Special Commercial Laws Cases

Deans
Circle
2016
UNIVERSITY OF SANTO
TOMAS
Digested by: DC 2016
Members
Editors: Tricia Lacuesta
Lorenzo Luigi Gayya
Cristopher Reyes
Macky Siazon
Janine Arenas
Ninna Bonsol
Lloyd Javier
SPECIAL COMMERCIAL
LAWS
FIRST SEM CASES
SPECIAL COMMERCIAL LAWS

Table of Contents
LETTERS OF CREDIT
Definition and Nature of Letters of Credit
2
Laws Governing Letters of Credit
9
Kinds of Letters of Credit 10
Parties to a Letter of Credit
14
Basic Principle of Letters of Credit
21
TRUST RECEIPT LAW
Definition/Concept of a Trust Receipt Transaction
28
Ownership of the Goods, Documents and Instruments under a Trust Receipt
Obligation and Liability of the Entrustee
39
Return of Goods, Documents or Instruments in Case of Non-Sale 47
Liability for Loss of Goods, Documents or Instruments
48
Penal Sanctions if Offender is a Corporation 49
Remedies Available51
WAREHOUSE RECEIPT'S LAW 56
BANKING LAWS
General Banking Law of 2000
Definition and Classification of Banks 60
Distinction of Banks from Quasi-Banks and Trust Entities 61
Bank Powers and Liabilities
62
Banking and Incidental Powers 64
Diligence Required of Banks
64
Nature of Bank Funds and Bank Deposits
77
Stipulation on Interests 78
Grant of Loans and Security Requirements
82
DOSRI Restrictions 83
The New Central Bank Act
Responsibility and Primary Objective 86
Monetary Board - Powers and Functions
88
How the BSP handles Banks in Distress
Conservatorship
90
Closure 92
Receivership
100
Liquidation
104
Law on Secrecy of Bank Deposits
Purpose
111
Prohibited Acts
112
Deposits Covered 113
Exceptions 115
Garnishment of Deposits, Including Foreign Deposits
125
Anti-Money Laundering Act
Unlawful Activities or Predicate Crimes 129
Freezing of Monetary Instrument or Property 131
MISCELLANEOUS TOPICS
PDIC 132
Truth in Lending 134
36
Letters or Credit
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Definition and Nature of Letters of Credit

BANK OF AMERICA, NT & SA v. CA, INTER-RESIN INDUSTRIAL CORPORATION,
FRANCISCO TRAJANO, JOHN DOE AND JANE DOE
G.R. No. 105395, December 10, 1993, VITUG, J.
A letter of credit is a financial device developed to facilitate commercial transactions.
Banks play different roles in such transactions, each of which carries different rights and
liabilities; if a bank is an advising bank based on the provisions in the letter of credit, and
other documents presented as evidence, it incurs no liability under the letter of credit as its
only role is to inform a possible client of the existence of the letter of credit, nothing more.
Facts:
Bank of America entered into an Irrevocable Letter of Credit purportedly issued by
Bank of Ayudhya for the account of General Chemicals Ltd. to cover the sale of plastic ropes
and agricultural files, with Bank of America as the advising bank and Inter-Resin as the
beneficiary. Bank of America wrote Inter-Resin of the foregoing and transmitted the letter of
credit. Inter-Resin then sought to confirm the letter of credit, but Bank of America did not, as
they explained that there was no need for confirmation because the letter would not be
transmitted if it were not genuine.
Relying on this, Inter-Resin sought to avail of the letter of credit, using it to ship rope
to General Chemicals. Bank of America then issued checks in favor of Inter-Resin, after which
it informed Bank of Ayudhya of the availment of the letter of credit, seeking reimbursement
in the process. Bank of Ayudhya declared the letter of credit fraudulent, so Bank of America
stopped the processing of Inter-Resin's documents.
Issue:
Whether or not Bank of America incurred any liability to the beneficiary (Inter-Resin)
under the letter of credit.
Ruling:
NO.Bank of America merely acted as an advising bank. A letter of credit is a financial
device developed by merchants to facilitate commercial transactions. It was developed as
an attempt to satisfy the seemingly irreconcilable interests of a seller, who refuses to part
with his goods before he is paid, and a buyer, who wants to have control of the goods before
paying.
To break the impasse, the buyer (here, General Chemicals) may be required to
contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the letter,
the issuing bank (here, Bank of Ayudhya) can authorize the seller (here, Inter-Resin) to draw
drafts and engage to pay them upon presentment along with tender of documents required
by the letter of credits (such documents are those evidencing the shipment). Once the credit
is established, the seller ships the goods to the buyer and in the process the required
shipping documents. To get paid, the seller executes a draft and presents it together with
the required documents to the issuing bank. The issuing bank redeems the draft and pays
cash to the seller if it finds that the documents submitted by the seller conform with what
the letter of credit requires. The bank then obtains possession of the documents upon
paying the seller. The transaction is completed when the buyer reimburses the issuing bank
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and acquires the documents entitling him to the goods. Under this arrangement, the seller
gets paid only if he delivers the documents of title over the goods, while the buyer acquires
said documents and control over the goods only after reimbursing the bank.
One of the types of letters of credit is the commercial letter of credit, as in this case.
A commercial letter of credit is a contractual agreement between a bank, known as the
issuing bank, on behalf of one of its customers, authorizing another bank, known as the
advising or confirming bank, to make payment to the beneficiary. The issuing bank, on the
request of its customer, opens the letter of credit. The issuing bank makes a commitment to
honor drawings made under the credit. The beneficiary is normally the provider of goods
and/or services. Essentially, the issuing bank replaces the bank's customer as the payor.
What makes letters of credit attractive is the independence of the engagement of the
issuing bank to pay the seller of the draft and the presentment of required shipping
documents from any breach of the main sales contract. The bank determines compliance
only by the examination of shipping documents, without looking at the main contract.
In modern commerce, the rights and liabilities of banks in letters of credit depend on
its role in the transaction. In this case, the conflict is on the role of Bank of America. If it is
the issuing bank, it may be liable for the letter of credit as it handles payment of the draft to
the seller. If it is an advising bank, it is not liable on the transaction as its sole role is to
inform the seller of the existence of the credit. Indicia of its role as an advising bank can be
found on the letter of credit itself (e.g. the draft that will be used for payment would be
partly the engagement of the Bank of Ayudhya, which is the issuing bank), a letter of advice
(and related fees that were paid by Inter-Resin), and a letter expressly stating that Bank of
America has no engagement under the letter of credit). Given this, it is not liable on the
letter of credit.
_____________________________________________________________________________________________
_________________________________
PRUDENTIAL BANK v. IAC, PHILIPPINE RAYON MILLS INC., ANACLETO R. CHI
G.R. No. 74886, December 8, 1992, DAVIDE, JR. J.
Liability on a letter of credit is created through the honouring of drafts or other
demands for payment upon compliance with the conditions specified in the credit. When this
occurs, a bank substitutes its own promise to pay (and would later pay a certain seller) in
place of a customer (who would reimburse the bank).
Facts:
Philippine Rayon Mills (PRMI) entered into a contract with Nissho Co., Ltd of Japan for
the importation of textile machineries.. PRMI applied for a commercial letter of credit (LOC)
with Prudential Bank and Trust Company in favor of Nissho. Against this LOC, sight drafts
were drawn and issued by Nissho, which were all paid by the Prudential Bank through its
correspondent in Japan, the Bank of Tokyo. These drafts were accepted by PRMI through its
president, Anacleto Chi. Upon arrival of machineries, Prudential Bank indorsed the shipping
documents to PRMI, which accepted delivery of the same.
PRMI executed, by prior arrangement with PB, a trust receipt (TC) which was signed
by Anacleto Chi in his capacity as President. At the back of the trust receipt is a printed form
to be accomplished by 2 sureties who are jointly and severally liable to the PB should PRMI
fail to pay the total amount or any portion of the drafts.
PRMI ceased business operation. The obligation of PRMI from the LOC and TC
remained unpaid and unliquidated. Demands were made but yielded no result.
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Prudential Bank then instituted an action for collection against PRMI and Analceto
Chi.
Issue:
WhetherPRMI is liable on the basis of the letter of credit.
Ruling:
YES. A letter of credit is an engagement by a bank or other person made at the
request of a customer that the issuer will honor drafts or other demands for payment upon
compliance with the conditions specified in the credit. Through a LOC, the bank merely
substitutes its own promise to pay for one of its customers who in return promised to pay
the bank the amount of funds mentioned (in this case, PRMI, in order to make purchases
with Nissho).
In this case, the drawee (the bank that would honor the drafts) was Prudential Bank.
It was to Prudential Bank that the drafts were presented for payment-- in this case, sight
drafts payable on demand (the presentment). When the sight drafts were presented, based
on the engagement in the letter of credit, Prudential Bank would make payments to the
seller, Nissho, and would be reimbursed by the buyer, PRMI. In this regard, PRMI is liable on
the basis of the letter of credit.
_____________________________________________________________________________________________
_________________________________
FEATI BANK and TRUST COMPANY v. COURT OF APPEALS and BERNARDO E.
VILLALUZ
G.R. No. 94209, April 30, 1991, GUTIERREZ, Jr. J.
A letter of credit, though possibly used as collateral, is an undertaking in itself,
distinct from the other contracts related to it (e.g. sale). A breach in a related contract
generally does not create liability in other contractsone such exception to this rule is when
a corresponding bank takes the role of a confirming bank in the transaction, as the bank
assumes a direct and primary obligation as if it had issued the letter of credit.
Facts:
Bernando Villaluz agreed to sell to Axel Christiansen lauan logs. Upon inspecting the
logs, Christiansen issued a purchase order. To pay for the logs, upon the instructions of the
consignee, Hanmi Trade Development, the Security Pacific National Bank of Los Angeles
(SPNB) issued an Irrevocable Letter of Credit available at sight in favor of Villaluz for the
purchase price of the logs. The letter of credit was mailed to Feati Bank and Trust Company
(Feati Bank) with the instruction that it be forwarded to the beneficiary.
The draft would be drawn on SPNB, and that for it to be honored, it must be
accompanied with several documents, including a certification from Christiansen stating that
the logs have been approved before shipment in line with the purchase order.
The logs were loaded on the shipping vessel and inspected by customs inspectors,
who all certified the good condition and exportability of the logs. Notwithstanding the
favorable conditions, Christiansen refused to issue the certification required by the letter of
credit in spite of requests made by Villaluz. Without the certification, Feati Bank refused to
advance the payment on the letter of credit. As Christiansen kept up his refusal to issue the
needed certification, the letter of the credit lapsed, while the logs reached their consignee.
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Villaluz then filed a case against Christiansen and Feati Bank in order to compel the
execution of the required certification, and to hold the two liable-- in particular, Feati Bank
for releasing the funds to Christiansen in spite of non-compliance with the requirements in
the letter of credit.
Issue(s):
terms.
Whether Feati Bank is liable under the letter of credit despite non-compliance with its
Ruling:
NO. Two things should be considered here (per BPI v Nery, Art. 2 of Code of
Commerce, and the Uniform Customs and Practice for Documentary Credits): first, in
commercial transactions involving letters of credit, the functions assumed by correspondent
banks depend on the obligations taken up by them. If the bank is a notifying bank, its only
obligation is to transmit to the beneficiary the existence of the letter of credit. If a
negotiating bank, it purchases and discounts drafts under the letter of credit, and it would be
liable depending on the stage of the negotiation-- if prior to negotiation, there is no liability
to the seller but after that, it would breach its contract with the seller. If a confirming bank,
the correspondent bank assumes a direct and primary obligation to assume the obligation as
if the corresponding bank had issued the letter of credit.
Second, a letter of credit (especially an irrevocable letter of credit) is a contract
independent from the contract between the buyer and the seller, and the credit agreement
between the issuing bank and the buyer. Breaches and liabilities in one contract may not
affect the other contracts. That is, while it provides security for commercial transactions, it is
not an accessory contract (such as a guaranty)-- it is a contract with obligations within itself,
some of which are related to those in other contracts (e.g. the letter of credit is used in order
to facilitate a sale, but the letter of credit is not the sale contract-- it is a contract that can be
used as part of the means of payment). Treating the contract as an accessory destroys the
independence of the banks responsibility from the contract upon which it was opened.
Feati Bank's sole involvement is that of a notifying bank. It forwarded the letter of
credit from SPNB to the beneficiary (the seller). Villaluz claims that Feati is a confirming
bank, that it would carry out SPNB's obligation as if it is own since there was a prior loan
agreement that anticipated the letter of credit (characterizing it as a confirmation and as an
accessory). However, the law requires that the undertaking be absolutely spelled out in
order for a bank to be considered confirming. Neither can Feati be considered a negotiating
bank with liability, as there did not seem to be any negotiation that would create a
contractual relationship. Without these, it does appear that Feati Bank really only advised
Villaluz of the letter of credit, and entered into no other obligation with him. It is not privy to
whatever agreements Villaluz may have had with Christiansen. Apparently, Villaluz had a
contract akin to one with services with Christiansen, which the latter breached when he
refused to issue the certification. However, his unjustified refusal is a matter between the
two men, and not the bank.
_____________________________________________________________________________________________
_________________________________
MWSS v. HON. REYNALDO DAWAY and MAYNILAD WATER SERVICES
G.R. No. 160732, June 21, 2004, AZCUNA, J.
Except when a letter of credit specifically stipulates otherwise, the obligation of the
banks issuing letters of credit are solidary with that of the person or entity requesting for its
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issuance, since a letter of credit constitutes a direct, primary, absolute and definite
undertaking to pay the beneficiary upon the presentation of the set of documents required
therein.
Facts:
MWSS granted Maynilad, under a Concession Agreement, a twenty-year period to
conduct various services for the existing MWSS water delivery and sewerage services in the
West Zone Service Area, for which Maynilad undertook to pay the corresponding concession
fees on the dates agreed upon in the said agreement. Among the means they relied upon
are foreign loans. To secure Maynilad's performance of obligations under the agreement,
Maynilad was required to put up a bond, bank guarantee, or other security acceptable to
MWSS. To meet this requirement, Maynilad arranged for a three-year credit facility with
foreign banks, led by Citicorp International Ltd., for the issuance of an Irrevocable Standby
Letter of Credit in favor of MWSS.
Months after the arrangement, Maynilad and MWSS had difficulties negotiating
possible solutions to Maynilad's supposed losses given the PHP's depreciation against the
USD, even leading to unilateral suspension of payment of concession fees. They eventually
reached an agreement.
In spite of that agreement, Maynilad served upon MWSS a Notice of Event of
Termination, claiming that MWSS failed to comply with its obligations under the Concession
Agreement and their agreed-upon amendments. MWSS challenged this, leading to an award
in favor of MWSS.
As a result, MWSS submitted a written notice to Citicorp, as agent of the foreign
banks, that by virtue of Maynilad's failure to perform its obligations under the Concession
agreement, it would draw on the mentioned letter of credit. Prior to this, Maynilad filed a
petition for rehabilitation which resulted in Stay Orders that would conflict with the letter of
credit.
Issue:
Whether MWSS may draw on the letter of credit in spite of the stay order.
Ruling:
YES. As stated in Feati Bank v. CA, an irrevocable letter of credit is not a guaranty-that is, not an accessory contract, but a primary obligation by a bank or other person made
at the request of a customer that the issuer shall honor drafts or other demands of payment
upon compliance with conditions specified in the credit. What distinguishes a letter of credit
from other accessory contracts is that an issuing bank is to pay the seller upon presentment
of the draft and required shipping documents. In effect, an undertaking to pay at sight
conditioned upon delivery of the required documents.
This should be read alongside the rule on rehabilitation stay orders. Stay orders
prevent the enforcement of claims against the debtor, and guarantees and sureties who are
not solidarily liable with the debtor.
The claim is one against the participating banks. Based on the letter of credit (in fact,
explicit in its terms), they have a primary, direct, definite and absolute undertaking to pay
that is not conditioned on prior exhaustion of the debtor's assets: a surety. As such, the
doctrine in Traders Royal Bank v CA applies: the claims can be pursued separately from and
independently of the rehabilitation case.
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_____________________________________________________________________________________________
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RELIANCE COMMODITIES v. DAEWOO INDUSTRIAL CO., LTD.
G.R. No. L-100831, December 17, 1993, FELICIANO, J.
Letters of credit transactions are composed of at least three distinct relationships
concretized in a contract or set thereof. Such relationships may form obligations that exist
and are enforceable separately.
Facts:
Reliance Commodities and Daewoo entered into a contract of sale under the terms of
which Daewoo would ship and deliver foundry pig iron. Pursuant to this, Daewoo shipped
from Korea the said stock, but when the cargo arrived in Manila, it came out short.
Months later, another set of contracts were made, with the final contract including a
provision on payment through an irrevocable letter of credit in favor of Daewoo. To
accomplish this, Reliance filed with Chinabank an application for a letter of credit in favor of
Daewoo. Such was endorsed to the Iron and Steel Authority for approval, but was denied.
Because of the denial, Reliance had to submit purchase orders from end-users to support its
application for a letter of credit, but did not make its target. Daewoo rejected the proposed
letter of credit.
As it turned out, the failure of Reliance to open the letter of credit was due to its
exceeding its foreign exchange allocation. Daewoo was forced to sell the pig iron to another
buyer at a lower price in order to recoup some of its losses, and then requested payment for
the amount represented by the short delivery. The request failed, leading to an action for
damages with the trial court.
Issue:
Whether or not the failure of Reliance (an importer) to open a letter of credit on the
terms agreed upon makes it liable to Daewoo (exporter) for damages.
Ruling:
YES. A letter of credit transaction is a composite of at least three distinct but
intertwined relationships being concretized in the contract: the account party or buyer or
importer to the beneficiary of the letter of credit (export or seller)-- here, Reliance agrees to
pay Daewoo based on the terms of the contract; the account party and the issuing bank (the
Application)-- Reliance tried to apply to Chinabank for the letter of credit, and had the letter
of credit been approved, they would reimburse the bank for amounts paid by that bank
pursuant to the letter of credit; and the issuing bank and the beneficiary, in order to support
the contract; finally, the account party and the beneficiary to, inter alia, pay certain monies
to each other. Other parties may be included, but the foregoing are indispensable. Note that
these relationships represent different obligations that have separate lifespans.
This case is centered on the contractual relation between the importer and exporter
(the first one). Although the contract refers to a letter of credit, it was not meant to be a
condition precedent-- only a mode of payment. The contract had already been perfected.
Consequently, the rights and obligations embodied in the contract now arise regardless of
the failure of the application for the letter of credit-- it was enforceable.
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The letter of credit was the mechanism of payment for the pig iron. When an issuing
bank undertakes to accept or pay the drafts presented, the bank in effect issues a loan to
the account party. This feature, along with the bank's undertaking to accept the beneficiary's
drafts drawn on the bank, is what makes a letter of credit a mode of payment.
_____________________________________________________________________________________________
_________________________________
CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP, RICHARD VELASCO
and ALFONSO CO v. CA, PHILIPPINE BANK OF COMMUNICATIONS
G.R. No. 117914, February 1, 2002, DE LEON, JR, J.
A letter of credit is not a negotiable instrument, which does not allow the pertinent
presumptions to apply, but instruments issued in conjunction with a letter of credit, such as
bank drafts, may be negotiable.
Facts:
Charles Lee, as President of MICO Metals (MICO) wrote private respondent Philippine
Bank of Communications (PBCom) requesting for a grant of a discounting loan/credit line in
the sum of three million pesos for the purpose of carrying out MICOs line of business as well
as to maintain its volume of business. On the same day, Charles Lee requested for another
discounting loan/credit line of three million pesos from PBCom for the purpose of opening
letters of credit and trust receipts. The proceeds of the loans were credited to their checking
account with the Philippine Bank of Communications (PBCom). Lee and several other officers
of the company executed surety agreements as part of the security for the loans.
Sometime after, MICO then filed applications for domestic and foreign letters of
credit. When the applications were approved, trust receipts were executed in favor of
PBCom, and in the case of the foreign letters of credit, bills of lading and commercial
invoices. These facilities were availed of by their beneficiaries, and drafts were issued and
later accepted by MICO.
MICO was eventually unable to repay their debts, leading to foreclosure of a real
estate mortgage also used as security, but that was not enough to completely pay the
obligation (there were still remaining trust receipts liabilities, for example). PBCom then
demanded settlement with Lee and the other sureties, but they refused to acknowledge
their obligations. Aggrieved, PBCom filed a complaint with prayer for writ of preliminary
attachment before the RTC of Manila. Failure of delivery was one of the defences considered
by the RTC in ruling in favour of MICO. In the CA, the Court relied on two presumptions to
overturn the ruling: (1) that a negotiable instrument is deemed prima facie issued for
valuable consideration and every person whose signature appears thereon is a party for
value, and (2) that an instrument sets out the true agreement of the parties thereto and that
it was executed for valuable consideration.
Issue:
Whether the CA erred in treating the letters of credit and trust receipts as negotiable
instruments.
Ruling:
YES. Two presumptions were established by PBCom when it presented several
documents, including letters of credit, trust receipts, and drafts. First, that a negotiable
instrument is deemed prima facie issued for valuable consideration and that every person
whose signature appears thereon to be a party for value. While letters of credit and trust
8 | Page

receipts are not negotiable instruments, bank drafts executed in connection with letters of
credit, which are distinct instruments, are negotiable. Second, that sufficient consideration
was given in a contract.
The documents allowed these presumptions to arise (particularly on the drafts, since
they were negotiable instruments), creating not merely a prima facie case but actual proof
of a solidary obligation between MICO and Lee (as well as the other sureties that signed).
They establish that the agreements were availed of, and the proceeds were delivered to
MICO.
_____________________________________________________________________________________________
_________________________________
BANK OF COMMERCE v. TERESITA S. SERRANO
G.R. No. 151895, February 16, 2005, QUISUMBING, J.
A letter of credit is a distinct from a trust receipt, creating separate obligations and
liabilities.
Facts:
Via Moda International, represented by Teresita Serrano, obtained an export packing
loan from Bank of Commerce (BOC), secured by a Deed of Assignment over an irrevocable
transferable letter of credit. Serrano executed in favor of BOC a promissory note for the
amount of the loan. Afterward, Via Moda opened a deposit account for the loan's proceeds.
Sometime after, BOC issued to Via Moda the subject irrevocable letter of credit for
the purchase and importation of fabric and textile products from Tiger East Fabric Co. Ltd. of
Taiwan. To secure the release of the goods covered, Serrano, in representation of Via Moda,
executed a trust receipt covering the shipment. The goods were shipped by Via Moda to its
proper consignee. However, the proceeds of the goods were not credited to the trust receipt,
but were applied to the export packing loan.
BOC then sent a demand letter to Via Moda for the payment of the obligation on the
trust receipts, or return of the goods covered. The demand was not heeded, leading to an
estafa case against Serrano. After an RTC ruling in favor of BOC, the CA acquitted Serrano
and said that she was not civilly liable.
Issue:
Whether Serrano is civilly liable based on the non-payment of the trust receipt.
Ruling:
NO. A letter of credit is a separate document from a trust receipt. While the trust
receipt may have been executed as security on the letter of credit, the two documents
involve different undertakings and obligations. The former is an engagement by a bank or
other person made at the request of a customer that the issuer will honor drafts or other
demands for payment upon compliance with the conditions specified in the credit. In
contrast, the latter is one where the entruster, who holds an absolute title or security
interests over certain goods, documents or instruments, released the same to the entrustee,
who executes a trust receipt binding himself to hold the goods, documents or instruments in
trust for the entruster and to sell or otherwise dispose of the goods, documents and
instruments with the obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster, or as appears in the trust receipt, or return the
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goods, documents or instruments themselves if they are unsold, or not otherwise disposed
of, in accordance with the terms and conditions specified in the trust receipt.
To BOC, Serrano has to account for two obligations: the guarantee clause in the letter
of credit, and the trust receipt. In the case of the former, the issue was never raised until the
SC, and was not considered by it. In the case of the latter, there was nothing on the trust
receipt that showed that Serrano was personally liable, or that she guaranteed the
obligation. Serrano merely represented Via Moda, which has a separate personality from her.
Without reason to justify the piercing of the veil of corporate fiction, the obligation on the
trust receipt could not pertain to her.
Moreover, the SC agreed with the CA in finding that there was no misappropriation or
conversion by Serrano of the proceeds of the sale in the good subject of the trust receipt
because it was BOC that unilaterally applied the proceeds to the export packing loan. It
should not create liability on Serrano who did not take part or have any knowledge thereof.
Hence, Serrano is not liable.
Laws Governing of Letters of Credit

BANK OF THE PHILIPPINE ISLANDS v. DE RENY FABRIC INDUSTRIES
G.R. No. L-24821, October 16, 1970, CASTRO, J.
In the absence of provision in our local laws, letters of credit are governed by
established usage and customs in commerce (e.g. Uniform Customs and Practices for
Commercial Documentary Credits Fixed for the Thirteenth Congress of International
Chamber of Commerce).
Facts:
De Reny Fabric Industries, through its president and secretary, applied to BPI for four
irrevocable commercial letters of credit to cover the purchase by the corporation of dyestuffs
of various colors from, JB. The applications were approved, and the letters of credit were
executed. Under these agreements, the president and secretary bound themselves
personally as joint and solidary debtors with the corporation.
By virtue of these transactions, BPI issued irrevocable commercial letters of credit
addressed to its correspond banks in the US, with instructions to inform the American
supplier that they have been authorized to negotiate the latter's sight drafts up to the
amountsmentioned therein, respectively, if accompanied, upon presentation, by a full set of
negotiable clean "on board" ocean bills of lading, covering the dyestuff. JB availed of these
facilities; with those availments, the correspondent banks then debited BPI's account with
them.
When the shipments arrived in the Philippines, De Reny made partial payments but
these were discontinued when it turned out the goods were actually colored chalk instead of
dyestuff. De Reny refused to take possession of the goods, leading to BPI depositing the
same in a bonded warehouse, and the present case for collection. One of De Reny's
defenses is that BPI has the duty to take the necessary precautions to insure that the goods
shipped under the covering letters of credit conformed with the item appearing therein. Any
losses that accrued should be burdened by BPI.
Issue:
10 | P a g e

Whether BPI insures that the goods shipped conform to the letters of credit.
Ruling:
NO. First, the letter of credit agreements show that the parties agreed that BPI shall
not be responsible for differences in character, quality, quantity, condition or value of the
property from that expressed in their documents (here, the dyestuff). Second, absent such
provision, Art. 10 of the Uniform Customs and Practices for Commercial Documentary Credits
Fixed for the Thirteenth Congress of International Chamber of Commerce, of which the
Philipines is a signatory, states that in documentary credit operations, all parties concerned
deal in documents and not in goods. The bank is not required to verify the goods
themselves-- the bank was only tapped in order to allow engagement in international
business. Such is a custom applicable to commercial transactions that will apply regardless
of the lack of provision in the contract and in our laws.
BPI cannot be liable on the agreement due to both contract provisions and a custom
taken as part of our law.
Kinds of Letters of Credit

INSULAR BANK of ASIA and AMERICA v. INTERMEDIATE APPELLATE COURT,
THE PHILIPPINE AMERICAN LIFE INSURANCE CO., SPS. MENDOZA
G.R. No. 74834, November 17, 1988, MELENCIO-HERRERA, J.
A standby letter of credit is a definite undertaking to pay a money advanced or an
amount for which credit is given on the faith of the instrumentin effect, a security, but not
an accessory contract. They are distinct obligations from the original loan which they
secure.
Facts:
The spouses Mendoza obtained two loans from Philam Life to finance the construction
of their house. To secure payments, Philam Life required that amortizations be guaranteed
by an irrevocable standby letter of credit of a commerical bank, leading the Mendozas to
apply for the issuance of two such letters of credit from Insular Bank of Asia and America.
Such letters of credit were in turn secured by a real estate mortgage in favor of the spouses'
property.
The Mendozas failed to pay their loan, so that Philam Life informed Insular Bank that
it was declaring both loans as entirely due and demandable, and demanded their payment.
IBAA contested the propriety of calling in the entire loan, so Philam Life desisted and
resumed availing of the letters of credit by drawing on them for five more amoritzations.
As time passed, the Mendozas still defaulted on their amortization, leading to another
declaration that the entire balance be immediately due and demandable. Philam Life also
demanded payment from Insular Bank, but it argued that it was a mere guarantor of the
Mendozas, and that its obligation was much less than what Philam Life demanded. It even
demanded a refund as the Mendozas made partial payments that reduced their liability.
While this went on, the real estate mortgage was foreclosed. Soon after, Philam Life
sued the spouses and Insular Bank for the recovery of the supposed balance.
11 | P a g e

Issue:
Whether or not partial payments made by the principal debtors (Mendoza spouses)
would reduce the liability of the guarantor (Insular Bank) under the terms of the standby
letter of credit.
Ruling:
NO. In construing the terms of a letter of credit, as in other contracts, it is the
intention of the parties that must govern, also considering the usages of the particular trade
of business contemplated. The standby letter of credit secures the payment of any
obligation of the debtor to the creditor. However, while they are security arrangements, they
are not contracts of guaranty. Rather, they are primary, independent contracts that
underline absolute undertakings to pay the money advanced or the amount for which credit
is given on the faith of the instrument.
Because of this, partial payments made by the Mendozas cannot be used in
computing Insular Bank's liability under its own standby letter of credit. Their obligation is
distinct from the Mendoza's, although they are related.
_____________________________________________________________________________________________
_________________________________
TRANSFIELD PHILIPPINES INC. v. LUZON HYDRO CORPORATION, AUSTRALIA and
NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK CORPORATION
G.R. No. 146717, November 22, 2004, TINGA, J.
A standby letter of credit, while a security arrangement, is not an accessory contract
such as guaranty. Obligations to pay arise upon proof that the principal obligor has failed to
meet his obligation, without need of other proceedings.
Facts:
Transfield and Luzon Hydro Corporation (LHC) entered into a Turnkey contract
whereby Transfield undertook to construct a hydro-electric power station (project). To secure
performance of its obligation, Transfield opened in favor of LHC 2 standby letters ofcredit
(securities), one with Australia and New Zealand Banking Group Limited (ANZ Bank) and one
with Security Bank Corporation (SBC).
Transfield sought various extensions of time to complete the project, due to factors
such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC
denied the requests. LHC filed before the Construction Industry Arbitration Commission
(CIAC) a Request for Arbitration. Transfield filed the same with the International Chamber of
Commerce (ICC).
Foreseeing that LHC would call on the securities, Transfield advised ANZ Bank and
SBC (banks) of the arbitration proceedings, and that LHC had no right to call on the
securities until resolution of the disputes. Transfield warned the banks that any transfer or
release of the securities in favor of LHC would make the banks liable for damages
LHC sent notice to Transfield that it failed to comply with its obligation to complete
the project. LHC then declared Transfield in default/delay. LHC served notice that it would
call on the securities for the payment of damages for the delay. In response, Transfield filed
a comlaint for injunction, seeking to restrain LHC from calling on the securities.
12 | P a g e

Issue:
Whether the beneficiary may call on the letters of credit.
Ruling:
YES. To start, there is a distinction between a commercial credit and a standby
credit. The former is a letter of credit that refers to the payment of money under a contract
of sale, and is payable upon presentation by the seller-beneficiary of documents that show
he has taken affirmative steps to comply with the sales agreement. Meanwhile, the latter is
an undertaking to pay for non-performance of an agreement, and is payable upon showing
that the principal obligor has not performed the related contract. Such letters of credit are
separate contracts from the contracts by which they are based, even if such contracts are
referenced in the credit (the independence principle).
The letter of credit in this case is a standby letter of credit. By its nature, it is
practically ministerial for LHC to call on the securities upon Transfield's default. To require a
prior negotiation or arbitration would be to convert the same into a guarantee, which is not
the nature of a letter of credit. Note that the securities admit their liability.
Moreover, LHC's right is not only rooted in the law and usages in business, but the
contract itself. All in all, Transfield cannot pursue the injunction.
_____________________________________________________________________________________________
_________________________________
PHILIPPINE VIRGINIA TOBACCO ADMINISTRATIONv.HON. WALFRIDO DE LOS
ANGELES, Judge of the Court of First Instance of Rizal, Branch IV (Quezon City)
and TIMOTEO A. SEVILLA, doing business under the name and style of PHILIPPINE
ASSOCIATED RESOURCES and PRUDENTIAL BANK AND TRUST COMPANY
G.R. No.L-27829, August 19, 1988, Paras, J.
An irrevocable letter of credit cannot, during its lifetime, be cancelled or modified

without the express permission of the beneficiary.
Facts:
Timoteo Sevilla, proprietor and General Manager of the Philippine Associated
Resources (PAR) entered into a contract for the importation of kilos of Virginia leaf tobacco
and Farmers tobacco. Due to prevailing export or world market price under which Sevilla will
be exporting at a loss, the parties agreed that Sevilla shall open an irrevocable letter of
credit with the Prudential Bank and Trust Co. (Prudential Bank) in favor of Philippine Virginia
Tobacco Administration (PVTA)
While Sevilla was trying to negotiate the reduction of the procurement cost of the
PVTA tobacco already exported, PVTA prepared two (2) drafts to be drawn against the said
letter of credit for the amounts which have become due and payable. Sevilla filed an
injunction against the release of funds with Prudential Bank which was not granted byJudge
Delos Angeles. Consequently, Judge Delos Angeles issued an order directing Prudential Bank
to make the questioned release of funds from the letters of credit.
Issue:
13 | P a g e

Whether the respondent judgeacted with grave abuse of discretion in releasing the
funds from the letters of credit.
Ruling:
YES. Respondent Judge violated the irrevocability of the letter of credit issued by
respondent Bank in favor of petitioner. An irrevocable letter of credit cannot during its
lifetime be cancelled or modified Without the express permission of the beneficiary (Miranda
and Garrovilla, Principles of Money Credit and Banking, Revised Edition, p. 291).
Consequently, if the finding the trial on the merits is that respondent Sevilla has alleged
unpaid balance due the petitioner, such unpaid obligation would be unsecured.
_____________________________________________________________________________________________
_________________________________
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION) v.
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ
G.R. No. 94209, April 30, 1991, Gutierrez, Jr., J.
The correspondent bank may be called a notifying bank, a negotiating bank, or a
confirming bank.In case of a notifying bank, the correspondent bank assumes no liability
except to notify and/or transmit to the beneficiary the existence of the letter of credit.A
negotiating bank, on the other hand, is a correspondent bank which buys or discounts a
draft under the letter of credit. In the case of a confirming bank, the correspondent bank
assumes a direct obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit
Facts:
Bernardo Villaluz agreed to sell Lauan logs to Axel Christiansen which the latter will
sell to Hanmi Trade Development, Inc. in Korea. Thereafter, Security Pacific National Bank of
Los Angeles (Issuing bank) issued an irrevocable letter of credit in favor of Villaluz.
Thereafter, the issuing bank instructed Feati Bank & Trust Company (Corresponding bank)
through an email to forward the enclosed letter of credit to Villaluz. The said letter of credit
provided terms and conditions which include a certification from Christiansen that logs have
been approved prior to its shipment in accordance with the latters purchasing order. Also
incorporated by reference in the letter of credit is the Uniform Customs and Practice for
Documentary Credits.
Subsequently, when the logs were loaded on the ship after passing the inspection,
Christiansen refused to issue the said certification, hence, when Villaluz presented the other
documents in compliance with the terms and conditions, Feati refused payment on the letter
of credit.
Since the demands by Villaluz for Christiansen to execute the certification proved
futile, the former, instituted an action for mandamus and specific performance against
Christiansen andFeatibefore Court of First Instance (CFI) of Rizal. It ruled that Feati assumed
the very same undertaking as the issuing bank under the terms of an irrevocable letter of
credit by accepting the instructions from the issuing bank. The Court of Appeals affirmed the
CFI decision on the ground that when Featiaccepted its role as the notifying and negotiating
bank for and in behalf of the issuing bank, it in effect accepted a trust reposed on it, and
became a trustee in relation to plaintiff as the beneficiary of the letter of credit.Thus, Feati
cannot be allowed to deny its commitment and liability under the letter of credit.
Issue:
14 | P a g e

Whether a correspondent bank should be held liable under the letter of credit despite
non-compliance by the beneficiary with the terms thereof.
Ruling:
NO.Since Featiwas only a notifying bank, its responsibility was solely to notify and/or
transmit the documentary of credit to the private respondent and its obligation ends there.
The notifying bank may suggest to the seller its willingness to negotiate, but this fact
alone does not imply that the notifying bank promises to accept the draft drawn under the
documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and the
seller, its relationship is only with that of the issuing bank and not with the beneficiary to
whom he assumes no liability.
In order that the petitioner may be held liable under the letter, there should be proof
that the petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that the
petitioner has confirmed the letter of credit.
There must have been an absolute assurance on the part of the petitioner that it will
undertake the issuing bank's obligation as its own.
Parties to a Letter of Credit
RELIANCE COMMODITIES, INC.v.DAEWOO INDUSTRIAL CO., LTD.

G.R. No.L-100831, December 17, 1993, Feliciano, J.
The primary purpose of the letter of credit is to substitute for and therefore support
the agreement of the buyer/importer to pay money under a contract or other arrangement.
It creates in the seller/exporter a secure expectation of payment.
Facts:
Reliance Commodities, Inc. entered a contract of sale with Daewoo Industrial Co., Ltd.
whereby the latter shall deliver 2,000 metric tons of foundry pig iron at a certain price. Both
parties likewise agreed that Reliance shall secure a letter of credit (L/C) in favor of Daewoo.
Consequently, Reliance failed to secure the L/C having exceeded its foreign exchange
allocation and to raise purchase orders for 2,000 metric tons as required by the Iron and
Steel Authority (ISA).
Corollarily, when the goods were shipped, it fell short of 135 metric tons of foundry
pig iron prompting Reliance to file for damages against Daewoo. However, the latter
contended that Reliance breached their contract for failure to secure the L/C hence should
be liable for damages. The trial court ruled that Reliance is guilty of breach of contract while
Daewoo must pay for the amount representing the value of the short delivered goods plus
interest. Reliance filed an appeal contending that the opening of the L/C is a condition
15 | P a g e

precedent to the effectivity of the contract between therefore it should not be held liable.
The Court of Appeals found no merit in Reliances contention. Hence, this petition was filed.
Issue:
Whether the failure of an importer (Reliance) to open a letter of credit as a condition

for another contract make it liable.
Ruling:
YES.A letter of credit transaction may be seen to be a composite of at least three (3)
distinct but intertwined relationships being concretized in a contract:
(a) One contract relationship links the party applying for the L/C (the account party or
buyer or importer) and the party for whose benefit the L/C is issued (the beneficiary or seller
or exporter). In this contract, the account party, here Reliance, agrees, among other things
and subject to the terms and conditions of the contract, to pay money to the beneficiary,
here Daewoo.
(b) A second contract relationship is between the account party and the issuing bank.
Under this contract, (sometimes called the "Application and Agreement" or the
"Reimbursement Agreement"), the account party among other things, applies to the issuing
bank for a specified L/C and agrees to reimburse the bank for amounts paid by that bank
pursuant to the L/C.
(c) The third contract relationship is established between the issuing bank and the
beneficiary, in order to support the contract.
We believe and so hold that failure of a buyer seasonably to furnish an agreed letter
of credit is a breach of the contract between buyer and seller. Where the buyer fails to open
a letter of credit as stipulated, the seller or exporter is entitled to claim damages for such
breach. Damages for failure to open a commercial credit may, in appropriate cases, include
the loss of profit which the seller would reasonably have made had the transaction been
carried out.
_____________________________________________________________________________________________
_________________________________
16 | P a g e
PRUDENTIAL BANKv.INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS,

INC. and ANACLETO R. CHI
G.R. No. 74886, December 8, 1992, Davide, Jr., J.
Commercial letters of credit have come into general use in international sales
transactions where much time necessarily elapses between the sale and the receipt by a
purchaser of the merchandise, during which interval great price changes may occur. Buyers
and sellers struggle for the advantage of position. The seller is desirous of being paid as
surely and as soon as possible, realizing that the vendee at a distant point has it in his
power to reject on trivial grounds merchandise on arrival, and cause considerable hardship
to the shipper. Letters of credit meet this condition by affording celerity and certainty of
payment.
Facts:
Philippine Rayon Mills entered into a contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries. To effect its payment, Rayon applied for a commercial
letter of credit with Prudential Bank and Trust Company in favor of Nissho which was
granted. After the drafts were drawn, Prudential Bank through its correspondent in Japan,
paid the amount of the machineries pursuant to the L/C. Consequently, Rayon ceased its
business operation and sold the textile machineries while the drafts remained unpaid in
spite of Prudential Banks demands. Hence, Prudential Bank filed an action for collection of
the principal amount against Rayon. However, the latter interposed the defense that the
drafts were not presented to it for acceptance therefore its liability to reimburse did not
arise. On the other hand, Prudential Bank averred that the drafts, being sight drafts, did not
require presentment for acceptance to Rayon. The trial court ruled in favor of the latter on
the ground that since the drafts were not presented and accepted, no valid demand for
payment can be made.
Issue:
Whether or not the presentment for acceptance of the drafts was indispensable to
make Philippine Rayon liable.
Ruling:
NO. A letter of credit is defined as an engagement by a bank or other person made

at the request of a customer that the issuer will honor drafts or other demands for payment
upon compliance with the conditions specified in the credit. Through a letter of credit, the
bank merely substitutes its own promise to pay for one of its customers who in return
promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or
commitment fees mutually agreed upon. In the instant case then, the drawee was
necessarily the herein petitioner. It was to the latter that the drafts were presented for
payment. In fact, there was no need for acceptance as the issued drafts are sight drafts.
Presentment for acceptance is necessary only in the cases expressly provided for in Section
143 of the Negotiable Instruments Law (NIL).
17 | P a g e
A different conclusion would violate the principle upon which commercial letters of
credit are founded because in such a case, both the beneficiary and the issuer, Nissho
Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine
Rayon even if the latter had already received the imported machinery and the petitioner had
fully paid for it.
_____________________________________________________________________________________________
_________________________________
RODZSSEN SUPPLY CO. INC. v. FAR EAST BANK & TRUST CO.
G.R. No. 109087, May 9, 2001, Panganiban, J.
When both parties to a transaction are mutually negligent in the performance of their
obligations, the fault of one cancels the negligence of the other. Thus, their rights and
obligations may be determined equitably. No one shall enrich oneself at the expense of
another.
Facts:
Rodzssen Supply Inc. applied for and obtained an irrevocable Letter of Credit from Far
East Bank and Trust Company Inc. in favor of Ekman and Company Inc., in order to finance
the purchase of five (5) units of hydraulic loaders in the amount of P190,000. For the first
three (3) hydraulic loaders that were delivered, the bank paid the amount specified in the
letter of credit. Five months after the expiration of the L/C, Far East paid Ekman the amount
of the last two (2) hydraulic loaders which were voluntarily received by Rodzssen. After four
years (4), Far East sought for the payment of the 2 hydraulic loaders against Rodzssen but to
no avail. Hence, it filed a complaint to recover its value. Rodzssen contended that Far East
acted in bad faith when it paid Ekman for the 2 hydraulic loaders from Ekman in spite of the
expiration of the L/C. Hence, Rodzssen was no longer bound to reimburse Far East under the
subject L/C.
Issue:
Whether or not it is proper for a banking institution to pay a letter of credit which has
long expired or been cancelled.
Ruling:
NO. The subject Letter of Credit had become invalid upon the lapse of the period
fixed therein.Thus, respondent should not have paid Ekman; it was not obliged to do so. In
the same vein, of no moment was Ekmans presentation, within the prescribed period, of all
the documents necessary for collection, as the Letter of Credit had already expired and had
in fact been cancelled.
Indeed, equitable considerations behoove us to allow recovery by respondent. True, it
erred in paying Ekman, but petitioner itself was not without fault in the transaction. It must
be noted that the latter had voluntarily received and kept the loaders since October 1979.
Petitioner claims that it accepted the late delivery of the equipment, only because it
was bound to accept it under the companys trust receipt arrangement with respondent
bank.
18 | P a g e

Granting that petitioner was bound under such arrangement to accept the late
delivery of the equipment, we note its unexplained inaction for almost four years with regard
to the status of the ownership or possession of the loaders. Bewildering was its lack of action
to validate the ownership and possession of the loaders, as well as its stolidity over the
purported failed sales transaction. Significant too is the fact that it formalized its offer to
return the two pieces of equipment only after respondents demand for payment, which
came more than three years after it accepted delivery.
_____________________________________________________________________________________________
_________________________________
RAMON L. ABAD v. HON. COURT OF APPEALS & THE PHILIPPINE COMMERCIAL AND
INDUSTRIAL BANK
G.R. No.L-42735, January 22, 1990, Grino-Aquino, J.
The marginal deposit requirement for letters of credit has been discontinued, except
in those cases where the applicant for a letter of credit is not known to the bank or does not
maintain
a
good
credit
standing
therein.
Facts:
TOMCO, Inc., now known as Southeast Timber Co. (Phils.), Inc., applied for, and was
granted by the Philippine Commercial and Industrial Bank (PCIB), a domestic letter of credit
for P 80,000 in favor of Oregon Industries, Inc., to pay for one Skagit Yarder with accessories.
PCIB paid to Oregon Industries the cost of the machinery with recourse, presentment and
notice of dishonor waived, and with date of maturity on January 4, 1964.
After making the required marginal deposit of P28,000 on November 5, 1963,

TOMCO, Inc. signed and delivered to the bank a trust receipt acknowledging receipt of the
merchandise in trust for the bank. In consideration of the release to TOMCO, Inc. by PCIB of
the machinery covered by the trust receipt, petitioner Ramon Abad signed an undertaking
entitled, "Deed of Continuing Guaranty" appearing on the back of the trust receipt, whereby
he promised to pay the obligation jointly and severally with TOMCO, Inc.Except for TOMCO's
P28,000 marginal deposit in the bank, no payment has been made to PCIB by either TOMCO,
Inc. or its surety, Abad, on the P80,000 letter of credit.
The bank sued TOMCO, Inc. and Abad. TOMCO did not deny its liability to PCIB under
the letter of credit but it alleged that inasmuch as it made a marginal deposit of P28,000,
this amount should have been deducted from its principal obligation.The trial court rendered
judgment in favor of PCIB, which was affirmed by CA.
19 | P a g e
Issue:
Whether or not the debtor (or its surety) is entitled to deduct the debtor's cash
marginal deposit from the principal obligation under a letter of credit and to have the
interest charges computed only on the balance of the said obligation.
Ruling:
YES. It is only fair then that the importer's marginal deposit (if one was made, as in
this case), should be set off against his debt, for while the importer earns no interest on his
marginal deposit, the bank, apart from being able to use said deposit for its own purposes,
also earns interest on the money it loaned to the importer. It would be onerous to compute
interest and other charges on the face value of the letter of credit which the bank issued,
without first crediting or setting off the marginal deposit which the importer paid to the
bank. Compensation is proper and should take effect by operation of law because the
requisites in Article 1279 of the Civil Code are present and should extinguish both debts to
the concurrent amount (Art. 1290, Civil Code). Although Abad is only a surety, he may set up
compensation as regards what the creditor owes the principal debtor, TOMCO (Art. 1280,
Civil Code).
It is not farfetched to assume that the bank used TOMCO's marginal deposit to
partially fund the P80,000 letter of credit it issued to TOMCO, hence, the interests and other
charges on said letter of credit should be levied only on the balance of P52,000 which was
the portion that was actually funded or loaned by the bank from its own funds. Requiring the
importer to pay interest on the entire letter of credit without deducting first him marginal
deposit, would be a clear case of unjust enrichment by the bank.
_____________________________________________________________________________________________
_________________________________
THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK) v. THE COURT
OF APPEALS, CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and SPOUSE
G.R. No. 114286. April 19, 2001, Ynares-Santiago, J.
The practice of banks of making borrowers sign trust receipts to facilitate collection
of loans and place them under the threats of criminal prosecution should they be unable to
pay it may be unjust and inequitable, if not reprehensible. Such agreements are contracts of
20 | P a g e

adhesion which borrowers have no option but to sign lest their loan be disapproved. The
resort to this scheme leaves poor and hapless borrowers at the mercy of banks.
Facts:
Continental Cement Corporation applied and obtained a letter of credit with
Consolidated Bank and Trust Corporation to purchase bunker fuel oils from Petrophil
Corporation. Thereafter, Continental paid a marginal deposit. Consequently, Petrophil
delivered directly to Continentals powerplant the bunker fuels oil. Subsequently, Continental
executed a trust receipt for the amount Consolidated Bank. Claiming that Continental failed
to turn over the goods covered by the trust receipt or the proceeds thereof, Consolidated
Bank filed a complaint for sum of money with application for preliminary attachmentbefore
the Regional Trial Court (RTC) of Manila. In answer to the complaint, respondents averred
that the transaction between them was a simple loan and not a trust receipt transaction,
and that that the marginal deposit it made should not be deducted outright from the amount
of the letter of credit.
Issues:
1. Whether or not the contention of Continental Cement Corporation that the marginal deposit
should be applied only after computing the principal and accrued interest is tenable.
2. Whether the transaction with Continental Cement Corporation is a trust receipt transaction.
Ruling:
1. NO. petitioners contention that the marginal deposit made by respondent Corporation
should not be deducted outright from the amount of the letter of credit is untenable.
Petitioner argues that the marginal deposit should be considered only after computing the
principal plus accrued interests and other charges. However, to sustain petitioner on this
score would be to countenance a clear case of unjust enrichment, for while a marginal
deposit earns no interest in favor of the debtor-depositor, the bank is not only able to use
the same for its own purposes, interest-free, but is also able to earn interest on the money
loaned to respondent Corporation. Indeed, it would be onerous to compute interest and
other charges on the face value of the letter of credit which the petitioner issued, without
first crediting or setting off the marginal deposit which the respondent Corporation paid to it.
Compensation is proper and should take effect by operation of law because the requisites in
Article 1279 of the Civil Code are present and should extinguish both debts to the concurrent
amount.
Hence, the interests and other charges on the subject letter of credit should be computed
only on the balance of P681,075.93, which was the portion actually loaned by the bank to
respondent Corporation.
2. NO. The transaction is a simple loan. The recent case of Colinares v. Court of Appeals
appears to be foursquare with the facts obtaining in the case at bar. There, we found that
inasmuch as the debtor received the goods subject of the trust receipt before the trust
receipt itself was entered into, the transaction in question was a simple loan and not a trust
receipt agreement. Prior to the date of execution of the trust receipt, ownership over the
goods was already transferred to the debtor. This situation is inconsistent with what normally
obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the
bank and are only released to the importer in trust after the loan is granted.
21 | P a g e

In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods
subject of the trust receipt occurred long before the trust receipt itself was executed.
Further, the oil was used up by respondent Corporation in its normal operations. On the
other hand, the subject trust receipt was only executed nearly two months after full delivery
of the oil was made to respondent Corporation.
_____________________________________________________________________________________________
_________________________________
BANK OF AMERICA, NT & SA v.COURT OF APPEALS, INTER-RESIN INDUSTRIAL
CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE DOE
G.R. No. 105395 December 10, 1993, Vitug, J.
Between the seller and the negotiating bank there is the usual relationship existing
between a drawer and purchaser of drafts. Unless drafts drawn in pursuance of the credit
are indicated to be without recourse therefore, the negotiating bank has the ordinary right
of recourse against the seller in the event of dishonor by the issuing bank. The fact that the
correspondent and the negotiating bank may be one and the same does not affect its rights
and obligations in either capacity, although a special agreement is always a possibility.
Facts:
General Chemicals, Ltd. Of Thailand applied for a letter of credit from the Bank of
Ayudhya in favor of Inter-Resin Industrial Corporation for the sale of plastic ropes and
agricultural files. Thereafter, Inter-Resin sought the services of Bank of America (BA) as its
advising bank in relation to the letter of credit. Consequently, BA received through
registered mail an irrevocable letter of credit allegedly from Bank of Ayudyha. Hence, it
informed Inter-Resin of the said letter of credit. To ensure the authenticity of the letter of
credit, Inter-Resin sent its attorney to BA for confirmation. BA failed to confirm its
authenticity however its bank employee explained that there is no need for confirmation
because the letter of credit would not have been transmitted if it were not genuine.
Subsequently, Inter-Resin made a partial availment of the L/C. Upon compliance with
the required documents, BA issued in favor Inter-Resin a cashiers check. Sometime after,
when Inter-Resin pursued for the second availment of the L/C, BA received a telex from Bank
of Ayudhya declaring the L/C as fraudulent. BA sought the assistance of the National Bureau
of Investigation (NBI) which discovered that the vans exported by Inter-Resin did not contain
plastic ropes but plastic strips, wrappers, rages, and waste materials. BA sued Inter-Resin for
the recovery of the peso equivalent of the draft for on the partial availment of the now
disowned letter of credit.
Issue:
Whether Bank of America may recover the amount it paid to Inter-Resin for the
latters partial availment of the disowned letter of credit.
Ruling:
YES.Bringing the letter of credit to the attention of the seller is the primordial
obligation of an advising bank. The view that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya, by using advanced mode of
business communications, before dispatching the same to Inter-Resin finds no real support in
U.C.P. Article 18 of the U.C.P. states that: "Banks assume no liability or responsibility for the
consequences arising out of the delay and/or loss in transit of any messages, letters or
22 | P a g e

documents, or for delay, mutilation or other errors arising in the transmission of any
telecommunication" As advising bank, Bank of America is bound only to check the
"apparent authenticity" of the letter of credit, which it did. Clarifying its meaning, Webster's
Ninth New Collegiate Dictionary explains that the word "APPARENT suggests appearance to
unaided senses that is not or may not be borne out by more rigorous examination or greater
knowledge."
May Bank of America then recover what it has paid under the letter of credit when
the corresponding draft for partial availment thereunder and the required documents were
later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is
commonly referred to as a discounting arrangement. This time, Bank of America has acted
independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting
the documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of course, could
have chosen other banks with which to negotiate the draft and the documents.) As a
negotiating bank, Bank of America has a right to recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a
contingent liability thereon.
While bank of America has indeed failed to allege material facts in its complaint that
might have likewise warranted the application of the Negotiable Instruments Law and
possible then allowed it to even go after the indorsers of the draft, this failure, nonetheless,
does not preclude petitioner bank's right (as negotiating bank) of recovery from Inter-Resin
itself. Inter-Resin admits having received from bank of America on the letter of credit and in
having executed the corresponding draft. The payment to Inter-Resin has given, as
aforesaid, Bank of America the right of reimbursement from the issuing bank, Bank of
Ayudhya which, in turn, would then seek indemnification from the buyer (the General
Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however, Bank
of America may now turn to Inter-Resin for restitution.
_____________________________________________________________________________________________
_________________________________
The correspondent bank may be called a notifying bank, a negotiating bank, or a
confirming bank. In case of a notifying bank, the correspondent bank assumes no liability
except to notify and/or transmit to the beneficiary the existence of the letter of credit. A
negotiating bank, on the other hand, is a correspondent bank which buys or discounts a
draft under the letter of credit. In the case of a confirming bank, the correspondent bank
assumes a direct obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit
Facts:
Bernardo Villaluz agreed to sell Lauan logs to Axel Christiansen which the latter will
sell to Hanmi Trade Development, Inc. in Korea. Thereafter, Security Pacific National Bank of
Los Angeles (Issuing bank) issued an irrevocable letter of credit in favor of Villaluz.
Thereafter, the issuing bank instructed Feati Bank & Trust Company (Corresponding bank)
through an email to forward the enclosed letter of credit to Villaluz. The said letter of credit
provided terms and conditions which include a certification from Christiansen that logs have
been approved prior to its shipment in accordance with the latters purchasing order. Also
23 | P a g e

of credit.
Christiansen and Feati before Court of First Instance (CFI) of Rizal. It ruled that Feati
assumed the very same undertaking as the issuing bank under the terms of an irrevocable
letter of credit by accepting the instructions from the issuing bank. The Court of Appeals
affirmed the CFI decision on the ground that when Feati accepted its role as the notifying
and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust
reposed on it, and became a trustee in relation to plaintiff as the beneficiary of the letter of
credit. Thus, Feati cannot be allowed to deny its commitment and liability under the letter of
credit.
Issue:
Ruling:
NO. Since Feati was only a notifying bank, its responsibility was solely to notify
and/or transmit the documentary of credit to the private respondent and its obligation ends
there.
The notifying bank may suggest to the seller its willingness to negotiate, but this fact
alone does not imply that the notifying bank promises to accept the draft drawn under the
documentary credit.
A notifying bank is not a privy to the contract of sale between the buyer and the
seller, its relationship is only with that of the issuing bank and not with the beneficiary to
whom he assumes no liability.
In order that the petitioner may be held liable under the letter, there should be proof
that the petitioner confirmed the letter of credit.
The records are, however, bereft of any evidence which will disclose that the
petitioner has confirmed the letter of credit.
There must have been an absolute assurance on the part of the petitioner that it will
undertake the issuing bank's obligation as its own.
Basic Principles of Letters of Credit
BANK OF THE PHILIPPINE ISLANDS v. DE RENY FABRIC INDUSTRIES, INC., AURORA

T. TUYO and AURORA CARCERENY alias AURORA C. GONZALES
G.R. No.L-24821 October 16, 1970, Castro, J.
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The existence of a custom in international banking and financing circles negating
any duty on the part of a bank to verify whether what has been described in letters of
credits or drafts or shipping documents actually tallies with what was loaded aboard ship,
having been positively proven as a fact, the appellants are bound by this established usage.
They were, after all, the ones who tapped the facilities afforded by the Bank in order to
engage in international business.
Facts:
De Reny Fabric Industries, Inc. (De Reny) applied for, and was granted, four (4)
irrevocable commercial letters of credit (L/Cs) with the Bank of Philippine Islands (BPI) in
favor of J.B distributing Company to cover the purchase of dyestuffs of various colors. As
each shipment arrived in the Philippines, De Reny made partial payments to the Bank
amounting. Further payments were, however, subsequently discontinued by the corporation
when it was established, as a result of a chemical test conducted by the National Science
Development Board, that the goods which arrived in Manila were colored chalks instead of
dyestuffs. Consequently, BPIfiled a complaint for payment of the amount of the L/Cs. In its
answer, De Reny contended that it was the duty of BPIs foreign correspondent banks to take
the necessary precaution to insure that the goods shipped under the covering L/Cs
conformed with the item appearing therein, and, that the foregoing banks having failed to
perform this duty, no claim for recoupment against the defendants-appellants, arising from
the losses incurred for the non-delivery or defective delivery of the articles ordered, could
accrue.
Issue:
Whether or not De Reny fabrics is liable under the Letters of Credit.
Ruling:
YES.Under the terms of their Commercial Letter of Credit Agreements with the Bank,
the appellants agreed that the Bank shall not be responsible for the "existence, character,
quality, quantity, conditions, packing, value, or delivery of the property purporting to be
represented by documents; for any difference in character, quality, quantity, condition, or
value of the property from that expressed in documents," or for "partial or incomplete
25 | P a g e

shipment, or failure or omission to ship any or all of the property referred to in the Credit,"
as well as "for any deviation from instructions, delay, default or fraud by the shipper or
anyone else in connection with the property the shippers or vendors and ourselves
[purchasers] or any of us." Having agreed to these terms, the appellants have, therefore, no
recourse but to comply with their covenant.
But even without the stipulation recited above, the appellants cannot shift the burden
of loss to the Bank on account of the violation by their vendor of its prestation.
It was uncontrovertibly proven by the Bank during the trial below that banks, in
providing financing in international business transactions such as those entered into by the
appellants, do not deal with the property to be exported or shipped to the importer, but deal
only with documents.
_____________________________________________________________________________________________
_________________________________
LAND BANK OF THE PHILIPPINES v. MONETS EXPORT AND MANUFACTURING
CORPORATION, SPOUSES VICENTE V. TAGLE, SR. and MA. CONSUELO G. TAGLE
G.R. No. 161865, March 10, 2005, Ynares-Santiago, J.
The so-called independence principle assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and precludes the issuing bank
from determining whether the main contract is actually accomplished or not.
Facts:
Land Bank of the Philippines (Land Bank) and Monets Export and Manufacturing
Corporation (Monet) executed an Export Packing Credit Line Agreementunder the latter was
given a credit line secured, among others, by the proceeds of its export letters of credit from
Wishbone Trading Corporation. When Monet failed to pay for its obligations with the Land
Bank, the latter filed a complaint for collection of sum of money. However, Monet countered
that Land Bank failed to protect Monets interest when it paid the suppliers despite
discrepancies in the shipment vis--vis the order specifications.
Issue:
Whether or not Monet is entitled to opportunity losses based on Land Banks
unauthorized payment on behalf of Monet.
Ruling:
NO. As regards to the Beautilike account, the trial court and the Court of Appeals
erred in holding that Land Bank failed to protect Monets interest when it paid the suppliers
despite discrepancies in the shipment vis--vis the order specifications of Monet. The Court
finds merit in the contention of Land Bank that, as the issuing bank in the Beautilike
transaction involving an import letter of credit, it only deals in documents and it is not
involved in the contract between the parties. The relationship between the beneficiary and
the issuer of a letter of credit is not strictly contractual, because both privity and a meeting
of the minds are lacking. Thus, upon receipt by Land Bank of the documents of title which
26 | P a g e

conform with what the letter of credit requires, it is duty bound to pay the seller, as it did in
this case. Consequently, it was error for the trial court and for the Court of Appeals to grant
opportunity losses to the respondents on this account.
_____________________________________________________________________________________________
_________________________________
PHILIPPINE NATIONAL BANK v.SAN MIGUEL CORPORATION

G.R. No. 186063, January 15, 2014, Peralta, J.
The engagement of the issuing bank is to pay the seller or beneficiary of the credit
once the draft and the required documents are presented to it. The so-called "independence
principle" assures the seller or the beneficiary of prompt payment independent of any
breach of the main contract and precludes the issuing bank from determining whether the
main contract is actually accomplished or not.
Facts:
San Miguel Corporation (SMC) entered into an exclusive dealership agreement with
and Rodolfo R. Goroza wherein the latter was given the right to trade, deal, market or
otherwise sell its various beer products. Consequently, to secure a credit line with SMC,
Goroza must apply for a letter of credit which he obtained from Philippine National Bank.
Upon presentment of required invoices and official receipts of Gorozas purchases of SMC
products, the amount of the credit line was released for payment to SMC. Subsequently,
Goroza was able to secure a revolving credit line with PNB which enabled it to pay for his
credit purchases with SMC. However, Goroza started to become delinquent with his
accounts. SMC demanded payment for the balance with Goroza and PNB but to no avail.
Hence, SMC filed an action for collection of sum of money with the Regional Trial Court (RTC)
against them.
The RTC ordered Goroza to pay SMC for the said amount without prejudice to the decision
against PNB in a separate trial of the case. PNB now contends that by virtue of the RTC
decision finding Gorozaliable to pay the entire amount sought to be recovered by SMC, has
settled the obligation of both Goroza and PNB, and that there is no longer any ground to hold
PNB for trial and make a separate judgment against it. However, the Court of Appeals (CA)
ruled that proceedings against PNB may continue in the RTC, despite the trial court's
complete adjudication of relief in favor of SMC. Hence, this petition was filed.
Issue:
Whether the adjudication of Gorozas liability against SMC also settled the obligation
of PNB.
27 | P a g e

Ruling:
NO. In a letter of credit transaction, such as in this case, where the credit is
stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the
beneficiary provided that the stipulated documents are presented and the conditions of the
credit are complied with. Precisely, the independence principle liberates the issuing bank
from the duty of ascertaining compliance by the parties in the main contract. As the
principle's nomenclature clearly suggests, the obligation under the letter of credit is
independent of the related and originating contract. In brief, the letter of credit is separate
and distinct from the underlying transaction.
In other words, PNB cannot evade responsibility on the sole ground that the RTC
judgment found Goroza liable and ordered him to pay the amount sought to be recovered by
SMC. PNB's liability, if any, under the letter of credit is yet to be determined.
_____________________________________________________________________________________________
_________________________________
INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE COMMERCIAL
INTERNATIONAL BANK)v.HON. INTERMEDIATE APPELLATE COURT, THE PHILIPPINE
AMERICAN LIFE INSURANCE CO., SPS. BEN MENDOZA & JUANITA M. MENDOZA
G.R. No. 74834, November 17, 1988, Melencio-Herrera, J.
Letters of credit and contracts for the issuance of such letters are subject to the
same rules of construction as are ordinary commercial contracts. They are to receive a
reasonable and not a technical construction and although usage and custom cannot control
express terms in letters of credit, they are to be construed with reference to all the
surrounding facts and circumstances, to the particular and often varying terms in which
they may be expressed, the circumstances and intention of the parties to them, and the
usages of the particular trade of business contemplated.
Facts:
Spouses Ben and Juanita Mendoza obtained two (2) loans from Philippine American
Life Insurance Co. (Philam Life) to finance the construction of their residential house. To
secure payment,Philam Life required that amortizations be guaranteed by an irrevocable
standby letter of credit of a commercial bank (LCs).Thus, the Mendozas contracted with
Insular Bank of Asia and America (IBAA) for the issuance of two (2) irrevocable standby
Letters of Credit in favor of Philam Life. Spouses Mendoza were able to pay initially but
subsequently became delinquent for the remaining balance. IBAA and contended that the
payment made by the spouses reduced its liability pursuant to the LCs. Nonetheless, Phil Am
Life filed a complaint for collection of sum of money against the spouses and IBAA before the
Regional Trial Court (RTC) which rendered a decision extinguishing the liability of IBAA to the
extent of the payment made by IBAA. The Court of Appeals (CA) however, reversed the RTC
decision on the ground that IBAAs liability was not reduced by the payments made by the
Mendozas.
Issue:
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Whether or not the partial payments made by the principal obligors (respondent
MENDOZAS) would have the corresponding effect of reducing the liability of the petitioner as
guarantor or surety under the terms of the standby LCs in question.
Ruling:
NO. The terms of the subject Irrevocable Standby Letters of Credit read, in part, as
follows: This credit secures the payment of any obligation of the accounteeto you under that
Loan Agreement hereto attached xxx.
Unequivocally, the subject standby Letters of Credit secure the payment of any
obligation of the Mendozas to Philam Life including all interests, surcharges and expenses
thereon. But while they are a security arrangement, they are not converted thereby into
contracts of guaranty. That would make them ultra vires rather than a letter of credit, which
is within the powers of a bank (Section 74[e], RA 337, General Banking Act). The standby
L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount for
which credit is given on the faith of the instrument." (Scribner v. Rutherford, 22 N.W. 670, 65
Iowa 551; Duval v. Trask,, 12 Mass. 154, cited in 38 CJS, Sec. 7, p. 1142). They are primary
obligations and not accessory contracts. Being separate and independent agreements, the
payments made by the Mendozas cannot be added in computing IBAA's liability under its
own standby letters of credit. Payments made by the Mendozas directly to Philam Life are in
compliance with their own prestation under the loan agreements. And although these
payments could result in the reduction of the actual amount which could ultimately be
collected from IBAA, the latter's separate undertaking under its L/Cs remains.
_____________________________________________________________________________________________
_________________________________
TRANSFIELD PHILIPPINES, INC. v. LUZON HYDRO CORPORATION, AUSTRALIA and
NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK CORPORATION
G.R. No. 146717, November 22, 2004, TINGA, J.
The independent nature of the letter of credit may be: (a) independence in toto
where the credit is independent from the justification aspect and is a separate obligation
from the underlying agreement like for instance a typical standby; or (b) independence may
be only as to the justification aspect like in a commercial letter of credit or repayment
standby, which is identical with the same obligations under the underlying agreement. In
both cases the payment may be enjoined if in the light of the purpose of the credit the
payment of the credit would constitute fraudulent abuse of the credit.
Facts:
Transfield Philippines, Inc. entered a contract with Luzon Hydro Corporation (LHC)
whereby the former shall construct hydro-electric power stations in Benguet and Ilocos Sur.
To secure the performance of the contract, both agreed that Transfield should obtain standby
letters of credit (LCs) whereby LHC shall be compensated should there be default or delays
in the completion of the project on its due date. Unfortunately, Transfield was unable to
complete the construction of the power plants on the date specified in their contract due to
fortuitous events. Since LHC refused to grant extensions of time for the project completion,
it called on the LCs before the Australia and New Zealand Banking Group Limited (ANZ Bank)
and Security Bank Corporation (SBC). Transfield filed a complaint for Injunction against LHC
from calling on the securities, and Anz Bank and SBC Bank from disposing the securities to
LHC pending the determination of default before the arbitral tribunal. The trial court denied
the application for writ of preliminary injunction. The Court of Appeals (CA) issued a
temporary restraining order enjoining LHC, ANZ bank and SBC bank but failed to act on the
29 | P a g e

writ of preliminary injunction, hence, LHC was able to withdraw certain amount from the
standby LCs. LHC now contends that LHCs call on the Securities is wrongful because it
fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in contract
knowing fully well that this is yet to be determined by the arbitral tribunals.Consequently,
the CA dismissed Transfields petition for certiorari and upheld the trial courts decision.
Issue:
Whether or not LHC may call and draw on the standby LCs prior to the resolution of
disputes between the LHC and Transfield subject of arbitration.
Ruling:
Yes. Petitioners argument that any dispute must first be resolved by the parties,
whether through negotiations or arbitration, before the beneficiary is entitled to call on the
letter of credit in essence would convert the letter of credit into a mere guarantee.
Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in
that the settlement of a dispute between the parties is not a pre-requisite for the release of
funds under a letter of credit. In other words, the argument is incompatible with the very
nature of the letter of credit. If a letter of credit is drawable only after settlement of the
dispute on the contract entered into by the applicant and the beneficiary, there would be no
practical and beneficial use for letters of credit in commercial transactions.
Because parties and courts should not confuse the different functions of the surety
contract on the one hand and the standby credit on the other, the distinction between surety
contracts and credits merits some reflection. The two commercial devices share a common
purpose. Both ensure against the obligors nonperformance. They function, however, in
distinctly different ways.
The standby credit has different expectations. He reasonably expects that he will
receive cash in the event of nonperformance, that he will receive it promptly, and that he
will receive it before any litigation with the obligor (the applicant) over the nature of the
applicants performance takes place. The standby credit has this opposite effect of the surety
contract: it reverses the financial burden of parties during litigation.
In the surety contract setting, there is no duty to indemnify the beneficiary until the
beneficiary establishes the fact of the obligors performance. The beneficiary may have to
establish that fact in litigation. During the litigation, the surety holds the money and the
beneficiary bears most of the cost of delay in performance.In the standby credit case,
however, the beneficiary avoids that litigation burden and receives his money promptly upon
presentation of the required documents.
While it is the bank which is bound to honor the credit, it is the beneficiary who has
the right to ask the bank to honor the credit by allowing him to draw thereon. The situation
itself emasculates petitioners posture that LHC cannot invoke the independence principle
and highlights its puerility, more so in this case where the banks concerned were impleaded
as parties by petitioner itself.
Respondent banks had squarely raised the independence principle
releases of the amounts due under the Securities. Owing to the nature and
standby letters of credit, this Court rules that the respondent banks were left
alternative but to honor the credit and both of them in fact submitted that it
for them to honor the call for payment.
to justify their
purpose of the
with little or no
was ministerial
30 | P a g e

_____________________________________________________________________________________________
_________________________________
It is a settled rule in commercial transactions involving letters of credit that the
documents tendered must strictly conform to the terms of the letter of credit. The tender of
documents by the beneficiary (seller) must include all documents required by the letter. A
correspondent bank which departs from what has been stipulated under the letter of credit,
as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to
recover from the buyer or the issuing bank, as the case may be, the money thus paid to the
beneficiary Thus the rule of strict compliance.
Facts:
Bernardo Villaluz agreed to sell Lauan logs to Axel Christiansen which the latter will sell to
Hanmi Trade Development, Inc. in Korea. Thereafter, Security Pacific National Bank of Los
Angeles (Issuing bank) issued an irrevocable letter of credit in favor of Villaluz. Thereafter,
the issuing bank instructed Feati Bank & Trust Company (Corresponding bank) through an
email to forward the enclosed letter of credit to Villaluz. The said letter of credit provided
terms and conditions which include a certification from Christiansen that logs have been
approved prior to its shipment in accordance with the latters purchasing order. Also
of credit.
Christiansen and Feati before Court of First Instance (CFI) of Rizal. It ruled that Feati
assumed the very same undertaking as the issuing bank under the terms of an irrevocable
letter of credit by accepting the instructions from the issuing bank. The Court of Appeals
affirmed the CFI decision on the ground that when Feati accepted its role as the notifying
and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust
reposed on it, and became a trustee in relation to plaintiff as the beneficiary of the letter of
credit. Thus, Feati cannot be allowed to deny its commitment and liability under the letter of
credit.
Issue:
Ruling:
NO.The incorporation of the Uniform Customs and Practice for Documentary Credit
(U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the
governance of the relations between the parties.And even if the U.C.P. was not incorporated
in the letter of credit, we have already ruled in the affirmative as to the applicability of the
U.C.P. in cases before us.
31 | P a g e

In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance
of the U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of
the Code of Commerce enunciates that in the absence of any particular provision in the
Code of Commerce, commercial transactions shall be governed by the usages and customs
generally observed.
There being no specific provision which governs the legal complexities arising from
transactions involving letters of credit not only between the banks themselves but also
between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable.
The pertinent provisions of the U.C.P. (1962 Revision) are:
Article 3.An irrevocable credit is a definite undertaking on the part of the issuing bank
and constitutes the engagement of that bank to the beneficiary and bona fide holders of
drafts drawn and/or documents presented thereunder, that the provisions for payment,
acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the
terms and conditions of the credit are complied with.
An irrevocable credit may be advised to a beneficiary through another bank (the
advising bank) without engagement on the part of that bank, but when an issuing bank
authorizes or requests another bank to confirm its irrevocable credit and the latter does so,
such confirmation constitutes a definite undertaking of the confirming bank. . . .
Article 7.Banks must examine all documents with reasonable care to ascertain that
they appear on their face to be in accordance with the terms and conditions of the credit,"
Article 8.Payment, acceptance or negotiation against documents which appear on
their face to be in accordance with the terms and conditions of a credit by a bank authorized
to do so, binds the party giving the authorization to take up documents and reimburse the
bank which has effected the payment, acceptance or negotiation.
Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or
pay, if the documents tendered to it are on their face in accordance with the terms and
conditions of the documentary credit. And since a correspondent bank, like the petitioner,
principally deals only with documents, the absence of any document required in the
documentary credit justifies the refusal by the correspondent bank to negotiate, accept or
pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to
rely on the completeness of the documents tendered by the beneficiary.
Trust Receipt Law
Definition/Concept of Trust Receipt Law
CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP, RICHARD VELASCO
and ALFONSO CO v. COURT OF APPEALS and PHILIPPINE BANK OF
COMMUNICATIONS
G.R. NO. 117914, February 1, 2002, De Leon, Jr., J
Modern letters of credit are usually not made between natural persons. They involve
bank to bank transactions. Historically, the letter of credit was developed to facilitate the
sale of goods between, distant and unfamiliar buyers and sellers. It was an arrangement
under which a bank, whose credit was acceptable to the seller, would at the instance of the
buyer agree to pay drafts drawn on it by the seller, provided that certain documents are
32 | P a g e

presented such as bills of lading accompanied the corresponding drafts. Expansion in the
use of letters of credit was a natural development in commercial banking.
Facts:
Charles Lee, as president of Mico Metals Corporation (MICO), applied and obtained
both local and foreign letters of credit from Philippine Bank of Communications (PBCom) to
facilitate the business. After the drafts were issued and the suppliers of the merchandise
were paid, trust receipts in favor of MICO were executed in favor of PBCom. When MICO
failed to pay for its credit availments and standing obligations from trust receipts liabilities in
spite of demands, it filed a complaint for collection of sums of money before the Regional
Trial Court (RTC). MICO contended thatthere was no proof that the proceeds of the loans or
the goods under the trust receipts were ever delivered to and received by it; thatit never
requested that legal possession of the merchandise be transferred to PBCom by way of trust
receipts. MICO insist that assuming it transferred possession of the merchandise to PBCom
by way of trust receipts, the same would be illegal since PBCom, being a banking institution,
is not authorized by law to engage in the business of importing and selling goods. The RTC
ruled in favor of MICO on the ground that the lack of proof as regards the existence of the
merchandise covered by the letters of credit bolstered the claim of herein petitioners that no
purchases of the goods were really made. The Court of Appeals reversed the ruling of the
trial court based on the presumption that an instrument sets out the true agreement
of the parties thereto and that it was executed for valuable consideration.
Issue:
Whether or not the contention of MICO is correct that PBCom, a banking institution, is
not authorized by law to engage in the business of importing and selling goods.
Ruling:
NO. A trust receipt is considered as a security transaction intended to aid in financing
importers and retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire credit except
through utilization, as collateral of the merchandise imported or purchased.A trust receipt,
therefor, is a document of security pursuant to which a bank acquires a security interest in
the goods under trust receipt. Under a letter of credit-trust receipt arrangement, a bank
extends a loan covered by a letter of credit, with the trust receipt as a security for the loan.
The transaction involves a loan feature represented by a letter of credit, and a security
feature which is in the covering trust receipt which securesindebtedness.
_____________________________________________________________________________________________
_________________________________
SPOUSES TIRSO I. VINTOLA AND LORETO DY VINTOLA v. INSULAR BANK OF ASIA
AND AMERICA
G.R. No. 73271, May 29, 1987, J. Melencio-Herrera
The trust receipt arrangement did not convert the IBAA into an investor; the latter
remained a lender and creditor. Since the IBAA is not the factual owner of the goods,
the Vintolas cannot justifiably claim that because they have surrendered the goods to IBAA
and subsequently deposited them in the custody of the court, they are absolutely relieved of
their obligation to pay their loan because of their inability to dispose of the goods. The fact
that they were unable to sell the seashells in question does not affect IBAAs right to recover
the advances it had made under the Letter of Credit.
Facts:
33 | P a g e

Spouses Vintola owns and manages manufacturing of raw seashells into finished products
under their business name Dax Kin International. They were granted a domestic letter of
credit by the Insular Bank of Asia and America (IBAA). They then executed a Trust Receipt
Agreement with IBAA stipulating that they agreed to hold the goods in trust for IBAA as the
"latter's property with liberty to sell the same for its account," and "in case of sale" to turn
over the proceeds as soon as received to IBAA. Having defaulted on their obligation, IBAA
demanded payment from the Vintolas. The Vintolas, who were unable to dispose of the
shells, responded by offering to return the goods. IBAA refused to accept the merchandise,
and due to the continued refusal of the Vintolas to make good their undertaking, IBAA
charged them with Estafa for having misappropriated, misapplied and converted for their
own personal use and benefit the aforesaid goods. During the trial of the criminal case the
Vintolas turned over the seashells to the custody of the Trial Court.
Issue:
Whetherthe surrender of the goods to the court absolved the liability of the Vintolas.
Ruling:
NO. Section 4 of P.D. No. 115 defines a trust receipt transaction as any transaction by
and between a person referred to as the entruster, and another person referred to as the
entrustee, whereby the entruster, who owns or holds absolute title or security interests over
certain specified goods, documents or instruments, releases the same to the possession of
the entrustee upon the latter's execution and delivery to the entruster of a signed document
called a 'trust receipt' wherein the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell or otherwise dispose of the
goods, documents or instruments thereof to the extent of the amount owing to the entruster
or as appears in the trust receipt or the goods, documents or instruments themselves if they
are unsold or not otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt.
Contrary to the allegation of the Vintolas, IBAA did not become the real owner of the
goods. It was merely the holder of a security title for the advances it had made to
the Vintolas . The goods the Vintolas had purchased through IBAA financing remain their
own property and they hold it at their own risk. The trust receipt arrangement did not
convert the IBAA into an investor; the latter remained a lender and creditor. Since the IBAA
is not the factual owner of the goods, the Vintolascannot justifiably claim that because they
have surrendered the goods to IBAA and subsequently deposited them in the custody of the
court, they are absolutely relieved of their obligation to pay their loan because of their
inability to dispose of the goods. The fact that they were unable to sell the seashells in
question does not affect IBAAs right to recover the advances it had made under the Letter
of Credit.
_____________________________________________________________________________________________
_________________________________
ROSARIO TEXTILE MILLS CORPORATION AND EDILBERTO YUJUICO v. HOME
BANKERS SAVINGS AND TRUST COMPANY
G.R. NO. 137232, June 29, 2005, J. Sandoval-Gutierrez
If under the trust receipt, the bank is made to appear as the owner, it was but an
artificial expedient, more of legal fiction than fact, for if it were really so, it could dispose of
the goods in any manner it wants, which it cannot do, just to give consistency with purpose
of the trust receipt of giving a stronger security for the loan obtained by the importer. To
consider the bank as the true owner from the inception of the transaction would be to
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disregard the loan feature thereof. Thus, petitioners cannot be relieved of their obligation to
pay their loan in favor of the bank.
Facts:
Rosario Textile Mills Corporation (RTMC) applied from Home Bankers Savings & Trust
Co. for an Omnibus Credit Line.Yujuico signed a Surety Agreement in favor of the bank,
where he bound himself jointly and severally with RTMC for the payment of all RTMCs
indebtedness to the bank from 1989 to 1990. RTMC availed of the credit line by making
numerous drawdowns, each drawdown being covered by a separate promissory note and
trust receipt. RTMC failed to pay its loans. RTMC and Yujuico contend that they should be
absolved from liability. They argue that the importation of raw materials under the credit
line was with a grant of option to them to turn-over to the bank the imported raw materials
should these fail to meet their manufacturing requirements. RTMC offered to make such
turn-over since the imported materials did not conform to the required specifications.
However, the bank refused to accept the same, until the materials were destroyed by a fire
which gutted down RTMCs premises.
Issue:
Whether or not RTMC and Yujuico are relieved of their obligation to pay their loan
after they tried to tender the goods to the bank which refused to accept the same, and
which goods were subsequently lost in a fire
Ruling:
NO. RTMC and Yujuico's stance conveniently ignores the true nature of its transaction
with the bank. In banking and commerce, a credit line is that amount of money or
merchandise which a banker, merchant, or supplier agrees to supply to a person on credit
and generally agreed to in advance. It is the fixed limit of credit granted by a bank, retailer,
or credit card issuer to a customer, to the full extent of which the latter may avail himself of
his dealings with the former but which he must not exceed and is usually intended to cover a
series of transactions in which case, when the customers line of credit is nearly exhausted,
he is expected to reduce his indebtedness by payments before making any further drawings.
It is thus clear that the principal transaction between RTMC and the bank is a contract of
loan. RTMC used the proceeds of this loan to purchase raw materials from a supplier
abroad. In order to secure the payment of the loan, RTMC delivered the raw materials to the
bank as collateral. Trust receipts were executed by the parties to evidence this security
arrangement. Simply stated, the trust receipts were mere securities.
disregard the loan feature thereof. Thus, petitioners cannot be relieved of their obligation to
pay their loan in favor of the bank.
_____________________________________________________________________________________________
_________________________________
MELVIN COLINARES AND LORDINO VELOSO v. HONORABLE COURT OF APPEALS,
AND THE PEOPLE OF THE PHILIPPINES
G.R. No. 90828, September 05, 2000, C.J. Davide Jr.
Ownership over the merchandise was already transferred to use the materials for
their construction project. It was only a day later that they went to the bank to apply for a
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loan to pay for the merchandise. This situation belies what normally obtains in a pure trust
receipt transaction where goods are owned by the bank and only released to the importer in
trust subsequent to the grant of the loan. The loan should be granted to finance acquisition
of the goods under trust receipt. If the loan is granted when entrustee already has
ownership of the goods, the transaction is only a simple loan.
Facts:
Colinares and Veloso were contracted by the Carmelite Sisters of Cagayan de Oro City
to renovate the latters convent. Colinares applied for a commercial letter of credit with the
Philippine Banking Corporation (PBC) in favor of CM Builders Centre. PBC approved the letter
of credit to cover the full invoice value of the goods. Petitioners signed a pro-forma trust
receipt as security. PBC debited from Petitioners marginal deposit as partial payment of the
loan. After the initial payment, the spouses defaulted. PBC wrote to Petitioners demanding
that the amount be paid within seven days from notice.
During trial, petitioner Veloso insisted that the transaction was a clean loan per
verbal guarantee of PBCs former manager. He and petitioner Colinares signed the
documents without reading the fine print, only learning of the trust receipt implication much
later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the trust
receipt was a mere formality.
Issue:
Whether or not the transaction of Colinares and Veloso was an ordinary loan, not a
trust receipt agreement under the Trust Receipts Law.
Ruling:
YES. This situation belies what normally obtains in a pure trust receipt transaction
where goods are owned by the bank and only released to the importer in trust subsequent to
the grant of the loan. The bank acquires a security interest in the goods as holder of a
security title for the advances it had made to the entrustee. The ownership of the
merchandise continues to be vested in the person who had advanced payment until he has
been paid in full, or if the merchandise has already been sold, the proceeds of the sale
should be turned over to him by the importer or by his representative or successor in
interest. To secure that the bank shall be paid, it takes full title to the goods at the very
beginning and continues to hold that title as his indispensable security until the goods are
sold and the vendee is called upon to pay for them; hence, the importer has never owned
the goods and is not able to deliver possession. In a certain manner, trust receipts partake of
the nature of a conditional sale where the importer becomes absolute owner of the imported
merchandise as soon as he has paid its price. The loan should be granted to finance
acquisition of the goods under trust receipt. If the loan is granted when entrustee already
has ownership of the goods, the transaction is only a simple loan.
_____________________________________________________________________________________________
_________________________________
THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK) v. THE COURT
OF APPEALS, CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM AND SPOUSE
G.R. No. 114286, April 19, 2001, J. Ynares-Santiago
The delivery to CCC of the goods subject of the trust receipt occurred long before the
trust receipt itself was executed. On the other hand, the subject trust receipt was only
executed nearly two months after full delivery of the oil was made to CCC. The loan should
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be granted to finance acquisition of the goods under trust receipt. If the loan is granted
when entrustee already has ownership of the goods, the transaction is only a simple loan.
Facts:
Continental Cement Corporation (CCC) obtained from Consolidated Bank letter of credit used
to purchase of bunker fuel oil. CCC made a marginal deposit to Consolidated Bank. A trust
receipt was executed by CCC, with Gregory Lim as signatory. Claiming that respondents
failed to turn over the goods or proceeds, Consolidated Bank filed a complaint for sum of
money before the RTC Manila. In their answer, respondents aver that the transaction was a
simple loan and not a trust receipt one.
Issue:
Whether or not the transaction between the bank and the corporation was a simple
loan and not a trust receipt
Ruling:
YES. Inasmuch as the debtor received the goods subject of the trust receipt before
the trust receipt itself was entered into, the transaction in question was a simple loan and
not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership
over the goods was already transferred to the debtor. This situation is inconsistent with what
normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership
to the bank and are only released to the importer in trust after the loan is granted.
In the case at bar, the delivery to CCC of the goods subject of the trust receipt occurred long
before the trust receipt itself was executed. More specifically, delivery of the bunker fuel oil
to CCC's Bulacan plant commenced on July 7, 1982 and was completed by July 19, 1982.
Further, the oil was used up by CCC in its normal operations by August, 1982. On the other
hand, the subject trust receipt was only executed nearly two months after full delivery of the
oil was made to CCC , or on September 2, 1982. The loan should be granted to finance
acquisition of the goods under trust receipt. If the loan is granted when entrustee already
has ownership of the goods, the transaction is only a simple loan.
_____________________________________________________________________________________________
_________________________________
ANTHONY L. NG v. PEOPLE OF THE PHILIPPINES
G.R. No. 173905, April 23, 2010, J. Velasco Jr.
The Trust Receipts Law was created to to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation or purchase
of merchandise, and who may not be able to acquire credit except through utilization, as
collateral, of the merchandise imported or purchased. Since Asiatrust knew that Ng was
neither an importer nor retail dealer, it should have known that the said agreement could
not possibly apply to Ng. The goods must be intended for sale or resale, otherwise, it is a
simple loan.
Facts:
Anthony Ng, then engaged in the business of building and fabricating
telecommunication towers under the trade name "Capitol Blacksmith and Builders," applied
for a credit line with Asiatrust Development Bank, Inc. (Asiatrust). Prior to the approval of the
loan, Ng informed Asiatrust that the proceeds would be used for purchasing construction
materials necessary for the completion of several steel towers he was commissioned to build
by several telecommunication companies. Asiatrust approved the loan but required Ng to
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sign a trust receipt agreement. When Ng failed to pay the loan, Asiatrust filed a criminal
case for Estafa in relation to PD 115 or the Trust Receipts Law.
Issue:
Whether Ng is liable for estafa.
Ruling:
NO. The Trust Receipts Law was created to to aid in financing importers and retail
collateral, of the merchandise imported or purchased. Since Asiatrust knew that Anthony
Ng was neither an importer nor retail dealer, it should have known that the said agreement
could not possibly apply to him. The true nature of a trust receipt transaction can be found
in the whereas clause of PD 115 which states that a trust receipt is to be utilized as a
convenient business device to assist importers and merchants solve their financing
problems. Obviously, the State, in enacting the law, sought to find a way to assist importers
and merchants in their financing in order to encourage commerce in the Philippines. A trust
receipt is considered a security transaction intended to aid in financing importers and retail
collateral, of the merchandise imported or purchased. Similarly, American Jurisprudence
demonstrates that trust receipt transactions always refer to a method of financing
importations or financing sales. The principle is of course not limited in its application to
financing importations, since the principle is equally applicable to domestic transactions.
Regardless of whether the transaction is foreign or domestic, it is important to note that the
transactions discussed in relation to trust receipts mainly involved sales. Considering that
the goods in this case were never intended for sale but for use in the fabrication of steel
communication towers, the trial court erred in ruling that the agreement is a trust receipt
transaction. The goods must be intended for sale or resale, otherwise, it is a simple loan.
_____________________________________________________________________________________________
_________________________________
LAND BANK OF THE PHILIPPINES v. LAMBERTO C. PEREZ, NESTOR C. KUN, MA.
ESTELITA P. ANGELES-PANLILIO, AND NAPOLEON O. GARCIA
G.R. No. 166884, June 13, 2012, J. Brion
In concluding that the transaction was a loan and not a trust receipt, it must be noted
that the industry or line of work that the borrowers were engaged in was construction. The
borrowers were not importers acquiring goods for resale. The goods must be intended for
sale or resale, otherwise, it is a simple loan.
Facts:
Perez et al were officers of Asian Construction and Development Corporation (ACDC),
a corporation engaged in the construction business. On several occasions, respondents
executed in favor of Land Bank of the Philippines (LBP) trust receipts to secure the purchase
of construction materials that they will need in their construction projects. When the trust
receipts matured, ACDC failed to return to LBP the proceeds of the construction projects or
the construction materials subject of the trust receipts. After several demands went
unheeded, LBP filed a complaint for Estafa or violation of Art. 315, par. 1(b) of the RPC, in
relation to PD 115, against the respondent officers of ACDC. The respondents allege that on
what was really intended was a simple contract of loan and not a trust receipts transaction.
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Issue:
Whether the transaction between LBP and the respondents is a simple contract of
loan and not a trust receipt transaction.
Ruling:
YES. When both parties enter into an agreement knowing that the return of the
goods subject of the trust receipt is not possible even without any fault on the part of the
trustee, it is not a trust receipt transaction penalized under Section 13 of P.D. 115; the only
obligation actually agreed upon by the parties would be the return of the proceeds of the
sale transaction. This transaction becomes a mere loan, where the borrower is obligated to
pay the bank the amount spent for the purchase of the goods. Thus, in concluding that the
transaction was a loan and not a trust receipt, it must be noted that the industry or line of
work that the borrowers were engaged in was construction. The borrowers were not
importers acquiring goods for resale. Indeed, goods sold in retail are often within the custody
or control of the trustee until they are purchased. In the case of materials used in the
manufacture of finished products, these finished products if not the raw materials or their
components similarly remain in the possession of the trustee until they are sold. But the
goods and the materials that are used for a construction project are often placed under the
control and custody of the clients employing the contractor, who can only be compelled to
return the materials if they fail to pay the contractor and often only after the requisite legal
proceedings. The contractors difficulty and uncertainty in claiming these materials (or the
buildings and structures which they become part of), as soon as the bank demands them,
disqualify them from being covered by trust receipt agreements.
LBP knew that ACDC was in the construction business and that the materials that it
sought to buy under the letters of credit were to be used for the following projects: the Metro
Rail Transit Project and the Clark Centennial Exposition Project. Clearly, they were aware of
the fact that there was no way they could recover the buildings or constructions for which
the materials subject of the alleged trust receipts had been used. The goods must be
intended for sale or resale, otherwise, it is a simple loan.
_____________________________________________________________________________________________
_________________________________
HUR TIN YANG v. PEOPLE OF THE PHILIPPINES
G.R. No. 195117, August 14, 2013, J. Velasco Jr.
The fact that the entruster bank, Metrobank in this case, knew even before the
execution of the alleged trust receipt agreements that the covered construction materials
were never intended by the entrustee (Yang) for resale or for the manufacture of items to be
sold would take the transaction between Yang and Metrobank outside the ambit of the Trust
Receipts Law. The goods must be intended for sale or resale, otherwise, it is a simple loan.
Facts:
Supermax, a domestic corporation engaged in the construction business, sought
several letters of credit from Metropolitan Bank and Trust Company (Metrobank) to pay for
the delivery of several construction materials to be used in their construction business. The
bank then required Hur Tin Yang, representative of Supermax, to sign 24 trust receipts as
security for the construction materials and to hold the proceeds of the sales in trust for
Metrobank to the extent of the amount stated in the receipts. Supermax failed to pay or
deliver the goods or proceeds to Metrobank , instead the company sought a restructuring of
the loan but it did not materialize, hence, Metrobank filed a case for Estafa in relation to PD
No. 115 (the Trust Receipts Law) against Hur Tin Yang.
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Issue:
Whether the transaction was a simple loan and not a trust receipt agreement.
Ruling:
YES. Yang's admissionthat he signed the trust receipts on behalf of Supermax,
which failed to pay the loan or turn over the proceeds of the sale or the goods to Metrobank
upon demanddoes not conclusively prove that the transaction was, indeed, a trust receipts
transaction. In contrast to the nomenclature of the transaction, the parties really intended a
contract of loan. In determining the nature of a contract, courts are not bound by the title or
name given by the parties. The decisive factor in evaluating such agreement is the intention
of the parties, as shown not necessarily by the terminology used in the contract but by their
conduct, words, actions and deeds prior to, during and immediately after executing the
agreement. As such, therefore, documentary and parol evidence may be submitted and
admitted to prove such intention.
_____________________________________________________________________________________________
_________________________________
SPOUSES QUIRINO V. DELA CRUZ AND GLORIA DELA CRUZ v. PLANTERS
PRODUCTS, INC.
G.R. No. 158649, February 18, 2013, J. Bersamin
Under Section 4 of the Trust Receipts Law, the sale of goods by a person in the
business of selling goods for profit who, at the outset of the transaction, has, as against the
buyer, general property rights in such goods, or who sells the goods to the buyer on credit,
retaining title or other interest as security for the payment of the purchase price, does not
constitute a trust receipt transaction and is outside the purview and coverage of the law.
Facts:
Spouses QuirinoDela Cruz and Gloria Dela Cruz operated the Barangay Agricultural
Supply, an agricultural supply store in Nueva Ecija engaged in the distribution and sale of
fertilizers and agricultural chemical products, among others. Gloria applied for and was
granted by Planters Products, Inc. (PPI) a regular credit line, with trust receipts as collaterals.
Gloria signed in the presence of the PPI distribution officer/assistant sales representative two
documents labelled Trust Receipt/Special Credit Scheme, indicating the invoice number,
quantity, value, and names of the agricultural inputs she received upon the trust of PPI.
The credit term lapsed without Gloria paying her obligation under the Trust Receipt/SCS. PPI
claimed that Gloria did not return the goods indicated in the invoices and did not remit the
proceeds of sales. Spouses Dela Cruz, on the other hand, justified that the non-compliance
by Gloria with her obligations under the Trust Receipt/SCS was due to the loss of the farm
outputs due to typhoon Kading.
Issue:
Whether the two transaction documents signed by Gloria is a simple loan, and not a
trust receipt agreement
Ruling:
YES. The contract, its label notwithstanding, was not a trust receipt transaction in
legal contemplation or within the purview of the Trust Receipts Law (PD No. 115) such that
its breach would render Gloria criminally liable for estafa.
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It is worthwhile to note that the application for credit facilities was a form contract
that Gloria filled out only with respect to her name, address, credit limit, term, and collateral.
Her act of signing the application signified her agreement to be bound by the terms of the
application, specifically her acquiescence to use trust receipts as collaterals, as well as by
the terms and conditions of the Trust Receipt/SCS. In this regard, whether or not the Trust
Receipt/SCS was a contract of adhesion apparently prepared by PPI would neither dilute nor
erase her liabilities.
_____________________________________________________________________________________________
_________________________________
PEOPLE OF THE PHILIPPINES AND ALLIED BANKING CORPORATION v. HON. JUDGE
DAVID G. NITAFAN AND BETTY SIA ANG
G.R. Nos. 81559-60, April 06, 1992, J. Gutierrez, Jr.
P.D. 115, like Batas PambansaBlg. 22, punishes the act not as an offense against
property, but as an offense against public order. The misuse of trust receipts therefore
should be deterred to prevent any possible havoc in trade circles and the banking
community. It is in the context of upholding public interest that the law now specifically
designates a breach of a trust receipt agreement to be an act that shall make one liable
for estafa. A mere failure to deliver the proceeds of the sale or the goods if
not sold, constitutes a criminal offense that causes prejudice not only to another, but more
to the public interest.
Facts:
Allied Banking Corporation charged Betty SiaAng with estafa, alleging that Ang
received in trust from the aforesaid bank Gordon Plastics, plastic sheeting and Hook
Chromed, in the total amount of P398,000.00, specified in a trust receipt and covered by
Domestic Letter of Credit under the express obligation on the part of said accused to sell the
same and account for the proceeds of the sale thereof, if sold, or to return said merchandise,
if not sold, on or before October 16, 1980, or upon demand, but the said accused, once in
possession of the said articles, far from complying with the aforesaid obligation, paid only
the amount of P283,115.78, thereby leaving unaccounted for the amount of P114,884.22
which, once in her possession, with intent to defraud, she misappropriated, misapplied and
converted to her own personal use and benefit, to the damage and prejudice of said Allied
Banking Corporation.
Issue:
Whether or not the failure of the entrustee to remit sale proceeds or return the goods
in case of non-sale constitutes criminal liability
Ruling:
YES. A trust receipt arrangement does not involve a simple loan transaction
between a creditor and a debtor-importer. Apart from a loan feature, the trust receipt
arrangement has a security feature that is covered by the trust receipt itself. That second
feature is what provides the much needed financial assistance to our traders in the
importation or purchase of goods or merchandise through the use of those goods or
merchandise as collateral for the advancements made by a bank. The title of the bank to
the security is the one sought to be protected and not the loan which is a separate and
distinct agreement.
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The Trust Receipts Law punishes the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another regardless of whether the latter is
the owner or not. The law does not seek to enforce payment of the loan. Thus, there can be
no violation of a right against imprisonment for non-payment of a debt.
Ownership of the Goods, Documents and Instruments

SPOUSES TIRSO I. VINTOLA AND LORETO DY VINTOLA v. INSULAR BANK OF ASIA
AND AMERICA
G.R. No. 73271, May 29, 1987, J. Melencio-Herrera
The goods the Vintolas had purchased through IBAA financing remain their own
property and they hold it at their own risk. The trust receipt arrangement did not convert
the IBAA into an investor; the latter remained a lender and creditor. Hence, the entrustee is
the deemed the owner of the goods.
Facts:
Spouses Vintola owns and manages manufacturing of raw seashells into finished
products under their business name Dax Kin International. They were granted a domestic
letter of credit by the Insular Bank of Asia and America (IBAA). They then executed a Trust
Receipt Agreement with IBAA stipulating that they agreed to hold the goods in trust for IBAA
as the "latter's property with liberty to sell the same for its account," and "in case of sale" to
turn over the proceeds as soon as received to IBAA. Having defaulted on their obligation,
IBAA demanded payment from the Vintolas. The Vintolas, who were unable to dispose of the
shells, responded by offering to return the goods. IBAA refused to accept the merchandise,
and due to the continued refusal of the Vintolas to make good their undertaking, IBAA
charged them with Estafa for having misappropriated, misapplied and converted for their
own personal use and benefit the aforesaid goods. The Vintolas take the position that their
obligation to IBAA has been extinguished inasmuch as, through no fault of their own, they
were unable to dispose of the seashells, and that they have relinquished possession thereof
to the IBAA, as owner of the goods, by depositing them with the Court.
Issue:
Whether the IBAA (entrustor) is the real owner of the goods.
Ruling:
NO. IBAA did not become the real owner of the goods. It was merely the holder of a
security title for the advances it had made to the Vintolas. The goods the Vintolas had
purchased through IBAA financing remain their own property and they hold it at their own
risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter
remained a lender and creditor. As cited in one case, for the bank has previously extended a
loan which the L/C represents to the importer, and by that loan, the importer should be the
real owner of the goods. If under the trust receipt, the bank is made to appear as the owner,
it was but an artificial expedient, more of a legal fiction than fact, for if it were so, it could
dispose of the goods in any manner it wants, which it cannot do, just to give consistency
with the purpose of the trust receipt of giving a stronger security for the loan obtained by
the importer. To consider the bank as the true owner from the inception of the transaction
would be to disregard the loan feature thereof.
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Since the IBAA is not the factual owner of the goods, the Vintolas cannot justifiably
claim that because they have surrendered the goods to IBAA and subsequently deposited
them in the custody of the court, they are absolutely relieved of their obligation to pay their
loan because of their inability to dispose of the goods. The fact that they were unable to sell
the seashells in question does not affect IBAAs right to recover the advances it had made
under the Letter of Credit. In so arguing, the Vintolas conveniently close their eyes to their
application for a Letter of Credit. Hence, the entrustee is the deemed the owner of the
goods.
_____________________________________________________________________________________________
_________________________________
ROSARIO TEXTILE MILLS CORPORATION AND EDILBERTO YUJUICO v. HOME
BANKERS SAVINGS AND TRUST COMPANY
G.R. NO. 137232, June 29, 2005, J. Sandoval-Guttierez.
disregard the loan feature thereof. RTMC, as the entrustee, is deemed the owner of the
goods.
Facts:
Rosario Textile Mills Corporation (RTMC) applied from Home Bankers Savings & Trust
Co. for an Omnibus Credit Line. Yujuico signed a Surety Agreement in favor of the bank,
where he bound himself jointly and severally with RTMC for the payment of all RTMCs
indebtedness to the bank from 1989 to 1990. RTMC availed of the credit line by making
trust receipt. RTMC failed to pay its loans. RTMC and Yujuico contend that they should be
absolved from liability. They argue that the importation of raw materials under the credit
line was with a grant of option to them to turn-over to the bank the imported raw materials
should these fail to meet their manufacturing requirements. RTMC offered to make such
turn-over since the imported materials did not conform to the required specifications.
However, the bank refused to accept the same, until the materials were destroyed by a fire
which gutted down RTMCs premises. RTMC contends that since the ownership of the goods
remains with the bank, then it should bear the loss. With the destruction of the goods by
fire, RTMC should have been relieved of any obligation to pay.
Issue:
Whether the ownership of the raw materials remained with the bank
Ruling:
NO. If under the trust receipt, the bank is made to appear as the owner, it was but an
disregard the loan feature thereof. RTMC, as the entrustee, is deemed the owner of the
goods. Thus, RTMC cannot be relieved of their obligation to pay their loan in favor of the
bank.
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_____________________________________________________________________________________________
_________________________________
DEVELOPMENT BANK OF THE PHILIPPINES v. PRUDENTIAL BANK
G.R. No. 143772, November 22, 2005, J. Corona
The entrustee cannot mortgage the goods under trust receipt.While it was allowed to
sell the items, Litex had no authority to dispose of them or any part thereof or their
proceeds through conditional sale, pledge or any other means.Article 2085 (2) of the Civil
Code requires that, in a contract of pledge or mortgage, it is essential that the pledgor or
mortgagor should be the absolute owner of the thing pledged or mortgaged.
Facts:.
Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with
Prudential Bank. This was in connection with its importation of spindles for spinning
machinery. These were released to Litex under covering trust receipts it executed in favor
of Prudential. 9 years later, DBP granted a foreign currency loan to Litex. To secure the loan,
Litex executed real estate and chattel mortgages on its plant site in Montalban, Rizal,
including the buildings and other improvements, machineries and equipment there. Among
the machineries and equipment mortgaged in favor of DBP were the articles covered by the
trust receipts. Prudential Bank informed DBP that it was the absolute and juridical owner of
the said items and they were thus not part of the mortgaged assets that could be legally
ceded to DBP. For the failure of Litex to pay its obligation, DBP extrajudicially foreclosed the
real estate and chattel mortgages, including the articles claimed by Prudential Bank.
Issue:
Whether Litex (entrustee) can mortgage the goods under the trust receipt.
Ruling:
NO.The articles were owned by Prudential Bank and they were only held by Litex in
trust. While it was allowed to sell the items, Litex had no authority to dispose of them or any
part thereof or their proceeds through conditional sale, pledge or any other means.Article
2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is essential
that the pledgor or mortgagor should be the absolute owner of the thing pledged or
mortgaged. Article 2085 (3) further mandates that the person constituting the pledge or
mortgage must have the free disposal of his property, and in the absence thereof, that he be
legally authorized for the purpose.
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Litex had neither absolute ownership, free disposal nor the authority to freely dispose
of the articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in
the mortgage was voidand had no legal effect.There being no valid mortgage, there could
also be no valid foreclosure or valid auction sale.Thus, DBP could not be considered either as
a mortgagee or as a purchaser in good faith.No one can transfer a right to another greater
than what he himself has.Nemodat quod non habet. Hence, Litex could not transfer a right
that it did not have over the disputed items.
_____________________________________________________________________________________________
_________________________________
PRUDENTIAL BANK v. NATIONAL LABOR RELATIONS COMMISSION, CECILIA
ORQUELLO, ET AL., ZENAIDA UCHI, ET AL., ALU-INTERASIA CONTAINER INDUSTRIES
INC., AND RAUL REMODO
G.R. No. 112592, December 19, 1995, J. Bellosillo
It is thus clear that the security interest of the entruster is not merely an empty or
idle title. To a certain extent, such interest becomes a "lien" on the goods because the
entruster's advances will have to be settled first before the entrustee can consolidate his
ownership over the goods. A contrary view would be disastrous. For to refuse to recognize
the title of the banker under the trust receipt as security for the advance of the purchase
price would be to strike down a bona fide and honest transaction of great commercial
benefit and advantage founded upon a well-recognized custom by which banking credit is
officially mobilized for manufacturers and importers of small means.
Facts:
INTERASIA was embroiled in 3 labor cases which were eventually resolved against
it. With the finality of the three (3) decisions, writs of execution were issued. The Sheriff
levied on execution personal properties located in the factory of INTERASIA. Prudential Bank
filed an Affidavit of Third-Party Claim asserting ownership over the seized properties on the
strength of trust receipts executed by INTERASIA in its favor. As a result, the Sheriff
suspended the public auction sale. But the Labor Arbiter denied the claim of Prudential Bank
and directed the Sheriff to proceed with the levy of the properties.
Issue:
Whether the security interest as against the creditors of the entrustee/innocent
purchaser for value is valid.
Ruling:
YES.Sec. 12 of P.D. No. 115 provides that the entruster's security interest in goods,
documents, or instruments pursuant to the written terms of a trust receipt shall be valid as
against all creditors of the entrustee for the duration of the trust receipt agreement. The
only exception to the rule is when the properties are in the hands of an innocent purchaser
for value and in good faith. The records however do not show that the winning bidder is
such purchaser. Neither can private respondents plead preferential claims to the properties
as Prudential Bank has the primary right to them until its advances are fully paid.
Obligations and Liabilities of Entrustees
45 | P a g e

METROPOLITAN BANK AND TRUST COMPANY v. JOAQUIN TONDA AND MA. CRISTINA
TONDA
G.R. No. 134436, August 16, 2000, J. Gonzaga-Reyes
Trust Receipts Law declares the failure to turn over the goods or the proceeds
realized from the sale thereof, as a criminal offense punishable under Article 315 (1) (b) of
the Revised Penal Code. The law is violated whenever the entrustee or the person to whom
the trust receipts were issued in favor of fails to: (1) return the goods covered by the trust
receipts; or (2) return the proceeds of the sale of the said goods. The foregoing acts
constitute estafa punishable under Article 315 (1) (b) of the Revised Penal Code.
Facts:
Spouses Joaquin and Ma. Cristina Tondaapplied for and were granted commercial
letters of credit by Metropolitan Bank and Trust Company (Metrobank) in connection with the
importation of raw textile materials to be used in the manufacturing of garments. Spouses
Tonda acting both in their capacity as officers of Honey Tree Apparel Corporation (HTAC) and
in their personal capacities, executed 11 trust receipts to secure the release of the raw
materials to HTAC. Due to their failure to settle their obligations under the trust receipts
upon maturity. Despite repeated demands, Spouses Tondafailed to account to Metrobankthe
goods and/or proceeds of sale of the merchandise, subject of the trust receipts. Spouses
Tondamaintain that Metrobankhas no legal standing to file the present petition without the
conformity or authority of the prosecutor as it deals solely with the criminal aspect of the
case, a separate action to recover civil liability having already been instituted; that the
issues raised in the present petition are purely factual; and that the subject trust receipts
obligations have been extinguished by payment or legal compensation.
Issue:
Whether Spouses Tonda are criminally liable for violation of the Trust Receipts Law in
relation to Art. 315(1) (b) of the Revised Penal Code
Ruling:
YES. Given that various trust receipts were executed by Spouses Tondaand that as
entrustees, they did not return the proceeds from the goods sold nor the goods themselves
to Metrobank, there is no dispute that Spouses Tondafailed to comply with the obligations
under the trust receipts despite several demands from Metrobank.
_____________________________________________________________________________________________
_________________________________
MELVIN COLINARES AND LORDINO VELOSO v. HONORABLE COURT OF APPEALS,
AND THE PEOPLE OF THE PHILIPPINES
G.R. No. 90828, September 05, 2000, C.J. Davide Jr.
Colinares and Veloso (entrustees) already own the goods when the loan under the
trust receipt was granted. If the loan is granted when entrustee already has ownership of
the goods, the transaction is only a simple loan. Also, Colinares and Velosoare contractors
who obtained the fungible goods for their construction project. At no time did title over the
construction materials pass to the bank, but directly to the Colinares and Veloso from CM
Builders Centre. This impresses upon the trust receipt in question vagueness and ambiguity,
46 | P a g e

which should not be the basis for criminal prosecution in the event of violation of its
provisions.
Facts:
Colinares and Veloso were contracted for by the Carmelite Sisters of Cagayan de Oro
City to renovate the latters convent. Colinares applied for a commercial letter of credit with
the Philippine Banking Corporation (PBC) in favor of CM Builders Centre. PBC approved the
letter of credit to cover the full invoice value of the goods. Petitioners signed a pro-forma
trust receipt as security. After the initial payment, the spouses defaulted. PBC wrote to
Petitioners demanding that the amount be paid within seven days from notice.
During trial, petitioner Veloso insisted that the transaction was a clean loan per
verbal guarantee of PBCs former manager. He and petitioner Colinares signed the
documents without reading the fine print, only learning of the trust receipt implication much
later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the trust
receipt was a mere formality.
Issue:
Whether or not Colinares and Veloso (entrustees) have criminal liability
Ruling:
NO. Colinares and Veloso received the merchandise from CM Builders Centre on 30
October 1979. It was only a day later that they went to the bank to apply for a loan to pay
for the merchandise. This situation belies what normally obtains in a pure trust receipt
transaction where goods are owned by the bank and only released to the importer in trust
subsequent to the grant of the loan. Hence, Colinares and Veloso (entrustees) already own
the goods when the loan under the trust receipt was granted. If the loan is granted when
entrustee already has ownership of the goods, the transaction is only a simple loan.
Also, it is crystal clear that on the part of Colinares and Veloso there was neither
dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC.
Colinares and Veloso continually endeavored to meet their obligations, as shown by several
receipts issued by PBC acknowledging payment of the loan.The Information charges
Colinares and Velosowith intent to defraud and misappropriating the money for their
personal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a
state of mind was not proved to be present in Colinares and Velosossituation. Colinares and
Velosoemployed no artifice in dealing with PBC and never did they evade payment of their
obligation nor attempt to abscond. Also, Colinares and Velosoare not importers acquiring the
goods for re-sale, contrary to the express provision embodied in the trust receipt. They are
contractors who obtained the fungible goods for their construction project. At no time did
title over the construction materials pass to the bank, but directly to the Colinares and
Velosofrom CM Builders Centre. This impresses upon the trust receipt in question vagueness
and ambiguity, which should not be the basis for criminal prosecution in the event of
violation of its provisions.The practice of banks of making borrowers sign trust receipts to
facilitate collection of loans and place them under the threats of criminal prosecution should
they be unable to pay it may be unjust and inequitable, if not reprehensible. Such
agreements are contracts of adhesion which borrowers have no option but to sign lest their
loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the
mercy of banks, and is prone to misinterpretation, as had happened in this case.
_____________________________________________________________________________________________
_________________________________
47 | P a g e
THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK) vs.COURT OF

APPEALS
G.R. No. 114286, April 19, 2001, YNARES-SANTIAGO, J.
Inasmuch as the debtor received the goods subject of the trust receipt before the
trust receipt itself was entered into, the transaction in question was a simple loan and not a
trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over
the goods was already transferred to the debtor. This situation is inconsistent with what
normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership
to the bank and are only released to the importer in trust after the loan is granted.
Facts:
Respondents Continental Cement Corp. (Corporation) and Gregory T. Lim as its

Executive Vice President obtained from Consolidated Bank (Bank) a Letter of Credit used to
purchase of bunker fuel oil from Petrophil Corporation, which the latter delivered directly to
the Corporation in its Bulacan plant. In relation to the same transaction, a trust receipt was
executed by the Corporation, with Lim as signatory. Claiming that respondents failed to turn
over the goods covered by the trust receipt or the proceeds thereof, the bank filed a
complaint for sum of money with application for preliminary attachment before the RTC. In
answer to the complaint, respondents averred that the transaction between them was a
simple loan and not a trust receipt transaction.
Issue:
Whether the respondents are liable under the trust receipt transaction.
Ruling:
48 | P a g e

NO. In the case at bar, as in Colinares, the delivery to respondent Corporation of the
goods subject of the trust receipt occurred long before the trust receipt itself was executed.
More specifically, delivery of the bunker fuel oil to respondent Corporation's Bulacan plant
commenced on July 7, 1982 and was completed by July 19, 1982. Further, the oil was used
up by respondent Corporation in its normal operations by August, 1982. On the other hand,
the subject trust receipt was only executed nearly two months after full delivery of the oil
was made to respondent Corporation, or on September 2, 1982. Respondent Corporation
is not an importer, which acquired the bunker fuel oil for re-sale; it needed the oil
for its own operations. More importantly, at no time did title over the oil pass to
petitioner, but directly to respondent Corporation to which the oil was directly delivered long
before the trust receipt was executed. The fact that ownership of the oil belonged to
respondent Corporation, through its President, Gregory Lim, was acknowledged by
petitioner's own account officer on the witness stand.
By all indications, then, it is apparent that there was really no trust receipt
transaction that took place. Evidently, respondent Corporation was required to sign the trust
receipt simply to facilitate collection by petitioner of the loan it had extended to the former.
_____________________________________________________________________________________________
_________________________________
ANTHONY L. NG vs. PEOPLE OF THE PHILIPPINES

G.R. No. 173905, April 23, 2010, VELASCO, JR.
The Trust Receipts Law was created to "to aid in financing importers and retail
collateral, of the merchandise imported or purchased." Since Asiatrust knew that Anthony
Ng was neither an importer nor retail dealer, it should have known that the said agreement
could not possibly apply to petitioner. Regardless of whether the transaction is foreign or
domestic, it is important to note that the transactions discussed in relation to trust receipts
mainly involved sales. Considering that the goods in this case were never intended for sale
but for use in the fabrication of steel communication towers, the trial court erred in ruling
that the agreement is a trust receipt transaction.
Facts:
Anthony Ng, in behalf of his company Capitol Blacksmith and Builders, applied for a
credit line with Asiatrust Development Bank, Inc. (Asiatrust) in order for him to procure
goods consisting of chemicals and metal plates to be utilized in building communication
towers ordered from him by his clients (e.g.: Islacom, Smart and Infocom). Asiatrust
approved Ngs loan application. However, he failed to pay his obligation to Asiatrust by
reason of his difficulty in in collecting from his client Islacom. Asiatrust consequently filed
with the RTC a case for Estafa under the RPC in relation to Sec. 3, PD 115 (Trust Receipts
Law) against Ng.
Issue:
49 | P a g e

Whether Anthony Ng is liable for Estafa in relation to PD 115 (Trust Receipts Law).
Ruling:
NO. The transaction between Ng and Asiatrust is not a trust receipt transaction but
one of simple loan. Ng was transparent to Asiatrust from the very beginning that the subject
goods were not being held for sale but were to be used for the fabrication of steel
communication towers in accordance with his contracts with his clients. In these contracts,
he was commissioned to build, out of the materials received, steel communication towers,
not to sell them. Moreover, Asiatrust was aware that petitioner was not engaged in selling
the subject goods and that petitioner will use them for the fabrication and installation of
communication towers. In fine, there was no abuse of confidence to speak of nor was there
any intention to convert the subject goods for another purpose, since Ng did not withhold
the fact that they were to be used to fabricate steel communication towers to Asiatrust.
_____________________________________________________________________________________________
_________________________________
LAND BANK OF THE PHILIPPINES vs LAMBERTO C. PEREZ, et al.
G.R. No. 166884, June 13, 2012, Brion, J.
When both parties enter into an agreement knowing that the return of the goods
subject of the trust receipt is not possible even without any fault on the part of the trustee,
it is not a trust receipt transaction penalized under Section 13 of P.D. 115; the only
obligation actually agreed upon by the parties would be the return of the proceeds of the
sale transaction. This transaction becomes a mere loan, where the borrower is obligated to
pay the bank the amount spent for the purchase of the goods.
Facts:
The respondents were officers of Asian Construction and Development Corporation
(ACDC), a corporation engaged in the construction business. On several occasions,
respondents executed in favor of Land Bank of the Philippines (LBP) trust receipts to secure
the purchase of construction materials that they will need in their construction projects.
When the trust receipts matured, ACDC failed to return to LBP the proceeds of the
construction projects or the construction materials subject of the trust receipts. After several
demands went unheeded, LBP filed a complaint for Estafa or violation of Art. 315, par. 1(b) of
the RPC, in relation to PD 115 (Trust Receipts Law) against the respondent officers of ACDC.
Issue:
Whether or not the respondents are guilty of estafa or violation of Article 315,
paragraph 1(b) of the RPC, in relation to P.D. 115 (Trust Receipts Law).
Ruling:
NO.The industry or line of work that the borrowers were engaged in was
construction. The borrowers were not importers acquiring goods for resale. Indeed, goods
sold in retail are often within the custody or control of the trustee until they are purchased.
In the case of materials used in the manufacture of finished products, these finished
products if not the raw materials or their components similarly remain in the possession
50 | P a g e

of the trustee until they are sold. But the goods and the materials that are used for a
construction project are often placed under the control and custody of the clients employing
the contractor, who can only be compelled to return the materials if they fail to pay the
contractor and often only after the requisite legal proceedings. The contractors difficulty
and uncertainty in claiming these materials (or the buildings and structures which they
become part of), as soon as the bank demands them, disqualify them from being covered by
trust receipt agreements. Since these transactions are not trust receipts, an action for estafa
should not be brought against the respondents, who are liable only for a loan.
_____________________________________________________________________________________________
_________________________________
HUR TIN YANG vs. PEOPLE OF THE PHILIPPINES

G.R. No. 195117, August 14, 2013, VELASCO JR., J.
The fact that the entruster bank knew even before the execution of the trust receipt
agreements that the construction materials covered were never intended by the entrustee
for resale or for the manufacture of items to be sold is sufficient to prove that the
transaction was a simple loan and not a trust receipts transaction.
Facts:
Metrobank extended several commercial letters of credit to Supermax which were

used by the latter to pay for the delivery of several construction materials to be used in its
construction business. Thereafter, Metrobank required Hur Tin Yang, as representative of
Supermax, to sign 24 trust receipts as security for the construction materials and to hold
those materials or the proceeds of the sales in trust for Metrobank to the extent of the
amount stated in the trust receipts. When the 24 trust receipts fell due and despite the
receipt of a demand letter, Supermax failed to pay or deliver the goods or proceeds to
Metrobank. Thus, Metrobank filed a case against Hur Tin Yang for Estafa under Art. 315, par.
1(b) of the RPC in relation to PD 115 (Trust Receipts Law). For his defense, Hur Tin Yang
argued that said trust receipts were demanded by Metrobank as additional security for the
loans extended to Supermax. Allegedly, the construction materials covered by the trust
receipts were delivered way before he signed the corresponding trust receipts. Further, he
argued that Metrobank knew all along that the construction materials subject of the trust
receipts were not intended for resale but for personal use of Supermax relating to its
construction business.
Issue:
51 | P a g e
Whether or not Hur Tin Yang is liable for Estafa under Art. 315, par. 1(b) of the RPC in
relation to PD 115 (Trust Receipts Law), even if Metrobank knew beforehand that the
construction materials subject of the trust receipts were never intended to be sold but only
for use in the entrustees construction business.
Ruling:
NO. The dealing between petitioner and Metrobank was not a trust receipt
transaction but one of simple loan. Hur Tin Yangs admission-- that he signed the trust
receipts on behalf of Supermax, which failed to pay the loan or turn over the proceeds of the
sale or the goods to Metrobank upon demanddoes not conclusively prove that the
transaction was, indeed, a trust receipts transaction. In contrast to the nomenclature of the
transaction, the parties really intended a contract of loan. This Courtin Ng v. People and
Land Bank of the Philippines v. Perez, cases which are in all four corners the same as the
instant caseruled that the fact that the entruster bank knew even before the execution of
the trust receipt agreements that the construction materials covered were never intended
by the entrustee for resale or for the manufacture of items to be sold is sufficient to prove
that the transaction was a simple loan and not a trust receipts transaction. The fact that the
entruster bank, Metrobank in this case, knew even before the execution of the alleged trust
receipt agreements that the covered construction materials were never intended by the
entrustee (petitioner) for resale or for the manufacture of items to be sold would take the
transaction between petitioner and Metrobank outside the ambit of the Trust Receipts Law.
Thus, the consolidated complaints for Estafa in relation to PD 115 have really no leg to stand
on.
_____________________________________________________________________________________________
_________________________________
TRINIDAD RAMOS vs. COURT OF APPEALS and PEOPLE OF THE PHILIPPINES

G.R. No. L-39922-25 August 21, 1987, NARVASA, J.
The trust receipts do not fare any better as proofs of the delivery to Ramos of the
goods. Except for the invoices, documents relating to each trust receipt agreement,
including the trust receipts themselves, appear to be standard Bank forms accomplished by
the Bank personnel, and were all signed by Ramos in one sitting, with a view to facilitating
the pending transactions between the parties.
52 | P a g e

Facts:
Trinidad Ramos filed with the Philippine National Cooperative Bank (PNCB) four (4)
applications for letters of credit which were approved. Consequently, domestic letters of
credit were opened. Among the papers filed for the issuance of the domestic letters of credit
were commercial invoices of the different suppliers of the merchandise sought to be
purchased. The different suppliers then drew sight drafts against the applicant payable to
the order of the PNCB. The PNCB then drew its own drafts against the accused as the buyer
of the merchandise and which drafts were accepted by the accused. After such acceptance,
the corresponding trust receipts were signed by Ramos which provide that she
acknowledges to have received in trust from the PNCB the merchandise covered by the
above-mentioned documents which are the property of said bank, with the liberty to sell the
same provided that the proceeds thereof are turned over to the said bank to be applied
against any acceptance(s) and any other indebtedness by her to the said bank. The drafts
drawn by the bank against Ramos were payable within 90 days from the dates thereof.
However, no payments were made except partial payments made pursuant to the written
demands for payment addressed by the PNCB to Ramos. Hence, the PNCB filed a case for
four (4) counts of Estafa before the RTC against Ramos.
Issue:
Whether Ramos is guilty of four (4) counts of Estafa.
Ruling:
NO. The proofs are inadequate as to the propositions of receipt of the merchandise
and the damage sustained by the Bank . It could not be said that the commercial invoices
attached to the applications for the letter of credit and of the trust receipts was sufficient
proof of delivery. The invoices are actually nothing more than lists of the items sought to be
purchased and their prices; and it can scarcely be believed that goods worth no mean sum
actually transferred hands without the unpaid vendor requiring the vendee to acknowledge
this fact in some way, even by a simple signature on these documents alone if not in fact by
the execution of some appropriate document, such as a delivery receipt.
At any rate, Ramos has categorically and consistently denied ever having received
the goods either from the Bank or the suppliers. And this was because, according to her, the
suppliers simply refused to part with the goods as no payment had been made therefor by
53 | P a g e

the Bank. The issue could quite easily have been resolved by the production of the delivery
receipts or the testimony of the employees who made the supposed deliveries which the
prosecution did not do. Having found the record to contain insufficient evidence of the
essential elements of the crime charged, this Court finds it unnecessary to resolve the other
issue raised by the accused.
_____________________________________________________________________________________________
_________________________________
FERNANDO ONG v. THE COURT OF APPEALS and JUDGE P. PURISIMA
G.R. No. L-58476. September 2, 1983, RELOVA, J.
Novation does not extinguish the criminal liability if the crime of estafa had been
completed. In the instant case the crime of estafa had been consummated long before the
compromise settlement was agreed upon. In fact, the criminal case had already been filed in
the court. Therefore, the subsequent agreement did not affect the criminal culpability of the
petitioner.
Facts:
Fernando Ong received from the Tramat Mercantile, Inc. (Tramat) several units of
machineries in trust for the purpose of displaying and selling the same for cash, under the
express obligation on his part of turning over to Tramat the proceeds from the sale thereof, if
sold, or of returning to the latter the said goods, if not sold. However, Ong failed to honor his
obligations in the said contract. A few months after the filing of the estafa case, a collection
suit was filed by Tramat against Ong. However, they were able to settle and subsequently
entered into a compromise agreement which was approved by the trial court. In line with
this, Ong moved for the dismissal of the criminal charge of estafa against him because the
compromise agreement in the civil case allegedly novated the contract embodied in the
trust receipts on which the estafa case was based. While the same took place after the filing
of the Information in the criminal case, the transaction had nonetheless been converted
from a criminal violation to civil obligation, which would therefore necessitate the
consequent dismissal of the criminal case. The trial court denied the motion to dismiss the
estafa case for lack of merit. Thereafter, Ong filed a petition for certiorari with the then CA
which likewise dismissed the same. Hence, this petition.
Issue:
Whether Ong is still liable for Estafa after a Compromise Agreement has been
executed in the collection suit grounded on the same act on which the estafa case is based.
Ruling:
NO. The novation theory may perhaps apply to the filing of the criminal information
in court by the state prosecutors because up to that time the original trust relation may be
converted by the parties into an ordinary creditor-debtor situation, thereby placing the
complainant in estoppel to insist on the original trust. But after the justice authorities have
taken cognizance of the crime and instituted action in court, the offended party may no
longer divest the prosecution of its power to exact the criminal liability, as distinguished
from the civil. The crime being an offense against the state, only the latter can renounce it.
It may be observed in this regard that novation is not one of the means recognized
by the Penal Code whereby criminal liability can be extinguished; hence, the role of novation
54 | P a g e

may only be to either prevent the rise of criminal liability or to cast doubt on the true nature
of the original basic transaction, whether or not it was such that its breach would not give
rise to penal responsibility, as when money loaned is made to appear as a deposit, or other
similar disguise is resorted to.
_____________________________________________________________________________________________
_________________________________
PILIPINAS BANK vs. ALFREDO T. ONG and LEONCIA LIM

G.R. No. 133176, August 8, 2002, SANDOVAL-GUTIERREZ, J.
There are two ways which could indicate the presence of novation, thereby
producing the effect of extinguishing an obligation by another which substitutes the same.
The first is when novation has been stated and declared in unequivocal terms. The second is
when the old and the new obligations are incompatible on every point. The test of
incompatibility is whether or not the two obligations can stand together. If they cannot, they
are incompatible and the latter obligation novates the first. The incompatibility must take
place in any of the essential elements of the obligation, such as its object, cause or principal
conditions.
Facts:
Baliwag Mahogany Corporation (BMC), through its president, Alfredo T. Ong, applied
for a domestic commercial letter credit with Pilipinas Bank (the bank) to finance the
purchase of Air Dried, Dark Lauan sawn lumber. The bank approved the application and
issued a Letter of Credit. To secure payment of the amount, BMC, through respondent Ong,
executed two (2) trust receipts providing that it shall turn over the proceeds of the goods to
the bank, if sold, or return the goods, if unsold, upon maturity. On the due dates, BMC failed
to comply with the trust receipt agreement. It thereafter filed with the Securities and
Exchange Commission (SEC) a Petition for Rehabilitation and for a Declaration in a State of
Suspension of Payments. The SEC issued an order creating a Management Committee
wherein the bank is represented. BMC and a consortium of 14 of its creditor banks entered
into a Memorandum of Agreement (MOA) rescheduling the payment of BMCs existing debts.
The SEC rendered a Decision approving the Rehabilitation Plan of BMC as contained in the
MOA and declaring it in a state of suspension of payments. However, BMC and respondent
Ong defaulted in the payment of the obligations under the rescheduled payment scheme
provided in the MOA. This compelled the bank to file a complaint charging respondents Ong
and Leoncia Lim (as president and treasurer of BMC) with violation of the Trust Receipts Law
(PD 115). The bank alleged that both respondents failed to pay their obligation under the
trust receipt despite demand. The office of the City Prosecutor recommended the dismissal
55 | P a g e

of the complaint which was likewise affirmed by the Justice Secretary. Upon appeal, the CA
affirmed the dismissal of the case. Hence, this petition.
Issue:
Whether the MOA was a novation of the trust agreement between the parties.
Ruling:
YES. Contrary to petitioners contention, the MOA did not only reschedule BMCs
debts, but more importantly, it provided principal conditions, which are incompatible with
the trust agreement. The execution of the MOA extinguished respondents obligation under
the trust receipts. Respondents liability, if any, would only be civil in nature since the trust
receipts were transformed into mere loan documents after the execution of the MOA.
Return of Goods, Documents or Instruments in Case Non-Sale
SPOUSES VINTOLA vs. INSULAR BANK OF ASIA AND AMERICA (IBAA)

G.R. No. 73271, May 29, 1987, MELENCIO-HERRERA, J.
Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably
claim that because they have surrendered the goods to IBAA and subsequently deposited
them in the custody of the court, they are absolutely relieved of their obligation to pay their
loan because of their inability to dispose of the goods. The fact that they were unable to sell
the seashells in question does not affect IBAA's right to recover the advances it had made
under the Letter of Credit.
Facts:
56 | P a g e

Spouses VINTOLAS, proprietors of "Dax Kin International" which is engaged in the
manufacture of raw sea shells into finished products, applied for and were granted a
domestic letter of credit by the Insular Bank of Asia and America (IBAA). The Letter of Credit
authorized the bank to negotiate for their account drafts drawn by their supplier, one Stalin
Tan, on Dax Kin International for the purchase of puka and olive seashells. Having received
the puka and olive shells, the VINTOLAS executed a Trust Receipt agreement with IBAA
which provides that they agree to hold the goods in trust for IBAA as the "latter's property
with liberty to sell the same for its account, " and "in case of sale" to turn over the proceeds
as soon as received to IBAA. Having defaulted on their obligation, IBAA demanded payment
from the VINTOLAS but the latter responded by offering to return the goods. IBAA refused to
accept the merchandise, and due to the continued refusal of the VINTOLAS to make good
their undertaking, IBAA charged them with Estafa During the trial of the criminal case, the
VINTOLAS turned over the seashells to the custody of the Trial Court. The CFI acquitted the
VINTOLAS of the crime charged but went on to say that the remedy of the Bank is civil and
not criminal in nature. Thereafter, IBAA commenced the present civil action to recover the
value of the goods before the RTC.
Issue:
Whether the return of the goods subject of the trust receipt agreement (puka and
olive shells) extinguished the liability of the Spouses Vintola.
Ruling:
NO. Under a letter of credit-trust receipt arrangement, a bank extends a loan covered
by the Letter of Credit, with the trust receipt as a security for the loan. In other words, the
transaction involves a loan feature represented by the letter of credit, and a security feature
which is in the covering trust receipt. A trust receipt, therefore, is a security agreement,
pursuant to which a bank acquires a "security interest" in the goods. "It secures an
indebtedness and there can be no such thing as security interest that secures no obligation.
Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the
goods. It was merely the holder of a security title for the advances it had made to the
VINTOLAS. The goods the VINTOLAS had purchased through IBAA financing remain their own
property and they hold it at their own risk. The trust receipt arrangement did not convert the
IBAA into an investor; the latter remained a lender and creditor. If under the trust receipt,
the bank is made to appear as the owner, it was but an artificial expedient, more of a legal
fiction than fact, for if it were so, it could dispose of the goods in any manner it wants, which
it cannot do, just to give consistency with the purpose of the trust receipt of giving a
57 | P a g e

stronger security for the loan obtained by the importer. To consider the bank as the true
owner from the inception of the transaction would be to disregard the loan feature thereof.
Liability for Loss of Goods, Documents or Instruments
ROSARIO TEXTILE MILLS CORPORATION vs. HOME BANKERS SAVINGS AND TRUST
COMPANY
G.R. No. 137232, June 29, 2005, SANDOVAL-GUTIERREZ, J.
A trust receipt as a security transaction is intended to aid in financing importers and

retail dealers who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased. A trust receipt,
therefore, is a security agreement, pursuant to which a bank acquires a security interest in
the goods. It secures an indebtedness and there can be no such thing as security
interest that secures no obligation. Security Interest means a property interest in
goods, documents, or instruments to secure performance of some obligation of the
entrustee or of some third persons to the entruster and includes title, whether or not
expressed to be absolute, whenever such title is in substance taken or retained for security
only.
Facts:
Rosario Textile Mills Corporation (RTMC) filed with the Home Bankers Savings & Trust
Co. (the bank) an application for a credit line. RTMC availed of the credit line by making
trust receipt. RTMC, represented by Yujuico, executed in favor of the bank a total of eleven
(11) promissory notes. Despite the lapse of the respective due dates under the promissory
notes and notwithstanding the banks demand letters, RTMC failed to pay its loans. Hence,
the bank filed a complaint for sum of money against RTMC and Yujuico. In their defense,
RTMC and Yujuico contend that under the trust receipt contracts between the parties, they
merely held the goods described therein in trust for respondent Home Bankers
Savings and Trust Company (the bank) which owns the same. Since the ownership of
the goods remains with the bank, then it should bear the loss. With the destruction of the
goods by fire, they should have been relieved of any obligation to pay.
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Issue:
Whether RTMC and Yujuico are relieved of their obligation to pay their loan after they
tried to tender the goods to the bank which refused to accept the same, and which goods
were subsequently lost in a fire.
Ruling:
NO.The principal transaction between petitioner RTMC and the bank is a contract of
loan. RTMC used the proceeds of this loan to purchase raw materials from a supplier abroad.
In order to secure the payment of the loan, RTMC delivered the raw materials to the bank as
collateral. Trust receipts were executed by the parties to evidence this security arrangement.
Simply stated, the trust receipts were mere securities.
Petitioners insistence that the ownership of the raw materials remained with the bank
is untenable. If under the trust receipt, the bank is made to appear as the owner, it was but
an artificial expedient, more of legal fiction than fact, for if it were really so, it could dispose
of the goods in any manner it wants, which it cannot do, just to give consistency with
purpose of the trust receipt of giving a stronger security for the loan obtained by the
importer. To consider the bank as the true owner from the inception of the transaction would
be to disregard the loan feature thereof. Thus, petitioners cannot be relieved of their
obligation to pay their loan in favor of the bank.
Penal Sanction if Offender is a Corporation
EDWARD C. ONG vs. THE COURT OF APPEALS AND THE PEOPLE OF THE
PHILIPPINES
G.R. No. 119858, April 29, 2003, CARPIO, J.
The Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes the
officers or employees or other persons responsible for the offense liable to suffer the
penalty of imprisonment. The reason is obvious: corporations, partnerships, associations and
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other juridical entities cannot be put to jail. Hence, the criminal liability falls on the human
agent responsible for the violation of the Trust Receipts Law.
Facts:
Edward Ong (Ong), in his capacity as an officer of ARMAGRI International Corporation

(ARMAGRI), executed two (2) trust receipts acknowledging receipt from the Solid Bank Corp.
of goods. When the trust receipts became due and demandable, ARMAGRI failed to pay or
deliver the goods to the Bank despite several demand letters. The trial court convicted Ong
of two (2) counts of estafa for violation of the Trust Receipts Law. On appeal, Ong posited
that he is no longer liable for Estafa since a compromise agreement was entered into by him
and ARMGARI.
Issue:
Whether Ong may be held liable for violation of the Trust Receipts Law(PD 115).
Ruling:
YES. In the instant case, the Bank was the entruster while ARMAGRI was the
entrustee. Being the entrustee, ARMAGRI was the one responsible to account for the goods
or its proceeds in case of sale. However, the criminal liability for violation of the Trust
Receipts Law falls on the human agent responsible for the violation. Petitioner Ong, who
admits being the agent of ARMAGRI, is the person responsible for the offense for two
reasons. First, petitioner is the signatory to the trust receipts, the loan applications and the
letters of credit. Second, despite being the signatory to the trust receipts and the other
documents, petitioner did not explain or show why he is not responsible for the failure to
turn over the proceeds of the sale or account for the goods covered by the trust receipts.
The Trust Receipts Law expressly makes the corporations officers or employees or
other persons therein responsible for the offense liable to suffer the penalty of
imprisonment. In the instant case, petitioner signed the two trust receipts on behalf of
ARMAGRI as the latter could only act through its agents. When petitioner signed the trust
60 | P a g e

receipts, he acknowledged receipt of the goods covered by the trust receipts. In addition,
petitioner was fully aware of the terms and conditions stated in the trust receipts, including
the obligation to turn over the proceeds of the sale or return the goods to the Bank.
_____________________________________________________________________________________________
_________________________________
ALFREDO CHING vs THE SECRETARY OF JUSTICE, et al.
G. R. No. 164317, February 6, 2006, CALLEJO, SR. J.
Though the entrustee is a corporation, the law specifically makes the officers,
employees or other officers or persons responsible for the offense, without prejudice to the
civil liabilities of such corporation and/or board of directors, officers, or other officials or
employees responsible for the offense. The rationale is that such officers or employees are
vested with the authority and responsibility to devise means necessary to ensure
compliance with the law and, if they fail to do so, are held criminally accountable; thus, they
have a responsible share in the violations of the law.
Facts:
Alfredo Ching, as the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI),
applied with the Rizal Commercial Banking Corporation for the issuance of commercial
letters of credit to finance its importation of assorted goods. The bank approved the
application and irrevocable letters of credit were issued in favor of Ching. The goods were
purchased and delivered in trust to PBMI. Ching signed 13 trust receipts as surety,
acknowledging delivery of the goods as contained in the said trust receipts. When the trust
receipts matured, Ching failed to return the goods to the bank or to return their value
despite demands. Thus, the bank filed a criminal complaint for 13 counts of estafa against
Ching in the Office of the City Prosecutor but the case was ultimately dismissed on the
ground that the material allegations therein did not amount to estafa. In the meantime, the
Court rendered judgment in Allied Banking Corporation v. Ordoez, holding that the penal
provision of P.D. No. 115 is not limited to transactions in goods which are to be
sold (retailed), reshipped, stored or processed as a component of a product
ultimately sold but covers failure to turn over the proceeds of the sale of
entrusted goods, or to return said goods if unsold or not otherwise disposed of in
accordance with the terms of the trust receipts. In the light of this ruling, the bank was
able to re-file 13 counts of estafa against Ching.
Issue:
Whether Ching is liable as SVP of PBMI.
RULING:
YES. In Allied Banking Corporation v. Ordoez, the Court ruled that PD 115 applies to
goods used by the entrustee in the operation of its machineries and equipment. The nonpayment of the amount covered by the trust receipts or the non-return of the goods covered
by the receipts, if not sold or otherwise not disposed of, violate the entrustees obligation to
pay the amount or to return the goods to the entruster which is a crime under P.D. No. 115,
without need of proving intent to defraud. The crime defined in P.D. No. 115 is malum
prohibitum but is classified as estafa under the Revised Penal Code. Though the entrustee is
a corporation, nevertheless, the law specifically makes the officers, employees or other
officers or persons responsible for the offense, without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or other officials or employees responsible for
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the offense. In this case, petitioner signed the trust receipts in question. He cannot, thus,
hide behind the cloak of the separate corporate personality of PBMI. A corporate officer
cannot protect himself behind a corporation where he is the actual, present and efficient
actor.
_____________________________________________________________________________________________
_________________________________
TUPAZ vs THE COURT OF APPEALS and BANK OF THE PHILIPPINE ISLANDS
G.R. No. 145578, November 18, 2005, CARPIO, J.
A corporation, being a juridical entity, may act only through its directors, officers, and
employees. Debts incurred by these individuals, acting as such corporate agents, are not
theirs but the direct liability of the corporation they represent. As an exception, directors or
officers are personally liable for the corporations debts only if they so contractually agree or
stipulate.
Facts:
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz were officers of El Oro Engraver
which had a contract with the Philippine Army to supply the latter with survival bolos. To
finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of El
Oro Corporation, applied with the Bank of the Philippine Islands (BPI) for two (2) commercial
letters of credit. The letters of credit were in favor of El Oro Corporations suppliers,
Tanchaoco Manufacturing Incorporated and Maresco Rubber and Retreading Corporation. BPI
granted petitioners application and issued Letter of Credit No. 2-008963for P564,871.05 to Tanchaoco and Letter of Credit No. 2-00914-5 for P294,000 to
Maresco. In line with this, petitioners signed trust receipts in favor of BPI. Jose C. Tupaz IV
signed in hispersonal capacity a trust receipt corresponding to Letter of Credit No. 200896-3 (for P564,871.05) while he and Petronilia signed in their official capacities the
trust receipt corresponding to Letter of Credit No. 2-00914-5 (for P294,000). Petitioners
failed to comply with their undertaking under the trust receipts. Hence, BPI charged them
with estafa under Section 13, PD No. 115 (Trust Receipts Law). The trial court acquitted the
petitioners of the crime of estafa but held them civilly liable to BPI.
ISSUE:
Whether or not petitioners bound themselves personally liable for El Oro Corporations debts
under the trust receipts.
RULING:
YES. Jose Tupaz is liable as guarantor of El Oro Corporations debt under the trust
receipt corresponding to Letter of Credit No. 2-00896-3 (for P564,871.05) but the he
and Petronilia are not personally liable with respect to the debt under the trust receipt
corresponding to Letter of Credit No. 2-00914-5 (for P294,000)
In the trust receipt corresponding to Letter of Credit No. 2-00914-5
(for P294,000), petitioners signed as officers of El Oro Corporation. Thus, under
Petronila Tupaz signature are the words Vice-Pres Treasurer and under petitioner Jose Tupaz
signature are the words Vice-Pres Operations. By so signing that trust receipt, petitioners did
not bind themselves personally liable for El Oro Corporations obligation. Hence, for the said
trust receipt, they are not personally liable for El Oro Corporations obligation.For the trust
receipt corresponding to Letter of Credit No. 2-00896-3 (for P564,871.05) the dorsal
portion of which Jose Tupaz signed alone, we find that he did so in his personal capacity.
Jose Tupaz did not indicate that he was signing as El Oro Corporations Vice-President for
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Operations. Hence, he bound himself personally liable for El Oro Corporations debts. Not
being a party to the said trust receipt, Petronila Tupaz is not liable under the same.
Remedies Available
SPOUSES VINTOLA vs. INSULAR BANK OF ASIA AND AMERICA (IBAA)

G.R. No. 73271, May 29, 1987, MELENCIO-HERRERA, J.
The VINTOLAS are liable ex contractu for breach of the Letter of Credit Trust
Receipt, whether they did or they did not "misappropriate, misapply or convert" the
merchandise as charged in the criminal case. Their civil liability does not arise ex
delicto, the action for the recovery of which would have been deemed instituted with the
criminal-action (unless waived or reserved) and where acquittal based on a judicial
declaration that the criminal acts charged do not exist would have extinguished the civil
action. Rather, the civil suit instituted by IBAA is based ex contractu and as such is distinct
and independent from any criminal proceedings and may proceed regardless of the result of
the latter.
Facts:
Spouses VINTOLAS, proprietors of "Dax Kin International" which is engaged in the

manufacture of raw sea shells into finished products, applied for and were granted a
domestic letter of credit by the Insular Bank of Asia and America (IBAA). The Letter of Credit
authorized the bank to negotiate for their account drafts drawn by their supplier, one Stalin
Tan, on Dax Kin International for the purchase of puka and olive seashells. Having received
the puka and olive shells, the VINTOLAS executed a Trust Receipt agreement with IBAA
which provides that they agree to hold the goods in trust for IBAA as the "latter's property
with liberty to sell the same for its account, " and "in case of sale" to turn over the proceeds
as soon as received to IBAA. Having defaulted on their obligation, IBAA demanded payment
from the VINTOLAS but the latter responded by offering to return the goods. IBAA refused to
accept the merchandise, and due to the continued refusal of the VINTOLAS to make good
their undertaking, IBAA charged them with Estafa During the trial of the criminal case, the
VINTOLAS turned over the seashells to the custody of the Trial Court. The CFI acquitted the
VINTOLAS of the crime charged but went on to say that the remedy of the Bank is civil and
not criminal in nature. Thereafter, IBAA commenced the present civil action to recover the
value of the goods before the RTC.
Issue:
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Whether or not the Spouses Vintolas acquittal in the Estafa case a bar for the filing
of a civil action for collection for the value of the goods which are the subject of the trust
receipt agreement.
Ruling:
NO. It is inaccurate for the VINTOLAS to claim that the judgment in the estafa case
had declared that the facts from which the civil action might arise, did not exist, for, it will be
recalled that the decision of acquittal expressly declared that "the remedy of the Bank is civil
and not criminal in nature." This amounts to a reservation of the civil action in IBAA's favor,
for the Court would not have dwelt on a civil liability that it had intended to extinguish by
the same decision. The VINTOLAS are liable ex contractu for breach of the Letter of Credit
Trust Receipt, whether they did or they did not "misappropriate, misapply or convert" the
merchandise as charged in the criminal case. Their civil liability does not arise ex
delicto, the action for the recovery of which would have been deemed instituted with the
criminal-action (unless waived or reserved) and where acquittal based on a judicial
declaration that the criminal acts charged do not exist would have extinguished the civil
action. Rather, the civil suit instituted by IBAA is based ex contractu and as such is distinct
and independent from any criminal proceedings and may proceed regardless of the result of
the latter.
_____________________________________________________________________________________________
_________________________________
SARMIENTO vs. COURT OF APPEALS and ASSOCIATED BANKING CORP.

G.R. No. 122502. December 27, 2002, AUSTRIA-MARTINEZ, J.
Breach of obligation is separate and distinct from any criminal liability for misuse
and/or misappropriation of goods or proceeds realized from the sale of goods, documents or
instruments released under trust receipts, punishable under Section 13 of the Trust Receipts
Law (P.D. 115) in relation to Article 315(1), (b) of the Revised Penal Code. Being based on an
obligation ex contractu and not ex delicto, the civil action may proceed independently of the
criminal proceedings instituted against petitioners regardless of the result of the latter.
Facts:
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Gregorio Limpin, Jr. and Antonio Apostol, doing business under the name and style of
Davao Libra Industrial Sales, filed an application for an Irrevocable Domestic Letter of Credit
with Associated Banking Corporation in favor of LS Parts Hardware and Machine Shop (LS
Parts) for the purchase of assorted scrap iron. After the same was approved, a Trust Receipt
was executed by Limpin and Antonio Apostol but it was signed by Lorenzo Sarmiento, Jr. as
surety/ guarantor. The defendants failed to comply with their undertaking under the Trust
Receipt after repeated demands were made by the bank. Hence, a complaint for Violation of
the Trust Receipt Law was filed against them before the City Fiscals Office. The
corresponding Information was filed but Lorenzo Sarmiento, Jr. was, however, dropped from
the Information while defendant Gregorio Limpin, Jr. was convicted. In their defense,
defendants claim that they cannot be held liable as the 825 tons of assorted scrap iron,
subject of the trust receipt agreement, were lost when the vessel transporting them sunk,
and that said scrap iron were delivered to Davao Libra Industrial Sales, a business concern
over which they had no interest whatsoever.
Issue:
Whether or not defendants are

notwithstanding the loss of the scrap irons.
liable
to
Associated
Banking
Corporation
Ruling:
YES. Associated Banking Corporations right to file a separate complaint for a sum of
money is governed by the provisions of Article 31 of the Civil Code, to wit: Article 31. When
the civil action is based on an obligation not arising from the act or omission complained of
as a felony, such civil action may proceed independently of the criminal proceedings and
regardless of the result of the latter.
In the present case, private respondents complaint against petitioners was based on
the failure of the latter to comply with their obligation as spelled out in the Trust Receipt
executed by them. This breach of obligation is separate and distinct from any criminal
liability for misuse and/or misappropriation of goods or proceeds realized from the sale of
goods, documents or instruments released under trust receipts, punishable under Section 13
of the Trust Receipts Law (P.D. 115) in relation to Article 315(1), (b) of the Revised Penal
Code. Being based on an obligation ex contractu and not ex delicto, the civil action may
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proceed independently of the criminal proceedings instituted against petitioners regardless
of the result of the latter.
_____________________________________________________________________________________________
_________________________________
PHILIPPINE NATIONAL BANK v. HON. GREGORIO G. PINEDA

G.R. No. L-46658, May 13, 1991, FERNAN, C.J.
PNB's possession of the subject machinery and equipment being precisely as a form
of security for the advances given to TCC under the Letter of Credit, said possession by itself
cannot be considered payment of the loan secured thereby. Payment would legally result
only after PNB had foreclosed on said securities, sold the same and applied the proceeds
thereof to TCC's loan obligation. Mere possession does not amount to foreclosure for
foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the
mortgagor on the property and includes the sale itself.
Facts:
The Arroyo Spouses obtained a loan from the Philippine National Bank (PNB) to
purchase 60% of the subscribed capital stock of Tayabas Cement Company, Inc. (TCC). To
secure the loan, the spouses Arroyo mortgaged the La Vista property to PNB. A surety
agreement was likewise executed by the said Spouses. Thereafter, TCC applied with the PNB
for the establishment of an eight (8) year deferred letter of credit (L/Cs) in favor of Toyo
Menka Kaisha, Ltd. to cover the importation of a cement plant machinery and equipment.
The imported materials were released to TCC under a trust receipt agreement.
Subsequently, Toyo Menka Kaisha, Ltd. made the corresponding drawings against the L/C as
scheduled. TCC, however, failed to remit the corresponding amount covered by the
drawings. PNB consequently notified TCC of its intention to repossess, as it later did, the
imported machinery and equipment for failure of TCC to settle its obligations under the L/C.
In the meantime, the other loan obligations of the spouses Arroyo secured by a real estate
mortgage over Hacienda Bacon had likewise become due. For failure to satisfy their
obligations with PNB, the latter decided to foreclose the real estate mortgages executed by
the spouses Arroyo in its favor. The CFI of Quezon City directed the City Sheriff to proceed
with the foreclosure sale pursuant to a petition for mandamus filed by the PNB. However, the
CFI of Rizal, Pasig through Judge Gregorio Pineda, issued a restraining order and granted a
writ of preliminary injunction restraining the foreclosure of the mortgages.
Issue:
Whether or not TCC's liability has been extinguished by the repossession of PNB of
the imported cement plant machinery and equipment.
Ruling:
NO. PNB's possession of the subject machinery and equipment being precisely as a
form of security for the advances given to TCC under the Letter of Credit, said possession by
itself cannot be considered payment of the loan secured thereby. Payment would legally
result only after PNB had foreclosed on said securities, sold the same and applied the
proceeds thereof to TCC's loan obligation. Mere possession does not amount to foreclosure
for foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of
the mortgagor on the property and includes the sale itself. Neither can said repossession
66 | P a g e

amount to dacion en pago. Dation in payment is the delivery and transmission of ownership
of a thing by the debtor to the creditor as an accepted equivalent of the performance of the
obligation. As aforesaid, the repossession of the machinery and equipment in question was
merely to secure the payment of TCC's loan obligation and not for the purpose of
transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en
pago was ever accomplished. Thus, PNB has the right to foreclose the mortgages executed
by theSpouses Arroyo as sureties of TCC.
_____________________________________________________________________________________________
_________________________________
SOUTH CITY HOMES, INC., FORTUNE MOTORS (PHILS.), PALAWAN LUMBER
MANUFACTURING CORPORATION v. BA FINANCE CORPORATION
G. R. No. 135462 December 7, 2001 PARDO, J.
In the event of default by the entrustee on his obligations under the trust receipt
agreement, it is not absolutely necessary that the entruster cancel the trust and take
possession of the goods to be able to enforce his rights thereunder.
Facts:
Joseph L. G. Chua, the President of Fortune Motors Corp.(FMC), Palawan Lumber
Manufacturing Corp. and South City Homes, Inc. executed in favor of BA Finance Corp.(BAFC)
a Continuing Suretyship Agreementin which, they jointly and severally unconditionally
guaranteed the payment and discharge of any and all indebtedness of FMC to BAFC.
Subsequently, Canlubang Automotive Resources Corporation (CARCO) drew six Drafts in its
own favor, payable thirty (30) days after sight, charged to the account of FMC. FMC
thereafter executed trust receipts covering the motor vehicles delivered to it by CARCO.
CARCO assigned the drafts and trust receipts to BAFC. Upon default of FMC, BAFC sent
demand letter to the aforementioned sureties. They, however, failed to settle their
outstanding account so BAFC fileda complaint for a sum of money with prayer for
preliminary attachment. RTC ordered FMC, Palawan Lumber Manufacturing Corporation and
Joseph Chua jointly and severally to pay BAFC.
Issue:
Whether BAFC has a valid cause of action for a sum of money following the drafts and
trust receipts transactions.
Ruling:
YES.Petitioners finally posit that as an entruster, respondent BAFC must first demand
the return of the unsold vehicles from Fortune Motors Corporation, pursuant to the terms of
the trust receipts. Having failed to do so, petitioners had no cause of action whatsoever
against Fortune Motors Corporation and the action for collection of sum of money was,
therefore, premature. A trust receipt is a security transaction intended to aid in financing
importers and retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire credit except
through utilization, as collateral, of the merchandise imported or purchased. In the event of
default by the entrustee on his obligations under the trust receipt agreement, it is not
absolutely necessary that the entruster cancel the trust and take possession of the goods to
be able to enforce his rights thereunder. We ruled:
Significantly, the law uses the word may in granting to the entruster the right to
cancel the trust and take possession of the goods. Consequently, petitioner has the
discretion to avail of such right or seek any alternative action, such as a third party claim or
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a separate civil action which it deems best to protect its right, at any time upon default or
failure of the entrustee to comply with any of the terms and conditions of the trust
agreement.
_____________________________________________________________________________________________
_________________________________
LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P. LUCENTE v.
METROPOLITAN BANK & TRUST COMPANY
G.R. No. 159622 July 30, 2004 YNARES-SANTIAGO, J.
The initial repossession by the bank of the goods subject of the trust receipt did not
result in the full satisfaction of the petitioners loan obligation.
Facts:
Upon compliance with the requirements, Metrobankopened an irrevocable letter of
credit for Landl& Company Inc. On the maturity date of the trust receipt, Landl defaulted in
the payment of its obligation to the bank and failed to turn over the goods to the latter.
Metrobank demanded the turn over the goods subject of the trust receipt to which the
company obliged. The goods were sold to Metrobank as the highest bidder at a public
auction.The proceeds of the auction sale, however, were insufficient to completely satisfy
Landls outstanding obligation to the Bank. Accordingly, Metrobankdemanded the payment
of the remaining balance but to no avail. Hence, it filed a complaint for sum of money
against Landland its directors.
Issue:
Whether Metrobank had the right to claim the deficiency from Landl et al.
notwithstanding the fact that the goods covered by the trust receipt were fully turned over
to it.
Ruling:
YES. The initial repossession by the bank of the goods subject of the trust receipt did
not result in the full satisfaction of the petitioners loan obligation. Petitioners are apparently
laboring under the mistaken impression that the full turn-over of the goods suffices to divest
them of their obligation to repay the principal amount of their loan obligation. This is
definitely not the case. In Philippine National Bank v. Hon. Gregorio G. Pineda and Tayabas
Cement Company, Inc., we had occasion to rule:
PNBs possession of the subject machinery and equipment being precisely as a form
of security for the advances given to TCC under the Letter of Credit, said possession by itself
cannot be considered payment of the loan secured thereby. Payment would legally result
only after PNB had foreclosed on said securities, sold the same and applied the proceeds
thereof to TCC's loan obligation. Mere possession does not amount to foreclosure for
foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the
mortgagor on the property and includes the sale itself.
Neither can said repossession amount to dacion en pago. Dation in payment takes place
when property is alienated to the creditor in satisfaction of a debt in money and the same is
governed by sales. Dation in payment is the delivery and transmission of ownership of a
thing by the debtor to the creditor as an accepted equivalent of the performance of the
obligation. As aforesaid, the repossession of the machinery and equipment in question was
merely to secure the payment of TCC's loan obligation and not for the purpose of
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transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en pago
was ever accomplished.
Warehouse Receipt's Law
LIBERATA ANTONIO ESTRADA, CANUTO CENIZAN, NAZARIO DE LA CRUZ, GENARO
ALVARO, ET AL. v. COURT OF AGRARIAN RELATIONS and FAUSTINO F. GALVAN
G.R. Nos. L-17481 and L-17537 to L-17559 August 15, 1961 NATIVIDAD, J.
Facts:
It was ordered by the SC that the owner or manager of the Moncada Bonded
Warehouse release and give to Liberata Antonio Estrada et al. the remaining deposits and
that Faustino Galvan to surrender the original of the receipts of the palay deposits to the
manager or owner of the Moncada Bonded Warehouse. Notwithstanding service of notice
and in spite of repeated demands, they refused and still refuse to comply, the former, for the
reason that Liberata Antonio Estrada et al. could not surrender to him the original of the
warehouse receipts issued for the palay in question, and the latter, because he could not
locate any more said receipts. Hence, the present action was filed asking that the manager
and Faustino F. Galvan be declared in contempt of court and be punished accordingly.
Issue:
Whether the excuses offered justify their refusal to comply with the orders.
Ruling:
NO. The excuses respectively offered by the manager of the Moncada Bonded
Warehouse and respondent Faustino F. Galvan are not without some merits. The former
unquestionably had the right to protect the interest of the bonded warehouse of which he
was manager, as the warehouse receipts issued for the palay in question might have been
for the value in favor of innocent third parties; and the latter, or Faustino F. Galvan, might
have in fact lost said warehouse receipts in the manner above stated, for his allegation to
the effect in his answer to petitioners' motion for contempt until now has not been
contradicted. Such incidents, however, do not constitute a valid excuse to evade compliance
with the order of this Court that the palay in question be delivered to the petitioners, and,
considering that the petitioners, according to the manifestation filed by their counsel under
date of August 3, 1961, are in dire need of said palay for their subsistence, our order must
be carried out in the meantime that this cases have not been finally decided in order to
ameliorate the precarious situation in which said petitioners find themselves.
_____________________________________________________________________________________________
_________________________________
CONSOLIDATED TERMINALS, INC. v.ARTEX DEVELOPMENT CO., INC.
G.R. No.L-25748March 10, 1975 AQUINO, J.
Facts:
CTI was the operator of a customs bonded warehouse. It received on deposit one
hundred ninety-three (193) bales of high density compressed raw cotton. It was understood
that CTI would keep the cotton in behalf of Luzon Brokerage Corporation until the consignee
thereof, Paramount Textile Mills, Inc., had opened the corresponding letter of credit in favor
of shipper, Adolph Hanslik Cotton of Corpus Christi, Texas.Allegedly by virtue of a forged
permit to deliver imported goods,Artex Development Co. Inc. (Artex) was able to obtain
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delivery of the bales of cotton after paying CTI of the storage and handling charges.CTI
instituted an action to recover possession of the cotton by means of a writ of replevin but
the same could not be executed. CTI then filed an amended complaint for damages.
Issue:
Whether Artex is liable for damages.
Ruling:
NO. Its amended complaint does not clearly show that, as warehouseman, it has a
cause of action for damages against Artex. The real parties interested in the bales of cotton
were Luzon Brokerage Corporation as depositor, Paramount Textile Mills, Inc. as consignee,
Adolph Hanslik Cotton as shipper and the Commissioners of Customs and Internal Revenue
with respect to the duties and taxes. These parties have not sued CTI for damages or for
recovery of the bales of cotton or the corresponding taxes and duties.
In other words, on the basis of the allegations of the amended complaint, the lower
court could not render a valid judgment in accordance with the prayer thereof. It could not
render such valid judgment because the amended complaint did not unequivocally allege
what right of CTI was violated by Artex, or, to use the familiar language of adjective law,
what delict or wrong was committed by Artex against CTI which would justify the latter in
recovering the value of bales of cotton even if it was not the owner thereof.
_____________________________________________________________________________________________
_________________________________
PHILIPPINE NATIONAL BANK v. NOAH'S ARK SUGAR REFINERY, ALBERTO T.
LOOYUKO, JIMMY T. GO, WILSON T. GO
G.R. No. 107243 September 1, 1993 NARVASA, C.J.
Facts:
Noah's Ark Sugar Refinery issued on several dates warehouse receipts (quedans).
Being negotiable, the receipts covering sugar deposited by RNS Merchandising was
negotiated and indorsed to Luis Ramos. Those covering sugar deposited by St. Therese
Merchandising, RNS Merchandising andRosa Sy were indorsed and negotiated to
CresensiaZoleta. The two indorsees used the quedans as security for loans obtained by them
from the PNB. Since both of them defaulted, PNB demanded Noahs Ark to deliver the sugar
covered by the quedans. However, the latter refused to comply.PNB filed a complaint for
Specific Performance with Damages and Application for Writ of Attachment but the RTC
denied the application for preliminary attachment and the MR later filed. After Noahs Ark
filed its answer with counterclaim, PNB filed a motion for summary judgment which was
denied. On appeal, CA commanded that summary judgment be rendered in favor of the PNB.
Noah's Ark, et al. moved for reconsideration, but their motion was denied. The judgment
became final. Entry of Judgment was made and was remanded to the RTC. The trial rendered
judgment not in accordance with the decision of the CA. It later denied PNB's MR.
Issue:
Whether or not RTC gravely erred in rendering judgment different from that of the CA.
Ruling:
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YES. The Court of Appeals found correctly that the indications in the pleadings to the
contrary notwithstanding, no substantial triable issue of fact actually existed, and that
certain issues raised in answer, even if taken as established, would not materially change
the ultimate findings relative to the main claim. Its decision is entirely in accord with this
Court's rulings regarding the propriety of summary judgments invoked by the Appellate
Tribunal, i.e., Vergara, Sr. v. Suelto, and Mercado v. Court of Appeals. According to Vergara,
for instance, "even if the answer does tender issues and therefore a judgment on the
pleadings is not proper a summary judgment may still be rendered on the plaintiff's
motion if he can show to the Court's satisfaction that "except as to the amount of damages,
there is no genuine issue as to any material fact," that is to say, the issues thus tendered are
not genuine, are in other words sham, fictitious, contrived, set up in bad faith, patently
unsubstantial. The determination may be made by the Court on the basis of the pleadings,
and the depositions, admissions and affidavits that the movant may submit, as well as those
which the defendant may present in turn."
In any event, the conclusions of fact and law set out in the Appellate Court's decision
are undeniably binding on all the parties to the case, the respondent Regional Trial Judge
included. Having been rendered by a competent court within its jurisdiction, and having
become final and executory, the decision now operates as the immutable law among the
parties, the respondent Trial Judge included; it has become the law of the case and may no
longer, in subsequent proceedings, be altered or modified in any way, much less reversed or
set at naught, by the latter, or any other judge, not even by the Supreme Court; it is an
unalterable determination of the propriety of a summary judgment in the action in question,
and upon all the issues therein raised or which could have been raised relative to the merits
of said action.
_____________________________________________________________________________________________
_________________________________
PHILIPPINE NATIONAL BANK v. HON. PRES. JUDGE BENITO C. SE, JR., RTC, BR. 45,
MANILA; NOAHS ARK SUGAR REFINERY; ALBERTO T. LOOYUKO, JIMMY T. GO and
WILSON T. GO
G.R. No. 119231 April 18, 1996 HERMOSISIMA, JR., J.
Lien may be lost where the warehouseman surrenders the possession of the goods
without requiring payment of his lien, because a warehousemans lien is possessory in
nature.
Facts:
The SC rendered judgment in favor of PNB in G.R. No. 107243 (PNB v. Noahs Ark).
Noahs Ark et al. moved for reconsideration of this decision. The Supplemental/Second MR
with leave of court filed by them was denied. They likewise filed a Motion Seeking
Clarification of the Decision which was also denied. They thereupon filed before the RTC an
Omnibus Motion seeking among others the deferment of the proceedings until they are
heard on their claim for warehousemans lien. PNB filed a Motion for the Issuance of a Writ of
Execution and an Opposition to the Omnibus Motion. The RTC granted the Omnibus Motion
and found that there exists in favor of the Noahs Ark a valid warehousemans lien under
Section 27 of RA 2137. Consequently, the PNB filed the present petition to seek the
nullification of the assailed order of Judge Se.
Issue:
Whether Judge Se erred in rendering the assailed order.
Ruling:
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NO. Petitioner is in estoppel in disclaiming liability for the payment of storage fees
due the private respondents as warehouseman while claiming to be entitled to the sugar
stocks covered by the subject Warehouse Receipts on the basis of which it anchors its claim
for payment or delivery of the sugar stocks. The unconditional presentment of the receipts
by the petitioner for payment against private respondents on the strength of the provisions
of the Warehouse Receipts Law (R.A. 2137) carried with it the admission of the existence and
validity of the terms, conditions and stipulations written on the face of the Warehouse
Receipts, including the unqualified recognition of the payment of warehousemans lien for
storage fees and preservation expenses. Petitioner may not now retrieve the sugar stocks
without paying the lien due private respondents as warehouseman.
In view of the foregoing, the rule may be simplified thus: While the PNB is entitled to
the stocks of sugar as the endorsee of the quedans, delivery to it shall be effected only upon
payment of the storage fees.
Imperative is the right of the warehouseman to demand payment of his lien at this
juncture, because, in accordance with Section 29 of the Warehouse Receipts Law, the
warehouseman loses his lien upon goods by surrendering possession thereof. In other words,
the lien may be lost where the warehouseman surrenders the possession of the goods
without requiring payment of his lien, because a warehousemans lien is possessory in
nature.
_____________________________________________________________________________________________
_________________________________
PHILIPPINE NATIONAL BANK v. HON. MARCELINO L. SAYO, JR., in his capacity as
Presiding Judge of the Regional Trial Court of Manila (Branch 45), NOAHS ARK
SUGAR REFINERY, ALBERTO T. LOOYUKO, JIMMY T. GO and WILSON T. GO
G.R. No. 129918 July 9, 1998 DAVIDE, JR., J.
The loss of the warehousemans lien, however, does not necessarily mean the
extinguishment of the obligation to pay the warehousing fees and charges which continues
to be a personal liability of the owners.
Facts:
After the decision in G.R. No. 119231 (PNB v. Se) became final and executory, various
incidents took place before the trial court. Noahs Ark and its officers filed a Motion for
Execution of Defendants Lien as Warehouseman pursuant to SCs decision which was
opposed by PNB. The RTC, this time presided Hon. Marcelino L. Sayo Jr., granted the Motion
for Execution.PNB was immediately served with a Writ of Execution for the amount of
P662,548,611.50. PNB thus filed an Urgent Motion seeking the deferment of the
enforcement of the Writ of Execution.Nevertheless, the Sheriff levied on execution several
properties of PNB. The said bank also filed a MR with Urgent Prayer for Quashal of Writ of
Execution. After several exchanges of motions, JudgeSayodenied with finality for lack of
merit the motions filed by PNB.
Issue:
Whether PNB is liable for storage fees.
Ruling:
YES.Regrettably, the factual settings do not sufficiently indicate whether the demand
to obtain possession of the goods complied with Section 8 of the law. The presumption,
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nevertheless, would be that the law was complied with, rather than breached, by petitioner.
Upon the other hand, it would appear that the refusal of private respondents to deliver the
goods was not anchored on a valid excuse, i.e., non-satisfaction of the warehousemans lien
over the goods, but on an adverse claim of ownership. Private respondents justified their
refusal to deliver the goods, as stated in their Answer with Counterclaim and Third-Party
Complaint in Civil Case No. 90-53023, by claiming that they are still the legal owners of the
subject quedans and the quantity of sugar represented therein. Under the circumstances,
this hardly qualified as a valid, legal excuse. The loss of the warehousemans lien, however,
does not necessarily mean the extinguishment of the obligation to pay the warehousing fees
and charges which continues to be a personal liability of the owners, i.e., the pledgors, not
the pledgee, in this case. But even as to the owners-pledgors, the warehouseman fees and
charges have ceased to accrue from the date of the rejection by Noahs Ark to heed the
lawful demand by petitioner for the release of the goods.
The finality of our denial in G.R. No. 119231 of petitioners petition to nullify the trial
courts order of 01 March 1995 confirms the warehousemans lien; however, such lien,
nevertheless, should be confined to the fees and charges as of the date in March 1990 when
Noahs Ark refused to heed PNBs demand for delivery of the sugar stocks and in no event
beyond the value of the credit in favor of the pledgee (since it is basic that, in foreclosures,
the buyer does not assume the obligations of the pledgor to his other creditors even while
such buyer acquires title over the goods less any existing preferred lien thereover). The
foreclosure of the thing pledged, it might incidentally be mentioned, results in the full
satisfaction of the loan liabilities to the pledgee of the pledgors.
Banking Laws
General Banking Law of 2000
Definition and Classification of Banks
REPUBLIC OF THE PHILIPPINES v. SECURITY CREDIT AND ACCEPTANCE
CORPORATION, ROSENDO T. RESUELLO, PABLO TANJUTCO, ARTURO SORIANO,
RUBEN BELTRAN, BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D.
BALATBAT, JOSE SEBASTIAN and VITO TANJUTCO JR.
G.R. No.L-20583 January 23, 1967 CONCEPCION, C.J.
An investment company which loans out the money of its customers, collects the
interest and charges a commission to both lender and borrower, is a bank.
Facts:
Security Credit and Acceptance Corporation (SCAC) registered its articles of
incorporation with the SEC. Upon request, the legal counsel of Superintendent of Banks of
the Central Bank of the Philippines opined that the said corporation is a banking institution,
within the purview of RA 337. Municipal Court of Manila issued search warrant upon
application of members of the Manila Police Department and an agent of the Central Bank.
The examination of seized documents disclosed that SCAC receives deposits from the public
regularly. Such deposits are treated in the Corporation's financial statements as conditional
subscription to capital stock. And that out of the funds obtained from the public, loans are
made regularly to any person. The Solicitor General commenced quo warranto proceedings
for the dissolution of the said corporation.
Issue:
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Whether SCAC is engaged in banking.
Ruling:
YES. Although, admittedly, defendant corporation has not secured the requisite
authority to engage in banking, defendants deny that its transactions partake of the nature
of banking operations. It is conceded, however, that, in consequence of a propaganda
campaign therefor, a total of 59,463 savings account deposits have been made by the public
with the corporation and its 74 branches, with an aggregate deposit of P1,689,136.74, which
has been lent out to such persons as the corporation deemed suitable therefor. It is clear
that these transactions partake of the nature of banking, as the term is used in Section 2 of
the General Banking Act. Indeed, a bank has been defined as:
A moneyed institute founded to facilitate the borrowing, lending and safe-keeping of
money and to deal, in notes, bills of exchange, and credits.
An investment company which loans out the money of its customers, collects the
interest and charges a commission to both lender and borrower, is a bank.
Any person engaged in the business carried on by banks of deposit, of discount, or of
circulation is doing a banking business, although but one of these functions is exercised.
Accordingly, the defendant corporation has violated the law by engaging in banking
without securing the administrative authority required in Republic Act No. 337.
Distinction of Bank from Quasi-Banks and Trust Entities
TEODORO BAAS,* C. G. DIZON CONSTRUCTION, INC., and CENEN DIZON v. ASIA
PACIFIC FINANCE CORPORATION, substituted by INTERNATIONAL CORPORATE
BANK now known as UNION BANK OF THE PHILIPPINES
G.R. No. 128703 October 18, 2000 BELLOSILLO, J.
What is prohibited by law is for investment companies to lend funds obtained from
the public through receipts of deposit.
Facts:
Teodoro Baas executed a promissory note in favor of C. G. Dizon Construction. Later,
C. G. Dizon Construction endorsed with recourse the PN to Asia Pacific, and to secure
payment, it executed a Deed of Chattel Mortgage. C. G. Dizon Construction defaulted in the
payment of the remaining installments. As the demand was unheeded, Asia Pacific filed a
complaint for a sum of money with prayer for a writ of replevin against Teodoro Baas, C. G.
Dizon Construction and Cenen Dizon. They claimed, however, that since Asia Pacific could
not directly engage in banking business, it proposed to them a scheme wherein Asia Pacific
could extend a loan to them without violating banking laws.
Issue:
Whether the disputed transaction between petitioners and Asia Pacific violated
banking laws.
Ruling:
NO. An investment company refers to any issuer which is or holds itself out as being
engaged or proposes to engage primarily in the business of investing, reinvesting or trading
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in securities. As defined in Sec. 2, par. (a), of the Revised Securities Act, securities "shall
include commercial papers evidencing indebtedness of any person, financial or non-financial
entity, irrespective of maturity, issued, endorsed, sold, transferred or in any manner
conveyed to another with or without recourse, such as promissory notes"
Clearly, the transaction between petitioners and respondent was one involving not a
loan but purchase of receivables at a discount, well within the purview of "investing,
reinvesting or trading in securities" which an investment company, like ASIA PACIFIC, is
authorized to perform and does not constitute a violation of the General Banking Act.
Moreover, Sec. 2 of the General Banking Act provides:
Only entities duly authorized by the Monetary Board of the Central Bank may engage
in the lending of funds obtained from the public through the receipt of deposits of any kind,
and all entities regularly conducting such operations shall be considered as banking
institutions and shall be subject to the provisions of this Act, of the Central Bank Act, and of
other pertinent laws
Indubitably, what is prohibited by law is for investment companies to lend funds
obtained from the public through receipts of deposit, which is a function of banking
institutions. But here, the funds supposedly "lent" to petitioners have not been shown to
have been obtained from the public by way of deposits, hence, the inapplicability of banking
laws.
_____________________________________________________________________________________________
_________________________________
FIRST PLANTERS PAWNSHOP, INC. v. COMMISSIONER OF INTERNAL REVENUE
G.R. No. 174134 July 30, 2008 AUSTRIA-MARTINEZ, J.
It need not be elaborated that pawnshops are non-banks/banking institutions.
Moreover, the nature of their business activities partakes that of a financial intermediary in
that its principal function is lending.
Facts:
First Planters Pawnshop (FPP) received Pre-Assessment Notice from the BIR that it has
an existing tax deficiency on its VAT and DST liabilities for the year 2000. It subsequently
received a Formal Assessment Notice directing payment of VAT deficiency. It filed protest on
both notices which were denied on the ground that it is considered as a non-bank financial
intermediary thus subject to VAT.
Issue:
Whether pawnshops are non-bank financial intermediaries.
Ruling:
YES. R.A. No. 337, as amended, or the General Banking Act characterizes the terms
banking institution and bank as synonymous and interchangeable and specifically include
commercial banks, savings bank, mortgage banks, development banks, rural banks, stock
savings and loan associations, and branches and agencies in the Philippines of foreign
banks. R.A. No. 8791 or the General Banking Law of 2000, meanwhile, provided that banks
shall refer to entities engaged in the lending of funds obtained in the form of deposits. R.A.
No. 8791 also included cooperative banks, Islamic banks and other banks as determined by
the Monetary Board of the Bangko Sentral ng Pilipinas in the classification of banks.
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Financial intermediaries, on the other hand, are defined as persons or entities whose
principal functions include the lending, investing or placement of funds or evidences of
indebtedness or equity deposited with them, acquired by them, or otherwise coursed
through them, either for their own account or for the account of others.
A pawnshop's business and operations are governed by Presidential Decree (P.D.) No.
114 or the Pawnshop Regulation Act and Central Bank Circular No. 374 (Rules and
Regulations for Pawnshops). Section 3 of P.D. No. 114 defines pawnshop as a person or
entity engaged in the business of lending money on personal property delivered as security
for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or
pawn brokerage.
Bank Powers and Liabilities
REGISTER of DEEDS OF MANILA v. CHINA BANKING CORPORATION
G.R. No.L-11964 April 28, 1962 DIZON, J.
Foreign owned banks may only register lands in its name under certain
circumstances.
Facts:
Alfonso Pangilinan and one Guillermo Chua were charged with qualified theft.
Pangilinan and his wife, Belen Sta. Ana, executed a public instrument entitled DEED OF
TRANSFER whereby, after admitting his civil liability in favor of his employer, the China
Banking Corporation, in relation to the offense aforesaid, he ceded and transferred to the
latter a parcel of land. The deed was presented for registration but because the transferee
was alien-owned and, as such, barred from acquiring lands in the Philippines.
Issue:
Whether the land is registrable.
Ruling:
NO. Paragraph (c), Section 25 of Republic Act 337 allows a commercial bank to
purchase and hold such real estate as shall be conveyed to it in satisfaction of debts
previously contracted in the course of its dealings, We deem it quite clear and free from
doubt that the "debts" referred to in this provision are only those resulting from previous
loans and other similar transactions made or entered into by a commercial bank in the
ordinary course of its business as such. Obviously, whatever "civil liability" arising from
the criminal offense of qualified theft was admitted in favor of appellant bank by its
former employee, Alfonso Pangilinan, was not a debt resulting from a loan or a similar
transaction had between the two parties in the ordinary course of banking business.
Neither do the provisions of paragraph (d) of the Same section apply to the present
case because the deed of transfer in question can in no sense be considered as a sale made
by virtue of a judgment, decree, mortgage, or trust deed held by appellant bank. In the
same manner it cannot be said that the real property in question was purchased by
appellant "to secure debts due to it", considering that, as stated heretofore, the term debt
employed in the pertinent legal provision can logically refer only to such debts as may
become payable to appellant bank as a result of a banking transaction.
_____________________________________________________________________________________________
_________________________________
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BANCO DE ORO-EPCI, INC. v. JAPRL DEVELOPMENTCORPORATION, RAPIDFORMING
CORPORATIONand JOSE U. AROLLADO
G.R. No. 179901April 14, 2008 CORONA, J.
Banks have the right to annul any credit accommodation or loan, and demand the
immediate payment thereof, from borrowers proven to be guilty of fraud.
Facts:
Banco de Oro-EPCI, Inc. extended credit facilities to JAPRL. Rapid Forming Corporation
(RFC) and Jose U. Arollado acted as JAPRLs sureties.JAPRL defaulted in the payment of four
trust receipts. Banco de Oro-EPCI demanded immediate payment of JAPRLs outstanding
obligations after learning that JAPRL had altered and falsified its financial statements.
Issue:
Whether the bank can demand immediate payment.
Ruling:
YES.Banks are entities engaged in the lending of funds obtained through
depositsfrom the public. They borrow the publics excess money (i.e., deposits) and lend out
the same. Banks therefore redistribute wealth in the economy by channeling idle savings to
profitable investments.
Banks operate (and earn income) by extending credit facilities financed primarily by
deposits from the public. They plough back the bulk of said deposits into the economy in the
form of loans. Since banks deal with the publics money, their viability depends largely on
their ability to return those deposits on demand. For this reason, banking is undeniably
imbued with public interest. Consequently, much importance is given to sound lending
practices and good corporate governance.
Meanwhile, the Makati RTC should proceed to hear Civil Case No. 03-991 against the
three respondents guided by Section 40 of the General Banking Law.
Under this provision, banks have the right to annul any credit accommodation or
loan, and demand the immediate payment thereof, from borrowers proven to be guilty of
fraud.
Banking and Incidental Powers
SPOUSES RAUL and AMALIA PANLILIO v. CITIBANK, N.A.
G.R. No. 156335 November 28, 2007 AUSTRIA-MARTINEZ, J.
Investment management activities may be exercised by a banking institution.
Facts:
Amalia Panlilio phoned Citibank saying she wanted to place an investment. During
the visit, Amalia instructed Lee, a bank employees, on what to do with the investment.
Later, she learned that part of it was placed by Citibank in a Long-Term Commercial Paper
(LTCP), a debt instrument that paid a high interest, issued by the corporation Camella and
Palmera Homes (C&P Homes). The rest of the money was placed in two Peso Repriceable
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Promissory Note (PRPN) accounts, in trust for each of Amalia's two children. The bank claims
to have regularly sent confirmations of investment (COIs) to Amalia. Later, Spouses Panlilio
met with the Banks employee to preterminate the LTCP and their other investments but
were told that as to the LTCP, liquidation could be made only if there is a willing buyer, a
prospect which could be difficult at that time because of the economic crisis. Spouses sent
three demand letters to the Bank for a withdrawal of her investment as soon as possible.
Issue:
Whether the Bank can exercise investment management activities.
Ruling:
YES. The transaction is perfectly legal, investment management activities may be
exercised by a banking institution, pursuant to Republic Act No. 337 or the General Banking
Act of 1948, as amended, which was the law then in effect.
Petitioners may not seek a return of their investment directly from respondent at or
prior to maturity. The investment is not a deposit and is not guaranteed by respondent.
Absent any fraud or bad faith, the recourse of petitioners in the LTCP is solely against the
issuer, C&P Homes, and only upon maturity.
Diligence Required of Banks - Relevant Jurisprudence
PACIFIC BANKING CORPORATION and CHESTER G. BABST v. THE COURT OF
APPEALS, JOSEPH C. HART and ELEANOR HART
G.R. No.L-45656May 5, 1989 GUTIERREZ, JR., J.
Foreclosure may only be done if the debtor is already in default.
Facts:
Joseph and Eleanor Hart organized Insular Farms Inc. and borrowed from Pacific
Banking Corporation (PBC).The business struggled, PBC and its then Executive Vice
President, Chester Babst, did not demand payment for the initial installment nor of the entire
obligation, but instead opted for more collateral in addition to the Continuing Guaranty of
John Clarkin. All Insular Farms shares of stocks were pledged to the Bank in lieu of additional
collateral and to insure an extension of the period to pay. Within less than a month, PBC
wrote Insular Farms Inc. giving the latter 48 hours to pay its entire obligation. Due to
nonpayment of debt, PBC sold the 1,000 shares of stocks of Insular Farms to Pacific Farms.
Meanwhile, Joseph Hart filed another case for recovery of sum of money comprising his
investments and earnings against Insular Farms, Inc. The cases were tried jointly and the
RTC ruled in favor of PBC and Hart. On appeal, CA modified the judgment.
Issue:
Whether PBC has the right to collect on the loan.
Ruling:
NO. It was established that there was an agreement to extend indefinitely the
payment of the installment of P50,000.00 in July 1957 as provided in the promissory note.
Consequently, Pacific Banking Corporation was precluded from enforcing the payment of the
said installment of July 1957, before the expiration of the indefinite period of extension,
which period had to be fixed by the court as provided in Art. 1197 of the Civil Code.
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Even the pledge which modified the fixed period in the original promissory note, did
not provide for dates of payment of installments, nor of any fixed date of maturity of the
whole amount of indebtedness. Accordingly, the date of maturity of the indebtedness should
be as may be determined by the proper court under Art. 1197 of the Civil Code. Hence, the
disputed foreclosure and the subsequent sale were premature.
_____________________________________________________________________________________________
_________________________________
SIMEX INTERNATIONAL (MANILA), INCORPORATED v.
THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK
G.R. No. 88013March 19, 1990 CRUZ, J.
Bank is under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship.
Facts:
Simex deposited to its account in Traders Royal Bankthe amount of P100,000.00.
Subsequently, Simex issued several checks against its deposit but was suprised to learn
later that they had been dishonored for insufficient funds. Investigation disclosed that the
sum of P100,000.00 deposited had not been credited to it. The error was rectified and the
dishonored checks were paid after they were re-deposited. Simex then demanded reparation
from the Bank for its "gross and wanton negligence." This demand was not met. Thus, Simex
filed a complaint claiming from moral damages and exemplary damages.
Issue:
Whether Simex is entitled to moral and exemplary damages.
Ruling:
YES. In every case, the depositor expects the bank to treat his account with the
utmost fidelity, whether such account consists only of a few hundred pesos or of millions.
The bank must record every single transaction accurately, down to the last centavo, and as
promptly as possible. This has to be done if the account is to reflect at any given time the
amount of money the depositor can dispose of as he sees fit, confident that the bank will
deliver it as and to whomever he directs. A blunder on the part of the bank, such as the
dishonor of a check without good reason, can cause the depositor not a little embarrassment
if not also financial loss and perhaps even civil and criminal litigation.
The point is that as a business affected with public interest and because of the nature
of its functions, the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship. In the case
at bar, it is obvious that the respondent bank was remiss in that duty and violated that
relationship. What is especially deplorable is that, having been informed of its error in not
crediting the deposit in question to the petitioner, the respondent bank did not immediately
correct it but did so only one week later or twenty-three days after the deposit was made. It
bears repeating that the record does not contain any satisfactory explanation of why the
error was made in the first place and why it was not corrected immediately after its
discovery. Such ineptness comes under the concept of the wanton manner contemplated in
the Civil Code that calls for the imposition of exemplary damages.
_____________________________________________________________________________________________
_________________________________
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LUZAN SIA v. CA AND SECURITY BANK AND TRUST COMPANY
G.R. No. 102970, May13, 1993, Davide, Jr., J.
A contract for the use of a safety deposit box is a special kind of deposit in which the
relation between a bank renting out safe deposit boxes and its customer with respect to the
contents of the box is that of a bailor and bailee.
Facts:
Sia rented a Safety Deposit Box of Security Bank and Trust Company (SBTC) where he
placed his collection of stamps. The safety deposit box rented was at the lowest level of the
safety deposit boxes of SBTC. During the floods that took place, floodwater entered into
SBTCs premises, seeped into the safety deposit box of Sia and damaged his stamps
collection. SBTC rejected Sias claim for compensation for his damaged stamps collection
hence Sia filed for damages against SBTC which denied liability based on the Rules and
Regulations Governing the Lease of Safe Deposit Boxes which states in paragraphs 9 and 13
that the liability of SBTC is limited to the exercise of the diligence to prevent the opening of
the safe by any person other than the renter or his agent; and that SBTC not a depository of
the contents of the safe and has neither the possession nor the control of the same.
Moreover, SBTC also contended that its contract was a lease and not deposit, that the cause
of the destruction was beyond its control and there was no obligation to notify Sia about the
flood.
Issue:
Whether the agreement entered into by the parties is just a contract of lease.
Ruling:
NO. In the recent case of CA Agro-Industrial Development Corp. vs. Court of
Appeals(G.R. No. 90027, March 3,1993), this Court explicitly rejected the contention that a
contract for the use of a safety deposit box is a contract of lease governed by Title VII, Book
IV of the Civil Code. Nor did We fully subscribe to the view that it is a contract of deposit to
be strictly governed by the Civil Code provision on deposit; it is, as We declared, a special
kind of deposit. The prevailing rule in American jurisprudence -- that the relation between a
bank renting out safe deposit boxes and its customer with respect to the contents of the
box is that of a bailor and bailee, the bailment being for hire and mutual benefit -- has been
adopted in this jurisdiction, thus:
In the context of our laws which authorize banking institutions to rent out safety
deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States has
been adopted. Section 72 of the General Banking Act [R.A. 337, as amended] pertinently
provides: SEC. 72. In addition to the operations specifically authorized elsewhere in this Act,
banking institutions other than building and loan associations may perform the following
services: (a) Receive in custody funds, documents, and valuable objects, and rent safety
deposit boxes for the safeguarding of such effects.The banks shall perform the services
permitted under subsections (a), (b) and (c) of this section as depositories or as agents.
It must be noted that conditions No. 13 and No. 14 in the Contract of Lease of Safety
Deposit Box in CA Agro-Industrial Development Corp. are strikingly similar to condition No.
13 in the instant case. On the other hand, both condition No. 8 in CA Agro-Industrial
Development Corp. and condition No. 9 in the present case limit the scope of the exercise of
due diligence by the banks involved to merely seeing to it that only the renter, his
authorized agent or his legal representative should open or have access to the safety
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deposit box. In short, in all other situations, it would seem that SBTC is not bound to exercise
diligence of any kind at all. Assayed in the light of Our aforementioned pronouncements
in CA Agro-Industrial Development Corp., it is not at all difficult to conclude that both
conditions No. 9 and No. 13 of the Lease Agreement covering the safety deposit box in
question must be stricken down for being contrary to law and public policy as they are
meant to exempt SBTC from any liability for damage, loss or destruction of the contents of
the safety deposit box which may arise from its own or its agents fraud, negligence or delay.
Accordingly, SBTC cannot take refuge under the said conditions.
_____________________________________________________________________________________________
_________________________________
GREGORIO REYES AND CONSUELO PUYAT-REYESv. CA AND FAR EAST BANK AND
TRUST CO.
G.R. No. 118492, August15, 2001, De Leon, Jr., J.
Banks are duty bound to treat the deposit accounts of their depositors with the
highest degree of care but the same higher degree of diligence is not expected to be
exerted by banks in commercial transactions that do not involve their fiduciary relationship
with their depositors.
Facts:
The Philippine Racing Club, Inc. (PRCI) sent delegates to the 20 thAsian Racing
Conference in Sydney, Australia. Gregorio Reyes sent Godofredo Reyes to FEBTC to apply for
a foreign exchange demand draft (FXDD) amounting to AU$1,610 payable to the order of the
20th Asian Racing Conference Secretariat. Mr. Yasis, FEBTCs assistant cashier, denied the
application since FEBTC did not have an Australian dollar account in any bank in Sydney.
Godofredo asked if there is a way for FEBTC to accommodate PRCIs urgent need to remit
Australian dollars. Yasis informed Godofredo of a roundabout way of effecting the requested
remittance to Sydney thus: FEBTC would draw a demand draft against Westpac-Sydney and
have the latter reimburse itself from the U.S. dollar account of FEBTC in Westpac-New York in
which PRCI and Gregorio agreed. FEBTC approved the application and issued the FXDD.
However, it was dishonored stating No account held with Westpac. Westpac-New York sent
a cable to FEBTC informing that AU$1,610.00 was debited in its dollar account. In response
to PRCIs complaint about the dishonor, FEBTC informed Westpac-Sydney of the issuance of
the FXDD drawn against the Westpac-Sydney and informing it to be reimbursed from
FEBTCs dollar account in Westpac-New York. FEBTC informed Westpac-New York requesting
the latter to honor the reimbursement claim of Westpac-Sydney. However, the FXDD was
again dishonored by Westpac-Sydney for the same reason.
Issue:
Whether FEBTC is required to exercise the highest degree of care as to its commercial
dealings.
Ruling:
NO. In Philippine Bank of Commerce v. Court of Appeals (G.R. No. 976276, March 14,
1997) upholding a long standing doctrine, we ruled that the degree of diligence required of
banks, is more than that of a good father of a family where the fiduciary nature of their
relationship with their depositors is concerned. In other words, banks are duty bound to treat
the deposit accounts of their depositors with thehighest degree of care. But the said ruling
applies only to cases where banks act under their fiduciary capacity, that is, as depositary of
the deposits of their depositors. But the same higher degree of diligence is not expected to
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be exerted by banks in commercial transactions that do not involve their fiduciary
relationship with their depositors.
Considering the foregoing, the respondent bank was not required to exert more than
the diligence of a good father of a family in regard to the sale and issuance of the subject
foreign exchange demand draft. The case at bar does not involve the handling of petitioners
deposit, if any, with the respondent bank. Instead, the relationship involved was that of a
buyer and seller, that is, between the respondent bank as the seller of the subject foreign
exchange demand draft, and PRCI as the buyer of the same, with the 20th Asian Racing
Conference Secretariat in Sydney, Australia as the payee thereof. As earlier mentioned, the
said foreign exchange demand draft was intended for the payment of the registration fees of
the petitioners as delegates of the PRCI to the 20th Asian Racing Conference in Sydney.
_____________________________________________________________________________________________
_________________________________
THE CONSOLIDATED BANK AND TRUST CORP. v. CA AND L.C. DIAZ AND COMPANY
G.R. No. 138569, September 11, 2003, Carpio, J.
The bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship. The fiduciary nature of
banking requires banks to assume a degree of diligence higher than that of a good father of
a family.
Facts:
L.C. Diaz opened a savings account with Solidbank. L.C. Diaz through its cashier,
Macaraya, filled up a savings cash deposit slip and a savings checks deposit slip. Macaraya
instructed Calapre to deposit the money with Solidbank and was given the Solidbank
passbook. Calapre went to Solidbank and presented to Teller No. 6 the deposit slips and the
passbook which acknowledged receipt of the deposit by returning to Calapre the duplicate
copies of the two deposit slips. Since the transaction took time, Calapre left the passbook
with Solidbank and went to Allied Bank to make a deposit. When Calapre returned, Teller No.
6 informed him that "somebody got the passbook." Calapre reported the incident. Macaraya
immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya,
together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and
check. When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got
the passbook but she could not remember to whom she gave the passbook. Teller No. 6
handed to Macaraya a deposit slip for the deposit of a check for P90,000 drawn on Philippine
Banking Corporation (PBC) which is a check of L.C. Diaz that it had "long closed."PBC
dishonored the check because of insufficient funds and because the signature in the check
differed from PBC's specimen signature. Failing to get back the passbook, Macaraya went
back to her office and reported the matter to the Personnel Manager Emmanuel Alvarez.
Luis Diaz called up and wrote to Solidbank to stop any transaction using the same
passbook until L.C. Diaz could open a new account. Diaz learned of the unauthorized
withdrawal of P300,000 from its savings account. The withdrawal slip for the P300,000 bore
the signatures of the authorized signatories of L.C. Diaz, namely Diaz and Murillo. The
signatories, however, denied signing the withdrawal slip.
Issue:
Whether Solidbank is liable for breach of contract due to negligence.
Ruling:
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YES. The law imposes on banks high standards in view of the fiduciary nature of
banking. Section 2 of Republic Act No. 8791 ("RA 8791"), which took effect on 13 June 2000,
declares that the State recognizes the "fiduciary nature of banking that requires high
standards of integrity and performance." This new provision in the general banking law,
introduced in 2000, is a statutory affirmation of Supreme Court decisions, starting with the
1990 case of Simex International v. Court of Appeals(G.R. No. 88013, March 19,
1990), holding that "the bank is under obligation to treat the accounts of its depositors with
meticulous care, always having in mind the fiduciary nature of their relationship."
This fiduciary relationship means that the bank's obligation to observe "high
standards of integrity and performance" is deemed written into every deposit agreement
between a bank and its depositor. The fiduciary nature of banking requires banks to assume
a degree of diligence higher than that of a good father of a family. Article 1172 of the Civil
Code states that the degree of diligence required of an obligor is that prescribed by law or
contract, and absent such stipulation then the diligence of a good father of a family. Section
2 of RA 8791 prescribes the statutory diligence required from banks - that banks must
observe "high standards of integrity and performance" in servicing their depositors.
Although RA 8791 took effect almost nine years after the unauthorized withdrawal of the
P300,000 from L.C. Diaz's savings account, jurisprudence at the time of the withdrawal
already imposed on banks the same high standard of diligence required under RA No. 8791.
The bank must not only exercise "high standards of integrity and performance," it
must also insure that its employees do likewise because this is the only way to insure that
the bank will comply with its fiduciary duty. Solidbank failed to present the teller who had
the duty to return to Calapre the passbook, and thus failed to prove that this teller exercised
the "high standards of integrity and performance" required of Solidbank's employees.
_____________________________________________________________________________________________
CITIBANK, N.A. v. SPOUSES LUIS AND CARMELITA CABAMONGAN AND THEIR SONS
LUIS CABAMONGAN JR. AND LITO CABAMONGAN
G.R. No. 146918, May 2, 2006, Austria-Martinez, J.
Banking business is impressed with public interest, of paramount importance thereto
is the trust and confidence of the public in general. Consequently, the highest degree of
diligence is expected, and high standards of integrity and performance are even required, of
it.
Facts:
Spouses Cabamongan opened a joint "and/or" foreign currency time deposit in trust
for their sons Luis, Jr. and Lito at Citibank. Prior to maturity, a person claiming to be
Carmelita went to Citibank and pre-terminated the time deposit by presenting a passport, a
Bank of America Versatele Card, an ATM card and a Mabuhay Credit Card. She filled up forms
for pre-termination of deposits with the assistance of Account Officer San Pedro. Since the
said person failed to surrender the original Certificate of Deposit, she had to execute a
notarized release and waiver document in favor of Citibank, pursuant to Citibank's internal
procedure, before the money was released to her. The release and waiver document was not
notarized on that same day but the money was given. After she left, San Pedro saw that she
left an ID. Thus, San Pedro called up Carmelita's listed address. Marites, the wife of Lito,
answered and was stunned that Carmelita pre-terminated her time deposit because
Carmelita was in the U.S. at that time. Marites informed Carmelita about what happened. It
seems an unidentified person broke in at the spouses' residence. Hence, the spouses
informed Citibank that Carmelita was in the U.S. and did not pre-terminate their deposit and
that the person who did so was an impostor who could have also been involved in the breakin of their California residence. The spouses made a formal demand upon Citibank for
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payment of their pre-terminated but refused. Thus, the spouses file for Specific Performance
with Damages.
Issue:
Whether Citibank is negligent for failure to exercise the required diligence from
banks.
Ruling:
YES. The Court has repeatedly emphasized that, since the banking business is
impressed with public interest, of paramount importance thereto is the trust and confidence
of the public in general. Consequently, the highest degree of diligence is expected, and high
standards of integrity and performance are even required, of it. By the nature of its
functions, a bank is "under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship."
In this case, it has been sufficiently shown that the signatures of Carmelita in the
forms for pre-termination of deposits are forgeries. Citibank, with its signature verification
procedure, failed to detect the forgery. Its negligence consisted in the omission of that
degree of diligence required of banks. The Court has held that a bank is "bound to know the
signatures of its customers; and if it pays a forged check, it must be considered as making
the payment out of its own funds, and cannot ordinarily charge the amount so paid to the
account of the depositor whose name was forged." Such principle equally applies here.
Citibank cannot label its negligence as mere mistake or human error. Banks handle
daily transactions involving millions of pesos. By the very nature of their works the degree of
responsibility, care and trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees. Banks are expected to exercise the
highest degree of diligence in the selection and supervision of their employees.
_____________________________________________________________________________________________
_________________________________
PHILIPPINE SAVINGS BANK v. CHOWKING FOOD CORPORATION
G.R. No. 177526, July 4, 2008, Reyes, J.
The General Banking Law of 2000 requires of banks the highest standards of integrity
and performance. A bank is "under obligation to treat the accounts of its depositors with
meticulous care.
Facts:
Joe Kuan Food Corp. issued in favor of Chowking five PSBank checks. On the
respective due dates of each check, Chowking's acting accounting manager, Manzano,
endorsed and encashed the checks and were honored even with only the endorsement of
Manzano approving them. The signatures of the other authorized officers of Chowking were
absent contrary to usual banking practice. Manzano absconded with and misappropriated
the check proceeds. When Chowking found out Manzano's scheme, it demanded
reimbursement from PSBank which refused. Hence, Chowking filed a complaint for a sum of
money with damages. PSBank and bank manager Santos filed cross claims and third party
complaints against Manzano. Despite all diligent efforts, summonses were not served to
Manzano. Manzano was declared in default for failure to file a responsive pleading. PSBank
did not controvert the foregoing facts, but denied liability and maintained it exercised due
diligence in the supervision of all its employees. It even dismissed Santos after she was
found guilty of negligence in the performance of her duties. However, Santos denied that
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she was negligent and contended that she merely followed the bank's practice of honoring
Chowking's checks even if accompanied only by Manzano's endorsement. PSBank claims
that the proximate cause of Chowking's loss was its own negligence.
Issue:
Whether PSBank failed to observe the diligence required of banks under the law
which is the proximate cause of Chowkings loss.
Ruling:
YES. It cannot be over emphasized that the banking business is impressed with
public interest. Of paramount importance is the trust and confidence of the public in general
in the banking industry. Consequently, the diligence required of banks is more than that of a
Roman pater familias or a good father of a family. The highest degree of diligence is
expected. In its declaration of policy, the General Banking Law of 2000 requires of banks the
highest standards of integrity and performance. Needless to say, a bank is "under obligation
to treat the accounts of its depositors with meticulous care. The fiduciary nature of the
relationship between the bank and the depositors must always be of paramount concern.
Proximate cause is determined by the facts of the case. It is that cause which, in natural and
continuous sequence, unbroken by any efficient intervening cause, produces the injury, and
without which the result would not have occurred. Measured by the foregoing yardstick, the
proximate cause of the loss is not respondent's alleged negligence in allowing Manzano to
take hold and encash respondent's checks. The proximate cause is petitioner's own
negligence in the supervision of its employees when it overlooked the irregular practice of
encashing checks even without the requisite endorsements.
_____________________________________________________________________________________________
_________________________________
PHILIPPINE NATIONAL BANK v. ERLANDO RODRIGUEZ AND NORMA RODRIGUEZ
G.R. No. 170325, September 26, 2008, Reyes, J.
The Court has recognized the unique public interest possessed by the banking
industry and the need for the people to have full trust and confidence in their banks. For
this reason, banks are minded to treat their customer's accounts with utmost care,
confidence, and honesty. Further, banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees.
Facts:
Spouses Rodriguez maintained savings and demand/checking accounts in PNB. They
were engaged in informal lending business and had a discounting arrangement with
PEMSLA, an association of PNB employees. PEMSLA also maintained current and savings
accounts in PNB.PEMSLA grants loans to its members and the spouses would rediscount the
postdated checks issued to members whenever the association was short of funds. The
spouses would replace the postdated checks with their own checks issued in the name of the
members. It was PEMSLA's policy not to approve applications for loans of members with
outstanding debts. However, some PEMSLA officers obtained additional loans by using the
names of other members without their consent. The PEMSLA checks issued for these loans
were given to the spouses and the officers forged the indorsement of the named payees in
the checks. The PEMSLA checks were deposited by the spouses to their account. Meanwhile,
the Rodriguez checks were deposited directly by PEMSLA to its savings account without any
indorsement from the named payees. This irregular procedure was made through Palermo,
Jr., treasurer of PEMSLA and bank teller in PNB.Later, PNB found out said acts and closed the
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current account of PEMSLA and the PEMSLA checks deposited by the spouses were
dishonored. The Rodriguez checks were deposited to the PEMSLA account and were duly
debited. Thus, because the PEMSLA checks given as payment were returned, the spouses
incurred losses from the rediscounting transactions. The spouses filed for damages and
sought to recover the value of their checks contending that PNB credited the checks to the
PEMSLA account even without indorsements. PNB violated its contractual obligation and paid
the wrong payees, hence, it should bear the loss.
Issue:
Whether or not PNB is negligent for accepting the checks even without any
indorsement from the payees.
Ruling:
YES. A bank that regularly processes checks that are neither payable to the
customer nor duly indorsed by the payee is apparently grossly negligent in its operations.
This Court has recognized the unique public interest possessed by the banking industry and
the need for the people to have full trust and confidence in their banks. For this reason,
banks are minded to treat their customer's accounts with utmost care, confidence, and
honesty.In a checking transaction, the drawee bank has the duty to verify the genuineness
of the signature of the drawer and to pay the check strictly in accordance with the drawer's
instructions, i.e., to the named payee in the check. It should charge to the drawer's
accounts only the payables authorized by the latter. Otherwise, the drawee will be violating
the instructions of the drawer and it shall be liable for the amount charged to the drawer's
account.
The checks were presented to PNB for deposit by a representative of PEMSLA absent any
type of indorsement, forged or otherwise. The facts clearly show that the bank did not pay
the checks in strict accordance with the instructions of the drawers, respondents-spouses.
Instead, it paid the values of the checks not to the named payees or their order, but to
PEMSLA, a third party to the transaction between the drawers and the payees. Moreover,
PNB was negligent in the selection and supervision of its employees. The trustworthiness of
bank employees is indispensable to maintain the stability of the banking industry. Thus,
banks are enjoined to be extra vigilant in the management and supervision of their
employees. In Bank of the Philippine Islands v. Court of Appeals (G.R. No. 102383,
November 26, 1992), this Court cautioned thus: Banks handle daily transactions involving
millions of pesos. By the very nature of their work the degree of responsibility, care and
trustworthiness expected of their employees and officials is far greater than those of
ordinary clerks and employees. For obvious reasons, the banks are expected to exercise the
highest degree of diligence in the selection and supervision of their employees.
_____________________________________________________________________________________________
_________________________________
CENTRAL BANK OF THE PHILIPPINES v. CITYTRUST BANKING CORPORATION
G.R. No. 141835, February4, 2009, Carpio-Morales, J.
The law imposes on banks high standards in view of the fiduciary nature of banking.
The fiduciary nature of banking requires banks to assume a degree of diligence higher than
that of a good father of a family.
Facts:
Citytrust maintained a demand deposit account with Central Bank (CB) and furnished
CB with the names and signatures of its officers authorized to sign checks and serve as
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drawers and indorsers for its account as well as the list and signatures of its roving tellers.
CB issued security IDs to the roving tellers one of whom was Flores who presented for
payment to CB's Senior Teller Dela Cruz two Citytrust checks payable to Citytrust which were
signed and indorsed by Citytrust's authorized signatory-drawers. Dela Cruz verified and
prepared the cash transfer slip and asked Flores to sign. However, Flores signed as "Rosauro
C. Cayabyab" which Dela Cruz did not notice. Dela Cruz sent the cash transfer slip and
checks to CB's Cash Department where an officer verified and approved them and paid
Flores. CB debited the checks from Citytrust's account. Later, Citytrust alleged that the
checks were already cancelled because they were stolen and demanded CB to restore the
amounts covered but the latter did not do so. Hence, Citytrust filed a complaint for estafa
against Flores who was convicted. Then, Citytrust filed a complaint for recovery of sum of
money with damages against CB for encashing the checks and in charging the proceeds to
its account, despite the lack of authority of "Rosauro C. Cayabyab."
Issue:
Whether the Central Bank is negligent in releasing the proceeds of the checks to
Flores despite lack of proper verification of signature.
Ruling:
YES. Petitioner's teller Iluminada did not verify Flores' signature on the flimsy excuse
that Flores had had previous transactions with it for a number of years. That circumstance
did not excuse the teller from focusing attention to or at least glancing at Flores as he was
signing, and to satisfy herself that the signature he had just affixed matched that of his
specimen signature. Had she done that, she would have readily been put on notice that
Flores was affixing, not his but a fictitious signature.
Given that petitioner is the government body mandated to supervise and regulate
banking and other financial institutions, this Court's ruling in Consolidated Bank and Trust
Corporation v. Court of Appeals (G.R. No. 138569, September 11, 2003) illumines: The law
imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of
Republic Act No. 8791 ("RA 8791"), which took effect on 13 June 2000, declares that the
State recognizes the "fiduciary nature of banking that requires high standards of integrity
and performance." This new provision in the general banking law, introduced in 2000, is a
statutory affirmation of Supreme Court decisions, starting with the 1990 case of Simex
International v. Court of Appeals, holding that "the bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in mind the fiduciary nature
of their relationship."
This fiduciary relationship means that the bank's obligation to observe "high
standards of integrity and performance" is deemed written into every deposit agreement
between a bank and its depositor. The fiduciary nature of banking requires banks to assume
a degree of diligence higher than that of a good father of a family. Article 1172 of the Civil
Code states that the degree of diligence required of an obligor is that prescribed by law or
contract, and absent such stipulation then the diligence of a good father of a family. Section
2 of RA 8791 prescribes the statutory diligence required from banks - that banks must
observe "high standards of integrity and performance" in servicing their depositors.
_____________________________________________________________________________________________
_________________________________
BANK OF AMERICA, NT & SA v. ASSOCIATED CITIZENS BANK, et al.
ASSOCIATED CITIZENS BANK v. BA-FINANCE CORPORATION, et al.
G.R. Nos. 141001 & 141018, May21, 2009, Carpio, J.
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The law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it to determine their genuineness and regularity. The collecting bank being
primarily engaged in banking holds itself out to the public as the expert and the law holds it
to a high standard of conduct.
Facts:
BA-Finance grated Miller Offset Press a credit line facility in which Miller could assign
or discount its trade receivables with BA-Finance. Millers authorized representatives
executed a Continuing Suretyship Agreement with BA-Finance whereby they jointly and
severally guaranteed the full and prompt payment of all indebtedness which Miller may
incur. In consideration of the assignment of its trade receivables, BA-Finance issued four
checks payable to the "Order of Miller Offset Press, Inc." with the notation "For Payee's
Account Only" which were drawn against Bank of America. It was deposited by the corporate
secretary of Miller in Associated Bank in a joint bank account under the names of Ching Uy
Seng and Uy Chung Guan Seng. Associated Bank stamped the checks with the notation "all
prior endorsements and/or lack of endorsements guaranteed," and sent them through
clearing. Later, Bank of America, honored the checks and paid Associated Bank. Miller failed
to deliver to BA-Finance the proceeds of the assigned trade receivables. BA-Finance filed
against Miller for collection of sum of money which BA-Finance paid in consideration of the
assignment.
Issue:
Whether Associated Bank is liable to reimburse Bank of America the amount of the
four checks for being negligent.
Ruling:
YES. When Associated Bank stamped the back of the four checks with the phrase "all
prior endorsements and/or lack of endorsement guaranteed," that bank had for all intents
and purposes treated the checks as negotiable instruments and, accordingly, assumed the
warranty of an endorser. Being so, Associated Bank cannot deny liability on the checks.
The law imposes a duty of diligence on the collecting bank to scrutinize checks
deposited with it for the purpose of determining their genuineness and regularity. The
collecting bank being primarily engaged in banking holds itself out to the public as the
expert and the law holds it to a high standard of conduct. In presenting the checks for
clearing and for payment, the defendant [collecting bank] made an express guarantee on
the validity of "all prior endorsements." Thus, stamped at the back of the checks are the
defendant's clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS
GUARANTEED. Without such warranty, plaintiff [drawee] would not have paid on the checks.
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the
warranty has proven to be false and inaccurate, the defendant is liable for any damage
arising out of the falsity of its representation.
_____________________________________________________________________________________________
_________________________________
EQUITABLE PCI BANK v. ARCELITO TAN
G.R. No. 165339, August 23, 2010, Peralta, J.
As a business affected with public interest and because of the nature of its functions,
the bank is under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship. The diligence required of
banks, therefore, is more than that of a good father of a family.
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Facts:
Tan has a current and savings account with PCIB, now petitioner Equitable
PCIBank. Tan issued PCIB postdated check in favor of Sulpicio Lines, Inc which deposited the
check to its account with Solidbank. After clearing, it was debited by Equitable PCI from Tan's
account leaving him with a balance of only P558.87. Tan issued three checks payable to
Agusan del Sur Electric Cooperative Inc. (ASELCO) and Agusan del Norte Electric Cooperative
Inc., (ANECO). However, the checks were dishonored for being drawn against insufficient
funds. The dishonor of the check caused the electric power supply for the two mini-sawmills
owned by Tan to be cut off and was restored only after several months. Hence, Tan filed a
complaint against the bank for payment of losses and damages claiming that the check
payable to Sulpicio was a postdated one and that his account would have sufficient funds to
cover the payment of the three checks were it not for the negligence of the bank debiting it
from his account immediately.
Issue:
Whether Equitable PCI Bank exercised the required degree of diligence of banks.
Ruling:
NO. The law imposes on banks high standards in view of the fiduciary nature of
banking. Although R.A. 8791 took effect only in the year 2000, the Court had already
imposed on banks the same high standard of diligence required under R.A. 8791 at the time
of the untimely debiting of respondent's account by petitioner in May 1992. In Simex
International (Manila), Inc. v. Court of Appeals(G.R. No. 88013, March 19, 1990), the Court
held that as a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors with meticulous
care, always having in mind the fiduciary nature of their relationship.
The diligence required of banks, therefore, is more than that of a good father of a
family. In every case, the depositor expects the bank to treat his account with the utmost
fidelity, whether such account consists only of a few hundred pesos or of millions. The bank
must record every single transaction accurately, down to the last centavo, and as promptly
as possible. This has to be done if the account is to reflect at any given time the amount of
money the depositor can dispose of as he sees fit, confident that the bank will deliver it as
and to whomever he directs. From the foregoing, it is clear that petitioner bank did not
exercise the degree of diligence that it ought to have exercised in dealing with its client.
_____________________________________________________________________________________________
_________________________________
COMSAVINGS BANK (NOW GSIS FAMILY BANK) v. SPOUSES DANILO & ESTRELLA
CAPISTRANO
G.R. No. 170942, August 28, 2013, Bersamin, J.
A banking institution is obliged to exercise the highest degree of diligence as well as
high standards of integrity and performance in all its transactions because its business is
imbued with public interest.
Facts:
Spouses Capistrano were the owners of a residential lot who availed themselves of
the UHLP implemented by the National Home Mortgage Finance Corp. (NHMFC) for the
construction of their house. They executed a construction contract with Cruz-Bay, proprietor
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of GCB Builders which shall undertake the construction within 75 days. GCB Builders
facilitated their loan application with Comsavings Bank. They executed in favor of GCB
Builders a deed of assignment for the proceeds of the loan from Comsavings. The bank
informed Estrella that she needs to sign documents for the release of the loan including a
certification of house completion and acceptance. The bank informed the spouses of the
approval of an interim financing loan which was to be paid out of the proceeds of the loan
from NHMFC.
NHMFC told the spouses that they should start paying their monthly amortizations
but their house was still unfinished. Thus, they protested considering that they had not
signed any certification of completion and acceptance, and that even if there was such, it
would have been forged.
Issue:
Whether Comsavings Bank is negligent for failure to exercise the required diligence of
banks.
Ruling:
YES. As aptly declared in Philippine National Bank v. Pike (G.R. No. 157845,
September 20, 2005): The stability of banks largely depends on the confidence of the
people in the honesty and efficiency of banks.
There is no question that Comsavings Bank was grossly negligent in its dealings with
respondents because it did not comply with its legal obligation to exercise the required
diligence and integrity. As a banking institution serving as an originator under the UHLP and
being the maker of the certificate of acceptance/completion, it was fully aware that the
purpose
of
the
signed
certificate
was
to
affirm
that
the
house
had
been completely constructed according to the approved plans and specifications, and that
respondents had thereby accepted the delivery of the complete house. Given the purpose of
the certificate, it should have desisted from presenting the certificate to respondents for
their signature without such conditions having been fulfilled. Yet, it made respondents sign
the certificate (through Estrella Capistrano, both in her personal capacity and as the
attorney-in-fact of her husband Danilo Capistrano) despite the construction of the house not
yet even starting. Its act was irregular per se because it contravened the purpose of the
certificate. Had Comsavings Bank been fair towards them as its clients, it should not have
made them pre-sign the certificate until it had confirmed that the construction of the house
had been completed.
_____________________________________________________________________________________________
_________________________________
LAND BANK OF THE PHILIPPINESv.EMMANUEL OATE
G.R. No. 192371, January15, 2014, Del Castillo, J.
A bank is remiss in its duty and obligation for accepting and paying a check to a
person other than the payee appearing on the face of the check sans valid endorsement.
Hence, it is liable for its own negligence and in disregarding established banking rules and
procedures.
Facts:
Oatehad trust accounts with Land Bank. Land Bank became a trustee of Philippine
Virginia Tobacco Administration (PVTA) and Philippine Virginia Tobacco Board (PVTB) funds
and invested P4 Million of the trust accounts of PVTA and PVTB, through a direct lending
90 | P a g e

scheme to several borrower companies and it issued four (4) cashiers checks for P1 Million
each. The borrowers pre-terminated their loans and paid their obligations in the form of
checks payable to the bank and delivered by Oates representative. When the checks were
delivered, Oate fraudulently misrepresented that they were Oates additional capital
contribution to his personal trust account. Thus, Land Bank credited the payments made by
the borrowers to Oates trust account. Oate withdrew the same, to the damage and
prejudice of Land Bank as the owner.Land Bank demanded from Oate the return of P4
million inadvertently deposited to his trust account as his additional funds but actually
represents the amount of the checks issued to Land Bank by its corporate borrowers
but Oate refused. Hence, Land Bank unilaterally applied the outstanding balance in all of
Oates trust accounts against his resulting indebtedness by reason of the miscrediting of
funds.
Issue:
Whether Land Bank can hold Oate liable for the alleged fraudulent scheme.
Ruling:
NO. It would be too presumptuous to immediately conclude that said amount came
from the checks paid to Land Bank by its corporate borrowers just because the maturity
dates of the loans coincided with the dates said total amount was deposited. There must be
proof showing an unbroken link between the proceeds of the pre-terminated loans and the
amount allegedly miscredited to Oates Trust Account.
We cannot thus lend credence to Land Banks excuse that the proximate cause of the
alleged miscrediting was the fraudulent representation of Polonio, for assuming that the
latter indeed employed fraudulent machinations, with the degree of prudence expected of
banks, Land Bank and its tellers could have easily detected that Oate was not the intended
payee.
_____________________________________________________________________________________________
_________________________________
DEVELOPMENT BANK OF THE PHILIPPINESv.GUARIA AGRICULTURAL AND REALTY
DEVELOPMENT CORPORATION
G.R. No. 160758, January15, 2015, Bersamin, J.
Being a banking institution, it should exercise the highest degree of diligence, as well
as to observe the high standards of integrity and performance in all its transactions because
its business is imbued with public interest.The stability of banks largely depends on the
confidence of the people in the honesty and efficiency of banks.
Facts:
Guaria Corp. applied for a loan from DBP to finance the development of its resort
complex which was approved.Guariaexecuted a promissory note and a real estate
mortgage in favor of DBP as security for the repayment of the loan, and also executed a
chattel mortgage. Prior to the release of the loan, DBP required Guaria Corporation to put
up a cash equity for the construction of the buildings and other improvements.Guaria used
the proceeds of the loan to defray the cost of additional improvements in the resort complex
and later demanded the release of the balance of the loan, but DBP refused and directly paid
some suppliers ofGuaria. DBP found out that Guaria had not completed the construction
works hence demanding to expedite the completion. However, such was not made so DBP
initiated extrajudicial foreclosure proceedings and a notice of foreclosure was sent and
published. Guariafiled for specific performance of DBPs obligations under the loan
91 | P a g e

agreement, and to stop the foreclosure of the mortgages. However, DBP moved for the
dismissal stating that the mortgaged properties were already sold. Thus, Guariasought to
nullify the foreclosure proceedings and the cancellation of the certificate of sale.
Issue:
Whether DBPs foreclosure and sale of the mortgaged properties were premature and
therefore void and ineffectual.
Ruling:
YES. Being a banking institution, DBP owed it to Guaria Corporation to exercise the
highest degree of diligence, as well as to observe the high standards of integrity and
performance in all its transactions because its business was imbued with public interest. The
high standards were also necessary to ensure public confidence in the banking system, for,
according to Philippine National Bank v. Pike (G.R. No. 157845, September 20, 2005): The
stability of banks largely depends on the confidence of the people in the honesty and
efficiency of banks. Thus, DBP had to act with great care in applying the stipulations of its
agreement with Guaria Corporation, lest it erodes such public confidence. Yet, DBP failed in
its duty to exercise the highest degree of diligence by prematurely foreclosing the
mortgages and unwarrantedly causing the foreclosure sale of the mortgaged properties
despite Guaria Corporation not being yet in default. DBP wrongly relied on Stipulation No.
26 as its basis to accelerate the obligation of Guaria Corporation, for the stipulation was
relevant to an Omnibus Agricultural Loan, to Guaria Corporations loan which was intended
for a project other than agricultural in nature.
Nature of Bank Funds and Deposit

THE CONSOLIDATED BANK AND TRUST CORP. v. CA AND L.C. DIAZ AND COMPANY
G.R. No. 138569, September 11, 2003, Carpio, J.
Article 1980 of the Civil Code expressly provides that "savings, deposits of money in
banks and similar institutions shall be governed by the provisions concerning simple loan."
There is a debtor-creditor relationship between the bank and its depositor.
Facts:
L.C. Diaz opened a savings account with Solidbank. L.C. Diaz through its cashier,
Macaraya, filled up a savings cash deposit slip and a savings checks deposit slip. Macaraya
instructed Calapre to deposit the money with Solidbank and was given the Solidbank
passbook. Calapre went to Solidbank and presented to Teller No. 6 the deposit slips and the
passbook which acknowledged receipt of the deposit by returning to Calapre the duplicate
copies of the two deposit slips. Since the transaction took time, Calapre left the passbook
with Solidbank and went to Allied Bank to make a deposit. When Calapre returned, Teller No.
6 informed him that "somebody got the passbook." Calapre reported the incident. Macaraya
immediately prepared a deposit slip in duplicate copies with a check of P200,000. Macaraya,
together with Calapre, went to Solidbank and presented to Teller No. 6 the deposit slip and
check. When Macaraya asked for the passbook, Teller No. 6 told Macaraya that someone got
the passbook but she could not remember to whom she gave the passbook. Teller No. 6
handed to Macaraya a deposit slip for the deposit of a check for P90,000 drawn on Philippine
Banking Corporation (PBC) which is a check of L.C. Diaz that it had "long closed."PBC
dishonored the check because of insufficient funds and because the signature in the check
92 | P a g e

differed from PBC's specimen signature. Failing to get back the passbook, Macaraya went
back to her office and reported the matter to the Personnel Manager Emmanuel Alvarez.
Luis Diaz called up and wrote to Solidbank to stop any transaction using the same
passbook until L.C. Diaz could open a new account. Diaz learned of the unauthorized
withdrawal of P300,000 from its savings account. The withdrawal slip for the P300,000 bore
the signatures of the authorized signatories of L.C. Diaz, namely Diaz and Murillo. The
signatories, however, denied signing the withdrawal slip.
Issue:
Whether or not Solidbank is liable for breach of contract due to negligence.
Ruling:
YES. The contract between the bank and its depositor is governed by the provisions
of the Civil Code on simple loan. Article 1980 of the Civil Code expressly provides that
"savings deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loan." There is a debtor-creditor relationship between the bank
and its depositor. The bank is the debtor and the depositor is the creditor. The depositor
lends the bank money and the bank agrees to pay the depositor on demand. The savings
deposit agreement between the bank and the depositor is the contract that determines the
rights and obligations of the parties.
However, the fiduciary nature of a bank-depositor relationship does not convert the
contract between the bank and its depositors from a simple loan to a trust agreement,
whether express or implied. Failure by the bank to pay the depositor is failure to pay a
simple loan, and not a breach of trust. The law simply imposes on the bank a higher
standard of integrity and performance in complying with its obligations under the contract of
simple loan, beyond those required of non-bank debtors under a similar contract of simple
loan.
Stipulation on Interests
FIDELITY SAVING AND MORTGAGE BANK v. HON. PEDRO D. CENZON, in his capacity
as Presiding Judge of the Court of First Instance of Manila (Branch XL) and
SPOUSES TIMOTEO AND OLIMPIA SANTIAGO
G.R. No. L-46208, 15 April 1990, J. Regalado
It is settled jurisprudence that a banking institution which has been declared
insolvent and subsequently ordered closed by the Central Bank of the Philippines cannot be
held liable to pay interest on bank deposits which accrued during the period when the bank
is actually closed and non-operational.
Facts:
Herein private respondents, the Spouses Santiago, deposited with petitioner Fidelity
Savings and Mortgage Bank an aggregate amount of P100,000 under a Savings Account and
a Time Deposit. Thereafter, the Bankwas found to be insolvent and was forbidden to do
business in the Philippines pursuant to issued Resolution No. 350. Eventually the bank was
set for liquidation.Pursuant to R.A. No. 5517, PDIC paid the Spouses the amount of P10,000
thereby leaving a deposit balance of P90,000. The spouses then demanded immediate
payment of the balance of the aforementioned savings and time deposits.While the
93 | P a g e

liquidation proceedingis still pending, an action for a sum of money with damages was
filed.The court a quo ruled in favor of the spouses and ordered the Bank to pay P90,000 with
accrued interests and exemplary damages as well as attorneys fees.
Issue:
Whether or not an insolvent bank like the Fidelity Savings and Mortgage Bank may be
adjudged to pay interest or unpaid deposits even after its closure by the Central Bank by
reason of insolvency without violating the provisions of the Civil Code on preference of
credits.
Ruling:
NO, it is settled jurisprudence that a banking institution which has been declared
insolvent and subsequently ordered closed by the Central Bank of the Philippines cannot be
held liable to pay interest on bank deposits which accrued during the period when the bank
is actually closed and non-operational. In The Overseas Bank of Manila v. CA and Tony
Tapia, the Court took judicial notice to the fact that what enables a bank to pay stipulated
interests on money deposited with it is that through the other aspects of its operation it is
able to generate funds to cover the payment of such interest. Unless a bank can lend
money, engage in international transactions, acquire foreclosed mortgaged properties or
their proceeds and generally engage in other banking and financing activities from which it
can derive income, it is inconceivable how it can carry on as a depository obligated to pay
stipulated interest. Therefore, petitioner Bank cannot be held liable for interest on bank
deposits which accrued from the time the Central Bank prohibited it to continue with its
banking operations.
_____________________________________________________________________________________________
_________________________________
ILEANA DR. MACALINAO v. BANK OF THE PHILIPPINE ISLANDS
G.R. No. 175490, 17 September 2009, J. Velasco, Jr.
Stipulations on interests which are excessive, iniquitous, unconscionable, and
exorbitant are void for being contrary to morals. While C.B. Circular No. 905-82 effectively
removed the ceiling on interest rates for both secured and unsecured loans, regardless of
maturity, nothing in the said circular could possibly be read as granting carte
blanche authority to lenders to raise interest rates to levels which would either enslave their
borrowers or lead to a hemorrhaging of their assets.
Facts:
Ileana Macalinao is an approved cardholder of BPI Mastercard. She received a letter
from BPI demanding payment of the amount of P141, 518.34. Under the Terms and
Conditions Governing the Issuance and Use of the BPI Credit and BPI Mastercard, the
charges or balance thereof remaining unpaid after the payment due date indicated on the
monthly Statement of Accounts shall bear interest at the rate of 3% per month and an
additional penalty fee equivalent to another 3% per month. For failure of Macalinao to settle
her obligations, BPI filed with the MeTC a complaint for sum of money against her and her
husband. The lower court ruled in favor of BPI and ordered Macalinao to pay the amount
plus interest and penalty charges of 2% per month; on appeal to the CA, it increased the
interest to 3% per month.
Issue:
94 | P a g e

Whether or not the interest rate and penalty charge of 3% per month imposed by the
CA is iniquitous as the same translates to 36% per annum or thrice the legal rate of interest.
Ruling:
YES. The interest rate and penalty charge of 3% per month should be equitably
reduced to 2% per month or 24% per annum.Indeed, in the Terms and Conditions Governing
the Issuance and Use of the BPI Credit Card, there was a stipulation on the 3% interest rate.
Nevertheless, it should be noted that this is not the first time that this Court has considered
the interest rate of 36% per annum as excessive and unconscionable. We held in Chua vs.
Timan:
We need not unsettle the principle we had affirmed in a plethora of cases that
stipulated interest rates of 3% per month and higher are excessive, iniquitous,
unconscionable and exorbitant. Such stipulations are void for being contrary to morals, if not
against the law. While C.B. Circular No. 905-82, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both secured and unsecured loans,
regardless of maturity, nothing in the said circular could possibly be read as granting carte
blanche authority to lenders to raise interest rates to levels which would either enslave their
borrowers or lead to a hemorrhaging of their assets.
Since the stipulation on the interest rate is void, it is as if there was no express
contract thereon. Hence, courts may reduce the interest rate as reason and equity
demand.The same is true with respect to the penalty charge.
_____________________________________________________________________________________________
_________________________________
HEIRS OF ESTELITA BURGOS-LIPAT v. HEIRS OF EUGENIO D. TRINIDAD
G.R. No. 185644, 2 March 2010, J. Corona
year
with
year
12%
The rate of interest specified in the mortgage contract shall be applied for the oneperiod reckoned from the date of registration of the certificate of sale in accordance
the General Banking Act. However, since petitioners effectively had more than one
to exercise the right of redemption, justice, fairness and equity require that they pay
per annum interest beyond the one-year period.
Facts:
Estelita Burgos-Lipat and her husband obtained a loan from Pacific Banking
Corporation (PBC) secured by a real estate mortgage on their Quezon City property. Due to
petitioners failure to pay their loans, PBC foreclosed on the subject property wherein
Eugenio D. Trinidad was declared the highest bidder and was thereafter issued a certificate
of sale on January 31, 1989. Petitioners filed a complaint for annulment of mortgage, extrajudicial foreclosure and certificate of sale in the RTC of QC. The RTC dismissed the complaint
but granted petitioners five months and 17 days from the finality of the decision to exercise
their right of redemption over the foreclosed property.
Issue:
Whether or not the same interest rate specified in the mortgage contract shall be
applied even beyond the one-year redemption period.
Ruling:
95 | P a g e

NO. Section 78 of the General Banking Act requires payment of the amount fixed by
the court in the order of execution, with interest thereon at the rate specified in the
mortgage contract, and all the costs and other judicial expenses incurred by the bank or
institution concerned by reason of the execution and sale and as a result of the custody of
said property less the income received from the property. The rate of interest specified in the
mortgage contract shall be applied for the one-year period reckoned from the date of
registration of the certificate of sale in accordance with the General Banking Act. However,
since petitioners effectively had more than one year to exercise the right of redemption,
justice, fairness and equity require that they pay 12% per annum interest beyond the oneyear period up to June 16, 2004 when Partas consigned the redemption price with the RTC.
_____________________________________________________________________________________________
_________________________________
ASIA TRUST DEVELOPMENT BANK v. CARMELO H. TUBLE
G.R. No. 183987, 25 July 2012, J. Sereno
While Article 2209 allows the recovery of interest sans stipulation, this charge is
provided not as a form of monetary interest, but as one of compensatory interest.
Compensatory interest, as a form of damages, is due only if the obligor is proven to have
defaulted in paying the loan.
Facts:
Carmelo Tuble, who served as the vice president of petitioner Asia Trust Development
Bank, availed himself of the car incentive plan and loan privileges offered by the bank. As
regards the loan privileges, Tuble obtained three separate loans. The first, a real estate loan
evidenced by Promissory Note No. 0142 with maturity date of 1 January 1999, was secured
by a mortgage over his property, with no interest indicated. Eventually, the bank filed a
complaint for replevin against Tuble wherein the Bank obtained a favorable judgment. The
Bank also filed a petition for extra-judicial foreclosure based on his real estate loan
amounting to P421,800. Tuble timely redeemed the property which at that time already
amounted to P1,318,401.90. The Bank explained that the redemption price ballooned in
that amount because it included the cars book value, the salary loan, car insurance, 18%
annual interest on the banks redemption price, penalty and interest charges on P.N. No.
0142, and litigation expenses.
Issue:
Whether or not the Bank is justified in claiming Tubles liability to pay legal interest,
notwithstanding that P.N. No. 0142 contains no stipulation on interest payments.
Ruling:
NO.While Article 2209 allows the recovery of interest sans stipulation, this charge is
provided not as a form of monetary interest, but as one of compensatory interest. Monetary
interest refers to the compensation set by the parties for the use or forbearance of
money.On the other hand, compensatory interest refers to the penalty or indemnity for
damages imposed by law or by the courts.Compensatory interest, as a form of damages, is
due only if the obligor is proven to have defaulted in paying the loan. Thus, a default must
exist before the bank can collect the compensatory legal interest of 12% per annum.
In the case at bar, Tuble was not yet in default because as evidence by P.N. No. 0142,
the obligation was set to mature on 1 January 1999. But Tuble had already settled his
96 | P a g e

liabilities on 17 March 1997 by paying the redemption price. Then, in 1999, the bank issued
his Clearance and share in the DIP in view of the full settlement of his obligations.
_____________________________________________________________________________________________
_________________________________
ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO B. OLAGUER v. BANGKO
SENTRAL MONETARY BOARD
G.R. No. 192986, 15 January 2013, J. Reyes
The lifting of the ceilings for interest rates does not authorize stipulations charging
excessive, unconscionable, and iniquitous interest.Nothing in CB Circular No. 905 grants
lenders a carte blanche authority to raise interest rates to levels which will either enslave
their borrowers or lead to a hemorrhaging of their assets.
Facts:
R.A. No. 265, which created the Central Bank of the Philippines, empowered the CBMB to, among others, set maximum interest rates which banks may charge for all types of
loans and other credit operations, within limits prescribed by the Usury Law. On March 17,
1980, the Usury Law was amended by Presidential Decree (P.D.) No. 1684, giving the CB-MB
authority to prescribe different maximum rates of interest which may be imposed for a loan
or renewal thereof or the forbearance of any money, goods or credits, provided that the
changes are effected gradually and announced in advance. Thereafter, the CB-MB issued CB
Circular No. 905, Series of 1982 removed the ceilings on interest rates on loans or
forbearance of any money, goods or credits.
Issue:
Whether or not exceeded its authority when it issued CB Circular No. 905, which
removed all interest ceilings and thus suspended Act No. 2655 as regards usurious interest
rates.
Ruling:
NO.In First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc. cited in
DBP v. Perez, the Courtenunciated that: the CB Circular No. 905 did not repeal nor in any
way amend the Usury Law but simply suspended the latters effectivity. A CB Circular
cannot repeal a law. By lifting the interest ceiling, CB Circular No. 905 merely upheld the
parties freedom of contract to agree freely on the rate of interest. It cited Article 1306 of the
New Civil Code, under which the contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.
It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche
authority to raise interest rates to levels which will either enslave their borrowers or lead to
a hemorrhaging of their assets.Stipulations authorizing iniquitous or unconscionable
interests have been invariably struck down for being contrary to morals, if not against the
law.Nonetheless, the nullity of the stipulation of usurious interest does not affect the lenders
right to recover the principal of a loan, nor affect the other terms thereof. Thus, in a usurious
loan with mortgage, the right to foreclose the mortgage subsists, and this right can be
exercised by the creditor upon failure by the debtor to pay the debt due. The debt due is
considered as without the stipulated excessive interest, and a legal interest of 12% per
annum will be added in place of the excessive interest formerly imposed.
Grant of Loans and Security Requirement
97 | P a g e

BANCO DE ORO v. JAIME Z. BAYUGA and ROBERTO TOLENTINO, THE COURT OF
APPEALS and HON. FRANCISCO DE LA ROSA, in his capacity as Judge of the CFIRizal, Branch VII-Pasay City
G.R. No. L49568, 17 October 1979, J. Melencio-Herrera
Funds of a bank are, in a sense, held in trust. There are the interests of depositors to
be protected.
Facts:
As security for a loan, private respondents Bayuga and Tolentino and one Leonardo
Zaballero executed a Real Estate Mortgage in favor of Acme Savings Bank (now Banco de
Oro) over a parcel of land in order to pay for another property.The value of the property
mortgaged was insufficient to cover the amount of the loan. Thereafter, claiming that the
borrowers showed no indication of complying with their obligation to pay the amount of the
loan to the vendor of the Tagaytay City property, which constituted diversion in violation of
Sec. 77, R.A. No. 337, BANK stopped payment of its Manager's check at the same time that
it refused to release the balance of the loan. An action for specific performance was then
filed and a writ of preliminary mandatory injunction was issued directing the BANK to comply
with the mortgage contract but the BANK apparently did not release the said amount. The
instant case was appealed and the private respondents filed a motion for execution pending
appeal which the court granted.
Issue:
Whether the bank has the right to refuse the release of the loan.
Ruling:
YES.The unfairness and inequity of this posture to the banking business is too
evident to require elaboration. Funds of a bank are, in a sense, held in trust. There are the
interests of depositors to be protected. The collateral the BANK has in its favor, with a loan
value of only P157,889.76, is far from adequate to answer for the amount of P389,000.00
that is now in the hands of private respondents. The manner of repayment by private
respondents of that amount remains nebulous. Of course, the BANK is not without fault for
this sorry state of affairs.
DOSRI Restrictions
JOSE C. GO v. BANGKO SENTRAL NG PILIPINAS
G.R. No. 178429, 23 October 2009, J. Brion
The essence of the crime under Section 83 of RA 337 is becoming an obligor of the
bank without securing the necessary written approval of the majority of the banks directors.
To make a distinction between the act of borrowing and guarantying is unnecessary because
in either situation, the director or officer concerned becomes an obligor of the bank.
Facts:
An Information for the violation of Section 83 of the General Banking Act was filed
against Jose Go. After arraignment, where he pleaded not guilty, Go filed a motion to quash
the Information claiming that it is defective and the facts do not constitute an offense. Go
claims that the prosecutions shotgun approach in alleging that he acted as borrower and/or
guarantor rendered the Information highly defective for failure to specify with certainty the
98 | P a g e

specific act or omission complained of. He further posited that Section 83 of RA 337
penalized only directors and officers of banking institutions who acted either as borrower or
as guarantor, but not as both.
Issue:
Whether or not Gos contention that Section 83 of RA 337 means penalizing a director
or officer of a banking institution for either borrowing the deposits or funds of the bank,
or guaranteeing or indorsing loans to others, but not for assuming both capacities and that
the acts so charged do not constitute an offense.
Ruling:
NO. Under Section 83, RA 337, the following elements must be present to constitute
a violation of its first paragraph: (1) the offender is a director or officer of any banking
institution; (2) the offender, either directly or indirectly, for himself or as representative or
agent of another, performs any of the following acts: [a] he borrows any of the deposits or
funds of such bank; or [b] he becomes a guarantor, indorser, or surety for loans from such
bank to others, or[c] he becomes in any manner an obligor for money borrowed from bank
or loaned by it;(3) the offender has performed any of such acts without the written approval
of the majority of the directors of the bank, excluding the offender, as the director
concerned.
A simple reading of the above elements easily rejects Gos contention that the law
penalizes a bank director or officer only either for borrowing the banks deposits or funds or
for guarantying loans by the bank, but not for acting in both capacities. The essence of the
crime is becoming an obligor of the bank without securing the necessary written approval of
the majority of the banks directors.The third mode under the second element, serves a
catch-all phrase that covers any situation when a director or officer of the bank becomes its
obligor. The prohibition is directed against a bank director or officer who becomes in any
manner an obligor for money borrowed from or loaned by the bank without the written
approval of the majority of the banks board of directors. To make a distinction between the
act of borrowing and guarantying is therefore unnecessary because in either situation, the
director or officer concerned becomes an obligor of the bank against whom the obligation is
juridically demandable.
_____________________________________________________________________________________________
_________________________________
HILARIO P. SORIANO v. PEOPLE OF THE PHILIPPINES, BSP, PDIC, PUBLIC
PROSECUTOR ANTONIO BUAN and STATE PROSECUTOR ALBERTO FONACIER
G.R. No. 162336, 1 February 2010, J. Del Castillo
A bank officer violates the DOSRI law when he acquires bank funds for his personal
benefit, even if such acquisition was facilitated by a fraudulent loan application. Directors,
officers, stockholders, and their related interests cannot be allowed to interpose the
fraudulent nature of the loan as a defense to escape culpability for their circumvention of
Section 83 of R.A. No. 337.
Facts:
Affidavits were submitted before the Prosecutors office charging Hilario Soriano with
Estafa through falsification of commercial documents in relation to P.D. No. 1689 and for
violation of Section 83 of R.A. No. 337, whereby it was alleged that the spouses Carlos
appeared to have an outstanding loan of P8 million with the Rural Bank of San Miguel
(Bulacan), Inc., but had never applied for nor received such loan; that it was petitioner, who
99 | P a g e

was then president of the Bank, who had ordered, facilitated, and received the proceeds of
the loan. Soriano however contends that the commission of estafa is inherently incompatible
with the violation of the DOSRI law, as petitioner contends. Essentially, the petitioner
theorized that the characterization of possession is different in the two offenses. If petitioner
acquired the loan as DOSRI, he owned the loaned money and therefore, cannot
misappropriate or convert it as contemplated in the offense of estafa. Conversely, if
petitioner committed estafa, then he merely held the money in trust for someone else and
therefore, did not acquire a loan in violation of DOSRI rules.
Issue:
Whether a loan transaction within the ambit of the DOSRI law (violation of Section 83
of RA 337, as amended) could also be the subject of Estafa under Article 315 (1) (b) of the
Revised Penal Code.
Ruling:
YES. Petitioners theory is based on the false premises that the loan was extended
to him by the bank in his own name, and that he became the owner of the loan
proceeds. Both premises are wrong. The bank money (amounting to P8 million) which came
to Sorianos possession was money held in trust or administration by him for the bank, in his
fiduciary capacity as the President of said bank. Soriano, through falsification, made it
appear that said Enrico Carlos applied for the loan when in fact he did not. Through such
fraudulent device, petitioner obtained the loan proceeds and converted the same. Under
these circumstances, it cannot be said that petitioner became the legal owner of the P8
million. Thus, petitioner remained the banks fiduciary with respect to that money, which
makes it capable of misappropriation or conversion in his hands.
The prohibition in Section 83 is broad enough to cover various modes of borrowing. It
covers loans by a bank director or officer which are made either: (1) directly, (2) indirectly,
(3) for himself, (4) or as the representative or agent of others. It applies even if the director
or officer is a mere guarantor, indorser or surety for someone else's loanor is in any manner
an obligor for money borrowed from the bank or loaned by it. Indirect borrowing applies in
the instant case, the Information describes the manner of securing the loan as indirect;
names petitioner as the benefactor of the indirect loan; and states that the requirements of
the law were not complied with. It contains all the required elements for a violation of
Section 83, even if petitioner did not secure the loan in his own name. In sum, the
informations filed against Soriano do not negate each other.
_____________________________________________________________________________________________
_________________________________
REPUBLIC OF THE PHILIPPINES v. SANDIGANBAYAN (First Division) et al.
------------------------------REPUBLIC OF THE PHILIPPINES v. SANDIGANBAYAN (First Division) et al.
------------------------------REPUBLIC OF THE PHILIPPINES v. EDUARDO M. COJUANGCO, JR. et al.
G.R. Nos.166859, 169203, 180702, 12 April 2011, J. Bersamin
Assuming that the loans were of a DOSRI nature or without the benefit of the
required approvals or in excess of the Single Borrowers Limit, the same would not be void
for that reason. Instead, the bank or the officers responsible for the approval and grant of
the DOSRI loan would be subject only to sanctions under the law.
Facts:
100 | P a g e

For over two decades, the issue of whether the sequestered sizable block of shares
representing 20% of the outstanding capital stock of San Miguel Corporation (SMC) at the
time of acquisition belonged to their registered owners or to the coconut farmers has
remained unresolved. The Republic argues and concludes that Cojuangco took money from
the bank entrusted by law with the administration of coconut levy funds and took more
money from the very corporations/oil mills in which part of those coconut levy funds (the
CIIF) was placed treating the funds of UCPB and the CIIF as his own personal capital to buy
his SMC shares. The Republic suggests that Cojuangco had been enabled to obtain the loans
by the issuance of LOI 926 exempting the UCPB from the DOSRI and the Single Borrowers
Limit restrictions.
Issue:
Whether or not there was a violation of the DOSRI and Single Borrowers restriction.
Ruling:
NO.Firstly, the Republic adduced no evidence on the significant particulars of the
supposed loan, like the amount, the actual borrower, the approving official, etc. It did not
also establish whether or not the loans were DOSRI or issued in violation of the Single
Borrowers Limit. Secondly, the Republic could not outrightly assume that President Marcos
had issued LOI 926 for the purpose of allowing the loans by the UCPB in favor of Cojuangco.
There must be competent evidence to that effect. And, finally, the loans, assuming that they
were of a DOSRI nature or without the benefit of the required approvals or in excess of the
Single Borrowers Limit, would not be void for that reason. Instead, the bank or the officers
responsible for the approval and grant of the DOSRI loan would be subject only to sanctions
under the law.
The New Central Bank Act

Responsibility and Primary Objective
DAMASO PEREZ and REPUBLIC BANK, etc. et al. v. MONETARY BOARD, THE
SUPERINTENDENT OF BANKS, CENTRAL BANK OF THE PHILIPPINES and SECRETARY
OF JUSTICE et al.
G.R. No. L-23307, 30 June 1967, J. J.P. Bengzon
Being an artificial person, the Central Bank is limited to its statutory powers and the
nearest power to which prosecution of violators of banking laws may be attributed is its
power to sue and be sued. There is nothing in said laws that impose a clear, specific duty on
the former to do the actual prosecution of the latter.
Facts:
Damaso Perez, for himself and in a derivative capacity on behalf of the Republic
Bank, instituted mandamus proceedings compelling respondents to prosecute certain
Republic Bank officials for violations of the General Banking Act and the Central Bank Act,
and for falsification of public or commercial documents in connection with certain alleged
anomalous loans. Respondents assailed the propriety of the mandamus. The Secretary of
Justice claimed that it was not their specific duty to prosecute the persons denounced by
Perez. The Central Bank and its respondent officials, on the other hand, averred that they
had already done their duty under the law by referring to the special prosecutors of the
Department of Justice for criminal investigation and prosecution the said cases.
101 | P a g e

Issue:
Whether or not the mandamus proceeding was proper.
Ruling:
NO, petitioners cannot seek by mandamus to compel respondents to prosecute
criminally those alleged violators of the banking laws. Although the Central Bank and its
respondent officials may have the duty under the Central Bank Act and the General Banking
Act to cause the prosecution of those alleged violators, yet the Court finds nothing in said
laws that impose a clear, specific duty on the former to do the actual prosecution of the
latter. The Central Bank is a government corporation created principally to administer the
monetary and banking system of the Republic, not a prosecution agency like the fiscal's
office. Being an artificial person, The Central Bank is limited to its statutory powers and the
nearest power to which prosecution of violators of banking laws may be attributed is its
power to sue and be sued. But this corporate power of litigation evidently refers to civil
cases only.
The Central Bank and its respondent officials have already done all they could, within
the confines of their powers, to cause the prosecution of those persons denounced by Perez.
The cases of the alleged anomalous loans had already been referred by the Central Bank to
the special prosecutors of the Department of Justice for criminal investigation and
prosecution. For respondents to do the actual prosecuting themselves, as petitioners would
have it, would be tantamount to an ultra vires act already.
_____________________________________________________________________________________________
_________________________________
ROMEO P. BUSUEGO, CATALINO F. BANEZ, and RENATO LIM v. THE HONORABLE
COURT OF APPEALS and THE MONETARY BOARD OF THE CENTRAL BANK OF THE
PHILIPPINES
G.R. No. 95326, 11 March 1999, J. Purisima
The Central Bank, through the Monetary Board, is empowered to conduct
investigations and examine the records of savings and loan associations. If any irregularity
is discovered in the process, the Monetary Board may impose appropriate sanctions.
Facts:
The Central Bank examiners, in conducting their 16 th regular examination of the
books and records of PAL Employees Savings and Loan Association, Inc. (PESALA),
discovered several anomalies and irregularities committed by petitioners who are PESALAs
directors and officers. The Monetary Board then adopted and issued MB Resolution No. 805
which among others provide the following: (1) inclusion of petitioners names in the Sectors
watchlist to prevent them from holding responsible positions in any institutions under
Central Bank supervision; (2) to require the board of directors of PESALA to file civil and
criminal cases against petitioners for all the misfeasance and malfeasance committed by
them, as warranted by the evidence. Thereafter, the petitioners filed and was issued a TRO
enjoining the Monetary Board from including petitioners names in the watchlist.
Issue:
Whether or not Monetary Board Resolution No. 805 is null and void for being violative
of petitioners' rights to due process.
102 | P a g e

Ruling:
NO. the Central Bank of the. Philippines (now BangkoSentral ng Pilipinas), through
the Monetary Board, is the government agency charged with the responsibility of
administering the monetary, banking and credit system of the country and is granted the
power of supervision and examination over banks and non-bank financial institutions
performing quasi-banking functions, of which savings and loan associations, such as PESALA,
form part of. The Central Bank, through the Monetary Board, is empowered to conduct
investigations and examine the records of savings and loan associations. If any irregularity is
discovered in the process, the Monetary Board may impose appropriate sanctions, such as
suspending the offender from holding office or from being employed with the Central Bank,
or placing the names of the offenders in a watchlist.
The requirement of prior notice is also relaxed under Section 28 (c) of RA 3779 as
investigations or examinations may be conducted with or without prior notice "but always
with fairness and reasonable opportunity for the association or any of its officials to give
their side." As may be gathered from the records, the said requirement was properly
complied with by the respondent Monetary Board.
_____________________________________________________________________________________________
_________________________________
ANA MARIA A. KORUGA v. TEODORO O. ARCENAS, JR., ALBERT C. AGUIRRE, CESAR
S. PAGUIO, FRANCISCO A. RIVERA and THE HONORABLE COURT OF APPEALS,
THIRD DIVISION
G.R. Nos. 168332, 19 June 2009, J. Nachura
It is the BSP which is authorized to administer the monetary, banking, and credit
system of the Philippines. It is further authorized to take the necessary steps against any
banking institution if its continued operation would cause prejudice to its depositors,
creditors and the general public as well.
Facts:
Ana Maria Koruga, a minority stockholder of Banco Filipino Savings and Mortgage
Bank, filed a complaint charging private respondents with violation of Sections 31 to 34 of
the Corporation Code, prohibiting self-dealing and conflict of interest of directors and
officers. She also invoked her right to inspect the corporations records and prayed for
Receivership and Creation of a Management Committee, pursuant to Rule 59 of the Rules of
Civil Procedure, the Securities Regulation Code, the Interim Rules of Procedure Governing
Intra-Corporate Controversies, the General Banking Law of 2000, and the New Central Bank
Act. She accused the directors and officers of Banco Filipino of engaging in unsafe, unsound,
and fraudulent banking practices, more particularly, acts that violate the prohibition on selfdealing. The respondents filed their answer raising, among others, the trial courts lack of
jurisdiction to take cognizance of the case.
Issue:
Whether or not Korugas complaint is within the jurisdiction of the RTC.
Ruling:
NO, it is the BSP that has jurisdiction over the case. It is clear that the acts
complained of pertain to the conduct of Banco Filipinos banking business. A bank, as defined
in the General Banking Law, refers to an entity engaged in the lending of funds obtained in
the form of deposits. The banking business is properly subject to reasonable regulation
103 | P a g e

under the police power of the state because of its nature and relation to the fiscal affairs of
the people and the revenues of the state. Banks are affected with public interest because
they receive funds from the general public in the form of deposits. It is the Governments
responsibility to see to it that the financial interests of those who deal with banks and
banking institutions, as depositors or otherwise, are protected. In this country, that task is
delegated to the BSP, which pursuant to its Charter, is authorized to administer the
monetary, banking, and credit system of the Philippines. It is further authorized to take the
necessary steps against any banking institution if its continued operation would cause
prejudice to its depositors, creditors and the general public as well.
The law vests in the BSP the supervision over operations and activities of banks, as
provided under Section 25 of the New Central Bank Act.Furthermore, the authority to
determine whether a bank is conducting business in an unsafe or unsound manner is also
vested in the Monetary Board pursuant to Section 56 of the General Banking Law of 2000.
Monetary Board Powers and Functions
ANA MARIA A. KORUGA v. TEODORO O. ARCENAS, JR., ALBERT C. AGUIRRE, CESAR
S. PAGUIO, FRANCISCO A. RIVERA, and THE HONORABLE COURT OF APPEALS,
THIRD DIVISION
G.R. No. 168332 and G.R. No. 169053, June 19, 2009, NACHURA, J.
The Central Monetary Authority, through the Monetary Board, is vested with
exclusive authority to assess, evaluate and determine the condition of any bank, and finding
such condition to be one of insolvency, or that its continuance in business would involve a
probable loss to its depositors or creditors, forbid bank or non-bank financial institution to do
business in the Philippines; and shall designate an official of the BSP or other competent
person as receiver to immediately take charge of its assets and liabilities.
Facts:
Petitioner Ana Maria Koruga is a minority stockholder of Banco Filipino Savings and
Mortgage Bank. She accused the directors and officers of Banco Filipino of engaging in
unsafe, unsound, and fraudulent banking practices, more particularly, acts that violate the
prohibition on self-dealing. With that, she filed a complaint before the RTC against the Board
of Directors of Banco Filipinoand praying therein for Receivership and Creation of a
Management Committee.
The respondent Directors argued that the case falls under the jurisdiction of the BSP
and hence they prayed for the dismissal of the case.The RTC ruled in favor of the Koruga but
it was reversed by the CA. Hence, this petition.
Issue:
Whether the court has jurisdiction over the case.
Ruling:
NO. The Central Monetary Authority, through the Monetary Board, is vested with
exclusive authority to assess, evaluate and determine the condition of any bank, and finding
such condition to be one of insolvency, or that its continuance in business would involve a
probable loss to its depositors or creditors, forbid bank or non-bank financial institution to do
business in the Philippines; and shall designate an official of the BSP or other competent
person as receiver to immediately take charge of its assets and liabilities.
104 | P a g e

This case involves not just ordinary intra-corporate matters; rather, they involve
banking activities which are, by law, regulated and supervised by the BSP. Hence, the court
has no jurisdiction over the case.
_____________________________________________________________________________________________
_________________________________
BANGKO SENTRAL NG PILIPINAS MONETARY BOARD and CHUCHI FONACIER v.
HON. NINA G. ANTONIO-VALENZUELA, in her capacity as Regional Trial Court Judge
of Manila, Branch 28; RURAL BANK OF PARAAQUE, INC. et al.
G.R. No. 184778, October 2, 2009, VELASCO, JR., J.
Sec. 28 of RA 7653, or the New Central Bank Act, which governs examinations of
banking institutions, provides that the Report on Examination shall be submitted to the MB;
the bank examined is not mentioned as a recipient of the Report on Examination. Therefore,
the BSP is not required to give copies of the Report on Examination to the bank examined.
Facts:
The Supervision and Examination Department of the BSP conducted examinations of
the books of the respondent banks and it found that these banks had deficiencies in their
capital. The respondent banks on their part filed before the RTC an action to nullify the
Report on Examination and issuance of restraining order. They contend that their right to
due process was violated because they were not furnished with the said report. They further
that the sanction of closure that the MB might imposed upon the receipt of such Report will
result in irreparable damage to them as well as to the public.
The RTC ruled in favor of the respondent banksand this was affirmed by the
CA.However, the SC issued a restraining order on the RTC and CA decision. By reason of the
such, the SED was able to submit their Report on Examination to the Monetary Board. The
MB then prohibited the respondent banks from transacting business and placed them under
receivership with the Philippine Deposit Insurance Corporation as the appointed receiver.
Hence, this petition.
Issue:
Whether the respondent banks were entitled to the copy of the Report on
Examination made by the BSP before its submission to the Monetary Board.
Ruling:
NO. There was no provision of law, no section in the procedures of the BSP that
shows that the BSP is required to give copies of the Report on Examination to banks. Sec. 28
of RA 7653, or the New Central Bank Act, which governs examinations of banking
institutions, provides that the Report on Examination shall be submitted to the MB; the bank
examined is not mentioned as a recipient of the Report on Examination. Therefore, the
respondent banks cannot claim a violation of their right to due process if they are not
provided with copies of the such report.
How BSP Handles Banks in Distress
Conservatorship
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO,
JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as
105 | P a g e

statutory receiver of Island Savings Bank v. THE HONORABLE COURT OF APPEALS
and SULPICIO M. TOLENTINO, G.R. No. L-45710, October 3, 1985, MAKASIAR, CJ.
The mere pecuniary inability to fulfill an engagement does not discharge the
obligation of the contract, nor does it constitute any defense to a decree of specific
performance. And, the mere fact of insolvency of a debtor is never an excuse for the nonfulfillment of an obligation but 'instead it is taken as a breach of the contract by him.
Facts:
Private respondent SulpicioTolentino obtained a loan with real estate mortgagee from
Island Savings Bank in the amount of P80,000. But only P17, 000 was released by the bank
because there was no fund yet available for the release of the P63,000.00
balance.Thereafter, the MB declared Island Bank insolvent and wasprohibited from doing
business in the Philippines.
However, Island Savings Bank, in view of non-payment of the P17,000, filed an
application for the extra-judicial foreclosure of the real estate mortgage, this was opposed
by Tolentino it his petition before the court. The court ruled in favor of the foreclosure, but
this was reversed by the CA. Hence, this petition.
Issue:
Whether the insolvency of Island Bank is a valid reason to the non-fulfillment of its
obligation.
Ruling:
NO. The mere pecuniary inability to fulfill an engagement does not discharge the
performance. And, the mere fact of insolvency of a debtor is never an excuse for the nonfulfillment of an obligation but 'instead it is taken as a breach of the contract by him. Hence,
the Board Resolution of MB to that effect cannot interrupt the default of Island Savings Bank
in complying with its obligation of releasing the P63,000.00 balance. More so that this
Resolution merely prohibited the Bank from making new loans and investments, and
nowhere did it prohibit island Savings Bank from releasing the balance of loan agreements
previously contracted.
_____________________________________________________________________________________________
_________________________________
CENTRAL BANK OF THE PHILIPPINES and HON. JOSE B. FERNANDEZ v. HON. COURT
OF APPEALS, RTC JUDGE TEOFILO GUADIZ, JR., PRODUCERS BANK OF THE
PHILIPPINES and PRODUCERS PROPERTIES, INC.
G.R. No. 88353 and G.R. No. 92943 May 8, 1992, DAVIDE, JR., J.
A conservator, once appointed, takes over the management of the bank and assumes
exclusive powers to oversee every aspect of the bank's operations and affairs. However, it
must be stressed that a bank retains its juridical personality even if placed under
conservatorship; it is neither replaced nor substituted by the conservator. Hence, the
approval of the CB is not necessary where the action was instituted by the bank through the
majority of the bank's stockholders. To contend otherwise would be to defeat the rights of
such stockholders under the fifth paragraph of Section 29 of the Central Bank Act.
Facts:
106 | P a g e

CB on the basis of the report submitted by the Supervision and Examination Sector of
the CB, the Monetary Board, placed PBP under conservatorship. The PBP in turnfiled a
complaint with the RTC against the CB asserting that the conservatorship was unwarranted,
ill-motivated, illegal, utterly unnecessary and unjustified; that the appointment of the
conservator was arbitrary; that CB acted in bad faith; that the CB-designated conservators
committed bank frauds and abuses; that the CB is guilty of promissory estoppel; and that by
reason of the conservatorship, it suffered losses. The complaint prayed that the CBs
conservator be ordered to restore the viability of PBP and to fully repair the damages
inflicted on PBP.
The CB, however, contends that the complaint should be dismissed on the ground of
lack of legal personality on the part of the respondent bank to bring the action as the same
was filed in the name of the PBP without the authority of the conservator.
Issue:
Whether an approval from the CB is necessary for the bank to bring action before
the court.
Ruling:
NO, but the Court in this case ruled that the case filed by PB should be dismissed. A
conservator, once appointed, takes over the management of the bank and assumes
exclusive powers to oversee every aspect of the bank's operations and affairs. However, it
must be stressed that a bank retains its juridical personality even if placed under
conservatorship; it is neither replaced nor substituted by the conservator. Hence, the
approval of the CB is not necessary where the action was instituted by the bank through the
majority of the bank's stockholders. To contend otherwise would be to defeat the rights of
such stockholders under the fifth paragraph of Section 29 of the Central Bank Act.
Therefore, the rule is the Board of Directors of a bank is not prohibited to file suit to
lift the conservatorship over it, to question the validity of the conservator's fraudulent acts
and abuses and the arbitrary action of the MB provided following requisites should be
complied with:
1. The appropriate pleading must be filed by the stockholders of record representing the
majority of the capital stock of the bank in the proper court;
2. Said pleading must be filed within ten (10) days from receipt of notice by said majority
stockholders of the order placing the bank under conservatorship; and
3. There must be convincing proof, after hearing, that the action is plainly arbitrary and made
in bad faith.
In the instant case, however,PBPs complaint was filed after the expiration of the 10day period deferred to above. Accordingly, the order placing PBP under conservatorship had
long become final and its validity could no longer be litigated upon before the trial court.
Furthermore, it is important to note that the action instituted was not for the purpose of
having the conservatorship lifted but it is an action for damage which must nevertheless be
dismissed for failure of the PBP to pay the correct docket fees.
_____________________________________________________________________________________________
_________________________________
FIRST PHILIPPINE INTERNATIONAL BANK (Formerly Producers Bank of the
Philippines) and MERCURIO RIVERA v. COURT OF APPEALS, CARLOS EJERCITO, in
substitution of DEMETRIODEMETRIA, and JOSE JANOLO
G.R. No. 115849, January 24, 1996, PANGANIBAN, J.
107 | P a g e

The powers of conservator of a bank cannot extend to the post-facto repudiation of
perfected transactions, otherwise they would infringe against the non-impairment clause of
the Constitution and would prejudice vested rights of third persons. Instead, the law merely
gives the conservator power to revoke contracts that are, under existing law, deemed to be
defective - i.e., void, voidable, unenforceable or rescissible.
Facts:
In the course of its banking operations, Producer Bank of the Philippines acquired six
parcels of land. Demetrio, Demetria and Jose O. Janolo, wanted to purchase the property and
thus initiated negotiations for that purpose. The result of such negotiation was that,
respondents Janolo accepted to purchase the property in the amount offered of the bank.
During the time of the negotiation and perfection of the contract of sale took place,
petitioner Bank was under a conservator. However, the said conservatorwas replaced by
Acting Conservator Leonida T. Encarnacion. Consequently, the bank informed respondents
Janolo that their proposal to purchase the property would be under the study of the newly
designated Acting Conservator of the bank.
But the Janolosfiled a suit for specific performance with damages against the bank,
its Manager Rivera and Acting Conservator Encarnacion. The basis of the suit was that the
transaction had with the bank resulted in a perfected contract of sale. The respondent court
ruled that there was already a perfected contract of sale and that the designation of a new
conservatorship would not revoke such contract.
Issue:
Whether or not the conservator have theunilateral power to revoke a perfected
contract of sale.
Ruling:
NO. The powers of
conservator of a bank cannot extend to the post-facto
repudiation of perfected transactions, otherwise they would infringe against the nonimpairment clause of the Constitution. The law merely gives the conservator power to
revoke contracts that are, under existing law, deemed to be defective - i.e., void, voidable,
unenforceable or rescissible. Hence, the conservator merely takes the place of a banks
board of directors. What the said board cannot do - such as repudiating a contract validly
entered into under the doctrine of implied authority - the conservator cannot do either.
Ineluctably, his power is not unilateral and he cannot simply repudiate valid obligations of
the Bank. His authority would be only to bring court actions to assail such contracts.
To rule otherwise would be to enable a failing bank to become solvent, at the
expense of third parties, by simply getting the conservator to unilaterally revoke all previous
dealings which had one way or another come to be considered unfavorable to the Bank,
yielding nothing to perfected contractual rights nor vested interests of the third parties who
had dealt with the Bank.
Closure
EMERITO M. RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA RAMOS
DE LA RAMA, HORACIO DE LA RAMA, ANTONIO B. RAMOS, FILOMENA RAMOS
LEDESMA, RODOLFO RAMOS, VICTORIA RAMOS TANJUATCO, and
TEOFILOTANJUATCO v. CENTRAL BANK OF THE PHILIPPINES
G.R. No. L-29352, October 4, 1971, REYES, J.B.L., J.
108 | P a g e

It is well-settled that the closure of a bank may be considered as an exercise of
police power. The action of the MB on this matter is final and executory. Such exercise may
nonetheless be subject to judicial inquiry and can be set aside if found to be in excess of
jurisdiction or with such grave abuse of discretion as to amount to lack or excess of
jurisdiction. In this case, the order of CB for liquidation and the suspension of OBM should be
set aside for having been adopted in abuse of discretion, equivalent to excess of jurisdiction.
Facts:
Petitioners were majority stock holders of Overseas Bank of Manila, which during that
time was in financial distress. To address necessity and urgency of rehabilitating the OBM,
the petitioners sough help from CB for the possible extension of emergency loan in the
amount of P20 Million. The CB bank, however, recommended the need of the execution of a
voting trust agreement between OBM and PNB and in such eventuality, the Central Bank will
support the PNB in order to allay the fears of depositors and creditors. With that, OBM
agreed to the execution of the trusteeship agreement.
After such execution, the CB extended an emergency loan only in the amount of P10
Million. This, however, did not elevate the financial woes of the bank. Consequently, CB
Monetary Board adopted a Resolution ordering the Superintendent of Banks to proceed to
the liquidation of the OBM, under Section 29 of the Central Bank Act. This was opposed by
the petitioners in their petition before the court arguing that CB failed to provide an
adequate financial assistance to OBM, a violation of their obligation under the voting trust
agreement and hence liquidation is not proper.On the other hand, CB argued that it is not a
party to the Voting Trust agreement, therefore cannot be compelled to implement it and that
the courts cannot interfere with CB's discretion in determining whether or not a distressed
bank should be supported or liquidated.
Issue:
Whether the liquidation of OBM is proper.
Ruling:
NO.It is well-settled that the closure of a bank may be considered as an exercise of
jurisdiction.
In this case, while the trust agreement on its face creates obligations only for the
Superintendent of Banks as trustee, his commitments were undeniably those of the Central
Bank itself, since it was the latter that had from the very beginning insisted upon such
voting trust being executed. Furthermore, even in the absence of contract, the record plainly
shows that the CB made express representations to petitioners herein that it would support
the OBM, and avoid its liquidation if the petitioners would execute (a) the Voting Trust
Agreement turning over the management of OBM to the CB or its nominees, and (b)
mortgage or assign their properties to the Central Bank to cover the overdraft balance of
OBM. The petitioners having complied with these conditions and parted with value to the
profit of the CB (which thus acquired additional security for its own advances), the CB may
not now renege on its representations and liquidate the OBM, to the detriment of its
stockholders, depositors and other creditors, under the rule of promissory estoppel.
109 | P a g e

The Court conclude that having induced the petitioners to part with additional
security in reliance upon its promises and commitments to avert liquidation and to support,
normalize and rehabilitate the OBM, CB is duty bound to comply in good faith with such
promises. Consequently CB Resolutions should be annulled and set aside for having been
adopted in abuse of discretion, equivalent to excess of jurisdiction.
_____________________________________________________________________________________________
_________________________________
CENTRAL BANK OF THE PHILIPPINES v. HONORABLE COURT OF APPEALS, ISIDRO
E.FERNANDEZ, and JESUS R. JAYME
G.R. No. L-50031-32, July 27, 1981, CONCEPCION, JR., J.
The closure and liquidation of a bank may be considered an exercise of police power,
however, the validity of such exercise of police power is subject to judicial inquiry and could
be set aside if it is either capricious, discriminatory, whimsical, arbitrary, unjust, or a denial
of the due process and equal protection clauses of the Constitution.
Facts:
Private respondents Isidro Fernandez and Jesus Jayme are majority and controlling
stockholders of Provident Savings Bank. In view of the unusually heavy withdrawals,
Provident requested for emergency loans from the Central Bank to meet the demands of the
depositors. As a condition, the CB posits that it will only release and continue its assistance
to Provident if Fernandez and Jayme will relinquish and turn over the management and
control of the bank to Iglesia Ni Kristo. The condition was allegedly necessary because
Iglesia Ni Kristo had seizable deposit to Provident and this deposit will be converted into
shares of stock. Thus, Fernandez and Jaymeagreed to such condition.
However, the Iglesia Ni Kristodid not comply with its commitment to purchase the
shares of stock and to convert its deposits into equity. Instead, the new management of
Provident caused the conversion of the deposits of Iglesia Ni Kristo into bills payable earning
12% interest. This contributed to the deteriorating financial condition of Provident which
resultedin MB declaring it insolvent, ordering its closure and its asset be liquidated.
Consequently, Fernandez and Jayme opposed to such in its petition before the CFI.
Issue:
Whether the action of the MB in ordering the closure and liquidation of an insolvent
bank can be annulled by the court.
Ruling:
YES. While the closure and liquidation of a bank may be considered an exercise of
police power, the validity of such exercise of police power is subject to judicial inquiry and
could be set aside if it is either capricious, discriminatory, whimsical, arbitrary, unjust, or a
denial of the due process and equal protection clauses of the Constitution.
In this case, it is not disputed that the Central Bank had committed itself to support
Provident and restore it to its former sound financial position provided that Fernandez and
Jayme should relinquish and give up its control and management of the bank to the Iglesia
Ni Kristo, and thereafter, whimsically withdrew such support to the detriment of Provident.
_____________________________________________________________________________________________
_________________________________
110 | P a g e

Facts:
Issue:
obligation.
Ruling:
_____________________________________________________________________________________________
_________________________________
SPOUSES ROMEO LIPANA and MILAGROS LIPANA v. DEVELOPMENT BANK OF RIZAL
G.R. No. 73884, September 24, 1987, PARAS, J.
It is well settled ruled that after the Monetary Board has declared that a bank is
insolvent and has ordered it to cease operations, the Board becomes the trustee of its
assets for the equal benefit of all the creditors, including depositors. The assets of the
insolvent banking institution are held in trust for the equal benefit of all creditors, and after
its insolvency, one cannot obtain an advantage or a preference over another by an
attachment, execution or otherwise.The same is true notwithstanding the fact that the
receivership was done after the filing of the complaint because it is the execution that win
obviously prejudice the other depositors and creditors.
Facts:
111 | P a g e

Spouses Lipanaopened and maintained time and savings deposits with theDBP of
Rizal. When some of the Time Deposit Certificates matured, spouses Lipana were not able to
cash them but instead were issued a manager's check which was dishonored upon
presentment. After demands for the payment of both time and savings deposits having
failed, spouses Lipanafiled with the a Complaint. The RTC ruled in favor the spouses.
Meanwhile, the MB declared the DBP of Rizal insolvent and that its continuance in
business would result in probable loss to its depositors and creditors, decided to place it
under receivership. Consequently, the court issued an order to Stay Writ of Execution of its
prior decision. Hence, this petition.
Issue:
Whether or not the placing under receivership by the Central Bank of the respondent
bank, long after the complaint became final and executory, could legally stay execution of
such judgment.
Ruling:
YES. The rule that once a decision becomes final and executory, it is the ministerial
duty of the court to order its execution, admits of certain exceptions as in cases of special
and exceptional nature where it becomes imperative in the higher interest of justice to direct
the suspension of its execution; whenever it is necessary to accomplish the aims of justice;
or when certain facts and circumstances transpired after the judgment became final which
could render the execution of the judgment unjust.
In the instant case, the stay of the execution of judgment is warranted by the fact
that respondent bank was placed under receivership. To execute the judgment would unduly
deplete the assets of respondent bank to the obvious prejudice of other depositors and
creditors. It is well settled ruled that after the Monetary Board has declared that a bank is
insolvent and has ordered it to cease operations, the Board becomes the trustee of its assets
for the equal benefit of all the creditors, including depositors. The assets of the insolvent
banking institution are held in trust for the equal benefit of all creditors, and after its
insolvency, one cannot obtain an advantage or a preference over another by an attachment,
execution or otherwise.
The same is true notwithstanding the fact that the receivership was done after the
filing of the complaint because it is the execution that win obviously prejudice the other
depositors and creditors.
_____________________________________________________________________________________________
_________________________________
OVERSEAS BANK OF MANILA v. THE COURT OF APPEALS and NATIONAL
WATERWORKS AND SEWERAGE AUTHORITY
G.R. No. L-45866, April 19, 1989, NARVASA, J.
The bank cannot be excused from its obligation which had matured long before its
operation was suspended by the Central Bank. In this case, The suspension of operations of
Overseas Bank which took place in August 1968, could not possibly excuse non-compliance
with the obligations in question which matured in 1966.
Facts:
112 | P a g e

The private respondent NAWASA obtained two time deposits with the Overseas Bank
of Manila for the payment made by a certain BonifacioRegalado. The period for such time
deposits were fixed at one year. Upon the maturity date, NAWASA made a demand for the
release of the funds from Overseas Bank, but the bank did not respond. After repeated
demands, NAWASA sought help from Central Bank about the matter. Consequently, the
Central Bank ordered the Overseas Bank to transfer the said government deposits in its
custody to the PNB or DBP. Apparently, even the this was ignored by Overseas
Bank.NAWASA thus brought suit to recover its deposits and damages and such was decided
in its favor.
Overseas Bank contends thatthe Central Bankhas suspended its operations and
because of that, it failed to generate funds which it could pay not only its depositors and
creditors but likewise, the interests due on the deposits.
Issue:
Whether or not the failure of Overseas Bank in complying with its obligation to
NAWASA should be attributed to the act of Central Bank.
Ruling:
NO.The suspension of operations which took place in August 1968, could not possibly
excuse non-compliance with the obligations in question which matured in 1966. The
suspension of banking operations and the further claim of distressed financial situation
cannot in any sense excuse the bank from its obligation to the NAWASA. Again, the such
obligation had nothing to do with the Central Bank's actuations or the events leading to the
bank's distressed state.
_____________________________________________________________________________________________
_________________________________
BANCO FILIPINO SAVINGS AND MORTGAGE BANK v. THE MONETARY BOARD,
CENTRAL BANK OF THE PHILIPPINES, JOSE B. FERNANDEZ, CARLOTA P.
VALENZUELA, ARNULFO B. AURELLANO and RAMON V. TIAOQUI
G.R. No. 70054, December 11, 1991, MEDIALDEA, J.
The pendency of the case regarding the validity of the closure and receivership of
the bank did not diminish the powers and authority of the designated liquidator to
effectuate and carry on the a ministration of the bank. Therefore, in this case, the liquidator
by himself or through counsel has the authority to bring actions for foreclosure of mortgages
executed by debtors in favor of the bank. The liquidator is likewise authorized to resist or
defend suits instituted against the bank by debtors and creditors of the bank and by other
private persons
Facts:
Top Management Programs Corporation, Pilar Development Corporation and El
Grande Development Corporation obtained a loan from Banco Filipino. Thereupon, the
Monetary Board issued a resolution placing the bank under liquidation and designating
Valenzuela as liquidator. Consequently, Banco Filipino filed the petition questioning the
validity of the resolutions issued by the Monetary Board authorizing the receivership and
liquidation of Banco Filipino.
Subsequently, Top Management, Pilar Development and El Grande Development
failed to pay its loan on the due date. Hence, Banco Filipino applied for extra-judicial
foreclosure of the mortgage. This was opposed on the ground that Banco Filipino has no
113 | P a g e

authority to proceed with the foreclosure sale of petitioners' properties on the ground that
the resolution of the issue on the validity of the closure and liquidation of Banco Filipino is
still pending with this Court.
Issue:
Whether the liquidator appointed by the CB has the authority to prosecute as well as
to defend suits, and to foreclose mortgages for and in behalf of the bank while the issue on
the validity of the receivership and liquidation of the latter is pending.
Ruling:
YES. Section 29 the Central Bank Act, provides that when a bank is forbidden to do
business in the Philippines and placed under receivership, the person designated as receiver
shall immediately take charge of the bank's assets and liabilities, as expeditiously as
possible, collect and gather all the assets and administer the same for the benefit of its
creditors, and represent the bank personally or through counsel as he may retain in all
actions or proceedings for or against the institution, exercising all the powers necessary for
these purposes including, but not limited to, bringing and foreclosing mortgages in the name
of the bank. If the Monetary Board shall later determine and confirm that banking institution
is insolvent or cannot resume business safety to depositors, creditors and the general public,
it shall, public interest requires, order its liquidation and appoint a liquidator who shall take
over and continue the functions of receiver previously appointed by Monetary Board. The
liquid for may, in the name of the bank and with the assistance counsel as he may retain,
institute such actions as may necessary in the appropriate court to collect and recover a
counts and assets of such institution or defend any action ft against the institution.
The pendency of the case regarding the validity of the closure and receivership of the
bank did not diminish the powers and authority of the designated liquidator to effectuate
and carry on the a ministration of the bank. Therefore, in this case, the liquidator by himself
or through counsel has the authority to bring actions for foreclosure of mortgages executed
by debtors in favor of the bank. The liquidator is likewise authorized to resist or defend suits
instituted against the bank by debtors and creditors of the bank and by other private
persons
_____________________________________________________________________________________________
_________________________________
CENTRAL BANK OF THE PHILIPPINES and HON. JOSE B. FERNANDEZ v. HON. COURT
OF APPEALS, RTC JUDGE TEOFILO GUADIZ, JR., PRODUCERS BANK OF THE
PHILIPPINES and PRODUCERS PROPERTIES, INC.
G.R. No. 88353 and G.R. No. 92943 May 8, 1992, DAVIDE, JR., J.
jurisdiction. In this case, the order of CB placing PBP under conservatorship is proper on the
ground that there was neither arbitrariness nor bad faith in the issuance of thereof.
Facts:
CB on the basis of the report submitted by the Supervision and Examination Sector of
the CB, the Monetary Board, placed PBP under conservatorship. The PBP in turn filed a
complaint with the RTC against the CB asserting that the conservatorship was unwarranted,
ill-motivated, illegal, utterly unnecessary and unjustified; that the appointment of the
114 | P a g e

conservator was arbitrary; that CB acted in bad faith; that the CB-designated conservators
committed bank frauds and abuses; that the CB is guilty of promissory estoppel; and that by
reason of the conservatorship, it suffered losses. The complaint prayed that the CBs
conservator be ordered to restore the viability of PBP and to fully repair the damages
inflicted on PBP.
Consequently, the court issued a preliminary injunction to restrain the MB in placing
PBP under conservatorship.
Issue:
Whether the court is correct in issuing the preliminary injunction
Ruling:
NO. It is well-settled that the closure of a bank may be considered as an exercise of
jurisdiction. The records of this case revealed that there was neither arbitrariness nor bad
faith in the issuance of MB Resolutions ordering for conservatorship.
It must be stressed in this connection that the banking business is properly subject to
reasonable regulation under the police power of the state because of its nature and relation
to the fiscal affairs of the people and the revenues of the state. It is then Government's
responsibility to see to it that the financial interests of those who deal with banks and
banking institutions, as depositors or otherwise, are protected. Hence, the CB is authorized
to take the necessary steps against any banking institution if its continued operation would
cause prejudice to its depositors, creditors and the general public as well. This power has
been expressly recognized by this Court.
_____________________________________________________________________________________________
_________________________________
RURAL BANK OF SAN MIGUEL, INC. and HILARIO P. SORIANO, in his capacity as
majority stockholder in the Rural Bankof San Miguel, Inc., v. MONETARY BOARD,
BANGKO SENTRAL NG PILIPINAS and PHILIPPINE DEPOSIT INSURANCE
CORPORATION
G.R. No. 150886, February 16, 2007,CORONA, J.
jurisdiction.
Facts:
Petitioner Rural Bank of San Miguel, Inc. was a domestic corporation engaged in
banking and in which Hilario P. Soriano claims to be the majority stockholder.MB issued a
Resolution prohibiting RBSM from doing business in the Philippines, placing it under
receivership and designating PDIC as receiver. The MB, after evaluating and deliberating on
the findings and recommendation of the Department of Rural Banks Supervision and
Examination Sector ordered the closure of the RBSM and placed its management under
PDIC.
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Hence, this petition contending that the closure order was bereft of any basis
considering that no complete examination had been conducted before it was issued.
Issue:
Whether a complete examination of the bank is required before it can be closed and placed
under receivership.
Ruling:
NO. It is clear that under the New Central Bank Act or RA 7653 that only a report of
the head of the supervising or examining department is necessary before the MB can order
for the closure of a bank and not a complete examination of the bank.It is well-settled that
the closure of a bank may be considered as an exercise of police power. The action of the MB
on this matter is final and executory. Such exercise may nonetheless be subject to judicial
inquiry and can be set aside if found to be in excess of jurisdiction or with such grave abuse
of discretion as to amount to lack or excess of jurisdiction.
In the case at bar, the reliance on the report of the head of the supervising or
examining department, the MB had sufficient basis to arrive at a sound conclusion that there
were grounds that would justify RBSMs closure and hence the issuance of closure order was
untainted with arbitrariness.
_____________________________________________________________________________________________
_________________________________
BANGKO SENTRAL NG PILIPINAS MONETARY BOARD and CHUCHI FONACIER v.
HON. NINA G. ANTONIO-VALENZUELA, in her capacity as Regional Trial Court Judge
of Manila, Branch 28; RURAL BANK OF PARAAQUE, INC. et al.
G.R. No. 184778, October 2, 2009, VELASCO, JR., J.
The "close now, hear later" scheme is grounded on practical and legal considerations
to prevent unwarranted dissipation of the banks assets and as a valid exercise of police
power to protect the depositors, creditors, stockholders, and the general public. Hence, the
MB could order the closure of the Bank even without notice and hearing.
Facts:
The Supervision and Examination Department of the BSP conducted examinations of
the books of the respondent banks and it found that these banks had deficiencies in their
capital. The respondent banks on their part filed before the RTC an action to nullify the
Report on Examination and issuance of restraining order. They contend that their right to
due process was violated because they were not furnished with the said report. They further
that the sanction of closure that the MB might imposed upon the receipt of such Report will
result in irreparable damage to them as well as to the public.
The RTC ruled in favor of the respondent banksand this was affirmed by the
CA.However, the SC issued a restraining order on the RTC and CA decision. By reason of the
such, the SED was able to submit their Report on Examination to the Monetary Board. The
MB then prohibited the respondent banks from transacting business and placed them under
receivership with the Philippine Deposit Insurance Corporation as the appointed receiver.
Hence, this petition.
Issue:
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Whether the sanction of closure that MB might imposed will result in irreparable
damage to the respondent banks and to the public.
Ruling:
NO. Under the law, the sanction of closure could be imposed upon a bank by the BSP
even without notice and hearing. The apparent lack of procedural due process would not
result in the invalidity of action by the MB. This is enshrined in the "close now, hear later"
scheme which is grounded on practical and legal considerations to prevent unwarranted
dissipation of the banks assets and as a valid exercise of police power to protect the
depositors, creditors, stockholders, and the general public. The writ of preliminary injunction
cannot, thus, prevent the MB from taking action, by preventing the submission of the Report
on Examination and by preventing the MB from acting on such.
Receivership
Facts:
Issue:
obligation.
Ruling:
117 | P a g e

_____________________________________________________________________________________________
_________________________________
SPOUSES ROMEO LIPANA and MILAGROS LIPANA vs. DEVELOPMENT BANK OF
RIZAL
G.R. No. 73884, September 24, 1987, PARAS, J.
The assets of the insolvent banking institution are held in trust for the equal benefit
of all creditors, and after its insolvency, one cannot obtain an advantage or a preference
over another by an attachment, execution or otherwise.
Facts:
Spouses Lipana maintained time and savings deposits with DBP. When the deposits
matured, spouses Lipana were issued a managers check instead of cash. However, the
check was dishonored. The court ordered DBP to pay the amount due.
Meanwhile, the Monetary Board placed the bank under receivership due to its
insolvency. A Motion for Execution Pending Appeal was filed by Spouses Lipana.
Issue:
Whether respondent judge could legally stay execution of judgment that has already
become final and executory.
Ruling:
YES.In the instant case, the stay of the execution of judgment is warranted by the
fact that respondent bank was placed under receivership. To execute the judgment would
unduly deplete the assets of respondent bank to the obvious prejudice of other depositors
and creditors, since, as aptly stated in Central Bank of the Philippines vs. Morfe (63 SCRA
114), after the Monetary Board has declared that a bank is insolvent and has ordered it to
cease operations, the Board becomes the trustee of its assets for the equal benefit of all the
creditors, including depositors. The assets of the insolvent banking institution are held in
trust for the equal benefit of all creditors, and after its insolvency, one cannot obtain an
advantage or a preference over another by an attachment, execution or otherwise.
_____________________________________________________________________________________________
_________________________________
ABACUS REAL ESTATE DEVELOPMENT CENTER, INC., vs. THE MANILA BANKING
CORPORATION.
G.R. No. 162270, April 06, 2005, GARCIA, J.
Thus, the appointment of a receiver operates to suspend the authority of the bank
and of its directors and officers over its property and effects, such authority being reposed
in the receiver, and in this respect, the receivership is equivalent to an injunction to restrain
the bank officers from intermeddling with the property of the bank in any way.
Facts:
The bank started to construct a 14-storey building on their land. However, the bank
encountered financial difficulties which rendered it unable to finish construction of the
building. The Central Bank ordered the closure of the bank and placed it under receivership.
118 | P a g e

The banks acting president, Vicente Puyat, started to scout investors who could
finance the completion of the building. The Laureano group offered to lease the building and
wanted to be given an exclusive option to purchase the building. The offer was accepted and
the building was subleased to petitioner, Abacus Real Estate. When Abacus expressed its
desire to exercise its exclusive option to purchase the building, Manila Bank refused to honor
it.
Abacus insists that the option to purchase the lot and building granted to it by Puyat
was binding upon Manila Bank. On the other hand, the bank insists that Puyat had no
authority to act for Manila bank, as it was already placed under receivership by the Central
Bank at the time of the granting of the exclusive option to purchase.
Issue:
Whether Abacus has acquired the right to purchase the lot and building in question.
Ruling:
NO.There can be no quibbling that respondent Manila Bank was under receivership,
pursuant to Central Banks MB Resolution No. 505 dated May 22, 1987, at the time the late
Vicente G. Puyat granted the exclusive option to purchase to the Laureano group of
investors. Owing to this defining reality, the appellate court was correct in declaring that
Vicente G. Puyat was without authority to grant the exclusive option to purchase the lot and
building in question. The invocation by the appellate court of the following pronouncement
in Villanueva vs. Court of Appeals, was apropos, to say the least:
The assets of the bank pass beyond its control into the possession and control of the
receiver whose duty it is to administer the assets for the benefit of the creditors of the bank.
Thus, the appointment of a receiver operates to suspend the authority of the bank and of its
directors and officers over its property and effects, such authority being reposed in the
receiver, and in this respect, the receivership is equivalent to an injunction to restrain the
bank officers from intermeddling with the property of the bank in any way.
With respondent bank having been already placed under receivership, its officers,
inclusive of its acting president, Vicente G. Puyat, were no longer authorized to transact
business in connection with the bank's assets and property. Clearly then, the exclusive
option to purchase granted by Vicente G. Puyat was and still is unenforceable against Manila
Bank.
_____________________________________________________________________________________________
_________________________________
ALFEO D. VIVAS, ON HIS BEHALF AND ON BEHALF OF THE SHAREHOLDERS OF
EUROCREDIT COMMUNITY BANK v. THE MONETARY BOARD OF THE BANGKO
SENTRAL NG PILIPINAS AND THE PHILIPPINE DEPOSIT INSURANCE CORPORATION
G.R. No. 191424, August 07, 2013, MENDOZA, J.
The Court, in several cases, upheld the power of the MB to take over banks without
need for prior hearing. It is not necessary inasmuch as the law entrusts to the MB the
appreciation and determination of whether any or all of the statutory grounds for the closure
and receivership of the erring bank are present.
Facts:
119 | P a g e

The examiners from the Department of Loans and Credit of the BSP arrived at the
Euro Credit Community Bank (ECBI) and cancelled the rediscounting line of the bank. A
general examination of books of ECBI was ordered by BSP, however, the former refused to
comply. Thereafter, the Monetary Board issued a cease and desist order against ECBI, which
enjoined it from pursuing certain acts and transactions that were considered unsafe or
unsound banking practices.
The Monetary Board placed ECBI under receivership as it can no longer pay its
liabilities nor it can continue in business without involving probable losses to its depositors.
Vivas, owner of the controlling interest of ECBI, submits that the respondents committed
grave abuse of discretion when they erroneously applied Section 30 of R.A. No. 7653,
instead of Sections 11 and 14 of the Rural Bank Act of 1992 or R.A. No. 7353. He argues that
despite the deficiencies, inadequacies and oversights in the conduct of the affairs of ECBI, it
has not committed any financial fraud and, hence, its placement under receivership was
unwarranted and improper. He posits that, instead, the BSP should have taken over the
management of ECBI and extended loans to the financially distrained bank pursuant to
Sections 11 and 14 of R.A. No. 7353 because the BSPs power is limited only to supervision
and management take-over of banks.
Issue:
Whether the Monetary Board acted in grave abuse of discretion in placing ECBI under
receivership
Ruling:
NO.Accordingly, there is no conflict which would call for the application of the
doctrine that a special law should prevail over a general law. It must be emphasized that R.A
.No. 7653 is a later law and under said act, the power of the MB over banks, including rural
banks, was increased and expanded. The Court, in several cases, upheld the power of the
MB to take over banks without need for prior hearing. It is not necessary inasmuch as the
law entrusts to the MB the appreciation and determination of whether any or all of the
statutory grounds for the closure and receivership of the erring bank are present. The MB,
under R.A. No. 7653, has been invested with more power of closure and placement of a bank
under receivership for insolvency or illiquidity, or because the banks continuance in
business would probably result in the loss to depositors or creditors.
ALFEO D. VIVAS, ON HIS BEHALF AND ON BEHALF OF THE SHAREHOLDERS OF
EUROCREDIT COMMUNITY BANK, v. THE MONETARY BOARD OF THE BANGKO
SENTRAL NG PILIPINAS AND THE PHILIPPINE DEPOSIT INSURANCE CORPORATION.
G.R. No. 191424, August 07, 2013, MENDOZA, J.
To address the growing concerns in the banking industry, the legislature has
sufficiently empowered the MB to effectively monitor and supervise banks and financial
institutions and, if circumstances warrant, to forbid them to do business, to take over their
management or to place them under receivership.
Facts:
The examiners from the Department of Loans and Credit of the BSP arrived at the
ECBI Community Bank and cancelled the rediscounting line of the bank. A general
examination of books of ECBI was ordered by BSP, however, the former refused to comply.
Thereafter, the Monetary Board issued a cease and desist order against ECBI, which enjoined
it from pursuing certain acts and transactions that were considered unsafe or unsound
banking practices.
120 | P a g e

The Monetary Board placed ECBI under receivership as it can no longer pay its liabilities nor
it can continue in business without involving probable losses to its depositors.
Vivas assails the constitutionality of Section 30 of R.A. No. 7653 claiming that said
provision vested upon the BSP the unbridled power to close and place under receivership a
hapless rural bank instead of aiding its financial needs. He is of the view that such power
goes way beyond its constitutional limitation and has transformed the BSP to a sovereign in
its own kingdom of banks.
Issue:
Whether or not Section 30 of R.A. No. 7653 is unconstitutional
Ruling:
NO.Lastly, the petitioner challenges the constitutionality of Section 30 of R.A. No.
7653, as the legislature granted the MB a broad and unrestrained power to close and place a
financially troubled bank under receivership. He claims that the said provision was an undue
delegation of legislative power. The contention deserves scant consideration.
In this case, under the two tests, there was no undue delegation of legislative
authority in the issuance of R.A. No. 7653. To address the growing concerns in the banking
industry, the legislature has sufficiently empowered the MB to effectively monitor and
supervise banks and financial institutions and, if circumstances warrant, to forbid them to do
business, to take over their management or to place them under receivership. The
legislature has clearly spelled out the reasonable parameters of the power entrusted to the
MB and assigned to it only the manner of enforcing said power. In other words, the MB was
given a wide discretion and latitude only as to how the law should be implemented in order
to attain its objective of protecting the interest of the public, the banking industry and the
economy.
Liquidation
APOLLO M. SALUD, as Attorney-in-Fact for its Stockholders, in his behalf and for
and in behalf of the Rural Bank of Muntinlupa, Inc., Hon. VICENTE R. CAMPOS,
Presiding Judge, Regional Trial Court, National Capital Region, Br. CLXIV vs.
CENTRAL BANK OF THE PHILIPPINES, AND CONSOLACION V. ODRA, in her capacity
as Liquidator of the Rural Bank of Muntinlupa, Inc.,
G.R. No. L-17620 August 19, 1986, NARVASA, J.
Indeed, the failure to assert, as a ground of defense or objection to a proceeding for
assistance in liquidation, the fact that the resolution of the Monetary Board authorizing the
initiation of such a proceeding is "arbitrary and made in bad faith" would constitute a waiver
thereof.
Facts:
The Monetary Board adopted two resolutions forbidding the rural bank from doing
business, thereafter, designating Odra as receiver. It also ordered the liquidation of the bank
after findings that it was insolvent.
The bank asserts that under Section 29 of the Central Bank Act, the RTC has
jurisdiction to adjudicate the question of whether the Monetary Board acted in arbitrarily and
121 | P a g e

in bad faith in directing the banks dissolution. The Central Bank, on the other hand,
contends that such issue may only be raised in a separate action or proceeding.
Issue:
Whether the RTC has jurisdiction to adjudicate the question of whether the Monetary
Board acted in arbitrarily and in bad faith.
Ruling:
YES.This Court perceives no reason whatever why a banking institution's claim that a
resolution of the Monetary Board under Section 29 of the Central Bank Act should be set
aside as plainly arbitrary and made in bad faith cannot be asserted as an affirmative
defense or a counterclaim in the proceeding for assistance in liquidation, but only as a cause
of action in a separate and distinct action. Nor can this Court see why "a full-blown hearing"
on the issue is possible only if it is asserted as a cause of action, but not when set up by way
of an affirmative defense, or a counterclaim. There is no provision of law which expressly or
even by implication imposes the requirement for a separate proceeding exclusively occupied
with adjudicating this issue. Moreover, to declare the issue as beyond the scope of matters
cognizable in a proceeding for assistance in liquidation would be to engender that
multiplicity of proceedings which the law abhors. Indeed, the failure to assert, as a ground of
defense or objection to a proceeding for assistance in liquidation, the fact that the resolution
of the Monetary Board authorizing the initiation of such a proceeding is "arbitrary and made
in bad faith" would constitute a waiver thereof, conformably with the rule of "Waiver of
Defenses," to the effect that "defenses and objections not pleaded either in a motion to
dismiss or in the answer are (generally) deemed waived," or the "Omnibus Motion Rule,"
providing that "A motion attacking a pleading or a proceeding shall include all objections
then available, and all objections not so included shall be deemed waived."
_____________________________________________________________________________________________
_________________________________
BANCO FILIPINO SAVINGS AND MORTGAGE BANK v.THE MONETARY BOARD,

CENTRAL BANK OF THE PHILIPPINES, JOSE B. FERNANDEZ, CARLOTA P.
VALENZUELA, ARNULFO B. AURELLANO and RAMON V. TIAOQUI
G.R. No. 70054, December 11, 1991, MEDIALDEA, J
There is no doubt that the prosecution of suits for collection and the foreclosure of
mortgages against debtors of the bank by the liquidator are among the usual and ordinary
transactions pertaining to the administration of a bank.
Facts:
The case pertains to nine consolidated cases concerning the legality of the closure
and receivership of Banco Filipino.
122 | P a g e
Issue:
Whether the liquidator appointed by Central Bank has the authority to prosecute as
well as to defend suits, and to foreclose mortgages for and in behalf of the bank while the
issue on the validity of the receivership and liquidation of the latter is pending resolution
Ruling:
YES.Section 29 of the Republic Act No. 265, as amended known as the Central Bank
Act, provides that when a bank is forbidden to do business in the Philippines and placed
under receivership, the person designated as receiver shall immediately take charge of the
banks assets and liabilities, as expeditiously as possible, collect and gather all the assets
and administer the same for the benefit of its creditors, and represent the bank personally or
through counsel as he may retain in all actions or proceedings for or against the institution,
exercising all the powers necessary for these purposes including, but not limited to, bringing
and foreclosing mortgages in the name of the bank. If the Monetary Board shall later
determine and confirm that the banking institution is insolvent or cannot resume business
with safety to depositors, creditors and the general public, it shall, if public interest requires,
order its liquidation and appoint a liquidator who shall take over and continue the functions
of the receiver previously appointed by Monetary Board. The liquidator may, in the name of
the bank and with the assistance of counsel as he may retain, institute such actions as may
be necessary in the appropriate court to collect and recover accounts and assets of such
institution or defend any action filed against the institution.
When the issue on the validity of the closure and receivership of Banco Filipino bank
was raised in G.R. No. 70054, the pendency of the case did not diminish the powers and
authority of the designated liquidator to effectuate and carry on the administration of the
bank. In fact when the Supreme Court adopted a resolution on August 25, 1985 and issued a
restraining order to respondents Monetary Board and Central Bank, the Supreme Court
enjoined merely further acts of liquidation. Such acts of liquidation, as explained in Sec. 29
of the Central Bank Act are those which constitute the conversion of the assets of the
banking institution to money or the sale, assignment or disposition of the same to creditors
and other parties for the purpose of paying the debts of such institution. The Supreme Court
did not prohibit however acts such as receiving collectibles and receivables or paying off
creditors claims and other transactions pertaining to normal operations of a bank. There is
no doubt that the prosecution of suits for collection and the foreclosure of mortgages against
123 | P a g e

debtors of the bank by the liquidator are among the usual and ordinary transactions
pertaining to the administration of a bank.
_____________________________________________________________________________________________
_________________________________
JERRY ONG vs. COURT OF APPEALS and RURAL BANK OF OLONGAPO, INC.,
represented by its Liquidator, GUILLERMO G. REYES, JR. and Deputy Liquidator
ABEL ALLANIGUE.
G.R. No. 112830, February 1, 1996, BELLOSILLO, J.
The lawmaking body contemplated that for convenience, only one court, if possible,
should pass upon the claims against the insolvent bank.
Facts:
Two parcels of land owned by Rural Bank of Olongapo were mortgaged in favor of
Ong. This is to guarantee the payment of Omnibus Finance to Ong. When Omnibus Finance
failed to settle its obligations, Ong extrajudicially foreclosed said mortgages. A Certificate of
Sale was issued in favor of Ong, however, such sale was not yet registered in view of the
fact that the title remains with RBO. He filed with the Regional Trial Court of Quezon City a
petition for the surrender of title against RBO.
RBO contends that it was undergoing liquidation, hence, it is the liquidation court
which has exclusive jurisdiction over Ongs claim. Ong, on the other hand, submits that the
liquidation court has no jurisdiction over subject parcels of land since they are no longer
assets of RBO.
Issue:
Whether the liquidation court have jurisdiction over the parcels of land
Ruling:
YES.We explained therein the rationale behind the provision, i.e., the judicial
liquidation is intended to prevent multiplicity of actions against the insolvent bank. It is a
pragmatic arrangement designed to establish due process and orderliness in the liquidation
of the bank, to obviate the proliferation of litigations and to avoid injustice and arbitrariness.
The lawmaking body contemplated that for convenience, only one court, if possible, should
pass upon the claims against the insolvent bank and that the liquidation court should assist
the Superintendent of Banks and regulate his operations.
Petitioner must have overlooked the fact that since respondent RBO is insolvent other
claimants not privy to their transaction may be involved. As far as those claimants are
concerned, in the absence of certificates of title in the name of petitioner, subject lots still
form part of the assets of the insolvent bank.
_____________________________________________________________________________________________
_________________________________
DOMINGO R. MANALO vs. COURT OF APPEALS (Special Twelfth Division) and PAIC
SAVINGS AND MORTGAGE BANK.
G.R. No. 141297, October 8, 2001, PUNO, J.
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In fine, the exclusive jurisdiction of the liquidation court pertains only to the
adjudication of claims against the bank. It does not cover the reverse situation where it is
the bank which files a claim against another person or legal entity.
Facts:
Vargas obtained a loan from PAIC Savings. Vargas executed a mortgage to secure the
debts. PAIC extrajudicially foreclosed the mortgage when Vargas failed to pay the loan. The
title of the lot was then consolidated in PAICs name.
The Central Bank filed a petition for assistance in the liquidation of PAIC. In the
meantime, PAIC Savings petitioned RTC Pasay for the issuance of a writ of possession for the
subject property as it has already consolidated its title. During the pendency of that case,
Vargas sold the land to one Angsico. Notwithstanding this sale, Vargas, still representing
herself to be the lawful owner of the property, leased the same to petitioner Domingo R.
Manalo. The court then granted the writ of possession to PAIC. Manalo entered into another
lease agreement, this time with PAIC, represented by its liquidator.
Manalo postulates that the lower court should have dismissed PAICs Petition for
Issuance of Writ of Possession for want of jurisdiction over the subject matter of the claim.
The power to hear the same, he insists, exclusively vests with the Liquidation Court pursuant
to the Central Bank Act.
Issue:
Whether the Liquidation Court has jurisdiction over the petition.
Ruling:
NO. The pertinent portion of Section 29 states:
The liquidator designated as hereunder provided shall, by the Solicitor General, file a
petition in the Regional Trial Court reciting the proceedings which have been taken and
praying the assistance of the court in the liquidation of such institution. The court shall have
jurisdiction in the same proceedings to assist in the adjudication of disputed claims against
the bank or non-bank financial intermediary performing quasi-banking functions and the
enforcement of individual liabilites of the stockholders and do all that is necessary to
preserve the assets of such institution and to implement the liquidation plan approved by
the Monetary Board.
Petitioner apparently failed to appreciate the correct meaning and import of the
above-quoted law. The legal provision only finds operation in cases where there are claims
against an insolvent bank. In fine, the exclusive jurisdiction of the liquidation court pertains
only to the adjudication of claims against the bank. It does not cover the reverse situation
where it is the bank which files a claim against another person or legal entity.
_____________________________________________________________________________________________
_________________________________
DOMINGO R. MANALO vs. COURT OF APPEALS (Special Twelfth Division) and PAIC
SAVINGS AND MORTGAGE BANK
G.R. No. 141297, October 8, 2001, PUNO, J.
125 | P a g e

A bank which had been ordered closed by the monetary board retains its juridical
personality which can sue and be sued through its liquidator. The only limitation being that
the prosecution or defense of the action must be done through the liquidator.
Facts:
Vargas obtained a loan from PAIC Savings. Vargas executed a mortgage to secure the
debts. PAIC extrajudicially foreclosed the mortgage when Vargas failed to pay the loan. The
title of the lot was then consolidated in PAICs name.
The Central Bank filed a petition for assistance in the liquidation of PAIC. In the
meantime, PAIC Savings petitioned RTC Pasay for the issuance of a writ of possession for the
subject property as it has already consolidated its title. During the pendency of that case,
Vargas sold the land to one Angsico. Notwithstanding this sale, Vargas, still representing
herself to be the lawful owner of the property, leased the same to petitioner Domingo R.
Manalo. The court then granted the writ of possession to PAIC. Manalo entered into another
lease agreement, this time with PAIC, represented by its liquidator.
Manalo casts doubt on the capacity of the PAIC to continue litigating the petition for
the issuance of the writ. He asserts that, being under liquidation, the bank is already a dead
corporation that cannot maintain the suit in the RTC.
Issue:
Whether a bank closed by the MB retains its juridical personality.
Ruling:
YES.The argument is devoid of merit. A bank which had been ordered closed by the
monetary board retains its juridical personality which can sue and be sued through its
liquidator. The only limitation being that the prosecution or defense of the action must be
done through the liquidator. Otherwise, no suit for or against an insolvent entity would
prosper. In such situation, banks in liquidation would lose what justly belongs to them
through a mere technicality.
That the law allows a bank under liquidation to participate in an action can be clearly
inferred from the third paragraph of the same Section 29 of The Central Bank Act earlier
quoted, which authorizes or empowers a liquidator to institute actions, thus:
He (liquidator) may in the name of the bank or non-bank financial intermediary
performing quasi-banking functions and with the assistance of counsel as he may retain,
institute such actions as may be necessary in the appropriate court to collect and recover
accounts and assests of such institution or defend any action filed against the institution.
_____________________________________________________________________________________________
_________________________________
RURAL BANK OF STA. CATALINA, INC., represented by The Philippine Deposit
Insurance Corporation, in its capacity as Liquidator vs. LAND BANK OF THE
PHILIPPINES
G.R. No. 148019, July 26, 2004, CALLEJO, SR., J.
It bears stressing that a defending party declared in default loses his standing in
court and his right to adduce evidence and to present his defense.
Facts:
126 | P a g e

Land Bank filed a suit for collection of sum of money against Sta. Catalina Rural Bank.
The rural bank was declared in default for its failure to file its answer. It also failed to file a
motion to set aside the order of default.
In the meantime, the Monetary Board approved the placement of the banks assets
under receivership. Unaware of the action of the Monetary Board, the trial court ordered Sta.
Catalina Rural Bank to pay Landbank.
The rural bank asserts that its liability to the Landbank under its availments must be
limited only to the aggregate amount of its outstanding liability as of the date of its closure,
inclusive of accrued interests and penalties. It avers that the PDIC, as the liquidator, should
not be faulted for failing to file its Answer to the complaint and to move for a reconsideration
of the default order in the trial court and in the CA, because it had no knowledge of the case
filed against the rural bank.
Issue:
Whether or not Rural Bank of Sta Catalina is still liable to pay interest on its loan
obligation after it has been placed under receivership/liquidation.
Ruling:
YES.The PDIC was designated by the Central Bank of the Philippines as receiver
(conservator) as early as January 14, 1998, and in the course of its management of the
petitioner banks affairs, it should have known of the pendency of the case against the latter
in the trial court. Moreover, the petitioner, through the PDIC, received a copy of the decision
of the trial court on June 2, 1998, but did not bother filing a motion for partial
reconsideration, under Rule 37 of the Rules of Court, appending thereto the orders of the
Monetary Board or a motion to set aside the order of default. Instead, the petitioner
appealed the decision, and even failed to assign as an error the default order of the trial
court. The petitioner is, thus, barred from relying on the orders of the Monetary Board of the
Central Bank of the Philippines placing its assets and affairs under receivership and ordering
its liquidation.
_____________________________________________________________________________________________
_________________________________
LETICIA G. MIRANDA v PHILIPPINE DEPOSIT INSURANCE CORPORATION, BANGKO
SENTRAL NG PILIPINAS and PRIME SAVINGS BANK
G.R. No. 169334, September 8, 2006, YNARES-SANTIAGO, J.
Disputed claims refer to all claims, whether they be against the assets of the
insolvent bank, for specific performance, breach of contract, damages, or whatever.
Facts:
Miranda withdrew substantial amounts from her deposits in Prime Savings Bank. She
was issued a crossed cashiers check. When she deposited the checks into her account in
another bank on the same day, the BSP suspended the clearing privileges of Prime Savings
Bank. Hence, two checks were returned to her unpaid. BSP placed Prime Savings Bank under
the receivership of the PDIC.
Miranda filed an action for sum of money to recover funds from her unpaid checks.
The trial court ruled in favor of Miranda. The Court of Appeals ruled in favor of the PDIC and
127 | P a g e

BSP, dismissing the case against them, without prejudice to the right of Miranda to file her
claim before the court designated to adjudicate on claims against Prime Savings Bank.
Issue:
Whether the claim lodged by the petitioner is a disputed claim under Section 30 of
the New Central Bank Act, and therefore, under the jurisdiction of the liquidation court
Ruling:
YES.As regards the second issue, the claim lodged by the petitioner qualifies as a
disputed claim subject to the jurisdiction of the liquidation court. Regular courts do not have
jurisdiction over actions filed by claimants against an insolvent bank, unless there is a clear
showing that the action taken by the BSP, through the Monetary Board in the closure of
financial institutions was in excess of jurisdiction, or with grave abuse of discretion.
Disputed claims refer to all claims, whether they be against the assets of the
insolvent bank, for specific performance, breach of contract, damages, or whatever.
Petitioners claim which involved the payment of the two cashiers checks that were not
honored by Prime Savings Bank due to its closure falls within the ambit of a claim against
the assets of the insolvent bank. The issuance of the cashiers checks by Prime Savings Bank
to the petitioner created a debtor/creditor relationship between them. This disputed claim
should therefore be lodged in the liquidation proceedings by the petitioner as creditor, since
the closure of Prime Savings Bank has rendered all claims subsisting at that time moot which
can best be threshed out by the liquidation court and not the regular courts.
_____________________________________________________________________________________________
_________________________________
IN RE: PETITION FOR ASSISTANCE IN THE LIQUIDATION OF THE RURAL BANK OF
BOKOD (BENGUET), INC., PHILIPPINE DEPOSIT INSURANCE CORPORATION, - versus
- BUREAU OF INTERNAL REVENUE
G.R. No. 158261, December 18, 2006, CHICO-NAZARIO, J.
Section 30 of the New Central Bank Act lays down the proceedings for receivership
and liquidation of a bank. The said provision is silent as regards the securing of a tax
clearance from the BIR.
Facts:
The Monetary Board placed the Rural Bank of Bokod (RBBI) bank under receivership
and liquidation due to its various loan irregularities. PDIC was appointed as the receiver of
RBBI. The former filed a Motion for Approval of Project Distribution of the assets of the RBBI
in the RTC.
During the hearing, BIR contends that PDIC should secure a tax clearance certificate
before it could proceed with the dissolution of the bank. On the other hand, PDIC argues that
securing a tax clearance is not a condition precedent since the closure of banks is summary
in nature. It contends that under the New Central Bank Act,asset distribution of a closed
bank requires only the approval of the liquidation court.
Issue:
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Whether a bank placed under receivership by the Monetary Board still needs to
secure a tax clearance certificate from the BIR before the liquidation court approves the
project of distribution of the assets of the bank.
Ruling:
NO.Section 30 of the New Central Bank Act lays down the proceedings for
receivership and liquidation of a bank. The said provision is silent as regards the securing of
a tax clearance from the BIR. The omission, nonetheless, cannot compel this Court to apply
by analogy the tax clearance requirement of the SEC, as stated in Section 52(C) of the Tax
Code of 1997 and BIR-SEC Regulations No. 1, since, again, the dissolution of a corporation by
the SEC is a totally different proceeding from the receivership and liquidation of a bank by
the BSP. This Court cannot simply replace any reference by Section 52(C) of the Tax Code of
1997 and the provisions of the BIR-SEC Regulations No. 1 to the SEC with the BSP. To do so
would be to read into the law and the regulations something that is simply not there, and
would be tantamount to judicial legislation.
Law on Secrecy of Bank Deposits
Purpose
BSB GROUP, INC., represented by its President, Mr. RICARDO BANGAYAN,
vs, SALLY GO a.k.a. SALLY GO-BANGAYAN,.
G.R. No. 168644, February 16, 2010, PERALTA, J.
The inquiry into bank deposits allowable under R.A. No. 1405 must be premised on
the fact that the money deposited in the account is itself the subject of the action
Facts:
Sally was employed as a cashier by a company run by her husband, Ricardo. Ricardo
charged Sally with Estafa/ Qualified Theft due to the latters misappropriation of the
companys funds. Sally allegedly deposited the checks issue by the customers to her
personal bank account in Security Bank.
The prosecution presented the testimony of Marasigan, a representative of Security
Bank. Marasigan said that Sally credited the amounts to her personal deposit account. Sally
moved to suppress the testimony of Marasigan on the ground of confidentiality under R.A.
1405.
Issue:
Whether the admission of Marasigans testimony on the particulars of Sallys account
with Security Bank, as well as of the corresponding evidence of the checks allegedly
deposited in said account, constitutes an unallowable inquiry under R.A. 1405.
Ruling:
YES.R.A. No. 1405 has two allied purposes. It hopes to discourage private hoarding
and at the same time encourage the people to deposit their money in banking institutions,
so that it may be utilized by way of authorized loans and thereby assist in economic
development. Owing to this piece of legislation, the confidentiality of bank deposits remains
to be a basic state policy in the Philippines. Section 2 of the law institutionalized this policy
by characterizing as absolutely confidential in general all deposits of whatever nature with
banks and other financial institutions in the country.
129 | P a g e

In taking exclusion from the coverage of the confidentiality rule, petitioner in the
instant case posits that the account maintained by respondent with Security Bank contains
the proceeds of the checks that she has fraudulently appropriated to herself and, thus, falls
under one of the exceptions in Section 2 of R.A. No. 1405, that the money kept in said
account is the subject matter in litigation.
What indeed constitutes the subject matter in litigation in relation to Section 2 of R.A.
No. 1405 has been pointedly and amply addressed in Union Bank of the Philippines v. Court
of Appeals, in which the Court noted that the inquiry into bank deposits allowable under R.A.
No. 1405 must be premised on the fact that the money deposited in the account is itself the
subject of the action.
Given this perspective, we deduce that the subject matter of the action in the case at
bar is to be determined from the indictment that charges respondent with the offense, and
not from the evidence sought by the prosecution to be admitted into the records. In the
criminal Information filed with the trial court, respondent, unqualifiedly and in plain
language, is charged with qualified theft by abusing petitioners trust and confidence and
stealing cash. The said Information makes no factual allegation that in some material way
involves the checks subject of the testimonial and documentary evidence sought to be
suppressed. Neither do the allegations in said Information make mention of the supposed
bank account in which the funds represented by the checks have allegedly been kept.
Prohibited Acts
EMMANUEL C. OATE and ECON HOLDINGS CORPORATION, vs. HON. ZUES C.

ABROGAR, as Presiding Judge of Branch 150 of the Regional Trial Court of Makati,
and SUN LIFE ASSURANCE COMPANY OF CANADA
G.R. No. 107303, February 23, 1995, NOCON, J.
Whether the transaction is considered a sale or money placement does not make the
money the "subject matter of litigation" within the meaning of Sec. 2 of Republic Act No.
1405 which prohibits the disclosure or inquiry into bank deposits except "in cases where the
money deposited or invested is the subject matter of litigation."
Facts:
Sun Life filed a complaint for sum of money against Onate, Econ Holdings and
Brunner Development. Sun Life alleges that Onate, as president of Econ, offered to sell 46
million worth of treasury bills at a discounted price. Sun Life paid the price by means of a
check payable to Brunner. Brunner, through its president Dio, issued to it a receipt with
undertaking to deliver the treasury bills to Sun Life. Brunner and Dio delivered instead a
130 | P a g e

promissory note, in which it was made to appear that the transaction was a money
placement instead of sale of treasury bills.
Sun Life moved to examine the accounts and ledgers of Brunner Development at
Urban Bank and BPI.
Issue:
Whether the money paid can be considered as a subject matter of litigation within
the meaning of RA 1405.
Ruling:
NO.Thus the issue is whether the money paid to Brunner was the consideration for
the sale of treasury bills, as Sun Life claims, or whether it was money intended for
placement, as petitioners allege. Petitioners do not deny receipt of P39,526,500.82 from Sun
Life. Hence, whether the transaction is considered a sale or money placement does not
make the money the "subject matter of litigation" within the meaning of Sec. 2 of Republic
Act No. 1405 which prohibits the disclosure or inquiry into bank deposits except "in cases
where the money deposited or invested is the subject matter of litigation." Nor will it matter
whether the money was "swindled" as Sun Life contends.
_____________________________________________________________________________________________
_________________________________
UNION BANK OF THE PHILIPPINES, vs. COURT OF APPEALS and ALLIED BANK
CORPORATION,
G.R. No. 134699, December 23, 1999, KAPUNAN, J.
By the terms of R.A. No. 1405, the money deposited itself should be the subject
matter of the litigation.
Facts:
131 | P a g e

A check in the amount of 1 million pesos was drawn against Account No. 0111-018548 with Allied Bank payable to the order of Alvarez. The payee deposited the check with
Union Bank who credited the P1,000,000.00 to the account of Mr. Alvarez. Union Bank sent
the check for clearing through the Philippine Clearing House Corporation. When the check
was presented for payment, a clearing discrepancy was committed by Union Banks clearing
staff when the 1 Million Pesos was erroneously under-encoded to 1 Thousand Pesos.
Union Bank filed a petition for the examination of Account No. 111-01854-8. The RTC
held that the case was not one where the money deposited is the subject matter of the
litigation.
Union Bank in its complaint filed before the PCHC, Arbicom Case, clearly stated that
its cause of action against defendant arose from Allied Banks deliberate violation of the
provisions of the PCHC Rule Book, Sec. 25.3, specifically on Under-Encoding of check. A
reading of petitioner collecting banks complaint in the Arbicom case shows that its thrust is
directed against respondent drawee banks alleged failure to inform the former of the underencoding. On the other hand, the petition before the Supreme Court reveals that the true
purpose for the examination is to aid petitioner in proving the extent of Allied Banks liability.
Issue:
Whether or not the money deposited is covered by the term subject matter of
litigation
Ruling:
NO.In short, petitioner is fishing for information so it can determine the culpability of
private respondent and the amount of damages it can recover from the latter. It does not
seek recovery of the very money contained in the deposit. The subject matter of the dispute
may be the amount of P999,000.00 that petitioner seeks from private respondent as a result
of the latters alleged failure to inform the former of the discrepancy; but it is not the
P999,000.00 deposited in the drawers account. By the terms of R.A. No. 1405, the money
deposited itself should be the subject matter of the litigation.
That petitioner feels a need for such information in order to establish its case against
private respondent does not, by itself, warrant the examination of the bank deposits. The
necessity of the inquiry, or the lack thereof, is immaterial since the case does not come
under any of the exceptions allowed by the Bank Deposits Secrecy Act.
Deposits Covered
CARMEN LL. INTENGAN, ROSARIO LL. NERI, and RITA P. BRAWNER vs. COURT OF
APPEALS, DEPARTMENT OF JUSTICE, AZIZ RAJKOTWALA, WILLIAM FERGUSON,
JOVEN REYES, and VIC LIM,
G.R. No. 128996, February 15, 2002, DE LEON, JR., J.
Thus, under R.A. No. 6426 there is only a single exception to the secrecy of foreign
currency deposits, that is, disclosure is allowed only upon the written permission of the
depositor.
Facts:
Citibank filed a complaint against two of its officers, Santos and Genuino. The two
appeared to have been actively engaged in business endeavors that were in conflict with the
business of the bank. They caused existing clients/depositors to divert their money from
132 | P a g e

Citibank to products offered by other companies. Intengan, Neri and Brawner are some of
clients who have long standing accounts with Citibank, N.A.
As evidence, Lim, the Vice-President of Citibank, annexed bank records purporting to
establish the deception practiced by Santos and Genuino. Some of the documents pertained
to the dollar deposits of the petitioners.
The Court of Appeals held that the disclosure of deposits was necessary to establish
the allegation that Santos and Genuino had violated Section 31 of the Corporation Code in
acquiring any interest adverse to the corporation in respect of any matter which has been
reposed in him in confidence. In assailing the appellate courts findings, petitioners assert
that the disclosure of their bank records was unwarranted and illegal.
Issue:
Whether the disclosure of the bank records was illegal.
Ruling:
YES.The accounts in question are U.S. dollar deposits; consequently, the applicable
law is not Republic Act No. 1405 but Republic Act (RA) No. 6426,known as the Foreign
Currency Deposit Act of the Philippines.
Thus, under R.A. No. 6426 there is only a single exception to the secrecy of foreign
currency deposits, that is, disclosure is allowed only upon the written permission of the
depositor. Incidentally, the acts of private respondents complained of happened before the
enactment on September 29, 2001 of R.A. No. 9160 otherwise known as the Anti-Money
Laundering Act of 2001.
A case for violation of Republic Act No. 6426 should have been the proper case
brought against private respondents. Private respondents Lim and Reyes admitted that they
had disclosed details of petitioners dollar deposits without the latters written permission. It
does not matter if that such disclosure was necessary to establish Citibanks case against
Dante L. Santos and Marilou Genuino. Lims act of disclosing details of petitioners bank
records regarding their foreign currency deposits, with the authority of Reyes, would appear
to belong to that species of criminal acts punishable by special laws, called malum
prohibitum.
_____________________________________________________________________________________________
_________________________________
JOSEPH VICTOR EJERCITO VS. SANDIGANBAYAN
G.R. Nos. 157294-95, November 30, 2006, CARPIO MORALES, J.
An examination of the law shows that the term deposits used therein is to be
understood broadly and not limited only to accounts which give rise to a creditor-debtor
relationship between the depositor and the bank.Moreover, the law applies not only to
money which is deposited but also to those which are invested.
Facts:
The special prosecution panel filed a Request for Issuance of Subpoena Duces Tecum
directing the President of Export and Industry Bank (EIB, formerly Urban Bank) or his/her
authorized representative to produce the Trust Account No. 858 and Savings Account No.
0116-17345-9 of the petitioner. In his Motion to Quash, petitioner claimed that his bank
accounts are covered by R.A. No. 1405 (The Secrecy of Bank Deposits Law) and do not fall
133 | P a g e

under any of the exceptions stated therein. For, to respondent People, the law applies only
to deposits which strictly means the money delivered to the bank by which a creditor-debtor
relationship is created between the depositor and the bank. Thus, the Trust Account No. 858
should be inquired into, not merely because it falls under the exceptions to the coverage of
R.A. 1405, but because it is not even contemplated therein.
Issue:
Whether a Trust Account is covered by the term deposit under R.A. 1405.
Ruling:
YES. An examination of the law shows that the term deposits used therein is to be
understood broadly and not limited only to accounts which give rise to a creditor-debtor
relationship between the depositor and the bank.
If the money deposited under an account may be used by banks for authorized loans
to third persons, then such account, regardless of whether it creates a creditor-debtor
relationship between the depositor and the bank, falls under the category of accounts which
the law precisely seeks to protect for the purpose of boosting the economic development of
the country.
Trust Account No. 858 is, without doubt, one such account. The Trust Agreement
between petitioner and Urban Bank provides that the trust account covers deposit,
placement or investment of funds by Urban Bank for and in behalf of petitioner. The money
deposited under Trust Account No. 858, was, therefore, intended not merely to remain with
the bank but to be invested by it elsewhere. To hold that this type of account is not
protected by R.A. 1405 would encourage private hoarding of funds that could otherwise be
invested by banks in other ventures, contrary to the policy behind the law.
Section 2 of the same law in fact even more clearly shows that the term deposits was
intended to be understood broadly:
SECTION 2. All deposits of whatever nature with banks or banking institutions in
the Philippines including investments in bonds issued by the Government of the Philippines,
its political subdivisions and its instrumentalities, are hereby considered as of an absolutely
confidential nature and may not be examined, inquired or looked into by any person,
government official, bureau or office, except upon written permission of the depositor, or in
cases of impeachment, or upon order of a competent court in cases of bribery or dereliction
of duty of public officials, or in caseswhere the money deposited or invested is the
subject matter of the litigation.
The phrase of whatever nature proscribes any restrictive interpretation of
deposits. Moreover, it is clear from the immediately quoted provision that, generally, the law
applies not only to money which is deposited but also to those which are invested. This
further shows that the law was not intended to apply only to deposits in the strict sense of
the word. Otherwise, there would have been no need to add the phrase or invested.
Exceptions
PHILIPPINE NATIONAL BANK and EDUARDO Z. ROMUALDEZ, in his capacity as
President of the Philippine National Bank vs. EMILIO A. GANCAYCO and
FLORENTINO FLOR, Special Prosecutors of the Dept. of Justice
G.R. No.L-18343, September 30, 1965, Regala, J.
134 | P a g e

Thus, while Republic Act No. 1405 provides that bank deposits are "absolutely
confidential ... and therefore may not be examined, inquired or looked into," except in those
cases enumerated therein, the Anti-Graft Law directs in mandatory terms that bank deposits
"shall be taken into consideration in the enforcement of this section, notwithstanding any
provision of law to the contrary." The only conclusion possible is that section 8 of the AntiGraft Law is intended to amend section 2 of Republic Act No. 1405 by providing additional
exception to the rule against the disclosure of bank deposits.
Facts:
Philippine National Bank (PNB) was required by the prosecutors to produce the
records of the bank deposits of Ernesto T. Jimenez who was then under investigation of an
unexplained wealth. The prosecutors cited the Anti-Graft and Corrupt Practices Act (Republic
Act No. 3019) while PNB, on the other hand, refused to comply and invoked R.A. No. 1405.
Subsequently, plaintiffs filed an action for declaratory judgment before the Manila court. The
said court said that, by enacting section 8 of, the Anti-Graft and Corrupt Practices Act,
Congress clearly intended to provide an additional ground for the examination of bank
deposits. Without such provision, the court added prosecutors would be hampered if not
altogether frustrated in the prosecution of those charged with having acquired unexplained
wealth while in public office.
Issue:
Whether section 8 of the Anti-Graft Law amends section 2 of R.A. No. 1405.
Ruling:
YES. Contrary to their claim that their position effects a reconciliation of the
provisions of the two laws, plaintiffs are actually making the provisions of Republic Act No.
1405 prevail over those of the Anti-Graft Law, because even without the latter law the
balance standing to the depositor's credit can be considered provided its disclosure is made
in any of the cases provided in Republic Act No. 1405.The truth is that these laws are so
repugnant to each other than no reconciliation is possible.
Indeed, it is said that if the new law is inconsistent with or repugnant to the old law,
the presumption against the intent to repeal by implication is overthrown because the
inconsistency or repugnancy reveals an intent to repeal the existing law. And whether a
statute, either in its entirety or in part, has been repealed by implication is ultimately a
matter of legislative intent.
_____________________________________________________________________________________________
_________________________________
BANCO FILIPINO SAVINGS AND MORTGAGE BANK vs.HON. FIDEL PURISIMA, etc.,
and HON. VICENTE ERICTA and JOSE DEL FIERO
G.R. No.L-56429 May 28, 1988, NARVASA, J.
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To sustain the petitioner's theory, and restrict the inquiry only to property held by or
in the name of the government official or employee, or his spouse and unmarried children is
unwarranted in the light of the provisions of the statutes in question, and would make
available to persons in government who illegally acquire property an easy and fool-proof
means of evading investigation and prosecution; all they would have to do would be to
simply place the property in the possession or name of persons other than their spouse and
unmarried children. This is an absurdity that we will not ascribe to the lawmakers.
Facts:
Manuel Caturla was the accused before the Tanodbayan of having allegedly acquired
property manifestly out of proportion to his salary and other lawful income, in violation of
the "Anti-Graft and Corrupt Practices Act. Tanodbayan issued a subpoena ducestecum to the
Banco Filipino Savings & Mortgage Bank, commanding its representative to appear at a
specified time at the Office of the Tanodbayan and furnish the latter with duly certified
copies of the records in all its branches and extension offices, of the loans, savings and time
deposits and other banking transactions of Manuel Caturla, his wife, PuritaCaturla, their
children. Caturla moved to quash the subpoena ducestecum arguing that compliance
therewith would result in a violation of Sections 2 and 3 of the Law on Secrecy of Bank
Deposits.
The Bank filed a complaint for declaratory relief praying for a judicial declaration as
to whether its compliance with the subpoenaducestecum would constitute an infringement
of the provisions of Sections 2 and 3 of R.A. No. 1405 in relation to Section 8 of R.A. No.
3019.
Issue:
Whether the "Law on Secrecy of Bank Deposits" precludes production by subpoena
ducestecum of bank records of transactions by or in the names of the wife, children and
friends of the accused.
Ruling:
NO. The inquiry into illegally acquired property or property NOT "legitimately
acquired" extends to cases where such property is concealed by being held by or
recorded in the name of other persons. This proposition is made clear by R.A. No. 3019
which quite categorically states that the term, "legitimately acquired property of a public
officer or employee shall not include .. property unlawfully acquired by the respondent, but
its ownership is concealed by its being recorded in the name of, or held by, respondent's
spouse, ascendants, descendants, relatives or any other persons."
_____________________________________________________________________________________________
_________________________________
RIZAL COMMERCIAL BANKING CORPORATION vs.THE HONORABLE PACIFICO P. DE
CASTRO and PHILIPPINE VIRGINIA TOBACCO ADMINISTRATION
G.R. No.L-34548 November 29, 1988, CORTES, J.
It is clear that PVTA has been endowed with a personality distinct and separate from
the government which owns and controls it. Accordingly, this Court has heretofore declared
that the funds of the PVTA can be garnished since "funds of public corporation which can sue
and be sued were not exempt from garnishment.
Facts:
136 | P a g e

The present case is an offshoot case of "Badoc Planters, Inc. versus Philippine Virginia
Tobacco Administration (PVTA), et al.," whereby defendants PVTA therein to pay jointly and
severally, the plaintiff Badoc Planters, Inc. (hereinafter referred to as "BADOC") within 48
hours the aggregate amount of P206,916.76, with legal interests thereon.Upon the issuance
of Urgent Ex-Parte Motion for a Writ of Execution of the said Partial Judgment, the
respondent De Castro ordered the herein petitioner to deliver in check the amount garnished
in the amount of P206,916.76. The PVTA then filed a motion for reconsideration ordering
petitioner and BADOC to restore, jointly and severally, the account of PVTA with the said
bank in the same condition and state it was before the issuance of the aforesaid Orders by
reimbursing the PVTA of the amount of P 206, 916.76 with interests.
Issue:
Whether PVTA funds are exempt from garnishment.
Ruling:
NO. Republic Act No. 2265 created the PVTA as an ordinary corporation with all the
attributes of a corporate entity subject to the provisions of the Corporation Law. Hence, it
possesses the power "to sue and be sued" and "to acquire and hold such assets and incur
such liabilities resulting directly from operations authorized by the provisions of this Act or
as essential to the proper conduct of such operations." [Section 3, Republic Act No. 2265.]
Inasmuch as the Tobacco Fund, a special fund, was by law, earmarked specifically to
answer obligations incurred by PVTA in connection with its proprietary and commercial
operations authorized under the law, it follows that said funds may be proceeded against by
ordinary judicial processes such as execution and garnishment. If such funds cannot be
executed upon or garnished pursuant to a judgment sustaining the liability of the PVTA to
answer for its obligations, then the purpose of the law in creating the PVTA would be
defeated. For it was declared to be a national policy, with respect to the local Virginia
tobacco industry, to encourage the production of local Virginia tobacco of the qualities
needed and in quantities marketable in both domestic and foreign markets, to establish this
industry on an efficient and economic basis, and to create a climate conducive to local
cigarette manufacture of the qualities desired by the consuming public, blending imported
and native Virginia leaf tobacco to improve the quality of locally manufactured cigarettes
[Section 1, Republic Act No. 4155.]
_____________________________________________________________________________________________
_________________________________
MELLON BANK, N.A. vs.HON. CELSO L. MAGSINO, in his capacity as Presiding
Judge of Branch CLIX of the Regional Trial Court at Pasig
G.R. No. 71479 October 18, 1990, FERNAN, CJ.
Section 2 of R.A. No. 1405 allows the disclosure of bank deposits in cases where the
money deposited is the subject matter of the litigation.
Facts:
Dolores Ventosa requested the transfer of $1,000 from the First National Bank of
Moundsville, West Virginia, U.S.A. to Victoria Javier in Manila through the Prudential Bank. To
effect the transfer, the First National Bank requested the petitioner, Mellon Bank, which
mistakenly indicated in its wire sent to Manufacturers Hanover Bank, a correspondent of
Prudential Bank the amount transferred as "US$1,000,000.00" instead of US$1,000.00.
137 | P a g e

Mellon Bank filed in the Court of First Instance of Rizal, Branch X, a complaint against
the Javier spouses, Honorio Poblador, etc to recover the amount they received for the sale of
the 160-acre lot in California City.
In due course, it was found out that the checks originally issued by Javier spouses
were already negotiated and now were deposited to Account 2825-1 of the Philippine
Veterans Bank in the name of Cipriano Azada, Poblador's law partner and counsel to the
Javiers. Mellon Bank then subpoenaed Erlinda Baylosis of Veterans Bank to show that Azada
deposited checks in his personal current account with said bank and Pilologo Red, Jr. of HSBC
to prove that said amount was returned by Azada to Hagedorn one of the companies
connected with Poblador. The testimonies of these witnesses were objected to by the
defense on the grounds of res inter alios acta, immateriality, irrelevancy and confidentiality
and then moved to strike off the testimonies from the record of the case in violation of
Republic Act No. 1405 the Secrecy of Bank Deposits
Issue:
Whether the disclosure of bank deposits in the present case violates R.A. no. 1405.
Ruling:
NO. Private respondents' protestations that to allow the questioned testimonies to
remain on record would be in violation of the provisions of Republic Act No. 1405 on the
secrecy of bank deposits, is unfounded.
Section 2 of said law allows the disclosure of bank deposits in cases where the money
deposited is the subject matter of the litigation. Inasmuch as Civil Case No. 26899 is aimed
at recovering the amount converted by the Javiers for their own benefit, necessarily, an
inquiry into the whereabouts of the illegally acquired amount extends to whatever is
concealed by being held or recorded in the name of persons other than the one responsible
for the illegal acquisition.
_____________________________________________________________________________________________
_________________________________
PHILIPPINE COMMERCIAL & INDUSTRIAL BANK and JOSE HENARES vs.THE HON.
COURT OF APPEALS and MARINDUQUE MINING AND INDUSTRIAL CORPORATION
G.R. No. 84526, January 28, 1991,SARMIENTO, J.
It is clear from the discussion of the conference committee report on Senate Bill No.
351 and House Bill No. 3977, which later became Republic Act 1405, that the prohibition
against examination of or inquiry into a bank deposit under Republic Act 1405 does not
preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real
inquiry in such a case, and if existence of the deposit is disclosed the disclosure is purely
incidental to the execution process. It is hard to conceive that it was ever within the
intention of Congress to enable debtors to evade payment of their just debts, even if
ordered by the Court, through the expedient of converting their assets into cash and
depositing the same in a bank.
Facts:
The present case originated from a NLRC case where a group of laborersobtained
therefrom a favorable judgment for the payment of backwages amounting to P205,853.00
against the private respondent.Thereafter, the Sheriff prepared on his own a Notice of
Garnishment addressed to six (6) banks, one of which being the petitioner herein, directing
138 | P a g e

the bank concerned to immediately issue a check in an amount equivalent to the amount of
the garnishment. Thereafter, the bank released the amount.
Issue:
Whether a bank is liable for releasing its depositor's funds on the strength of the
notice of garnishment made by the deputy sheriff pursuant to a writ of execution issued by
the National Labor Relations Commission (NLRC).
Ruling:
NO. Since there is no evidence that the petitioners themselves divulged the
information that the private respondent had an account with the petitioner bank and it is
undisputed that the said account was properly the object of the notice of garnishment and
writ of execution carried out by the deputy sheriff, a duly authorized officer of the court, we
cannot therefore hold the petitioners liable under R.A. 1405.
_____________________________________________________________________________________________
_________________________________
ALEXANDER VAN TWEST and THE HON. SALVADOR P. DE GUZMAN, in his capacity
as Presiding Judge of the Regional Trial Court of Makati, Branch 142 vs. THE HON.
COURT OF APPEALS and GLORIA ANACLETO,
G.R. No. 106253, February 10, 1994, FELICIANO, J.
Circular No. 960, Series of 1983 was in force at the time private respondent
undertook her questioned transactions; thus, such local transfer from the original joint
foreign currency account to another (personal) foreign currency account, was not an eligible
foreign currency deposit within the coverage of R.A. No. 6426 and not entitled to the benefit
of the confidentiality provisions of R.A. No. 6426.
Facts:
Alexander Van Twest and Gloria Anacleto opened a joint foreign currency savings
account with Interbank to hold funds which "belonged entirely and exclusively" to petitioner,
to "facilitate the funding of certain business undertakings" of both of them and which funds
were to be "temporarily (held) in trust" by private respondent, who "shall turnover the same
to plaintiff upon demand." When the business relationship of petitioner and respondent
ended, the respondent unilaterally closed their joint account, withdrew the remaining
balance of Deutschmark (DM) 269,777.37 and placed the money in her own personal
account with the same bank. Petitioner thus sought an injunctive writ to prevent private
respondent from withdrawing the money at any time.
Private respondent contends for the first time before the CA that the personal foreign
currency deposit account she is maintaining is exempt from processes issued by the courts,
pursuant to Section 8 of R.A. 6426 as amended by P. D. 1246, the date she withdrew the
foreign exchange fund from her joint account with petitioner and transferred the same to her
personal account.
Issue:
139 | P a g e

Whether the account is covered byconfidentiality.
Ruling:
NO.Although transfers from one foreign currency deposit account to another foreign
currency deposit account in the Philippines are now eligible deposits under the Central
Bank's Foreign Currency Deposit System, private respondent is still not entitled to the
confidentiality provisions of the relevant circulars. For, as noted earlier, private respondent
is not the ownerof such foreign currency funds and her personal deposit account is not
protected.
_____________________________________________________________________________________________
_________________________________
LOURDES T. MARQUEZ, in her capacity as Branch Manager, Union Bank of the

Philippines, petitioners, vs. HON. ANIANO A. DESIERTO
G.R. No. 135882. June 27, 2001, PARDO, J.
We rule that before an in camera inspection may be allowed, there must be a

pending case before a court of competent jurisdiction. Further, the account must be clearly
identified, the inspection limited to the subject matter of the pending case before the court
of competent jurisdiction. The bank personnel and the account holder must be notified to be
present during the inspection, and such inspection may cover only the account identified in
the pending case.
Facts:
The present case originated from Fact-Finding and Intelligence Bureau (FFIB) v.
Amado Lagdameo, et. al. Petitioner Marquez, the manager of Union Bank of the Philippines,
Vargas branch, received an Order from the Ombudsman Aniano A. Desierto to produce
several bank documents for purposes of inspection in camerarelative to various accounts
maintained at Union Bank of the Philippines. Later on, petitioner together with Union Bank of
the Philippines, filed a petition for declaratory relief, prohibition and injunction before the
RTC alleging that clear conflict between R. A. No. 6770, Section 15 and R. A. No. 1405,
Sections 2 and 3.
Petitioner prayed for a temporary restraining order (TRO) because the Ombudsman
and other persons acting under his authority were continuously harassing her to produce the
bank documents relative to the accounts in question.
Issue:
Whether the order of the Ombudsman to have an in camerainspection of the
questioned account is allowed as an exception to the law on secrecy of bank deposits (R. A.
No. 1405).
140 | P a g e

Ruling:
NO. The order of the Ombudsman to produce for in camera inspection the subject
accounts with the Union Bank of the Philippines, Julia Vargas Branch, is based on a pending
investigation at the Office of the Ombudsman against Amado Lagdameo, et. al. for violation
of R. A. No. 3019, Sec. 3 (e) and (g) relative to the Joint Venture Agreement between the
Public Estates Authority and AMARI.
In Union Bank of the Philippines v. Court of Appeals, we held that Section 2 of the Law
on Secrecy of Bank Deposits, as amended, declares bank deposits to be absolutely
confidential except:
(1) In an examination made in the course of a special or general examination of a

bank that is specifically authorized by the Monetary Board after being satisfied that there is
reasonable ground to believe that a bank fraud or serious irregularity has been or is being
committed and that it is necessary to look into the deposit to establish such fraud or
irregularity,
(2) In an examination made by an independent auditor hired by the bank to conduct

its regular audit provided that the examination is for audit purposes only and the results
thereof shall be for the exclusive use of the bank,
(3) Upon written permission of the depositor,
(4) In cases of impeachment,
(5) Upon order of a competent court in cases of bribery or dereliction of duty of public
officials, or
(6) In cases where the money deposited or invested is the subject matter of the
litigation
141 | P a g e
In the case at bar, there is yet no pending litigation before any court of competent
authority. What is existing is an investigation by the office of the Ombudsman. In short, what
the Office of the Ombudsman would wish to do is to fish for additional evidence to formally
charge Amado Lagdameo, et. al., with the Sandiganbayan. Clearly, there was no pending
case in court which would warrant the opening of the bank account for inspection.
_____________________________________________________________________________________________
_________________________________
OFFICE OF THE OMBUDSMAN, petitioner, vs. HON. FRANCISCO B. IBAY, et. al.
G. R. No. 137538, September 3, 2001, QUISUMBING, J.
In Marquez vs. Desierto, we ruled that before an in camera inspection of bank
accounts may be allowed, there must be a pending case before a court of competent
jurisdiction.
Facts:
This case is a continuance of the Marquez vs. Desierto case. Petitioner in this case
questioned the jurisdiction of the public respondent in entertaining the petition for
declaratory relief filed by the petitioner.
Issue:
Whether in camera inspection of bank accounts are allowed.
Ruling:
NO. Before an in camera inspection of bank accounts may be allowed, there must be
a pending case before a court of competent jurisdiction. Further, the account must be clearly
identified, and the inspection limited to the subject matter of the pending case before the
court of competent jurisdiction. The bank personnel and the account holder must be notified
to be present during the inspection, and such inspection may cover only the account
identified in the pending case. In the present case, since there is no pending litigation yet
before a court of competent authority, but only an investigation by the Ombudsman on the
so-called scam, any order for the opening of the bank account for inspection is clearly
premature and legally unjustified.
_____________________________________________________________________________________________
_________________________________
CHINA BANKING CORPORATION vs. THE HONORABLE COURT OF APPEALS, et. al.
G.R. No. 140687, December 18, 2006, CHICO-NAZARIO, J.
All things considered and in view of the distinctive circumstances attendant to the
present case, we are constrained to render a limited pro hac vice ruling. Clearly it was not
the intent of the legislature when it enacted the law on secrecy on foreign currency deposits
142 | P a g e

to perpetuate injustice. This Court is of the view that the allowance of the inquiry would be
in accord with the rudiments of fair play, the upholding of fairness in our judicial system and
would be an avoidance of delay and time-wasteful and circuitous way of administering
justice.
Facts:
Jose Gotianuy and Mary Margaret Dee (the latters daughter) are co-payees of various
Citibank checks. Mary Margaret Dee withdrew these checks from Citibank but she alleged
that she withdrew the funds from Citibank upon the instruction of her father Jose Gotianuy
and that the funds belonged exclusively to the latter. Consequently, these checks were
endorsed by Mary Margaret Dee at the dorsal portion; and (5) Jose Gotianuy discovered that
these checks were deposited with China Bank as shown by the stamp of China Bank at the
dorsal side of the checks.
A Complaint for recovery of sums of money and annulment of sales of real properties
and shares of stock docketed was filed by Jose Joseph Gotianuy against his son-in-law,
George Dee, and his daughter, Mary Margaret. Upon motion, the trial court issued a
subpoena to CristotaLabios and Isabel Yap, employees of China Bank, to testify on the case.
A MR was filed but was denied. Subsequently, upon a petition for certiorari before the CA,
the latter denied the petition reasoning that the law specifically encompasses only the
money or funds in foreign currency deposited in a bank. Thus, the coverage of the law
extends only to the foreign currency deposit in the CBC account where Mary Margaret Dee
deposited the Citibank checks in question and nothing more.
Issue:
Whether or not Court of Appeals has interpreted the provision of Section 8 of R.A.
6426, as amended, otherwise known as the Foreign Currency Deposit Act, in a manner
contrary to the legislative purpose, that is, to provide absolute confidentiality of whatever
information relative to the foreign currency deposit.
Ruling:
NO.As the owner of the funds unlawfully taken and which are undisputably now
deposited with China Bank, Jose Gotianuy has the right to inquire into the said deposits.A
depositor, in cases of bank deposits, is one who pays money into the bank in the usual
course of business, to be placed to his credit and subject to his check or the beneficiary of
the funds held by the bank as trustee.
It must be remembered that in the complaint of Jose Gotianuy, he alleged that his US
dollar deposits with Citibank were illegally taken from him. On the other hand, China Bank
employee Cristuta Labios testified that Mary Margaret Dee came to China Bank and
deposited the money of Jose Gotianuy in Citibank US dollar checks to the dollar account of
her sister Adrienne Chu. This fortifies our conclusion that an inquiry into the said deposit at
China Bank is justified. At the very least, Jose Gotianuy as the owner of these funds is
entitled to a hearing on the whereabouts of these funds.
_____________________________________________________________________________________________
_________________________________
143 | P a g e

BSB GROUP, INC., represented by its President, Mr. RICARDO BANGAYAN vs. SALLY
GO a.k.a. SALLY GO-BANGAYAN
G.R. No. 168644, February 16, 2010, PERALTA, J.
Admission of testimonial and documentary evidence relative to respondents Security

Bank account serves no other purpose than to establish the existence of such account, its
nature and the amount kept in it. It constitutes an attempt by the prosecution at an
impermissible inquiry into a bank deposit account the privacy and confidentiality of which is
protected by law. On this score alone, the objection posed by respondent in her motion to
suppress should have indeed put an end to the controversy at the very first instance it was
raised before the trial court.
Facts:
Bangayan filed with the Manila Prosecutors Office a complaint for estafa and/or
qualified theft against respondent, alleging that several checks issued by the companys
customers in payment of their obligation were, instead of being turned over to the
companys coffers, indorsed by respondent Sally Go who deposited the same to her personal
banking account maintained at Security Bank and Trust Company (Security Bank) in
Divisoria, Manila Branch.
The prosecution moved for the issuance of subpoena ducestecum /ad testificandum
against the respective managers or records custodians of Security Banks Divisoria Branch,
as well as of the Asian Savings Bank (now Metropolitan Bank & Trust Co. [Metrobank]). The
trial court granted the motion and issued the corresponding subpoena.
Meanwhile, the prosecution was able to present in court the testimony of
ElenitaMarasigan (Marasigan), the representative of Security Bank.But before the testimony
could be completed, respondent filed a Motion to Suppress, seeking the exclusion of
Marasigans testimony and accompanying documents thus far received, bearing on the
subject Security Bank account. This time respondent invokes, in addition to irrelevancy, the
privilege of confidentiality under R.A. No. 1405.
Issue:
Whether or not the testimony of Marasigan would be a violation of confidentiality
under R.A. No. 1405.
Ruling:
YES. What indeed constitutes the subject matter in litigation in relation to Section 2
of R.A. No. 1405 has been pointedly and amply addressed in Union Bank of the Philippines v.
Court of Appeals, in which the Court noted that the inquiry into bank deposits allowable
under R.A. No. 1405 must be premised on the fact that the money deposited in the account
is itself the subject of the action. Given this perspective, we deduce that the subject matter
of the action in the case at bar is to be determined from the indictment that charges
respondent with the offense, and not from the evidence sought by the prosecution to be
admitted into the records. In the criminal Information filed with the trial court, respondent,
144 | P a g e

unqualifiedly and in plain language, is charged with qualified theft by abusing petitioners
trust and confidence and stealing cash. The said Information makes no factual allegation
that in some material way involves the checks subject of the testimonial and documentary
evidence sought to be suppressed. Neither do the allegations in said Information make
mention of the supposed bank account in which the funds represented by the checks have
allegedly been kept.
_____________________________________________________________________________________________
_________________________________
RIZAL COMMERCIAL BANKING CORPORATION vs. HI-TRI DEVELOPMENT

CORPORATION and LUZ R. BAKUNAWA
G.R. No. 192413, June 13, 2012, SERENO, J.
In the case of dormant accounts, the state inquires into the status, custody, and
ownership of the unclaimed balance to determine whether the inactivity was brought about
by the fact of death or absence of or abandonment by the depositor. If after the proceedings
the property remains without a lawful owner interested to claim it, the property shall be
reverted to the state to forestall an open invitation to self-service by the first comers.
However, if interested parties have come forward and lain claim to the property, the courts
shall determine whether the credit or deposit should pass to the claimants or be forfeited in
favor of the state. We emphasize that escheat is not a proceeding to penalize depositors for
failing to deposit to or withdraw from their accounts. It is a proceeding whereby the state
compels the surrender to it of unclaimed deposit balances when there is substantial ground
for a belief that they have been abandoned, forgotten, or without an owner.
Facts:
TeresitaMillan (Millan) offered to buy the parcels of land belonging to Spouses
Bakunawa with the condition that she will take care of clearing whatever preliminary
obstacles there may be to effect a completion of the sale. However, Millan was not able to
clear the said obstacles. As a result, the Spouses Bakunawa rescinded the sale and offered
to return to Millan her down payment of 1,019,514.29. However, Millan refused to accept
back the 1,019,514.29 down payment. A complaint was filed by the SpousesBakunawa
against Millan. During the pendency of the case, the Spouses Bakunawa, through their
company, the Hi-Tri Development Corporation (Hi-Tri) took out on October 28, 1991, a
Managers Check from RCBC-Ermita in the amount of 1,019,514.29, payable to
MillanscompanyRosmil Realty and Development Corporation (Rosmil) c/o TeresitaMillan.
On January 31, 2003, the RCBC reported the 1,019,514.29-credit existing in favor of
Rosmil to the Bureau of Treasury as among its unclaimed balances. On December 14, 2006,
Republic, through the Office of the Solicitor General (OSG), filed with the RTC the action
below for Escheat. Manuel Bakunawa, in 2008, wrote a letter to the RCBC saying that the
1,019,514.29-creditcontinues to form part of the funds in the Corporations RCBC bank
account.
Issue:
Whether the allocated funds may be escheated in favor of the Republic.
Ruling:
145 | P a g e

NO. Under Act No. 3936 which outlines the proper procedure to be followed by banks
and other similar institutions in filing a sworn statement with the Treasurer concerning
dormant accounts, the law sets a detailed system for notifying depositors of unclaimed
balances. This notification is meant to inform them that their deposit could be escheated if
left unclaimed. Accordingly, before filing a sworn statement, banks and other similar
institutions are under obligation to communicate with owners of dormant accounts. The
purpose of this initial notice is for a bank to determine whether an inactive account has
indeed been unclaimed, abandoned, forgotten, or left without an owner. If the depositor
simply does not wish to touch the funds in the meantime, but still asserts ownership and
dominion over the dormant account, then the bank is no longer obligated to include the
account in its sworn statement. It is not the intent of the law to force depositors into
unnecessary litigation and defense of their rights, as the state is only interested in
escheating balances that have been abandoned and left without an owner.
_____________________________________________________________________________________________
_________________________________
DOA ADELA EXPORT INTERNATIONAL, INC. vs. TRADE AND INVESTMENT
DEVELOPMENT CORPORATION (TIDCORP), AND THE BANK OF THE PHILIPPINE
ISLANDS (BPI)
G.R. No.201931, February 11, 2015, VILLARAMA, JR., J.
Corollarily, the stipulation in the Joint Motion to Approve Compromise Agreement that
petitioner waives its right to confidentiality of its bank deposits requires the approval and
conformity of Atty. Gonzales as receiver since all the property, money, estate and effects of
petitioner have been assigned and conveyed to her and she has the right to recover all the
estate, assets, debts and claims belonging to or due to the insolvent debtor.
Facts:
Petitioner was declared insolvent. The petitioner agreed to enter into a compromise
agreement with its creditors. TIDCORP and BPI agreed to approve the Dacion En Pago by
Compromise Agreement with the following terms:
WAIVER OF CONFIDENTIALITY. The petitioner and the members of its Board of
Directors shall waive all rights to confidentiality provided under the provisions of Republic
Act No. 1405, as amended, otherwise known as the Law on Secrecy of Bank Deposits, and
Republic Act No. 8791, otherwise known as The General Banking Law of 2000.
Petitioner asserts that express and written waiver from the depositor concerned is
required by law before any third person or entity is allowed to examine bank deposits or
bank records.
According to petitioner, it is not a party to the compromise agreement
between BPI and TIDCORP and its silence or acquiescence is not tantamount to an admission
that binds it to the compromise agreement of the creditors especially the waiver of
confidentiality of bank deposits. While Respondent TIDCORP contends that the waiver of
confidentiality under Republic Act (R.A.) Nos. 1405 and 8791 does not require the express or
written consent of the depositor.
It is TIDCORPs position that upon declaration of
insolvency, the insolvency court obtains complete jurisdiction over the insolvents property
which includes the authority to issue orders to look into the insolvents bank deposits. Since
bank deposits are considered debts owed by the banks to the petitioner, the receiver is
empowered to recover them even without petitioners express or written consent, said
TIDCORP.
Issue:
Whether the compromise agreement is binding on the petitioner.
146 | P a g e

Ruling:
NO. In this case, the Joint Motion to Approve Agreement was executed by BPI and
TIDCORP only. There was no written consent given by petitioner or its representative,
Epifanio Ramos, Jr., that petitioner is waiving the confidentiality of its bank deposits. Neither
can petitioner be deemed to have given its permission by failure to interpose its objection
during the proceedings. The norm is that a waiver must not only be voluntary, but must
have been made knowingly, intelligently, and with sufficient awareness of the relevant
circumstances and likely consequences. There must be persuasive evidence to show an
actual intention to relinquish the right. Mere silence on the part of the holder of the right
should not be construed as a surrender thereof; the courts must indulge every reasonable
presumption against the existence and validity of such waiver.
Garnishment of Deposits, Including Foreign Deposits
LOURDES DE LA RAMA vs. AUGUSTO R. VILLAROSA, ET AL., LUZON SURETY

COMPANY, INC.,
G.R. No.L-17927, June 29, 1963, LABRADOR, J.
The mere garnishment of funds belonging to the party upon order of the court does
not have the effect of delivering the money garnished to the sheriff or to the party in whose
favor the attachment is issued. The fund is retained by the garnishee or the person holding
the money for the defendant.
Facts:
Plaintiff lessor Lourdes de la Rama filed a complaint for confirmation of the

cancellation, rescission and annulment of a contract of lease of sugarland against defendant
lessee Augusto R. Villarosa and the latter's surety, the Luzon Surety Co., Inc. The court
rendered a partial summary judgment in favour of Lourdes. Accordingly, the sheriff of Manila
garnished the deposit of defendant-appellant with the Philippine Trust Co. to the amount of
P71,533.99. and required the latter not to deliver, transfer or otherwise dispose of the said
amount belonging to the defendant, to any person except to the sheriff, or suffer the
penalties prescribed by law.The Philippine Trust Co., complying with such notice, set aside
the amount of P71,533.99 out of the deposit of the defendant-appellant in its possession for
the benefit of the sheriff of Manila and the plaintiff-appellee.
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After the lower court ordered Philippine Trust Co. to pay the sheriff out of the deposit
of the Luzon Surety Co., Inc., defendant Luzon Surety Co. filed a petition for certiorari with
preliminary injunction with the Court of Appeals. As a result, Philippine Trust Co. did not
deliver to the sheriff of Manila any portion of the amount garnished.
Issue:
Whether or not the amount garnished be awarded to the defendant-appellant.
Ruling:
NO. In the first place, the amount garnished was not actually taken possession of by
the sheriff, even from the time of the garnishment, because upon the perfection of the
defendant-appellant's appeal to the Court of Appeals this Court issued an injunction
prohibiting execution of the judgment. The plaintiff-appellee was, therefore, able to secure a
full satisfaction of the judgment only upon final judgment of the Court on August 6, 1960.
The total sum garnished was not delivered to the sheriff in execution, because the order for
the execution of the judgment of the lower court was suspended in time by the appeal and
the preliminary injunction issue on appeal.
In the second place, the mere garnishment of funds belonging to the party upon
order of the court does not have the effect of delivering the money garnished to the sheriff
or to the party in whose favor the attachment is issued. The fund is retained by the
garnishee or the person holding the money for the defendant.
The garnishee, or one in whose hands property is attached or garnished, is

universally regarded as charged with its legal custody pending the outcome of the
attachment of garnishment, unless, by local statute and practice, he is permitted to
surrender or pay the garnished property or funds into court, to the attaching officer, or to a
receiver or trustee appointed to receive them.
The effect of the garnishment, therefore, was to require the Philippine Trust
Company, holder of the funds of the Luzon Surety Co., to set aside said amount from the
funds of the Luzon Surety Co. and keep the same subject to the final orders of the Court. In
the case at bar there was never in order to deliver the full amount garnished to the plaintiffappellee; all that was ordered to be delivered after the judgment had become final was the
amount found by the Court of Appeals to be due. The balance of the amount garnished,
therefore, remained all the time in the possession of the bank as part of the funds of the
Luzon Surety Co., although the same could not be disposed of by the owner.
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_____________________________________________________________________________________________
_________________________________
PHILIPPINE COMMERCIAL & INDUSTRIAL BANK and JOSE HENARES vs. THE HON.
COURT OF APPEALS and MARINDUQUE MINING AND INDUSTRIAL CORPORATION
G.R. No. 84526, January 28, 1991, SARMIENTO, J.
Garnishment is considered as a specie of attachment for reaching credits belonging
to the judgment debtor and owing to him from a stranger to the litigation. Under the abovecited rule, the garnishee [the third person] is obliged to deliver the credits, etc. to the
proper officer issuing the writ and "the law exempts from liability the person having in his
possession or under his control any credits or other personal property belonging to the
defendant, . . . if such property be delivered or transferred, . . . to the clerk, sheriff, or other
officer of the court in which the action is pending."
Facts:
This is a labor case where the court ruled in favour of the workers for the payment of
backwages against the private respondent.Pursuant to the Notice of Garnishment, the sheriff
directed the bank, one of which is the petitioner PCIB, to immediately issue a check in the
name of the Deputy Provincial Sheriff of Negros Occidental in an amount equivalent to the
amount of the garnishment and that proper receipt would be issued therefor. Later on,
Marinduque Mining and Industrial Corporation filed a complaint against the petitioners and
Damian Rojas, the Deputy Provincial Sheriff of Negros Occidental alleging that the former's
current deposit with the petitioner bank was levied upon, garnished, and with undue haste
unlawfully allowed to be withdrawn.
Issue:
Whether a bank is liable for releasing its depositor's funds on the strength of the
notice of garnishment made by the deputy sheriff pursuant to a writ of execution issued by
the National Labor Relations Commission (NLRC).
Ruling:
NO. The cases more in point to the present controversy are the recent decisions
in Engineering Construction Inc. v. National Power Corporation and Rizal Commercial
Banking Corporation (RCBC) vs. De Castro, Unless there are compelling reasons such as: a
defect on the face of the writ or actual knowledge on the part of the garnishee of lack of
entitlement on the part of the garnisher, it is not incumbent upon the garnishee to inquire or
to judge for itself whether or not the order for the advance execution of a judgment is valid.
After an execution against property has issued, a person indebted to the judgment
debtor, may pay to the officer holding the execution the amount of his debt or so much
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thereof as may be necessary to satisfy the execution, and the officer's receipt shall be a
sufficient discharge for the amount so paid or directed to be credited by the judgment
creditor on the execution.
_____________________________________________________________________________________________
_________________________________
KAREN E. SALVACION, minor, thru Federico N. Salvacion, Jr., father and Natural
Guardian, and Spouses FEDERICO N. SALVACION, JR., and EVELINA E. SALVACION
vs. CENTRAL BANK OF THE PHILIPPINES, CHINA BANKING CORPORATION and GREG
BARTELLI y NORTHCOTT
G.R. No. 94723 August 21, 1997, TORRES, JR., J.
If we rule that the questioned Section 113 of Central Bank Circular No. 960 which
exempts from attachment, garnishment, or any other order or process of any court,
legislative body, government agency or any administrative body whatsoever, is applicable to
a foreign transient, injustice would result especially to a citizen aggrieved by a foreign guest
Facts:
Greg Bartelli, an American tourist, was arrested for committing four counts of rape
and serious illegal detention against Karen Salvacion. Police recovered from him several
dollar checks and a dollar account in the China Banking Corp. Trial court awarded Salvacion
moral, exemplary and attorneys fees amounting to almost P1,000,000.00. Salvacion tried to
execute the judgment on the dollar deposit of Bartelli with the China Banking Corp. but the
latter refused arguing that Section 11 of Central Bank Circular No. 960 exempts foreign
currency deposits from attachment, garnishment, or any other order or process of any court,
legislative body, government agency or any administrative body whatsoever.
Issue:
Whether Section 113 of Central Bank Circular No. 960 and Section 8 of Republic Act
No. 6426, as amended by PD 1246, otherwise known as the Foreign Currency Deposit Act be
made applicable to a foreign transient?
Ruling:
NO.The SC adopted the comment of the Solicitor General who argued that the
Offshore Banking System and the Foreign Currency Deposit System were designed to draw
deposits from foreign lenders and investors and, subsequently, to give the latter protection.
However, the foreign currency deposit made by a transient or a tourist is not the kind of
deposit encouraged by PD Nos. 1034 and 1035 and given incentives and protection by said
laws because such depositor stays only for a few days in the country and, therefore, will
maintain his deposit in the bank only for a short time. Considering that Bartelli is just a
tourist or a transient, he is not entitled to the protection of Section 113 of Central Bank
Circular No. 960 and PD No. 1246 against attachment, garnishment or other court processes.
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_____________________________________________________________________________________________
_________________________________
GOVERNMENT SERVICE INSURANCE SYSTEM, vs. THE HONORABLE 15th DIVISION

OF THE COURT OF APPEALS and INDUSTRIAL BANK OF KOREA, TONG YANG
MERCHANT BANK, HANAREUM BANKING CORP., LAND BANK OF THE PHILIPPINES,
WESTMONT BANK and DOMSAT HOLDINGS, INC.
G.R. No. 189206, June 8, 2011, PEREZ, J.
The lone exception to the non-disclosure of foreign currency deposits, under Republic
Act No. 6426, is disclosure upon the written permission of the depositor.
Facts:
A collection of sum of money with damages filed by Industrial Bank of Korea, Tong
Yang Merchant Bank, First Merchant Banking Corporation, Land Bank of the Philippines, and
Westmont Bank (Banks) against Domsat Holdings, Inc. and the GSIS. Said case stemmed
from a Loan Agreement, whereby the said banks agreed to lend United States (U.S.) $11
Million to Domsat for the purpose of financing the lease and/or purchase of a Gorizon
Satellite from the International Organization of Space Communications (Intersputnik).Domsat
obtained a surety bond from GSIS to secure the payment of the loan from the Banks. When
Domsat failed to pay the loan, GSIS refused to comply with its obligation reasoning that
Domsat, with Westmont Bank as the conduit, transferred the U.S. $11 Million loan proceeds
from the Industrial Bank of Korea to Citibank New York account of Westmont Bank and from
there to the Binondo Branch of Westmont Bank. In the course of the hearing, GSIS requested
for the issuance of a subpoena duces tecum to the custodian of records of Westmont Bank. A
motion to quash was filed by the said banks on the ground that request for the documents
will violate the Law on Secrecy of Bank Deposits. RTC denied the motion to quash. However,
Court of Appeals declared that Domsats deposit in Westmont Bank is covered by Republic
Act No. 6426 or the Bank Secrecy Law. GSIS insists that Domsats deposit with Westmont
Bank can be examined based on Republic Act No. 1405 or the "Law on Secrecy of Bank
Deposits," which allows the disclosure of bank deposits in cases where the money deposited
is the subject matter of the litigation.
Issue:
Whether the US$11,000,000.00 deposit in the account of respondent Domsat in
Westmont Bank is covered by the secrecy of bank deposit.
Ruling:
Yes.Presidential Decree No. 1246, provides, Section 8. Secrecy of Foreign Currency
Deposits. States that All foreign currency deposits authorized under this Act, as amended by
Presidential Decree No. 1035, as well as foreign currency deposits authorized under
Presidential Decree No. 1034, are hereby declared as and considered of an absolutely
confidential nature and, except upon the written permission of the depositor, in no instance
shall foreign currency deposits be examined, inquired or looked into by any person,
government official, bureau or office whether judicial or administrative or legislative or any
other entity whether public or private.
Applying the said provision, absent the written permission from Domsat, Westmont
Bank cannot be legally compelled to disclose the bank deposits of Domsat, otherwise, it
might expose itself to criminal liability under the same act.
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Anti-Money Laundering Act
Unlawful Activities or Predicate Crimes
REPUBLIC OF THE PHILIPPINES, represented by the ANTI-MONEYLAUNDERING
COUNCIL VS. GLASGOW CREDIT ANDCOLLECTION SERVICES, INC. and CITYSTATE
SAVINGS BANK, INC.
G.R. No. 170281, January 18, 2008, CORONA, J.
A criminal conviction for an unlawful activity is not a prerequisite for the institution of
a civil forfeiture proceeding. Stated otherwise, a finding of guilt for an unlawful activity is not
an essential element of civil forfeiture.
Facts:
Republic of the Philippines filed a complaint for civil forfeiture of assets with the RTC
of Manila against the bank deposits maintained by GLASGOW in CSBI pursuant to RA 9160 or
the Anti-Money Laundering Act of 2001. Meanwhile, summons to GLASGOW was returned
unserved as it could no longer be found at its last known address.Trial court archived the
case for failure of the Republic to serve alias summons. GLASGOWs motion to dismiss by
way of special appearance alleging that the complaint was premature and stated no cause
of action.
Issue:
Whether a criminal conviction is necessary for the institution of a civil forfeiture
proceeding.
Ruling:
NO.Section 6 of RA 9160, as amended, provides:
SEC. 6. Prosecution of Money Laundering.
(a)
Any person may be charged with and convicted of both the offense of
money laundering and the unlawful activity as herein defined.
(b)
Any proceeding relating to the unlawful activity shall be given
precedence over the prosecution of any offense or violation under this Act without
prejudice to the freezing and other remedies provided.
Rule 6.1 of the Revised Implementing Rules and Regulations of RA 9160, as amended,
states:
(a)
Any person may be charged with and convicted of both the offense of
money laundering and the unlawful activity as defined under Rule 3(i) of the AMLA.
(b)
Any proceeding relating to the unlawful activity shall be given
precedence over the prosecution of any offense or violation under the AMLA without
prejudice to the application ex-parte by the AMLC to the Court of Appeals for a freeze
order with respect to the monetary instrument or property involved therein and resort to
other remedies provided under the AMLA, the Rules of Court and other pertinent
laws and rules. (emphasis supplied)
152 | P a g e

Finally, Section 27 of the Rule of Procedure in Cases of Civil Forfeiture provides:
Sec. 27. No prior charge, pendency or conviction necessary. No prior criminal
charge, pendency of or conviction for an unlawful activity or money laundering
offense is necessary for the commencement or the resolution of a petition for civil
forfeiture. (emphasis supplied)
Thus, regardless of the absence, pendency or outcome of a criminal prosecution for
the unlawful activity or for money laundering, an action for civil forfeiture may be separately
and independently prosecuted and resolved.
_____________________________________________________________________________________________
_________________________________
REPUBLIC OF THE PHILIPPINES, Represented by THE ANTI-MONEY LAUNDERING
COUNCIL (AMLC),v. HON. ANTONIO M. EUGENIO, JR., AS PRESIDING JUDGE OF RTC,
MANILA, BRANCH 34, PANTALEON ALVAREZ and LILIA CHENG
G.R. No. 174629, February 14, 2008, TINGA, J.
AMLC may inquire into a bank account upon order of any competent court in cases of
violation of the AMLA after having been established that there is probable cause that the
deposits or investments are related to unlawful activities such as those acts under AntiGraft and Corrupt Practices Act.
Facts:
AMLC filed an application to inquire into or examine the deposits or investments of
Alvarez, Trinidad, Liongson and Cheng Yong before the RTC of MakatiMakati RTC rendered an
Order granting the AMLC the authority to inquire and examine the subject bank accounts of
Alvarez, Trinidad, Liongson and Cheng Yong, The trial court being satisfied that there existed
probable cause to believe that the deposits in various bank accounts which are related to
the offense of violation of Anti-Graft and Corrupt Practices Act. AMLC promulgated Resolution
No. 121 Series of 2005, which authorized the executive director of the AMLC to inquire into
and examine the accounts named in the letter, including one maintained by Alvarez with
DBS Bank and two other accounts in the name of Cheng Yong with Metrobank.
Issue:
Whether the bank accounts of Alvarez, Trinidad, Liongson and Cheng Yong can be
examined.
Ruling:
YES.Section 2 of the Bank Secrecy Act itself prescribes exceptions whereby these
bank accounts may be examined by any person, government official, bureau or official;
namely when: (1) upon written permission of the depositor; (2) in cases of impeachment; (3)
the examination of bank accounts is upon order of a competent court in cases of bribery or
dereliction of duty of public officials; and (4) the money deposited or invested is the subject
matter of the litigation. Section 8 of R.A. Act No. 3019, the Anti-Graft and Corrupt Practices
Act, has been recognized by this Court as constituting an additional exception to the rule of
absolute confidentiality, and there have been other similar recognitions as well. The AMLA
also provides exceptions to the Bank Secrecy Act. Under Section 11, the AMLC may inquire
153 | P a g e

into a bank account upon order of any competent court in cases of violation of the AMLA, it
having been established that there is probable cause that the deposits or investments are
related to unlawful activities such as deposits or investments are related to kidnapping for
ransom,certain violations of the Comprehensive Dangerous Drugs Act of 2002,hijacking and
other violations under R.A. No. 6235, destructive arson and murder, then there is no need for
the AMLC to obtain a court order before it could inquire into such accounts.
Freezing of Monetary Instruments or Property

REPUBLIC OF THE PHILIPPINES, Represented by the ANTI-MONEYLAUNDERING
COUNCIL,v. CABRINI GREEN & ROSS, INC.,MICHAEL J. FINDLAY and JANEGELBERG,
G.R. No. 154522, May 5, 2006, CORONA, J.
Court of Appeals which has the authority to issue a freeze order as well as to extend
its effectivity.
Facts:
In the exercise of its power under Section 10 of RA 9160, the Anti-Money Laundering
Council (AMLC) issued freeze orders against various bank accounts of Cabrini Green and
Ross Inc. The frozen bank accounts were previously found prima facie to be related to the
unlawful activities of respondents. However, the CA disagreed with the AMLC and dismissed
the petitions on the ground that it was not vested by RA 9160 with the power to extend a
freeze order issued by the AMLC.
Issue:
Whether AMLC has the jurisdiction to extend freeze order.
Ruling:
NO.During the pendency of these petitions, Congress enactedAnti-Money Laundering
Act of 2001 and gave the CA jurisdiction to extend the effectivity of a freeze order. The
amendment by RA 9194 of RA 9160 erased any doubt on the jurisdiction of the CA over the
extension of freeze orders. As the law now stands, it is solely the CA which has the authority
to issue a freeze order as well as to extend its effectivity. It also has the exclusive jurisdiction
to extend existing freeze orders previously issued by the AMLC vis--vis accounts and
deposits related to money-laundering activities.
_____________________________________________________________________________________________
_________________________________
RET. LT. GEN. JACINTO C. LIGOT, ERLINDA Y. LIGOT, PAULO Y. LIGOT, RIZA Y. LIGOT,
and MIGUEL Y. LIGOT, v. REPUBLIC OF THE PHILIPPINES, represented by the ANTIMONEY LAUNDERING COUNCIL
G.R. No. 176944, March 6, 2013, BRION, J.
Based on Section 10 of R.A 9160, there are only two requisites for the issuance of a
freeze order: (1) the application ex parte by the AMLC and (2) the determination of probable
cause by the CA.
Facts:
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Republic of the Philippines, represented by the Anti-Money Laundering Council
(AMLC), filed an Urgent Ex-Parte Application for the issuance of a freeze order with the CA
against certain monetary instruments and properties of the Ret. Lt. Gen Ligot, pursuant to
Anti-Money Laundering Act of 2001based on the February 1, 2005 letter of the Office of the
Ombudsman for possible violation ofAnti-Graft and Corrupt Practices Act. AMLC issued
Resolution No. 52, Series of 2005, directing the AMLC Secretariat to file an application for a
freeze order against the properties of Lt. Gen. Ligot and the members of his family with the
CA and the appellate court granted the application ruling that probable cause existed that
an unlawful activity and/or money laundering offense had been committed by Lt. Gen. Ligot
and his family, and that the properties sought to be frozen are related to the unlawful
activity or money laundering offense. Ligots filed a motion to lift the extended freeze order,
principally arguing that it deprived them of their property without due process and it also
punished them before their guilt could be proven.
Issue:
Whether the freeze order deprived them of their property and due process since it
was issued even before their guilt was proven.
Ruling:
NO.The legal basis for the issuance of a freeze order is Section 10 of RA No. 9160, as
amended by RA No. 9194, which states the Court of Appeals, upon application ex parte by
the AMLC and after determination that probable cause exists that any monetary instrument
or property is in any way related to an unlawful activity, may issue a freeze order which shall
be effective immediately. The freeze order shall be for a period of twenty (20) days unless
extended by the court.
As defined in the law, the probable cause required for the issuance of a freeze order
refers to such facts and circumstances which would lead a reasonably discreet, prudent or
cautious man to believe that an unlawful activity and/or a money laundering offense is about
to be, is being or has been committed and that the account or any monetary instrument or
property subject thereof sought to be frozen is in any way related to said unlawful activity
and/or money laundering offense.Since these assets are grossly disproportionate to Lt. Gen.
Ligots income, as well as the lack of any evidence that the Ligots have other sources of
income, the CA properly found that probable cause exists that these funds have been
illegally acquired.
Miscellaneous Topics
PDIC
PHILIPPINE DEPOSIT INSURANCE CORPORATION, vs. COURT OF APPEALS, ROSA
AQUERO, GERARD YU, ERIC YU, MINA YU, ELIZABETH NGKAION, MERLY CUESCANO,
LETICIA TAN, FELY RUMBANA, LORNA ACUB, represented by their Attorney-in-Fact,
JOHN FRANCIS COTAACO
G.R. No. 118917. December 22, 1997, KAPUNAN, J.
In order that a claim for deposit insurance with the PDIC may prosper, the law
requires that a corresponding deposit be placed in the insured bank.
Facts:
Aquero et. al. invested in money market placements with the Premiere Financing
Corporation (PFC) in the sum ofP10,000.00 each for which they were issued by the PFC
155 | P a g e

corresponding promissory notes and checks. John Francis Cotaoco, for and in behalf of
Aquero et al, went to the PFC to encash the promissory notes and checks, but the PFC
referred him to the Regent Saving Bank (RSB). Instead of paying the promissory notes and
checks, the RSB, upon agreement of Cotaoco, issued the subject 13 certificates of time
deposit. On the aforesaid maturity date Cotaoco went to the RSB to encash the said
certificates but RSB still failed to pay the value of the certificates. Instead, RSB advised
Cotaoco to file a claim with the PDIC. PDIC refused the aforesaid claims on the ground that
the Traders Royal Bank Checkissued by PFC was returned by the drawee bank for having
been drawn against insufficient funds. Trial court rendered its decision ordering the PDIC
therein to pay Aquero et al, jointly and severally, the amount corresponding to the latters
certificates of time deposit. CA affirmed the decision.
Issue:
Whether PDIC is jointly and severally liable to Aquero et al.
Ruling:
NO.SECTION 1. There is hereby created a Philippine Deposit Insurance Corporation
states that it shall insure, as provided, the deposits of all banks which are entitled to the
benefits of insurance under this Act whenever an insured bank shall have been closed on
account of insolvency, payment of the insured deposits in such bank shall be made by the
Corporation as soon as possible. Under the said law, The term deposit means the unpaid
balance of money or its equivalent received by a bank in the usual course of business and
for which it has given or is obliged to give credit to a commercial, checking, savings, time or
thrift account or which is evidence by passbook, check and/or certificate of deposit printed
or issued in accordance with Central Bank rules and regulations and other applicable laws,
together with such other obligations of a bank which, consistent with banking usage and
practices.
The certificates that were issued to PFC which did not acquire the for value because
the check issued by the latter for the certificates bounced for insufficiency of funds. Such
issuance could only give rise to the presumption that the amount stated in the certificates
have been deposited to RSB. These pieces of evidence convincingly show that the subject
CTDs were indeed issued without RSB receiving any money therefor. No deposit, as defined
in Section 3 (f) of R.A. No. 3591, therefore came into existence. Accordingly, petitioner PDIC
cannot be held liable for value of the certificates of time deposit held by private
respondents.
_____________________________________________________________________________________________
_________________________________
PHILIPPINE DEPOSIT INSURANCE CORPORATION, vs. THE HONORABLE COURT OF
APPEALS andJOSE ABAD, LEONOR ABAD, SABINA ABAD, JOSEPHINE JOSIE BEATA
ABAD-ORLINA, CECILIA ABAD, PIO ABAD, DOMINIC ABAD, TEODORA ABAD
G.R. No. 126911. April 30, 2003, CARPIO-MORALES, J.
The evident implication of the law, therefore, is that the appointment of a receiver
may be made by the Monetary Board without notice and hearing but its action is subject to
judicial inquiry to insure the protection of the banking institution.
Facts:
156 | P a g e

Monetary Board of the Central Bank of the Philippines, now Bangko Sentral ng
Pilipinas, issued a resolution prohibiting Manila Banking Corporation to do business in the
Philippines, and placing its assets and affairs under receivership. However, a copy thereof
was served on MBC only on May 26, 1987. The next banking day following the issuance of
the MB Resolution, Jose Abad pre-terminatie the 71 aforementioned GTDs and re-depositing
the fund represented thereby into 28 new GTDs in denominations of P40,000.00 or less
under the names of Leonor Abad et al., individually or jointly with each other. Of the 28 new
GTDs, Jose Abad pre-terminated 8 and withdrew the value thereof in the total amount
of P320,000.00.Leonor Abad and other thereafter filed their claims with the PDIC for the
payment of the remaining 20 insured GTDs. PDIC refused payment claiming that they are
only liable for deposits received by a bank in the usual course of business and since MBC
was prohibited from doing further business by MB Resolution 505 as of May 22, 1987, all
transactions subsequent to such date were not done in the usual course of business.
Issue:
Whether Philippine Deposit Insurance Corporation (PDIC) is liable, as statutory

insurer, for the value of 20 Golden Time Deposits belonging to respondents.
Ruling:
YES.MB issued Resolution 505 on May 22, 1987, a copy thereof was served on MBC
only on May 26, 1987. MBC and its clients could be given the benefit of the doubt that they
were not aware that the MB resolution had been passed, given the necessity of
confidentiality of placing a banking institution under receivership. The evident implication of
the law, therefore, is that the appointment of a receiver may be made by the Monetary
Board without notice and hearing but its action is subject to judicial inquiry to insure the
protection of the banking institution. Mere conjectures that MBC had actual knowledge of its
impending closure do not suffice. The MB resolution could not thus have nullified
respondents transactions which occurred prior to May 26, 1987.
Truth in Lending
THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK), v. THE
HONORABLE COURT OF APPEALS, GEORGE AND GEORGE TRADE, INC., GEORGE
KING TIM PUA and PUA KE SENG
G.R. No. 91494, July 14, 1995, QUIASON, J.
All banks and non-bank financial intermediaries authorized to engage in quasibanking functions are required to strictly adhere to the provisions of Republic Act No. 3765
otherwise known as the "Truth in Lending Act" and shall make the true and effective cost of
borrowing an integral part of every loan contract.
Facts:
George King Tim Pua, in his personal capacity, applied for, and was granted, by
Consolidated bank a loan for which he executed a promissory note. Thereafter, George and
George Trade Inc., through George King Tim Pua, obtained a loan from the Consolidated
bank for which the latter executed a promissory note on behalf of the said corporation, with
George King Tim Pua and Pua Ke Seng as co-makers and the loan bears an interest of
13.23% per annum and will be paid through the assignment of the fire insurance proceeds.
157 | P a g e

Thereafter, Consolidated bank instituted Civil Case against Pua et al. before the then Court
of First Instance of Manila for the recovery of the unpaid balances, included therein handling
charges. In their defense Pua et al. claimed that the loans had been extinguished by way of
payment through the assignment of the fire insurance proceeds and that it was in fact
petitioner which owed them by reason of its failure to return to the latter the balance of said
insurance proceeds. Trial court rendered judgment, finding for Consolidated bank and
ordering George and George Trade, Inc., George King Tim Pua and Pua Ke Seng to pay the
sum of the balance of P228,469.80 with handling charges.
Issue:
Whether Consolidated bank can charge Pua and Ke Seng for handling charges.
Ruling:
NO.Section 7 of the same Circular provides that all banks and non-bank financial
intermediaries authorized to engage in quasi-banking functions are required to strictly
adhere to the provisions of Republic Act No. 3765 otherwise known as the "Truth in Lending
Act" and shall make the true and effective cost of borrowing an integral part of every loan
contract. The promissory notes signed by Pua and Ke Seng do not contain any stipulation on
the payment of handling charges. Consolidated bank cannot, therefore, charge private
respondents such handling charges.
_____________________________________________________________________________________________
_________________________________
DEVELOPMENT BANK OF THE PHILIPPINES v. FELIPE P. ARCILLA, JR.
G.R. No. 161397, June 30, 2005, CALLEJO, SR., J.
Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan
transaction, the bank, as creditor, is obliged to furnish a client with a clear statement, in
writing, setting forth, to the extent applicable and in accordance with the rules and
regulations prescribed by the Monetary Board of the Central Bank of the Philippines, the
following information: (1) the cash price or delivered price of the property or service to be
acquired; (2) the amounts, if any, to be credited as down payment and/or trade-in; (3) the
difference between the amounts set forth under clauses (1) and (2); (4) the charges,
individually itemized, which are paid or to be paid by such person in connection with the
transaction but which are not incident to the extension of credit; (5) the total amount to be
financed;(6) the finance charges expressed in terms of pesos and centavos; and (7) the
percentage that the finance charge bears to the total amount to be financed expressed as a
simple annual rate on the outstanding unpaid balance of the obligation.
Facts:
Atty. Felipe P. Arcilla, Jr. was employed by the DBPavailed a loan under the Individual
Housing Project of the bank. He obliged himself to pay the loan in 25 years, with a monthly
amortization of P1,417.91, with 9% interest per annum, to be deducted from his monthly
salary. It was also agreed therein that if Arcilla availed of optional retirement, he could elect
to continue paying the loan, provided that the loan/amount would be converted into a
regular real estate loan account with the prevailing interest assigned on real estate loans,
payable within the remaining term of the loan account. Thereafter, Arcilla opted to resign
from the bank so he decided to issue three Promissory Notes for the total amount
of P186,364.15 for the balance and pay for the service charge and interests. However, he
failed to pay as of October 31, 1990 which amounted to P241,940.93. As a result, DBP
rescinded the Deed of Conditional Sale and the property was advertised for sale at public
bidding. This prompted Arcilla to file a complaint against DBP with the RTC alleging that DBP
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failed to furnish him with the disclosure statement required by R.A. No. 3765 and CB Circular
No. 158 prior to the execution of the deed of conditional sale and the conversion of his loan
account with the bank into a regular housing loan account. DBP alleged that it substantially
complied with the said provisions since the details required in said statements were
particularly disclosed in the promissory notes, deed of conditional sale and the required
notices sent to Arcilla. DBP claimed that it any event, its failure to comply strictly with R.A.
No. 3765 did not affect the validity and enforceability of the subject contracts or
transactions.
Issue:
Whether petitioner DBP substantially complied with the disclosure requirement of
R.A. No. 3765 and CB Circular No. 158, Series of 1978, in the execution of the deed of
conditional sale, the supplemental deed of conditional sale, as well as the promissory notes
Ruling:
YES.If the borrower is not duly informed of the data required by the law prior to the
consummation of the availment or drawdown, the lender will have no right to collect such
charge or increases thereof, even if stipulated in the promissory note. However, such failure
shall not affect the validity or enforceability of any contract or transaction. In the present
case, DBP failed to disclose the requisite information in the disclosure statement form
authorized by the Central Bank, but did so in the loan transaction documents between it and
Arcilla. However, the Court is convinced that Arcillas claim of not having been furnished the
data/information required by R.A. No. 3765 and CB Circular No. 158 was but an afterthought.
Despite the notarial rescission of the conditional sale in 1990, and DBPs subsequent
repeated offers to repurchase the property, the latter maintained his silence. Arcilla filed his
complaint only on February 21, 1994, or four years after the said notarial rescission. It must
be stressed that the Truth in Lending Act (R.A. No. 3765), was enacted primarily to protect
its citizens from a lack of awareness of the true cost of credit to the user. Contrary to
appellees claim that he was not sufficiently informed of the details of the loan, the records
disclose that the required informations were readily available in the three (3) promissory
notes he executed. Precisely, the said promissory notes were executed to apprise appellee
of the remaining balance on his loan when the same was converted into a regular housing
loan. And on its face, the promissory notes signed by no less than the appellee readily shows
all the data required by the Truth in Lending Act.
_____________________________________________________________________________________________
_________________________________
UNITED COCONUT PLANTERS BANK v. SPOUSES SAMUEL and ODETTE BELUSO
G.R. No. 159912, August 17, 2007, CHICO-NAZARIO, J.
Sec. 2. Of Truth in Lending Act states that it is hereby declared to be the policy of the
State to protect its citizens from a lack of awareness of the true cost of credit to the user by
assuring a full disclosure of such cost with a view of preventing the uninformed use of credit
to the detriment of the national economy.
Facts:
UCPB granted the spouses Beluso a Promissory Notes Line under a P2.35 Million
Credit Agreement . To completely avail themselves of the credit line extended to them by
UCPB, the spouses Beluso executed two more promissory notes. UCPB applied interest rates
on the different promissory notes ranging from 18% to 34%. Unfortunately, Spouses Beluso
failed to make any payment of the foregoing amounts. This prompted UCPB to foreclose the
properties mortgaged by the spouses Beluso. As a result, spouses Beluso filed a Petition for
159 | P a g e

Annulment, Accounting and Damages against UCPB with the RTC. UCPB countered that while
the interest rate was not numerically quantified in the face of the promissory notes, it was
nonetheless categorically fixed, at the time of execution thereof, at the rate indicative of the
DBD retail rate. According to UCPB, the imposition of the questioned interest rates did not
infringe on the principle of mutuality of contracts, because the spouses Beluso had the
liberty to choose whether or not to renew their credit line at the new interest rates pegged
by petitioner. RTC ruled in favor of the spouses Beluso declaring that the interest rate used
by UCPB void and the foreclosure and Sheriffs Certificate of Sale void.
Issue:
Whether the imposition of interest in the following provision found in the promissory
notes of the spouses Beluso is void, as the interest rates and the bases were determined
solely by petitioner UCPB.
Ruling:
YES.The provision in the loan stating that the interest shall be at the rate indicative
of DBD retail rate or as determined by the Branch Head is indeed dependent solely on the
will of petitioner UCPB. Under such provision, petitioner UCPB has two choices on what the
interest rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a rate as determined
by the Branch Head. As UCPB is given this choice, the rate should be categorically
determinable in both choices. If either of these two choices presents an opportunity for UCPB
to fix the rate at will, the bank can easily choose such an option, thus making the entire
interest rate provision violative of the principle of mutuality of contracts.
The interest rate provisions in the case at bar are illegal not only because of the
provisions of the Civil Code on mutuality of contracts, but also, violate the Truth in Lending
Act. Not disclosing the true finance charges in connection with the extensions of credit is,
furthermore, a form of deception which the Court cannot countenance. Moreover, while the
spouses Beluso indeed agreed to renew the credit line, the offending provisions are found in
the promissory notes themselves, not in the credit line. In fixing the interest rates in the
promissory notes to cover the renewed credit line, UCPB still reserved to itself the same two
options (1) a rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch
Head.
_____________________________________________________________________________________________
_________________________________
SPOUSES EDUARDO and LYDIA SILOS, v. PHILIPPINE NATIONAL BANK
G.R. No. 181045, July 2, 2014, DEL CASTILLO, J.
Truth in Lending Act, or Republic Act No. 3765 was enacted to protect citizens from a
lack of awareness of the true cost of credit to the user by using a full disclosure of such cost
with a view of preventing the uninformed use of credit to the detriment of the national
economy.
Facts:
Spouses Silos secured a revolving credit line obtained from PNB, constituted anda
Real Estate Mortgage over lot in Kalibo, Aklan. The Credit Agreement contained a stipulation
on interest which provides that the Borrower shall agrees that the Bank may modify the
interest rate in the Loan depending on whatever policy the Bank may adopt in the future.
The promissory note also provided that without need for notice or demand, failure to pay or
any installment thereon, when due, shall constitute default shall be subject to a penalty
charge of twenty four percent (24%) per annum based on the defaulted principal amount.
160 | P a g e

The credit came due but despite demand, petitioners failed to pay. Thus, PNB foreclosed on
the mortgage and sold the property. Spouses Silos filed a case seeking annulment of the
foreclosure sale on the ground that the payment of interest in their loan agreements with
PNB, which allegedly left to the latter the sole will to determine the interest rate are null and
void. In its Answer, PNB denied that it unilaterally imposed or fixed interest rates and that
petitioners agreed that without prior notice, PNB may modify interest rates depending on
future policy adopted by it and that the imposition of penalties was agreed upon in the
Credit Agreement. It added that the imposition of penalties is supported by the all-inclusive
clause in the Real Estate Mortgage agreement which provides that the mortgage shall stand
as security for any and all other obligations of whatever kind and nature owing to
respondent.
Issue:
Whether the interests and penalty imposed is valid.
Ruling:
NO. The element of consent or agreement by the borrower in the credit agreement is
completely lacking. It appears that by its acts, PNB violated the Truth in Lending Act, or
Republic Act No. 3765. The law states that Aany creditor shall furnish to each person to
whom credit is extended, prior to the consummation of the transaction, a clear statement in
writing setting forth, (1) the cash price or delivered price of the property or service to be
acquired; (2) the amounts, if any, to be credited as down payment and/or trade-in; (3) the
difference between the amounts set forth under clauses (1) and (2);(4) the charges,
individually itemized, which are paid or to be paid by such person in connection with the
transaction but which are not incident to the extension of credit;(5) the total amount to be
financed; (6) the finance charge expressed in terms of pesos and centavos; and(7) the
percentage that the finance bears to the total amount to be financed expressed as a simple
annual rate on the outstanding unpaid balance of the obligation.
By requiring the petitioners to sign the credit documents and the promissory notes in
blank, and then unilaterally filling them up later on, respondent violated the Truth in Lending
Act, and was remiss in its disclosure obligations.
161 | P a g e

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SPECIAL COMMERCIAL LAWS

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Definition and Nature of Letters of Credit

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