, quality, advises the beneficiary of the LC.

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 7
Compiled by: Sheena Marie S. Ysit

2. Confirming bank- bank which, upon one who in compliance with the
the request of the beneficiary, contract of sale ships the goods
confirms the LC issued. to the buyer and delivers the
3. Paying Bank- bank on which the documents of title and draft to
drafts are to be drawn, which may be the issuing bank to recover
the issuing bank or another bank not payment for the goods. Their
in the city of the beneficiary. relationship is governed by the
4. Negotiating bank- bank in the city of contract of sale.
the beneficiary which buys or 2. Between the issuing bank and the
discounts the drafts contemplated by beneficiary/seller/exporter The
the LC, if such draft is to be drawn issuing bank is the one that issues
on the opening bank not in the city of the letter of credit and undertakes
the beneficiary. to pay the seller upon receipt of
the draft and proper documents
Stages of LC of title. On the other hand, the
1. Contract of sale between the surrenders document of title to
buyer and seller the bank in compliance with the
2. Application for LC by the terms of the LC. Their
buyer with the bank relationship is governed by the
3. Issuance of LC by the bank terms of the LC.
4. Shipping of goods by the 3. Between the issuing bank and the
seller applicant/buyer/importer The
5. Execution of draft and tender applicant/buyer/importer obliges
of documents by the seller himself to reimburse the issuing
6. Redemption of draft bank upon receipt of the
(payment) and obtaining of documents of title. Their
documents by the issuing relationship is governed by the
bank terms of the application for the
7. Reimbursement to the bank issuance of the letter of credit by
and obtaining of documents the bank. (2002 Bar Question)
by the buyer
When is the bank entitled to
e.) Rights and obligations of reimbursement?
parties Once the issuing bank shall
Three (3) distinct but intertwined have paid the beneficiary
contract relationships that are after the latters compliance
indispensable in a letter of credit with the terms of the LC.
transaction. Presentment for acceptance
1. Between the to the customer/applicant is
applicant/buyer/importer and the not a condition sine qua non
beneficiary/seller/exporter- The for reimbursement.
applicant/buyer/importer is the (Prudential Bank v. IAC,
one who procures the letter of G.R. No. 74886, Dec. 8,
credit while the 1992)
beneficiary/seller/exporter is the What is the consequence of

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

payment upon an expired LC? authenticity of apparent authority.

An issuing bank which paid the Letter of (Bank of America
the beneficiary of an expired Credit. (Bank of NT & SA v. CA,
letter of credit can recover the America NT & G.R. No. 105395,
payment from the applicant SA v. CA, G.R. Dec. 10, 1993)
which obtained the goods No. 105395, Dec. Not liable for
from the beneficiary to 10, 1993) damages unless the
prevent unjust enrichment. document on its face
(Rodzssen Supply Co. v. Far is manifestly fake.
East Bank and Trust Co, G.R. Confirming
No. 109087, May 9, 2001) Lends credence Direct obligation, as
Should the marginal deposit made to the LC issued if it is the one which
by the customer, in possession of by a lesser issued the LC.
the bank be first deducted from known bank.
the principal indebtedness before Negotiating
computing the interest? Buys the sellers Depends on the
Yes, since it is supposed to be draft and later stage of negotations
returned upon compliance with on sells the draft thus:
his obligation. Indeed, it would to the issuing 1. Before
be onerous to compute interest bank. negotiation No
and other charges on the face liability with respect
value of the letter of credit to the seller. Merely
which the issuing bank issued, suggests its
without first crediting or setting willingness to
off the marginal deposit which negotiate.
the importer paid to it. 2. After negotiation
Requiring the importer to pay A contractual
the interest on the entire letter relationship will
of credit without deducting first then arise. Making
his marginal deposit would be a the bank liable.
clear case of unjust enrichment Paying
by the bank. (Abad v. CA, G.R. May either be Direct obligation
42735, Jan. 22, 1990) the issuing bank
or any other
The liabilities of correspondent bank in the
banks place of the
Notifying/ advising
Serves as an Does not incur any f.) Basic Principles of letter
agent of the obligation more than Credit
issuing bank; just notifying the 1. Doctrine of independence
Warrants the seller/beneficiary of The relationship of the buyer and
apparent the opening of the the bank is separate and
(Appearance to LC after it has distinct from the relationship of
unaided senses) determined its the buyer and seller in the main

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 9
Compiled by: Sheena Marie S. Ysit

contract; the bank is not contract underlying it. (Insular

required to investigate if the Bank of Asia & America v. IAC,
contract underlying the LC has Nov. 17, 1988)
been fulfilled or not because in
transactions involving LC, 2. Fraud exception principle
banks deal only with documents The Fraud exception rule. It provides
and not goods (BPI v. De Reny that the untruthfulness of a certificate
Fabric Industries, Inc., L-2481, accompanying a demand for payment
Oct. 16, 1970). In effect, the under a standby letter of credit may
buyer has no course of action qualify as fraud sufficient to support an
against the issuing bank. injunction against payment. (Transfield
v. Luzon Hydro, G.R. No. 146717, Nov.
22, 2004)
Effect of the buyers failure to
procure an LC t the main
3. Doctrine of strict compliance
The documents tendered by the
The LC is independent from
seller/beneficiary must strictly conform
the contract of sale. Failure
to the terms of the letter of credit. The
of the buyer to open the
tender of documents must include all
Letter of Credit does not
documents required by the letter. Thus, a
prevent the birth of the Sales
correspondent bank which departs from
Contract. (Reliance
what has been stipulated under the LC
Commodities, Inc. v.
acts on its own risk and may not
Daewoo Industrial Co. Ltd.,
thereafter be able to recover from the
G.R. No. 100831, Dec. 17,
buyer or the issuing bank, as the case
1993) The opening of the LC
may be, the money thus paid to the
is only a mode of payment.
beneficiary. (Feati Bank and Trust
The LC is not an essential
Company v. CA, G.R. No. 940209, Apr.
requisite to the contract of
30, 1991)

In a contract of loan secured by a CASE:

standby LC, can the partial Feati Bank & Trust Company vs. Court
payments made on the loan be of Appeals, 196 SCRA 576 (1991)
added in computing the issuing
banks liability under its own FACTS:
standby letter of credit? Bernardo E. Villaluz agreed to sell to the
then defendant Axel Christiansen 2,000
No, although these payments
cubic meters of lauan logs at$27.00 per
could result in the reduction of
cubic meter FOB. After inspecting the logs,
the actual amount which, could
Christiansen issued purchase order.-On the
ultimately be collected from the
arrangements made and upon the instructions of
issuing bank, the latters separate
the consignee, Hanmi Trade Development, Ltd.,
undertaking under its letters of
de Santa Ana, California, the Security
credit remain. This is because the
Pacific National Bank of Los Angeles,
letter of credit is an absolute and
California issued Irrevocable Letter of
primary undertaking which is
Credit available at sight in favor of Villaluz for
separate and distinct from the

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

the sum of $54,000.00, the total purchase price Philippines without informing the Court and his
of the lauan logs. The letter of credit was mailed counsel. Hence, Villaluz, filed an amended
to the Feati Bank and Trust Company (now complaint make the petitioner solidarily liable
City trust) with the instruction to the latter that it with Christiansen.
"forward the enclosed letter of credit to the
beneficiary. The letter of credit further provided ISSUE: Whether or not a correspondent
that the draft to be drawn is on Security bank is to be held liable under the letter
Pacific National Bank and that it be of credit despite non-compliance by the
accompanied by the documents specified beneficiary with the terms thereon.
therein. Also incorporated by reference is the
Uniform Customs and Practice for HELD: Commercial transactions involving
Documentary Credits). The logs were letter of credits are governed by the rule on strict
thereafter loaded on the vessel "Zenlin compliance. It is a settled rule in commercial
Glory" which was chartered by transactions involving letters of credit that the
Christiansen. Before its loading, the logs documents tendered must strictly conform to the
were inspected by custom inspectors, all of terms of the letter of credit. The tender of
whom certified to the good condition and documents by the beneficiary (seller) must
exports ability of the logs, and the loading was include all documents required by the letter. A
completed. However, Christiansen refused correspondent bank which departs from
to issue the certification as required in what has been stipulated under the letter
paragraph 4 of the letter of credit, of credit, as when it accepts a faulty
despite several requests made by the tender, acts on its own risks and it may
private respondent. Because of the not thereafter be able to recover from the
absence of the certification by buyer or the issuing bank, as the case may be,
Christiansen, the Feati Bank and Trust the money thus paid to the beneficiary. Thus the
Company refused to advance the payment on rule of strict compliance. In the United States,
the letter of credit. Meanwhile, the logs commercial transactions involving letters of
arrived at Inchon, Korea and were credit are governed by the rule of strict
received by the consignee, Hanmi Trade compliance. In the Philippines, the same holds
Development Company, to whom true. The-same rule must also be
Christiansen sold the logs and obtained followed. Although in some American
profit. Hanmi Trade Development decisions, banks are granted a little
Company, on the other hand sold the logs to discretion to accept a faulty tender
Taisung Lumber Company at Inchon, Korea. as when the other documents may be
Since the demands by the private considered immaterial or superfluous,
respondent for Christiansen to execute this theory could lead to dangerous
the certification proved futile, Villaluz, precedents. Since a bank deals only with
instituted an action for mandamus and documents, it is not in a position to determine
specific performance against whether or not the documents required by the
Christiansen and the Feati Bank and letter of credit are material or
Trust Company (now City trust). The superfluous. The mere fact that the
petitioner was impleaded as defendant before document was specified therein readily
the lower court only to afford complete relief means that the document is of vital importance
should the court a quo order Christiansen to to the buyer.
execute the required certification. While the case
was still pending trial, Christiansen left the

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 11
Compiled by: Sheena Marie S. Ysit


LAW (act 2137, amended) RECEIPTS
1. A warehouseman, whether public
*DEFINITION and NATURE of or private, bonded or not.
2. A person authorized by a
Warehouse receipt law warehouseman.
A written acknowledgment by
the warehouseman that he has *FORM and CONTENT of
received and holds certain goods WAREHOUSE RECEIPTS
therein described in his Form of a warehouse receipt and
warehouse for the person to its essential terms:
whom the document is issued. It need not be in particular form but must
The warehouse receipt has two- embody within its written or printed
fold functions, that is, it is a terms:
contract and a receipt. (Telengtan a. The location of the warehouse
Bros. & Sons v. CA, G.R. No. L- b. The date of the issue
110581, Sept 21, 1994) c. A statement whether the goods
received will be delivered to
WAREHOUSE RECEIPTS VS. bearer, to a specified person or to
DOCUMENT OF TITLE a specified person or his order
RECEIPTS LAW OF TITLE e. A description of the goods
UNDER CIVIL f. The signature of the
CODE warehouseman
Warehouse Other receipts of g. If the receipt is issued for goods
receipts issued by documents issued of which the warehouseman is
warehouses, in bailment the owner, either solely or jointly
whether public or contracts other or in common with others the
private, bonded than warehouse fact of such ownership; and
or not. receipts (Civil h. A statement of the amount of
Code 1507-1520) advances made and of liabilities
incurred for which the
*PURPOSE of the LAW warehouseman claims a lien.
1. To prescribe the rights and duties (Sec. 2)
of a warehouseman
2. To regulate the relationship The effect when the goods deposited are
between a warehouseman and: incorrectly described
a. The depositor of the goods or It does not make the receipt
b. Holder of a warehouse ineffective when the
receipt for the goods or identity of the goods is
c. The person lawfully entitled fully established by
to the possession of the goods evidence. This, the
or indorsement and delivery
d. Other persons. shall constitute sufficient

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

transfer of the title of the goods.

goods. 5. Those exempting the
G.R: Warehouseman shall be liable for warehouseman from liability for
damages for non-existence or negligence.
misdescription of goods at the time of its
issue. a. Nature and function of a
XPN: When the goods are described warehouse receipt
based on:
1. Series or labels upon them; 1. To whom the goods be delivered
2. Statement that the goods are To the person lawfully entitled to
of certain kind. the possession of the goods, or
his agent;
* EFFECT of OMMISSION of ANY To the person entitled to delivery
of the ESSENTIAL TERMS: under a non-negotiable
a. A warehouseman shall be instrument or with written
liable to any person authority; or
injured thereby for all to the lawful order of a
damages caused by the negotiable receipt. (person in
omission possession of a negotiable receipt
b. Validity of receipt not (sec.9)
c. Negotiability of receipts 2. Kinds
not affected 1.Negotiable warehouse receipt
d. Contract is converted to a. One which states that the
ordinary deposit. goods received by the
warehouseman will bedelivered to the
*TERMS THAT CANNOT BE bearer or tothe order of any
INCLUDED person named in such receipt.
What terms may and may not be b. Can not be converted to non-
inserted? negotiable
A warehouseman may insert in a receipt
issued by him any other terms and 2. Non- negotiable warehouse
conditions provided that such terms and receipt
conditions shall not be: a. One which states that the
1. Contrary to the Warehouse goods received by the warehouseman
Receipts Law. (Sec. 3) will be delivered to the depositor
2. Terms reducing the required or to any other specified person
diligence of the warehouseman. b. The word non-negotiable
(Ibid.) should be placed plainly upon its
3. Contrary to law, morals, good face
customs, public order or public
policy. What is a non-negotiable warehouse
4. Those exempting the receipt?
warehouseman from liability for It is a receipt in which it states
misdelivery or for not giving that the goods received delivered
statutory notice in case of sale of to the depositor or to any other

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 13
Compiled by: Sheena Marie S. Ysit

specified person. (Sec. 4) warehouse receipt as against a

transferee of a non-negotiable
What is required in a non- warehouse receipt
negotiable receipt?
It shall have plainly placed upon its In case the signature of an owner of a
face by the warehouseman issuing it negotiable receipt was forged and
non-negotiable, or not the forger who now holds the
negotiable. (Sec. 7) negotiable receipt was able to
withdraw the goods from the
Note: Failure to mark non-negotiable warehouseman. What are the rights
shall make it negotiable (if the holder of the owner of the negotiable
purchased it for value supposing it to be receipt?
negotiable). If under the terms of the negotiable
warehouse receipt, the goods are
A. Distinction between a negotiable deliverable to the depositor or to his
instrument and a negotiable order, the owner of the said
warehouse receipt. negotiable receipt may proceed
against the warehouseman and/or
NEGOTIABLE NEGOTIABLE the holder. Without the valid
INSTRUMENT WAREHOUSE indorsement of the owner to the
RECEIPT holder or in blank, the
Contains an Does not warehouseman is liable to the owner
unconditional contain an for conversion in the misdelivery. If,
promise to pay unconditional however, by the terms of the
a sum certain promise to pay a negotiable warehouse receipt, the
in money. sum certain in goods are deliverable to bearer
money. (either because it is so expressed in
The subject is The subject is the warehouse receipt or because of
money. merchandise. a blank indorsement by a person to
The negotiable The warehouse whose order the goods are
instrument is receipt is not the deliverable) the owner may only
the object of object of value. proceed against the holder. The
value. warehouseman is not liable for
The negotiable The warehouse conversion where the goods are
instrument is receipt is not the delivered to a person in possession
the object of object of value. of a bearer negotiable instrument.
Intermediate Intermediate b. Duties of a warehouseman
parties become parties are not 1. Who is a warehouseman?
secondarily liable for the A person, natural or juridical,
liable. warehouse lawfully engaged in the business
mans failure to of storing of goods for profit.
deliver the (Sec. 58, WRL)
2. Principal obligations of
4. Rights of a holder of a negotiable

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

1. To take care of the good acknowledging the receipt of the

entrusted to his safekeeping; goods from the warehouse.
2. To deliver them to the holder of
the receipt or the depositor provided 5. The failure was not due to any
there is demand by the depositor fault on the part of the
accompanied by either: warehouseman:
a. An offer to satisfy the a. Upon request by or on
warehousemans lien; behalf of the person
b. An offer to surrender the lawfully entitled. (Sec. 10)
receipt, if negotiable with b. b. If he had information that
such indorsements as would be the delivery about to be
necessary for the negotiation of the made was to one not
receipts; or lawfully entitled. (Ibid.)
c. A readiness and willingness to c. If several persons claim the
sign, when the goods are delivered, goods. (Sec. 17)
an acknowledgement that they have d. If the warehouseman needs
been delivered, if such signature reasonable time to ascertain
is requested by the warehouseman the validity of the claim if
(Sec. 8); and someone other than the
3. To keep the goods separate from depositor claims title to the
the goods of other depositors, except if goods. (Sec. 18)
authorized by agreement or by custom, e. If the goods are lost, despite
fungible goods may be mingled with ordinary care by the
other goods of the same kind and grade. warehouseman.

3. Lawful excuses to deliver goods 5. Incase of Misdelivery

1. If the warehousemans lien is not a. Loss or destruction of the
satisfied by the claimants. (Sec. goods without the fault of the
31) bailee;
2. Where the goods have already b. Failure to satisfy the bailees
been sold to satisfy the lien;
warehousemans lien or because c. Failure to surrender a
of their perishable or hazardous negotiable document of title;
nature. (Sec. 34) d. Lack of willingness to sign
3. If the warehouse receipt is e. Delivery to a claimant with
negotiated back to him. better right;
f. Where the document of title
4. When the holder does not satisfy
is attached by a creditor;
the conditions prescribed in
g. Receipt by the bailee of a
Section 8:
request by or on behalf of the
a. Non-satisfaction of
person lawfully entitled to a
warehousemans lien.
right of property or
b. Failure to surrender warehouse
possession in the goods, not
to make such delivery;
c. Refusal to sign the
h. The bailee has information
acknowledgement receipt,

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 15
Compiled by: Sheena Marie S. Ysit

that the delivery about to be 7. Failure to give notice in case of sale of

made was to one not lawfully goods to satisfy lien (Sec. 33) or because
entitled to the possession of the goods are perishable or
the goods and; hazardous.(Se. 34.)
i. Attachment or levy of the
goods by a creditor where the c. Warehousemans lien
document is surrendered or 1. Extent
its negotiation is enjoined or * Warehouse lien over the goods
the document is impounded. deposited or on the proceeds thereof:
a. Charges for storage and
5. Altered Receipts preservation of the goods (insurance and
* Effects of alteration of the receipt others may be included as long as it is
1. Alteration immaterial stipulated)
whether fraudulent or not, whether b. Money advanced, interest,
authorized or not, the warehouseman is insurance, transportation, labor,
liable on the altered receipt according to weighing, coopering and other charges
its original tenor. and expenses in relation to such goods
2. Authorized material alteration c. Chargers and expenses for
the warehouseman is liable according notice, and advertisements of sale, and
to the terms of the receipt as altered. for sale of the goods where default had
3. Material alteration innocently been made in satisfying the
made the warehouseman is liable on the warehousemans lien. (sec. 27)
altered receipt according to the original
tenor of the receipt to a purchaser of the 2. Loss and waiver of lien
receipt for value without notice and even *What if the receipts are lost or
to the altered and subsequent purchaser destroyed?
with notice except that as regards to the A court of competent
last two, the warehousemans liability is jurisdiction may order the
limited only to delivery as he is excused delivery of the goods
from any liability. only:
a. Upon satisfactory proof
6. Liability of a Warehouseman of the loss or destruction of the
* Other liabilities of a warehouse man receipt; and
1. Failure to stamp duplicate on b. Upon the giving of a
copies of negotiable receipt. (Sec.6) bond with sufficient sureties to
2. Failure to place non-negotiable or be approved by the court. (Sec.
not-negotiable on a non-negotiable 14)
receipt. (Sec. 7)
3. Misdelivery of goods. (Sec. 10) Note: The delivery of the goods
4. Failure to effect cancellation of a under an order of the court shall
negotiable receipt upon delivery of the not relieve the warehouseman
goods. (Sec. 11) from liability to a person to
5. Issuing receipt for non-existing goods whom the negotiable receipt has
or misdescribed goods. (Sec.20) been or shall be negotiated for
6. Failure to take care of the goods. (Sec. value without notice of the
21) proceedings or of the delivery of

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

the goods. (Sec. 14) How may the warehouseman

lose his lien
Remedies available to a 1. By surrendering possession
warehouseman to enforce thereof, or
his warehousemans lien: 2. By refusing to deliver the goods
1. by refusing to deliver the when a demand is made with
goods until the lien is which he is bound to comply.
satisfied; (Sec. 29)
2. By causing the extrajudicial
sale of the property and Note: Where a negotiable receipt is
applying the proceeds of the issued, with the exception of the charges
value of the lien for the storage or preservation of goods
for which a negotiable receipt has been
Note: Where the sale was made issued, the lien exists only for other
without the publication required charges expressly enumerated in the
and before the time provided by receipt so far as they are written
law, such sale is void and the although the amount of the said charge
purchases of the goods acquires isnt stated.
no title to them.
Loss of lien does not mean that the
3. By filing a civil action for warehouseman does not have any other
collection of the unpaid remedy.
charges or by way of d. Other topics- negotiation and
counterclaim in an action to transfer of receipts
recover the property from
him or such other remedies * When does the duty to insure
allowed by law for the the goods arise?
enforcement of a lien against a. where the law provides;
personal property or to a b. where it was an inducement
creditor against his debtor, for the depositor to enter into the
for the collection from the contract;
depositor of all the charges c. Established practice; or
which the depositor has d. Where the warehouse receipt
bound himself to pay. contains a representation to that
Against whose goods may the
lien be enforced? Q: Coco was issued by a
1. Goods belonging to the warehouseman a negotiable receipt
person who is liable as for safekeeping by the latter of his
debtor; and goods. Can the judgment creditor of
2. Goods belonging to others Coco levy by execution the goods
which have been deposited at covered by the negotiable receipt?
any time by the debtor with A: The goods cannot, while in the
authority to make a valid possession of the warehouseman, be
pledge. (Sec. 28) attached by garnishment or otherwise, or
be levied upon under an execution unless

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 17
Compiled by: Sheena Marie S. Ysit

the receipt be first surrendered to the warehouseman if he is uncertain as to

warehouseman, or its negotiation who is entitled to the goods? Explain.
enjoined. The warehouseman cannot be A: Since there is a conflicting claim of
compelled to deliver the actual ownership or title, the warehouseman
possession of the goods until the receipt should file a complaint in interpleader
is surrendered to it or impounded by the requiring Ryan and Angela to interplead.
court. The matter involves a judicial question
as to whose claim is valid. (2005 Bar
Q: Assuming that prior to the levy, the Question)
receipt was sold to Yoyo on the basis
of which he filed a claim with the The rule where a warehouse
sheriff. Would Yoyo have better rights receipt is transferred to secure
to the goods than the creditor? payment of a loan by way of
Explain your answer. pledge or mortgage?
A: Yes. Yoyo, as a holder for value of The pledgee or mortgagee does not
the receipt, has a better right to the automatically become the owner of
goods than the creditor. It is Yoyo that the goods but merely retains the
can surrender the receipt which is in its right to keep and with the consent of
possession and can comply with the the owner to sell them so as to
other requirements which will oblige the satisfy the obligation from the
warehouseman to deliver the goods, proceeds for the simple reason that
namely, to sign a receipt for the delivery the transaction is not a sale but only
of the goods, and to pay the a mortgage or pledge. Likewise, if
warehouseman's liens and fees and other the property is lost without the fault
charges. or negligence of the mortgagee or
pledgee, then said goods are to be
Q: Bon took the goods of Angela regarded as lost on account of the
without her consent and deposited the real owner, mortgagor or pledgor.
same with a warehouseman. The latter (PNB v. Sayo, Jr., G.R. No. 129198,
issued to Bon a negotiable receipt July 9, 1998)
which she indorsed for value to Ryan.
Between Angela and Ryan, who has Does the non-payment by the
better right over the goods? Why? original depositors of the
A: Ryan has better right to the goods. purchase price render the
The goods are covered by a negotiable further negotiation of the receipt
warehouse receipt which was indorsed to invalid?
Ryan for value. The negotiation to Ryan No, the negotiation of the
was not impaired by the fact that Bon warehouse receipt by the buyer of
took the goods without the consent of goods purchased from and
Angela, as Ryan had no notice of such deposited to the warehouseman is
fact. Moreover, Ryan is in possession of valid even if the warehouseman
the warehouse receipt and only he can who issued the negotiable
surrender it to the warehouseman. (Sec. warehouse receipt was not paid by
8, WRL) the buyer. The validity of the
negotiation cannot be impaired by
Q: What is the proper recourse of the the fact that the

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

owner/warehouseman was may impair the validity or worth

of the receipt
What happens if the indorsement is 4. That he has a right to transfer
necessary but the negotiable receipt title to the goods and that the
was only delivered? goods are merchantable or fit for
1. The transferee acquires title a particular purpose whenever
against the transferor such warranties would have been
2. There is no direct obligation to transfer without a receipt of
of the warehouseman; and goods represented thereby. (Sec.
3. The transferee can compel 44)
the transferor to complete the
negotiation by indorsing the Note: The indorsee does not guarantee
instrument. Negotiation takes that the warehouseman will comply with
effect as of the time when the his duties. (Sec. 45)
indorsement is actually made. A creditor receiving the warehouse
receipt given as a collateral makes no
What is the rule when more than
warranty. (Sec. 46)
one negotiable receipt is issued for
the same goods? How is it transferred?
A warehouseman shall be liable for A non-negotiable warehouse
all damages caused by his failure to receipt may be transferred by its
do so to anyone who purchased the delivery to the transferee
subsequent receipt for value accompanied by a deed of
supposing it to be an original, even assignment, donation or other
though the purchase is after the form of transfer.
delivery of the goods by the
warehouseman to the holder of the What is the effect of indorsement?
original receipt (Sec. 6). Even if the receipt is indorsed, the
transferee acquires no additional
Note: The word duplicate shall be right (Sec. 39)
plainly placed upon the face of every
such receipt, except the first one issued. When is the need for a demand by
(Sec. 6.) the depositor not necessary.
What are the warranties on a When the warehouseman has
warehouse receipt? rendered it beyond his power to
A person who, for value, deliver the goods.
negotiates or transfers a receipt What is conversion?
by indorsement or delivery, An unauthorized assumption and
including one who assigns for exercise of the right of ownership
value a claim secured by a over goods belonging to right of
receipt, unless a contrary ownership over goods belonging to
intention appears warrants: another through the alteration of
1. Receipt is genuine their condition or the exclusion of
2. Legal right to negotiate or the owners right.
transfer it
3. No knowledge of defects that

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 19
Compiled by: Sheena Marie S. Ysit

THE WAREHOUSE * Warehouseman / Bailee

RECEIPTS LAW (ACT NO. A person (natural or juridical)
2137, AS AMENDED) lawfully engaged in the business
of storing goods for profit.
a. To prescribe the rights and WAREHOUSE RECEIPTS
duties of a warehouseman; Only a warehouseman
b. To regulate the relationship be may issue warehouse
tween a warehouseman and the receipts to putsaid
depositor of goods, or the holder warehouse receipts within
of a warehouse receipts for the the purview of the WRL.
goods, or other persons;
c. To render title to, and right of * FORM OF RECEIPTS;
possession of, property stored in ESSENTIAL TERMS
warehouse more easily 1. The location of the warehouse
convertible; where the goods are stored;
2. The date of issue of the receipt
d. To protect those who, in good ;
faith and for value, acquire 3. Consecutive number of the rec
negotiable warehouse receipts by eipt;
negotiation. 4. A statement whether the goods
received will be delivered to the
WAREHOUSE RECEIPT bearer, to a specified person, or
1. It is to a specified person or his order;
a written acknowledgement by a 5. The rate of storage charges;
warehouseman that he has 6. A description of the goods
received and holds certain goods or of the package containing
therein described in store for the them;
person to whom it is issued. 7. The signature of the
(Talengtan Bros. & Sons warehouseman which may be
vs. CA, G.R. No. L- made by his authorized agent;
110581,Sept. 21, 1994) 8. If the receipt is issued
for goods of which the
2. It is a simple written contract warehouseman is owner, either
between the owner of the goods solely or jointly or in common
and the warehouseman to pay the with others, the fact of such
compensation for that service. ownership;
9. A statement of the amount of
3. It is a bilateral contract. It advances made and of liabilities
imports that goods are in the incurred for which the
hands of a warehouseman and is warehouseman claims as lien. If
a symbolical representation of the precise amount for such
the property itself. advances made or of such
liabilities incurred is, at the same
time of the issue of the receipt,

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

unknown to the warehouseman of the document to

or his agent who issues it, a transfer or receive either
statement of the fact that by indorsement or by
advances have been made or delivery, goods
liabilities incurred and the represented by
purpose thereof is sufficient. such document.
(Art.1636, NCC)
1. A warehouseman shall be liabl
e to any person injured thereby 1. Bill of Lading
all damages caused by the - Written acknowledgement of
omission from a negotiable the receipt of goods and an
receipt of any of the terms herein agreement to transport and to
required; deliver them at a specified place
2. Validity of receipt not affected to a person named therein or on
; his order.
3. Negotiability of receipt not aff
ected. a. On Board Bill of
* TERMS THAT CANNOT Issued when the goods
BE INCLUDED IN have been actually placed
THEWAREHOUSE RECEIPT aboard the ship with very
reasonable expectation
1. Those contrary to any provisi that the shipment is as
on of the law; good as on its way.
2. In any wise impair the
warehouseman's obligation to b. Port Bill of Lading
exercise that degree of care in issued by the carrier to
the safekeeping of the goods whom the goods have
entrusted to him which a been delivered and the
reasonably careful man vessel indicated in the bill
would exercise with regard to of lading by which the
similar goods of his own. goods are to be shipped is
already in the port where
* Document of Title to Goods the goods are held for
Any document used in
the ordinary course of 2. Quedan
business, in the Warehouse receipt that
sale/transfer of goods, as covers sugar.
proof of possession or
control of the goods, or 3. Dock Warrant
authorizing or purporting Warrant given by dock
to authorize the possessor owners to the owner of

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 21
Compiled by: Sheena Marie S. Ysit

merchandise imported 2. To the order of any person

and warehoused on the named in such receipt. (Sec.5,
dock, upon the faith of WRL)
the bills of lading, as a
recognition of his title to *Non-Negotiable Warehouse
the goods. Receipts
A non-negotiable
*FUNCTIONS OF warehouse receipt is one
DOCUMENTS OF TITLE in which it is stated that
the goods received will
1. Evidence of receipt of goods; be delivered to the
2. Represents the goods and depositor or to
therefore operates as any specified person.
transferrable document that
carries with it the control over * DUPLICATE RECEIPTS
the goods. It is used to pass title MUST BE MARKED
to the goods;
3. It is a contract. When more than one is is
sued for the same goods, t
* MEANING OF he word "duplicate" shall
NEGOTIABLE UNDER THE be plainly placed upon
ACT the face of every such
It indicates that in the receipt, except the first
passage of warehouse one issued.
receiptsthrough the A warehouseman shall be
channels of commerce, held liable for damages f
the law regards or failure to do so to
theproperty which they anyone who purchased
describe as following the subsequent receipt for
them and gives totheir value supposing it to be
regular transfer by original, even though the
indorsement the effect of purchaser be after the
manualdelivery of the delivery of the goods
things specified in them. by the warehouseman to
the holder of the original
*Negotiable Warehouse receipt.
A negotiable warehouse *NEGOTIATION OF
receipt is one in which it WAREHOUSE RECEIPTS
is stated that the goods
received will be delivered A. By Delivery
either: 1. Where by the terms of the
receipt, the warehouseman
1. To the bearer; or undertakes to deliver the goods
to the bearer; or

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

2. Where by the terms of the receipt, 1. In case of receipt negotiable

the warehouseman undertakes to by delivery, such title to the goods as the
deliver the goods to the order of a person negotiating the receipt to him had
specified person, and such person or or had ability to convey to a purchaser in
a subsequent endorsee of the receipt good faith for value;
has indorsed it in blank or bearer.
The bearer document is not always a 2. In case of receipt negotiable by indors
bearer document. A special ement coupled by delivery, such title to
indorsement has the effect of the goods as the depositor or person to
converting the bearer instrument whose order the goods were to be
into an order instrument. delivered by the terms of the receipt has
or had ability to convey to a purchaser in
B. By Indorsement Coupled with good faith for value;
1. If the receipt states that the goods are 4. The direct obligation of the
to be delivered to the order of a person warehouseman to hold possession of
named therein; the goods for him according to the
terms of the receipt as fully as if the
3. Effects when indorsement is warehouseman had contracted
necessary but the negotiable directly with him. (Sec.41, WRL)
receipt was only delivered:
a. The transferee acquires * RIGHTS OF A PERSON TO WHOM A
title against the transferor; RECEIPT HAS
b. There is no direct BEEN TRANSFERRED:
obligation of the warehouseman
to deliver the goods to 1. The title to the goods as against the
such holder of the receipt; transferor with respect to a negotiable
c. The transferee can warehouse receipt not duly negotiated
compel the transferor to (merely steps into the shoes);
complete the negotiation by
indorsing the instrument 2. The right, thereafter, to acquire
(Sec.43, WRL). The negotiation the obligation of the warehouseman to
takes effect on the date of hold the goods for him; and
the indorsement only.
3. If the receipt is non-negotiable, such
* EFFECT OF NEGOTIATION OF person acquires the right to notify the
WAREHOUSE RECEIPT warehouseman of the transfer thereof.
Negotiation of the document has (Sec. 42, WRL)
the effect of manual delivery so
as to constitute the transferee the Prior to the notification of the
owner of the goods. warehouseman by the transferor or
transferee of a non-negotiable receipt,
* RIGHTS OF A PERSON TO WHOM A the title of the transferee to the goods
RECEIPT HASBEEN NEGOTIATED: and the right to acquire the obligation of
the warehouseman may be defeated by:

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 23
Compiled by: Sheena Marie S. Ysit

1. The levy of an attachment or 9. Attachment/levy of the goods by a

execution upon the goods by a creditor creditor where the document is
of the transferor; or surrendered or its negotiation is enjoined
2. A notification to the or the document is impounded
warehouseman by the transferor or a
subsequent purchaser from the transferor * IN CASE OF ADVERSE CLAIM,
of the subsequent sale of the goods THE BAILEE MAY:
by the transferor. But unpaid sellers lien
or right of stoppage intransitu cannot 1. Refuse to deliver the goods to anyone
defeat the right of the holder in good of them until he has had reasonable time
faith of NWR. to check the validity of the claims.
-Goods covered by NWR cannot be
attached or levied upon unless receipt is 2. File as action for interpleader and
surrendered. allow the claimants to prove their claims
or in case an action is filed against the
*WAREHOUSEMANS DEFENSES bailee, he can set up the defense of
FOR NON-DELIVERYOR adverse claims.
1. Loss or destruction of the goods *
without the fault of the bailee; WAREHOUSEMANS OBLIGATIO
2.Failure to satisfy the bailees lien;
A. Under the WRL
3. Failure to surrender a negotiable docu
ment of title; 1.Deliver the goods upon a demand
made either by the holder of a receipt for
4. Lack of willingness to sign acknowled the goods or depositor.
2. Obligation to deliver arises only if the
5. Delivery to a claimant with better righ demand is accompanied by:
6. Where the document of title An offer to satisfy the warehousemans
is attached by a creditor; and lien;

7. Receipt by the bailee of a request by b. An offer to surrender the receipt, if

or on behalf of the person lawfully negotiable, with such indorsement as
entitled to a right of property or may be necessary for the negotiation of
possession in the goods, not to make the receipt; and
such delivery;
c. A readiness and willingness to sign,
8. The bailee has information that the when the goods are delivered, an
delivery about to be made was to one not acknowledgement that they have been
lawfully entitled to the possession of the delivered, if such signature is requested
goods; and by the warehouseman.

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

B. Under the General Bonded coopering, and other charges and

Warehouse Law (Act No.9893; R.A. expenses in relation to such goods; and
3. All reasonable charges and expenses
1. Secure a license from the Department for notice and advertisements of sale,
of Trade and Industry; and for the sale of the goods where
default had been made in satisfying the
2. File a bond equivalent to 33% of the warehousemans lien.
market value of maximum quantity of
goods to be received for the protection *REMEDIES OF A
of the depositors; WAREHOUSEMAN TO
3. Not discriminate and must open his
warehouse to the public; 1. Refuse to deliver the goods until his
lien is satisfied(Sec. 31, WRL);
4. Be liable in the amount equivalent to
double the market value of the goods in 2. Sell the goods and apply the proceeds
case of damage to the goods because the thereof to the value of the lien (Sections
warehouseman accepts goods in excess 33 & 34, WRL);
of the capacity of his warehouse; and
3. By other means allowed by law to a
5. Insure the goods against fire. creditor against his debtor (Sec. 32,
WAREHOUSEMAN FOR 4. Such other remedies allowed by law
STOLEN AND DEPOSITED GOODS for the enforcement of a lien against
If stolen goods are deposited by personal property (Sec.35, WRL).
the thief with a warehouseman,
the latter shall not be liable to the * LOSS OF LIEN
holder of the receipt even if he Warehousemans lien is lost
delivers the goods to the real either by:
owners without the receipt being
surrendered to him. (Sec.11 1. Surrendering possession thereof; or
and141, WRL)
2. Refusing to deliver the goods when a
* WAREHOUSEMANS LIEN demand is made with which he is bound
to comply (Sec. 29, WRL).
A warehouseman shall have a lien
on the goods deposited or on the Note: When warehouseman withholds
proceeds thereof in his hands for: the delivery of the goods without any
1. All lawful charges for storage and valid reason, he is liable for the loss of
preservation of the goods; the goods and the liability cannot be
eliminated by proof of exercise of due
2. All lawful claims for money diligence.
advanced, interest, insurance,
transportation, labor, weighing,

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 25
Compiled by: Sheena Marie S. Ysit

*ATTACHMENT OR LEVY receipt, unless a contrary

intention appears, warrants that:
Negotiable receipt- the goods 1. The receipt is genuine;
cannot be attached/levied in 2. He has a legal right to negotiate or
execution unless: transfer it;
3. He has knowledge of no fact which
1. The receipt is first surrendered; would impair the validity or worth of
2. Its negotiation is enjoined; and that receipt;
3.The receipt is impounded by the court 4. He has a right to transfer the title to
(Sec. 25,WRL) the goods; and
5. The goods are merchantable or fit for
*Creditor's Remedies To Reach a particular purpose whenever such
Negotiable Receipt: warranties would have been implied, if
the contract of the parties had been to
A creditor whose debtor is owner transfer without a receipt of the goods
of a negotiable warehouse represented thereby. (Sec. 44, WRL)
receipt may seek for the
attachment of the receipt or seek I. Nature and Function
aid from the courts to compel the
debtor to satisfy claims by means 1. One of these statements is not correct:
allowed by law in regard to a) A warehouse receipt serves as proof
property which cannot readily be of possession of the warehouseman of
attached or levied upon by the goods described in it and as
ordinary legal process. (Sec.26, authorization for the possessor of the
WRL) It does not apply when: warehouse receipt to transferor receive
1. The depositor is not the owner of the the goods described in it.
goods (thief) or one who has no right to
convey title to the goods binding upon b) A non-negotiable receipt is one in
the owner; which it is stated that the goods received
2. The action for recovery or manual will be delivered to the depositor or to
delivery of goods by the real owner; any other specified person.
3. Where attachment is made prior to the
issuance of receipt. c) A negotiable receipt is a receipt in
which it is stated that the goods received
-Non-negotiable: the goods can be will be delivered to the bearer or to the
attached, provided it is done prior to the order of any person named in the receipt.
notification of the bailee of the transfer.
(Sec. 42, WRL) d) A warehouse receipt is not a
document of title.
A person who, for value, 2. One of these statements is not correct:
negotiates or transfers a receipt
by indorsement or delivery, a) When a negotiable instrument is
including one who assigns for altered, it becomes null and void. When
value a claim secured by a a negotiable warehouse receipt is altered,

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

it is still valid but may be enforced only 2. A warehouseman is not justified

in accordance with its original tenor. in delivering the goods to one of the
b) A negotiable instrument which is
originally payable to bearer remains so a) The person lawfully entitled to the
payable even if it is indorsed specially. possession of the goods or his agent.
A negotiable receipt deliverable to
bearer if indorsed specially becomes b) A person entitled to the delivery by
deliverable to order. the terms of the non-negotiable receipt
for goods or has written authority from
c) The holder in due course of a such person.
negotiable instrument may be able to
obtain a title better than that of c) A person in possession of a
the indorser. An indorsee of a negotiable negotiable receipt for goods deliverable
receipt acquires only such title as the to him or his order or to bearer, which
person who negotiated had over the has been indorsed to him or in blank by
goods even if he is a holder in due the person to whom delivery was
course. promised or by his indorsee. The
pledgee of the goods covered by the
d) Both in a negotiable instrument and in receipt.
a negotiable receipt the indorser
warrants that all prior parties had 3. One of these statements is not
capacity to contract. correct:
a) The general rule is that a
II. Duties of Warehouseman warehouseman cannot invoke the right
A. Delivery of Goods or title of a third person as an excuse for
1. One of these is not required to not delivering the goods covered by a
bind the warehouseman to deliver the receipt.
goods: b) By way of exception, the
warehouseman may withhold delivery
a) An offer to satisfy his lien. until he has had reasonable opportunity
to ascertain the validity of the claim of
b) An offer to surrender the receipt, if it the third party or to file an action for
is negotiable, with indorsements interpleader.
necessary for its negotiation. c) If the goods were lawfully sold to
satisfy the lien of the warehouseman or
c) A readiness and willingness to were lawfully sold or disposed of
sign upon delivery of the goods, an because of their perishable or hazardous
acknowledgment that they have been nature, the warehouseman is not liable
received, if the warehouseman requests for not delivering them.
it. d) If the warehouse receipt was
fraudulently altered, the warehouseman
d) An undertaking to hold the will be discharged from liability to
warehouseman harmless from claims of deliver the goods.
third parties.

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 27
Compiled by: Sheena Marie S. Ysit

4. One of these statements is not d) The person claiming the goods

correct: has the burden of proving the loss was
a) A warehouseman cannot set up title due to the fault of the warehouseman.
in himself as an excuse for refusing to
deliver the goods unless the title is
directly or indirectly from a transfer by II. Warehousemans Lien
the depositor or from enforcement of his
lien; A. Claims Included and Properties
b) If a warehouseman delivers goods Covered
covered by a warehouse receipt and 1. One of these statements is not
does not take up and cancel it, he will correct:
be liable to anyone who purchases the
warehouse receipt in good faith and for a) A warehouseman has a lien
value; on the goods deposited or their
proceeds in his hands for all
c) If a warehouseman delivers a part awful charges for storage and
of the goods for which he issued a preservation of the goods, for all
negotiable receipt and did not take up lawful claims in relation to the
and cancel the receipt or state plainly goods, for all reasonable charges and
upon it what goods were delivered, he expenses for notice and
will be liable to anyone who purchased advertisement for sale, and for sale
the receipt in good faith and for value; of the goods.
b) If the receipt is negotiable, the
d) A warehouseman is not liable to the warehouseman will have no lien
holder of a receipt if the goods do not on the goods except charges for
correspond with the description in it. storage, unless the receipt expressly
enumerates other charges for which
B. Safekeeping of the Goods a lien is claimed.
1. One of these statements is not
correct: c) A warehouseman has a lien
a) A warehouseman is liable for against all goods belonging to the
any loss or injury to the goods caused person liable for the claims with
by his failure to exercise such care as a respect to which a lien is asserted.
reasonably careful owner would
exercise. d) A warehouseman cannot have
a lien against the goods if the
b) In the absence of a stipulation depositor was merely entrusted with
to the contrary, the warehouseman is its possession, even if the
not liable for any lossor injury to the warehouseman acted in good faith
goods which could not have been and for value.
avoided by exercise of such care.
B. Enforcement of Warehousemans
c) A warehouseman is not liable Lien
for loss due to a fortuitous event. 1. One of these statements is not

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

a) A warehousemans lien maybe a) A negotiable receipt may be

satisfied by selling the goods. negotiated by delivery if by its terms
the goods are deliverable to the bearer or
b) The warehouseman must give by its terms the goods are deliverable to
the person for whose account he the order of a specified person and he or
is holding the goods or any other person a subsequent indorsee indorsed the
he knows to claim an interest in the receipt in blank or to bearer.
goods notice to pay within ten days.
b) If the goods are deliverable
c) If the warehouseman is not to bearer or the negotiable receipt was
paid, an advertisement of the sale must indorsed in blank or to bearer, even if
be published once a week for three the holder indorsed it to himself or a
consecutive weeks in a newspaper specified person, the receipt can be
published in the place of the sale. negotiated further by delivery.

d) The sale cannot be made c) The warrant of a negotiable

less than 15 days before the date of receipt by the person to whose order the
the first publication. goods are deliverable may be in blank, to
bearer, or to a specified person.
2. One of these statements is not
correct: d) Subsequent negotiations may
a) If there is no newspaper be made in the same manner.
published in the place of the sale,
the advertisement must be posted atleast 2. One of these statements is not correct:
10 days before the sale in six
conspicuous places. a) A negotiable receipt may be
negotiated by the owner.
b) A sale held without complying b) If by the terms of a negotiable
with the publication and before the receipt, the goods are deliverable
prescribed time is void. to the order of the person to
whose possession the owner of
c) In case of deficiency in the the receipt entrusted it, such
proceeds of the sale, the warehouseman person cannot negotiate the
cannot sue for the deficiency. receipt.
c) A person to whom a
d) If the proceeds of the sale negotiable receipt was negotiated
exceed the amount due the acquires such title to the goods as
warehouseman, the excess shall be the person negotiating had ability
delivered to the person entitled to the to convey to a buyer in good
delivery of the goods. faith and for value.
d) A person to whom a negotiable
III. Negotiation and Transfer of receipt was negotiated acquires
Warehouse Receipts the direct obligation of the
A. Negotiation warehouseman to hold the goods
1. One of these statements is not for him.
correct: 3. One of these statements is not correct:

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 29
Compiled by: Sheena Marie S. Ysit

a) The negotiation of a warehouseman of the transfer to him and

negotiable receipt is not impaired by the to acquire the direct obligation of the
fact that it was a breach of duty of the warehouseman to hold the goods for
person negotiating it or that the owner of him.
the receipt was induced by fraud,
mistake or duress to entrust the receipt to 2. One of these statements is not correct:
such person if the person to whom it was a) Before the notification to the
negotiated took it in good faith and for warehouseman, the title of the transferee
value. to the goods may be defeated by a levy
upon them by a creditor ofthe goods.
b) If a person who sold goods
covered by a negotiable receipt remained b) Before the notification to the
in possession of it, the negotiation of the warehouseman, the title of the transferee
receipt to a person who took it in good to the goods may be defeated by a
faith and for value has the same effect as notification to the warehouseman of a
if the first buyer had authorized the subsequent sale of the goods.
c) If a negotiable receipt is
c) A sellers lien or right of transferred for value by delivery and
stoppage intransitu will defeat the rights indorsement is necessary for its
of a buyer in good faith and for value to negotiation, the transferee can compel
whom the receipt was negotiated. the transferor to indorse it.

d) If a warehouseman who sold d) The effect of the negotiation

sugar covered by a negotiable receipt will retroact to the date of the transfer of
was not paid by the buyer, the the receipt.
negotiation of the receipt by the buyer is
B. Transfer of Rights
1. One of these statements is not correct: "action"- includes counterclaim and set-
a) A non-negotiable receipt may off;
not be transferred by delivery.
"fungible goods"-means goods of
b) The negotiation of a non which any unit is, from its nature or by
negotiable receipt does not give the mercantile custom, treated as the
transferee any additional right. equivalent of any other unit;

c) A person to whom a non- "goods"-includes all chattels personal

negotiable receipt was transferred other than things inaction and money;
acquires as against the transferor title to
the goods subject to their agreement. "holder"- as applied to a negotiable
receipt, means a person who has
d) A person to whom a non- possession of the receipt and a right of
negotiable receipt was transferred property therein, and, as applied to a
acquires the right to notify the non-negotiable receipt, means a person

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

named therein as the person to whom the 3. To declare the misuse and/or
goods are to the delivered or misappropriation of goods or proceeds
his transferee; realized from the sale of goods,
documents or instruments released under
"negotiable receipt"-means a receipt in trust receipts as a criminal offense
which it is stated that the goods therein punishable as Estafa.
specified will be delivered to bearer or to
the order of a named person; * DEFINITION/CONCEPT OF A
"non-negotiable receipt"-means a
receipt in which it is stated that the What is a trust receipt
goods therein specified will be delivered transaction?
to the holder thereof; It is any transaction between the
entruster and entrustee:
"purchase"- includes to take as
mortgagee or as pledgee; 1. Whereby the entruster
who owns or holds
"purchaser"- includes mortgagee and absolute title or security
pledgee; interests over certain
specified goods,
"receipt"- means a warehouse receipt; documents or instrument,
releases the same to the
"warehouse receipt"-means an possession of entrustee
acknowledgment in writing by a upon the latters
warehouseman of the receipt for a execution of a TR
storage of goods no this own; agreement.
2. Wherein the entrustee
"warehouseman"-means a person who binds himself to hold the
received goods for storage for reward. designated goods in trust
R.S., c. 333, s. 1. for the entruster and, in
case of default, to sell
such goods, documents or
III. TRUST RECEIPTS LAW instrument with the
(P.D. 115) obligation to turn over to
the entruster the proceeds
* PURPOSE OF THE LAW to the extent of the
1. To encourage and promote the use of amount owing to it or to
trust receipts as an additional and turn over the goods,
convenient aid to commerce and trade; documents or instrument
itself if not sold. (Sec. 4,
2. To provide for the regulation of trust P.D. 115)
receipts transactions in order to assure
the protection of the rights and What is a trust receipt(TR)?
enforcement of obligations of the parties It is the written or printed
involved therein; and, document signed by the entrustee
in favor of the entruster containing

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 31
Compiled by: Sheena Marie S. Ysit

terms and conditions substantially that set-up, a bank extends a loan

complying with the provisions of covered by the Letter of Credit, with
PD 115. the trust receipt as a security for the
loan. In other words, the transaction
What are the two views involves a loan feature represented
regarding TR? by the letter of credit, and a security
1. As a commercial document feature which is in the covering trust
(Sec. 4, P.D. 115) receipt. A trust receipt, therefore, is
a security agreement, pursuant to
2. As a commercial transaction which a bank acquires a "security
It is a separate and interest" in the goods. It secures an
independent security indebtedness and there can be no
transaction intended to aid in such thing as security interest that
financing importers and retail secures no obligation.
dealers who do not have
sufficient funds. (Nacu v. CA,
G.R. No. 108638, Mar. 11, B. OWNERSHIP OF THE GOODS,
Are LC and TR negotiable
instruments? Who is the owner of the articles
Letters of credit and trust subject of the TR?
receipts are not negotiable
instrument, but drafts issued in The entrustee. A trust receipt has
connection with letters of credit two features, the loan and security
are negotiable instruments. features. The loan is brought about
Hence, while the presumption by the fact that the entruster
of consideration under the financed the importation or purchase
negotiable instrument law may of the goods under TR. Until and
not necessarily be applicable to unless this loan is paid, the
trust receipts and letters of obligation to pay subsists. If the
credit, the presumption that the entrustee is made to appear as the
drafts drawn in connection with owner, it was but an artificial
the letters of credit have expedient, more of legal fiction than
sufficient consideration applies. fact, for if it were really so, it could
(Lee v. CA, G.R. No. 117913, dispose of the goods in any manner
Feb. 1, 2002 that it wants, which it cannot do. To
consider the entrustee as the true
A.LOAN/SECURITY FEATURE owner from the inception of the
transaction would be to disregard
What is the loan and security the loan feature thereof. (Rosario
feature of the trust receipt Textile Mills Corp. v. Home Bankers
transaction? Savings and Trust Company, G.R.
No. 137232. June 29, 2005)
A trust receipt arrangement is
endowed with its own distinctive
features and characteristics. Under

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

II. RIGHTS OF THE ENTRUSTER duration of the trust receipt

agreement. (Sec. 12, P.D. 115)
Who is an entruster?
Who can defeat the rights of the
A lender, financer or creditor. entruster over the goods?
Person holding title over the
goods documents or A purchaser in good faith. He
instruments (GDI) subject of a acquires goods, documents or
trust receipt transaction; instruments free from the entruster's
releases possession of the goods security interest. (Sec. 11, P.D. 115)
upon execution of trust receipt.
The rights of the entruster?
Who is an entrustee?
1. To receive the proceeds from the sale
of the goods, documents, or A borrower, buyer, importer or
instruments to the extent of the debtor. Person to whom the goods are
amount owing to him delivered for sale or processing in
trust, with the obligation to return the
2. To the return of the goods, proceeds of sale of the goods or the
documents or instruments (GDI) in goods themselves to the entruster.
case of non sale and enforcement of (Sec. 3[b])
all other rights conferred to him in
the trust receipt The obligations and liabilitites of
3. May cancel the trust and take the entrustee?
possession of the goods, upon default
or failure of the entrustee to comply 1. To hold good, documents and
with any of the terms and conditions instruments (GDI) in trust for the
of the trust receipt. (Sec. 7, P.D. 115) entruster and to dispose of them
strictly in accordance with the terms
CREDITORS OF THE 1. To receive the proceeds of the sale
ENTRUSTEE/INNOCENT for the entruster and to turn over the
PURCHASERS FOR VALUE same to the entruster to the extent of
amount owing to the entruster;
2. To insure GDI against loss from fire,
As between the entruster and the
theft, pilferage or other casualties.
creditors of the entrustee, who has
a better right over the goods? 3. To keep GDI or the proceeds thereof,
The entruster. His security interest whether in money or whatever form,
in goods, documents, or instruments separate and capable of identification
pursuant to the written terms of a as property of the entruster;
trust receipt shall be valid as against
all creditors of the entrustee for the 4. To return GDI to the entruster in

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 33
Compiled by: Sheena Marie S. Ysit

case they could not be sold or upon are the subject of a TR, pending
demand of the entruster; and their disposition, irrespective of
whether or not it was due to the
5. To observe all other conditions of the fault or negligence of the
trust receipts. (Sec. 9, P.D. 115) entrustee, shall not extinguish his
obligation to the entruster for the
value thereof. (Sec. 10, P.D. 115)

The order in the application of Acts or omissions are penalized

proceeds or the TR transactions? under the TR Law?
The TR Law declares the failure to
1. Expenses of the sale turn over goods or proceeds realized
2. Expenses derived from storing the from sale thereof, as a criminal
goods offense under Art. 315(l)(b) of RPC
3. Principal obligation (estafa). The law is violated
whenever the entrustee or person to
Is the entrustee liable for the whom trust receipts were issued
deficiency? fails to:
Yes, but any excess shall likewise (a) return the goods covered by
belong to him. (Sec. 7, P.D. 115) the trust receipts; or
(b) return the proceeds of the sale
B. RETURN OF GOODS, of said goods.
IN CASE OF NON-SALE Does P.D. 115 violate the
prohibition in the Constitution
The obligation of the entrustee in against imprisonment for non-
case the goods, documents or payment of a debt?
instruments were not sold?
No. What is being punished is the
The entrustee should return the dishonesty and abuse of
goods, documents, or instruments confidence in the handling of
to the entrustor. (Sec. 4, P.D. 115) money or goods to the prejudice
of another regardless of whether
C. LIABILITY FOR LOSS OF the latter is the owner or not. It
GOODS, DOCUMENTS OR does not seek to enforce payment
INSTRUMENTS of the loan. Thus, there can be no
violation of a right against
Who shall bear the loss of goods imprisonment for non-payment
which are the subject of TR? of a debt.

The entrustee. Loss of goods,

documents or instruments which

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

Is lack of intent to defraud a liability falls on the human agent

bar to the prosecution of these responsible for the violation of the
acts or omissions? Trust Receipts Law.

No. The mere failure to account or IV. REMEDIES AVAILABLE

return gives rise to the crime
which is malum prohibitum. There In the event of default by the
is no requirement to prove intent to entrustee on his obligation under
defraud (2006 Bar Question) the trust receipt agreement, is it
absolutely necessary for the
The effect of insufficiency of entruster to cancel the trust and
proof of delivery of goods? take possession of the goods to be
able to enforce his right
Estafa cannot lie. thereunder?

What will happen to the The law uses the word "may" in
criminal action if the entrustee granting to the entruster the right to
complied with his obligation cancel the trust and take possession
under the TR agreement? of the goods. Consequently, the
entrustee has the discretion to avail
1. If compliance occurred before the of such right or seek any alternative
criminal charge- there is no criminal action, such as a third party claim or
liability. a separate civil action which it
deems best to protect its right, at any
2. If compliance occurred after the time upon default or failure of the
charge even before conviction- the entrustee to comply with any of the
criminal action will not be terms and conditions of the trust
extinguished. agreement.

The penal sanction if Can the repossession of the goods

offender is a by the entruster be considered as
corporation? payment?
The Trust Receipts Law
recognizes the impossibility of No, payment would legally result
imposing the penalty of only after the entruster has
imprisonment on a corporation. foreclosed on the securities, sold the
Hence, if the entrustee is a same and applied the proceeds
corporation, the law makes the thereof to the entrustees obligation.
officers or employees or other Since the trust receipt is a mere
persons responsible for the offense security arrangement, the
liable to suffer the penalty of repossession by the entruster cannot
imprisonment. The reason is be considered payment of the
obvious, corporations, loan/advances given to the entrustee
partnerships, associations and under the letter of credit/trust
other juridical entities cannot be receipt.
put to jail. Hence, the criminal

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 35
Compiled by: Sheena Marie S. Ysit

Q. Earl failed to comply with his trust receipt either by payment,

undertaking under the trust receipt he return of the proceeds or return of
issued in favor of ABC bank. The the goods.
bank filed both criminal and civil
cases against Earl. The court 2. The transaction does not fall under
proceeded with the civil case PD 115. (Colinares v. CA, G.R. No.
independently from the criminal case. 90828, Sept. 5, 2000, Consolidated v.
Is the court correct in proceeding CA, G.R. No. 114286, Apr. 19, 2001)
independently although a criminal
case is also instituted?
Note: In these cases, the
Yes, the complaint against Earl was execution of a TR was made after
based on the failure of the latter to the goods covered by it had been
comply with his obligation as spelled purchased, making the buyer the
out in the TR. This breach of obligation owner thereof. The transaction
is separate and distinct from any does not involve a trust receipt
criminal liability for "misuse and/or but a simple loan even though the
misappropriation of goods or proceeds parties denominate the
realized from the sale of goods, transaction as one of a trust
documents or instruments released receipt.
under trust receipts", punishable under
Section 13 of the Trust Receipts Law. Non-receipt of the goods or where proof
Being based on an obligation ex of delivery of goods covered by a
contractu and not ex delicto, the civil trust receipt to the accused is
action may proceed independently of insufficient
the criminal proceedings instituted
against petitioners regardless of the Cancellation of the trust receipt
result of the latter. agreement and taking into possession
of the goods by the entruster.
The effect of novation of a trust
agreement? Note: Mere repossession of the
goods will extinguish criminal
Where the entruster and entrustee liability.
entered into an agreement which
provides for conditions incompatible Compromise by parties before filing of
with the trust receipt agreement, the information in court.
obligation under the trust receipt is
extinguished. Hence, the breach in the Novation before the filing of the
subsequent agreement does not give criminal complaint.
rise to a criminal liability under P.D.
115 but only civil liability. Loss of goods without fault of the
The defenses to negate criminal Consignment.
liability of the entrustee?
Deposits in a savings account
1. Compliance with the terms of the opened by the buyer subsequent

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

to the TR transaction be applied Mortgage Registry

to outstanding obligations under 3. If necessary, additional registration
the TR account? with the proper government agency

No, the receipt of the bank of a *What is an affidavit of good faith?

sum of money without reference
to the trust receipt obligation A certificate included in the
does not obligate the bank to chattel mortgage contract
apply the money received against executed by both mortgagor and
the trust receipt obligation. mortgagee stating that:
Neither does compensation arise 1. The obligation is valid, just
because compensation is not and subsisting; and
proper when one of the debts 2. It is not one entered into for
consists in civil liability arising purposes of fraud.
from criminal.
_________________________________ *What is the effect of absence of
affidavit of good faith?
(ACT 1508 IN REL. TO ARTS. 1484, It does not affect the validity of
1485, 2140 AND 2141 OF THE CIVIL the chattel mortgage but the same
CODE) will be unenforceable against
third persons.
*What is the status of an unrecorded
*What are the essential requisites for The mortgage is valid and
a valid chattel mortgage? binding between the parties.
Registration is necessary only for
1. Constituted to secure fulfillment of the purpose of binding third
the principal obligation person. (Filipinas Marble Corp.
2. Mortgagor is the absolute owner of
v. IAC, G.R. No. L- _68010, May
the property
30, 1986) Knowledge, however
3. Mortgagor has free disposal of the
is equivalent to registration.
property, in the absence thereof, that
he be legally authorized for such
4. That it involves a personal property.
*What is the period within which to
(Sec. 2085,NCC)
make registration and where?
There is no specific time within
*What are the formal requisites for a which a chattel mortgage should
valid chattel mortgage? be recorded but the law is
substantially complied with if
1. Affidavit of good faith registration is made:
2. Registration with the Chattel 1. Before the mortgagor has
complied with his principal

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 37
Compiled by: Sheena Marie S. Ysit

obligation; and OBLIGATION

2. No right of innocent third parties *Can the CM cover after incurred
is prejudiced. obligations?
No, the affidavit of good faith in a CM
*What is the dual registration rule? makes it obvious that the debt referred to
in the law is current, not an obligation
GR: The property must be registered that is yet merely contemplated. (Acme
twice; first, in the place where Shoe v. CA, GR. No. 103576, Aug. 22,
mortgagor resides and second, in the 1996)
place where property is situated. (Sec.
4, Act 1508) *What then is the consequence of a
CM covering after incurred
XPN: First, if the mortgagor resides obligations?
in the same place where the property
is located; second, if the amount of A promise expressed in a CM to
the loan is above P 500,000.00, include debts that are yet to be
registration which should be made in contracted can be a binding
the city or municipality where the commitment that can be
property is situated. (Sec. 116, P.D. compelled upon. The security
1159) itself, however, does not come
into existence or arise until after
D. AFTER ACQUIRED PROPERTY a CM agreement covering newly
contracted debt is executed either
*Can the CM cover after acquired by concluding a fresh CM or by
properties? amending the old contract
conformably with the form
GR: No, because Section 7 of Act 1508 prescribed by the CM law. The
provides: remedy of foreclosure can only
cover the debts extant at the time
A chattel mortgage shall be deemed to of constitution and during the life
cover only the property described therein of the CM sought to be
and not like or substituted property foreclosed.
thereafter acquired by the mortgagor and
placed in the same depository as the F. RIGHT OF JUNIOR
property originally mortgage. MORTGAGEE

XPN: Where the after acquired property *What is the right of a subsequent
is in renewal of, or in substitution for, attaching creditor?
goods on hand when the mortgage was A subsequent attaching creditor
executed, or is purchased with the acquired the properties in
proceeds of the sale of such goods. question subject to the creditors
(Torres v. Limjap, G.R. No. 34385, Sept. mortgage lien as it existed
21, 1931) thereon at the time of the
attachment. What may be
attached in this case is only the
E. AFFTER INCURRED equity or right of redemption of

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

the mortgagor. (Allied Banking 3. A subsequent attaching creditor

Corporation v. Salas, G.R. No. (Sec. 13, Act 1508)
L-49091, Dec. 13, 1988)
*Is the mortgagee entitled to recover
* When and how is foreclosure of CM the deficiency?
After 30 days from the time the GR: Yes, mortgagee is entitled to
condition is broken: recover deficiency.
1. At a public auction by a public
officer XPN:
2. Provided at least 10 days notice 1. Recto Law
of the time, place, and purpose of 2. In accommodation mortgages,
such sale has been posted at two the accommodation mortgagor is
or more public places in such liable only to the extent of the
municipality value of the mortgaged property;
3. At a public place in the 3. Due to death of mortgagor. (Vda.
municipality where the De Jacob v. CA, G.R. No. 88602,
mortgagor resides, or where the Apr. 6, 1990)
property is situated
*When does the Recto Law apply
H. REDEMPTION (Articles 1484 & 1485 of the civil code
Civil Code)?
*Is there a right of redemption in
CM? 1. Sale of personal property, the
There is no right of redemption price of which is payable in
in Chattel Mortgage. There is two or more installments
only an equity of redemption.
2. Contracts purporting to be
*When is equity of redemption may leases of personal property
be exercised? with option to buy (Art. 1485,
Equity of redemption may be
exercised by the mortgagor after
*What are the requisites for the sale
his default in the performance of
to be covered under the Recto Law?
his obligation but before the sale
of the mortgaged property or
1. Sale of personal property
confirmation of sale.
2. Payable in installments
3. CM constituted over the same
*Who may redeem?
The following may redeem if the
condition of the mortgage is
Note: It does not contemplate a sale on
straight term in which the balance, after
1. Mortgagor
payment of initial sum, should be paid in
2. A person holding subsequent
its totality at the time specified in the
promissory note. (Levy Hermano Inc. v.

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 39
Compiled by: Sheena Marie S. Ysit

Lazaro Blas Gervaci, G.R. No. 46306,

*Under the Recto Law, what are the RA 4118)
remedies of the unpaid seller?
1. Exact fulfillment of the obligation,
should the vendee fail to pay (action * What is real estate mortgage
for specific performance) (REM)?
2. Cancel the sale, should the vendees It is a contract whereby the
failure to pay cover two or more debtor secures to the creditor the
installments (rescission); or fulfillment of a principal
3. Foreclose the chattel mortgage on obligation, specially subjecting to
the thing sold, should the vendees such security immovable
failure to pay cover 2 or more property or real rights over
installments. immovable property which
obligation shall be satisfied with
*Can the unpaid seller avail of all the proceeds of the sale of said
remedies? property or rights in case the said
No, the remedies are alternative. obligation is not complied with at
the time stipulated.
Note: However, recovery of property
through a replevin case preparatory to *What is the nature of REM?
foreclosure will not bar the other It creates real right over the
remedies if there was no actual property, such that in subsequent
foreclosure. If seller-mortgagee opts to transfers by the mortgagor, the
file an action for specific performance, transferee must respect the
he shall be deemed to have waived his mortgage.
right as a mortgagee but may still levy
on the mortgaged property (on C. REMEDIES AVAILABLE TO
execution). MORTGAGEE UPON
*Is the mortgagees letter informing MORTGAGOR
the mortgagor of his intent to
foreclose is already considered a *What are the alternative remedies of
foreclosure of the chattel? the mortgagee?

No. A mere offer by the 1. Mortgagor is living

mortgagor to surrender the a. Foreclosure
chattel, not accepted by the b. Judicial (Rule 68, ROC)
mortgagee, does not preclude the c. Extrajudicial (Act 3135)
mortgagee from bringing suit to d. Ordinary action for collection of
recover the balance of the money effect is waiver of REM
purchase price. (Industrial
Finance Corp v. Castor Tobias,
G.R. No. L-41555, July 27 1977) 2. Mortgagor is dead

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

agreement (G.R. No. L-21813,

a. Waive the mortgage and claim July 30, 1966)
the entire debt from the estate of
the mortgagor as an ordinary E. FORECLOSURE PROCEDURE
b. Judicial foreclosure; and * What are the stages in extra-judicial
c. Rely on the mortgage. (Sec. 7, foreclosure?
Rule 86. ROC)
1. Execution of contact of loan and
d. Extrajudicial foreclosure (Act REM agreement with the
3135) before it is barred by corresponding SPA.
prescription without right to file 2. Default of the loan or REM
a claim for any deficiency. (Vda. agreement.
De Jacob v. CA, G.R. No. 88602,
Apr. 6, 1990) 3. Filing of petition for sale with
clerk of court who acts as ex-
D. NEED FOR SPECIAL POWER officio sheriff (A.M. No. 99-10-
OF ATTORNEY 05-00). Afterwards, the clerk of
the court will raffle it among the
* Why is special of power of attorney sheriffs, who shall conduct the
needed? foreclosure sale once given the
Because an extrajudicial authority to do so.
foreclosure may only be effected
if the mortgage contract covering NOTE: Petition is filed where the
a real estate, clause is property is located. In case the
incorporated therein giving the mortgaged properties are located. In case
mortgagee the power, upon the mortgaged properties are located in
default of the debtor to foreclose different provinces, the venue of the
the mortgage by an extrajudicial extrajudicial foreclosure proceedings is
sale of the mortgaged property the place where each of the mortgaged
(Pineda, Credit Transactions and property is located.
Quasi contracts, 2006).
A mortgaged action prescribed in 10
E. AUTHORITY TO FORECLOSE years from the time the right of action
EXTRA JUDICIALLY accrues, that is, from the time the
mortgagor defaults in the payment of his
*May the authority to sell may be obligation to the mortgagee and not from
done in a separate document but the date of the execution of the mortgage
annexed to the contract of mortgage? contract. (Cando v. Sps. Olaza, G.R. No.
Yes, (Pineda, Credit Transactions 160741, March 22, 2007)
and Quasi-contracts, 2006)
4. Compliance with the certain
* Is the authority extinguished by the jurisdictional requirements:
death of the mortgagor or mortgagee? a. Publication- in a newspaper of
No, because it is an essential and general circulation once a week
inseparable part of a bilateral for 3 consecutive weeks; and

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 41
Compiled by: Sheena Marie S. Ysit

b. Posting- of the notice of sale for basis of which is the order of court
not less than 20 days in at least confirming the sale.
3public/ conspicuous places in
the province or municipality 10. Petiton for a writ of possession-
where property is located. There is no need to file an ejectment
suit. Here, the mortgagee employs
Note: force to oust the mortgagor from the
A certificate of posting is not property. This writ may be even
indispensible for the validity of an extra issued during redemption period
judicial foreclosure sale of real property. provided the mortgagee issued a
What the law requires is the posting of bond, but the grant of which is
the notice of sale and not the certificate discretionary on the part of the court.
of posting. (DBP v. CA, G.R. No. But if the petition for the writ is filed
125838 June 10, 2003) after the expiration of the redemption
period, the issuance of which is
5. Foreclosure- the remedy available to ministerial on the part of the court.
the mortgagee by which he subjects This writ can be issued without the
the mortgaged property to the issuance of a bond; in fact it can
satisfaction of the obligation to even be issued ex parte. The writ
secure which the mortgage was cannot be suspended even by the
given.(59. C.J.S. 482) filing of the mortgagor of an action
to annul the foreclosure sale.
6. Registration of sale with the RD-
This pertains to the annotation of the * What is meant by once a week for
sale to the TCT on file with the RD. there consecutive week?
A period of 7 days, inclusive of
7. Redemption- The mortgagor the first day of publication. The
reacquires or buys back the property, publication must be made 7 days
which may have passed under the apart. (PNB v. CA, G.R. No.
mortgage. 108870, July 14, 1995)

8. Consolidation of title- By filing *Is there a need for personal notice?

affidavit with RD. The Affidavit of No, because foreclosure of CM is
Consolidation of Title must indicate an action in rem whereby mere
the relevant dates to show publication is enough to confer
mortgagors failure to redeem within jurisdiction over the subject
the allowable time. This enables the matter. Personal notice to the
mortgagors failure to redeem within parties is not necessary. (GSIS v.
the allowable time. This enables the CA, G.R. No. 40824, Feb. 23,
mortgagee to acquire full ownership 1989)
over the property. His inchoate right
ripens to full ownership. * What happens when the foreclosure
sale is postponed?
9. Cancellation of the title of the The notice of sale must be
mortgagor and issuance of a new republished once a week for
title in favor of the mortgagee- The three consecutive weeks,

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

otherwise, foreclosure is invalid. aside and the writ of possession

(Tambunting v. CA, G.R. No. be cancelled on the ground that
L48278, Nov. 8, 1988) he wasn't in default or that the
sale wasn't made in accordance
* Is the rule on republication with Act 3135. This must be filed
absolute? within 30 days from issuance of
the writ of possession.
GR: Yes.
XPN: * Who may redeem?
1. The sale was not finished and is The debtor, his
continued the following day until successors-in-interest, or any
completed; or
judicial creditor or judgment
2. When there is waiver.
creditor of said debtor, or any
person having a lien on the
property subsequent to the
mortgage or deed of trust under
which the property is sold, may
* Who retains possession of the
redeem the same at any time
foreclosed property?
within the term of 1 year from
Upon foreclosure, the mortgagor and after the date of the sale and
shall remain in possession of the such will be governed by the
property until the period to rules of Court.
redeem expires and no
redemption was made. If the * What is the amount of redemption
winning bidder wants to take price?
possession during the redemption
The redemption price would be
period, he may execute a bond in
the mortgaged obligation plus the
the amount equivalent to the use
interest as stipulated in the
of the property for 12 months, to
original obligation.
indemnify the debtor in case it be
shown that the sale was made
*What is the rule as to the redemption
without violating the mortgage or
price in case the mortgagee is a
without complying with the
banking institution?
requirements of the Act. Upon
Where the mortgagee is a
approval, a writ of possession
banking institution, the
will be issued in his favor.
redemption price is the amount
fixed by the court in the order of
execution or the amount due
under the mortgaged deed.
(Tolentino v. CA, G.R. No.
*What is the remedy of debtor if
171354, Mar. 7, 2007)
foreclosure is not proper?
If the winning bidder is able to
* What is the redemption price in case
secure possession, the mortgagor
of accommodation mortgagors?
may petition that the sale is set
Accommodation mortgagors are

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 43
Compiled by: Sheena Marie S. Ysit

not liable for the payment of the judicially.

loan of the debtor. The liability
of the accommodation *What is the effect of filing an action
mortgagors extends only up to to annul the foreclosure sale during
the loan value of their mortgaged the one-year redemption period?
property and not to the entire It will not toll the running of the
loan itself. Hence, it is only just one-year redemption period.
that they be allowed to redeem (MBTC v. Spouses Tan, G.R.
their mortgaged property by No. 159934, June 26,2008)
paying only the winning bid
price thereof (plus interest Note: A judicial action instituted for the
thereon) at the public auction sole purpose of determining the amount
sale. (Belo v. PNB, G.R. No. of the redemption price, if filed before
134330, Mar. 1, 2001) the expiration of the original period to
redeem, has the effect of a valid exercise
* When must the buyer exercise the of the right to redeem and will suspend
right of redemption? the running of the period of redemption
One year from the date of even if unaccompanied by a
registration of certificate of sale. simultaneous tender of the redemption
price. However, before this rule can be
Note: The exercise of the right of made to apply, it is essential that the
redemption is an implied admission of judicial action was instituted by the
the regularity of the foreclosure sale and mortgagor in good faith and not merely
estops the mortgagor from later designed to delay the redemptive period
impugning its validity on that ground. indefinitely. (Heirs of Norberto
Redemption is inconsistent with the Quisumbing v. PNB, G.R. No. 178242,
claim of the invalidity of the sale. Jan. 20, 2009)

* What does the one year period for I. WRIT OF POSSESSION

redemption not apply?
* When is the issuance of the Writ of
It does not apply to real estate Possession a ministerial duty of the
mortgages constituted by court?
juridical persons in favor of a The writ may be issued during
bank, quasi-bank or trust entity. redemption period provided the
Right to redeem can only be mortgagee gives a bond, the
exercised until but not after the grant of which is discretionary on
registration of the certification of the part of the court. But if the
the certification of sale or 3 petition for the writ is filed after
months from foreclosure, the expiration of the redemption
whichever is earlier, under the period, the issuance is ministerial
following conditions: on the part of the court
1. Mortgagor must be a juridical
person that is either a partnership
or a corporation.
2. Mortgagee is done extra * What are the remedies availing in

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

favor of third parties adversely writ of possession, without

affected by the order for the issuance prejudice to the eventual
of the writ of possession in favor of the outcome of the said case.
winning bidder? (Baldueza vs. CA, G.R. No.
155813, October 15, 2008)
Terceria to determine whether
the sheriffs has rightly or J. ANNULMENT OF SALE
wrongfully taken hold of the
property not belonging to the * Is the filing of an action to nullify
judgment debtor or obligor; and the extrajudicial sale a prejudicial
question to the petition filed by the
An independent separate action mortgagee for the issuance of the writ
to vindicate their claim of of possession?
ownership and/or possession No, a complaint for annulment of
over the foreclosed property. extrajudicial sale is a civil action
(China Banking Corporation v. and a petition for the issuance of
Ordinario, G.R. No. 121943, writ of possession is but an
Mar. 24, 2003) incident to the land registration
Note: A third party in possession proceeding hence no prejudicial
of the property who is claiming a question can arise from the two
right adverse to that of the actions. (Pahang vs. Vestil GR.
debtor/mortgagor may not be No. 148595, July 12, 2004).
dispossessed on the strength of a
mere ex parte possessory writ, * Is the filing of the annulment of sale
since to do so would be toll the 1-year redemption period?
tantamount to his summary No, Settled is the rule that the period
ejectment. (Penson v. Spouses within which to redeem the property sold
Maranan, G.R. No. 148630, June at a sheriffs sale is not suspended by the
20, 2006). The available institution to annul the foreclosure sale
remedies are cumulative. (Metrobank vs. Sps. Tan, G.R. No.
178499, October 17, 2008)
*What is the effect of a pending action
for annulment of sale?
the mortgagee is still entitled to GENERAL BANKING ACT (RA
writ of possession, without 8791)
prejudice to the eventual 1. DEFINITION AND
outcome of the said case. CLASSIFICATION
*Banking institution
J. ANNULMENT OF SALE - An entity duly authorized by the
monetary board of the central bank to
* Is the filing of an action to nullify engage regularly in the lending of funds
the extrajudicial sale a prejudicial obtained from the public through the
question to the petition filed by the receipt of deposits of any and regularly
mortgagee for the issuance of the writ conducting such operation (section 2,
of possession? R.A 337)
The mortgagee is still entitled to * Elements determinative of a bank

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 45
Compiled by: Sheena Marie S. Ysit

a. Must be authorized by law; financial and credit services to

b. Accepts fund, in form of a cooperatives. It shall include
deposit; and cooperative rural banks. They are
c. Lends money to the public. governed primarily by the
Cooperative Code (R.A.6938).
*Classifications of banks and their
definition . Islamic banks Banks whose business
. Universal banks- Primarily governed dealings and activities are subject
by the General Banking Law to the basic principles and rulings
(GBL), can exercise the powers of Islamic Sharia, such the Al
of an investment house and Amanah Islamic Investment
invest in non-allied enterprises Bank of the Philippines which
and have the highest was created by RA 6848.
capitalization requirement.
* Differentiate universal banks,
. Commercial banks- Ordinary banks commercial banks, and thrift banks.
governed by the GBL which
have a lower capitalization UNIVERS COMMERCI THRIFT
requirement than universal banks AL AL BANKS BANKS
and can neither exercise the BANKS
powers of an investment house
nor invest in non-allied Governing laws
General GBL Thrift
. Thrift banks These are: banking Bank Act
law (GBL) (R.A
a) Savings and mortgage banks; 7906)

b) Stock savings and loan Powers

1. Has the To engage in All the
c) Private development banks, which authority allied powers
are primarily governed by the to exercise undertakings of a
Thrift Banks Act (R.A. 7906). the powers and, in commerc
of a addition to the ial bank,
. Rural banks Mandated to make commercia general except:
needed credit available and l bank. powers
readily accessible in the rural incident to a 1. To
areas on reasonable terms and 2. To act corporation, issue
which are primarily governed by as an may exercise imported
the Rural Banks. Act of 1992 investment all such LC
(R.A.7353). house- a powers as may
corporatio be necessary 2. To
. Cooperative banks Those banks n that sells to carry on the accept or
organized whose majority shares and business of open
are owned and controlled by guarantees commercial checking
cooperatives primarily to provide sale of account

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

securities banking. except banks net worth banks

and shares with worth. net
of stocks, Note: Allied prior worth.
i.e. Petron undertakings approval
will tap an are those by the Simple equity investment
investment activities or monetary
house in entities which board Not to exceed 25% of the banks net
order to enhance or (MB) worth
sell its complement requires
stocks. banking. at least a
3. To net assets 2. DISTINCTION OF BANKS
engage in a worth of FROM QUASI BANKS
non-allied 28M) FROM QUASI-BANKS AND
undertakin TRUST ENTITIES-
g- which is SECTION
not related
to all * Quasi bank- These are entities
banking. engaged in the borrowing of funds
E.g. Realty through the issuance, endorsement
Equity investment or assignment with recourse or
acceptance of deposit substitutes for
Can be a Only allied Only purposes of re-lending or purchasing
stock undertaking allied of receivables and other obligations
holder in undertaki (Sec 4). Unlike banks, quasi banks
both allied ng do not accept deposits.
and non- *Trust entities-These are entities
allied engaged in trust business that act as
undertakin a trustee or administer any trust or
g hold property in trust or on deposit
for the use, benefit, or behoof of
Capitalization others (Sec.79). A bank does not act
as a trustee.
4,950 2.4 1. Manila- 3.25 M
Billion Billion *Financial intermediaries-Persons
2. Elsewhere- 6.25 or entities whose principal functions
M include the lending, investing, or
placement of funds on pieces of
Equity investment evidence of indebtedness or equity
deposited or equity deposited with
Equity Cannot invest Cannot them, acquired by them or otherwise
investment invest coursed through them, either for
their own account or for the
Total amount of investment equity accounts of others.
Not to Not to exceed Not to
exceed 35% of the exceed *Deposit substitutes- It is an
50% of the banks net 35% of

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 47
Compiled by: Sheena Marie S. Ysit

alternative form of obtaining funds corporations may own or control up to

from the public, other than deposits, 40% of the voting stock of a domestic
through the issuance, endorsement, bank. This rule shall apply to Filipinos
or acceptance of debt instruments, and domestic non-bank corporations.
for the borrower's own account, for
the purpose of relending or Note: The percentage of foreign owned
purchasing of receivables and other voting stocks in a bank shall be
obligations. These instruments may determined by the citizenship of the
include, but need not be limited to, individual stockholders in that bank. The
bankers acceptances, promissory citizenship of the corporation which is a
notes, participations, certificates of stockholder in a bank shall follow the
assignment and similar instruments citizenship of the controlling
with recourse, and repurchase stockholders of the corporation,
agreements irrespective of the place of
incorporation. (Sec 11)
LIABILITIES- SECTION 3- 5. Stockholdings of individuals related to
53 each other within the fourth degree of
* The corporate powers of a bank consanguinity or affinity, legitimate or
- All powers provided by the corporation common law, shall be considered family
code like issuance of stocks and entering groups or related interests and must be
into merger or consolidation with other fully disclosed in all transactions by such
corporation or banks. corporations or related groups of persons
with the bank. (Sec 12)
* The rules regarding the issuance of
stocks by a bank? 6.Two or more corporations owned or
1. The monetary board may prescribe controlled by the same family group or
rules and regulations on the types of same persons (Corporate stockholdings)
stock a bank may issue. shall be considered related interests and
must be fully disclosed in all
2. Banks shall issue par value stocks transactions by such corporations or
only. (Sec.9) related group of persons with the bank.
(Sec. 13)
3. GR: No bank shall purchase or
acquire shares of its own capital stock or
* The effect of merger or
accept its own shares as a security for a
consolidation of banks to the number
of directors allowed
XPN: when authorized by the Monetary
-The number of directors may be more
Note: That in every case the stock so than 15 but should not exceed
purchased or acquired shall, within six 21(Sec.17).
months from the time of its purchase or
acquisition, be sold or disposed of at a
public or private sale. (Sec 10)

4. Foreign individuals and non-bank * How many independent directors

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

are required? *The banks are prohibited on

declaring dividends when:
-2 (Sec.16)
a. Its clearing account with the Bangko
* When may the Monetary Board Sentral is overdrawn; or
limit the grant of compensation to the
directors? b. It is deficient in the required liquidity
- Only in exceptional cases and when the floor for government deposits for five or
circumstances warrant, such as but not more consecutive days, or
limited to the following:
1. When a bank is under c. It does not comply with the liquidity
comptrollership or conservatorship. standards/ratios prescribed by the
Bangko Sentral for purposes of
2. When a bank is found by the determining funds available for dividend
Monetary Board to be conducting declaration; or
business in an unsafe or unsound manner
d. It has committed a major violation as
may be determined by the Bangko
3. When a bank is found by the
Monetary Board to be in an
unsatisfactory financial condition * The powers which may be necessary
in carrying on the business of
* What is the required for a bank may commercial banking.
register or amend their articles of
incorporation with SEC? 1. Accepting drafts and issuing letters of
- Certificate of Authority to Register credit
issued by the Monetary Board. (sec. 14)
2. Discounting and negotiating
* The banks should be proven to promissory notes, drafts, bills of
satisfy the Monetary Board and grant exchange and other instrument
that certificate? evidencing debt

1. That all requirements of existing laws 3. Accepting or creating demand

and regulations to engage in the business deposits, receiving other types of deposit
for which the applicant is proposed to be and deposit substitutes
incorporated have been complied with
4. Buying and selling FOREX and gold
2. That the public interest and economic or silver bullion
conditions, both general and local,
justify the authorization 5. Acquiring marketable bonds and other
debt securities
3. That the amount of capital, the
financing, organization, direction and 6. Extending credit
administration, as well as the integrity 7. Determination of bonds and other debt
and responsibility of the organizers and securities eligible for investment
administrators reasonably assure the including maturities and aggregate
safety of deposits and the public interest. amount of such investment, subject to

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 49
Compiled by: Sheena Marie S. Ysit

such rules as the Monetary Board may - If the teller gives the passbook to
promulgate. (Sec. 29) the wrong person, they would be
clothing that person presumptive
* The additional powers given to a ownership of the passbook,
universal bank aside from those facilitating unauthorized
mentioned in section2 withdrawals by that person. For
failing to return the passbook to
-Act as investment house Ability invest authorized representative of the
in non allied enterprises. (Sec 24) depositor, the bank presumptively
failed to observe such high degree
4. DILIGENCE REQUIRED OF of diligence in safeguarding the
BANKS- RELEVANT passbook and insuring its return to
JURISPRUDENCE the party authorized to receive the
* The degree of diligence required same. The banks liability, however,
of banks in handling deposits is mitigated by the depositors
contributory negligence in allowing
- Extraordinary diligence. The
a withdrawal slip signed by
appropriate standard of diligence
authorized signatories to fall into the
must be very high, if not the highest,
hands of an impostor.
degree of diligence; highest degree
of care. This applies only to cases *Did a bank exercise the diligence
where banks are acting in their required when the pre-
fiduciary capacity, that is, as termination of the account is
depository of the deposits of their allowed despite discrepancies in
depositors. the signature and photograph of
the person claiming to be the
*Does the bank need to exercise
depositor and failure to surrender
extra ordinary diligence in all
the original certificate of time
commercial transactions?
- No, the degree of diligence
No. The bank is negligent because
required of banks, is more than that
the depositor did not present the
of a good father of the family where
certificate of deposit
the fiduciary nature of their
relationship with their depositors is * Is the bank liable when an
concerned, that is, depositary of employee encashed a check
deposits. But the same higher degree without the requisite of
of diligence is not expected to be endorsement?
exerted by banks in commercial
transactions that do not involve their Yes. The fiduciary nature of the
fiduciary relationship with their relationship between the bank and
depositors, such as sale and issuance the depositors must always be of
of foreign exchange demand draft. paramount concern. (Philippine
Savings Bank vs. Chowking, G.R.
* The effect when the teller gave No. 177526, July 04, 2008).
the passbook to a wrong person.

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

5. NATURE OF ANK FUNDS 1. Individual;or

SEC. 33 2. Joint:

1. As debtor- creditor: a. And account the signature of both

a. Demand deposits: all those liabilities co depositors are required for
of banks which are denominated in the withdrawals.
Philippine currency and are subject to
payment in legal tender upon demand by b. And/or account either one of the
representation of checks. co depositors may deposit and withdraw
from the account without the knowledge
b. Savings deposits: the most common consent and signature of the other.
type of deposit and is usually evidenced
* Is an anonymous account
by a passbook.
Note: The requirement of presentation GR: Anonymous accounts or those
of passbooks is usually included in the under fictitious names are prohibited.
term s and conditions printed in the (R.A. 9160 as amended by R.A. 9194;
passbooks. A bank is negligent if it BSP Circular No. 251, July 21, 2000)
allows the withdrawal without requiring
the presentation of passbook. XPN: In case where numbered accounts
is allowed such as in foreign currency
c. Negotiable order of withdrawal deposits. However, banks/non bank
account (NOWA)- Interest-bearing financial institutions should ensure that
deposit accounts that can he payable on the client is identified in an official or
demand feature of checks and other identifying documents. (Sec. 8,
investment feature of saving accounts. R.A. 6426 as amended, FCDA)

d. Time Deposit: an account with fixed * The nature of a bank deposit

term; payment of which cannot be
legally required within such a specific - All kinds of bank deposits are loan.
number of days. The bank can make use as its own the
money deposited. Said amount is not
2. As trustee-trustor: Trust account- a being held in trust for the depositor nor
saving account, established under a trust is it being kept for safekeeping.
agreement containing funds
administered by the bank for the benefit * The enforcement of obligations
of the trustor or another person or concerning deposit, will the remedy of
persons. mandamus lie?

3. As agent-principal: - No, because all kinds of deposit are

a. Deposit of checks for loans. Thus, the relationship being
collection contractual in nature, mandamus cannot
b. Deposit of specific purpose be availed of because mandamus will not
c. Deposit for safekeeping lie to enforce the performance of
*The types of deposit accounts contractual obligations.

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 51
Compiled by: Sheena Marie S. Ysit

* Does the fiduciary nature of the the bank may render, deleted reference
bank depositor relationship convert to depository
the contract between banks and
depositors to a trust agreement? 6. STIPULATION ON
-No, thus, failure by the bank to pay the
depositor is failure to pay simple loan, *The rules on stipulation of interests
and not a breach of trust.
1. Central Bank Circular 416 12% per
* After procuring a checking account, annum in cases of:
the depositor issued several checks. He
was surprised to learn later that they a. Loans;
had been dishonored for insufficient
funds. Investigation disclosed that b. Forbearance of money, goods
deposits made by the depositor were and credits;
not credited to its account. Is the bank
liable for damages? c. Judgement involving such loan
or forbearance, in the absence
-Yes, the depositor expects the bank to of express agreement as to such
treat his account with utmost fidelity, rate of interest
whether such account consist only of a
few hundred pesos or of millions. The Note: During the interim period from the
bank must record every single date of judgment until actual payment.
transaction accurately, down to the last Pursuant to P.D. No. 116 amending Act
centavo, and as promptly as possible. No. 2655 (Usury Law), the Central Bank
This has to be done if the account is to of the Philippines issued Circular No.
reflect at any given time the amount of 416 raising the legal rate of interest from
money the depositor can dispose of as he 6% to 12% per annum.
sees fit, confident that the bank will
In the absence of a stipulation as to
deliver it as and to whomever he directs.
interest, the loan due will now earn
A blunder on the part of the bank, such
interest at the legal rate of 12% per
as the dishonor of the check without
good reason, can cause the depositor not
a little embarrassment if not also 2. Interest accruing from unpaid
financial loss and perhaps even civil and interest interest due shall earn interest
criminal litigation. from the time it is judicially demanded
although the obligation may be silent
* Is a safety deposit box a form of
upon this point.N ON INTERESTS
deposit or lease?
* If the bank was forbidden by
- The contract for the use of a safe
Central Bank to do business, does it
deposit box should be governed by the
still have the obligation to pay interest
law on lease. Under the old banking law,
on deposit?
a safety deposit box is a special deposit.
However, the new General Banking - No, because a bank lends money,
Law, while retaining the renting of safe engages in international transactions,
deposit box as one of the services that acquires foreclosed mortgaged

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

properties or their proceeds and 2. GR: Acquisition of major assets and

generally engages in other banking and making of new investments may be
financing activities in order that it can restricted.
derive income therefrom. Therefore,
unless a bank can engage in those XPN: purchases of evidence of
activities from which it can derive indebtedness guaranteed by the
income, it is inconceivable how it can Government (Sec. 34).
carry on as a depository obligated to pay
interest on money deposited with it. Note: In case of a bank merger or
consolidation, or when a bank is under
rehabilitation under a program approved
7. GRANT OF LOANS AND by BSP, the MB may temporarily relieve
SECURITY the surviving bank, consolidated bank,
REQUIREMENTS- or constituent bank or corporations
SECTIONS 37-47 under rehabilitation from full
compliance with the required capital
*Net worth ratio. (Sec.5)

-The total of the unimpaired paid in * The limitations imposed upon banks
surplus, retained earnings and undivided with respect to its loan function?
profit, net of valuation reserves and
other adjustments as may be required by 1. G.R: Single borrowers limit- The
the BSP. (Sec.24.2) total amount of the loans, credit
accomodations and guarantees that the
* Risked based capital bank could grant should at no time
exceed 25% of the banks net worth.
- The minimum ratio prescribed by the
Monetary Board which the net worth of XPN:
a bank must bear to its total risk assets
which may include contingent accounts. a. As the Monetary Board may
otherwise prescribe for reasons
Note: However, the Monetary Board of national interest
may require or suspend compliance with
such ratio whenever necessary for a b. Deposits of rural banks with
maximum period of one year and that government owned or controlled
such ratio shall be applied uniformly to financial institutions like LBP,
banks of the same category (Sec.34). DBP, and PNB.

* The effect of non compliance with 2. The total amount of loans, credit
the ratio? accommodations and guarantees
prescribed in (a) may be increased by an
1. Distribution of net profits may be additional 10% of the net worth of such
limited or prohibited and MB may bank provided that additional liabilities
require that part or all of the net profits are adequately secured by trust receipt,
be used to increase the capital accounts shipping documents, warehouse receipts
of the bank until the minimum and other similar documents which must
requirement has been met; or be fully covered by an insurance. (Sec.

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 53
Compiled by: Sheena Marie S. Ysit

35.2, GBL) * What are excluded from such loan

3. Loans and other credit
accommodations secured by REM shall -Non risk loans, such as:
not exceed 75% of the appraised value
of the real estate security plus 60% of 1. Loans secured by obligations of the
the appraised value of the insured Bangko Sentral ng Pilipinas or the
improvements (Sec. 37, GBL) Philippine Government

CM/intangible property such as patents, 2. Loans fully guaranteed by the

trademarks, etc. shall not exceed 75% of Government
the appraised value of the security (Sec.
38,GBL) 3. Loans covered by assignment of
deposits maintained in the lending bank
4. Loans being contractual, the period of and held in the Philippines
payment may be subject to stipulation by
the parties. In the case of amortization, 4. Loans, credit accommodations and
the amortization schedule has no fixed acceptances under letters of credit to the
period as it depends on the project to be extent covered by margin deposits
financed such that if it was capable of
raising revenues, it should be at least 5. Other loans or credit accommodations
once a year with a grace period of 3 which the MB may specify as non risk
years if the project to be financed is not items.
that profitable which could be deferred
* Joint and solidary signature (JSS)
up to 5 years if the project was not
capable of raising revenues. (Sec.
44,GBL) -A common banking practice requiring
as an additional security for a loan
5. Loans granted to DOSRI:
granted to a corporation the joint and
. Director solidary signature of a major stockholder
or corporate officer of the borrowing
. Officer corporation.

. Stockholder, which should at least 1% *In case of DOSRI accounts, what are
(if below 1% not the requirements that must be
anymore covered) complied with?

. Related Interests, such as DOSs 1. Procedural requirement- Loan must

spouses, their relatives within be approved by the majority of all the
the first degree whether by directors not including the director
consanguinity or affinity, concerned. CB approval is not
partnership whereby DOS is a necessary; however, there is a need to
partner or a corporation where inform them prior to the transaction.
DOS owns at least 20%. Loan must be entered in the books of the
corporation. (Sec.36)

2. Substantive requirement-Loan must

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

not exceed the paid in contribution and * The arms length rule:
unencumbered deposits. (Not to exceed
15% of the portfolio or 100% of the net - It provides that any dealings of a bank
worth, whichever is lower.) (Sec. 36 [4]) with any of its DOSRI shall be upon
terms not less favorable to the bank than
*The effect of non-compliance with those offered to others. [Sec. 36 (2)]
the foregoing requirements
* Can the bank terminate the loan and
- Violations of DOSRI is a crime and demand immediate payment if the
carries with it penal sanctions. borrower used the funds for purposes
other than that agreed upon?
* What are excluded from such loan
limitations? If the bank finds that the borrower has
not employed the funds borrowed for the
Non-risk loans, such as: purpose agreed upon between the bank
and the borrower, the bank may
1. Loans secured by obligations of the terminate the loan and demand
Bangko Sentral ng Pilipinas or the immediate payment. (Banco de Oro v.
Philippine Government Bayuga, G.R. No. L 49568, Oct.
2. Loans fully guaranteed by the
3. Loans covered by assignment of VIOLATIONS- SECTIONS 5-
deposits maintained in the lending bank 57
and held in the Philippines;
* What are the acts that may be
4. Loans, credit accommodations and
penalized of fine and
acceptances under letters of credit to the
imprisonment as provided in the
extent covered by margin deposits; and
New Central Bank Act (NCBA)?
5.Other loans or credit accommodations
1. Refusal to Make Reports or
which the MB may specify as non risk
Permit Examination (Sec. 34 NCBA)
2. False Statement (Sec. 35. NCBA)
* The transactions covered by the
DOSRI regulation? 3. Other acts that violates any
banking laws (Sec. 36, NCBA)
-The transaction covered are loan and
credit accommodation. Not being a loan, * What are the administrative
the ceiling will not apply to lease and sanctions that the monetary board
sale. However, it should still comply may impose notwithstanding with
with the procedural requirement. sanctions 34-36 0f NCBA?

1. Fines in amounts as may be

determined by the Monetary Board
to be appropriate, but in no case to
exceed P30,000 a day for each

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 55
Compiled by: Sheena Marie S. Ysit

violation, taking into consideration commits or omits an act which render

the attendant circumstances, such as him unfit for the position. In determining
the nature and gravity of the whether an individual is fit and proper to
violation or irregularity and the size hold the position of a director or officer
of the bank or quasi bank. of a bank, regard shall be given to his
integrity, experience, education, training,
2. Suspension of rediscounting and competence. (Sec. 16, GBL)
privileges or access to Bangko
Sentral credit facilities *How could a bank be dissolved?

3. Suspension of lending or foreign 1. Voluntary Liquidation (Sec. 68 GBL)

exchange operations or authority to
accept new deposits or make new 2. Receivership and Involuntary
investments. Liquidation (Sec.69 GBL)

4. Suspension of interbank clearing * Penalty for transactions after the

privileges; and/or bank becomes insolvent

5. Revocation of quasi banking -Any director or officer of any bank

license. (Sec 37, NCBA) declared insolvent or placed under
receivership by the Monetary Board who
Note: Resignation or termination from refuses to turn over the bank's records
office shall not exempt such director or and assets to the designated receivers, or
officer from administrative or criminal who tampers with banks records, or who
sanctions. appropriates for himself for another
party or destroys or causes the
* Who may file a criminal case for misappropriation and destruction of the
violations of banking laws? bank's assets, or who receives or permits
or causes to be received in said bank any
It does not appear from the law that only deposit, collection of loans and/or
the Central Bank or its respondent receivables, or who pays out or permits
officials can cause the prosecution of or causes to be transferred any securities
alleged violations of banking laws. Said or property of said bank shall be subject
violations constitute a public offense, the to the penal provisions of the New
prosecution of which is a matter of Central Bank Act (Sec. 70 GBL)
public interest and hence, anyone even
private individuals can denounce such __________________________
violations before the prosecuting
authorities. (Perez v. Monetary Board, THE NEW CENTRAL BANK ACT
G.R. No.L23307, June 30, 1967) (R.A. 7653)

* May the Monetary Board issue * BANGKO SENTRAL NG

sanctions on unfit directors? PILIPINAS (BSP)-The states central
monetary authority; it is the government
Yes. After due notice to the board of agency charged with the responsibility
directors of the bank, the Monetary of administering the monetary, banking
Board may disqualify, suspend or and credit system of the country and is
remove any bank director or officer who

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

granted the power of supervision and 3. RESPONSIBILITY AND

examination over bank and non-bank PRIMARY OBJECTIVE-
financial institutions performing quasi SECTION 3
banking functions, including savings and a. To provide policy directions in
loan associations. (Busuego vs. CA, G.R. the areas of money, banking, and
No. L 48955, June 30, 1987) credit.

1. STATE POLICIES-SECTION 1 b. To supervise bank operations.

a.) The Stat shall maintain a central
monetary authority that shall c. To regulate the operations of
function and operate as an finance companies and non-bank
independent and accountable financial institutions performing
body corporate in the discharge quasi banking functions, and
of its responsibilities concerning similar institutions. (Sec.3)
banking and credit
* The primary objectives of BSP
b.) In line with this policy, and
considering its unique functions a. To maintain price stability conducive
and responsibilities, the central to a balanced and sustainable growth of
monetary authority established the economy.
under this Act, while being a
b. To promote and maintain monetary
government owned corporation,
stability and the convertibility of the
shall enjoy fiscal and
peso. (Sec.3)
administrative autonomy (Sec.1.)
* What are the function of BSP
SENTRAL NG PILIPINAS 1.Issuer of currency. (Sec.49-60)
- The salient consideration on the 2. Custodian of reserves. (Secs.64-66,
creation of the BSP: 94,103)
a. It is established as an independent
central monetary authority. 3. Clearing channel or house; especially
b. Its capital shall be P50,000,000,000, where the PCHC does not operate.(Sec.
to be fully subscribed by the Philippine 102)
c. The P10,000,000,000 of the capital 4. Banker of the government the BSP
shall be fully paid for by the shall be the official depository of the
Government upon the effectivity of this Government and shall represent it in all
Act and the balance to be paid for monetary fund dealing (Secs. 110-116)
within a period of 2 years from the
effectivity of this Act in such manner 5. Financial advisor of the government
and form as the Government, through (Secs. 123-124) Under Article VII, Sec.
the Secretary of Finance and the 20 of the 1987 Constitution, the
Secretary of Budget and Management, President may contract or guarantee
may thereafter determine.(Sec.2) foreign loans but wit the prior
concurrence of the Monetary Board.

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 57
Compiled by: Sheena Marie S. Ysit

6. Source of credit (Secs.61-63,81- . Establish a human resource

89,109) management system

7.Supervisor of the banking system . Adopt an annual budget for and

(Sec25) shall include the power to: authorize such expenditures by
the Bangko Sentral as are in the
a. Examine, extending to interest of the effective
enterprises wholly or majority administration and operations of
owned or controlled by the bank the Bangko Sentral in accordance
(Sec.7, RA 8791); this power may with applicable laws and
not be restrained by a writ of regulations
injunction unless there is
convincing proof that the action . Indemnify its members and other
of the BSP is a plainly arbitrary officials of the Bangko Sentral,
(Sec. 25) including personnel of the
departments performing
b. Place a bank under supervision and examination
receivership or liquidation functions against all costs and
(Sec.30) expenses reasonably incurred by
such persons in connection with
c. Initiate criminal prosecution any civil or criminal action. (Sec.
oferring officer of banks 15)
8. Government agent (Secs.117-122) Note: In the event of a settlement or
compromise, indemnification shall be
4. MONETARY BOARD- POWERS provided only in connection with such
AND FUNCTIONSA-SECTIONS matters covered by the settlement as to
5-16 which the Bangko Sentral is advised by
* The Monetary Board- The body external counsel that the person to be
through which the powers and indemnified did not commit any
functions of the Bangko Sentral are negligence or misconduct. The costs and
exercised. (Sec 6) expenses incurred in defending the
aforementioned action, suit or
* The powers and functions of the
proceeding may be paid by the Bangko
Monetary Board:
Sentral in advance of the final
. Issue rules and regulations it considers disposition of such action, suit or
necessary for the effective proceeding upon receipt of an
discharge of the responsibilities undertaking by or on behalf of the
and exercise of its powers. member, officer, or employee to repay
the amount advanced should it
. Direct the management, operations, ultimately be determined by the
and administration of the Bangko Monetary Board that he is not entitled to
Sentral, reorganize its personnel, be indemnified as provided in this
and issue such rules and subsection. (Sec. 15)
regulations as it may deem
necessary or convenient for this

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit


deemed in
SECTIONS 19,25,29-31 legis.
*The function of the BSP on a
distressed bank- Appointment of a
conservator or receiver or closure of the *Who is a conservator?
=> One appointed if the bank is in the
*Distinguish between the grounds for state of illiquidity or the bank fails or
conservatorship, receivership and refuses to maintain a state of liquidity
liquidation and their effects. adequate to protect its depositors and
creditors. The bank still has more assets
CONSERVATOR RECIEVERS LIQUIDAT than its liabilities but its asset are not
liquid or not in cash thus it cannot pay
GROUNDS its obligation when it falls due. The
bank, not the Central Bank, pays for
1.Continuing . Inability to pay 1. Insolvency fees.
inability liabilities as
they fall due 2. Bank
2.Unwillingness to e.g: bank run, cannot be
* The powers of a conservator
maintain rumors, etc. rehabilitated
condition of . To take charge of the assets, liabilities,
liquidity . Assets are and the management thereof
less than its
. Recognize the management
. Cannot
continue . Collect all monies and debts due said
damage; Exercise all powers necessary to restore
its viability with the power to overrule or
. Violation of
a cease and
revoke the actions of the previous
desist management and board of directors of
the bank or quasi bank (First Philippine
. Bank International bank vs.CA, G.R. No.
more than 30 115849, Jan. 24, 1996).
days. (Sec.30)
Note: Such powers cannot extend to post
EFFECTS facto repudiation of perfected
transactions. Thus, the law merely gives
1.Juridical. Juridical Same with
personality is personality is conversators the conservator power to revoke
retained. retained hip. contracts that are deemed to be defective
void, voidable, unenforceable or
2.Perfected . Suspensio
transactions n of
rescissible. Hence, the conservator
cannot be operation merely takes the place of the banks
repudiated; /stoppage board.
5. To bring court actions to assail or

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 59
Compiled by: Sheena Marie S. Ysit

repudiate contract entered into by the than 30 days (Sec 53, GBL).
. Persisting in conducting its business in
* Conservatorship is terminated: an unsafe or unsound manner
(Sec 56, GBL).
=> When Monetary Board is satisfied
that the institution can continue to *The close now hear later doctrine?
operate on its own and the
conservatorship is no longer necessary. => The law does not contemplate prior
notice and hearing before the bank may
Note: When the Monetary Board, on the be directed to stop operations and placed
basis of the report of the conservator or under receivership. The purpose is to
of its own findings, determine that the prevent unwarranted dissipation of the
continuance in business of the institution banks assets and as a valid exercise of
would involve probable losses to its police power to protect the depositors,
depositors or creditors, the bank will go creditors, stockholders and the general
under receivership. public. (Central Bank of the Philippines
v. CA, G.R. No. 76118 Mar. 30, 1993)
*The Monetary Board close a bank or
quasi bank? *Can the closure and liquidation of a
bank, which is considered an exercise
. Cash Flow test- Inability to pay of police power, be the subject of
liabilities as they become due in judicial inquiry?
the ordinary course of business
(Sec.30[a]NCBA). A: Yes. While the closure and
liquidation of a bank may be considered
. Balance sheet test Insufficiency of an exercise of police power, the validity
realizable assets to meet its of such exercise of police power is
liabilities (Sec 30 [b] NCBA). subject to judicial inquiry and could be
set aside if it is either capricious,
. Inability to continue business without discriminatory, whimsical, arbitrary,
involving probable losses to its unjust or a denial or due process and
depositors and creditors (Sec 30 equal protection clauses of the
[c] NCBA). Constitution (Central Bank v. CA, G.R.
No. L 5003132,July27,1981).
. Willful violation of a cease and desist
order under Section 37 that has * Upon maturity of the time deposit,
become final, involving acts or the bank failed to remit. By reason of
transactions which amount to punitive action taken by Central
fraud or a dissipation of the Bank, the bank has been prevented
assets (Sec 30 [d] NCBA). from performing banking operations.
Is the bank still obligated to pay the
. Notification to the BSP or public time deposits despite the fact that its
announcement of a bank holiday operations were suspended by the
(Sec 53,GBL). Central Bank?
. Suspension of payment of its deposit A: The suspension of operations of a
liabilities continuously for more

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

bank cannot excuse non compliance raised in a separate action?

with the obligation to remit the time
deposits of depositors which matured A: No. While resolutions of the
before the banks closure. (Overseas Monetary Board forbidding a bank to
Bank of Manila v.CA, G.R. No.45886, do business on account of a
Apr.19,1989) condition of insolvency and
appointing a receiver to take charge
**Who is a receiver? of the banks assets or determining
whether the bank may be
A: One appointed if bank is already rehabilitated or should be liquidated
insolvent which means that its liabilities are by law final and executory.
are greater than its assets. However, they can be set aside by
the court on one specific ground if
*Duties of a receiver the action is plainly arbitrary and
made in bad faith. Such contention
A: can be asserted as an affirmative
defense of a counterclaim in the
. The receiver shall immediately gather
proceeding for assistance in
and take charge of all the assets
and liabilities of the institution.
*What is liquidation?
. Administer the same for the benefit of
the creditors, and exercise the A: It is an act of settling a debt by
general powers of a receiver payment or other satisfaction. It is
under the Revised Rules of Court also the act or process of converting
assets into cash especially to settle
. Shall not, with the exception of
debts (Blacks Law Dictionary).
administrative expenditures, pay
or commit any act that will * Can the liquidator of a distressed
involve the transfer or disposition bank prosecute and defend suits
of any asset of the institution: against the bank and foreclose
Provided that the receiver may mortgages for and in behalf of the
deposit or place the funds of the bank while the issue on
institution in non speculative receivership and liquidation is still
investments (Sec30,NCBA) pending?
. Is the receiver authorized to A: Yes. The Central Bank is vested
transact business in connection with the authority to take charge and
with the banks assets and administer the monetary and banking
property? systems of the country and this
authority includes the power to
. No, the receiver only has
examine and determine the financial
authority to administer the same
conditions of banks for the purpose
for the benefit of its creditors.
of closure on the ground of
*Should the issue of whether or insolvency. Even if the bank is
not the Monetary Boards questioning the validity of its
resolution is arbitrary be only closure, during the pendency of the

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 61
Compiled by: Sheena Marie S. Ysit

case the liquidator can continue case where the SC held that the CB
prosecution suits for collection and may not thereafter renege on its
foreclosure of mortgages, as they are representation and liquidate the bank
acts done in the usual course of after majority stockholders of the
administration of the bank. (Banco bank complied with the conditions
Filipino v. Central Bank, G.R.No. and parted with value to the profit of
70054,Dec.11, 1991) CB, which thus acquired additional
security for its own advances, to the
* An intra corporate case was filed detriment of the banks
before RTC. On the other hand, stockholders, depositors and other
another complaint was filed before creditors.
BSP to compel a bank to disclose
its stockholdings invoking the * Can a final and executory
supervisory power of the latter. Is judgment against an insolvent
there a forum shopping? bank be stayed?

- None. The two proceedings are of -Yes, after the Monetary Bank has
different nature praying for different declared that a bank is insolvent and
relief. The complaint filed with the has ordered it to cease operations,
BSP was an invocation of its the assets of the insolvent bank are
supervisory powers over banking held in trust for the equal benefit of
operations which does not amount to all creditors.
a judicial proceeding.
One cannot obtain an advantage or
*Where will the claims against the preference over another by
insolvent bank be filed? attachment, execution or otherwise.
The final judgment against the bank
-Where liquidation is undertaken should be stayed as to execute the
with judicial intervention, all claims judgment would unduly deplete the
against the insolvent bank should be assets of the banks to the obvious
filed in the liquidation proceeding. It prejudice of other depositors and
is not necessary that a claim be creditors.
initially disputed in a court or agency
before it is filed with the liquidation
Note: The judicial liquidation is 61-80
intended to prevent multiplicity of
actions against the insolvent bank. * Legal Tender
Where it is the bank that files a claim
against another person or legal - All notes and coins issued by the
entity, the claim should be filed in Bangko Sentral are fully guaranteed by
the regular courts. the Republic and shall be legal tender in
the Philippines for all debts, both public
*Rule of promissory estoppel and private (Sec.52)
-The doctrine was applied in one

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

* Legal tender power of coins? 2. After that period, they shall cease to
be legal tender during the following year
1. 1 Peso, 5 Peso and 10 Peso coins: In or for such longer period as MB may
amounts not exceeding P1,000.00 determine.
2. 25 centavo coin or less: In amounts 3. After the expiration of this latter
not exceeding P100.00 (Circular No. period, the notes and coins which have
537, 2006) not been exchanged shall cease to be a
liability of BSP and shall be
demonetized. (Sec. 57)
*The rules on BSPs Authority to Note: Checks representing demand
replace legal tender: deposits do not have legal tender power
and their acceptance in the payment of
1. Notes for any series or denomination debts, both public and private, is at the
More than 5 years old option of the creditor. However, a
check which has been cleared and
2. Coins- More than 10 years old
credited to the account of the creditor
* The Power to determine Rates of shall be equivalent to a delivery to the
Exchange exercised creditor of cash in an amount equal to
the amount credited to his account (Sec.
-The Monetary Board shall determine 60).
the rates at which the Bangko Sentral
shall buy and sell spot exchange, and *The period of replacement
shall establish deviation limits from the
1. Notes for any series or denomination-
effective exchange rate or rates as it may
More than 5 years old.
deem proper.
2.Coins- More than 10 years.
-The Monetary Board shall similarly
determine the rates for other types of * What actions does the Bangko
foreign exchange transactions by the Sentral take when international
Bangko Sentral, including purchases and stability of Peso is threatened?
sales of foreign notes and coins, but the
margins between the effective exchange - Whenever the international reserve of
rates and the rates thus established may the Bangko Sentral falls to a level which
not exceed the corresponding margins the Monetary Board considers
for spot exchange transactions by more inadequate to meet the prospective
that the additional costs or expenses demands on the Bangko Sentral for
involved in each type of transactions. foreign currencies, or whenever the
international reserve appears to be in
* The rules on BSPs Authority to imminent danger of falling to such a
replace legal tender? level, or whenever the international
reserve is falling as a result of payments
1. Notes and coins called in for
or remittances abroad which, in the
replacement shall remain legal tender for
opinion of the Monetary Board, are
a period of one year from the date of
contrary to the national welfare, the

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 63
Compiled by: Sheena Marie S. Ysit

Monetary Board shall: Note: In order that the Bangko Sentral may
at all times have foreign exchange resources
1. Take such remedial measures as are sufficient to enable it to maintain the
appropriate and within the powers stability and convertibility of the peso, or in
granted to the Monetary Board, and the order to promote the domestic investment of
Bangko Sentral bank resources, the Monetary Board may
require the banks to sell to the Bangko
Sentral or to other banks all or part of their
2. Submit to the President of the
surplus holdings of foreign exchange. (Sec.
Philippines and the Congress, and make
public a detailed report which shall
includes, as a minimum, a description
and analysis of:
a. The nature and causes of the existing AMMENDED)
or imminent decline; 1. PURPOSE
A. To encourage deposit in
b. The remedial measures already taken banking institutions; and
or to be taken by the Monetary Board B. To discourage private
hoarding so that banks may
c. The monetary, fiscal or administrative lend such funds and assist in
measures further proposed The character the economic development
and extent of the cooperation required of the country.
from other government agencies for the
successful execution of the policies of 2. PROHIBITION ACTS
the Monetary Board (Sec. 67). -Examination/inquiry/looking into all
deposits of whatever nature with
* What are the emergency restrictions banks or banking institutions in the
on the foreign exchange operations? Philippines (including investment in
bonds issued by the government) by
1. Temporarily suspending and any person, government official or
restricting sales of foreign exchange by office (Sec. 2)
the Bangko Sentral;
-Disclosure by any official or
2. Subjecting all transactions in gold and employee of any banking institution
foreign exchange to license by the to any authorized person of any
Bangko Sentral; information concerning said deposit
(Sec. 3)
3. Requiring that any foreign exchange
thereafter obtained by any person 3. DEPOSITS COVERED
residing or entity operating in the
Philippines be delivered to the Bangko * Kinds of Deposits that are covered:
Sentral or to any bank or agent
designated by the Bangko Sentral for the 1. All deposits of whatever nature with
purpose, at the effective exchange rate or banks or banking institutions found in
rates (Sec. 72) the Philippines; or

2. Investments in bonds issued by the

Philippine government, its branches, and

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

institutions. (Sec. 2, R.A. 1405) estate. (Sec.6[F][1],NIRC)

* Trust funds are covered by the term e. In cases where the money deposited or
deposit- The money deposited under invested is the subject matter of the
the trust agreement is intended not litigation. (Sec.2)
merely to remain with the bank but to be
invested by it elsewhere. To hold that
this type of account is not protected by f. Upon the order of the Commissioner
R.A. 1405 would encourage private of Internal Revenue in respect of bank
hoarding of funds that could otherwise deposits of a taxpayer who has filed an
be invested by banks in other ventures, application for compromise of his tax
contrary to the policy behind the law. liability by reason of financial incapacity
to pay his tax liability. (Sec.
Note: Despite such pronouncement that 6[f][1],NIRC)
trust funds are considered deposits, trust
funds remain not covered by PDIC. g. In case of dormant accounts/deposits
for at least 10 years under the Unclaimed
* Is foreign currency deposits covered Balances Act. (Sec.2,Act No. 3936).
by the Secrecy in Bank Deposits(R.A.
1405) h. When the examination is made by the
BSP to insure compliance with the AML
-No. Foreign currency deposits are Law in the course of a periodic or
covered by R.A. 6426 otherwise known special examination
as the Foreign Currency Act. Under the
same law, all authorized foreign i. With court order:
currency deposits are considered of an
absolutely confidential nature and, . In cases of unexplained wealth under
except upon the written permission of the Sec. 8 of the Anti Graft and
depositors, in no instance shall be Corrupt Practices Act
examined, inquired or looked into by
any person, government official, bureau . In cases filed by the Ombudsman and
or office whether judicial or upon the latters authority to
administrative private. examine and have access to bank
accounts and records
j. Without court order:
*Disclosing an information is allowed
If the AMLC determines that a
particular deposit or
a. upon a written consent of a depositor
b. In cases of impeachment
Investment with any banking
c. Upon order of competent court in
institution is relted to the following:
cases of bribery or dereliction of duty of
public officials. (Sec.2)
d. Upon order of the Commissioner of -Hijacking,
Internal Revenue in respect of the bank
deposits of a decedent for the purpose of -Kidnapping,
determining such decedents gross

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 65
Compiled by: Sheena Marie S. Ysit

-Murder; recover the money transmitted by

mistake, can the bank be allowed to
Destructive Arson;and present the accounts which it believed
were responsible for the acquisition of
-Violation of the Dangerous Drugs Act. the money?
(2004 Bar question)
-Yes, R.A. 1405 allows the disclosure of
bank deposits in cases where the money
deposited is the subject matter of
*The requisites before the litigation. In an action filed by the bank
Ombudsman may examine deposits? to recover the money transmitted by
mistake, necessarily, an inquiry into the
1. There is a pending case before court
whereabouts of the amount extends to
of competent jurisdiction
whatever is concealed by being held or
2. The account must be clearly identified recorded in the name of the persons
other than the one responsible for the
3. There is notice upon the account illegal acquisition.
holder and bank personnel of their
presence during inspection. 5. GARNISHMENT OF
Note: The inspection must cover only FOREIGN DEPOSITS
the account identified in the pending
case. *Does the garnishment of bank
deposits violates a law?
* Can a bank be compelled to disclose - No, the prohibition against examination
the records of the accounts of a does not preclude its being garnished for
depositor under the investigation for satisfaction of judgment. The disclosure
unexplained wealth? is purely incidental to the execution
process and it was not the intention of
- Since cases of unexplained wealth are the legislature to place bank deposits
similar to cases of bribery, dereliction of beyond the reach of judgment creditor.
duty, no reason is seen why it cannot be
excepted from the rule making bank * How about foreign currency
deposits confidential. In this connection, deposits, can they be subject to
inquiry into illegally acquired property garnishment?
in anti graft cases extends to cases where
such property is concealed by being held - GR: Foreign currency deposits shall be
or recorded in the name of other persons. exempt from attachment, garnishment,
This is also because the Anti Graft and or any other order or process of any
Corrupt Practices Act, bank deposits court, legislative body, government
shall be taken into consideration in agency or any administrative body
determining whether or not a public whatsoever.
officer has acquired property manifestly
out of proportion with his lawful XPN: The application of Section of R.A.
income. 6426 depends on the extent of its justice.
The garnishment of a foreign currency
* In an action filed by the bank to deposit should be allowed to prevent

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

injustice and for equitable grounds, accounts shall be

otherwise, it would negate Article 10 of protected and preserved;
the New Civil Code which provides 2. To ensure that the
that in case of doubt in the Philippines shall not be
interpretation or application of laws, it is
presumed that the lawmaking body used as a money
intended right and justice to prevail. laundering site for the
proceeds of any unlawful
*Can the foreign currency deposit of a activity.
transient foreigner who illegally 3. Philippines shall not
detained and raped a minor Filipina,
extend cooperation in
be garnished to satisfy the award for
damages to the victim? transnational and
prosecutions of persons
- The exemption from garnishment of involved in money
foreign currency deposits under R.A. laundering activities
6426 cannot be invoked to escape wherever committed
liability for the damages to the victim.
The garnishment of the transient
foreigners foreign currency deposit B. COVERED INSTITUTION
should be allowed to prevent injustice
and for equitable grounds. The law was 1. Banks
enacted to encourage foreign currency 2. Non-banks
deposit and not to benefit a wrongdoer.
3. Quasi-banks
4. Trust entities
* The penalties for violation of 5. All other institutions,
R.A.1405 their subsidiaries and
affiliates supervised or
-The penalty of imprisonment of not regulated by BSP
more than 5 years or a fine of not more
6. Insurance companies and
than 20,000pesos or both, in the
discretion of the court shall be imposed all other institutions
upon any official or employee of a supervised and regulated
banking institution who, upon by the Insurance
conviction, was found to have violated Commission
R.A. 1405. 7. Securities dealers,
brokers, salesmen,
investment houses and
(R.A. 9160)
other similar entities
managing securities or
A. POLICY of the LAW
rendering services as
investment agent, advisor,
1. The integrity and
or consultant
confidentiality of bank

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 67
Compiled by: Sheena Marie S. Ysit

8. Mutual funds, closed-end E. SUSPICIOUS

investment companies,
common trust funds,
Regardless of amount, if any of
pre-need companies and the following is present:
other similar entities. 1. No underlying economic, trade
9. Foreign exchange, or legal justification
corporations, money 2. Client not properly identified;
changers, money numbered accounts are allowed
payments, remittance, and provided client is identified.
transfer companies and 3. Transaction is not commensurate
other similar entities; and with financial capability of the
10. Other entities client
administering or 4. Transaction is so structured that
otherwise dealing in it cannot be reported to the
currency, commodities or AMLC
financial derivatives 5. Transaction which deviates from
based thereon, valuable usual profile of the client
objects, cash substitutes, 6. Relates to unlawful activity as
and other similar defined by law
monetary instruments or 7. Analogous transactions
property supervised or
regulated by SEC. (Sec. 3 F. WHEN is MONEY
R.A. 9160, as amended) LAUNDERING COMMITTED

C. OBLIGATIONS of COVERED The meaning of Money

- A crime whereby the proceeds
They are mandated by the of unlawful activity are transacted,
AMLA to submit covered making them appear to have come from
and suspicious transaction lawful transaction. (Sec. 4 R.A. 9160, as
reports to the AMLC. amended)

D. COVERED TRANSACTIONS Money laundering act is

These are transactions in committed by the
cash or other equivalent following persons:
monetary instrument a) Any person knowing that
involving a total amount the monetary instrument or
in excess of 500,000.00 property represents,
within 1 banking day. involves, or relates to, the

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

proceeds of any unlawful g. Piracy

activity, transacts or attempts h. Qualified theft
to transact said monetary i. Swindling
instrument or property;
j. Smuggling
b) Any person knowing that
k. Violations under the Electronic
Commerce Act of 2000
any monetary instrument or
property involves the l. Hijacking, destructive arson, and
proceeds of any unlawful murder, including those
activity performs or fails to perpetrated by terrorists against
perform any act as a result of non-combatant persons and similar
which he facilitates the targets.
offense referred to in No. 1 m. Fraudulent practices and other
above violations under the SRC of
c) Any person knowing that n. Felonies or offenses of a similar
any monetary instrument or nature that are punishable under
property is required under the penal laws of other countries.
this Act to be disclosed and (Sec. 3(i) R.A. 9160, as amended)
filed with the Anti-Money
Laundering Council
(AMLC), fails to do so. (Sec
4 R.A. 9160, as amended)
1. Governor of Bangko Sentral ng
Pilipinas as Chairman
2. Insurance Commissioner
3. Chairman of Security and
These refer to any act or
Exchange Commissioner
omission or series or
combination thereof
The purpose of the law on
involving or having direct
creating the Anti-Money
relation to the following:
Laundering Council
a. Kidnapping for ransom
b. Drug trafficking and related 1. To protect and preserve the
offenses integrity and confidentiality
c. Graft and corrupt practices of bank accounts;
d. Plunder 2. To ensure that the
e. Robbery and Extortion Philippines shall not be used
f. Jueteng and Masiao as a money laundering site

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 69
Compiled by: Sheena Marie S. Ysit

for proceeds of any unlawful e) Must have served for at least 5

activity; and years in Insurance Commission,
3. To extend cooperation in SEC or BSP & shall hold full-
transnational investigation time permanent position within
and prosecution of person the BSP.
involved in money
laundering activities General Rule:
wherever committed. Members of AMLC, Executive
Director, all members of Secretariat, on
The AMLC is a collegial detail, on secondment shall not reveal in
body where Chairman & any manner any information by reason
members of AMLC are of their office
entitled to one vote each
General Rule: Under any orders of the court,
AMLC acts Congress, or any government offices
unanimously in authorized by law
discharge of
functions MEETING:
AMLC shall meet every first Monday of
Exception: the month or as often as may be
In case of incapacity, necessary at the call of Chairman
absence or disability, any Through modern
member to discharge his technologies such as, but not
functions, the officer limited to
designated shall act in his TELECONFERENCING &


Headed by Exec. by Congress)
Director, appointed by Used to defray
AMLC for a term of operational expenses, including
percentage years indemnification for LEGAL
qualifications: COST & EXPENSES.
a) member of Phil. Bar;
b) at least 35 years of age; I. FUNCTIONS
c) of good moral character;
d) with unquestionable integrity & The following are the functions of the
known probity; and anti-money laundering act:

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

1. To require and receive 7. To implement such measures

reports of suspicious as may be necessary and
transactions from covered justified to counteract money
institutions laundering

Note: Covered institutions include, 8. To receive and take action in

(banks and all other institutions and respect of any request for
their subsidiaries and affiliates assistance from foreign states
supervised or regulated by BSP; in their own anti-money
insurance companies and all other laundering operations
institutions supervised or regulated 9. To develop educational
by the IC; and securities dealers and programs on the pernicious
other entities supervised or regulated effects of money laundering.
by the SEC)
10. To enlist the assistance of
2. To issue orders addressed to any branch, department,
the Supervising Authority or bureau, office, agency or
the covered institution instrumentality of the
government, including
3. To institute civil forfeiture GOCCs in undertaking any
proceedings and all other and all anti-money
remedial proceedings through laundering operations
the OSG
11. To impose administrative
4. To cause the filing of sanctions for the violation of
complaints with the DOJ or laws, rules, regulations and
the Ombudsman for the orders and resolutions issued
prosecution of money pursuant thereto. (Sec. 7 R.A.
laundering offenses 9160, as amended)
5. To investigate suspicious 12. To examine or inquire into
transactions and covered bank deposits/investments
transactions deemed upon order of any competent
suspicious after an court in cases of violation of
investigation by AMLC the AMLA, when it has been
6. To apply before the CA, ex established that there is
parte, for the freezing of any probable cause that the
monetary instrument/property deposits/investments are
alleged to be proceeds of any related to an unlawful
unlawful activity as defined activity. (Sec. 11 R.A. 9160,
in the AMLA as amended)

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 71
Compiled by: Sheena Marie S. Ysit

Note: No court order, however, is and deposits related to money-

necessary in cases involving laundering activities. (Republic v.
kidnapping for ransom; narcotics Cabrini Green & Ramos, G.R.
offenses; and hijacking, destructive No. 154522, May 5, 2006)
arson and murder, including those
perpetrated by terrorists against non- K. AUTHORITY to INQUIRE
combatant persons and similar INTO BANK DEPOSITS
The Anti-Money
J. FREEZING of MONETARY Laundering Council
INSTRUMENT or PROPERTY (AMLC) can inquire into
bank deposits when
The following has the
jurisdiction for violations General Rule:
of Anti-Money Only upon order of any
Laundering Act: competent court in cases of violation of
R.A.9160, as amended.
1. RTC all cases on money
laundering. Exception:
2. Sandiganbayan Those No need of court order in cases
committed by public officers of Kidnapping, Hijacking, Drugs,
and private persons in Arson, Murder. (Sec. 11 R.A. 9160, as
conspiracy with them. (Sec. amended)
5. R.A. (160, as amended)
The Court of Appeals has 1. Alvin is jobless but is reputed
the jurisdiction to issue a to be a jueteng operator. He
freeze order because, It is has never been charged or
solely the CA which has convicted of any crime. He
the authority to issue a maintains several bank
freeze order upon accounts amounting to P100
application ex parte by Million. AMLC charged Alvin
the AMLC and after with violation of the
determination that Anti-Money Laundering Law.
probable cause exists. (Bar exam question 2002)

It also has the exclusive a. Can Alvin move to dismiss the

jurisdiction to extend existing case on the ground that he has no
freeze orders previously issued criminal record?
by the AMLC vis--vis accounts ANSWER:

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

No. The contention of Alvin is charged him with violation of

not tenable because under AMLA, the Anti-Money Laundering
"money laundering crime" committed Law. Upon request of the
when the proceeds of an "unlawful AMLC, the bank disclosed to
activity," like jueteng operations, are it Rudy's bank deposits
made to appear as having originated amounting to P100 Million.
from legitimate sources. The money Subsequently, he was charged
laundering crime is separate from the in court for violation of the
unlawful activity of being a jueteng Anti-Money Laundering Law.
operator, and requires no previous (Bar exam question 2002)
conviction for the unlawful activity.
(Sec. 3, AMLA) A: Can Rudy move to dismiss
the case on the ground that he has no
b. In disclosing Alvin's bank criminal record? (2.5%)
accounts to the AMLC, did the bank
violate any law? ANSWER:
ANSWER: No. Under the Anti-Money
No, the bank did not violate any law. Laundering Law, Rudy would be
The bank being specified as a "covered guilty of a "money laundering
institution" under the Anti-Money crime" committed when the proceeds of
Laundering Law, is obliged to report to an "unlawful activity," like jueteng
the AMLC covered and suspicious operations, are made to appear as
transactions, without thereby violating having originated from legitimate
any law. This is one of the exceptions to sources. The money laundering crime is
the Secrecy of Bank Deposit separate from the unlawful activity of
being a jueteng operator, and requires no
2. Rudy is jobless but is previous conviction for the unlawful
reputed to be a jueteng activity (See also Sec. 3, Anti- Money
operator. He has never been Laundering Act of 2001).
charged or convicted of any
crime. He maintains several B: To raise funds for his defense,
bank accounts and has Rudy sold the houses and lots to a
purchased 5 houses and lots friend. Can Luansing Realty, Inc.
for his children from the be compelled to transfer to the
Luansing Realty, Inc. Since buyer ownership of the houses and
he does not have any visible lots? (2.5%)
job, the company reported
his purchases to the Anti- ANSWER:
Money Laundering Council Luansing Realty, Inc. is a real
(AMLC). Thereafter, AMLC estate company, hence it is not a covered

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 73
Compiled by: Sheena Marie S. Ysit

institution under Section 3 of the Realty, Inc. is not a covered

Anti- Money Laundering Act. Only institution under Section 3 of the
banking institutions, insurance Anti-Money Laundering Act, it
companies, securities dealers and may not invoke this law to refuse
brokers, pre- need companies and other delivery of the titles to Rudy.
entities administering or otherwise
dealing in currency, commodities or 3. Who shall be liable if the
financial derivatives are covered offender is a juridical entity?
institutions. Hence, Luansing Realty, Answer:
Inc. may not use the Anti-Money If the offender is a corporation,
Laundering Act to refuse to transfer association, partnership or any judicial
to the buyer ownership of the person, the penalty shall be
houses and lots. imposed upon the responsible officers,
as the case may be, who
C: In disclosing Rudy's bank accounts participated or failed to prevent
to the AMLC, did the bank violate its commission. If the offender is a
any law? (2.5%) juridical person, the court may
suspend or revoke its license.
ANSWER: (Rule 3, Sec. 2 (par.6), IRR)
No, the bank did not violate
any law. The bank being specified as 4. Who has the authority to
a "covered institution" under the freeze accounts?
Anti-Money Laundering Law, is Answer:
obliged to report to the AMLC The AMLC is authorized under
covered and suspicious Sections 6 (6) and 10 of the AMLA to
transactions, without thereby freeze any account or any monetary
violating any law. This is one of the instrument or property subject thereof
exceptions to the Secrecy of upon determination that probable cause
Bank Deposit Act. exists that the same is in any way related
to any unlawful activity and/or money
laundering offense. The AMLC may
D: Supposing the titles of the houses freeze any account or any monetary
and lots are in possession of the instrument or property subject thereof
Luansing Realty, Inc., is it prior to the institution or in the course
under obligation to deliver the titles of, the criminal proceedings
to Rudy? (2.5%) involving the unlawful activity and/or
money laundering offense to which said
ANSWER account, monetary instrument or
Yes, it has an obligation to property is any way related. The freeze
deliver titles to Rudy. As Luansing order on such account shall be effective

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat)
Compiled by: Sheena Marie S. Ysit

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

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew Umayat) 75
Compiled by: Sheena Marie S. Ysit

The following are the compositions of
the AMLC:
A: Governor of Bangko Sentral ng
Pilipinas as Chairman;
B: Insurance Commissioner;
C: Chairman of Security and Exchange

SPECIAL COMMERCIAL LAWS (Atty. Susana C. Gapla-ew- Umayat) 76
Compiled By Sheena Marie S. Ysit