Virtus in infirmitate perficitur! 2 Cor.
12:9
UST Faculty of Civil Law
CASE OUTLINE IN MERCANTILE LAW REVIEW 1
Dean Nilo T. Divina
I. LETTERS OF CREDIT
1. Definition and Nature of Letter of Credit
*A Financial devise to facilitate commercial transaction
Bank of America vs. Court of Appeals, 228 SCRA 357
G.R. No. 105395, December 10, 1993 (VITUG)
FACTS
Parties:
a. Petitioner Bank of America (BA) – advising
bank; notifying bank; negotiating bank
b. Bank of Adhuya – issuer bank
c. Private Respondent Inter-Resin (IR) –
beneficiary/seller/exporter
d. General Chemicals Ltd of Thailand (GC) –
buyer/applicant of LoC
Bank of America (BA) received by registered mail an
Irrevocable Letter of Credit No. 20272/81 purportedly
issued by Bank of Ayudhya for the account of General
Chemicals, Ltd., of Thailand in the amount of
US$2,782,000.00 to cover the sale of plastic ropes
and "agricultural files," with the petitioner BA as advising
bank and private respondent Inter-Resin Industrial
Corporation as beneficiary. BA wrote Inter-Resin
informing the latter of the foregoing and transmitting,
along with the bank's communication, the letter of credit.
After being satisfied that Inter-Resin's documents
conformed with the conditions expressed in the letter of
credit, Bank of America issued in favor of Inter-Resin a
Cashier's Check for P10,219,093.20, "the Peso
equivalent of the draft (for) US$1,320,600.00 drawn by
Inter-Resin.
Bank of America wrote Bank of Ayudhya advising the
latter of the availment under the letter of credit and sought
the corresponding reimbursement therefor.
It was discovered that the vans exported by Inter-Resin
did not contain ropes but plastic strips, wrappers, rags and
waste materials. Bank of America sued Inter-Resin for the
recovery of P10,219,093.20, the peso equivalent of the
draft for US$1,320,600.00 on the partial availment of the
now disowned letter of credit. On the other hand, Inter-
Resin claimed that not only was it entitled to retain
P10,219,093.20 on its first shipment but also to the
balance US$1,461,400.00 covering the second shipment.
ISSUES
1. How, in its modern use, is a letter of credit
employed in trade transactions?
2. Did Bank of America incur any liability to the
beneficiary (Inter-Resin) of the L/C?
3. Is Bank of America entitled to recover on Inter-
Resin's partial availment as beneficiary of the
letter of credit which has been disowned by the
alleged issuer bank?
4. Inter-Resin sent waste products – does this fact
have any bearing to the right of BA to recover?
HELD
How, in its modern use, is a letter of credit employed
in trade transactions?
Definition; Nature
***A letter of credit is a financial device developed by
merchants as a convenient and relatively safe mode of
dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with
his goods before he is paid, and a buyer, who wants to
[9]
have control of the goods before paying. To break the
impasse, the buyer may be required to contract a bank to
issue a letter of credit in favor of the seller so that, by virtue
of the letter of credit, the issuing bank can authorize the
seller to draw drafts and engage to pay them upon their
presentment simultaneously with the tender of documents
[10]
required by the letter of credit. The buyer and the seller
agree on what documents are to be presented for
payment, but ordinarily they are documents of title
evidencing or attesting to the shipment of the goods to the
buyer.
Obligations of Parties to a L/C
***Once the credit is established, the seller ships the
goods to the buyer and in the process secures the
required shipping documents or documents of
title. To get paid, the seller executes a draft and presents
it together with the required documents to the issuing
bank. The issuing bank redeems the draft and pays cash
to the seller if it finds that the documents submitted by the
seller conform with what the letter of credit requires. The
bank then obtains possession of the documents upon
paying the seller. The transaction is completed when the
buyer reimburses the issuing bank and acquires the
documents entitling him to the goods. Under this
arrangement, the seller gets paid only if he delivers the
documents of title over the goods, while the buyer
acquires the said documents and control over the goods
only after reimbursing the bank.
Independence Principle
What characterizes letters of credit, as distinguished from
other accessory contracts, is the engagement of the
issuing bank to pay the seller once the draft and the
required shipping documents are presented to it. In turn,
this arrangement assures the seller of prompt payment,
independent of any breach of the main sales contract. By
this so-called "independence principle," the bank
determines compliance with the letter of credit only by
1

examining the shipping documents presented; it is
precluded from determining whether the main contract is
[11]
actually accomplished or not.
Parties
There would at least be three (3) parties: (a)
[12]
the buyer, who procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipt of the
documents of title; (b) the bank issuing the letter of
[13]
credit, which undertakes to pay the seller upon receipt
of the draft and proper documents of titles and to
surrender the documents to the buyer upon
[14]
reimbursement; and, (c) the seller, who in compliance
with the contract of sale ships the goods to the buyer and
delivers the documents of title and draft to the issuing
bank to recover payment.
The number of the parties, not infrequently and almost
invariably in international trade practice, may be
increased. Thus, the services of an advising (notifying)
[15]
bank may be utilized to convey to the seller the
[16]
existence of the credit; or, of a confirming bank which
will lend credence to the letter of credit issued by a lesser
[17]
known issuing bank; or, of a paying bank which
undertakes to encash the drafts drawn by the exporter.
Further, instead of going to the place of the issuing bank
to claim payment, the buyer may approach another bank,
[18]
termed the negotiating bank, to have the draft
discounted.
Application of UCP
Being a product of international commerce, the impact of
this commercial instrument transcends national
boundaries, and it is thus not uncommon to find a dearth
of national law that can adequately provide for its
governance. This country is no exception. Our own Code
of Commerce basically introduces only its concept under
Articles 567-572, inclusive, thereof. It is no wonder then
why great reliance has been placed on commercial usage
and practice, which, in any case, can be justified by the
universal acceptance of the autonomy of contracts rule.
The rules were later developed into what is now known as
the Uniform Customs and Practice for Documentary
Credits ("U.C.P.") issued by the International Chamber of
Commerce. It is by no means a complete text by itself, for,
to be sure, there are other principles, which, although part
of lex mercatoria, are not dealt with in the U.C.P.
In FEATI Bank and Trust Company v. Court of
[19]
Appeals, we have accepted, to the extent of their
pertinency, the application in our jurisdiction of this
international commercial credit regulatory set of
[20] [21]
rules. In Bank of Phil. Islands v. De Nery, we have
said that the observance of the U.C.P. is justified by
Article 2 of the Code of Commerce which expresses that,
in the absence of any particular provision in the Code of
Commerce, commercial transactions shall be governed
by usages and customs generally observed. We have
further observed that there being no specific provisions
which govern the legal complexities arising from
transactions involving letters of credit not only between or
Virtus in infirmitate perficitur! 2 Cor. 12:9
among banks themselves but also between banks and the
seller or the buyer, as the case may be, the applicability
of the U.C.P. is undeniable.
Did Bank of America incur any liability to the
beneficiary (Inter-Resin) of the L/C?
NO. As a mere advising or notifying bank, it would not be
liable, but as a confirming bank, had this been the case, it
could be considered as having incurred that liability.
Bank of America has, in fact, only been an advising, not
confirming bank, by the provisions of the letter of credit
itself, the petitioner bank's letter of advice, its request for
payment of advising fee, and the admission of Inter-Resin
that it has paid the same. That Bank of America has asked
Inter-Resin to submit documents required by the letter of
credit and eventually has paid the proceeds thereof, did
not obviously make it a confirming bank. The fact, too, that
the draft required by the letter of credit is to
be drawn under the account of General Chemicals
(buyer) only means that the same had to be presented to
Bank of Ayudhya (issuing bank) for payment. It may
be significant to recall that the letter of credit is an
engagement of the issuing bank, not the advising bank, to
pay the draft.
No less important is that Bank of America’s letter of 11
March 1981 has expressly stated that "[t]he enclosure
is solely an advise of credit opened by the
abovementioned correspondent
[24]
and conveys no engagement by us.” This written
reservation by Bank of America in limiting its obligation
only to being an advising bank is in consonance with the
provisions of U.C.P.
As an advising or notifying bank, Bank of America did not
incur any obligation more than just notifying Inter-Resin of
the letter of credit issued in its favor, let alone to confirm
[25]
the letter of credit. The bare statement of the bank
employee, aforementioned, in responding to the inquiry
made by Atty. Tanay, Inter-Resin's representative, on the
authenticity of the letter of credit certainly did not have the
effect of novating the letter of credit and Bank of America's
[26]
letter of advise, nor can it justify the conclusion that the
bank must now assume total liability on the letter of credit.
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 documents, or for
delay, mutilation or other errors arising in the transmission
of any telecommunication x x x" As advising bank, Bank
of America is bound only to check the "apparent
authenticity" of the letter of credit, which it
[29]
did. Clarifying its meaning, Webster's
[30]
Ninth New Collegiate Dictionary explains that the word
2

"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 therefor were later negotiated with it by
Inter-Resin?
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 of 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.
Inter-Resin admits having received P10,219,093.20 from
Bank of America on the letter of credit transaction
and in having executed the corresponding draft. That
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, could 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.
"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 x x x 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 x x x"
Inter-Resin sent waste products – does this fact have
any bearing to the right of BA to recover?
NO. In the operation of a letter of credit, the involved
banks deal only with documents and not on goods
described in those documents.
WHEREFORE, the assailed decision is SET ASIDE, and
respondent Inter-Resin Industrial Corporation is ordered
to refund to petitioner Bank of American NT & SA the
amount of P10,219,093.20 with legal interest the filing of
the complaint until fully paid.
Virtus in infirmitate perficitur! 2 Cor. 12:9
Prudential Bank and Trust Company vs. IAC, 216
SCRA 257
G.R. No. 74886, December 8, 1992 (DAVIDE, JR)
FACTS
Philippine Rayon applied for a commercial letter of credit
with the petitioner Prudential Bank in the amount of
$128,548.78 to cover the former's contract to purchase
and import loom and textile machinery from Nissho
Company, Ltd. of Japan under a five-year deferred
payment plan. Petitioner approved the application.
By virtue of said Application and Agreement for
Commercial Letter of Credit, Prudential Bank was under
obligation to pay through its correspondent bank in Japan
the drafts that Nisso (sic) Company, Ltd., periodically
drew against said letter of credit from 1963 to 1968,
pursuant to plaintiff's contract with the defendant
Philippine Rayon Mills, Inc. In turn, defendant Philippine
Rayon Mills, Inc., was obligated to pay plaintiff bank the
amounts of the drafts drawn by Nisso (sic) Company, Ltd.
against said plaintiff bank together with any accruing
commercial charges, interest, etc. pursuant to the terms
and conditions stipulated in the Application and
Agreement of Commercial Letter of Credit.
At the back of the trust receipt is a printed form to be
accomplished by two sureties who, by the very
terms and conditions thereof, were to be jointly and
severally liable to the Prudential Bank should the
Philippine Rayon (PR) fail to pay the total amount or any
portion of the drafts issued by Nissho and paid for by
Prudential Bank. PR was able to take delivery of the textile
machineries and installed the same at its factory site at 69
Obudan Street, Quezon City. Sometime in 1967, it ceased
business operation.
The obligation arising from the letter of credit and the trust
receipt remained unpaid and unliquidated. Repeated
formal demands for the payment of the said trust receipt
yielded no result. Hence, the present action for the
collection of the principal amount of P956,384.95 was
filed on October 3, 1974 against PR and Anacleto R. Chi.
In their respective answers, the defendants interposed
identical special defenses, viz., the complaint states no
cause of action; if there is, the same has prescribed; and
the plaintiff is guilty of laches."
ISSUES
1. Is presentment for acceptance of the drafts
indispensable to make Philippine Rayon
liable thereon?
2. Is Philippine Rayon liable on the basis of the
trust receipt?
3. Is private respondent Chi is jointly and
severally liable with Philippine Rayon for the
obligation sought to be enforced and if not,
whether he may be considered a guarantor;
in the latter situation, whether the case
should have been dismissed on the ground
3

of lack of cause of action as there was no
prior exhaustion of Philippine Rayon's
properties?
HELD
Is presentment for acceptance of the drafts
indispensable to make Philippine Rayon liable
thereon?
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
[11]
the credit. Through a letter of credit, the bank merely
substitutes its own promise to pay for the promise to pay
of 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
[12]
upon. In the instant case then, the drawee was
necessarily the herein petitioner Prudential Bank. 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).
Obviously then, sight drafts do not require presentment
for acceptance.
Corollarily, they are, pursuant to Section 7 of the NIL,
payable on demand. It is payable on demand, when
among others, it is payable on sight.
Is Philippine Rayon liable on the basis of the trust
receipt?
YES. Paragraph 8 of the Trust Receipt which reads:
"My/our liability for payment at maturity of any accepted
draft, bill of exchange or indebtedness shall not be
[17]
extinguished or modified" does not, contrary to the
holding of the public respondent, contemplate prior
acceptance by Philippine Rayon, but by the petitioner.
Acceptance, however, was not even necessary in the first
place because the drafts which were eventually issued
were sight drafts. And even if these were not sight drafts,
thereby necessitating acceptance, it would be the
petitioner -- and not Philippine Rayon -- which had to
accept the same for the latter was not the drawee.
Presentment for acceptance is defined as the production
of a bill of exchange to a drawee for acceptance. The
[18]
trial court and the public respondent, therefore, erred in
ruling that presentment for acceptance was an
indispensable requisite for Philippine Rayon's liability on
the drafts to attach. Contrary to both courts’
pronouncements, Philippine Rayon immediately became
liable thereon upon petitioner's payment thereof. Such is
the essence of the letter of credit issued by the petitioner.
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
Virtus in infirmitate perficitur! 2 Cor. 12:9
petitioner had fully paid for it. The typical setting and
purpose of a letter of credit are described in Hibernia Bank
[19]
and Trust Co. vs. J. Aron & CO., Inc., thus:
"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. Their purpose is to insure to a seller
payment of a definite amount upon presentation of
documents. The bank deals only with documents. It has
nothing to do with the quality of the merchandise.
Disputes as to the merchandise shipped may arise and
be litigated later between vendor and vendee, but they
may not impede acceptance of drafts and payment by the
issuing bank when the proper documents are presented."
This Court explains the nature of a trust receipt by
[21]
quoting In re Dunlap Carpet Co., thus:
"By this arrangement a banker advances money to an
intending importer, and thereby lends the aid of capital, of
credit, or of business facilities and agencies abroad, to the
enterprise of foreign commerce. Much of this trade could
hardly be carried on by any other means; and therefore it
is of the first importance that the fundamental factor in the
transaction, the banker's advance of money and credit,
should receive the amplest protection. Accordingly, in
order to secure that the banker shall be repaid at the
critical point -- that is, when the imported goods finally
reach the hands of the intended vendee -- the banker
takes the full title to the goods at the very beginning; he
takes it as soon as the goods are bought and settled for
by his payments or acceptances in the foreign country,
and he continues to hold that title as his indispensable
security until the goods are sold in the United States and
the vendee is called upon to pay for them. This security is
not an ordinary pledge by the importer to the banker, for
the importer has never owned the goods, and moreover
he is not able to deliver the possession; but the security is
the complete title vested originally in the bankers, and this
characteristic of the transaction has again and again been
recognized and protected by the courts. Of course, the
title is at bottom a security title, as it has sometimes been
called, and the banker is always under the obligation to
reconvey; but only after his advances have been fully
repaid and after the importer has fulfilled the other terms
of the contract."
As further stated in National Bank vs. Viuda e Hijos de
[22]
Angel Jose, trust receipts:
"x x x [I]n a certain manner, x x x partake of the nature of
a conditional sale as provided by the Chattel Mortgage
Law, that is, the importer becomes absolute owner of the
imported merchandise as soon as he has paid its price.
4

The ownership of the merchandise continues to be vested
in the owner thereof or in the person who has 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."
Under P.D. No. 115, otherwise known as the Trust
Receipts Law, which took effect on 29 January 1973, a
trust receipt transaction is defined as "any transaction by
and between a person referred to in this Decree as the
entruster, and another person referred to in this Decree
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 the ‘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 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 the
goods, instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other
purposes substantially equivalent to any one of the
following: x x x."
Defendants already sold the machinery covered by the
trust receipt to Yupangco Cotton Mills," and that "as
trustees of the property covered by the trust receipt, x x x
and therefore acting in fiduciary (sic) capacity, defendants
have willfully violated their duty to account for the
whereabouts of the machinery covered by the trust receipt
or for the proceeds of any lease, sale or other disposition
of the same that they may have made, notwithstanding
demands therefore; defendants have fraudulently
misapplied or converted to their own use any money
realized from the lease, sale, and other disposition of said
machinery."
Although it is true that the petitioner commenced a
criminal action for the violation of the Trust Receipts Law,
no legal obstacle prevented it from enforcing the civil
liability arising out of the trust receipt in a separate civil
action. Under Section 13 of the Trust Receipts Law, the
failure of an entrustee to turn over the proceeds of the sale
of goods, documents or instruments covered by a trust
receipt to the extent of the amount owing to the entruster
or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable
under the provisions of Article 315, paragraph 1(b) of the
[25]
Revised Penal Code. Under Article 33 of the Civil
Code, a civil action for damages, entirely separate and
distinct from the criminal action, may be brought by the
injured party in cases of defamation, fraud and physical
injuries. Estafa falls under fraud.
Virtus in infirmitate perficitur! 2 Cor. 12:9
Is private respondent Chi jointly and severally liable
with Philippine Rayon?
NO. The obligation of Chi is only that of a guarantor. This
is further bolstered by the last sentence which speaks of
waiver of exhaustion, which, nevertheless, is ineffective in
this case because the space therein for the party whose
property may not be exhausted was not filled up. Under
Article 2058 of the Civil Code, the defense of exhaustion
(excussion) may be raised by a guarantor before he may
be held liable for the obligation. Petitioner likewise admits
that the questioned provision is
a solidary guaranty clause, thereby clearly distinguishing
it from a contract of surety. It, however, described the
guaranty as solidary between the guarantors; this would
have been correct if two (2) guarantors had signed it. The
clause "we jointly and severally agree and undertake"
refers to the undertaking of the two (2) parties who are to
sign it or to the liability existing between themselves. It
does not refer to the undertaking between either one or
both of them on the one hand and the petitioner on the
other with respect to the liability described under the trust
receipt. Elsewise stated, their liability is not divisible as
between them, i.e., it can be enforced to its full extent
against any one of them.
Furthermore, any doubt as to the import or true intent of
the solidary guaranty clause should be resolved against
the petitioner. The trust receipt, together with the
questioned solidary guaranty clause, is on a form drafted
and prepared solely by the petitioner; Chi's participation
therein is limited to the affixing of his signature thereon. It
[28]
is, therefore, a contract of adhesion as such, it must be
strictly construed against the party responsible for its
preparation.
What is the vinculum juris to hold respondent Chi
secondarily liable with Philippine Rayon?
"SEC. 13. Penalty Clause. -- The failure of an entrustee
to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears
in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall
constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph
one (b) of Act Numbered Three thousand eight hundred
and fifteen, as amended, otherwise known as the Revised
Penal Code. If the violation or offense is committed by a
corporation, partnership, association or other juridical
entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other
officials or persons therein responsible for the offense,
without prejudice to the civil liabilities arising from the
criminal offense."
A close examination of the quoted provision reveals that
it is the last sentence which provides for the correct
solution. It is clear that if the violation or offense is
committed by
a corporation, partnership, association or other juridical
5

entities, the penalty shall be imposed upon the directors,
officers, employees or other officials or persons therein
responsible for the offense. The penalty referred to
is imprisonment, the duration of which would depend on
the amount of the fraud as provided for in Article 315 of
the Revised Penal Code. The reason for this is obvious:
corporations, partnerships, associations and other
juridical entities cannot be put in jail. However, it is these
entities which are made liable for the civil liability arising
from the criminal offense. This is the import of the clause
"without prejudice to the civil liabilities arising from the
criminal offense." And, as We stated earlier, since that
violation of a trust receipt constitutes fraud under Article
33 of the Civil Code, petitioner was acting well within its
rights in filing an independent civil action to enforce the
civil liability arising therefrom against Philippine Rayon.
Is excussion necessary before a guarantor may be
sued?
NO. Excussion is not a condition sine qua non for the
institution of an action against a guarantor. In Southern
[34]
Motors, Inc. vs. Barbosa, this Court stated:
“Although an ordinary Personal guarantor -- not a
mortgagor or pledgor -- may demand the aforementioned
exhaustion, the creditor may, prior thereto, secure a
judgment against said guarantor, who shall be entitled,
however, to a deferment of the execution
of said judgment against him until after the properties of
the principal debtor shall have been exhausted to satisfy
the obligation involved in the case."
There was then nothing procedurally objectionable in
impleading private respondent Chi as a co-defendant in
Civil Case No. Q-19312 before the trial court. As a matter
of fact, Section 6, Rule 3 of the Rules of Court on
permissive joinder of parties explicitly allows it.
However, Chi's liability is limited to the principal obligation
in the trust receipt plus all the accessories thereof
including judicial costs.
WHEREFORE, the instant Petition is hereby GRANTED:
declaring private respondent Philippine Rayon Mills, Inc.
liable on the twelve drafts in question and on the trust
receipt; declaring private respondent Anacleto R. Chi
secondarily liable on the trust receipt and ordering him to
pay the face value thereof, with interest at the legal rate.
*Security arrangements but not accessory contracts
Feati Bank & Trust Company vs. Court of Appeals,
196 SCRA 576
G.R. No. 94209, April 30, 1991
FACTS
Bernardo E. Villaluz agreed to sell to the then defendant
Axel Christiansen 2,000 cubic meters of lauan logs at
$27.00 per cubic meter FOB. After inspecting the logs,
Christiansen issued purchase order No. 76171.
Virtus in infirmitate perficitur! 2 Cor. 12:9
On the arrangements made and upon the instructions of
the consignee, Hanmi Trade Development, Ltd., de Santa
Ana, California, the Security Pacific National Bank of Los
Angeles, California issued Irrevocable Letter of Credit No.
IC-46268 available at sight in favor of Villaluz for the sum
of $54,000.00, the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust
Company (now Citytrust) with the instruction to the latter
that it "forward the enclosed letter of credit to the
beneficiary."
The letter of credit further provided that the draft to be
drawn is on Security Pacific National Bank and that it be
accompanied, among others, by a Certification from Han-
Axel Christiansen, Ship and Merchandise Broker, stating
that logs have been approved prior to shipment in
accordance with terms and conditions of corresponding
purchase Order.
The logs were thereafter loaded on the vessel "Zenlin
Glory" which was chartered by Christiansen. The logs
were certified in good condition by custom inspectors and
the Chief Mate. However, Christiansen refused to issue
the certification as required in paragraph 4 of the letter of
credit, despite several requests made by the private
respondent. Because of the absence of the certification
by Christiansen, the Feati Bank and Trust Company
refused to advance the payment on the letter of credit.
The letter of credit lapsed on June 30, 1971, (extended,
however up to July 31, 1971) without the private
respondent receiving any certification from Christiansen.
Since the demands by the private respondent for
Christiansen to execute the certification proved futile,
Villaluz, on September 1, 1971, instituted an action
for mandamus and specific performance against
Christiansen and the Feati Bank and Trust Company (now
City Trust).
ISSUES
1. Discuss the Rule of Strict Compliance in
letters of credit.
2. Distinguish between an irrevocable letter of
credit and a confirmed letter of credit?
3. May a correspondent bank be held liable
under the letter of credit despite non-
compliance by the beneficiary with the terms
thereof?
4. Are the principles governing guaranty
consistent with the principles of a letter or
credit?
HELD
Discuss the Rule of Strict Compliance in letters of
credit.
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
6

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.
In the United States, commercial transactions involving
letters of credit are governed by the rule of strict
compliance. In the Philippines, the same holds true. The
same rule must also be followed.
The case of Anglo-South American Trust Co. v. Uhe et
al. (184 N.E. 741 [1933]) expounded clearly on the rule of
strict compliance: "We have heretofore held that these
letters of credit are to be strictly complied with, which
documents, and shipping documents must be followed as
stated in the letter. There is no discretion in the bank or
trust company to waive any requirements. The terms of
the letter constitute an agreement between the purchaser
and the bank." (p. 743)
Moreover, 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.
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
Virtus in infirmitate perficitur! 2 Cor. 12:9
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.
Distinguish between an irrevocable letter of credit
and a confirmed letter of credit. Are they
synonymous?
NO. An irrevocable credit is not synonymous with a
confirmed credit. These types of letters have different
meanings and the legal relations arising from there
varies. A credit may be an irrevocable credit and at the
same time a confirmed credit or vice-versa.
An irrevocable credit refers to the duration of the letter of
credit. What it simply means is that the issuing bank may
not without the consent of the beneficiary (seller) and the
applicant (buyer) revoke his undertaking under the
letter. The issuing bank does not reserve the right to
revoke the credit. On the other hand, a confirmed letter
of credit pertains to the kind of obligation assumed by the
correspondent bank. In this case, the correspondent
bank gives an absolute assurance to the beneficiary that
it will undertake the issuing bank's obligation as its own
according to the terms and conditions of the credit.
The trial court wrongly mixed up the meaning of an
irrevocable credit with that of a confirmed credit. In its
decision, the trial court ruled that the petitioner, in
accepting the obligation to notify the respondent that
the irrevocable credit has been transmitted to the
petitioner on behalf of the private respondent, has
confirmed the letter.
Hence, the mere fact that a letter of credit is irrevocable
does not necessarily imply that the correspondent bank in
accepting the instructions of the issuing bank has also
confirmed the letter of credit.
May a correspondent bank be held liable under the
letter of credit despite non-compliance by the
beneficiary with the terms thereof?
NO. In commercial transactions involving letters of credit,
the functions assumed by a correspondent bank are
classified according to the obligations taken up by it. The
correspondent bank may be called a notifying bank, a
negotiating bank, or a confirming bank.
In case of a notifying bank, the correspondent bank
assumes no liability except to notify and/or transmit to the
beneficiary the existence of the letter of credit. A
negotiating bank, on the other hand, is a correspondent
bank which buys or discounts a draft under the letter of
credit. Its liability is dependent upon the stage of the
negotiation. If before negotiation, it has no liability with
respect to the seller but after negotiation, a contractual
7

relationship will then prevail between the negotiating bank
and the seller.
In the case of a confirming bank, the correspondent bank
assumes a direct obligation to the seller and its liability is
a primary one as if the correspondent bank itself had
issued the letter of credit.
In this case, the letter merely provided that the petitioner
"forward the enclosed original credit to the beneficiary."
Considering the aforesaid instruction to the petitioner by
the issuing bank, the Security Pacific National Bank, it is
indubitable that the petitioner is only a notifying bank and
not a confirming bank as ruled by the courts below.
If the petitioner was a confirming bank, then a categorical
declaration should have been stated in the letter of credit
that the petitioner is to honor all drafts drawn in conformity
with the letter of credit. What was simply stated therein
was the instruction that the petitioner forward the original
letter of credit to the beneficiary.
Since the petitioner was only a notifying bank, its
responsibility was solely to notify and/or transmit the
documentary of credit to the private respondent and its
obligation ends there.
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. It follows therefore that
when the petitioner refused to negotiate with the private
respondent, the latter has no cause of action against the
petitioner for the enforcement of his rights under the letter.
In order that the petitioner may be held liable under the
letter, there should be proof that the petitioner confirmed
the letter of credit. The records are, however, bereft of any
evidence which will disclose that the petitioner has
confirmed the letter of credit.
At the most, when the petitioner extended the loan to the
private respondent, it assumed the character of a
negotiating bank. Even then, the petitioner will still not be
liable, for a negotiating bank before negotiation has no
contractual relationship with the seller.
The case of Scanlon v. First National bank (supra)
perspicuously explained the relationship between the
seller and the negotiating bank, viz: "It may buy or refuse
to buy as it chooses. Equally, it must be true that it owes
no contractual duty toward the person for whose benefit
the letter is written to discount or purchase any draft
drawn against the credit. No relationship of agent and
principal, or of trustee and cestui, between the receiving
bank and the beneficiary of the letter is established." (P.
568)
Virtus in infirmitate perficitur! 2 Cor. 12:9
Whether therefore the petitioner is a notifying bank or a
negotiating bank, it cannot be held liable. Absent any
definitive proof that it has confirmed the letter of credit or
has actually negotiated with the private respondent, the
refusal by the petitioner to accept the tender of the private
respondent is justified.
Are the principles of Trust applicable in Letters of
Credit?
NO. The concept of a trust presupposes the existence of
a specific property which has been conferred upon the
person for the benefit of another. In order therefore for
the trust theory of the private respondent to be sustained,
the petitioner should have had in its possession a sum of
money as specific fund advanced to it by the issuing bank
and to be held in trust by it in favor of the private
respondent. This does not obtain in this case.
The mere opening of a letter of credit, it is to be noted,
does not involve a specific appropriation of a sum of
money in favor of the beneficiary. It only signifies that the
beneficiary may be able to draw funds upon the letter of
credit up to the designated amount specified in the
letter. It does not convey the notion that a particular sum
of money has been specifically reserved or has been held
in trust.
What actually transpires in an irrevocable credit is that the
correspondent bank does not receive in advance the sum
of money from the buyer or the issuing bank. On the
contrary, when the correspondent bank accepts the
tender and pays the amount stated in the letter, the money
that it doles out comes not from any particular fund that
has been advanced by the issuing bank, rather it gets the
money from its own funds and then later seeks
reimbursement from the issuing bank.
Granting that a trust has been created, still, the petitioner
may not be considered a trustee. As the petitioner is only
a notifying bank, its acceptance of the instructions of the
issuing bank will not create estoppel on its part resulting
in the acceptance of the trust. Precisely, as a notifying
bank, its only obligation is to notify the private respondent
of the existence of the letter of credit. How then can such
create estoppel when that is its only duty under the law?
It is a fundamental rule that an irrevocable credit is
independent not only of the contract between the buyer
and the seller but also of the credit agreement between
the issuing bank and the buyer.
The relationship between the buyer (Christiansen) and
the issuing bank (Security Pacific National Bank) is
entirely independent from the letter of credit issued by the
latter.
The contract between the two has no bearing as to the
non-compliance by the buyer with the agreement between
the latter and the seller. Their contract is similar to that of
a contract of services (to open the letter of credit) and not
that of agency as was intimated by the Court of
Appeals. The unjustified refusal therefore by
8

Christiansen to issue the certification under the letter of
credit should not likewise be charged to the issuing bank.
As a mere notifying bank, not only does the petitioner not
have any contractual relationship with the buyer, it has
also nothing to do with the contract between the issuing
bank and the buyer regarding the issuance of the letter of
credit.
Are the principles governing guaranty consistent with
the principles of a letter or credit?
NO. The concept of guarantee vis-à-vis the concept of an
irrevocable credit are inconsistent with each other. In the
first place, the guarantee theory destroys the
independence of the bank's responsibility from the
contract upon which it was opened. In the second place,
the nature of both contracts is mutually in conflict with
each other. In contracts of guarantee, the guarantor's
obligation is merely collateral and it arises only upon the
default of the person primarily liable. On the other hand,
in an irrevocable credit the bank undertakes a primary
obligation.
The relationship between the issuing bank and the
notifying bank, on the contrary, is more similar to that of
an agency and not that of a guarantee. It may be
observed that the notifying bank is merely to follow the
instructions of the issuing bank which is to notify or to
transmit the letter of credit to the beneficiary.
Its commitment is only to notify the beneficiary. It does
not undertake any assurance that the issuing bank will
perform what has been mandated to or expected of it. As
an agent of the issuing bank, it has only to follow the
instructions of the issuing bank and to it alone is it
obligated and not to the buyer with whom it has no
contractual relationship.
In fact the notifying bank, even if the seller tenders all the
documents required under the letter of credit, may refuse
to negotiate or accept the drafts drawn thereunder and it
will still not be held liable for its only engagement is to
notify and/or transmit to the seller the letter of credit.
Finally, even if we assume that the petitioner is a
confirming bank, the petitioner cannot be forced to pay the
amount under the letter. As we have previously
explained, there was a failure on the part of the private
respondent to comply with the terms of the letter of credit.
The failure by him to submit the certification was fatal to
his case. The U.C.P. which is incorporated in the letter of
credit ordains that the bank may only pay the amount
specified under the letter if all the documents tendered are
on their face in compliance with the credit. It is not tasked
with the duty of ascertaining the reason or reasons why
certain documents have not been submitted, as it is only
concerned with the documents. Thus, whether or not the
buyer has performed his responsibility towards the seller
is not the bank's problem.
We are aware of the injustice committed by Christiansen
on the private respondent but we are deciding the
Virtus in infirmitate perficitur! 2 Cor. 12:9
controversy on the basis of what the law is, for the law is
not meant to favor only those who have been oppressed,
the law is to govern future relations among people as
well. Its commitment is to all and not to a single
individual. The faith of the people in our justice system
may be eroded if we are to decide not what the law states
but what we believe it should declare. Dura lex sed lex.
Considering the foregoing, the materiality of ruling upon
the validity of the certificate of approval required of the
private respondent to submit under the letter of credit, has
become insignificant.
WHEREFORE, the COURT RESOLVED to GRANT the
petition.
MWSS vs. Hon. Daway, 432 SCRA 559
G.R. No. 160732, June 21, 2004 (AZCUNA)
FACTS
Parties:
a. Maynilad – obligor/applicant of LoC
b. MWSS – obligee/beneficiary of LoC
MWSS granted Maynilad under a Concession Agreement
a twenty-year period to manage, operate, repair,
decommission and refurbish the existing MWSS water
delivery and sewerage services in the West Zone Service
Area. To secure the concessionaire’s performance of its
obligations under the Concession Agreement, Maynilad
was required under Section 6.9 of said contract to put up
a bond, bank guarantee or other security acceptable to
MWSS.
In compliance with this requirement, Maynilad arranged
on July 14, 2000 for a three-year facility with a number of
foreign banks, led by Citicorp International Limited, for the
[6]
issuance of an Irrevocable Standby Letter of Credit in
the amount of US$120,000,000 in favor of MWSS for the
full and prompt performance of Maynilad’s obligations to
MWSS as aforestated.
Sometime in September 2000, respondent Maynilad
requested MWSS for a mechanism by which it hoped to
recover the losses it had allegedly incurred and would be
incurring as a result of the depreciation of the Philippine
Peso against the US Dollar. This terminated in the parties’
agreeing to resolve the issues through an amendment of
the Concession Agreement on October 5, 2001, known as
Amendment No. 1. However, on November 5, 2002,
Maynilad served upon MWSS a Notice of Event of
Termination, claiming that MWSS failed to comply with its
obligations under the Concession Agreement and
Amendment No. 1 regarding the adjustment mechanism
that would cover Maynilad’s foreign exchange losses. On
December 9, 2002, Maynilad filed a Notice of Early
Termination of the concession, which was challenged by
MWSS.
Appeals Panel ruled that there was no Event of
Termination as defined under the Concession Agreement
and that, therefore, Maynilad should pay the concession
9

fees that had fallen due. MWSS, thereafter, submitted a
[11]
written notice on November 24, 2003, to Citicorp
International Limited, as agent for the participating banks,
that by virtue of Maynilad’s failure to perform its
obligations under the Concession Agreement, it was
drawing on the Irrevocable Standby Letter of Credit and
thereby demanded payment in the amount of
US$98,923,640.15.
Prior to this, however, Maynilad had filed on November
13, 2003, a petition for rehabilitation before the court a
quo which resulted in the issuance of the Stay Order of
November 17, 2003 and the disputed Order of November
27, 2003.
ISSUE
Did the rehabilitation court sitting as such, act in
excess of its authority or jurisdiction when it enjoined
herein petitioner MWSS from seeking the payment of
the concession fees from the banks that issued the
Irrevocable Standby Letter of Credit in its favor and
for the account of respondent-debtor Maynilad?
HELD
YES. The foregoing topics are discussed by SC to resolve
the main issue.
a. Interim Rules’ provision: bank is solidarily
liable
b. Guarantee vis-à-vis Letter or Credit
c. Purpose and nature: absolute
undertaking; primary obligation, not
accessory contracts
d. U.C.P’s pertinent provisions
e. Terms of Irrevocable Standby LoC show
that bank’s obligation is solidarily
f. Exception to bank’s solidary liability with
the applicant/obligor
First, the claim is not one against the debtor but against
an entity that respondent Maynilad has procured to
answer for its non-performance of certain terms and
conditions of the Concession Agreement, particularly the
payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does
not enjoin the enforcement of all claims against
guarantors and sureties, but only those claims against
guarantors and sureties who are not solidarily liable
with the debtor. Respondent Maynilad’s claim that the
banks are not solidarily liable with the debtor does not find
support in jurisprudence.
We held in Feati Bank & Trust Company v. Court of
[16]
Appeals that the concept of guarantee vis-à-vis the
concept of an irrevocable letter of credit are
inconsistent with each other. The guarantee theory
destroys the independence of the bank’s responsibility
from the contract upon which it was opened and the
nature of both contracts is mutually in conflict with each
other. In contracts of guarantee, the guarantor’s obligation
Virtus in infirmitate perficitur! 2 Cor. 12:9
is merely collateral and it arises only upon the default of
the person primarily liable. On the other hand, in an
irrevocable letter of credit, the bank undertakes a primary
obligation. We have also defined a letter of credit as an
engagement 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 the
conditions specified in the credit.
Letters of credit were developed for the purpose of
insuring to a seller payment of a definite amount upon the
[18]
presentation of documents and is thus a commitment
by the issuer that the party in whose favor it is issued and
who can collect upon it will have his credit against the
applicant of the letter, duly paid in the amount specified in
[19]
the letter. They are in effect absolute undertakings
to pay the money advanced or the amount for which
credit is given on the faith of the instrument. They are
primary obligations and not accessory contracts and
while they are security arrangements, they are not
[20]
converted thereby into contracts of guaranty. What
distinguishes letters of credit from other accessory
contracts, is the engagement of the issuing bank to pay
the seller once the draft and other required shipping
[21]
documents are presented to it. They are definite
undertakings to pay at sight once the documents
stipulated therein are presented.
Letters of Credits have long been and are still governed
by the provisions of the Uniform Customs and Practice
for Documentary Credits of the International Chamber
of Commerce. In the 1993 Revision it provides in Art. 2
that “the expressions Documentary Credit(s) and Standby
Letter(s) of Credit mean any arrangement, however made
or described, whereby a bank acting at the request and
on instructions of a customer or on its own behalf is to
make payment against stipulated document(s)” and Art. 9
thereof defines the liability of the issuing banks on an
irrevocable letter of credit as a “definite undertaking of the
issuing bank, provided that the stipulated documents are
presented to the nominated bank or the issuing bank and
the terms and conditions of the Credit are complied with,
to pay at sight if the Credit provides for sight payment.”
The prohibition under Sec 6 (b) of Rule 4 of the Interim
Rules does not apply to herein petitioner as the prohibition
is on the enforcement of claims against guarantors or
sureties of the debtors whose obligations are not solidary
with the debtor. The participating banks’ obligation are
solidary with respondent Maynilad in that it is a
primary, direct, definite and an absolute undertaking
to pay and is not conditioned on the prior exhaustion
of the debtor’s assets. These are the same
characteristics of a surety or solidary obligor.
Being solidary, the claims against them can be pursued
separately from and independently of the rehabilitation
case, as held in Traders Royal Bank v. Court of
[26]
Appeals and reiterated in Philippine Blooming Mills,
[27]
Inc. v. Court of Appeals, where we said that property of
the surety cannot be taken into custody by the
rehabilitation receiver (SEC) and said surety can be sued
separately to enforce his liability as surety for the debts or
10

obligations of the debtor. The debts or obligations for
which a surety may be liable include future debts, an
amount which may not be known at the time the surety is
given.
The terms of the Irrevocable Standby Letter of Credit do
not show that the obligations of the banks are not solidary
with those of respondent Maynilad. On the contrary, it is
issued at the request of and for the account of Maynilad
Water Services, Inc., in favor of the Metropolitan
Waterworks and Sewerage System, as a bond for the full
and prompt performance of the obligations by the
[28]
concessionaire under the Concession Agreement and
herein petitioner is authorized by the banks to draw on it
by the simple act of delivering to the agent a written
certification substantially in the form Annex “B” of the
Letter of Credit. It provides further in Sec. 6, that for as
long as the Standby Letter of Credit is valid and
subsisting, the Banks shall honor any written Certification
made by MWSS in accordance with Sec. 2, of the Standby
Letter of Credit regardless of the date on which the event
giving rise to such Written Certification arose.
We hold that 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 issuance, the same
being a direct, primary, absolute and definite
undertaking to pay the beneficiary upon the
presentation of the set of documents required
therein.
The public respondent, therefore, exceeded his
jurisdiction, in holding that he was competent to act on the
obligation of the banks under the Letter of Credit under
the argument that this was not a solidary obligation with
that of the debtor. Being a solidary obligation, the letter
of credit is excluded from the jurisdiction of the
rehabilitation court and therefore in enjoining petitioner
from proceeding against the Standby Letters of Credit to
which it had a clear right under the law and the terms of
said Standby Letter of Credit, public respondent acted in
excess of his jurisdiction.
WHEREFORE, the petition for certiorari is GRANTED.
*A composite of at least three distinct but intertwined
relationships, each relationship being concretized in a
contract:
Reliance Commodities, Inc. vs. Daewoo Industrial
Co., Ltd., 228 SCRA 545
G.R. No. L-100831, December 17, 1993 (FELICIANO)
FACTS
On 9 January 1980, petitioner Reliance Commodities, Inc.
("Reliance") and private respondent Daewoo Industrial
Co., Ltd. ("Daewoo") entered into a contract of sale under
the terms of which the latter undertook to ship and deliver
to the former 2,000 (plus another 2000mt in a subsequent
contract) metric tons of foundry pig iron.
Virtus in infirmitate perficitur! 2 Cor. 12:9
Reliance, through its Mr. Samuel Chuason, filed with the
China Banking Corporation, an application for a Letter of
Credit (L/C) in favor of Daewoo covering the amount of
US$380,600.00. The application was endorsed to the Iron
and Steel Authority (ISA) for approval but the application
was denied. Reliance was instead asked to submit
purchase orders from end-users to support its application
for a Letter of Credit. However, Reliance was not able to
raise purchase orders for 2,000 metric tons. Whatever the
exact amount of the purchase orders was, Daewoo
rejected the proposed L/C for the reason that the covered
quantity fell short of the contracted tonnage. Thus,
Reliance withdrew the application for the L/C on 14
August 1980.
Subsequently, Daewoo learned that the failure of
Reliance to open the L/C stipulated in the 31 July 1980
contract was due to the fact that as early as May 1980,
Reliance had already exceeded its foreign exchange
allocation for 1980. Because of the failure of Reliance to
comply with its undertaking under the 31 July 1980
contract, Daewoo was compelled to sell the 2,000 metric
tons to another buyer at a lower price, to cut losses and
expenses Daewoo had begun to incur due to its inability
to ship the 2000 metric tons to Reliance under their
contract.
On 3 September 1980, Reliance, through its counsel,
wrote Daewoo requesting payment of the amount of
P226,370.48, representing the value of the short delivery
of 135.655 metric tons of foundry pig iron under the
contract of 9 January 1980. Not being heeded, Reliance
filed an action for damages against Daewoo with the trial
court. Daewoo responded, inter alia, with a counterclaim
for damages, contending that Reliance was guilty of
breach of contract when it failed to open an L/C as
required in the 31 July 1980 contract.
Reliance contends a) that its failure to open a Letter of
Credit was due to the failure of Daewoo to accept the
purchase orders for 1,900 metric tons instead of 2,000
metric tons; b) that the opening of the Letter of Credit was
a condition precedent to the effectivity of the contract
between Reliance and Daewoo; and c) that since such
condition had not occurred, the contract never came into
existence and, therefore, Reliance should not have been
held liable for damages.
ISSUES
1. Is the failure of an importer (Reliance) to open
a letter of credit on the date agreed upon
makes him liable to the exporter (Daewoo) for
damages?
a. Three distinct but intertwined
relationships
2. Corollarily, is the opening of an L/C upon
application of Reliance a condition precedent
for the birth of the obligation of Reliance to
purchase foundry pig iron from Daewoo?
11

a. Central Bank’s Requirements for opening
a letter of credit
HELD
Is the failure of an importer (Reliance) to open a letter
of credit on the date agreed upon makes him liable to
the exporter (Daewoo) for damages?
YES. 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.
In addressing this issue, it is useful to recall the nature of
a Letter of Credit, and the mechanics involved in
applying for a Letter of Credit. The nature of a letter of
credit was extensively discussed in Bank of America, NT
[6]
& SA v. Court of Appeals, et al by Vitug, J (refer to
discussions above with ***).
A letter of credit is one of the modes of payment, set out
in Sec. 8, Central Bank Circular No. 1389, "Consolidated
Foreign Exchange Rules and Regulations", dated 13 April
1993, by which commercial banks sell foreign exchange
to service payments for, e.g., commodity imports. 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
[8]
arrangement. It creates in the seller/exporter a secure
expectation of payment.
A letter of credit transaction may thus be seen to be a
composite of at least three (3) distinct but intertwined
relationships, each relationship 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.
Virtus in infirmitate perficitur! 2 Cor. 12:9
(c) The third contract relationship is established
between the issuing bank and the beneficiary, in
order to support the contract, under (a) above, of
the account party and the beneficiary
to, inter alia, pay certain monies to the latter.
Certain other parties may be added to the foregoing, but
the above three are the indispensable ones.
Corollarily, is the opening of an L/C upon application
of Reliance a condition precedent for the birth of the
obligation of Reliance to purchase foundry pig iron
from Daewoo?
NO. The issue raised in the Petition at bar relates
principally to the first component contractual relation
above: that between account party or importer Reliance
and beneficiary or exporter Daewoo.
Examining the actual terms of that relationship as set out
in the 31 July 1980 contract quoted earlier (and not simply
the summary inaccurately rendered by the trial court), the
Court considers that under that instrument, the opening of
an L/C upon application of Reliance was not a condition
precedent for the birth of the obligation of Reliance to
purchase foundry pig iron from Daewoo. We agree with
the Court of Appeals that Reliance and Daewoo, having
reached "a meeting of minds" in respect of the subject
matter of the contract (2000 metric tons of foundry pig iron
with a specified chemical composition), the price thereof
(US $380,600.00), and other principal provisions, "they
[9]
had a perfected contract." The failure of Reliance to
open, the appropriate L/C did not prevent the birth of that
contract, and neither did such failure extinguish that
contract. The opening of the L/C in favor of Daewoo was
an obligation of Reliance and the performance of that
obligation by Reliance was a condition for enforcement of
the reciprocal obligation of Daewoo to ship the subject
matter of the contract - the foundry pig iron - to Reliance.
But the contract itself between Reliance and Daewoo had
already sprung into legal existence and was enforceable.
The L/C provided for in that contract was the mode or
mechanism by which payment was to be effected by
Reliance of the price of the pig iron. In undertaking to
accept or pay the drafts presented to it by the beneficiary
according to the tenor of an L/C, and only later on being
reimbursed by the account party, the issuing bank in effect
extends a loan to the account party. This loan feature,
combined with the bank's undertaking to accept the
beneficiary's drafts drawn on the bank, constitutes the L/C
[10]
as a mode of payment. Logically, before the issuing
bank opens an L/C, it will take steps to ensure that it would
indeed be reimbursed when the time comes. Before an
L/C can be opened, specific legal requirements must be
complied with.
The Central Bank of the Philippines has established
the following requirements for opening a letter of
credit: "All L/C's must be opened on or before the date of
shipment with maximum validity of one (1) year. Likewise,
only one L/C should be opened for each import
transaction. For purposes of opening an L/C, importers
12

shall submit to the commercial bank the following
documents:
a) the duly accomplished L/C application;
b) firm offer/proforma invoice which shall contain
information on the specific quantity of the
importation, unit cost and total cost, complete
description/specification of the commodity and
the Philippine Standard Commodity
Classification statistical code;
c) permits/clearances from the appropriate
government agencies, whenever applicable; and
d) duly accomplished Import Entry Declaration
(IED) form which shall serve as basis for payment
[11]
of advance duties as required under PD 1853."
The need for permits or clearances from appropriate
government agencies arises when regulated commodities
[12]
are to be imported. Certain commodities are classified
as "regulated commodities" for purposes of their
importation, "for reasons of public health and safety,
national security, international commitments, and
[13]
development/rationalization of local industry". The
petitioner in the instant case entered into a transaction to
import foundry pig iron, a regulated commodity. In respect
of the importation of this particular commodity, the Iron
and Steel Authority (ISA) is the government agency
[14]
designated to issue the permit or clearance. Prior to the
issuance of such permit or clearance, ISA asks the
buyer/importer to comply with particular requirements,
such as to show the availability of foreign exchange
allocations. The issuance of an L/C becomes, among
other things, an indication of compliance by the
buyer/importer with his own government's regulations
[15]
relating to imports and to payment thereof.
The record shows that the opening of the L/C in the instant
case became very difficult because Reliance had
exhausted its dollar allocation. Reliance knew that it had
already exceeded its dollar allocation for the year 1980
when it entered into the 31 July 1980 transaction with
[16]
Daewoo. As a rule, when the importer has exceeded its
foreign exchange allocation, his application would be
denied. However, ISA could reconsider such application
[17]
on a case to case basis. Thus, in the instant case, ISA
required Reliance to support its application by submitting
purchase orders from end-users for the same quantity the
latter wished to import. As earlier noted, Reliance was
able to present purchase orders for only 900 metric tons
[18]
of the subject pig iron. For having exceeded its foreign
exchange allocation before it entered into the 31 July
1980 contract with Daewoo, petitioner Reliance can hold
only itself responsible. For having failed to secure end-
users' purchase orders equivalent to 2,000 metric tons,
only Reliance should be held responsible.
WHEREFORE, in view of all the foregoing, petition is
denied for lack of merit.
Virtus in infirmitate perficitur! 2 Cor. 12:9
*Not a negotiable instrument
Lee vs. Court of Appeals, 375 SCRA 579
G.R. No. 117913, February 1, 2002 (DE LEON JR.)
FACTS
Upon maturity of all credit availments obtained by MICO
from PBCom, the latter made a demand for payment.
[30]
For failure of petitioner MICO to pay the obligations
incurred despite repeated demands, private respondent
PBCom extrajudicially foreclosed MICO’s real estate
mortgage and sold the said mortgaged properties in a
public auction sale held on November 23, 1982. Private
respondent PBCom which emerged as the highest bidder
in the auction sale, applied the proceeds of the purchase
price at public auction of Three Million Pesos
(P3,000,000.00) to the expenses of the foreclosure,
interest and charges and part of the principal of the loans,
leaving an unpaid balance of Five Million Four Hundred
Forty-One Thousand Six Hundred Sixty-Three Pesos and
Ninety Centavos (P5,441,663.90) exclusive of penalty
and interest charges. Aside from the unpaid balance of
Five Million Four Hundred Forty-One Thousand Six
Hundred Sixty- Three Pesos and Ninety Centavos
(P5,441,663.90), MICO likewise had another standing
obligation in the sum of Four Hundred Sixty-One
Thousand Six Hundred Pesos and Six Centavos
(P461,600.06) representing its trust receipts liabilities to
private respondent. PBCom then demanded the
settlement of the aforesaid obligations from herein
petitioners-sureties who, however, refused to
acknowledge their obligations to PBCom under the surety
agreements. Hence, PBCom filed a complaint with prayer
for writ of preliminary attachment before the Regional Trial
Court of Manila.
Petitioners (MICO and herein petitioners-sureties
[sureties contended that they obtained no consideration
whatsoever on the surety agreements]) denied all the
allegations of the complaint filed by respondent PBCom.
Trial court ruled for petitioners stating that inasmuch as
no consideration ever passed from PBCom to MICO, all
the documents involved therein, such as the promissory
notes, real estate mortgage including the surety
agreements were all void or nonexistent for lack of cause
or consideration.
Petitioners allege that PBCom presented no evidence that
it remitted payments to cover the domestic and foreign
letters of credit. Petitioners placed much reliance on the
erroneous decision of the trial court which stated that
private respondent PBCom allegedly failed to prove that
it actually made payments under the letters of credit since
the bank drafts presented as evidence show that they
were made in favor of the Bank of Taiwan and First
Commercial Bank. For this, the trial court said 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 and that the letters of credit transactions were
simply resorted to by the PBCom and Chua Siok Suy to
accommodate the latter in his financial requirements.
13

Finally, petitioners aver that MICO never requested that
legal possession of the merchandise be transferred to
PBCom by way of trust receipts. Petitioners insist that
assuming that MICO 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.
ISSUES
1. Are the notes and all agreements void for lack
of consideration?
2. Did PBCom fail to prove that it actually made
payments under the letters of credit since the
bank drafts presented as evidence show that
they were made in favor of the Bank of Taiwan
and First Commercial Bank?
3. Would the transfer by MICO of the possession
of the merchandise to PBCom be illegal
considering that PBCom, being a banking
institution, is not authorized by law to engage
in the business of importing and selling
goods?
HELD
Are the notes and all agreements void for lack of
consideration?
NO. Under Section 3, Rule 131 of the Rules of Court the
following presumptions, among others, are satisfactory if
uncontradicted: a) That there was a sufficient
consideration for a contract and b) That a negotiable
instrument was given or indorsed for sufficient
consideration. As observed by the Court of Appeals, a
similar presumption is found in Section 24 of the
Negotiable Instruments Law which provides that every
negotiable instrument is deemed prima facieto have been
issued for valuable consideration and every person
whose signature appears thereon to have become a party
for value. Negotiable instruments which are meant to be
substitutes for money, must conform to the following
requisites to be considered as such a) it must be in writing;
b) it must be signed by the maker or drawer; c) it must
contain an unconditional promise or order to pay a sum
certain in money; d) it must be payable on demand or at
a fixed or determinable future time; e) it must be payable
to order or bearer; and f) where it is a bill of exchange, the
drawee must be named or otherwise indicated with
reasonable certainty. Negotiable instruments include
promissory notes, bills of exchange and checks. Letters
of credit and trust receipts are, however, not
negotiable instruments. But drafts issued in
connection with letters of credit are negotiable
instruments.
The above-cited documents presented have not merely
created a prima facie case but have actually proved the
solidary obligation of MICO and the petitioners, as
sureties of MICO, in favor of respondent PBCom. While
Virtus in infirmitate perficitur! 2 Cor. 12:9
the presumption found under the Negotiable Instruments
Law may not necessarily be applicable to trust receipts
and letters of credit, the presumption that the drafts drawn
in connection with the letters of credit have sufficient
consideration. Under Section 3(r), Rule 131 of the Rules
of Court there is also a presumption that sufficient
consideration was given in a contract. Hence, petitioners
should have presented credible evidence to rebut that
presumption as well as the evidence presented by private
respondent PBCom. The letters of credit show that the
pertinent materials/merchandise have been received by
MICO. The drafts signed by the beneficiary/suppliers in
connection with the corresponding letters of credit proved
that said suppliers were paid by PBCom for the account
of MICO. On the other hand, aside from their bare denials
petitioners did not present sufficient and competent
evidence to rebut the evidence of private respondent
PBCom. Petitioner MICO did not proffer a single piece of
evidence, apart from its bare denials, to support its
allegation that the loan transactions, real estate
mortgage, letters of credit and trust receipts were issued
allegedly without any consideration.
Anent petitioners-sureties contention that they obtained
no consideration whatsoever on the surety agreements,
we need only point out that the consideration for the
sureties is the very consideration for the principal obligor,
MICO, in the contracts of loan. In the case of Willex
[46]
Plastic Industries Corporation vs. Court of Appeals, we
ruled that the consideration necessary to support a surety
obligation need not pass directly to the surety, a
consideration moving to the principal alone being
sufficient. For a guarantor or surety is bound by the same
consideration that makes the contract effective between
the parties thereto. It is not necessary that a guarantor or
surety should receive any part or benefit, if such there be,
accruing to his principal.
Did PBCom fail to prove that it actually made
payments under the letters of credit since the bank
drafts presented as evidence show that they were
made in favor of the Bank of Taiwan and First
Commercial Bank?
NO. Petitioners’ allegations are untenable. 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 presented such as
bills of lading accompanied the corresponding drafts.
Expansion in the use of letters of credit was a natural
[38]
development in commercial banking. Parties to a
commercial letter of credit include (a) the buyer or the
importer, (b) the seller, also referred to as beneficiary, (c)
the opening bank which is usually the buyer’s bank which
actually issues the letter of credit, (d) the notifying bank
which is the correspondent bank of the opening bank
through which it advises the beneficiary of the letter of
credit, (e) negotiating bank which is usually any bank in
14

the city of the beneficiary. The services of the notifying
bank must always be utilized if the letter of credit is to be
advised to the beneficiary through cable, (f) the paying
bank which buys or discounts the drafts contemplated by
the letter of credit, if such draft is to be drawn on the
opening bank or on another designated bank not in the
city of the beneficiary. As a rule, whenever the facilities of
the opening bank are used, the beneficiary is supposed to
present his drafts to the notifying bank for negotiation and
(g) the confirming bank which, upon the request of the
beneficiary, confirms the letter of credit issued by the
opening bank.
From the foregoing, it is clear that letters of credit, being
usually bank to bank transactions, involve more than just
one bank. Consequently, there is nothing unusual in the
fact that the drafts presented in evidence by respondent
bank were not made payable to PBCom. As explained by
respondent bank, a draft was drawn on the Bank of
Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier
of the goods covered by the foreign letter of credit. Having
paid the supplier, the Bank of Taiwan then presented the
bank draft for reimbursement by PBCom’s correspondent
bank in Taiwan, the Irving Trust Company — which
explains the reason why on its face, the draft was made
payable to the Bank of Taiwan. Irving Trust Company
accepted and endorsed the draft to PBCom. The draft was
later transmitted to PBCom to support the latter’s claim for
payment from MICO. MICO accepted the draft upon
presentment and negotiated it to PBCom.
Would the transfer by MICO of the possession of the
merchandise to PBCom be illegal?
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
[39]
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 secures
an indebtedness.
WHEREFORE, the assailed Decision of the Court of
Appeals is AFFIRMED in toto.
*Different from trust receipt
Bank of Commerce vs. Serrano, 451 SCRA 484
G.R. No. 151895, February 16, 2005 (QUISUMBING)
FACTS
Via Moda International, Inc., a domestic business entity
primarily engaged in the import and export of textile
Virtus in infirmitate perficitur! 2 Cor. 12:9
materials and fabrics, represented by respondent,
obtained an export packing loan from petitioner, Bank of
Commerce (BOC)-Diliman, Quezon City Branch, in the
amount of US$50,000 (P1,382,250), secured by a Deed
of Assignment over Irrevocable Transferable Letter of
Credit No. 100072119.
On March 15, 1994, BOC issued to Via Moda, Irrevocable
Letter of Credit No. BCZ-940051, in the amount of
US$56,735, for the purchase and importation of fabric and
textile products from Tiger Ear Fabric Co. Ltd. of Taiwan.
To secure the release of the goods covered, respondent,
in representation of Via Moda, executed Trust Receipt No.
94-22221 dated April 21, 1994 with due date on July 20,
1994 for US$55,944.73 (P1,554,424.32).
The goods covered by the trust receipt were shipped by
Via Moda to its consignee in New Jersey, USA, who sent
an Export Letter of Credit issued by the Bank of New York,
in favor of BOC. The Regional Operations Officer of BOC
signed the export declarations to show consent to the
shipment. The total value of the entrusted goods which
were shipped per export declaration was US$81,987
(P2,246,443.80). The proceeds of the entrusted goods
sold were not credited to the trust receipt but, were
applied by the bank to the principal, penalties and interest
of the export packing loan. The excess P472,114.85 was
applied to the trust receipt, leaving a balance of
[7]
P1,444,802.28 as of November 15, 1994.
On November 16, 1994, petitioner sent a demand letter to
Via Moda to pay the said amount plus interest and penalty
charges, or to return the goods covered by Trust Receipt
No. 94-22221 within 5 days from receipt. The demand
was not heeded. As of December 15, 1998, the
[8]
outstanding balance of Via Moda was P4,783,487.15.
On March 8, 1998, respondent was charged with the
crime of estafa under Article 315 (b) of the Revised Penal
Code in relation to Presidential Decree No. 115.
ISSUES
1. Distinguish between a letter of credit and a
trust receipt.
2. Is respondent jointly and solidarily liable with
Via Moda under the Guarantee Clause of
Letter of Credit No. BCZ-940051 secured by
Trust Receipt No. 94-22221?
HELD
Distinguish between a letter of credit and a trust
receipt.
A letter of credit is a separate document from a trust
receipt. While the trust receipt may have been executed
as a security on the letter of credit, still the two documents
involve different undertakings and obligations. 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 letter
15

of credit, the bank merely substitutes its own promise to
pay for the promise to pay of 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
[14]
fees mutually agreed upon. By contrast, a trust receipt
transaction 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 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.
Is respondent jointly and solidarily liable with Via
Moda under the Guarantee Clause of Letter of Credit
No. BCZ-940051 secured by Trust Receipt No. 94-
22221?
NO. However, the question of the liability of respondent
based on the Guarantee Clause of the Letter of Credit,
was not raised either at the trial court or before the Court
of Appeals. A question that was never raised in the courts
below cannot be allowed to be raised for the first time on
appeal without offending basic rules of fair play, justice
and due process. Such an issue was not brought to the
fore either in the trial court or the appellate court, and
would have been disregarded by the latter tribunal for the
reasons previously stated. With more reason, the same
does not deserve consideration by this Court.
WHEREFORE, the petition is DENIED for lack of merit.
2. Laws governing letter of credit
*Applicability of usage and customs apply in commercial
transactions in the absence of any particular provision in
the Code of Commerce
Bank of the Philippine Islands vs. De Reny Fabric
Industries, Inc., 35 SCRA 253
G.R. No. L-24821, October 16, 1970 (CASTRO)
FACTS
On four (4) different occasions in 1961, the
De Reny Fabric Industries, Inc., a Philippine corporation,
through its co-defendants-appellants,
Aurora Carcereny, alias Aurora C. Gonzales, and Aurora
T. Tuyo, president and secretary, respectively of the
corporation, applied to the Bank for four (4) irrevocable
commercial letters of credit to cover the purchase by the
corporation of goods described in the covering L/C
applications as "dyestuffs of various colors" from its
American supplier, the J.B. Distributing Company.
Bank issued irrevocable commercial letters of credit
addressed to its correspondent banks in the United
Virtus in infirmitate perficitur! 2 Cor. 12:9
States, with uniform instructions for them to notify the
beneficiary thereof, the J.B. Distributing Company. The
shipment (covered by the above-mentioned letters of
credit) arrived in the Philippines. De Reny, however,
subsequently discontinued paying when it became
established, as a result of a chemical test conducted by
the National Science Development Board, that the goods
that arrived in Manila were colored chalks instead of
dyestuffs.
Respondents submit that it was the duty of the foreign
correspondent banks of the Bank of the Philippine Islands
to take the necessary precautions to insure that the goods
shipped under the covering L/Cs conformed with the item
appearing therein, and, that the foreign 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
Are banks obliged to take the necessary precautions
to insure that the goods shipped under the covering
L/Cs conformed with the item appearing therein?
HELD
NO. We can appreciate the sweep of the appellants,
argument, but we also find that it is nestled hopelessly
inside a salient where the valid contract between the
parties and the internationally accepted customs of the
banking trade must prevail.
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
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 or
the shipping thereof, " and "for any breach of contract
between 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
[2]
with their covenant.
But even without the stipulation recited above, the appel-
lants cannot shift the burden of loss to the Bank on
account of the violation by their vendor of its prestation. It
was incontrovertibly 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. The Bank introduced in evidence a provision
contained in the "Uniform Customs and Practices for
Commercial Documentary Credits Fixed for the Thirteenth
16

Congress of International Chamber of Commerce," to
which the Philippines is a signatory nation.
Article 10 thereof provides: "In documentary credit
operations, all parties concerned deal in documents and
not in goods. Payment, negotiation or acceptance
against documents in accordance with the terms and
conditions of a credit by a Bank authorized to do
so binds the party given the authorization to take up the
documents and reimburse the Bank making the payment,
negotiation or acceptance."
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.
ACCORDINGLY, the judgment a quo is affirmed, at
defendants-appellants’ cost.
3. Kinds of letter of credit
a. Commercial and stand by letter of credit
Insular Bank of Asia & America vs. Intermediate
Appellate Court, 167 SCRA 450 (1988)
G.R. No. 74834, November 17, 1988 (MELENCIO-
HERRERA)
FACTS
Spouses Mendoza obtained two (2) loans from
respondent Philippine American Life Insurance Co.
(Philam Life) in the total amount of P600,000.00 to finance
the construction of their residential house at Mandaue
City.
To secure payment, Philam Life required that
amortizations be guaranteed by an irrevocable standby
letter of credit of a commercial bank. Thus, the Mendozas
contracted with petitioner Insular Bank of Asia and
America (IBAA) for the issuance of two (2) irrevocable
standby Letters of Credit in favor of Philam Life for the
total amount of P600,000.00.
The Mendozas failed to pay Philam Life the amortization
that fell due on 1 June 1978 so that Philam Life informed
IBAA that it was declaring both loans as "entirely due and
demandable" and demanded payment of P492,996.30
(Exhibit "H"). However, because IBAA contested the
propriety of calling in the entire loan, Philam Life desisted
and resumed availing of the L/Cs by drawing on them for
five (5) more amortizations.
On 7 September 1979, because the Mendozas defaulted
on their amortization due on 1 September 1979, Philam
Life again informed IBAA that it was declaring the entire
Virtus in infirmitate perficitur! 2 Cor. 12:9
balance outstanding on both loans, including liquidated
damages, "immediately due and payable." Philam Life
then demanded the payment of P274,779.56 from IBAA
but the latter took the position that, as a mere guarantor
of the Mendozas who are the principal debtors, its
remaining outstanding obligation under the two (2)
standby L/Cs was only P30,100.60. Later, IBAA corrected
the latter amount and showed instead an overpayment.
IBAA stresses that it has no more liability to Philam Life
under the two (2) standby Letters of Credit and, instead,
is entitled to a refund. Whereas Philam Life and the
Mendoza spouses separately maintain that IBAA's
obligation under said two (2) L/Cs is original and primary
and is not reduced by the direct payments made by the
Mendozas to Philam Life.
ISSUE
Would the partial payments made by the principal
obligors (respondent MENDOZAS) have the
corresponding effect of reducing the liability of the
petitioner IBAA as guarantor or surety under the
terms of the standby LoCs in question?
HELD
NO. 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 not to exceed P600,000.00. 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.” 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.
The amount of P222,000.00, therefore, considered as
"any obligation of the accountee" under the L/Cs will still
have to be paid by IBAA under the explicit terms thereof,
which IBAA had itself supplied. Letters of credit are strictly
construed to the end that the rights of those directly
parties to them may be preserved and their interest
safeguarded (Moss vs. Old Colony Trust Co., 140 N.E.
803, 246 Mass. 138, 152). Like any other writing, it will be
construed most strongly against the writer and so as to be
reasonable and consistent with honest intentions. On the
whole, the construction will be generally a strict one
(Lamborn vs. National Park Bank of New York, 208
17

N.Y.S. 428, 212 App. Div. 25, affirming Id., 204 N.Y.S.
557, 123 Misc. 211, affirmed Id., 148 N.E. 664, 240 N.Y.
520). As found by the Appellate Court, however, the
amount payable should not exceed P296,294.05
(P600,000.00 less P303,705.95, the total amount found
by the Appellate Court to have been paid by IBAA to
Philam Life).
The remaining obligation of P222,000.00 on the loan of
the Mendozas, therefore, is now IBAA's sole responsibility
to pay to Philam Life; by virtue of its absolute and
irrevocable undertaking under the standby L/Cs. Specially
so, since the Promissory Notes executed by the
Mendozas in favor of IBAA authorized the sale of the
mortgaged security "for the purpose of applying their
proceeds to x x x payments" of their obligations to IBAA.
WHEREFORE, the Decision of respondent Intermediate
Appellate Court, dated 20 December 1985, is hereby
MODIFIED. Petitioner IBAA (now the Philippine
Commercial International Bank) shall pay Philippine
American Life Insurance Company the sum of
P222,000.00 plus 2% per month as penalty interest from
12 September 1979 until the whole amount is fully paid,
but in no case to exceed P296,294.05, plus P25,000.00
as attorney's fees.
Bank of America vs Court of Appeals 228 SCRA 357
(**refer to discussion above)
Transfield Philippines, Inc. vs. Luzon Hydro Corp.
443 SCRA 307 (2004)
G.R. No. 146717, November 22, 2004 (TINGA)
FACTS
On 26 March 1997, petitioner Transfield and respondent
Luzon Hydro Corporation (hereinafter, LHC) entered into
[3]
a Turnkey Contract whereby petitioner, as Turnkey
Contractor, undertook to construct, on a turnkey basis, a
seventy (70)-Megawatt hydro-electric power station at the
Bakun River in the provinces of Benguet and Ilocos Sur
(hereinafter, the Project). Petitioner was given the sole
responsibility for the design, construction, commissioning,
testing and completion of the Project.
To secure performance of petitioner’s obligation on or
before the target completion date, or such time for
completion as may be determined by the parties’
agreement, petitioner opened in favor of LHC two (2)
standby letters of credit both dated 20 March 2000
(hereinafter referred to as “the Securities”), to wit:
Standby Letter of Credit No. E001126/8400 with the local
branch of respondent Australia and New Zealand Banking
[7]
Group Limited (ANZ Bank) and Standby Letter of Credit
No. IBDIDSB-00/4 with respondent Security Bank
Corporation
[8]
(SBC) each in the amount of
US$8,988,907.00.
In the course of the construction of the project, petitioner
sought various extension of time to complete the project
(EOT) to complete the Project. LHC denied the requests,
Virtus in infirmitate perficitur! 2 Cor. 12:9
however. This gave rise to a series of legal actions
between the parties which culminated in the instant
petition.
Petitioner sought to restrain respondent LHC from calling
on the Securities and respondent banks from transferring,
paying on, or in any manner disposing of the Securities or
any renewals or substitutes thereof.
RTC denied petitioner’s application for a writ of
preliminary injunction. It ruled that petitioner had no legal
right and suffered no irreparable injury to justify the
issuance of the writ. Employing the principle of
“independent contract” in letters of credit, the trial court
ruled that LHC should be allowed to draw on the
Securities for liquidated damages. It debunked
petitioner’s contention that the principle of “independent
contract” could be invoked only by respondent banks
since according to it respondent LHC is the ultimate
beneficiary of the Securities. The trial court further ruled
that the banks were mere custodians of the funds and as
such they were obligated to transfer the same to the
beneficiary for as long as the latter could submit the
required certification of its claims.
Appellate court expressed conformity with the trial court’s
decision that LHC could call on the Securities pursuant to
the first principle in credit law that the credit itself is
independent of the underlying transaction and that as long
as the beneficiary complied with the credit, it was of no
moment that he had not complied with the underlying
contract.
Petitioner contends that the courts below improperly
relied on the “independence principle” on letters of credit
when this case falls squarely within the “fraud exception
rule.” Respondent LHC deliberately misrepresented the
supposed existence of delay despite its knowledge that
the issue was still pending arbitration, petitioner
continues.
ISSUES
1. May LHC be allowed to draw on the Securities
for liquidated damages?
a. Nature of a Letter of Credit
b. Commercial v. Standby Letter of Credit
2. Can the beneficiary invoke the independence
principle?
a. Prof. Dolan’s distinction between standby
and commercial letters of credit.
3. Is “fraud exception rule” applicable in the
case?
4. Were respondent banks justified in releasing
the amounts due under the Securities?
HELD
May LHC be allowed to draw on the Securities for
liquidated damages?
18

YES. The letter of credit evolved as a mercantile specialty,
and the only way to understand all its facets is to
recognize that it is an entity unto itself. 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, yet strict compliance
with its terms is an enforceable right. Nor is it a third-party
beneficiary contract, because the issuer must honor drafts
drawn against a letter regardless of problems
subsequently arising in the underlying contract. Since the
bank’s customer cannot draw on the letter, it does not
function as an assignment by the customer to the
beneficiary. Nor, if properly used, is it a contract of
suretyship or guarantee, because it entails a primary
liability following a default. Finally, it is not in itself a
negotiable instrument, because it is not payable to order
or bearer and is generally conditional, yet the draft
presented under it is often negotiable.
In commercial transactions, a letter of credit is a financial
device developed by merchants as a convenient and
relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller,
who refuses to part with his goods before he is paid, and
a buyer, who wants to have control of the goods before
[30]
paying. The use of credits in commercial transactions
serves to reduce the risk of nonpayment of the purchase
price under the contract for the sale of goods. However,
credits are also used in non-sale settings where they
serve to reduce the risk of nonperformance. Generally,
credits in the non-sale settings have come to be known as
standby credits.
There are three significant differences between
commercial and standby credits. First, commercial
credits involve the payment of money under a contract of
sale. Such credits become payable upon the presentation
by the seller-beneficiary of documents that show he has
taken affirmative steps to comply with the sales
agreement. In the standby type, the credit is payable upon
certification of a party's nonperformance of the
agreement. The documents that accompany the
beneficiary's draft tend to show that the applicant has not
performed. The beneficiary of a commercial credit must
demonstrate by documents that he has performed his
contract. The beneficiary of the standby credit must certify
that his obligor has not performed the contract.
By definition, a letter of credit is a written instrument
whereby the writer requests or authorizes the addressee
to pay money or deliver goods to a third person and
assumes responsibility for payment of debt therefor to the
[33]
addressee. A letter of credit, however, changes its
nature as different transactions occur and if carried
through to completion ends up as a binding contract
between the issuing and honoring banks without any
regard or relation to the underlying contract or disputes
between the parties thereto.
Can the beneficiary invoke the independence
principle?
Virtus in infirmitate perficitur! 2 Cor. 12:9
YES. Article 3 of the UCP provides that credits, by their
nature, are separate transactions from the sales or other
contract(s) on which they may be based and banks are in
no way concerned with or bound by such contract(s), even
if any reference whatsoever to such contract(s) is
included in the credit. Consequently, the undertaking of a
bank to pay, accept and pay draft(s) or negotiate and/or
fulfill any other obligation under the credit is not subject to
claims or defenses by the applicant resulting from his
relationships with the issuing bank or the beneficiary. A
beneficiary can in no case avail himself of the contractual
relationships existing between the banks or between the
applicant and the issuing bank.
Thus, 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. Under this principle, banks assume
no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor
do they assume any liability or responsibility for the
description, quantity, weight, quality, condition, packing,
delivery, value or existence of the goods represented by
any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the
consignor, the carriers, or the insurers of the goods, or
any other person whomsoever.
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.
As discussed above, 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
[41]
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.
Given the nature of letters of credit, petitioner’s
argument—that it is only the issuing bank that may invoke
the independence principle on letters of credit—does not
19

impress this Court. To say that the independence
principle may only be invoked by the issuing banks would
render nugatory the purpose for which the letters of credit
are used in commercial transactions. As it is, the
independence doctrine works to the benefit of both the
issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to
enter into commercial transactions, not for the benefit of
the issuing bank but mainly for the benefit of the parties
to the original transactions. With the letter of credit from
the issuing bank, the party who applied for and obtained
it may confidently present the letter of credit to the
beneficiary as a security to convince the beneficiary to
enter into the business transaction. On the other hand,
the other party to the business transaction, i.e., the
beneficiary of the letter of credit, can be rest assured of
being empowered to call on the letter of credit as a
security in case the commercial transaction does not push
through, or the applicant fails to perform his part of the
transaction. It is for this reason that the party who is
entitled to the proceeds of the letter of credit is
appropriately called “beneficiary.”
Petitioner’s 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.
Professor John F. Dolan, the noted authority on
letters of credit, sheds more light on the issue:
The standby credit is an attractive commercial device for
many of the same reasons that commercial credits are
attractive. Essentially, these credits are inexpensive and
efficient. Often they replace surety contracts, which tend
to generate higher costs than credits do and are usually
triggered by a factual determination rather than by the
examination of documents.
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 obligor’s
nonperformance. They function, however, in distinctly
different ways.
Traditionally, upon the obligor’s default, the surety
undertakes to complete the obligor’s performance, usually
by hiring someone to complete that performance. Surety
contracts, then, often involve costs of determining
Virtus in infirmitate perficitur! 2 Cor. 12:9
whether the obligor defaulted (a matter over which the
surety and the beneficiary often litigate) plus the cost of
performance. The benefit of the surety contract to the
beneficiary is obvious. He knows that the surety, often an
insurance company, is a strong financial institution that
will perform if the obligor does not. The beneficiary also
should understand that such performance must await the
sometimes lengthy and costly determination that the
obligor has defaulted. In addition, the surety’s
performance takes time.
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 applicant’s
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 obligor’s 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. It
may be that the applicant has, in fact, performed and that
the beneficiary’s presentation of those documents is not
rightful. In that case, the applicant may sue the
beneficiary in tort, in contract, or in breach of warranty;
but, during the litigation to determine whether the
applicant has in fact breached the obligation to perform,
the beneficiary, not the applicant, holds the
money. Parties that use a standby credit and courts
construing such a credit should understand this allocation
of burdens. There is a tendency in some quarters to
overlook this distinction between surety contracts and
standby credits and to reallocate burdens by permitting
the obligor or the issuer to litigate the performance
[42]
question before payment to the beneficiary.
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 petitioner’s 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 to justify their releases of the amounts due under
the Securities. Owing to the nature and purpose of the
standby letters of credit, this Court rules that the
respondent banks were left with little or no alternative but
to honor the credit and both of them in fact submitted that
it was “ministerial” for them to honor the call for
[43]
payment.
Furthermore, LHC has a right rooted in the Contract to call
on the Securities. By petitioner’s own admission, the right
20

of LHC to call on the Securities was contractually rooted
and subject to the express stipulations in the Turnkey
[55]
Contract. Indeed, the Turnkey Contract is plain and
unequivocal in that it conferred upon LHC the right to draw
upon the Securities in case of default.
Is “fraud exception rule” applicable in the case?
NO. Most writers agree that fraud is an exception to the
independence principle. Professor Dolan opines that the
untruthfulness of a certificate accompanying a demand for
payment under a standby credit may qualify as fraud
[48]
sufficient to support an injunction against payment. The
remedy for fraudulent abuse is an injunction. However,
injunction should not be granted unless: (a) there is clear
proof of fraud; (b) the fraud constitutes fraudulent abuse
of the independent purpose of the letter of credit and not
only fraud under the main agreement; and (c) irreparable
injury might follow if injunction is not granted or the
recovery of damages would be seriously damaged.
In the instant case, petitioner failed to show that it has a
clear and unmistakable right to restrain LHC’s call on the
Securities which would justify the issuance of preliminary
injunction.
The pendency of the arbitration proceedings would
not per se make LHC’s draws on the Securities wrongful
or fraudulent for there was nothing in the Contract which
would indicate that the parties intended that all disputes
regarding delay should first be settled through arbitration
before LHC would be allowed to call upon the
Securities. It is therefore premature and absurd to
conclude that the draws on the Securities were outright
fraudulent given the fact that the ICC and CIAC have not
ruled with finality on the existence of default.
Nowhere in its complaint before the trial court or in its
pleadings filed before the appellate court, did petitioner
invoke the fraud exception rule as a ground to justify the
issuance of an injunction. The lower courts could thus not
be faulted for not applying the fraud exception rule not
only because the existence of fraud was fundamentally
interwoven with the issue of default still pending before
the arbitral tribunals, but more so, because petitioner
never raised it as an issue in its pleadings filed in the
courts below. At any rate, petitioner utterly failed to show
that it had a clear and unmistakable right to prevent LHC’s
call upon the Securities.
Were respondent banks justified in releasing the
amounts due under the Securities?
YES. Pursuant to the independence principle the banks
were under no obligation to determine the veracity of
LHC’s certification that default has occurred. Neither were
they bound by petitioner’s declaration that LHC’s call
thereon was wrongful. To repeat, respondent banks’
undertaking was simply to pay once the required
documents are presented by the beneficiary.
At any rate, should petitioner finally prove in the pending
arbitration proceedings that LHC’s draws upon the
Virtus in infirmitate perficitur! 2 Cor. 12:9
Securities were wrongful due to the non-existence of the
fact of default, its right to seek indemnification for
damages it suffered would not normally be foreclosed
pursuant to general principles of law.
[62]
Moreover, in a Manifestation, dated 30 March 2001,
LHC informed this Court that the subject letters of credit
had been fully drawn. This fact alone would have been
sufficient reason to dismiss the instant petition. Settled is
the rule that injunction would not lie where the acts sought
to be enjoined have already become fait accomplior an
accomplished or consummated act. In the instant case,
the consummation of the act sought to be restrained had
rendered the instant petition moot—for any declaration by
this Court as to propriety or impropriety of the non-
issuance of injunctive relief could have no practical effect
on the existing controversy.
WHEREFORE, the instant petition is DENIED.
b. Irrevocable and revocable letter of credit
Philippine Virginia Tobacco Administration vs. De
Los Angeles, 164 SCRA 543
G.R. No. L-27829, August 19, 1988 (PARAS)
FACTS
Respondent Timoteo Sevilla, proprietor and General
Manager of the Philippine Associated Resources (PAR)
together with two other entities, namely, the Nationwide
Agro-Industrial Development Corp. and the Consolidated
Agro-Producers Inc. were awarded in a public bidding the
right to import Virginia leaf tobacco for blending purposes
and exportation by them of PVTA and farmer’s low-grade
tobacco. The other two entities assigned their rights to
PVTA and respondent remained the only private entity
accorded the privilege.
The contract entered into between the petitioner and
respondent Sevilla was for the importation of 85 million
kilos of Virginia leaf tobacco and a counterpart exportation
of 2.53 million kilos of PVTA and 5.1 million kilos of
farmer’s and/or PVTA at P3.00 a kilo.
On September 14, 1965 subject contract which was
already amended on December 14, 1963 because of the
prevailing export or world market price under which
respondent will be exporting at a loss, (Complaint, Rollo,
p. 3) was further amended to grant respondent the
privileges under aforesaid law, subject to the following
conditions: among others, (3) that respondent Sevilla
would open an irrevocable letter of credit No. 6232
with the Prudential Bank and Trust Co. in favor of the
PVTA to secure the payment of said balance, drawable
upon the release from the Bureau of Customs of the
imported Virginia blending tobacco.
While respondent was trying to negotiate the reduction of
the procurement cost of the 2,101,479 kilos of PVTA
tobacco already exported which attempt was denied by
petitioner and also by the Office of the President,
21

petitioner prepared two drafts to be drawn against said
letter of credit for amounts which have already become
due and demandable. Respondent then filed a complaint
for damages with preliminary injunction against the
petitioner in the amount of P5,000,000.00. Petitioner filed
an answer with counterclaim, admitting the execution of
the contract. It alleged however that respondent violated
the terms thereof by causing the issuance of the
preliminary injunction to prevent the former from drawing
from the letter of credit for amounts due and payable and
thus caused petitioner additional damage of 6% per
annum.
A writ of preliminary injunction was issued by respondent
judge enjoining petitioner from drawing against the letter
of credit. On motion of respondent, Sevilla, the lower court
dismissed the complaint. But petitioner's motion for
reconsideration was granted and the Order dismissing the
complaint was set aside. Pending the resolution of
respondent's motion and without notice to the petitioner,
respondent judge issued the assailed Order of July 17,
1967 directing the Prudential Bank & Trust Co. to make
the questioned release of funds from the Letter of Credit.
ISSUE
Did respondent judge act without or in excess of
jurisdiction or with grave abuse of discretion when he
issued the Order of July 17, 1967, for the following
reasons: among others, (a) the letter of credit issued
by respondent bank is irrevocable?
HELD
YES. Among others, in issuing the Order of July 17, 1967,
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 after the trial on the merits is
that respondent Sevilla has an unpaid balance due the
petitioner, such unpaid obligation would be unsecured.
PREMISES CONSIDERED, the petition is given due
course and the assailed Orders of July 17, 1967 and
November 3, 1967 and March 16, 1968 are ANNULLED
and SET ASIDE, and the preliminary injunctions issued
by this Court should continue until the termination of Case
No. Q-10351 on the merits.
c. Confirmed and unconfirmed letter of credit
Feati Bank & Trust Company vs. Court of Appeals,
196 SCRA 576 (1991)
(**refer to discussion above)
Virtus in infirmitate perficitur! 2 Cor. 12:9
4. Parties to a Letter of Credit
a. Rights and Obligations of Parties
i. Applicant
ii. Issuing Bank
iii. Beneficiary
Reliance Commodities, Inc. vs. Daewoo Industrial
Co., Ltd., 228 SCRA 545 (1993)
(**refer to discussion above)
Prudential Bank & Trust Company vs. IAC, 216 SCRA
257 (1992)
(**refer to discussion above)
Rodzssen Supply Company, Inc. vs. Far East Bank
and Trust Company, 357 SCRA 618
G.R. No. 109087, May 9, 2001 (PANGANIBAN)
FACTS
Petitioner asserts that respondent bank was negligent in
paying for the two hydraulic loaders, when it no longer had
any obligation to do so in view of the expiration and
cancellation of the Letter of Credit.
Petitioner Rodzssen Supply Inc. applied for and obtained
an irrevocable 30-day domestic Letter of Credit from Far
East Bank and Trust Company Inc. on January 15, 1979,
in favor of Ekman and Company Inc., in order to finance
the purchase of five units of hydraulic loaders in the
amount of P190,000. Originally set to expire on February
15, 1979, the subject Letter of Credit was amended
several times to extend its validity until October 16, 1979.
The Letter of Credit expressly restricted the negotiation to
respondent bank and specifically instructed Ekman and
Company Inc. to tender the following documents: (1)
delivery receipt duly acknowledged by the buyer, (2)
accepted draft, and (3) duly signed commercial invoices.
Likewise, the instrument contained a provision with regard
8
to its expiration date. For the first three hydraulic loaders
that were delivered, the bank paid the amount specified in
the letter of credit. The present dispute pertains only to
the last two hydraulic loaders.
ISSUES
1. Is it proper for a banking institution to pay a
letter of credit which has long expired or been
cancelled?
2. Was petitioner liable to respondent?
HELD
Is it proper for a banking institution to pay a letter of
credit which has long expired or been cancelled?
NO. Clearly, the bank paid Ekman when the former was
no longer bound to do so under the subject Letter of
22

Credit. The records show that respondent paid the
latter P76,000 for the last two hydraulic loaders on March
10
14, 1980, five months after the expiration of the Letter of
11
Credit on October 16, 1979. In fact, on December 27,
1979, the bank had informed Rodzssen of
the cancellation of the commercial paper and
credited P22,800 to the account of the latter. The amount
represented the marginal deposit, which petitioner had
been required to put up for the unnegotiated portion of the
12
Letter of Credit -- P76,000 for the two hydraulic loaders.
The subject Letter of Credit had become invalid upon the
13
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 Ekman's
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.
Was petitioner liable to respondent?
Be that as it may, we agree with the CA that petitioner
should pay respondent bank the amount the latter
expended for the equipment belatedly delivered by
Ekman and voluntarily received and kept by petitioner.
Respondent bank's right to seek recovery from petitioner
is anchored, not upon the inefficacious Letter of Credit,
but on Article 2142 of the Civil Code which reads as
follows: "Certain lawful, voluntary and unilateral acts give
rise to the juridical relation of quasi-contract to the end
that no one shall be unjustly enriched or benefited at the
expense of another."
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 company's trust receipt arrangement with respondent
bank. 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 respondent's
demand for payment, which came more than three years
after it accepted delivery.
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 and, as in this case,
their rights and obligations may be determined equitably
under the law proscribing unjust enrichment.
WHEREFORE, the Petition is DENIED.
Virtus in infirmitate perficitur! 2 Cor. 12:9
Abad vs. Court of Appeals, 181 SCRA 191
G.R. No. L-42735, January 22, 1990 (GRINO-AQUINO)
FACTS
TOMCO, Inc., now known as Southeast Timber Co.
(Phils.), Inc., applied for, and was granted by the
Philippine Commercial and Industrial Bank (hereafter
called "PCIB"), a domestic letter of credit for P80,000 in
favor of its supplier, Oregon Industries, Inc., to pay for one
Skagit Yarder with accessories. PCIB paid to Oregon
Industries the cost of the machinery against a bill of
exchange for P80,000, 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, with the obligation "to
hold the same in storage" as property of PCIB, with a right
to sell the same for cash provided that the entire proceeds
thereof are turned over to the bank, to be applied against
acceptance(s) and any other indebtedness of TOMCO,
Inc.
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. Consequently, 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, leaving a balance
of P52,000 only, on which the bank should have
computed the interest, bank charges, and attorney's fees.
ISSUE
Is the debtor (or its surety) 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?
HELD
YES. The marginal deposit requirement is a Central Bank
measure to cut off excess currency liquidity which would
create inflationary pressure. It is a collateral security given
by the debtor, and is supposed to be returned to him upon
his compliance with his secured obligation. Consequently,
the bank pays no interest on the marginal deposit, unlike
an ordinary bank deposit which earns interest in the bank.
23

As matter of fact, the marginal deposit requirement for
letters of credit has been discontinued, except in those
cases where the applicant for a letters of credit is not
known to the bank or does not maintain a good credit
standing therein (Bankers Associations of the Philippines
Policy, Rules 6 and 7).
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 his marginal deposit,
would be a clear case of unjust enrichment by the bank.
WHEREFORE, the petition for review is granted.
Consolidated Bank & Trust Corporation vs. Court of
Appeals, 356 SCRA 671
G.R. No. 114286, April 19, 2001 (YNARES-
SANTIAGO)
FACTS
Respondents Continental Cement Corporation
(hereinafter, respondent Corporation) and Gregory T. Lim
(hereinafter, respondent Lim) obtained from petitioner
Consolidated Bank and Trust Corporation Letter of Credit
No. DOM-23277 in the amount of P1,068,150.00 On the
same date, respondent Corporation paid a marginal
deposit of P320,445.00 to petitioner. The letter of credit
was used to purchase around five hundred thousand liters
of bunker fuel oil from Petrophil Corporation, which the
latter delivered directly to respondent Corporation in its
Bulacan plant. In relation to the same transaction, a trust
receipt for the amount of P1,001,520.93 was executed by
respondent Corporation, with respondent Lim as
signatory.
Claiming that respondents failed to turn over the goods
covered by the trust receipt or the proceeds thereof,
petitioner filed a complaint for sum of money with
Virtus in infirmitate perficitur! 2 Cor. 12:9
[3]
application for preliminary attachment before the
Regional Trial Court 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 the amount claimed by petitioner did
not take into account payments already made by
them. Respondent Lim also denied any personal liability
in the subject transactions. In a Supplemental Answer,
respondents prayed for reimbursement of alleged
overpayment to petitioner of the amount of P490,228.90.
ISSUES
1. Are the interest rates charged against the
defendants by the plaintiff proper under the
letter of credit, trust receipt and under
existing rules or regulations of the Central
Bank?
2. Is the transaction involved a loan transaction
or a trust receipt transaction?
HELD
Are the interest rates charged against the defendants
by the plaintiff proper under the letter of credit, trust
receipt and under existing rules or regulations of the
Central Bank?
NO. The interest rates charged are not proper because
the marginal deposit was not deducted first from the
amount of the letter of credit before the interest rates were
reckoned. Petitioner's 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
[8]
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.
Neither do we find error when the lower court and the
Court of Appeals set aside as invalid the floating rate of
interest exhorted by petitioner to be applicable. While it
may be acceptable, for practical reasons given the
fluctuating economic conditions, for banks to stipulate that
interest rates on a loan not be fixed and instead be made
24

dependent upon prevailing market conditions, there
should always be a reference rate upon which to peg such
variable interest rates. An example of such a valid
variable interest rate was found in Polotan, Sr. v. Court of
[10]
Appeals. In that case, the contractual provision stating
that "if there occurs any change in the prevailing market
rates, the new interest rate shall be the guiding rate in
computing the interest due on the outstanding obligation
without need of serving notice to the Cardholder other
than the required posting on the monthly statement
[11]
served to the Cardholder" was considered valid. The
aforequoted provision was upheld notwithstanding that it
may partake of the nature of an escalation clause,
because at the same time it provides for the decrease in
the interest rate in case the prevailing market rates dictate
its reduction. In other words, unlike the stipulation subject
of the instant case, the interest rate involved in
the Polotan case is designed to be based on the
prevailing market rate. On the other hand, a stipulation
ostensibly signifying an agreement to "any increase or
decrease in the interest rate," without more, cannot be
accepted by this Court as valid for it leaves solely to the
creditor the determination of what interest rate to charge
against an outstanding loan.
Is the transaction involved a loan transaction or a
trust receipt transaction?
It was a loan transaction. The recent case of Colinares
[12]
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.
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,
[13]
1982. Further, the oil was used up by respondent
Corporation in its normal operations by August,
[14]
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.
The danger in characterizing a simple loan as a trust
receipt transaction was explained in Colinares, to wit:
“The Trust Receipts Law does not seek to enforce
payment of the loan, rather it 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. Here, it is crystal clear that on the part of
Virtus in infirmitate perficitur! 2 Cor. 12:9
Petitioners there was neither dishonesty nor abuse of
confidence in the handling of money to the prejudice of
PBC. Petitioners continually endeavored to meet their
obligations, as shown by several receipts issued by PBC
acknowledging payment of the loan.
The Information charges Petitioners with 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 Petitioners' situation. Petitioners
employed no artifice in dealing with PBC and never did
they evade payment of their obligation nor attempt to
abscond. Instead, Petitioners sought favorable terms
precisely to meet their obligation.”
Similarly, respondent Corporation cannot be said to have
been dishonest in its dealings with petitioner. Neither has
it been shown that it has evaded payment of its
obligations. Indeed, it continually endeavored to meet the
same, as shown by the various receipts issued by
petitioner acknowledging payment on the loan. Certainly,
the payment of the sum of P1,832,158.38 on a loan with
a principal amount of only P681,075.93 negates any
badge of dishonesty, abuse of confidence or mishandling
of funds on the part of respondent Corporation, which are
the gravamen of a trust receipt violation. Furthermore,
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.
WHEREFORE, in view of all the foregoing, the instant
Petition for Review is DENIED.
Marphil Export Corporation and Ireneo Lim v. Allied
Banking Corporation, substituted by Philippine
National Bank
G.R. No. 187922, September 21, 2016, (JARDELEZA)
FACTS
The transaction involved in this petition is the export of
cashew nuts to Intan Trading Ltd. Hongkong (Intan) in
Llong Kong. Upon application of Intan, Nanyang
Commercial Bank (Nanyang Bank), a bank based in
China, issued irrevocable letters of credit. These were
Letter of Credit (L/C) No. 22518 and L/C No. 21970, with
Marphil as beneficiary and Allied Bank as correspondent
[14]
bank. These covered two (2) separate purchase
contracts/orders for cashew nuts made by Intan.
25

It was the second order covered by L/C No. 21970 that
encountered problems. When Intan placed a second
order for cashew nuts, Marphil availed additional loans in
their credit line evidenced by PN No. 0100-88-
[16]
02463 (PN No. 2463) for P500,000.00 and PN No.
[17]
0100-88-02730 (PNNo. 2730) for P500,000.00. Similar
to the previous transaction, Intan applied for and opened
L/C No. 21970 with Nanyang Bank in the amount of
US$185,000.00, with Marphil as the beneficiary and Allied
[18]
Bank as correspondent bank. After receiving the
export; documents including the draft issued by Marphil,
Allied Bank credited Marphil in the amount of
P1,913,763.45, the peso value of the amount in the letter
of credit.
However, on July 2, 1988, Allied Bank informed Marphil
that it received a cable from Nanyang Bank noting some
[20]
discrepancies in the shipping documents. On July 16,
1988, Allied Bank again informed Marphil that it received
another cable from Nanyang Bank still noting the
discrepancies and that Intan refused to accept the
[21]
discrepancies. Consequently, Nanyang Bank refused
to reimburse Allied Bank the amount the latter had
credited in Marphil's credit line. In its debit memo, Allied
Bank informed Marphil of the dishonor of L/C No. 21970
and that it was reversing the earlier credit entry of
P1,913,763.45.
Allied Bank debited on Maprhil's credit line in the amount
of P1,913,763.45. Marphil claims that Allied Bank had no
authority to debit the amount equivalent to the face value
of L/C No. 21970 since the latter is directly liable for it.
ISSUE
Did Allied Bank act as a confirming bank, making
itself directly liable for Marphil, so that it cannot
validly debit on Maprhil's credit line in the amount of
P1,913,763.45 as it became Allied Bank’s liability?
HELD
NO. In order to consider a correspondent bank as a
confirming bank, it must have assumed a direct obligation
to the seller as if it had issued the letter of credit
[53]
itself. We said that "[i]f the [correspondent bank] was a
confirming bank, then a categorical declaration should
have been stated in the letter of credit that the
[correspondent bank] is to honor all drafts drawn in
[54]
conformity with the letter of credit." Thus, if we were to
hold Allied Bank liable to Marphil (which would result in a
finding that the former's debit from the latter's account is
wrong) based on the rule of strict compliance, it must be
because Allied Bank acted as confirming bank under the
language of L/C No. 21970.
In finding that Allied Bank, as correspondent bank, did not
act as confirming bank; the CA reviewed the instructions
of Nanyang Bank to Allied Bank in L/C No. 21970. It found
that based on the instructions, there is nothing to support
Marphil's argument that Allied Bank undertook, as its own,
Nanyang Bank's obligations in the letter of credit:
Virtus in infirmitate perficitur! 2 Cor. 12:9
In the case of [Bank of America], the functions assumed
by a correspondent bank are classified according to the
obligations taken up by it. In the case of a notifying bank,
the correspondent bank assumes no liability except to
notify and/or transmit to the beneficiary the existence of
the L/C. A negotiating bank is a correspondent bank which
buys or discounts a draft under the L/C. Its liability is
dependent upon the stage of the negotiation. If before
negotiation, it has no liability with respect to the seller but
after negotiation, a contractual relationship will then
prevail between the negotiating bank and the seller. A
confirming bank is a correspondent bank which assumes
a direct obligation to the seller and its liability is a primary
one as if the correspondent bank itself had issued the L/C.
In the instant case, the letter of Nanyang to Allied provided
the following instructions: 1) the negotiating bank is kindly
requested to forward all documents to Nanyang in one lot;
2) in reimbursement for the negotiation(s), Nanyang shall
remit cover to Allied upon receipt of documents in
compliance with the terms and conditions of the credit; 3)
the drafts drawn must be marked "drawn under Nanyang
Commercial Bank"; and 4) to advise beneficiary.
From the above-instructions, it is clear that Allied did
not undertake to assume the obligation of Nanyang to
Marphil as its own, as if it had itself issued the L/C. At
most, it can only be a discounting bank which bought the
drafts under the L/C. Following then the rules laid down in
the case of Bank of America, a negotiating bank has a
right of recourse against the issuing bank, and until
reimbursement is obtained, the drawer of the draft
[55]
continues to assume a contingent liability thereon. x x x
In this regard, this issue of whether Allied Bank confirmed
L/C No. 21970 and assumed direct obligation on it is a
question of fact that was resolved by both RTC and CA in
the negative. Factual findings of the trial court affirmed by
the CA are final and conclusive and may not be reviewed
[58]
on appeal. Here, there is no reason to deviate from
these findings of the RTC and CA.
In any event, we find that Allied Bank may seek
reimbursement of the amount credited to Marphil's
account on an independent obligation it undertook under
the Letter Agreement.
WHEREFORE, the petition for review
on certiorari is PARTLY GRANTED.
26
 Virtus in infirmitate perficitur! 2 Cor. 12:9

iv. Advising/Notifying Bank discrepancies in the shipment vis-à-vis the order

v. Paying Bank specifications of Monet.
vi. Confirming Bank
ISSUE
Bank of America vs. Court of Appeals, ibid.
(**refer to discussion above) Does Land Bank’s payment to suppliers despite
discrepancies in the shipment render it liable for
mismanagement of the Beautilike account of Monet?
Feati Bank and Trust Company vs. Court of Appeals,
ibid. HELD
(**refer to discussion above)
NO. Our ruling in Bank of America, NT & SA v. Court of
[21]
Appeals, is pertinent: (refer to discussions above with
5. Basic Principles of Letter of Credit ***) What characterizes letters of credit, as distinguished
from other accessory contracts, is the engagement of
a. Doctrine of Independence the issuing bank to pay the seller once the draft and the
required shipping documents are presented to it. In turn,
i. In commercial letter of credit this arrangement assures the seller of prompt payment,
independent of any breach of the main sales contract. By
this so-called “independence principle,” the bank
BPI vs. De reny Fabrics, ibid. determines compliance with the letter of credit only
(**refer to discussion above) by examining the shipping documents presented; it is
precluded from determining whether the main
contract is actually accomplished or not.
Land Bank of the Philippines vs. Monet’s Export and
Manufacturing Corp., 453 SCRA 173 (2005) Moreover, Article 3 of the Uniform Customs and Practice
G.R. No. 161865, March 10, 2005 (YNARES- (UCP) for Documentary Credits provides that credits, by
SANTIAGO) their nature, are separate transactions from the sales or
other contract(s) on which they may be based and banks
FACTS are in no way concerned with or bound by such
contract(s), even if any reference whatsoever to such
Petitioner, Land Bank of the Philippines (Land Bank), and contract(s) is included in the credit. Consequently, the
Monet’s Export and Manufacturing Corporation (Monet) undertaking of a bank to pay, accept and pay draft(s) or
executed an Export Packing Credit Line negotiate and/or fulfill any other obligation under the credit
[4]
Agreement under which Monet was given a credit line in is not subject to claims or defenses by the applicant
the amount of P250,000.00, secured by the proceeds of resulting from his relationships with the issuing bank or
[5]
its export letters of credit, the continuing guaranty of the the beneficiary.
spouses Vicente V. Tagle, Sr. and Ma. Consuelo G.
[6]
Tagle, and the third party mortgage executed by Pepita In particular, Article 15 of the UCP states:
[7]
C. Mendigoria.
Banks assume no liability or responsibility for the form,
The credit line agreement was renewed and amended sufficiency, accuracy, genuineness, falsification or legal
[8]
several times until it was increased to effect of any documents, or for the general and/or
[9]
P5,000,000.00. Owing to the continued failure and particular conditions stipulated in the documents or
refusal of Monet, notwithstanding repeated demands, to superimposed thereon; nor do they assume any
pay its indebtedness to Land Bank, which have ballooned liability or responsibility for the description, weight,
[10]
to P11,464,246.19 by August 31, 1992, a quality, condition, packing, delivery, value or
[11]
complaint for collection of sum of money with prayer existence of the goods represented by any
for preliminary attachment was filed by Land Bank with documents, or for the good faith or acts and/or
the Regional Trial Court of Manila, docketed as Civil Case omissions, solvency, performance or standing of the
[12]
No. 93-64350. consignor, the carriers, or the insurers of the goods, or
any other person whomsoever. (Emphasis supplied)
In their joint Answer with Compulsory
[13]
Counterclaim, Monet and the Tagle spouses alleged, In Transfield Philippines, Inc. v. Luzon Hydro Corporation,
[22]
among others, that Land Bank made unauthorized et al., we held that the engagement of the issuing bank
payments on their import letter of credit to Beautilike is to pay the seller or beneficiary of the credit once the
(H.K.) Ltd. in the amount of US$38,768.40, which draft and the required documents are presented to it. The
seriously damaged the business interests of Monet. so-called “independence principle” assures the seller or
the beneficiary of prompt payment independent of any
As regards the Beautilike account, the trial court and the breach of the main contract and precludes the issuing
Court of Appeals held that Land Bank failed to protect bank from determining whether the main contract is
Monet’s interest when it paid the suppliers despite actually accomplished or not.

27

For, if the letter of credit is drawable only after the
settlement of any dispute on the main contract entered
into by the applicant of the said letter of credit and the
beneficiary, then there would be no practical and
beneficial use for letters of credit in commercial
transactions.
Accordingly, we find 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 conform with what the letter of
credit requires, it is duty bound to pay the seller, as it did
in this case.
Thus, no fault or acts of mismanagement can be attributed
to Land Bank relative to Monet’s import letter of credit. Its
actions find solid footing on the legal principles and
jurisprudence earlier discussed.
WHEREFORE, the instant petition is GRANTED.
Philippine National Bank vs. San Miguel Corporation
G.R. No. 186063, January 15, 2014, (PERALTA)
FACTS
On July 1, 1996, respondent San Miguel Corporation
(SMC, for brevity) entered into an Exclusive Dealership
Agreement with a certain Rodolfo R. Goroza (Goroza,
hereafter), wherein the latter was given by SMC the right
to trade, deal, market or otherwise sell its various beer
products.
Goroza applied for a credit line with SMC, but one of the
requirements for the credit line was a letter of credit. Thus,
Goroza applied [for] and was granted a letter of credit by
the PNB in the amount of two million pesos
(P2,000,000.00). Under the credit agreement, the PNB
has the obligation to release the proceeds of Goroza's
credit line to SMC upon presentation of the invoices and
official receipts of Goroza's purchases of SMC beer
products to the PNB, Butuan Branch.
On August 1, 1996, Goroza availed of his credit line with
PNB and started selling SMC's beer products x x x.
On February 11, 1997, Goroza applied for an additional
credit line with the PNB. The latter granted Goroza a one
(1) year revolving credit line in the amount not exceeding
two million four hundred [thousand] pesos
(P2,400,000.00). Thus, Goroza's total [credit line]
reached four million four hundred thousand pesos
(P4,400,000.00) x x x. Initially, Goroza was able to pay his
credit purchases with SMC x x x. Sometime in January
1998, however, Goroza started to become delinquent with
his accounts.
Virtus in infirmitate perficitur! 2 Cor. 12:9
Demands to pay the amount of three million seven
hundred twenty-two thousand four hundred forty pesos
and 88/100 (P3,722,440.88) were made by SMC against
Goroza and PNB, but neither of them paid. Thus, on April
23, 2003, SMC filed a Complaint for collection of sum of
money against PNB and Goroza with the respondent
Regional Trial Court Branch 3, Butuan City.
RTC rendered decision finding Goroza solely liable. PNB
[14]
filed an Urgent Motion to Terminate Proceedings on the
ground that a decision was already rendered on May 10,
2005 finding Goroza solely liable.
ISSUE
Is PNB freed from its liability under the letter of credit
upon RTC’s judgment pronouncing Goroza solely
liable to SMC?
HELD
NO. In this regard, this Court's disquisition on the import
of a letter of credit, in the case of Transfield Philippines,
[26]
Inc. v. Luzon Hydro Corporation, as correctly cited by
the CA, is instructive, to wit:
By definition, a letter of credit is a written instrument
whereby the writer requests or authorizes the addressee
to pay money or deliver goods to a third person and
assumes responsibility for payment of debt therefor to the
addressee. A letter of credit, however, changes its nature
as different transactions occur and if carried through to
completion ends up as a binding contract between the
issuing and honoring banks without any regard or relation
to the underlying contract or disputes between the parties
thereto.
Thus, 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. Under this principle, banks assume
no liability or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor
do they assume any liability or responsibility for the
description, quantity, weight, quality, condition, packing,
delivery, value or existence of the goods represented by
any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the
consignor, the carriers, or the insurers of the goods, or
any other person whomsoever.
As discussed above, 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
28

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
[27]
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.
WHEREFORE, the instant petition is DENIED.
The Hongkong & Shanghai Banking Corporation,
Limited v. National Steel Corporation And Citytrust
Banking Corporation (Now Bank Of The Philippine
1
Islands
G.R. No. 183486, February 24, 2016, (JARDELEZA)
FACTS
Respondent National Steel Corporation (NSC) entered
into an Export Sales Contract (the Contract) with Klockner
[1]
East Asia Limited (Klockner) on October 12, 1993. NSC
sold 1,200 metric tons of prime cold rolled coils to
Klockner under FOB ST Iligan terms. In accordance with
the requirements in the Contract, Klockner applied for an
irrevocable letter of credit with HSBC in favor of NSC as
the beneficiary. On October 22, 1993, HSBC issued an
irrevocable and onsight letter of credit no. HKH 239409
[2]
(the Letter of Credit) in favor of NSC. The Letter of Credit
stated that it is governed by the International Chamber of
Commerce Uniform Customs and Practice for
Documentary Credits, Publication No. 400 (UCP 400).
On November 21, 1993, NSC, through Emerald
Forwarding Corporation, loaded and shipped the cargo of
prime cold rolled coils on board MV Sea Dragon under
China Ocean Shipping Company Bill of Lading No. HKG
266001. The cargo arrived in Hongkong on November 25,
[7]
1993.
NSC coursed the collection of its payment from Klockner
through City Trust Banking Corporation (City Trust). NSC
had earlier obtained a loan from City Trust secured by the
[8]
proceeds of the Letter of Credit issued by HSBC.
On November 29, 1993, City Trust sent a collection order
(Collection Order) to HSBC respecting the collection of
payment from Klockner.
Further, the Collection Order stated that proceeds should
be remitted to Standard Chartered Bank of Australia, Ltd.,
Offshore Branch Manila (SCB-M) which was, in turn, in
[11]
charge of remitting the amount to City Trust. On the
same date, City Trust also presented to HSBC the
necessary documents.
1
This 2016 case discusses essentially all the principles underlying a
letter of credit.
Virtus in infirmitate perficitur! 2 Cor. 12:9
HSBC sent a cablegram to SCB-M advising it that
Klockner had refused payment. It then informed SCB-M
that it intends to return the documents to NSC with all the
banking charges for its account.
Klockner persisted in its refusal to pay. Thus, on February
17, 1994, HSBC returned the documents to
[31]
CityTrust. In a letter accompanying the returned
documents, HSBC stated that it considered itself
discharged of its duty under the transaction. It also asked
for payment of handling charges.
ISSUE
Who among the parties bears the liability to pay the
amount stated in the Letter of Credit.
HELD
HSBC.
The nature of a letter of credit
A letter of credit is a commercial instrument developed to
address the unique needs of certain commercial
transactions. It is recognized in our jurisdiction and is
[63]
sanctioned under Article 567 of the Code of Commerce
and in numerous jurisprudence defining a letter of credit,
the principles relating to it, and the obligations of parties
arising from it.
[64]
In Bank of America, NT & SA v. Court of Appeals, this
Court defined a letter of credit as "...a financial device
developed by merchants as a convenient and relatively
safe mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who refuses
to part with his goods before he is paid, and a buyer, who
wants to have control of the goods before
[65]
paying." Through a letter of credit, a buyer obtains the
credit of a third party, usually a bank, to provide assurance
[66]
of payment. This, in turn, convinces a seller to part with
his or her goods even before he or she is paid, as he or
she is insured by the third party that he or she will be paid
as soon as he or she presents the documents agreed
[67]
upon.
A letter of credit generally arises out of a separate contract
requiring the assurance of payment of a third party. In a
transaction involving a letter of credit, there are usually
three transactions and three parties. The first transaction,
which constitutes the underlying transaction in a letter of
credit, is a contract of sale between the buyer and the
seller. The contract may require that the buyer obtain a
letter of credit from a third party acceptable to the seller.
The obligations of the parties under this contract are
governed by our law on sales.
The second transaction is the issuance of a letter of credit
between the buyer and the issuing bank. The buyer
requests the issuing bank to issue a letter of credit naming
29

the seller as the beneficiary. In this transaction, the
issuing bank undertakes to pay the seller upon
presentation of the documents identified in the letter of
credit. The buyer, on the other hand, obliges himself or
herself to reimburse the issuing bank for the payment
made. In addition, this transaction may also include a fee
[68]
for the issuing bank's services. This transaction
constitutes an obligation on the part of the issuing bank to
perform a service in consideration of the buyer's payment.
The obligations of the parties and their remedies in cases
of breach are governed by the letter of credit itself and by
our general law on obligations, as our civil law finds
[69]
suppletory application in commercial documents.
The third transaction takes place between the seller and
the issuing bank. The issuing bank issues the letter of
credit for the benefit of the seller. The seller may agree to
ship the goods to the buyer even before actual payment
provided that the issuing bank informs him or her that a
letter of credit has been issued for his or her benefit. This
means that the seller can draw drafts from the issuing
bank upon presentation of certain documents identified in
the letter of credit. The relationship between the issuing
bank and the seller is not strictly contractual since there is
no privity of contract nor meeting of the minds between
[70]
them. It also does not constitute a stipulation pour
autrui in favor of the seller since the issuing bank must
honor the drafts drawn against the letter of credit
regardless of any defect in the underlying
[71]
contract. Neither can it be considered as an
assignment by the buyer to the seller-beneficiary as the
[72]
buyer himself cannot draw on the letter. From its
inception, only the seller can demand payment under the
letter of credit. It is also not a contract of suretyship or
guaranty since it involves primary liability in the event of
[73]
default. Nevertheless, while the relationship between
the seller-beneficiary and the issuing bank is not strictly
contractual, strict payment under the terms of a letter of
[74]
credit is an enforceable right. This enforceable right
finds two legal underpinnings. First, letters of credit, as will
be further explained, are governed by recognized
international norms which dictate strict compliance with its
terms. Second, the issuing bank has an existing
agreement with the buyer to pay the seller upon proper
presentation of documents. Thus, as the law on
[75]
obligations applies even in commercial documents, the
issuing bank has a duty to the buyer to honor in good faith
its obligation under their agreement. As will be seen in the
succeeding discussion, this transaction is also governed
by international customs which this Court has recognized
[76]
in this jurisdiction.
In simpler terms, the various transactions that give rise to
a letter of credit proceed as follows: Once the seller ships
the goods, he or she obtains the documents required
under the letter of credit. He or she shall then present
these documents to the issuing bank which must then pay
the amount identified under the letter of credit after it
ascertains that the documents are complete. The issuing
bank then holds on to these documents which the buyer
needs in order to claim the goods shipped. The buyer
reimburses the issuing bank for its payment at which point
the issuing bank releases the documents to the buyer.
Virtus in infirmitate perficitur! 2 Cor. 12:9
The buyer is then able to present these documents in
order to claim the goods. At this point, all the transactions
are completed. The seller received payment for his or her
performance of his obligation to deliver the goods. The
issuing bank is reimbursed for the payment it made to the
seller. The buyer received the goods purchased.
Owing to the complexity of these contracts, there may be
a correspondent bank which facilitates the ease of
completing the transactions. A correspondent bank may
be a notifying bank, a negotiating bank or a confirming
bank depending on the nature of the obligations
[77]
assumed. A notifying bank undertakes to inform the
seller-beneficiary that a letter of credit exists. It may also
have the duty of transmitting the letter of credit. As its
obligation is limited to this duty, it assumes no liability to
[78]
pay under the letter of credit. A negotiating bank, on the
other hand, purchases drafts at a discount from the seller-
beneficiary and presents them to the issuing bank for
[79]
payment. Prior to negotiation, a negotiating bank has
no obligation. A contractual relationship between the
negotiating bank and the seller-beneficiary arises only
after the negotiating bank purchases or discounts the
[80]
drafts. Meanwhile, a confirming bank may honor the
letter of credit issued by another bank or confirms that the
[81]
letter of credit will be honored by the issuing bank. A
confirming bank essentially insures that the credit will be
paid in accordance with the terms of the letter of
[82]
credit. It therefore assumes a direct obligation to the
[83]
seller-beneficiary.
Parenthetically, when banks are involved in letters of
credit transactions, the standard of care imposed on
banks engaged in business imbued with public interest
applies to them. Banks have the duty to act with the
highest degree of diligence in dealing with
[84]
clients. Thus, in dealing with the parties in a letter of
credit, banks must also observe this degree of care.
The value of letters of credit in commerce hinges on an
important aspect of such a commercial transaction.
Through a letter of credit, a seller-beneficiary is assured
of payment regardless of the status of the underlying
transaction. International contracts of sales are perfected
and consummated because of the certainty that the seller
will be paid thus making him or her willing to part with the
goods even prior to actual receipt of the amount agreed
upon. The legally demandable obligation of an issuing
bank to pay under the letter of credit, and the enforceable
right of the seller-beneficiary to demand payment, are
indispensable essentials for the system of letters of credit,
if it is to serve its purpose of facilitating commerce. Thus,
a touchstone of any law or custom governing letters of
credit is an emphasis on the imperative that issuing banks
respect their obligation to pay, and that seller-
beneficiaries may reasonably expect payment, in
accordance with the terms of a letter of credit.
Rules applicable to letters of credit
Letters of credit are defined and their incidences
[85]
regulated by Articles 567 to 572 of the Code of
Commerce. These provisions must be read with Article
30

[86]
2 of the same code which states that acts of commerce
are governed by their provisions, by the usages and
customs generally observed in the particular place and, in
the absence of both rules, by civil law. In addition, Article
[87]
50 also states that commercial contracts shall be
governed by the Code of Commerce and special laws and
in their absence, by general civil law.
[88]
The International Chamber of Commerce (ICC) drafted
a set of rules to govern transactions involving letters of
credit. This set of rules is known as the Uniform Customs
and Practice for Documentary Credits (UCP). Since its
first issuance in 1933, the UCP has seen several
revisions, the latest of which was in 2007, known as the
UCP 600. However, for the period relevant to this case,
the prevailing version is the 1993 revision called the UCP
400. Throughout the years, the UCP has grown to
become the worldwide standard in transactions involving
[89]
letters of credit. It has enjoyed near universal
application with an estimated 95% of worldwide letters of
[90]
credit issued subject to the UCP.
In Bank of the Philippine Islands v. De Reny Fabric
[91]
Industries, Inc., this Court applied a provision from the
UCP in resolving a case pertaining to a letter of credit
transaction. This Court explained that the use of
international custom in our jurisdiction is justified by
Article 2 of the Code of Commerce which provides that
acts of commerce are governed by, among others,
usages and customs generally observed. Further, in Feati
[92]
Bank & Trust Company v. Court of Appeals, this Court
ruled that the UCP should be applied in cases where the
letter of credit expressly states that it is the governing
[93]
rule. This Court also held in Feati that the UCP applies
even if it is not incorporated into the letter of the
[94]
credit. The application of the UCP in Bank of Philippine
Islands and in Feati was further affirmed in Metropolitan
[95]
Waterworks and Sewerage System v. Daway where
this Court held that "[l]etters of credit have long been and
are still governed by the provisions of the Uniform
Customs and Practice for Documentary Credit[s] of the
[96]
International Chamber of Commerce." These
precedents highlight the binding nature of the UCP in our
jurisdiction.
Thus, for the purpose of clarity, letters of credit are
[97]
governed primarily by their own provisions, by laws
[98]
specifically applicable to them, and by usage and
[99]
custom. Consistent with our rulings in several
[100]
cases, usage and custom refers to UCP 400. When
the particular issues are not covered by the provisions of
the letter of credit, by laws specifically applicable to them
and by UCP 400, our general civil law finds suppletory
[101]
application.
Applying this set of laws and rules, this Court rules that
HSBC is liable under the provisions of the Letter of Credit,
in accordance with usage and custom as embodied in
UCP 400, and under the provisions of general civil law.
HSBC's Liability
Virtus in infirmitate perficitur! 2 Cor. 12:9
The Letter of Credit categorically stated that it is subject
to UCP 400, to wit:
Except so far as otherwise expressly stated, this
documentary credit is subject to uniform Customs and
Practice for Documentary Credits (1983 Revision),
International Chamber of Commerce Publication No.
[102]
400.
From the moment that HSBC agreed to the terms of the
Letter of Credit - which states that UCP 400 applies - its
actions in connection with the transaction automatically
became bound by the rules set in UCP 400. Even
assuming that URC 322 is an international custom that
has been recognized in commerce, this does not change
the fact that HSBC, as the issuing bank of a letter of credit,
undertook certain obligations dictated by the terms of the
Letter of Credit itself and by UCP 400. In Feati, this Court
applied UCP 400 even when there is no express
stipulation in the letter of credit that it governs the
[103]
transaction. On the strength of our ruling in Feati, we
have the legal duty to apply UCP 400 in this case
independent of the parties' agreement to be bound by it.
UCP 400 states that an irrevocable credit payable on
sight, such as the Letter of Credit in this case, constitutes
a definite undertaking of the issuing bank to pay, provided
that the stipulated documents are presented and that the
terms and conditions of the credit are complied
[104]
with. Further, UCP 400 provides that an issuing bank
has the obligation to examine the documents with
[105]
reasonable care. Thus, when City Trust forwarded the
Letter of Credit with the attached documents to LISBC, it
had the duty to make a determination of whether its
obligation to pay arose by properly examining the
documents.
In its petition, HSBC argues that it is not UCP 400 but
[106]
URC 322 that should govern the transaction. URC 322
[107]
is a set of norms compiled by the ICC. It was drafted
by international experts and has been adopted by the ICC
members. Owing to the status of the ICC and the
international representation of its membership, these
rules have been widely observed by businesses
throughout the world. It prescribes the collection
procedures, technology, and standards for handling
[108]
collection transactions for banks. Under the facts of
this case, a bank acting in accordance with the terms of
URC 322 merely facilitates collection. Its duty is to forward
the letter of credit and the required documents from the
entity seeking payment to another entity which has the
duty to pay. The bank incurs no obligation other than as a
collecting agent. This is different in the case of an issuing
bank acting in accordance with UCP 400. In this case, the
issuing bank has the duty to pay the amount stated in the
letter of credit upon due presentment. HSBC claims that
while UCP 400 applies to letters of credit, it is also
common for beneficiaries of such letters to seek collection
under URC 322. HSBC further claims that URC 322 is an
[109]
accepted custom in commerce.
HSBC's argument is without merit. We note that HSBC
failed to present evidence to prove that URC 322
31

constitutes custom and usage recognized in commerce.
Neither was there sufficient evidence to prove that
beneficiaries under a letter of credit commonly resort to
collection under URC 322 as a matter of industry practice.
HSBC claims that the testimony of its witness Mr. Lincoln
MacMahon (Mr. MacMahon) suffices for this
[110]
purpose. However, Mr. MacMahon was not presented
as an expert witness capable of establishing the existing
banking and commercial practice relating to URC 322 and
letters of credit. Thus, this Court cannot hold that URC
322 and resort to it by beneficiaries of letters of credit are
[111]
customs that demand application in this case.
HSBC's position that URC 322 applies, thus allowing it,
the issuing bank, to disregard the Letter of Credit, and
merely demand collection from Klockner cannot be
countenanced. Such an argument effectively asks this
Court to give imprimatur to a practice that undermines the
value and reliability of letters of credit in trade and
commerce. The entire system of letters of credit rely on
the assurance that upon presentment of the proper
documents, the beneficiary has an enforceable right and
the issuing bank a demandable obligation, to pay the
amount agreed upon. Were a party to the transaction
allowed to simply set this aside by the mere invocation of
another set of norms related to commerce - one that is not
established as a custom that is entitled to recognition by
this Court - the sanctity of letters of credit will be
jeopardized. To repeat, any law or custom governing
letters of credit should have, at its core, an emphasis on
the imperative that issuing banks respect their obligation
to pay and that seller-beneficiaries may reasonably
expect payment in accordance with the terms of a letter of
credit. Thus, the CA correctly ruled, to wit:
At this juncture, it is significant to stress that an
irrevocable letter of credit cannot, during its lifetime, be
cancelled or modified without the express permission of
the beneficiary. Not even partial payment of the obligation
by the applicant-buyer would amend or modify the
obligation of the issuing bank. The subsequent
correspondences of [CityTrust] to HSBC, thus, could not
in any way affect or amend the letter of credit, as it was
not a party thereto. As a notifying bank, it has nothing to
do with the contract between the issuing bank and the
buyer regarding the issuance of the letter of
[112]
credit. (Citations omitted)
The provisions in the Civil Code and our jurisprudence
[113]
apply suppletorily in this case. When a party knowingly
and freely binds himself or herself to perform an act, a
juridical tie is created and he or she becomes bound to
fulfill his or her obligation. In this case, HSBC's obligation
arose from two sources. First, it has a contractual duty to
Klockner whereby it agreed to pay NSC upon due
presentment of the Letter of Credit and the attached
documents. Second, it has an obligation to NSC to honor
the Letter of Credit. In complying with its obligation, HSBC
had the duty to perform all acts necessary. This includes
a proper examination of the documents presented to it
and making a judicious inquiry of whether City Trust, in
behalf of NSC, made a due presentment of the Letter of
Credit.
Virtus in infirmitate perficitur! 2 Cor. 12:9
Further, as a bank, HSBC has the duty to observe the
highest degree of diligence. In all of its transactions, it
must exercise the highest standard of care and must fulfill
its obligations with utmost fidelity to its clients. Thus, upon
receipt of City Trust's Collection Order with the Letter of
Credit, HSBC had the obligation to carefully examine the
documents it received. Had it observed the standard of
care expected of it, HSBC would have discovered that the
Letter of Credit is the very same document which it issued
upon the request of Klockner, its client. Had LISBC taken
the time to perform its duty with the highest degree of
diligence, it would have been alerted by the fact that the
documents presented to it corresponded with the
documents stated in the Letter of Credit, to which HSBC
freely and knowingly agreed. HSBC ought to have noticed
the discrepancy between City Trust's request for
collection under URC 322 and the terms of the Letter of
Credit. Notwithstanding any statements by City Trust in
the Collection Order as to the applicable rules, FISBC had
the independent duty of ascertaining whether the
presentment of the Letter of Credit and the attached
documents gave rise to an obligation which it had to
Klockner (its client) and NSC (the beneficiary).
Regardless of any error that City Trust may have
committed, the standard of care expected of LISBC
dictates that it should have made a separate
determination of the significance of the presentment of the
Letter of Credit and the attached documents. A bank
exercising the appropriate degree of diligence would
have, at the very least, inquired if NSC was seeking
payment under the Letter of Credit or merely seeking
collection under URC 322. In failing to do so, HSBC fell
below the standard of care imposed upon it.
This Court therefore rules that CityTrust's presentment of
the Letter of Credit with the attached documents in behalf
of NSC, constitutes due presentment. Under the terms of
the Letter of Credit, LISBC undertook to pay the amount
of US$485,767.93 upon presentment of the Letter of
[114]
Credit and the required documents. In accordance
with this agreement, NSC, through CityTrust, presented
the Letter of Credit and the following documents: (1) Letter
of Credit; (2) Bill of Lading; (3) Commercial Invoice; (4)
Packing List; (5) Mill Test Certificate; (6) NSC's TELEX to
Klockner on shipping details; (7) Beneficiary's Certificate
of facsimile transmittal of documents; (8) Beneficiary's
Certificate of air courier transmittal of documents; and (9)
[115]
DHL Receipt No. 669988911 and Certificate of Origin.
In transactions where the letter of credit is payable on
sight, as in this case, the issuer must pay upon due
presentment. This obligation is imbued with the character
of definiteness in that not even the defect or breach in the
underlying transaction will affect the issuing bank's
[116]
liability. This is the Independence Principle in the law
on letters of credit. Article 17 of UCP 400 explains that
under this principle, an issuing bank assumes no liability
or responsibility "for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon..."
Thus, as long as the proper documents are presented, the
issuing bank has an obligation to pay even if the buyer
32
 Virtus in infirmitate perficitur! 2 Cor. 12:9

should later on refuse payment. Hence, Klockner's refusal
to pay carries no effect whatsoever on HSBC's obligation
to pay under the Letter of Credit. To allow HSBC to refuse
to honor the Letter of Credit simply because it could not
collect first from Klockner is to countenance a breach of
the Independence Principle.
HSBC's persistent refusal to comply with its obligation
notwithstanding due presentment constitutes delay
[117]
contemplated in Article 1169 of the Civil Code.
provision states that a party to an obligation incurs in
delay from the time the other party makes a judicial or
extrajudicial demand for the fulfillment of the obligation.
We rule that the due presentment of the Letter of Credit
and the attached documents is tantamount to a demand.
IISBC incurred in delay when it failed to fulfill its obligation
despite such a demand.
[118]
Under Article 1170 of the Civil Code, a party in delay
is liable for damages. The extent of these damages
[119]
pertains to the pecuniary loss duly proven. In this
case, such damage refers to the losses which NSC
incurred in the amount of US$485,767.93 as stated in the
Letter of Credit. We also award interest as indemnity for
the damages incurred in the amount of six percent (6%)
[120]
from the date of NSC's extrajudicial demand.
interest in the amount of six percent (6%) is also awarded
from the time of the finality of this decision until full
[121]
payment.
One of the obligations of an agent is to carry out the
agency in accordance with the instructions of the
principal.
Nevertheless while this Court recognizes that CityTrust
committed a breach of its obligation to NSC, this carries
no implications on the clear liability of HSBC. As this Court
already mentioned, HSBC had a separate obligation that
it failed to perform by reason of acts independent of
This CityTrust's breach of its obligation under its contract of
agency. If CityTrust has incurred any liability, it is to its
principal NSC. However, NSC has not raised any claim
against CityTrust at any point in these proceedings. Thus,
this Court cannot make any finding of liability against City
Trust in favor of NSC.
WHEREFORE, in view of the foregoing, the Assailed
Decision dated November 19, 2007 is AFFIRMED to the
extent that it orders HSBC to pay NSC the amount of
US$485,767.93.
ii. In Standby letter of credit
An Insular Bank of Asia & America vs. Intermediate
Appellate Court, 167 SCRA 450 (1988)
(**refer to discussion above)

Having been remiss in its obligations under the applicable b. Fraud Exception Principle
law, rules and jurisprudence, HSBC only has itself to
blame for its consequent liability to NSC.
Transfield Philippines, Inc. vs. Luzon Hydro Corp.
However, this Court finds that there is no basis for the Ibid.
CA's grant of attorney's fees in favor of NSC. Article 2208 (**refer to discussion above)
[122]
of the Civil Code enumerates the grounds for the award
of attorney's fees. This Court has explained that the award
of attorney's fees is an exception rather than the c. Doctrine of Strict Compliance
[123]
rule. The winning party is not automatically entitled to
attorney's fees as there should be no premium on the right Feati Bank & Trust Company vs. Court of Appeals,
[124]
to litigate. While courts may exercise discretion in ibid.
granting attorney's fees, this Court has stressed that the (**refer to discussion above)
grounds used as basis for its award must approximate as
[125]
closely as possible the enumeration in Article 2208. Its
award must have sufficient factual and legal
[126]
justifications. This Court rules that none of the grounds
stated in Article 2208 are present in this case. NSC has
not cited any specific ground nor presented any particular
fact to warrant the award of attorney's fees.

CityTrust's Liability

When NSC obtained the services of CityTrust in collecting

under the Letter of Credit, it constituted CityTrust as its
agent. Article 1868 of the Civil Code states that a contract
of agency exists when a person binds himself or herself
"to render some service or to do something in
representation or on behalf of another, with the consent
or authority of the latter." In this case, CityTrust bound
itself to collect under the Letter of Credit in behalf of NSC.

33

II. Trust Receipts Law
1. Definition/Concept of a Trust Receipt
Transaction
a. 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.
Lee vs. Court of Appeals, 375 SCRA 579 (2002)
(**see discussion above)
b. The loan and security features of a trust receipt
Vintola vs. Insular Bank of Asia and America, 150
SCRA 140
G.R. No. 73271, May 29, 1987 (MELENCIO-HERRERA)
FACTS
Spouses Tirso and Loreta Vintola (the VINTOLAS, for
short), doing business under the name and style "Dax Kin
International," 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
[1]
America (IBAA), Cebu City, in the amount of
P40,000.00. 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.
On the same day, August 20, 1975, having received from
Stalin Tan the puka and olive shells worth P40,000.00, the
VINTOLAS executed a Trust Receipt agreement with
IBAA, Cebu City. Under that Agreement, the VINTOLAS
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 in a letter dated January 1,
1976. 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.
Among others, 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
Virtus in infirmitate perficitur! 2 Cor. 12:9
possession thereof to the IBAA, as owner of the goods,
by depositing them with the Court.
ISSUE
Will the relinquishment of the goods to IBAA and
depositing them to the court covered by a Letter of
Credit — Trust Receipt Agreement extinguish the
obligation of the spouses?
HELD
NO. The foregoing submission overlooks the nature and
mercantile usage of the transaction involved. A letter of
credit-trust receipt arrangement is endowed with its own
distinctive features and characteristics. Under that set-up,
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.
Thus, Section 4 of P.D. No. 115 defines a trust receipt
transaction as:
"x x x any transaction by and between a person referred
to in this Decree as the entruster, and another person
referred to in this Decree 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, or for other purposes substantially
equivalent to any one of the following:
1. In the case of goods or documents, (a) to sell the goods
or procure their sale, x x x "
A trust receipt, therefore, is a security agreement,
pursuant to which a bank acquires a "security interest" in
the goods. "It secures an undebtedness and there can
be no such thing as security interest that secures no
[4]
obligation". As defined in our laws:
(h) "Security Interest means a property interest in goods,
documents or instruments to secure performance of some
obligations 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
[5]
or retained for security only."
[6]
As elucidated in Samo vs. People "a trust receipt is
considered as a security transaction intended to aid in
financing importers and retail dealers who do not have
34

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".
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.
"x x x 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
[7]
thereof, x x x "
Since the IBAA is not the factual owner of the goods, the
VTNTOLAS 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. In so arguing, the
VINTOLAS conveniently close their eyes to their
application for a Letter of Credit wherein they expressly
obligated themselves in these terms:
"IN CONSIDERATION THEREOF, I/we promise and
agree to pay you at maturity in Philippine Currency the
equivalent of the above amount or such portion thereof as
may be drawn or paid upon the faith of said credit together
with the usual charges. x x x " (Exhibit "A")
They further agreed that their marginal deposit of
P8,000.00, later increased to P11,000.00 'be applied,
without further proceedings or formalities to pay or reduce
our obligation under this letter of credit or its
corresponding Trust Receipt." (Underlining supplied)
[8]
The foregoing premises considered, it follows that the
acquittal of the VINTOLAS in the Estafa case is no bar to
the institution of a civil action for collection. 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
[9]
Virtus in infirmitate perficitur! 2 Cor. 12:9
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.
WHEREFORE, finding no reversible error in the judgment
appealed from, the same is hereby AFFIRMED.
Rosario Textile Mills Corp. vs. Home Bankers
Savings and Trust Company, 462 SCRA 88
G.R. No. 137232, June 29, 2005 (SANDOVAL-
GUTIERREZ)
FACTS
Petitioners theorize that when petitioner RTMC imported
the raw materials needed for its manufacture, using the
credit line, it was merely acting on behalf of the bank, the
true owner of the goods by virtue of the trust
receipts. Hence, under the doctrine of res perit domino,
the bank took the risk of the loss of said raw
materials. RTMC’s role in the transaction was that of end
user of the raw materials and when it did not accept those
materials as they did not meet the manufacturing
requirements, RTMC made a valid and effective tender of
the goods to the bank. Since the bank refused to accept
the raw materials, RTMC stored them in its
warehouse. When the warehouse and its contents were
gutted by fire, petitioners’ obligation to the bank was
accordingly extinguished.
ISSUES
1. 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?
2. Does the suretyship agreement bind Yuijuico?
HELD
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?
NO. Petitioners conveniently ignores the true nature of its
transaction with the bank. We recall that RTMC filed with
the bank an application for a credit line in the amount of
P10 million, but only P8 million was approved. RTMC
then made withdrawals from this credit line and issued
several promissory notes in favor of 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
[3]
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 customer’s line of
credit is nearly exhausted, he is expected to reduce his
35

indebtedness by payments before making any further
[4]
drawings.
It is thus clear that 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.
[5]
In Samo vs. People, we described a trust receipt 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
[6]
merchandise imported or purchased.”
[7]
In Vintola vs. Insular Bank of Asia and America, we
elucidated further that “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
[8]
security interest that secures no obligation.” Section
3 (h) of the Trust Receipts Law (P.D. No. 115) defines a
“security interest” as follows:
“(h) 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.”
Petitioners’ insistence that the ownership of the raw
materials remained with the bank is untenable. In Sia vs.
[9] [10]
People, Abad vs. Court of Appeals, and PNB vs.
[11]
Pineda, we held that:
“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
[12]
the loan feature thereof...”
Thus, petitioners cannot be relieved of their obligation to
pay their loan in favor of the bank.
Does the suretyship agreement bind Yuijuico?
YES. First, there is no record to support his allegation that
the surety agreement is a “mere formality;” and
Second, as correctly held by the Court of Appeals, the
Suretyship Agreement signed by petitioner Yujuico binds
Virtus in infirmitate perficitur! 2 Cor. 12:9
him. The terms clearly show that he agreed to pay the
bank jointly and severally with RTMC.
WHEREFORE, the petition is DENIED.
c. The loan should be granted to finance
acquisition of the goods under trust receipt. If
loan is granted when entrustee already has
ownership of the goods, transaction only a
simple loan
Colinares vs. Court of Appeals, 339 SCRA 609
G.R. No. 90828, September 5, 2000 (DAVIDE, JR)
FACTS
In 1979 Melvin Colinares and Lordino Veloso (hereafter
Petitioners) were contracted for a consideration of
P40,000 by the Carmelite Sisters of Cagayan de Oro City
to renovate the latter’s convent at Camaman-an, Cagayan
de Oro City.
On 30 October 1979, Petitioners obtained 5,376 SF
Solatone acoustical board 2’x4’x½”, 300 SF tanguile
wood tiles 12”x12”, 260 SF Marcelo economy tiles and 2
gallons UMYLIN cement adhesive from CM Builders
[1]
Centre for the construction project. The following day,
31 October 1979, Petitioners applied for a commercial
[2]
letter of credit with the Philippine Banking Corporation,
Cagayan de Oro City branch (hereafter PBC) in favor of
CM Builders Centre. PBC approved the letter of
[3]
credit for P22,389.80 to cover the full invoice value of
the goods. Petitioners signed a pro-forma trust
[4]
receipt as security. The loan was due on 29 January
1980.
On 31 October 1979, PBC debited P6,720 from
Petitioners’ marginal deposit as partial payment of the
loan.
[10]
Petitioners proposed that the terms of payment of the
loan be modified as follows: P2,000 on or before 3
December 1980, and P1,000 per month starting 31
January 1980 until the account is fully paid. Pending
approval of the proposal, Petitioners paid P1,000 to PBC
[11]
on 4 December 1980, and thereafter P500 on 11
[12] [13]
February 1981, 16 March 1981, and 20 April
[14]
1981. Concurrently with the separate demand for
attorney’s fees by PBC’s legal counsel, PBC continued to
[15]
demand payment of the balance.
On 14 January 1983, Petitioners were charged with the
violation of P.D. No. 115 (Trust Receipts Law) in relation
to Article 315 of the Revised Penal Code.
ISSUE
What is the true nature of the transaction?
36

HELD
A contract of LOAN. Section 4, P.D. No. 115, the Trust
Receipts Law, 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 interest 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 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 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.
There are two possible situations in a trust receipt
transaction. The first is covered by the provision which
refers to money received under the obligation involving
the duty to deliver it (entregarla) to the owner of the
merchandise sold. The second is covered by the provision
which refers to merchandise received under the obligation
[33]
to “return” it (devolvera) to the owner.
Failure of the entrustee to turn over the proceeds of the
sale of the goods, covered by the trust receipt to the
entruster or to return said goods if they were not disposed
of in accordance with the terms of the trust receipt shall
be punishable as estafa under Article 315 (1) of the
[34]
Revised Penal Code, without need of proving intent to
defraud.
A thorough examination of the facts obtaining in the case
at bar reveals that the transaction intended by the parties
was a simple loan, not a trust receipt agreement.
Petitioners received the merchandise from CM Builders
Centre on 30 October 1979. On that day, ownership over
the merchandise was already transferred to Petitioners
who were to use the materials for their construction
project. It was only a day later, 31 October 1979, 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. The bank acquires a “security
interest” in the goods as holder of a security title for the
[35]
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
[36]
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
Virtus in infirmitate perficitur! 2 Cor. 12:9
importer has never owned the goods and is not able to
[37]
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
[38]
merchandise as soon as he has paid its price.
Trust receipt transactions are 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
[39]
merchandise imported or purchased.
The antecedent acts in a trust receipt transaction consist
of the application and approval of the letter of credit, the
making of the marginal deposit and the effective
importation of goods through the efforts of the importer.
PBC attempted to cover up the true delivery date of the
merchandise, yet the trial court took notice even though it
failed to attach any significance to such fact in the
judgment. Despite the Court of Appeals’ contrary view
that the goods were delivered to Petitioners previous to
the execution of the letter of credit and trust receipt, we
find that the records of the case speak volubly and this
fact remains uncontroverted.
The Trust Receipts Law does not seek to enforce
payment of the loan, rather it 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
[45]
the owner. Here, it is crystal clear that on the part of
Petitioners there was neither dishonesty nor abuse of
confidence in the handling of money to the prejudice of
PBC. Petitioners continually endeavored to meet their
obligations, as shown by several receipts issued by PBC
acknowledging payment of the loan.
The Information charges Petitioners with 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 Petitioners’ situation. Petitioners
employed no artifice in dealing with PBC and never did
they evade payment of their obligation nor attempt to
abscond. Instead, Petitioners sought favorable terms
precisely to meet their obligation.
Also noteworthy is the fact that Petitioners are 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
Petitioners from CM Builders Centre. This impresses
upon the trust receipt in question vagueness and
ambiguity, which should not be the basis for criminal
[46]
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
37

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. Eventually, PBC showed its true colors and
admitted that it was only after collection of the money, as
manifested by its Affidavit of Desistance.
WHEREFORE, the challenged Decision and Resolution
are SET ASIDE. Petitioners are hereby ACQUITTED of
the crime charged, i.e., for violation of P.D. No. 115 in
relation to Article 315 of the Revised Penal Code.
Consolidated Bank & Trust Corp. vs. Court of
Appeals, 356 SCRA 671
(**refer to discussion above)
d. The goods must be intended for sale or resale,
otherwise, it is a simple loan
Anthony L. Ng vs. People of the Philippines
G.R. No. 173905, April 23, 2010 (VELASCO, JR)
FACTS
Petitioner 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 of PhP 3,000,000 with Asiatrust
Development Bank, Inc. (Asiatrust).
On May 30, 1997, Asiatrust approved petitioner's loan
application. Petitioner was then required to sign several
documents, among which are the Credit Line Agreement,
Application and Agreement for Irrevocable L/C, Trust
[4]
Receipt Agreements, and Promissory Notes. Though
the Promissory Notes matured on September 18, 1997,
the two (2) aforementioned Trust Receipt Agreements did
not bear any maturity dates as they were left unfilled or in
[5]
blank by Asiatrust.
After petitioner received the goods, consisting of
chemicals and metal plates from his suppliers, he utilized
them to fabricate the communication towers ordered from
him by his clients which were installed in three project
sites, namely: Isabel, Leyte; Panabo, Davao; and
Tongonan.
As petitioner realized difficulty in collecting from his client
Islacom, he failed to pay his loan to Asiatrust. The parties
thereafter held a series of conferences to work out the
problem and to determine a way for petitioner to pay his
debts. However, efforts towards a settlement failed to be
reached.
On March 16, 1999, Remedial Account Officer Ma. Girlie
C. Bernardez filed a Complaint-Affidavit before the Office
of the City Prosecutor of Quezon City. Consequently, on
September 12, 1999, an Information for Estafa, as
Virtus in infirmitate perficitur! 2 Cor. 12:9
defined and penalized under Art. 315, par. 1(b) of the RPC
in relation to Sec. 3, PD 115 or the Trust Receipts Law,
was filed with the RTC.
ISSUE
Is petitioner liable for Estafa under Art. 315, par. 1(b) of
the RPC in relation to PD 115?
HELD
NO. The essential elements of Estafa are: (1) that money,
goods or other personal property is received by the
offender in trust or on commission, or for administration,
or under any obligation involving the duty to make delivery
of or to return it; (2) that there be misappropriation or
conversion of such money or property by the offender, or
denial on his part of such receipt; (3) that such
misappropriation or conversion or denial is to the
prejudice of another; and (4) there is demand by the
[12]
offended party to the offender.
Likewise, Estafa can also be committed in what is called
a "trust receipt transaction" under PD 115, which is
defined as:
Section 4. What constitutes a trust receipts
transaction.--A trust receipt transaction, within the
meaning of this Decree, is any transaction by and
between a person referred to in this Decree as the
entruster, and another person referred to in this Decree
as 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 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 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, or
for other purposes substantially equivalent to any of the
following:
1. In the case of goods or documents: (a) to sell the goods
or procure their sale; or (b) to manufacture or process the
goods with the purpose of ultimate sale: Provided, That,
in the case of goods delivered under trust receipt for the
purpose of manufacturing or processing before its
ultimate sale, the entruster shall retain its title over the
goods whether in its original or processed form until the
entrustee has complied full with his obligation under the
trust receipt; or (c) to load, unload, ship or transship or
otherwise deal with them in a manner preliminary or
necessary to their sale; or
2. In the case of instruments: (a) to sell or procure their
sale or exchange; or (b) to deliver them to a principal; or
38

(c) to effect the consummation of some transactions
involving delivery to a depository or register; or (d) to
effect their presentation, collection or renewal.
The sale of good, documents or instruments by a person
in the business of selling goods, documents or
instruments for profit who, at the outset of transaction,
has, as against the buyer, general property rights in such
goods, documents or instruments, or who sells the same
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 this Decree.
In other words, a trust receipt transaction is one where the
entrustee has the obligation to deliver to the entruster the
price of the sale, or if the merchandise is not sold, to return
the merchandise to the entruster. There are, therefore,
two obligations in a trust receipt transaction: the first refers
to money received under the obligation involving the duty
to turn it over (entregarla) to the owner of the merchandise
sold, while the second refers to the merchandise received
under the obligation to "return" it (devolvera) to the
[13]
owner. A violation of any of these undertakings
constitutes Estafa defined under Art. 315, par. 1(b) of the
RPC, as provided in Sec. 13 of PD 115.
A thorough examination of the facts obtaining in the
instant case, however, reveals that the transaction
between petitioner and Asiatrust is not a trust receipt
transaction but one of simple loan.
PD 115 Does Not Apply
It must be remembered that petitioner 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 Islacom, Smart, and Infocom. In
these contracts, he was commissioned to build, out
of the materials received, steel communication
towers, not to sell them.
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.
[14]
As stressed in Samo v. People, a trust receipt is
considered 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. Similarly,
American Jurisprudence demonstrates that trust receipt
transactions always refer to a method of "financing
[15]
importations or financing sales." The principle is of
course not limited in its application to financing
Virtus in infirmitate perficitur! 2 Cor. 12:9
importations, since the principle is equally applicable to
[16]
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.
Following the precept of the law, such transactions affect
situations wherein the entruster, who owns or holds
absolute title or security interests over specified goods,
documents or instruments, releases the subject goods to
the possession of the entrustee. The release of such
goods to the entrustee is conditioned upon his execution
and delivery to the entruster of a trust receipt wherein the
former binds himself to hold the specific goods,
documents or instruments in trust for the entruster and to
sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster
the proceeds to the extent of the amount owing to the
entruster or the goods, documents or instruments
themselves if they are unsold. Similarly, we held in State
Investment House v. CA, et al. that the entruster is entitled
"only to the proceeds derived from the sale of goods
[17]
released under a trust receipt to the entrustee."
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.
Having established the inapplicability of PD 115, this
Court finds that petitioner's liability is only limited to the
satisfaction of his obligation from the loan. The real intent
of the parties was simply to enter into a simple loan
agreement.
To emphasize, 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 petitioner was
neither an importer nor retail dealer, it should have known
that the said agreement could not possibly apply to
petitioner.
Moreover, this Court finds that petitioner is not liable
for Estafa both under the RPC and PD 115.
Goods Were Not Received in Trust
The first element of Estafa under Art. 315, par. 1(b) of the
RPC requires that the money, goods or other personal
property must be received by the offender in trust or on
commission, or for administration, or under any other
obligation involving the duty to make delivery of, or to
return it. But as we already discussed, the goods received
by petitioner were not held in trust. They were also not
intended for sale and neither did petitioner have the duty
to return them. They were only intended for use in the
fabrication of steel communication towers.
39

No Misappropriation of Goods or Proceeds
The second element of Estafa requires that there be
misappropriation or conversion of such money or property
by the offender, or denial on his part of such receipt.
This is the very essence of Estafa under Art. 315, par.
1(b). The words "convert" and "misappropriated" connote
an act of using or disposing of another's property as if it
were one's own, or of devoting it to a purpose or use
different from that agreed upon. To misappropriate for
one's own use includes not only conversion to one's
personal advantage, but also every attempt to dispose of
[18]
the property of another without a right.
Petitioner argues that there was no misappropriation or
conversion on his part, because his liability for the amount
of the goods subject of the trust receipts arises and
becomes due only upon receipt of the proceeds of the
sale and not prior to the receipt of the full price of the
goods.
Petitioner is correct. Thus, assuming arguendo that the
provisions of PD 115 apply, petitioner is not liable
for Estafabecause Sec. 13 of PD 115 provides that an
entrustee is only liable for Estafa when he fails "to turn
over the proceeds of the sale of the goods x x x covered
by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt x x x in
accordance with the terms of the trust receipt."
The trust receipt entered into between Asiatrust and
petitioner states:
In case of sale I/we agree to hand the proceeds as soon
as received to the BANK to apply against the relative
acceptance (as described above) and for the payment of
any other indebtedness of mine/ours to ASIATRUST
[19]
DEVELOPMENT BANK.
Clearly, petitioner was only obligated to turn over the
proceeds as soon as he received payment. However, the
evidence reveals that petitioner experienced difficulties in
collecting payments from his clients for the
communication towers. Despite this fact, petitioner
endeavored to pay his indebtedness to Asiatrust, which
payments during the period from September 1997 to July
1998 total approximately PhP 1,500,000. Thus, absent
proof that the proceeds have been actually and fully
received by petitioner, his obligation to turn over the same
to Asiatrust never arose.
What is more, under the Trust Receipt Agreement itself,
no date of maturity was stipulated. The provision left blank
by Asiatrust is as follows:
x x x and in consideration thereof, I/we hereby agree to
hold said goods in Trust for the said Bank and as its
property with liberty to sell the same for its account within
________ days from the date of execution of the Trust
[20]
Receipt x x x
Virtus in infirmitate perficitur! 2 Cor. 12:9
In fact, Asiatrust purposely left the space designated for
the date blank, an action which in ordinary banking
transactions would be noted as highly irregular. Hence,
the only way for the obligation to mature was for Asiatrust
to demand from petitioner to pay the obligation, which it
never did.
Again, it also makes the Court wonder as to why Asiatrust
decided to leave the provisions for the maturity dates in
the Trust Receipt agreements in blank, since those dates
are elemental part of the loan.
Reasonable Doubt Exists
In the final analysis, the prosecution failed to prove
beyond reasonable doubt that petitioner was guilty
of Estafa under Art. 315, par. 1(b) of the RPC in relation
to the pertinent provision of PD 115 or the Trust Receipts
Law; thus, his liability should only be civil in nature.
At this point, the ruling of this Court in Colinares v. Court
of Appeals is very apt, thus:
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,
[23]
and is prone to misinterpretation x x x.
Such is the situation in this case.
WHEREFORE, petitioner ANTHONY L. NG is
hereby ACQUITTED of the charge of violation of Art. 315,
par. 1(b) of the RPC in relation to the pertinent provision
of PD 115.
Land Bank of the Philippines vs. Perez
G.R. No. 166884, June 13, 2012 (BRION)
FACTS
Petitioner Land Bank of the Philippines (LBP) is a
government financial institution and the official depository
[3]
of the Philippines. Respondents are the officers and
representatives of Asian Construction and Development
Corporation (ACDC), a corporation incorporated under
Philippine law and engaged in the construction
[4]
business.
On June 7, 1999, LBP filed a complaint for estafa or
violation of Article 315, paragraph 1(b) of the Revised
Penal Code, in relation to P.D. 115, against the
respondents before the City Prosecutor’s Office in Makati
[5]
City. In the affidavit-complaint of June 7, 1999, the
LBP’s Account Officer for the Account Management
Development, Edna L. Juan, stated that LBP extended a
credit accommodation to ACDC through the execution of
an Omnibus Credit Line Agreement
40

[6]
(Agreement) between LBP and ACDC on October 29,
1996. In various instances, ACDC used the Letters of
Credit/Trust Receipts Facility of the Agreement to buy
construction materials. The respondents, as officers and
[7]
representatives of ACDC, executed trust receipts in
connection with the construction materials, with a total
principal amount of P52,344,096.32. The trust receipts
matured, but ACDC failed to return to LBP the proceeds
of the construction projects or the construction materials
subject of the trust receipts. LBP sent ACDC a demand
[8]
letter, dated May 4, 1999, for the payment of its debts,
including those under the Trust Receipts Facility in the
amount of P66,425,924.39. When ACDC failed to comply
with the demand letter, LBP filed the affidavit-complaint.
[9]
The respondents filed a joint affidavit wherein they
stated that they signed the trust receipt documents on or
about the same time LBP and ACDC executed the loan
documents; their signatures were required by LBP for the
release of the loans. The trust receipts in this case do not
contain (1) a description of the goods placed in trust, (2)
their invoice values, and (3) their maturity dates, in
violation of Section 5(a) of P.D. 115. Moreover, they
alleged that ACDC acted as a subcontractor for
government projects such as the Metro Rail Transit, the
Clark Centennial Exposition and the Quezon Power Plant
in Mauban, Quezon. Its clients for the construction
projects, which were the general contractors of these
projects, have not yet paid them; thus, ACDC had yet to
receive the proceeds of the materials that were the
subject of the trust receipts and were allegedly used for
these constructions. As there were no proceeds received
from these clients, no misappropriation thereof could have
taken place.
ISSUES
1. Are the disputed transactions trust receipts?
2. Is misappropriation or abuse of confidence
present?
HELD
Are the disputed transactions trust receipts?
NO. Section 4 of P.D. 115 defines a trust receipt
transaction in this manner:
Section 4. What constitutes a trust receipt transaction. A
trust receipt transaction, within the meaning of this
Decree, is any transaction by and between a person
referred to in this Decree as the entruster, and another
person referred to in this Decree as 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 with the obligation to
turn over to the entruster the proceeds thereof to the
Virtus in infirmitate perficitur! 2 Cor. 12:9
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, or for other purposes substantially
equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods
or procure their sale; or (b) to manufacture or process the
goods with the purpose of ultimate sale: Provided, That,
in the case of goods delivered under trust receipt for the
purpose of manufacturing or processing before its
ultimate sale, the entruster shall retain its title over the
goods whether in its original or processed form until the
entrustee has complied fully with his obligation under the
trust receipt; or (c) to load, unload, ship or tranship or
otherwise deal with them in a manner preliminary or
necessary to their sale[.]
There are two obligations in a trust receipt transaction.
The first is covered by the provision that refers to money
under the obligation to deliver it (entregarla) to the owner
of the merchandise sold. The second is covered by the
provision referring to merchandise received under the
obligation to return it (devolvera) to the owner. Thus,
[22]
under the Trust Receipts Law, intent to defraud is
presumed when (1) the entrustee fails to turn over the
proceeds of the sale of goods covered by the trust receipt
to the entruster; or (2) when the entrustee fails to return
the goods under trust, if they are not disposed of in
[23]
accordance with the terms of the trust receipts.
In all trust receipt transactions, both obligations on the
part of the trustee exist in the alternative – the return of
the proceeds of the sale or the return or recovery of the
[24]
goods, whether raw or processed. 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
[25]
loan, where the borrower is obligated to pay the bank
the amount spent for the purchase of the goods.
We note in this regard that at the onset of these
transactions, 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
[26]
Clark Centennial Exposition Project. LBP had in fact
authorized the delivery of the materials on the
construction sites for these projects, as seen in the letters
[27]
of credit it attached to its complaint. 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.
Notably, despite the allegations in the affidavit-complaint
wherein LBP sought the return of the construction
[28]
materials, its demand letter dated May 4, 1999 sought
the payment of the balance but failed to ask, as an
41

alternative, for the return of the construction materials or
[29]
the buildings where these materials had been used.
The fact that LBP had knowingly authorized the delivery
of construction materials to a construction site of two
government projects, as well as unspecified construction
sites, repudiates the idea that LBP intended to be the
owner of those construction materials. As a government
financial institution, LBP should have been aware that the
materials were to be used for the construction of an
immovable property, as well as a property of the public
domain. As an immovable property, the ownership of
whatever was constructed with those materials would
presumably belong to the owner of the land, under Article
445 of the Civil Code.
Even if we consider the vague possibility that the
materials, consisting of cement, bolts and reinforcing steel
bars, would be used for the construction of a movable
property, the ownership of these properties would still
pertain to the government and not remain with the bank
as they would be classified as property of the public
domain.
In contrast with the present situation, it is fundamental in
a trust receipt transaction that the person who advanced
payment for the merchandise becomes the absolute
owner of said merchandise and continues as owner until
he or she is paid in full, or if the goods had already been
sold, the proceeds should be turned over to him or to
[30]
her.
Thus, in concluding that the transaction was a loan and
not a trust receipt, we noted in Colinares that the industry
or line of work that the borrowers were engaged in was
construction. We pointed out that the borrowers were not
[31]
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 contractor’s
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.
Based on these premises, we cannot consider the
agreements between the parties in this case to be trust
receipt transactions because (1) from the start, the parties
were aware that ACDC could not possibly be obligated to
reconvey to LBP the materials or the end product for
which they were used; and (2) from the moment the
materials were used for the government projects, they
became public, not LBP’s, property.
Virtus in infirmitate perficitur! 2 Cor. 12:9
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. In passing, it is useful to
note that this is the threat held against borrowers that
Retired Justice Claudio Teehankee emphatically opposed
[32]
in his dissent in People v. Cuevo, restated in Ong v.
[33]
CA, et al.:
The very definition of trust receipt x x x sustains the lower
court’s rationale in dismissing the information that the
contract covered by a trust receipt is merely a secured
loan. The goods imported by the small importer and retail
dealer through the bank’s financing remain of their own
property and risk and the old capitalist orientation of
putting them in jail for estafa for non-payment of the
secured loan (granted after they had been fully
investigated by the bank as good credit risks) through the
fiction of the trust receipt device should no longer be
permitted in this day and age.
As the law stands today, violations of Trust Receipts Law
are criminally punishable, but no criminal complaint for
violation of Article 315, paragraph 1(b) of the Revised
Penal Code, in relation with P.D. 115, should prosper
against a borrower who was not part of a genuine trust
receipt transaction.
Is misappropriation or abuse of confidence present?
Misappropriation or abuse of
confidence is absent in this case.
Even if we assume that the transactions were trust
receipts, the complaint against the respondents still
should have been dismissed. 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 singularly seek to enforce payment of the
loan, as “there can be no violation of [the] right against
[34]
imprisonment for non-payment of a debt.”
In order that the respondents “may be validly prosecuted
for estafa under Article 315, paragraph 1(b) of the Revised
[35]
Penal Code, in relation with Section 13 of the Trust
Receipts Law, the following elements must be
established: (a) they received the subject goods in trust or
under the obligation to sell the same and to remit the
proceeds thereof to [the trustor], or to return the goods if
not sold; (b) they misappropriated or converted the goods
and/or the proceeds of the sale; (c) they performed such
acts with abuse of confidence to the damage and
prejudice of Metrobank; and (d) demand was made on
them by [the trustor] for the remittance of the proceeds or
[36]
the return of the unsold goods.” In this case, no
dishonesty or abuse of confidence existed in the handling
of the construction materials.
In this case, the misappropriation could be committed
should the entrustee fail to turn over the proceeds of the
sale of the goods covered by the trust receipt transaction
or fail to return the goods themselves. The respondents
could not have failed to return the proceeds since their
42

allegations that the clients of ACDC had not paid for the
projects it had undertaken with them at the time the case
was filed had never been questioned or denied by LBP.
What can only be attributed to the respondents would be
the failure to return the goods subject of the trust receipts.
We do not likewise see any allegation in the complaint that
ACDC had used the construction materials in a manner
that LBP had not authorized. As earlier pointed out, LBP
had authorized the delivery of these materials to these
project sites for which they were used. When it had done
so, LBP should have been aware that it could not possibly
recover the processed materials as they would become
part of government projects, two of which (the Metro Rail
Transit Project and the Quezon Power Plant Project) had
even become part of the operations of public utilities vital
to public service. It clearly had no intention of getting
these materials back; if it had, as a primary government
lending institution, it would be guilty of extreme
negligence and incompetence in not foreseeing the legal
complications and public inconvenience that would arise
should it decide to claim the materials. ACDC’s failure to
return these materials or their end product at the time
these “trust receipts” expired could not be attributed to its
volition. No bad faith, malice, negligence or breach of
contract has been attributed to ACDC, its officers or
representatives. Therefore, absent any abuse of
confidence or misappropriation on the part of the
respondents, the criminal proceedings against them for
estafa should not prosper.
[37]
In Metropolitan Bank, we affirmed the city prosecutor’s
dismissal of a complaint for violation of the Trust Receipts
Law. In dismissing the complaint, we took note of the
Court of Appeals’ finding that the bank was interested only
in collecting its money and not in the return of the goods.
Apart from the bare allegation that demand was made for
the return of the goods (raw materials that were
manufactured into textiles), the bank had not
accompanied its complaint with a demand letter. In
addition, there was no evidence offered that the
respondents therein had misappropriated or misused the
goods in question.
WHEREFORE, we DENY the petition.
Hur Tin Yang vs. People of the Philippines
G.R. No. 195117, August 14, 2013 (VELASCO, JR)
FACTS
Supermax Philippines, Inc. (Supermax) is a domestic
corporation engaged in the construction business. On
various occasions in the month of April, May, July, August,
September, October and November 1998, Metropolitan
Bank and Trust Company (Metrobank), Magdalena
Branch, Manila, extended several commercial letters of
credit (LCs) to Supermax. These commercial LCs were
used by Supermax to pay for the delivery of several
construction materials which will be used in their
construction business. Thereafter, Metrobank required
petitioner, as representative and Vice-President for
Virtus in infirmitate perficitur! 2 Cor. 12:9
Internal Affairs of Supermax, to sign twenty-four (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 dated August 15, 2000, Supermax
failed to pay or deliver the goods or proceeds to
Metrobank. Instead, Supermax, through petitioner,
requested the restructuring of the loan. When the
intended restructuring of the loan did not materialize,
Metrobank sent another demand letter dated October 11,
2001. As the demands fell on deaf ears, Metrobank,
through its representative, Winnie M. Villanueva, filed the
instant criminal complaints against petitioner.
ISSUE
Is petitioner liable for Estafa under Art. 315, par. 1(b) of
the RPC in relation to PD 115, even if it was sufficiently
proved that the entruster (Metrobank) knew beforehand
that the goods (construction materials) subject of the trust
receipts were never intended to be sold but only for use
in the entrustee’s construction business?
HELD
NO. In the instant case, the factual findings of the trial and
appellate courts reveal that the dealing between petitioner
and Metrobank was not a trust receipt transaction but
one of simple loan. Petitioner’s 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 demand––does 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
[14]
loan. This Court––in Ng v. People and Land Bank of
[15]
the Philippines v. Perez, cases which are in all four
corners the same as the instant case––ruled 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 petitioner was charged with Estafa committed in what
is called, under PD 115, a “trust receipt transaction.”
Simply stated, a trust receipt transaction is one where the
entrustee has the obligation to deliver to the entruster the
price of the sale, or if the merchandise is not sold, to return
the merchandise to the entruster. There are, therefore,
two obligations in a trust receipt transaction: the first refers
to money received under the obligation involving the duty
to turn it over (entregarla) to the owner of the merchandise
sold, while the second refers to the merchandise received
under the obligation to “return” it (devolvera) to the
[16]
owner. A violation of any of these undertakings
constitutes Estafa defined under Art. 315, par. 1(b) of the
RPC, as provided in Sec. 13 of PD 115, viz:
43

Section 13. Penalty Clause.—The failure of an entrustee
to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the
extent of the amount owing to the entruster or as appears
in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall
constitute the crime of estafa, punishable under the
provisions of Article Three hundred fifteen, paragraph one
(b) of Act Numbered Three thousand eight hundred and
fifteen, as amended, otherwise known as the Revised
Penal Code. x x x
Nonetheless, when both parties enter into an agreement
knowing fully well 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 Sec. 13 of PD 115 in relation to Art. 315,
par. 1(b) of the RPC, as 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
[17]
purchase of the goods.
In Ng v. People, Anthony Ng, then engaged in the
business of building and fabricating telecommunication
towers, applied for a credit line of PhP 3,000,000 with
Asiatrust Development Bank, Inc. Prior to the approval of
the loan, Anthony 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
Anthony Ng to sign a trust receipt agreement. When
Anthony Ng failed to pay the loan, Asiatrust filed a criminal
case for Estafa in relation to PD 115 or the Trust Receipts
Law. This Court acquitted Anthony Ng and ruled that
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 Anthony Ng
was neither an importer nor retail dealer, it should have
known that the said agreement could not possibly apply
to petitioner.
Further, in Land Bank of the Philippines v. Perez, 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,
against the respondent officers of ACDC. This Court, like
Virtus in infirmitate perficitur! 2 Cor. 12:9
in Ng, acquitted all the respondents on the postulate that
the parties really intended a simple contract of loan and
not a trust receipts transaction, viz:
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. x x x x
Thus, in concluding that the transaction was a loan
and not a trust receipt, we noted in Colinares that the
industry or line of work that the borrowers were
engaged in was construction. We pointed out that 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 contractor’s 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
[19]
from being covered by trust receipt agreements.
Since the factual milieu of Ng and Land Bank of the
Philippines are in all four corners similar to the instant
case, it behooves this Court, following the principle
[20]
of stare decisis, to rule that the transactions in the
instant case are not trust receipts transactions but
contracts of simple loan. 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.
For reasons discussed above, the subject transactions in
the instant case are not trust receipts transactions. Thus,
the consolidated complaints for Estafa in relation to PD
115 have really no leg to stand on.
WHEREFORE, petitioner Hur Tin Yang is ACQUITTED of
the charge of violating Art. 315, par. 1 (b) of the RPC, in
relation to the pertinent provision of PD 115 in Criminal
Case Nos. 04-223911 to 34.
44

e. No trust receipt, notwithstanding the label, if goods
offered as security for a loan accommodation are
goods sold to the debtor
Sps. Dela Cruz vs. Dela Cruz
GR No. 158649, February 18, 2013 (BERSAMIN)
FACTS
Gloria signed the application for credit facilities on March
23, 1978, indicating that a trust receipt would serve as
collateral for the credit line. On August 4, 1978, Gloria, as
“dealer,” signed together with Quirino the list of their
assets having a total value of P260,000.00 (consisting of
a residential house and lot, 10-hectare agricultural lands
in Aliaga and Talavera, and two residential lots) that they
tendered to PPI “to support our credit application in
connection with our participation to your Special Credit
[34]
Scheme.” Gloria further signed the Trust Receipt/SCS
documents defining her obligations under the agreement,
and also the invoices pursuant to the agreement with PPI,
indicating her having received PPI products on various
dates.
ISSUE
Would Gloria’s breach constitute estafa under the
trust receipts law?
HELD
NO. At this juncture, the Court clarifies that the contract,
its label notwithstanding, was not a trust receipt
transaction in legal contemplation or within the purview of
the Trust Receipts Law (Presidential Decree No. 115)
such that its breach would render Gloria criminally liable
for estafa. 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, to wit:
Section. 4. What constitutes a trust receipt transaction. –
A trust receipt transaction, within the meaning of this
Decree, is any transaction by and between a person
referred to in this Decree as the entruster, and another
person referred to in this Decree 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 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
Virtus in infirmitate perficitur! 2 Cor. 12:9
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, or for other purposes substantially
equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods
or procure their sale; or (b) to manufacture or process the
goods with the purpose of ultimate sale: Provided, That,
in the case of goods delivered under trust receipt for the
purpose of manufacturing or processing before its
ultimate sale, the entruster shall retain its title over the
goods whether in its original or processed form until the
entrustee has complied fully with his obligation under the
trust receipt; or (c) to load, unload, ship or tranship or
otherwise deal with them in a manner preliminary or
necessary to their sale; or
2. In case of instruments x x x.
The sale of goods, documents or instruments by a
person in the business of selling goods, documents
or instruments for profit who, at the outset of the
transaction, has, as against the buyer, general
property rights in such goods, documents or
instruments, or who sells the same 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 this Decree.
[43]
In Land Bank v. Perez, the Court has elucidated on the
coverage of Section 4, supra, to wit:
There are two obligations in a trust receipt transaction.
The first is covered by the provision that refers to money
under the obligation to deliver it (entregarla) to the owner
of the merchandise sold. The second is covered by the
provision referring to merchandise received under the
obligation to return it (devolverla) to the owner. Thus,
under the Trust Receipts Law, intent to defraud is
presumed when (1) the entrustee fails to turn over the
proceeds of the sale of goods covered by the trust receipt
to the entruster; or (2) when the entrustee fails to return
the goods under trust, if they are not disposed of in
accordance with the terms of the trust receipts.
In all trust receipt transactions, both obligations on the
part of the trustee exist in the alternative – the return of
the proceeds of the sale or the return or recovery of the
goods, whether raw or processed. 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.
It is not amiss to point out that the RTC even erred in citing
Section 4 of the Trust Receipts Law as its basis for
45

ordering Gloria to pay the total amount of P240,355.10.
Section 13 of the Trust Receipts Law considers the
“failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by
a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust
receipt” as constituting the crime of estafa under Article
315 (b) of the Revised Penal Code. However, had PPI
intended to charge Gloria with estafa, it could have then
done so. Instead, it brought this collection suit, a clear
indication that the trust receipts were only collaterals for
the credit line as agreed upon by the parties.
To be clear, the obligation assumed by Gloria under the
Trust Receipt/SCS involved “the execution of a Trust
Agreement by the farmer-participants” in her favor, which,
in turn, she would assign “in favor of PPI with recourse” in
case of delivery and sale to the farmer-participants. The
term recourse as thus used means “resort to a person
who is secondarily liable after the default of the person
[44]
who is primarily liable.” An indorsement “with recourse”
of a note, for instance, makes the indorser a general
indorser, because the indorsement is without
qualification. Accordingly, the term with
recourse confirms the obligation of a general indorser,
[45]
who has the same liability as the original obligor. As the
assignor “with recourse” of the Trust Agreement executed
by the farmer participating in the SCS, therefore, Gloria
made herself directly liable to PPI for the value of the
inputs delivered to the farmer-participants. Obviously, the
signature of the representative of PPI found in the
demand letters Gloria sent to the farmer-participants only
indicated that the Trust Agreement was part of the SCS of
PPI.
The petitioners could not validly justify the non-
compliance by Gloria with her obligations under the Trust
Receipt/SCS by citing the loss of the farm outputs due to
typhoon Kading. There is no question that she had
expressly agreed that her liability would not be
extinguished by the destruction or damage of the crops.
The use of the term with recourse was, in fact, consonant
with the provision of the Trust Receipt/SCS stating that if
Gloria could not deliver or serve “all the inputs” to the
farmer-participants within 60 days, she agreed that “the
undelivered inputs will be charged” to her “regular credit
line.” Under her arrangement with PPI, the trust receipts
were mere securities for the credit line granted by
[46]
PPI, having in fact indicated in her application for the
credit line that the trust receipts were “collaterals” or
separate obligations “attached to any other contract to
[47]
guaranty its performance.”
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.
Virtus in infirmitate perficitur! 2 Cor. 12:9
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. A contract of
adhesion prepared by one party, usually a corporation, is
generally not a one-sided document as long as the
signatory is not prevented from studying it before signing.
Gloria did not show that she was deprived of that
opportunity to study the contract. At any rate, the social
stature of the parties, the nature of the transaction, and
the amount involved were also factors to be considered in
determining whether the aggrieved party “exercised
adequate care and diligence in studying the contract prior
[48]
to its execution.” Thus, “[u]nless a contracting party
cannot read or does not understand the language in which
the agreement is written, he is presumed to know the
[49]
import of his contract and is bound thereby.” Here,
Gloria was married to a lawyer who was also then the
Municipal Mayor of Aliaga. Both of them signed the list of
conjugal assets that they used to support the application
for the credit line.
The last circumstance was that the petitioners now focus
on the amount of liabilities adjudged against them by the
lower courts. They thereby bolster the finding that they
fully knew and accepted the legal import of the documents
Gloria had signed of rendering them personally liable
towards PPI for the value of the inputs granted to the
farmer-participants through them. The finding is further
confirmed by her admission of paying to PPI the amount
of P50,000.00, which payment, albeit allegedly made
grudgingly, solidified the existence of a creditor-debtor
relationship between them. Indeed, Gloria would not have
paid that amount except in acknowledgement of an
indebtedness towards PPI.
f. Failure of the entrustee to remit sale proceeds or
return the goods in case of non-sale constitutes
criminal liability
g. Crime against public order
People vs. Hon. Nitafan 207 SCRA 726
G.R. No. 81559-60, April 6, 1992 (GUTIERREZ, JR)
FACTS
Petitioner Allied Banking Corporation charged Betty Sia
Ang with estafa in Criminal Case No. 87-53501 in an
information which alleged:
"That on or about July 18, 1980, in the City of Manila,
Philippines, the said accused, being then the proprietress
of Eckart Enterprises, a business entity located at 756
Norberto Amoranto Avenue, Quezon City, did then and
there wilfully, unlawfully and feloniously defraud the Allied
Banking Corporation, a banking institution, represented
by its Account Officer, Raymund S. Li, in the following
manner, to wit: the said accused received in trust from
the aforesaid bank Gordon Plastics, plastic sheeting and
Hook Chromed, in the total amount of P398,000.00,
46

specified in a trust receipt and covered by Domestic
Letter of Credit No. DLC?002-801254, 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, notwithstanding repeated
demands made upon her to that effect, 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 in the aforesaid sum of
P114,884.22, Philippine Currency."
ISSUES
1. Is Betty Sia Ang liable for estafa?
2. Is the penal clause of trust receipt law
unconstitutional?
HELD
Is Betty Sia Ang liable for estafa?
YES. As in G.R. No. 82495, we resolve the instant
petition in the light of the Court's ruling in Lee v. Rodil,
175 SCRA 100 [1989] and Sia v. Court of Appeals, 166
SCRA 263 [1988]. We have held in the latter cases that
acts involving the violation of trust receipt agreements
occuring after 29 January 1973 (date of enactment of
P.D. 115) would make the accused criminally liable for
estafa under paragraph 1 (b), Article 315 of the Revised
Penal Code (RPC) pursuant to the explicit provision in
Section 13 of P.D. 115.
The relevant penal provision of P.D. 115 provides:
"SEC. 13 of P.D. No. 115 provides:
"xxx Penalty clause. - The failure of an entrustee to turn
over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to
the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three Hundred and Fifteen,
paragraph one (b) of Act Numbered Three Thousand
Eight Hundred and Fifteen, as amended, otherwise
known as the Revised Penal Code. If the violation or
offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided
for in this Decree shall be imposed upon the directors,
officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil
liabilities arising from the criminal offense.”
Section 1 (b), Article 315 of the RPC under which the
violation is made to fall, states:
Virtus in infirmitate perficitur! 2 Cor. 12:9
"xxx Swindling (estafa). - Any person who shall
defraud another by any of the means mentioned herein
below x x x:
"b. By misappropriating or converting, to the prejudice of
another, money, goods, or any other personal property
received by the offender in trust or on commission, or for
administration, or under any other obligation involving the
duty to make delivery of or to return the same, even
though such obligation be totally or partially guaranteed
by a bond; or by denying having received such money,
goods, or other property."
The factual circumstances in the present case show that
the alleged violation was committed sometime in 1980 or
during the effectivity of P.D. 115. The failure, therefore,
to account for the P114,884.22 balance is what makes
the accused-respondent criminally liable for estafa. The
Court reiterates its definitive ruling that, in
the Cuevo and Sia(1983) cases relied upon by
the accused, P.D. 115 was not applied because the
questioned acts were committed before its
effectivity. (Lee v. Rodil, supra, p. 108) At the time those
cases were decided, the failure to comply with the
obligations under the trust receipt was susceptible to two
interpretations. The Court in Sia adopted the view that a
violation gives rise only to a civil liability as the more
feasible view "before the promulgation of P.D. 115,"
notwithstanding prior decisions where we ruled that a
breach also gives rise to a liability for estafa. (People v.
Yu Chai Ho, 53 Phil. 874 [1929]; Samo v. People, 115
Phil. 346 [1962]; Philippine National Bank v. Arrozal, 103
Phil. 213 [1958]; Philippine National Bank v. Viuda
e Hijos de Angel Jose, 63 Phil. 814 [1936]).
Contrary to the reasoning of the respondent court and the
accused, 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. (Vintola v. Insular Bank of Asia and
America, 151 SCRA 578 [1987]) 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. (Samo v. People, supra). 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.
Is the penal clause of trust receipt law
unconstitutional?
NO. 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.
Trust receipts are indispensable contracts in international
and domestic business transactions. The prevalent use
of trust receipts, the danger of their misuse and/or
47

misappropriation of the goods or proceeds realized from
the sale of goods, documents or instruments
held in trust for entruster-banks, and the need for
regulation of trust receipt transactions to safeguard the
rights and enforce the obligations of the parties involved
are the main thrusts of P.D. 115. As correctly observed
by the Solicitor General, P.D. 115, like Batas Pambansa
Blg. 22, punishes the act “not as an offense against
property, but as an offense against public order. x x
x The misuse of trust receipts therefore should be
deterred to prevent any possible havoc in trade circles
and the banking community (citing Lozano v. Martinez,
146 SCRA 323 [1986]; Rollo, p. 57). 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.
The offense is punished as
a malum prohibitum regardless of the existence of intent
or malice. 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.
We are continually re-evaluating the opposite view which
insists that the violation of a trust receipt agreement
should result only in a civil action for collection. The
respondent contends that there is no malice
involved. She cites the dissent of the late Chief Justice
Claudio Teehankee in Ong v. Court of Appeals, (124
SCRA 578 [1983]) to wit:
"The old capitalist orientation of putting importers in jail
for supposed estafa or swindling for non-payment of the
price of the imported goods released to them under trust
receipts (a purely commercial transaction) under the
fiction of the trust receipt device, should no longer be
permitted in this day and age."
As earlier stated, however, the law punishes the
dishonesty and abuse of confidence in the handling of
money or goods to the prejudice of the bank.
The Court reiterates that the enactment of P.D. 115 is a
valid exercise of the police power of the State and is, thus,
constitutional. (Lee v. Rodil, supra; Lozano
v. Martinez, supra) The arguments of the respondent are
appropriate for a repeal or modification of the law and
should be directed to Congress. But until the law is
repealed, we are constrained to apply it.
WHEREFORE, the petition is hereby GRANTED.
**Compensation shall not be proper when one of the
debts consists in civil liability arising from a penal offense;
moreover, any compromise relating to the civil liability
does not automatically extinguish the criminal liability of
the accused. The mere failure of the entrustee 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.
Virtus in infirmitate perficitur! 2 Cor. 12:9
Metropolitan Bank & Trust Company vs. Tonda
338 SCRA 254
(2000)
FACTS
2. Ownership of the Goods, Documents and
Instruments under a Trust Receipt
a. Entrustee is the owner of the goods
Vintola vs IBAA, ibid
Rosario Textile Mills vs Home Bankers Trust, ibid.
b. Entrustee can not mortgage the goods under trust
receipt
DBP vs. Prudential Bank, 475 SCRA 623 (2005)
3. Rights of the Entruster
a. Validity of the Security Interest as Against the
Creditors of the Entrustee/Innocent Purchaser for
Value
Prudential Bank vs. National Labor Relations
Commission, 251 SCRA 412 (1995)
4. Obligation and Liability of the Entrustee
a. No criminal liability in the following cases
i. entrustee already owns the goods when loan
under TR granted
Colinares vs Court of Appeals, ibid.
Consolidated vs Court of Appeals, ibid.
ii. goods not intended for sale or resale
Ng vs People, ibid.
Land Bank vs Court of Appeals, ibid.
Hur Ting Yang vs People, ibid.
iii. Non-delivery of the goods
Ramos vs. Court of Appeals, 153 SCRA 276 (1987)
iv. Novation
Ong vs. Court of Appeals, 124 SCRA 578 (1983)
Pilipinas Bank vs. Ong, 387 SCRA 37 (2002)
48

5. Payment/Delivery of Proceeds of Sale or
Disposition of Goods, Documents or Instruments
6. Return of Goods, Documents or Instruments in
Case of Non-Sale
Vintola vs. Insular Bank of Asia and America, ibid
7. Liability for Loss of Goods, Documents or
Instruments
Rosario Textile Mills Corp. vs. Home Bankers
Savings and Trust Company, ibid.
8. Penal Sanctions if Offender is a Corporation
a. Criminal Liability of directors, officers and agents
Ong vs. Court of Appeals, 401 SCRA 649 (2003)
Ching vs Secretary of Justice
b. Directors and officers of the corporation not civilly
liable unless they assume personal liability
Tupaz IV vs. Court of Appeals, 475 SCRA 398 (2005)
9. Remedies Available
a. Criminal and civil actions
Vintola vs. Insular Bank of Asia and America, ibid
Sarmiento vs. Court of Appeals, 394 SCRA 315
(2002)
b. Entruster’s repossession of the goods under trust
receipt not a bar to foreclosure of mortgage of other
collateral
Philippine National Bank vs. Pineda, 197 SCRA 1
(1991)
c. cancellation of trust and repossession of goods
South City Homes, Inc. vs. BA Finance Corporation,
371 SCRA 603 (2001)
d. entrustee liable for deficiency
Landl & Company vs. Metropolitan Bank, 435 SCRA
639 (2004)
III. Warehouse Receipt’s Law
Estrada vs. Court of Agrarian Relations, 2 SCRA 986
Virtus in infirmitate perficitur! 2 Cor. 12:9
G.R. No. L-17481, August 15, 1961
FACTS
It appears that, upon motion, this Court, on January 6,
1961, issued a resolution ordering the owner and
manager of the Warehouse to release and give to
petitioners-appellants the remaining deposits —10% of
the net produce of the first crop minus P300 and 15% of
the net produce of the second crop minus P200, the court
resolved to grant the motion, without prejudice to
subsequent accounting.
On April 12, 1961, this Court, passing upon a motion filed
by the petitioners in which they alleged that the manager
of the Moncada Bonded Warehouse had refused to
comply with the above resolution unless "the original of
the receipts of palay deposits be presented and
surrendered to him.”
The manager of the Moncada Bonded Warehouse and
respondent Faustino F. Galvan refused and still refuse to
comply with the above orders of this Court, the former, for
the reason that petitioners could not surrender to him the
original of the warehouse receipts issued for the palay in
question, and the latter, because, as he alleged in his
answer to the motion for contempt, he could not locate
any more said receipts "as they were scattered,
misplaced, destroyed or lost when the contents of the
Office of said respondent-appellee, Faustino F. Galvan, in
the Galvan-Cabrera Building in Ylaya Street, Manila, were
being desperately evacuated therefrom during the fire
which burned the Divisoria market.
ISSUE
Are their excuses justified?
HELD
NO. But they are not without merit. 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 interests of the bonded
warehouse of which he was manager, as the warehouse
receipts issued for the palay in question might have been
negotiated for 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 that 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 these cases have not been finally decided,
in order to ameliorate the precarious situation in which
said petitioners find themselves.
49

Wherefore, it is hereby ordered that the manager or the
owner of the Moncada Bonded Warehouse in Moncada,
Tarlac, and respondent Faustino F. Galvan release and
deliver to the petitioners the portion still remaining to be
delivered to them of their shares in the palay involved in
these cases which was ordered deposited in said
warehouse by the trial court, upon the issuance by said
petitioners, or their duly authorized representatives, of the
corresponding receipts, without the necessity of
producing and surrendering the original of the warehouse
receipts issued therefor. It is so ordered.
Consolidated Terminals vs. Artex Development Co.,
63 SCRA 46
G.R. No. L-25748, March 10, 1975 (AQUINO)
FACTS
CTI was the operator of a customs bonded warehouse
located at Port Area, Manila. It received on deposit one
hundred ninety-three (193) bales of high density
compressed raw cotton valued at P99,609.76. 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, purportedly issued by the Bureau of Customs,
Artex was able to obtain delivery of the bales of cotton on
November 5 and 6, 1964 after paying CTI P15,000 as
storage and handling charges. At the time the
merchandise was released to Artex, the letter of credit had
not yet been opened and the customs duties and taxes
due on the shipment had not been paid.
CTI, in its original complaint, sought to recover
possession of the cotton by means of a writ of
replevin. The writ could not be executed. CTI then filed
an amended complaint by transforming its original
complaint into an action for the recovery from Artex of
P99,609.76 as compensatory damages, P10,000 as
nominal and exemplary damages and P20,000 as
attorney's fees.
ISSUE
Does CTI have a cause of action for damages against
Artex?
HELD
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.
Virtus in infirmitate perficitur! 2 Cor. 12:9
The case might have been different if it was alleged in the
amended complaint that the depositor, consignee and
shipper had required CTI to pay damages, or that the
Commissioners of Customs and Internal Revenue had
held CTI liable for the duties and taxes. In such a case,
CTI might logically and sensibly go after Artex for having
wrongfully obtained custody of the merchandise.
But that eventuality has not arisen in this case. So, CTI's
basic action to recover the value of the merchandise
seems to be untenable. It was not the owner of the
cotton. How could it be entitled to claim the value of the
shipment?
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 the bales of cotton even if
it was not the owner thereof. (See Ma-ao Sugar Central
Co., Inc. vs. Barrios, 79 Phil. 666; 1 Moran's Comments
on the Rules of Court, 1970 Ed., pp. 259, 495).
WHEREFORE, the order of dismissal is affirmed with
costs against the plaintiff-appellant.
Philippine National Bank vs. Noah’s Ark Sugar
Refinery, 226 SCRA 36
G.R. No. 107243, September 1, 1993 (NARVASA)
FACTS
In accordance with Act No. 2137, the Warehouse
Receipts Law, Noah’s Ark Sugar Refinery issued on
several dates warehouse receipts (quedans) (cf. full text
on list).
The receipts are substantially in the form, and contain the
terms, prescribed for negotiable warehouse receipts by
Section 2 of the law.
Subsequently, warehouse receipts Numbered 18080 and
18081 (covering sugar deposited by RNS Merchandising)
were negotiated and indorsed to Luis T. Ramos; and
receipts Numbered 18086 (sugar of St. Therese
Merchandising), 18087 (sugar of RNS Merchandising)
and 18062 (sugar of Rosa Sy) were negotiated and
indorsed to Cresencia K. Zoleta. Zoleta and Ramos then
used the quedans as security for loans obtained by them
from the Philippine National Bank (PNB) in the amounts
of P23.5 million and P15.6 million, respectively.
These quedans they indorsed to the bank.
Both Zoleta and Ramos failed to pay their loans upon
maturity on January 9, 1990. Consequently on March 16,
1990, PNB wrote to Noah’s Ark Sugar Refinery (hereafter,
simply Noah’s Ark) demanding delivery of the sugar
50

covered by the quedans indorsed to it by Zoleta and
Ramos. When Noah’s Ark refused to comply with the
demand, PNB filed with the Regional Trial Court of Manila
a verified complaint for “Specific Performance with
Damages and Application for Writ of Attachment” against
Noah’s Ark, Alberto T. Looyuko, Jimmy T. Go, and Wilson
T. Go, the last three being identified as “the Sole
Proprietor, Managing Partner and Executive Vice
President of Noah’s Ark **, respectively.”
ISSUES
1. Did the non-payment of the purchase price for
the sugar stock evidenced by the quedans, by
the original depositors/vendees (RNS
Merchandising and St. Therese Merchandising)
render invalid the negotiation of said quedans by
vendees/first indorsers to indorsers (Ramos and
Zoleta) and the subsequent negotiation of Ramos
and Zoleta to PNB?
2. Was PNB as indorsee/pledgee of quedans
entitled to delivery of sugar stocks from the
warehouseman, Noah’s Ark?
HELD
These legal questions were disposed of by the Appellate
Court as follows:
“The validity of the negotiation by RNS Merchandising
and St. Therese Merchandising to Ramos and Zoleta, and
by the latter to PNB to secure a loan cannot be impaired
by the fact that the negotiation between Noah’s Ark and
RNS Merchandising and St. Therese Merchandising was
made in breach of faith on the part of the merchandising
firms or by the fact that the owner (Noah’s Ark) was
deprived of the possession of the same by fraud, mistake
or conversion of the person to whom the warehouse
receipt/quedan was subsequently negotiated if (PNB)
paid value therefor in good faith without notice of such
breach of duty, fraud, mistake or conversion. (See Article
1518, New Civil Code). And the creditor (PNB) whose
debtor was the owner of the negotiable document of title
(warehouse receipt) shall be entitled to such aid from the
court of appropriate jurisdiction in attaching such
document or in satisfying the claim by means as is
allowed by law or in equity in regard to property which
cannot be readily attached or levied upon by ordinary
process. (See Art. 1520, New Civil Code). If the quedans
were negotiable in form and duly indorsed to PNB (the
creditor), the delivery of the quedans to PNB makes the
PNB the owner of the property covered by said quedans
and on deposit with Noah’s Ark, the warehouseman. (See
Sy Cong Bieng & Co. vs Hongkong & Shanghai Bank
Corp., 56 Phil. 598).
In the case at bar, We found that the factual bases
underlying the defendants’ affirmative defenses (upon
which PNB has moved for summary udgment) are not
disputed and have been stipulated by the parties and
therefore do not require presentation of evidence. PNB’s
Virtus in infirmitate perficitur! 2 Cor. 12:9
right to enforce the obligation of Noah’s Ark as a
warehouseman, to deliver the sugar stock to PNB as
holder of the quedans, does not depend on the outcome
of the third-party complaint because the validity of the
negotiation transferring title to the goods to PNB as holder
of the quedans is not affected by any act of RNS
Merchandising and St. Therese Merchandising, in breach
of trust, fraud or conversion against Noah’s Ark.”
The Court considers the Appellate Court’s conclusions of
fact and law to be correct.
In its decision, as just pointed out, the Court of Appeals
explicitly ruled that the “validity of the negotiation” of
the quedans to PNB “cannot be impaired by the fact that
the negotiation between Noah’s Ark and RNS
Merchandising and St. Therese Merchandising was made
in breach of faith on the part of the merchandising firms or
by the fact that the owner (Noah’s Ark) was deprived of
the possession of the same by fraud, mistake or
[5]
conversion ** .” It also ruled that the quedans were
negotiable documents and had been duly negotiated to
the PNB which thereby acquired the rights set out in
[6]
Article 1513 of the Civil Code,” viz.”
“(1) Such title to the goods as the person negotiating the
document to him had or had ability to convey to a
purchaser in good faith for value and also such title to the
goods as the person to whose order the goods were to be
delivered by the terms of the document had or had ability
to convey to a purchaser in good faith for value; and
(2) The direct obligation of the bailee issuing the
document to hold possession of the goods for him
according to the terms of the document as fully as if such
bailee had contracted directly with him.”
WHEREFORE, the Trial Judge’s Decision in Civil Case
No. 9053023 dated June 18, 1992 is REVERSED and
SET ASIDE and a new one rendered conformably with the
final and executory Decision of the Court of Appeals in
CA-G.R. SP No. 25938, ordering the private respondents,
Noah’s Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T.
Go and William T. Go, jointly and severally:
a) to deliver to the petitioner Philippine National
Bank, “the sugar stocks covered by the
Warehouse Receipts/Quedans which are now in
the latter’s possession as holder for value and in
due course; or alternatively, to pay (said) plaintiff
actual damages in the amount of P39.1 Million,”
with legal interest thereon from the filing of the
complaint until full payment; and
b) to pay plaintiff Philippine National Bank attorney’s
fees, litigation expenses and judicial costs hereby
fixed at the amount of one hundred fifty thousand
pesos (P150,000.00), as well as the costs.
51

Philippine National Bank vs. Se. Jr., 256 SCRA 380
G.R. No. 119231, April 18, 1996 (HERMOSISIMA, JR)
FACTS
The source of conflict herein is the question as to whether
the Philippine National Bank should pay storage fees for
sugar stocks covered by five (5) Warehouse Receipts
stored in the warehouse of private respondents in the face
of the Court of Appeals’ decision (affirmed by the
Supreme Court) declaring the Philippine National Bank as
the owner of the said sugar stocks and ordering their
delivery to the said bank.
ISSUE
Can the warehouseman enforce his warehouseman’s
lien before delivering the sugar stocks as ordered by
the Court of Appeals or need he file a separate action
to enforce payment of storage fees?
HELD
YES. We have carefully examined our resolution, dated
March 9, 1994, which denied Noah’s Ark’s motion for
clarification of our decision, dated September 1, 1993,
wherein we affirmed in full and adopted the Court of
Appeals’ earlier decision, dated December 13, 1991, in
CA-G.R. SP. No. 25938. We are not persuaded by the
petitioner’s argument that our said resolution carried with
it the denial of the warehouseman’s lien over the sugar
stocks covered by the subject Warehouse Receipts. We
have simply resolved and upheld in our decision, dated
September 1, 1993, the propriety of summary judgment
which was then assailed by private respondents. In effect,
we ruled therein that, considering the circumstances
obtaining before the trial court, the issuance of the
Warehouse Receipts not being disputed by the private
respondents, a summary judgment in favor of PNB was
proper. We in effect further affirmed the finding that
Noah’s Ark is a warehouseman which was obliged to
deliver the sugar stocks covered by the Warehouse
Receipts pledged by Cresencia K. Zoleta and Luis T.
Ramos to the petitioner pursuant to the pertinent
provisions of Republic Act 2137.
In disposing of the private respondents’ motion for
clarification, we could not contemplate the matter of
warehouseman’s lien because the issue to be finally
resolved then was the claim of private respondents for
retaining ownership of the stocks of sugar covered by the
endorsed quedans. Stated otherwise, there was no point
in taking up the issue of warehouseman’s lien since the
matter of ownership was as yet being determined. Neither
could storage fees be due then while no one has been
declared the owner of the sugar stocks in question.
Of considerable relevance is the pertinent stipulation in
the subject Warehouse Receipts which provides for
respondent Noah’s Ark’s right to impose and collect
warehouseman’s lien:
Virtus in infirmitate perficitur! 2 Cor. 12:9
"Storage of the refined sugar quantities mentioned herein
shall be free up to one (1) week from the date of the
quedans covering said sugar and thereafter, storage fees
shall be charged in accordance with the Refining Contract
under which the refined sugar covered by this Quedan
[6]
was produced. "
It is not disputed, therefore, that, under the subject
Warehouse Receipts provision, storage fees are
chargeable.
Petitioner anchors its claim against private respondents
on the five (5) Warehouse Receipts issued by the latter to
third-party defendants Rosa Ng Sy of RNS Merchandising
and Teresita Ng of St. Therese Merchandising, which
found their way to petitioner after they were negotiated to
them by Luis T. Ramos and Cresencia K. Zoleta for a loan
of P39.1 Million. Accordingly, petitioner PNB is legally
bound to stand by the express terms and conditions on
the face of the Warehouse Receipts as to the payment of
storage fees. Even in the absence of such a provision, law
and equity dictate the payment of the warehouseman’ s
lien pursuant to Sections 27 and 31 of the Warehouse
Receipts Law (R.A. 2137), to wit:
"SECTION 27. What claims are included in the
warehouseman’s lien. - Subject to the provisions of
section thirty, a warehouseman shall have lien on goods
deposited or on the proceeds thereof in his hands, for all
lawful charges for storage and preservation of the goods;
also for all lawful claims for money advanced, interest,
insurance, transportation, labor, weighing coopering and
other charges and expenses in relation to such goods;
also for all reasonable charges and expenses for notice,
and advertisement of sale, and for sale of the goods
where default has been made in satisfying the
warehouseman’s lien.
xxx xxx xxx
SECTION 31. Warehouseman need not deliver until lien
is satisfied. - A warehouseman having a lien valid against
the person demanding the goods may refuse to deliver
the goods to him until the lien is satisfied."
After being declared not the owner, but the
warehouseman, by the Court of Appeals on December
13, 1991 in CA-G.R. SP. No. 25938, the decision having
been affirmed by us on December 1, 1993, private
respondents cannot legally be deprived of their right to
enforce their claim for warehouseman’s lien, for
reasonable storage fees and preservation expenses.
Pursuant to Section 31 which we quote hereunder, the
goods under storage may not be delivered until said lien
is satisfied.
"SECTION 31. Warehouseman need not deliver until lien
is satisfied. - A warehouseman having a lien valid against
the person demanding the goods may refuse to deliver
the goods to him until the lien is satisfied."
Considering that petitioner does not deny the existence,
validity and genuineness of the Warehouse Receipts on
52

which it anchors its claim for payment against private
respondents, it cannot disclaim liability for the payment of
the storage fees stipulated therein. As contracts, the
receipts must be respected by authority of Article 1159 of
the Civil Code, to wit:
"ART. 1159. Obligations arising from contracts have the
force of law between the contracting parties and should
be complied with in good faith."
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 warehouseman’s 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 warehouseman’s lien is possessory in
nature.
We, therefore, uphold and sustain the validity of the
assailed orders of public respondent, dated December 20,
1994 and March 1, 1995.
In fine, we fail to see any taint of abuse of discretion on
the part of the public respondent in issuing the questioned
orders which recognized the legitimate right of Noah’s
Ark, after being declared as warehouseman, to recover
storage fees before it would release to the PNB sugar
stocks covered by the five (5) Warehouse Receipts. Our
resolution, dated March 9, 1994, did not preclude private
respondents’ unqualified right to establish its claim to
recover storage fees which is recognized under Republic
Act No. 2137. Neither did the Court of Appeals’ decision,
dated December 13, 1991, restrict such right.
Our Resolution’s reference to the decision by the Court of
Appeals, dated December 13, 1991, in CA-G.R. SP. No.
25938, was intended to guide the parties in the
subsequent disposition of the case to its final end. We
certainly did not foreclose private respondents’ inherent
Virtus in infirmitate perficitur! 2 Cor. 12:9
right as warehouseman to collect storage fees and
preservation expenses as stipulated n the face of each of
the Warehouse Receipts and as provided for in the
Warehouse Receipts Law (R.A. 2137).
WHEREFORE, the petition should be, as it is, hereby
dismissed for lack of merit. The questioned orders issued
by public respondent judge are affirmed.
Philippine Naitonal Bank vs. Sayo, Jr., 292 SCRA 202
G.R. NO. 129918, July 9, 1998 (DAVIDE, JR)
B. Under the Special Circumstances in This Case,
Private Respondents May Enforce Their
Warehouseman’s Lien in Civil Case No. 90-53023.
The remedies available to a warehouseman, such as
private respondents, to enforce his warehouseman’s lien
are:
(1) To refuse to deliver the goods until his lien is
satisfied, pursuant to Section 31 of the Warehouse
Receipt Law;
(2) To sell the goods and apply the proceeds thereof to
the value of the lien pursuant to Sections 33 and 34
of the Warehouse Receipts Law; and
(3) By other means allowed by law to a creditor against
his debtor, for the collection from the depositor of
all charges and advances which the depositor
expressly or impliedly contracted with the
warehouseman to pay under Section 32 of the
Warehouse Receipt Law; or such other remedies
allowed by law for the enforcement of a lien against
personal property under Section 35 of said law. The
third remedy is sought judicially by suing for the
[35]
unpaid charges.
Initially, private respondents availed of the first remedy.
However, when petitioner moved to execute the judgment
in G.R. No. 107243 before the trial court, private
respondents, in turn, moved to have the warehouse
charges and fees due them determined and thereafter
sought to collect these from petitioners. While the most
appropriate remedy for private respondents was an action
for collection, in G.R. No. 119231, we already recognized
their right to have such charges and fees determined in
Civil Case No. 90-53023. The import of our holding in G.R.
No. 119231 was that private respondents were likewise
entitled to a judgment on their warehouse charges and
fees, and the eventual satisfaction thereof, thereby
avoiding having to file another action to recover these
charges and fees, which would only have further delayed
the resolution of the respective claims of the parties, and
as a corollary thereto, the indefinite deferment of the
execution of the judgment in G.R. No. 107243. Thus we
note that petitioner, in fact, already acquiesced to the
53

scheduled dates previously set for the hearing on private
respondents’ warehouseman’s charges.
However, as will be shown below, it would be premature
to execute the order fixing the warehouseman’s charges
and fees.
C. Petitioner is Liable for Storage Fees.
We confirmed petitioner’s liability for storage fees in G.R.
No. 119231. However, petitioner’s status as to the
quedans must first be clearly defined and delineated to be
able to determine the extent of its liability.
Petitioner insisted, both in its petition and during the oral
arguments on 24 November 1997, that it was a mere
pledgee as the quedans were used to secure two loans it
[36]
granted. In our decision in G.R. No. 107243, we upheld
this contention of petitioner, thus:
Zoleta and Ramos then used the quedans as security for
loans obtained by them from the Philippine National Bank
(PNB) as security for loans obtained by them in the
amounts of P23.5 million and P15.6 million, respectively.
[37]
These quedans they indorsed to the bank.
[38]
As such, Martinez v. Philippine National Bank becomes
relevant:
In conclusion, we hold that where a warehouse receipt or
quedan is transferred or endorsed to a creditor only to
secure the payment of a loan or debt, the transferee or
endorsee does not automatically become the owner of the
goods covered by the warehouse receipt or quedan but
he merely retains the right to keep and with the consent
of the owner to sell them so as to satisfy the obligation
from the proceeds of the sale, this for the simple reason
that the transaction involved is not a sale but only a
mortgage or pledge, and that if the property covered by
the quedans or warehouse receipts is lost without the fault
or negligence of the mortgagee or pledgee or the
transferee or endorsee of the warehouse receipt or
quedan, then said goods are to be regarded as lost on
account of the real owner, mortgagor or pledgor.
The indorsement and delivery of the warehouse receipts
(quedans) by Ramos and Zoleta to petitioner was not to
convey “title” to or ownership of the goods but to secure
(by way of pledge) the loans granted to Ramos and Zoleta
by petitioner. The indorsement of the warehouse receipts
[39]
(quedans), to perfect the pledge, merely constituted a
symbolical or constructive delivery of the possession of
[40]
the thing thus encumbered.
The creditor, in a contract of real security, like pledge,
cannot appropriate without foreclosure the things given by
[41]
way of pledge. Any stipulation to the contrary, termed
[42]
pactum commissorio, is null and void. The law requires
foreclosure in order to allow a transfer of title of the good
[43]
given by way of security from its pledgor, and before
any such foreclosure, the pledgor, not the pledgee, is the
owner of the goods. In Philippine National Bank v.
[44]
Atendido, we said:
Virtus in infirmitate perficitur! 2 Cor. 12:9
The delivery of the palay being merely by way of security,
it follows that by the nature of the transaction its
ownership remains with the pledgor subject only to
foreclosure in case of non-fulfillment of the obligation. By
this we mean that if the obligation is not paid upon
maturity the most that the pledgee can do is to sell the
property and apply the proceeds to the payment of the
obligation and to return the balance, if any, to the pledgor
(Art. 1872, Old Civil Code [Art. 2112, New Civil Code]).
This is the essence of this contract, for, according to law,
a pledgee cannot become the owner of, nor appropriate
to himself, the thing given in pledge (Article 1859, Old Civil
Code [Art. 2088, New Civil Code])… The fact that the
warehouse receipt covering palay was delivered,
endorsed in blank, to the bank does not alter the situation,
the purpose of such endorsement being merely to transfer
the juridical possession of the property to the pledgees
and to forestall any possible disposition thereof on the part
of the pledgor. This is true notwithstanding the provisions
of the Warehouse Receipt Law.
The warehouseman, nevertheless, is entitled to the
warehouseman’s lien that attaches to the goods invokable
against anyone who claims a right of possession thereon.
The next issue to resolve is the duration of time the right
of petitioner over the goods may be held subject to the
warehouseman’s lien.
Sections 8, 29 and 31 of the Warehouse Receipts Law
now come to fore. They provide, as follows:
SECTION 8. Obligation of warehousemen to deliver. – A
warehouseman, in the absence of some lawful excuse
provided by this Act, is bound to deliver the goods upon a
demand made either by the holder of a receipt for the
goods or by the depositor, if such demand is accompanied
with:
(a) An offer to satisfy warehouseman’s lien;
(b) An offer to surrender the receipt, if negotiable, with
such indorsements as would be necessary for the
negotiation of the receipt; and
(c) A readiness and willingness to sign, when the goods
are delivered, an acknowledgment that they have
been delivered, if such signature is requested by the
warehouseman.
In case the warehouseman refuses or fails to deliver the
goods in compliance with a demand by the holder or
depositor so accompanied, the burden shall be upon the
warehouseman to establish the existence of a lawful
excuse for such refusal.
SECTION 29. How the lien may be lost. – A
warehouseman loses his lien upon goods;
(a) By surrendering possession thereof, or
54

(b) By refusing to deliver the goods when a demand
is made with which he is bound to comply under
the provisions of this Act.
SECTION 31. Warehouseman need not deliver until lien
is satisfied. – A warehouseman having a lien valid against
the person demanding the goods may refuse to deliver
the goods to him until the lien is satisfied.
Simply put, where a valid demand by the lawful holder of
the quedans for the delivery of the goods is refused by the
warehouseman, despite the absence of a lawful excuse
provided by the statute itself, the warehouseman’s lien is
thereafter concomitantly lost. As to what the law deems a
valid demand, Section 8 enumerates what must
accompany a demand; while as regards the reasons
which a warehouseman may invoke to legally refuse to
effect delivery of the goods covered by the quedans,
these are:
(1) That the holder of the receipt does not satisfy the
conditions prescribed in Section 8 of the Act. (See
Sec. 8, Act No. 2137)
(2) That the warehouseman has legal title in himself
on the goods, such title or right being derived
directly or indirectly from a transfer made by the
depositor at the time of or subsequent to the
deposit for storage, or from the warehouseman’s
lien. (Sec. 16, Act No. 2137)
(3) That the warehouseman has legally set up the
title or right of third persons as lawful defense for
non-delivery of the goods as follows:
(a) Where the warehouseman has been requested,
by or on behalf of the person lawfully entitled to a
right of property of or possession in the goods,
not to make such delivery (Sec. 10, Act No.
2137), in which case, the warehouseman may,
either as a defense to an action brought against
him for nondelivery of the goods, or as an original
suit, whichever is appropriate, require all known
claimants to interplead (Sec. 17, Act No. 2137);
(b) Where the warehouseman had information that
the delivery about to be made was to one not
lawfully entitled to the possession of the goods
(Sec. 10, Act No. 2137), in which case, the
warehouseman shall be excused from liability for
refusing to deliver the goods, either to the
depositor or person claiming under him or to the
adverse claimant, until the warehouseman has
had a reasonable time to ascertain the validity of
the adverse claims or to bring legal proceedings
to compel all claimants to interplead (Sec. 18, Act
No. 2137); and
Virtus in infirmitate perficitur! 2 Cor. 12:9
(c) Where the goods have already been lawfully sold
to third persons to satisfy a warehouseman’s lien,
or have been lawfully sold or disposed of because
of their perishable or hazardous nature. (Sec. 36,
Act No. 2137).
(4) That the warehouseman having a lien valid
against the person demanding the goods refuses
to deliver the goods to him until the lien is
satisfied. (Sec. 31, Act No. 2137)
(5) That the failure was not due to any fault on the
part of the warehouseman, as by showing that,
prior to demand for delivery and refusal, the
goods were stolen or destroyed by fire, flood, etc.,
without any negligence on his part, unless he has
contracted so as to be liable in such case, or that
the goods have been taken by the mistake of a
third person without the knowledge or implied
assent of the warehouseman, or some other
justifiable ground for non-delivery. (67 C.J.
[45]
532)
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, 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 warehouseman’s
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 warehouseman’s 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 Noah’s 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 petitioner’s
petition to nullify the trial court’s order of 01 March 1995
confirms the warehouseman’s lien; however, such lien,
nevertheless, should be confined to the fees and charges
as of the date in March 1990 when Noah’s Ark refused to
heed PNB’s 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
55

[46]
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
[47]
pledgors.
D. Respondent Judge Committed Grave Abuse of
Discretion.
We hold that the trial court deprived petitioner of due
process in rendering the challenged order of 15 April 1996
without giving petitioner an opportunity to present its
evidence.
It was likewise grave abuse of discretion on the part of
respondent court to order immediate execution of the 15
April 1997 order. We ruled earlier that said order was in
the nature of a final order fixing the amount of the
warehouseman’s charges and fees, and petitioner’s net
liability, after the set-off of the money judgment in its favor
in G.R. No. 107243. Section 1 of Rule 39 of the Rules of
Court explicitly provides that execution shall issue as a
matter of right, on motion, upon a judgment or order that
disposes of the action or proceeding upon the expiration
of the period to appeal therefrom if no appeal has been
duly perfected. Execution pending appeal is, however,
allowed in Section 2 thereof, but only on motion with due
notice to the adverse party, more importantly, only “upon
good reasons shown in a special order.” Here, there is no
showing that a motion for execution pending appeal was
filed and that a special order was issued by respondent
court. Verily, the immediate execution only served to
further strengthen our perception of undue and
unwarranted haste on the part of respondent court in
resolving the issue of the warehouseman’s lien in favor of
private respondents.
In light of the above, we need not rule anymore on the
fourth formulated issue.
WHEREFORE, the petition is GRANTED. The challenged
orders of 15 April and 14 July 1997, including the notices
of levy and garnishment, of the Regional Trial Court of
Manila, Branch 45, in Civil Case No. 90-53023
are REVERSED and SET ASIDE, and said court
is DIRECTED to conduct further proceedings in said
case:
(1) to allow petitioner to present its evidence on the
matter of the warehouseman’s lien;
(2) to compute the petitioner’s warehouseman’s lien
in light of the foregoing observations; and
(3) to determine whether, for the relevant period,
Noah’s Ark maintained a sufficient inventory to
cover the volume of sugar specified in the
quedans.
IV. Banking Laws
A. The New Central Bank Act (R.A. No. 7653)
1. Responsibility and Primary Objective
Virtus in infirmitate perficitur! 2 Cor. 12:9
Perez vs. Monetary Board, 20 SCRA 592
G.R. No. L-23307, June 30, 1967 (BENGZON)
The Central Bank is a government corporation created
principally to administer monetary and banking system of
the Republic, not a prosecution agency like
the fiscal's office.
FACTS
Petitioner-appellant Damaso P. Perez, for himself
and in a derivative capacity on behalf of the Republic
Bank, instituted mandamus proceedings CFI of Manila on
June 23, 1962, against the Monetary Board, the
Superintendent of Banks, the Central Bank and the
Secretary of Justice. His object was to compel these
respondents to prosecute, among others, Pablo Roman
and several other Republic Bank officials for violations of
the General Banking Act (specifically secs. 76-
78 and 83 thereof) and the Central Bank Act, and for
falsification of public or commercial documents in
connection with certain alleged anomalous loans
amounting to P1,303,400.00 authorized by Roman and
the other bank officials.
The Central Bank and respondent officials, on the other
hand, averred that they had already done their duty under
the law by referring to the special prosecutors of the
Department of Justice for criminal investigation and
prosecution those cases involving the alleged anomalous
loans.
Intervenors-appellees filed a motion to dismiss before the
lower claiming that the ouster of Pablo Roman
and his family from the management of the Republic Bank
effected by the voting trust agreement rendered the
mandamus case moot and academic.
Appellants, contending that the ouster of Pablo Roman
from Republic Bank's management and control has not
altered or rendered moot the issues in the case,
[3]
argue that the remedy of mandamus lies to compel
respondents to prosecute the aforementioned Pablo
Roman and company.
ISSUE
May the Central Bank and its officials be compelled
by mandamus to prosecute criminally Pablo Roman
and company for their alleged violation of the banking
laws?
HELD
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 We find
nothing in said laws that imposes a clear, specific duty on
the former to do the actual prosecution of the latter. The
56

Central Bank is a government corporation created
principally to administer monetary and banking system of
[4] [5]
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
[6]
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. Annexes 5 to 7-C CBP of
respondents’ answer and even petitioners’ opposition to
[7]
the first motion to dismiss show that 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.
Moreover, it does not appear from the law that only the
Central Bank or its respondent officials can cause
the prosecution of alleged violations of banking
laws. Said violations constitute a public offense, the
prosecution of which is a matter of public interest and
hence, anyone - even private individuals - can denounce
such violations before the prosecuting authorities. Since
Perez himself could cause the filing of criminal complaints
against those allegedly involved in the anomalous loans,
if any, then he has a plain, adequate and speedy remedy
in the ordinary course of law, which makes mandamus
against respondents improper.
WHEREFORE, the order of dismissal appealed from is,
as it is hereby, affirmed.
Romeo Busuego vs. Court of Appeals
G.R. No. 95326, March 11, 1999 (PURISIMA)
The Central Bank of the. Philippines (now Bangko Sentral
ng Pilipinas), through the Monetary Board, is the
government agency charged with the responsibility of
administering the monetary, banking and credit system of
[19]
the country and is granted the power of supervision and
examination over banks and non-bank financial
institutions performing quasi-banking functions.
FACTS
The 16th regular examination of the books and records of
the PAL Employees Savings and Loan Association, Inc.
("PESALA") was conducted from March 14 to April 16,
1988 by a team of CB examiners headed by Belinda
Rodriguez. Following the said examination, several
anomalies and irregularities committed by the herein
petitioners; PESALA's directors and officers, were
uncovered.
Virtus in infirmitate perficitur! 2 Cor. 12:9
On September 9, 1988, the Monetary Board adopted and
issued MB Resolution No. 805.
Petitioners theorize that Monetary Board Resolution No.
805 is null and void for being violative of petitioners' right
to due process. They opine that with the issuance of
Monetary Board Resolution No. 805, "they are now barred
from being elected or designated as officers again of
PESALA, and are likewise prevented from future
engagements or employments in all institutions under the
supervision of the Central Bank thereby virtually depriving
them of the opportunity to seek employments in the field
which they can excel and are best fitted." According to
them, the Monetary Board is not vested with "the authority
to disqualify persons from occupying positions in
institutions under the supervision of the Central Bank
without proper notice and hearing" nor is it vested with
authority "to file civil and criminal cases against its
officers/directors for suspected fraudulent acts."
ISSUE
Were petitioners’ right to due process violated?
HELD
NO. It must be remembered that the Central Bank of the.
Philippines (now Bangko Sentral ng Pilipinas), through
the Monetary Board, is the government agency charged
with the responsibility of administering the monetary,
[19]
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
[20]
as PESALA, form part of .
The special law governing savings and loan association
is Republic Act No. 3779, as amended, otherwise known
as the "Savings and Loan Association Act." Said law
authorizes the Monetary Board to conduct regular yearly
examinations of the books and records of savings and
loan associations, to suspend, a savings and loan
association for violation of law, to decide any controversy
over the obligations and duties of directors and officers,
and to take remedial measures, among others.
From the foregoing, it is gleanable that 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
57

their side." As may be gathered from the records, the said
requirement was properly complied with by the
respondent Monetary Board.
We sustain the ruling of the Court of Appeals that
petitioners' suspension was only preventive in nature and
therefore, no notice or, hearing was necessary. Until such
time that the petitioners have proved their innocence, they
may be preventively suspended from holding office so as
not to influence the conduct of investigation, and to
prevent the commission of further irregularities.
Neither were petitioners deprived of their lawful calling as
they are free to look for another employment so long as
the agency or company involved is not subject to Central
Bank control and supervision. Petitioners can still practise
their profession or engage in business as long as these
are not within the ambit of Monetary Board Resolution No.
805.
All things studiedly considered, the court upholds the
validity of Monetary Board Resolution No. 805 and affirms
the decision of the respondent court.
WHEREFORE, the petition is DENIED.
Ana Maria Koruga vs. Teodoro Arcenas, Jr.
G.R. No. 168332, G.R. No. 169053, June 19, 2009
(NACHURA)
The law vests in the BSP the supervision over operations
and activities of banks.
FACTS
Koruga's Complaint charged defendants with violation of
Sections 31 to 34 of the Corporation Code, prohibiting
self-dealing and conflict of interest of directors and
officers; invoked her right to inspect the corporation's
records under Sections 74 and 75 of the Corporation
Code; 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 self-dealing.
ISSUE
1. Which body has jurisdiction over the Koruga
Complaint, the RTC or the BSP?
2. Is Koruga’s invocation of the Corporation Code
proper?
HELD
Which body has jurisdiction over the Koruga
Complaint, the RTC or the BSP?
BSP. It is clear that the acts complained of pertain to the
conduct of Banco Filipino's banking business. A bank, as
Virtus in infirmitate perficitur! 2 Cor. 12:9
[21]
defined in the General Banking Law, refers to an entity
engaged in the lending of funds obtained in the form of
[22]
deposits. 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. Banks are
affected with public interest because they receive funds
from the general public in the form of deposits. It is the
Government's responsibility to see to it that the financial
interests of those who deal with banks and banking
institutions, as depositors or otherwise, are protected. 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
[23]
general public as well.
The law vests in the BSP the supervision over operations
and activities of banks. The New Central Bank
Act provides:
Section 25. Supervision and Examination. - The Bangko
Sentral shall have supervision over, and conduct periodic
or special examinations of, banking institutions and quasi
banks, including their subsidiaries and affiliates engaged
[24]
in allied activities.
Specifically, the BSP's supervisory and regulatory powers
include:
4.1 The issuance of rules of conduct or the
establishment of standards of operation for uniform
application to all institutions or functions covered,
taking into consideration the distinctive character of
the operations of institutions and the substantive
similarities of specific functions to which such rules,
modes or standards are to be applied;
4.2 The conduct of examination to determine
compliance with laws and regulations if the
circumstances so warrant as determined by the
Monetary Board;
4.3 Overseeing to ascertain that laws and
Regulations are complied with;
4.4 Regular investigation which shall not be oftener
than once a year from the last date of
examination to determine whether an institution
is conducting its business on a safe or sound
basis: Provided, That the deficiencies/irregularities
found by or discovered by an audit shall be
immediately addressed;
4.5 Inquiring into the solvency and liquidity of the
institution (2-D); or
[25]
4.6 Enforcing prompt corrective action.
Koruga alleges that "the dispute in the trial court involves
the manner with which the Directors' (sic) have handled
58

the Bank's affairs, specifically the fraudulent loans
and dacion en pago authorized by the Directors in favor
of several dummy corporations known to have close ties
[26]
and are indirectly controlled by the Directors." Her
allegations, then, call for the examination of the allegedly
questionable loans. Whether these loans are covered by
the prohibition on self-dealing is a matter for the BSP to
determine. These are not ordinary intra-corporate
matters; rather, they involve banking activities which are,
by law, regulated and supervised by the BSP. As the
Court has previously held:
It is well-settled in both law and jurisprudence that 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
[27]
to immediately take charge of its assets and liabilities.
Correlatively, the General Banking Law of
2000 specifically deals with loans contracted by bank
directors or officers, thus:
SECTION 36. Restriction on Bank Exposure to
Directors, Officers, Stockholders and Their Related
Interests. -- No director or officer of any bank shall,
directly or indirectly, for himself or as the representative
or agent of others, borrow from such bank nor shall he
become a guarantor, indorser or surety for loans from
such bank to others, or in any manner be an obligor or
incur any contractual liability to the bank except with the
written approval of the majority of all the directors of the
bank, excluding the director concerned: Provided, That
such written approval shall not be required for loans, other
credit accommodations and advances granted to officers
under a fringe benefit plan approved by the Bangko
Sentral. The required approval shall be entered upon the
records of the bank and a copy of such entry shall be
transmitted forthwith to the appropriate supervising and
examining department of the Bangko Sentral.
Dealings of a bank with any of its directors, officers or
stockholders and their related interests shall be upon
terms not less favorable to the bank than those offered to
others.
After due notice to the board of directors of the bank, the
office of any bank director or officer who violates the
provisions of this Section may be declared vacant and the
director or officer shall be subject to the penal provisions
of the New Central Bank Act.
The Monetary Board may regulate the amount of
loans, credit accommodations and guarantees that
may be extended, directly or indirectly, by a bank to
its directors, officers, stockholders and their related
interests, as well as investments of such bank in
enterprises owned or controlled by said directors,
officers, stockholders and their related
interests. However, the outstanding loans, credit
Virtus in infirmitate perficitur! 2 Cor. 12:9
accommodations and guarantees which a bank may
extend to each of its stockholders, directors, or officers
and their related interests, shall be limited to an amount
equivalent to their respective unencumbered deposits and
book value of their paid-in capital contribution in the bank:
Provided, however, That loans, credit accommodations
and guarantees secured by assets considered as non-risk
by the Monetary Board shall be excluded from such limit:
Provided, further, That loans, credit accommodations and
advances to officers in the form of fringe benefits granted
in accordance with rules as may be prescribed by the
Monetary Board shall not be subject to the individual limit.
The Monetary Board shall define the term "related
interests."
The limit on loans, credit accommodations and
guarantees prescribed herein shall not apply to loans,
credit accommodations and guarantees extended by a
[28]
cooperative bank to its cooperative shareholders.
***cf powers and functions of the Monetary Board as
discussed under No. 2 below.***
Is Koruga’s invocation of the Corporation Code
proper?
NO. Koruga's invocation of the provisions of the
Corporation Code is misplaced. In an earlier case with
similar antecedents, we ruled that:
The Corporation Code, however, is a general law applying
to all types of corporations, while the New Central Bank
Act regulates specifically banks and other financial
institutions, including the dissolution and liquidation
thereof. As between a general and special law, the latter
[31]
shall prevail - generalia specialibus non derogant.
Consequently, it is not the Interim Rules of Procedure on
[32]
Intra-Corporate Controversies, or Rule 59 of the Rules
of Civil Procedure on Receivership, that would apply to
this case. Instead, Sections 29 and 30 of the New Central
Bank Act should be followed, viz.:
Section 29. Appointment of Conservator. - Whenever, on
the basis of a report submitted by the appropriate
supervising or examining department, the Monetary
Board finds that a bank or a quasi-bank is in a state of
continuing inability or unwillingness to maintain a
condition of liquidity deemed adequate to protect the
interest of depositors and creditors, the Monetary Board
may appoint a conservator with such powers as the
Monetary Board shall deem necessary to take charge of
the assets, liabilities, and the management thereof,
reorganize the management, collect all monies and debts
due said institution, and exercise all powers necessary to
restore its viability. The conservator shall report and be
responsible to the Monetary Board and shall have the
power to overrule or revoke the actions of the previous
management and board of directors of the bank or quasi-
bank.
x x x x
59

The Monetary Board shall terminate the conservatorship
when it is satisfied that the institution can continue to
operate on its own and the conservatorship is no longer
necessary. The conservatorship shall likewise be
terminated should the Monetary Board, on the basis of the
report of the conservator or of its own findings, determine
that the continuance in business of the institution would
involve probable loss to its depositors or creditors, in
which case the provisions of Section 30 shall apply.
Section 30. Proceedings in Receivership and
Liquidation. - Whenever, upon report of the head of the
supervising or examining department, the Monetary
Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due
in the ordinary course of business: Provided, That
this shall not include inability to pay caused by
extraordinary demands induced by financial panic
in the banking community;
(b) has insufficient realizable assets, as determined
by the Bangko Sentral, to meet its liabilities; or
(c) cannot continue in business without involving
probable losses to its depositors or creditors; or
(d) has willfully violated a cease and desist order
under Section 37 that has become final, involving
acts or transactions which amount to fraud or a
dissipation of the assets of the institution; in which
cases, the Monetary Board may summarily
and without need for prior hearing forbid the
institution from doing business in the
Philippines and designate the Philippine
Deposit Insurance Corporation as receiver of
the banking institution.
x x x x
The actions of the Monetary Board taken under this
section or under Section 29 of this Act shall be final
and executory, and may not be restrained or set aside
by the court except on petition for certiorari on the
ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion as
to amount to lack or excess of jurisdiction. The petition
for certiorari may only be filed by the stockholders of
record representing the majority of the capital stock within
ten (10) days from receipt by the board of directors of the
institution of the order directing receivership, liquidation or
conservatorship.
The designation of a conservator under Section 29 of this
Act or the appointment of a receiver under this section
shall be vested exclusively with the Monetary Board.
Furthermore, the designation of a conservator is not a
[33]
precondition to the designation of a receiver.
Virtus in infirmitate perficitur! 2 Cor. 12:9
On the strength of these provisions, it is the Monetary
Board that exercises exclusive jurisdiction over
proceedings for receivership of banks.
Crystal clear in Section 30 is the provision that says the
"appointment of a receiver under this section shall be
vested exclusively with the Monetary Board." The term
"exclusively" connotes that only the Monetary Board can
resolve the issue of whether a bank is to be placed under
receivership and, upon an affirmative finding, it also has
authority to appoint a receiver. This is further affirmed by
the fact that the law allows the Monetary Board to take
action "summarily and without need for prior hearing."
And, as a clincher, the law explicitly provides that "actions
of the Monetary Board taken under this section or under
Section 29 of this Act shall be final and executory, and
may not be restrained or set aside by the court except on
a petition for certiorari on the ground that the action taken
was in excess of jurisdiction or with such grave abuse of
discretion as to amount to lack or excess of jurisdiction."
From the foregoing disquisition, there is no doubt that the
RTC has no jurisdiction to hear and decide a suit that
seeks to place Banco Filipino under receivership.
Koruga herself recognizes the BSP's power over the
allegedly unlawful acts of Banco Filipino's directors. The
records of this case bear out that Koruga, through her
[34]
legal counsel, wrote the Monetary Board on April 21,
2003 to bring to its attention the acts she had enumerated
in her complaint before the RTC.
Thus, the court's jurisdiction could only have been
invoked after the Monetary Board had taken action on the
matter and only on the ground that the action taken was
in excess of jurisdiction or with such grave abuse of
discretion as to amount to lack or excess of jurisdiction.
Finally, there is one other reason why Koruga's complaint
before the RTC cannot prosper. Given her own admission
- and the same is likewise supported by evidence - that
she is merely a minority stockholder of Banco Filipino, she
would not have the standing to question the Monetary
Board's action. Section 30 of the New Central Bank Act
provides:
The petition for certiorari may only be filed by the
stockholders of record representing the majority of the
capital stock within ten (10) days from receipt by the board
of directors of the institution of the order directing
receivership, liquidation or conservatorship.
WHEREFORE, the foregoing premises considered, the
Petition in G.R. No. 168332 is DISMISSED, while the
Petition in G.R. No. 169053 is GRANTED.
60

2. Monetary Board - Powers and Functions
Ana Maria Koruga vs. Teodoro Arcenas, Jr. Ibid.
Furthermore, the authority to determine whether a bank is
conducting business in an unsafe or unsound manner is
also vested in the Monetary Board.
The General Banking Law of 2000 provides:
SECTION 56. Conducting Business in an Unsafe or
Unsound Manner. -- In determining whether a particular
act or omission, which is not otherwise prohibited by any
law, rule or regulation affecting banks, quasi-banks or
trust entities, may be deemed as conducting business in
an unsafe or unsound manner for purposes of this
Section, the Monetary Board shall consider any of the
following circumstances:
56.1. The act or omission has resulted or may result in
material loss or damage, or abnormal risk or danger
to the safety, stability, liquidity or solvency of the
institution;
56.2. The act or omission has resulted or may result in
material loss or damage or abnormal risk to the
institution's depositors, creditors, investors,
stockholders or to the Bangko Sentral or to the
public in general;
56.3. The act or omission has caused any undue injury,
or has given any unwarranted benefits, advantage
or preference to the bank or any party in the
discharge by the director or officer of his duties and
responsibilities through manifest partiality, evident
bad faith or gross inexcusable negligence; or
56.4. The act or omission involves entering into any
contract or transaction manifestly and grossly
disadvantageous to the bank, quasi-bank or trust
entity, whether or not the director or officer profited
or will profit thereby.
Whenever a bank, quasi-bank or trust entity persists in
conducting its business in an unsafe or unsound manner,
the Monetary Board may, without prejudice to the
administrative sanctions provided in Section 37 of the
New Central Bank Act, take action under Section 30 of the
same Act and/or immediately exclude the erring bank
from clearing, the provisions of law to the contrary
notwithstanding.
Finally, the New Central Bank Act grants the Monetary
Board the power to impose administrative sanctions on
the erring bank:
Section 37. Administrative Sanctions on Banks and
Quasi-banks. - Without prejudice to the criminal sanctions
against the culpable persons provided in Sections 34, 35,
Virtus in infirmitate perficitur! 2 Cor. 12:9
and 36 of this Act, the Monetary Board may, at its
discretion, impose upon any bank or quasi-bank,
their directors and/or officers, for any willful violation of
its charter or by-laws, willful delay in the submission of
reports or publications thereof as required by law, rules
and regulations; any refusal to permit examination into the
affairs of the institution; any willful making of a false or
misleading statement to the Board or the appropriate
supervising and examining department or its examiners;
any willful failure or refusal to comply with, or violation of,
any banking law or any order, instruction or regulation
issued by the Monetary Board, or any order, instruction or
ruling by the Governor; or any commission of
irregularities, and/or conducting business in an
unsafe or unsound manner as may be determined by
the Monetary Board, the following administrative
sanctions, whenever applicable:
(a) fines in amounts as may be determined by the
Monetary Board to be appropriate, but in no case
to exceed Thirty thousand pesos (P30,000) a day
for each violation, taking into consideration the
attendant circumstances, such as the nature and
gravity of the violation or irregularity and the size
of the bank or quasi-bank;
(b) suspension of rediscounting privileges or access
to Bangko Sentral credit facilities;
(c) suspension of lending or foreign exchange
operations or authority to accept new deposits or
make new investments;
(d) suspension of interbank clearing privileges;
and/or
(e) revocation of quasi-banking license.
Resignation or termination from office shall not exempt
such director or officer from administrative or criminal
sanctions.
The Monetary Board may, whenever warranted by
circumstances, preventively suspend any director or
officer of a bank or quasi-bank pending an investigation:
Provided, That should the case be not finally decided by
the Bangko Sentral within a period of one hundred twenty
(120) days after the date of suspension, said director or
officer shall be reinstated in his position: Provided, further,
That when the delay in the disposition of the case is due
to the fault, negligence or petition of the director or officer,
the period of delay shall not be counted in computing the
period of suspension herein provided.
The above administrative sanctions need not be applied
in the order of their severity.
Whether or not there is an administrative proceeding, if
the institution and/or the directors and/or officers
concerned continue with or otherwise persist in the
commission of the indicated practice or violation, the
Monetary Board may issue an order requiring the
institution and/or the directors and/or officers concerned
to cease and desist from the indicated practice or
violation, and may further order that immediate action be
61

taken to correct the conditions resulting from such
practice or violation. The cease and desist order shall be
immediately effective upon service on the respondents.
The respondents shall be afforded an opportunity to
defend their action in a hearing before the Monetary
Board or any committee chaired by any Monetary Board
member created for the purpose, upon request made by
the respondents within five (5) days from their receipt of
the order. If no such hearing is requested within said
period, the order shall be final. If a hearing is conducted,
all issues shall be determined on the basis of records,
after which the Monetary Board may either reconsider or
make final its order.
The Governor is hereby authorized, at his discretion, to
impose upon banking institutions, for any failure to comply
with the requirements of law, Monetary Board regulations
and policies, and/or instructions issued by the Monetary
Board or by the Governor, fines not in excess of Ten
thousand pesos (P10,000) a day for each violation, the
imposition of which shall be final and executory until
reversed, modified or lifted by the Monetary Board on
appeal.
BSP Monetary Board vs. Hon. Antonio-Valenzuela,
G.R. No. 184778, October 2, 2009 (VELASCO, JR)
The respondent banks have failed to show that they are
entitled to copies of the ROEs. They can point to no
provision of law, no section in the procedures of the BSP
that shows that the BSP is required to give them copies of
the ROEs.
FACTS
In September of 2007, the Supervision and Examination
Department (SED) of the Bangko Sentral ng
Pilipinas (BSP) conducted examinations of the books of
the respondent banks.
After the examinations, exit conferences were held with
the officers or representatives of the banks wherein the
SED examiners provided them with copies of Lists of
Findings/Exceptions containing the deficiencies
discovered during the examinations. These banks were
then required to comment and to undertake the remedial
measures stated in these lists within 30 days from their
receipt of the lists, which remedial measures included the
infusion of additional capital. Though the banks claimed
that they made the additional capital infusions, petitioner
Chuchi Fonacier, officer-in-charge of the SED, sent
separate letters to the Board of Directors of each bank,
informing them that the SED found that the banks failed
to carry out the required remedial measures. In response,
the banks requested that they be given time to obtain BSP
approval to amend their Articles of Incorporation, that they
have an opportunity to seek investors. They requested as
well that the basis for the capital infusion figures be
disclosed, and noted that none of them had received the
Report of Examination (ROE) which finalizes the audit
findings. They also requested meetings with the BSP
Virtus in infirmitate perficitur! 2 Cor. 12:9
audit teams to reconcile audit figures. In response,
Fonacier reiterated the banks' failure to comply with the
directive for additional capital infusions.
On May 12, 2008, the RBPI filed a complaint for
nullification of the BSP ROE with application for a TRO
and writ of preliminary injunction before the RTC against
Fonacier, the BSP, Amado M. Tetangco, Jr., Romulo L.
Neri, Vicente B. Valdepenas, Jr., Raul A. Boncan, Juanita
D. Amatong, Alfredo C. Antonio, and Nelly F. Villafuerte.
RBPI prayed that Fonacier, her subordinates, agents, or
any other person acting in her behalf be enjoined from
submitting the ROE or any similar report to the Monetary
Board (MB), or if the ROE had already been submitted,
the MB be enjoined from acting on the basis of said ROE,
on the allegation that the failure to furnish the bank with a
copy of the ROE violated its right to due process. Other
respondent banks followed suit.
In granting the writs of preliminary injunction, the trial
court held that the submission of the ROEs to the MB
before the respondent banks would violate the right to due
process of said banks.
ISSUE
Are the respondents entitled to the WPI’s?
HELD
NO. The requisites for preliminary injunctive relief are: (a)
the invasion of right sought to be protected is material and
substantial; (b) the right of the complainant is clear and
unmistakable; and (c) there is an urgent and paramount
necessity for the writ to prevent serious damage.
As such, a writ of preliminary injunction may be issued
only upon clear showing of an actual existing right to be
protected during the pendency of the principal action. The
twin requirements of a valid injunction are the existence
of a right and its actual or threatened violations. Thus, to
be entitled to an injunctive writ, the right to be protected
and the violation against that right must be shown.
The respondent banks have failed to show that they
are entitled to copies of the ROEs. They can point to no
provision of law, no section in the procedures of the BSP
that shows that the BSP is required to give them copies of
the ROEs. Sec. 28 of RA 7653, or the New Central Bank
Act, which governs examinations of banking institutions,
provides that the ROE shall be submitted to the MB; the
bank examined is not mentioned as a recipient of the
ROE.
The respondent banks cannot claim a violation of their
right to due process if they are not provided with copies of
the ROEs. The same ROEs are based on the lists of
findings/exceptions containing the deficiencies found by
the SED examiners when they examined the books of the
respondent banks. As found by the RTC, these lists of
findings/exceptions were furnished to the officers or
representatives of the respondent banks, and the
respondent banks were required to comment and to
62

undertake remedial measures stated in said lists. Despite
these instructions, respondent banks failed to comply with
the SED's directive.
Respondent banks are already aware of what is required
of them by the BSP, and cannot claim violation of their
right to due process simply because they are not
furnished with copies of the ROEs. Respondent banks
were held by the CA to be entitled to copies of the ROEs
prior to or simultaneously with their submission to the MB,
on the principles of fairness and transparency. Further,
the CA held that if the contents of the ROEs are
essentially the same as those of the lists of
findings/exceptions provided to said banks, there is no
reason not to give copies of the ROEs to the banks. This
is a flawed conclusion, since if the banks are already
aware of the contents of the ROEs, they cannot say that
fairness and transparency are not present. If sanctions
are to be imposed upon the respondent banks, they are
already well aware of the reasons for the sanctions,
having been informed via the lists of findings/exceptions,
demolishing that particular argument. The ROEs would
then be superfluities to the respondent banks, and should
not be the basis for a writ of preliminary injunction. Also,
the reliance of the RTC on Banco Filipino v. Monetary
[9]
Board is misplaced. The petitioner in that case was held
to be entitled to annexes of the Supervision and
Examination Sector's reports, as it already had a copy of
the reports themselves. It was not the subject of the case
whether or not the petitioner was entitled to a copy of the
reports. And the ruling was made after the petitioner bank
was ordered closed, and it was allowed to be supplied
with annexes of the reports in order to better prepare its
defense. In this instance, at the time the respondent
banks requested copies of the ROEs, no action had yet
been taken by the MB with regard to imposing sanctions
upon said banks.
The issuance by the RTC of writs of preliminary injunction
is an unwarranted interference with the powers of the MB.
[10]
Secs. 29 and 30 of RA 7653 refer to the appointment of
a conservator or a receiver for a bank, which is a power
of the MB for which they need the ROEs done by the
supervising or examining department. The writs of
preliminary injunction issued by the trial court hinder the
MB from fulfilling its function under the law. The actions of
the MB under Secs. 29 and 30 of RA 7653 "may not be
restrained or set aside by the court except on petition
for certiorari on the ground that the action taken was in
excess of jurisdiction or with such grave abuse of
discretion as to amount to lack or excess of jurisdiction."
The writs of preliminary injunction order are precisely
what cannot be done under the law by preventing the MB
from taking action under either Sec. 29 or Sec. 30 of RA
7653.
***the third requisite is discussed under *closure.
BANGKO SENTRAL NG PILIPINAS, Petitioner, v.
FELICIANO P. LEGASPI, Respondent.
G.R. No. 205966, March 02, 2016 (PERALTA, J.)
In cases involving the BSP, the Monetary Board may
authorize the BSP Governor to represent it personally or
Virtus in infirmitate perficitur! 2 Cor. 12:9
through a counsel, even a private counsel, and the
authority to represent the BSP may be delegated to any
of its officers.
FACTS
Petitioner BSP filed a Complaint for annulment of title,
revocation of certificate and damages (with application for
TRO/writ of preliminary injunction) against Secretary Jose
L. Atienza, Jr., Luningning G. De Leon, Engr. Ramon C.
Angelo, Jr., Ex-Mayor Matilde A. Legaspi and respondent
Feliciano P. Legaspi before the RTC of Malolos, Bulacan.
Respondent, together with his fellow defendants, filed
their Answer to the complaint.
Respondent Legaspi filed a Motion to Dismiss dated
August 15, 2008 alleging that the RTC did not acquire
jurisdiction over the person of the petitioner BSP because
the suit is unauthorized by petitioner BSP itself and that
the counsel representing petitioner BSP is not authorized
and thus cannot bind the same petitioner. Respondent
Legaspi also alleged that the RTC did not acquire
jurisdiction over the subject matter of the action because
the complaint is prima facie void and that an illegal
representation produces no legal effect. In addition,
respondent Legaspi asserted that the complaint was
initiated without the authority of the Monetary Board and
that the complaint was not prepared and signed by the
Office of the Solicitor General (OSG), the statutory
counsel of government agencies.
CA ruled that the BSP, being a government-owned and
controlled corporation, should have been represented by
the Office of the Solicitor General (OSG) or the Office of
the Government Corporate Counsel (OGCC) and not a
private law firm or private counsel, as in this case.
ISSUES
1. Does RTC have exclusive jurisdiction over the
subject matter of Civil Case No. 209-M-2008?
2. Did BSP lawfully engage the services of [the]
undersigned counsel?
HELD
Does RTC have exclusive jurisdiction over the
subject matter of Civil Case No. 209-M-2008?
YES. Under Batas Pambansa Bilang 129, as amended by
Republic Act No. 7691, the RTC has exclusive original
jurisdiction over civil actions which involve title to
possession of real property, or any interest therein, where
the assessed value of the property involved exceeds
[9]
Twenty Thousand Pesos (P20,000.00). Petitioner BSP
insists that the property involved has an assessed value
of more than P20,000.00, as shown in a Tax Declaration
attached to the complaint. Incidentally, the
[10]
complaint, on its face, is devoid of any amount that
would confer jurisdiction over the RTC.
63

The non-inclusion on the face of the complaint of the
amount of the property, however, is not fatal because
attached in the complaint is a tax declaration (Annex "N"
in the complaint) of the property in question showing that
it has an assessed value of P215,320.00. It must be
emphasized that annexes to a complaint are deemed part
of, and should be considered together with the
[11]
complaint. In Fluor Daniel, Inc.-Philippines v. E.B.
[12]
Villarosa and Partners Co., Ltd., this Court ruled that in
determining the sufficiency of a cause of action, the courts
should also consider the attachments to the complaint.
Hence, being an annex to BSP's complaint, the tax
declaration showing the assessed value of the property is
deemed a part of the complaint and should be considered
together with it in determining that the RTC has exclusive
original jurisdiction.
Did BSP lawfully engage the services of [the]
undersigned counsel?
YES. Under Republic Act No. 7653, or the New Central
Bank Act, the BSP Governor is authorized to represent
the Bangko Sentral, either personally or through counsel,
including private counsel, as may be authorized by the
Monetary Board, in any legal proceedings, action or
[16]
specialized legal studies. Under the same law, the BSP
Governor may also delegate his power to represent the
BSP to other officers upon his own responsibility.
As aptly found by the RTC, petitioner BSP was able to
justify its being represented by a private counsel, thus:
BSP's complaint dated April 10, 2008 was verified by
Geraldine C. Alag, an officer of the BSP being the Director
of its Asset Management Department. It has been
explained that this was authorized by the Monetary Board,
as per Resolution No. 865 dated June 17, 2004, which
reads:
To approve delegation of authority to the Director, Asset
Management Department (AMD), or in his absence, the
Officer-in-Charge, AMD to sign all documents, contracts,
agreements and affidavits relating to the consolidation of
ownership, lease, cancellation of decision, redemption
and sale of acquired assets, and all documents to be filed
in court upon clearance by the Office of the General
Counsel and Legal Services x x x.
Also submitted to this Court is the Secretary's Certificate
issued by Silvina Q. Mamaril-Roxas, Officer-in-Charge,
Office of the Secretary of BSP's Monetary Board attesting
to Monetary Board Resolution No. 900, adopted and
passed on July 18, 2008, which reads:
3. At the regular meeting of the MB on 18 July 2008, the
MB adopted and passed MB Resolution No. 900, to wit:
The Board approved the recommendation of the Asset
Management Department (AMD) to engage the services
of Ongkiko Kalaw Manhit and Acorda Law Offices (OKMA
Law) as follows:
1. To act as counsel for the Bangko Sentral ng Pilipinas
(BSP) in a complaint to be filed against the Department of
Virtus in infirmitate perficitur! 2 Cor. 12:9
Environment and Natural Resources (DENR) Secretary,
et al., before the Regional Trial Court, Malolos, Bulacan,
involving a BSP-acquired property covered by Transfer
Certificate of Title No. 48694 P(M) with a total area of
483.87 hectares in Norzagaray, Bulacan, and under the
terms and conditions of the service engagement and the
fees as shown in Annex G of the memorandum of Ms.
Geraldine C. Alag, Director, AMB, dated 8 July 2008; and
2. To act as true and lawful attorney-in-fact of the BSP,
with full power and authority, as follows:
a. To represent the BSP in the pre-trial conference and
trial of the case;
b. To negotiate, conclude, enter into and execute a
compromise or amicable settlement of the case, under
such terms and conditions as an attorney-in-fact may
deem just and reasonable;
c. To agree on the simplification of issues;
d. To file and/or amend the necessary pleadings;
xxx
Thus, the filing of the instant suit and the engagement of
the services of counsel are duly authorized.
It is significant to note that neither the Governor or
General Counsel nor the Monetary Board of BSP has
come out to disown the authority given for the filing of the
instant suit and for the engagement of the services of
[17]
BSP's counsel of record in this case.
Therefore, as discussed above, in cases involving the
BSP, the Monetary Board may authorize the BSP
Governor to represent it personally or through a counsel,
even a private counsel, and the authority to represent the
BSP may be delegated to any of its officers.
WHEREFORE, the Petition for Review
on Certiorari under Rule 45 dated March 13, 2013 of
petitioner Bangko Sentral ng Pilipinas is GRANTED.
Monetary Board v. Philippine Veterans Bank
G.R. No. 189571, January 21, 2015 (PERALTA)
The BSP Monetary Board is indeed a quasi-judicial body
exercising quasi-judicial functions, hence, its decision in
MB Resolution No. 1139 cannot be the proper subject of
declaratory relief.
FACTS
64

Respondent established a pension loan product for bona
fide veterans or their surviving spouses, as well as salary
loan product for teachers and low-salaried employees
pursuant to its mandate under Republic Act (RA) Nos.
[3] [4]
3518 and 7169 to provide financial assistance to
veterans and teachers through, among others, a program
by charging a premium in the form of a higher fee known
as Credit Redemption Fund (CRF) from said borrowers.
On April 30, 2002, an examination was conducted by the
Supervision and Examination Department (SED) II of the
Bangko Sentral ng Pilipinas (BSP). It found, among other
things, that respondent’s collection of premiums from the
proceeds of various salary and pension loans of
borrowers to guarantee payment of outstanding loans
[5]
violated Section 54 of RA No. 8791 which states that
banks shall not directly engage in insurance business as
insurer. BSP notified respondent about the Insurance
Commission’s opinion that the CRF is a form of insurance.
Respondent complied with the BSP’s directive and
discontinued the collection of fees for CRF.
Petitioners issued Monetary Board (MB) Resolution No.
1139 directing respondent’s Trust and Investment
Department to return to the borrowers all the balances of
the CRF in the amount of P144,713,224.54 as of August
31, 2004, and to preserve the records of borrowers who
were deducted CRFs from their loan proceeds pending
resolution or ruling of the Office of the General Counsel of
the BSP.
Accordingly, respondent filed a Petition for Declaratory
Relief with the RTC of Makati City.
ISSUE
Is the petition for declaratory relief proper?
HELD
NO. Declaratory relief is defined as an action by any
person interested in a deed, will, contract or other written
instrument, executive order or resolution, to determine
any question of construction or validity arising from the
instrument, executive order or regulation, or statute; and
for a declaration of his rights and duties thereunder. The
only issue that may be raised in such a petition is the
question of construction or validity of provisions in an
[9]
instrument or statute.
Ergo, the Court, in CJH Development Corporation v.
[10]
Bureau of Internal Revenue, held that in the same
manner that court decisions cannot be the proper subjects
of a petition for declaratory relief, decisions of quasi-
judicial agencies cannot be subjects of a petition for
declaratory relief for the simple reason that if a party is not
agreeable to a decision either on questions of law or of
fact, it may avail of the various remedies provided by the
Rules of Court.
In view of the foregoing, the decision of the BSP Monetary
Board cannot be a proper subject matter for a petition for
declaratory relief since it was issued by the BSP Monetary
Virtus in infirmitate perficitur! 2 Cor. 12:9
Board in the exercise of its quasi-judicial powers or
functions.
The authority of the petitioners to issue the questioned MB
Resolution emanated from its powers under Section
[11] [12] [13]
37 of RA No. 7653 and Section 66 of RA No.
[14]
8791 to impose, at its discretion, administrative
sanctions, upon any bank for violation of any banking law.
The nature of the BSP Monetary Board as a quasi-judicial
agency, and the character of its determination of whether
or not appropriate sanctions may be imposed upon erring
banks, as an exercise of quasi-judicial function, have
been recognized by this Court in the case of United
[15]
Coconut Planters Bank v. E. Ganzon, Inc., to wit:
A quasi-judicial agency or body is an organ of government
other than a court and other than a legislature, which
affects the rights of private parties through either
adjudication or rule-making. The very definition of an
administrative agency includes its being vested with
quasi-judicial powers. The ever increasing variety of
powers and functions given to administrative agencies
recognizes the need for the active intervention of
administrative agencies in matters calling for technical
knowledge and speed in countless controversies which
cannot possibly be handled by regular courts. A “quasi-
judicial function” is a term which applies to the action,
discretion, etc. of public administrative officers or bodies,
who are required to investigate facts, or ascertain the
existence of facts, hold hearings, and draw conclusions
from them, as a basis for their official action and to
exercise discretion of a judicial nature.
Undoubtedly, the BSP Monetary Board is a quasi-
judicial agency exercising quasi-judicial powers or
functions. As aptly observed by the Court of Appeals,
the BSP Monetary Board is an independent central
monetary authority and a body corporate with fiscal
and administrative autonomy, mandated to provide
policy directions in the areas of money, banking, and
credit. It has the power to issue subpoena, to sue for
contempt those refusing to obey the subpoena
without justifiable reason, to administer oaths and
compel presentation of books, records and others,
needed in its examination, to impose fines and other
sanctions and to issue cease and desist order.
Section 37 of Republic Act No. 7653, in particular,
explicitly provides that the BSP Monetary Board shall
exercise its discretion in determining whether
administrative sanctions should be imposed on
banks and quasi-banks, which necessarily implies
that the BSP Monetary Board must conduct some
form of investigation or hearing regarding the same.
A priori, having established that the BSP Monetary Board
is indeed a quasi-judicial body exercising quasi-judicial
functions, then its decision in MB Resolution No. 1139
cannot be the proper subject of declaratory relief.
WHEREFORE, premises considered, the instant petition
is hereby GRANTED.
65

3. How the BSP handles Banks in Distress
a. Conservatorship
Central Bank of the Philippines vs. Court of Appeals
G.R. No. L-45710, October 3, 1985 (MAKASIAR)
The power of the Monetary Board to take over insolvent
banks for the protection of the public is recognized by
Section 29 of R.A. No. 265 (An Act Establishing the
Central Bank of the Philippines), which took effect on June
15, 1948, the validity of which is not in question.
FACTS
On April 28, 1965, Island Savings Bank, upon favorable
recommendation of its legal department, approved the
loan application for P80,000.00 of Sulpicio M. Tolentino,
who, as a security for the loan, executed on the same day
a real estate mortgage over his 100-hectare land.
A mere P17,000.00 partial release of the P80,000.00 loan
was made by the Bank. The Bank, thru its vice-president
and treasurer, promised repeatedly the release of the
P63,000.00 balance.
On August 13, 1965, the Monetary Board of the Central
Bank, after finding Island Savings Bank was suffering
liquidity problems, issued Resolution No. 1049, which
provides:
"In view of the chronic reserve deficiencies of the Island
Savings Bank against its deposit liabilities, the Board, by
unanimous vote, decided as follows:
"1) To prohibit the bank from making new loans and
investments [except investments in government
securities] excluding extensions or renewals of already
approved loans, provided that such extensions or
renewals shall be subject to review by the Superintendent
of Banks, who may impose such limitations as may be
necessary to insure correction of the bank's deficiency as
soon as possible;”
On June 14, 1968, the Monetary Board, after finding that
Island Savings Bank failed to put up the required capital
to restore its solvency, issued Resolution No. 967 which
prohibited Island Savings Bank from doing business in the
Philippines and instructed the Acting Superintendent of
Banks to take charge of the assets of Island Savings
Bank.
On August 1, 1968, Island Savings Bank, in view of
nonpayment of the P17,000.00 covered by the promissory
note, filed an application for the extra-judicial foreclosure
of the real estate mortgage covering the 100-hectare land
of Sulpicio M. Tolentino.
On January 20, 1969, Sulpicio M. Tolentino filed a petition
with the Court of First Instance of Agusan for injunction,
specific performance or rescission and damages with
preliminary injunction.
Virtus in infirmitate perficitur! 2 Cor. 12:9
ISSUE
Can the action of Sulpicio M. Tolentino for specific
performance prosper?
HELD
NO. When Island Savings Bank and Sulpicio M. Tolentino
entered into an P80,000.00 loan agreement on April 28,
1965, they undertook reciprocal obligations. In reciprocal
obligations, the obligation or promise of each party is the
consideration for that of the other (Penaco vs. Ruaya, 110
SCRA 46 [1981]; Vda. de Quirino vs. Pelarca, 29 SCRA 1
[1969]); and when one party has performed or is ready
and willing to perform his part of the contract, the other
party who has not performed or is not ready and willing to
perform incurs in delay (Art. 1169 of the Civil Code). The
promise of Sulpicio M. Tolentino to pay was the
consideration for the obligation of Island Savings Bank to
furnish the P80,000.00 loan. When Sulpicio M. Tolentino
executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan. From
such date, the obligation of Island Savings Bank to furnish
the P80,000.00 loan accrued. Thus, the Bank's delay in
furnishing the entire loan started on April 28, 1965, and
lasted for a period of 3 years or when the Monetary Board
of the Central Bank issued Resolution No. 967 on June
14, 1968, which prohibited Island Savings Bank from
doing further business. Such prohibition made it legally
impossible for Island Savings Bank to furnish the
P63,000.00 balance of the P80,000.00 loan. The power
of the Monetary Board to take over insolvent banks
for the protection of the public is recognized by
Section 29 of R.A. No. 265, which took effect on June
15, 1948, the validity of which is not in question.
The Monetary Board Resolution No. 1049 issued on
August 13, 1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing
the P63,000.00 balance because said 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. Besides, 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 (Gutierrez
Repide vs. Afzelius and Afzelius, 39 Phil. 190 Phil. 190
[1918]). And, the mere fact of insolvency of a debtor is
never an excuse for the non-fulfillment of an obligation but
instead it is taken as a breach of the contract by him (Vol.
17A, 1974 ed., CJS p. 650).
Since Island Savings Bank was in default in fulfilling its
reciprocal obligation under their loan agreement, Sulpicio
M. Tolentino, under Article 1191 of the Civil Code, may
choose between specific performance or rescission with
damages in either case. But since Island Savings Bank
is now prohibited from doing further business by Monetary
Board Resolution No. 967, WE cannot grant specific
performance in favor of Sulpicio M. Tolentino.
66

Since Island Savings Bank failed to furnish the
P63,000.00 balance of the P80,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became
unenforceable to such extent. P63,000.00 is 78.75% of
P80,000.00, hence the real estate mortgage covering 100
hectares is unenforceable to the extent of 78.75
hectares. The mortgage covering the remainder of 21.25
hectares subsists as a security for the P17,000.00
debt. 21.25 hectares is more than sufficient to secure a
P17,000.00 debt.
WHEREFORE, the decision of the court of appeals dated
February 11, 1977 is hereby modified.
Central Bank of the Philippines vs. Court of Appeals
G.R. No. 88353, May 8, 1992 (DAVIDE, JR)
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.
FACTS
Petitioners claim that on 29 April 1983, during the regular
examination of the PBP, CB examiners stumbled upon
some highly questionable loans which had been extended
by the PBP management to several entities. Upon further
examination, it was discovered that these loans, totalling
approximately P300 million, were "fictitious" as they were
extended, without collateral, to certain interests related to
PBP owners themselves. Said loans were deemed to be
anomalous particularly because, the total paid-in capital
of PBP at that time was only P140.544 million. This means
that the entire paid-in capital of the bank, together with
some P160 million of depositors’ money, was utilized by
PBP management to fund these unsecured loans.
Sometime in August of the same year, at the height of the
controversy surrounding the discovery of the anomalous
loans, several blind items about a family-owned bank in
Binondo which granted fictitious loans to its stockholders
appeared in major newspapers. These news items
triggered a bank-run in PBP which resulted in continuous
over-drawings on the bank's demand deposit account with
the Central Bank; the over-drawings reached P74.109
million by 29 August 1983. By 17 January 1984, PBP's
overdraft with the CB increased to P143.955 million, an
indication of PBP's continuing inability to maintain that
condition of solvency and liquidity necessary to protect
the interests of its depositors and creditors. Hence, on 20
January 1984, on the basis of the report submitted by the
Supervision and Examination Sector, Department I of the
CB, the Monetary Board (MB), pursuant to its authority
under Section 28-A of R.A. No. 265 and by virtue of MB
Board Resolution No. 164, placed PBP under
conservatorship.
[5]
While PBP admits that it had no choice but to submit to
[6]
the conservatorship, it nonetheless requested that the
same be lifted by the CB.
Virtus in infirmitate perficitur! 2 Cor. 12:9
No other rehabilitation program was submitted by PBP for
almost three (3) years; as a result thereof, its overdrafts
with the CB continued to accumulate. By the end of June
1987, the figure swelled to a staggering P1.023 billion.
Consequently, per Resolution No. 649 dated 3 July 1987,
the CB Monetary Board decided, to approve in principle
what it considered a viable rehabilitation program for PBP.
RTC issued the Writ of Preliminary Injunction to enjoin
petitioner from implementing Monetary Board Resolutions
Nos. 649 and 751 for having been issued arbitrarily and
with bad faith.
CA ruled that the CB's sudden and untimely
announcement of the conservatorship over PBP eroded
the confidence which the banking public had hitherto
reposed on the bank and resulted in the bank-run; it then
concluded that when the CB "peremptorily and illtimely
(sic) announced" the conservatorship, PBP was not given
an opportunity to be heard since the CB arbitrarily
brushed aside administrative due process
notwithstanding PBP's having "sufficiently established its
inherent corporate right to autonomously perform its
banking activities without undue governmental
interference that would in effect divest its stockholders of
their control over the operations of the bank." It further
held that the challenged resolutions of the MB are not just
advisory in character "because the same sought to
impose upon the respondent bank petitioners’
governmental acts that were specifically designed and
executed to devise a scheme that would irreparably divest
from the stockholders of the respondent bank control of
the same."
ISSUES
1. May the conservatorship be validly set aside by
PBP?
2. May an action for damages arising from the MB's
act of placing the PBP under conservatorship
and the acts of the conservator, and to enjoin the
MB from implementing resolutions related or
incident to, or in connection with the
conservatorship, be brought only for and in
behalf of the PBP by the stockholders on record
representing the majority of the capital stock
thereof or simply upon authority of its Board of
Directors, or by its Chairman?
HELD
May the conservatorship be validly set aside by
PBP?
NO. PBP has been under conservatorship since 20
January 1984. Pursuant to Section 28-A of the Central
[38]
Bank Act, 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.
67

If it were to lift the conservatorship because it was
arbitrarily imposed, then the case should have been
dismissed on the grounds of prescription and lack of
personality to bring the action. Per the fifth paragraph of
Section 29 of the Central Bank Act, as amended by
Executive Order No. 289, the actions of the MB may be
assailed in an appropriate pleading filed by the
stockholders of record representing the majority of the
capital stock within ten (10) days from receipt of notice
by the said majority stockholders of the order placing the
bank under conservatorship. The pertinent portion of said
paragraph reads as follows:
"The provisions of any law to the contrary
notwithstanding, the actions of the Monetary Board under
this Section, Section 28-A, and the second paragraph "of
Section 34 of this Act shall be final and executory, and
can be set aside by a court only if there is convincing
proof, after hearing, that the action is plainly arbitrary and
made in bad faith: Provided, That the same is raised in
an appropriate pleading filed by the stockholders of
record representing the majority of the capital stock
within ten (10) days from the date the receiver takes
charge of the assets and liabilities of the bank or non-
bank financial intermediary performing quasi-banking
functions or, in case of conservatorship or liquidation,
within ten (10) days from receipt of notice by the said
majority stockholders of said bank or non-bank financial
intermediary of the order of its placement under
conservatorship or liquidation. x x x."
The following requisites, therefore, must be present
before the order of conservatorship may be set aside by
a court:
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
[42]
the action is plainly arbitrary and made in bad faith.
In the instant case, PBP was placed under
conservatorship on 20 January 1984. The original
complaint in Civil Case No. 17692 was filed only on 27
August 1987,
or three (3) years, seven (7) months and seven (7) days
later, long after the expiration of the 10-day period
referred to above. It is also beyond question that the
complaint and the amended complaint were not initiated
by the stockholders of record representing the majority of
the capital stock. Accordingly, the order placing PBP
under conservatorship had long become final and its
validity could no longer be litigated upon before the trial
court.
Applying the original provision of the aforesaid Section
29 of the Central Bank Act, this Court, in Rural Bank of
[43]
Lucena, Inc. vs. Arca, et al., ruled that:
Virtus in infirmitate perficitur! 2 Cor. 12:9
"Nor can the proceedings before Judge Arca be deemed
a judicial review of the 1962 resolution No. 122 of the
Monetary Board, if only because by law (Section 29, R.A.
265) such review must be asked within 10 days from
notice of the resolution of the Board. Between the
adoption of Resolution No. 122 and the challenged order
of Judge Arca, more than one year had elapsed. Hence,
the validity of the Monetary Board's resolution can no
longer be litigated before Judge Arca, whose role under
the fourth paragraph of section 29 is confined to assisting
and supervising the liquidation of the Lucena bank.”
This rule is still good law notwithstanding the amendment
to Section 29 which expands its scope by including the
actions of the MB under Section 28-A of the Act on the
appointment of a conservator.
It was precisely an awareness of the futility of any action
to set aside the conservatorship which prompted PBP to
limit its action to a claim for damages and a prayer for an
injunction against the implementation of MB Resolutions
Nos. 649 and 751. However, to make it appear that it had
a meritorious case and a valid grievance against the
Central Bank, it wandered long into the past and narrated
a sad story of persecution, oppression and injustice since
the inception of the conservatorship -- obviously to gain
the sympathy of the court, which it eventually obtained.
The next crucial question that suggests itself for
resolution is whether an action for damages arising
from the MB's act of placing the PBP under
conservatorship and the acts of the conservator, and
to enjoin the MB from implementing resolutions
related or incident to, or in connection with the
conservatorship, may be brought only for and in
behalf of the PBP by the stockholders on record
representing the majority of the capital stock thereof
or simply upon authority of its Board of Directors, or
by its Chairman. We hereby rule that as to the first kind
of damages, the same may be claimed only if the MB's
action is plainly arbitrary and made in bad faith, and that
the action therefor is inseparable from an action to set
aside the conservatorship. In other words, the same must
be filed within ten (10) days from receipt of notice of the
order placing the bank under conservatorship.
Otherwise, the provision of the fifth paragraph of Section
29 of the Central Bank Act could be rendered
meaningless and illusory by the bank's filing, beyond the
prescribed ten-day period, of an action ostensibly
claiming damages but in reality questioning the
conservatorship. As to actions for the second kind of
damages and for injunction to restrain the enforcement
of the CB's implementing resolutions, said fifth paragraph
of Section 29 of the Central Bank Act, as amended,
equally applies because the questioned acts are but
incidental to the conservatorship. The purpose of the law
in requiring that only the stockholders of record
representing the majority of the capital stock may bring
the action to set aside a resolution to place a bank under
conservatorship is to ensure that it be not frustrated or
defeated by the incumbent Board of Directors or officers
who may immediately resort to court action to prevent its
implementation or enforcement. It is presumed that such
68

a resolution is directed principally against acts of said
Directors and officers which place the bank in a state of
continuing inability to maintain a condition of liquidity
adequate to protect the interest of depositors and
creditors. Indirectly, it is likewise intended to protect and
safeguard the rights and interests of the stockholders.
Common sense and public policy dictate then that the
authority to decide on whether to contest the resolution
should be lodged with the stockholders owning a majority
of the shares for they are expected to be more objective
in determining whether the resolution is plainly arbitrary
and issued in bad faith.
The original complaint in Civil Case No. 17692 was not
initiated by the majority of the stockholders, hence it
should have been dismissed. However, confronted with
this fatal flaw, counsel for PBP, through shrewd
maneuvering, attempted to save the day by impleading
as co-plaintiff a corporation, the PPI, which was not under
conservatorship. Unfortunately, the maneuver was
crudely and imperfectly executed. Except for the
inclusion of its name, nothing new was actually added to
the original complaint in terms of causes of action and
reliefs for PPI. The amendment then was an exercise in
futility.
***cf discussion infra for an additional issue on
conservatorship.
PREMISES CONSIDERED, the writ of preliminary
injunction issued by the trial court in its Order dated 21
September 1987 is hereby LIFTED.
First Philippine International Bank vs. CA
G.R. No. 115849, January 24, 1996 (PANGANIBAN)
While admittedly, the Central Bank law gives vast and far-
reaching powers to the conservator of a bank, it must be
pointed out that such powers must be related to the
"(preservation of) the assets of the bank, (the
reorganization of) the management thereof and (the
restoration of) its viability." Such powers, enormous and
extensive as they are, cannot extend to the post-facto
repudiation of perfected transactions, otherwise they
would infringe against the non-impairment clause of the
Constitution.
FACTS
In the course of its banking operations, the defendant
Producer Bank of the Philippines acquired six parcels of
land with a total area of 101 hectares located at Don Jose,
Sta. Rosa, Laguna, and covered by Transfer Certificates
of Title Nos. T-106932 to T-106937. The property used to
be owned by BYME Investment and Development
Corporation which had them mortgaged with the bank as
collateral fora loan. The original plaintiffs, Demetrio
Demetria and Jose O. Janolo, wanted to purchase the
property and thus initiated negotiations for that purpose.
Virtus in infirmitate perficitur! 2 Cor. 12:9
In the early part of August 1987 said plaintiffs, upon the
suggestion of BYME Investment’s legal counsel, Jose
Fajardo, met with defendant Mercurio Rivera, Manager of
the Property Management Department of the defendant
bank. The meeting was held pursuant to plaintiffs’ plan to
buy the property (TSN of Jan. 16, 1990, pp. 7-10). After
the meeting, plaintiff Janolo, following the advice of
defendant Rivera, made a formal purchase offer to the
bank through a letter.
On May 3, 1988, plaintiff, through counsel, made a final
demand for compliance by the bank with its obligations
under the considered perfected contract of sale (Exhibit
"N"). As recounted by the trial court (Original Record, p.
656), in a reply letter dated May 12, 1988 (Annex "4" of
defendant’s answer to amended complaint), the
defendants through Acting Conservator Encarnacion
repudiated the authority of defendant Rivera and claimed
that his dealings with the plaintiffs, particularly his
counter-offer of P5.5 Million are unauthorized or illegal.
On that basis, the defendants justified the refusal of the
tenders of payment and the non-compliance with the
obligations under what the plaintiffs considered to be a
perfected contract of sale.
On May 16, 1988, plaintiffs filed 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 defendants
took the position that there was no such perfected sale
because the defendant Rivera is not authorized to sell the
property, and that there was no meeting of the minds as
to the price.
ISSUE
May the Conservator Revoke the Perfected and
Enforceable Contract?
HELD
NO. It is not disputed that the petitioner Bank was under
a conservator placed by the Central Bank of the
Philippines during the time that the negotiation and
perfection of the contract of sale took place. Petitioners
energetically contended that the conservator has the
power to revoke or overrule actions of the management
or the board of directors of a bank, under Section 28-A of
Republic Act No. 265 (otherwise known as the Central
Bank Act) as follows:
"Whenever, on the basis of a report submitted by the
appropriate supervising or examining department, the
Monetary Board finds that a bank or a non-bank financial
intermediary performing quasi - banking functions is in a
state of continuing inability or unwillingness to maintain a
state of liquidity deemed adequate to protect the interest
of depositors and creditors, the Monetary Board may
appoint a conservator to take charge of the assets,
liabilities, and the management of that institution, collect
all monies and debts due said institution and exercise all
powers necessary to preserve the assets of the institution,
69

reorganize the management thereof, and restore its
viability. He shall have the power to overrule or revoke the
actions of the previous management and board of
directors of the bank or non-bank financial intermediary
performing quasi-banking functions, any provision of law
to the contrary notwithstanding, and such other powers as
the Monetary Board shall deem necessary."
In the first place, this issue of the Conservator’s alleged
authority to revoke or repudiate the perfected contract of
sale was raised for the first time in this Petition - as this
was not litigated in the trial court or Court of Appeals. As
already stated earlier, issues not raised and/or ventilated
in the trial court, let alone in the Court of Appeals, "cannot
be raised for the first time on appeal as it would be
offensive to the basic rules of fair play, justice and due
[43]
process."
In the second place, there is absolutely no evidence that
the Conservator, at the time the contract was perfected,
actually repudiated or overruled said contract of sale. The
Bank’s acting conservator at the time, Rodolfo Romey,
never objected to the sale of the property to Demetria and
Janolo. What petitioners are really referring to is the letter
of Conservator Encarnacion, who took over from Romey
after the sale was perfected on September 30, 1987
(Annex V, petition) which unilaterally repudiated - not the
contract - but the authority of Rivera to make a binding
offer - and which unarguably came months after the
perfection of the contract.
In the third place, while admittedly, the Central Bank law
gives vast and far-reaching powers to the conservator of
a bank, it must be pointed out that such powers must be
related to the "(preservation of) the assets of the bank,
(the reorganization of) the management thereof and (the
restoration of) its viability." Such powers, enormous and
extensive as they are, cannot extend to the post-facto
repudiation of perfected transactions, otherwise they
would infringe against the non-impairment clause of the
[44]
Constitution. If the legislature itself cannot revoke an
existing valid contract, how can it delegate such non-
existent powers to the conservator under Section 28-A of
said law?
Obviously, therefore, Section 28-A 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 bank’s 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 - as he has
already done so in the instant case. A contrary
understanding of the law would simply not be permitted
by the Constitution. Neither by common sense. 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
Virtus in infirmitate perficitur! 2 Cor. 12:9
unfavorable to the Bank, yielding nothing to perfected
contractual rights nor vested interests of the third parties
who had dealt with the Bank.
WHEREFORE, assailed Decision is AFFIRMED.
b. Closure
Lipana vs. Development Bank of Rizal
154 SCRA 257
G.R. No. 73884, September 24, 1987 (PARAS)
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.
FACTS
During the period from 1982 to January, 1984, herein
petitioners opened and maintained both lime and savings
deposits with the herein respondent Development Bank of
Rizal all in the aggregate amount of P939,737.32. When
some of the Time Deposit Certificates matured,
petitioners were not able to cash them but instead were
issued a manager's check which was dishonored upon
presentment. Demands for the payment of both time and
savings deposits having failed, on March 14, 1984,
petitioners filed with the Regional Trial Court of Pasig a
Complaint With Prayer For Issuance of a Writ of
Preliminary Attachment for collection of a sum of money
with damages, docketed therein as Civil Case No. 50802
(Record, pp. 3-11).
Respondent Judge, in an Order dated March 19,1984
( Ibid., p. 19-21), ordered the issuance of a writ of
attachment, and pursuant thereto, a writ of attachment
dated March 20, 1984 was issued in favor of the
petitioners.
Respondent judge, in a Decision dated November 13,
1984, rendered judgment in favor of petitioners.
Meanwhile, on August 10, 1984, the Monetary Board, in
its Resolution No. 1009, finding that the condition of
respondent bank was one of insolvency and that its
continuance in business would result in probable loss to
its depositors and creditors, decided to place it under
receivership (Rollo, p. 84).
On December 7, 1984, petitioners filed a Motion for
Execution Pending Appeal (Red., pp. 91-93), which was
opposed by respondent bank.
ISSUE
Could respondent judge legally stay execution of
judgment that has already become final and
executory?
Other issues are discussed infra.
70

HELD
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 (Vecine vs. Geronimo, 59
O.G. 579); whenever it is necessary to accomplish the
aims of justice (Pascual vs. Tan, 85 Phil. 164); or when
certain facts and circumstances transpired after the
judgment became final which could render the execution
of the judgment unjust (Cabrias vs. Adil, 135 SCRA 354).
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 aptiy 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.
Moreover, it will be noted that respondent bank was
placed under receivership on August 10, 1984, and the
Decision of respondent judge is dated November 13,
1984. Accordingly, in line with the ruling in the aforesaid
Morfe case, which reads:
"The circumstance that the Fidelity Savings Bank, having
stopped operations since February 19, 1969, was
forbidden to do business (and that ban would include the
payment of time deposits) implies that suits for the
payment of such deposits were prohibited. What was
directly prohibited should not be encompassed indirectly,
.x x x."
petitioners' complaint should have been dismissed.
It is the contention of petitioners, however, that the placing
under receivership of respondent bank long after the filing
of the complaint removed it from the doctrine in the said
Morfe case.
This contention is untenable. The time of the filing of the
complaint is immaterial. It is the execution that will
obviously prejudice the other depositors and creditors.
Moreover, as stated in the said Morfe case, the effect of
the judgment is only to fix the amount of the debt, and not
give priority over other depositors and creditors.
Anent the contention of petitioners that the attachment of
the properties of respondent bank was erased by virtue of
the delayed receivership is to expand the power of the
Central Bank, Suffice it to say that in the case of Central
Bank of the Philippines, et al. vs. Court of Appeals, et
Virtus in infirmitate perficitur! 2 Cor. 12:9
al., (Resolution of this Court dated September 17, 1984 in
G.R. No. 33302), wherein the original plaintiff Algue Inc.
was able to obtain a writ of preliminary attachment against
the original defendant Island Savings Bank, this Court
refused to recognize any preference resulting from such
attachment and ruled that after a declaration of
insolvency, the remedy of the depositors is to intervene in
the liquidation proceedings.
It is also contended by the petitioners that the indefinite
stay of execution without ruling as to how long it will last,
amounts to a deprivation of their property without due
process of law.
Said contention, likewise, is devoid of merit. Apart from
the fact that the stay of execution is not only in accordance
with law but is also supported by jurisprudence, such
staying of execution is not without a time limit. In fact, the
Monetary Board, in its resolution No. 433 approved the
liquidation of respondent bank on April 26, 1985 and
ordered, among others, the filing of a petition in the
Regional Trial Court praying for assistance of said court
in the liquidation of the bank. (Rollo, p. 81). The staying of
the writ of execution will be lifted after approval by the
liquidation court of the project of distribution, and the
liquidator or his deputy will authorize payments to all
claimants concerned in accordance with the approved
project of distribution.
PREMISES CONSIDERED, the instant petition is hereby
DISMISSED.
Banco Filipino Savings and Mortgage Bank vs.
Central Bank
G.R. No. 70054, December 11, 1991 (MEDIALDEA)
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. 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
This refers to nine (9) consolidated cases concerning the
legality of the closure and receivership of petitioner Banco
Filipino Savings and Mortgage Bank (Banco Filipino for
brevity) pursuant to the order of respondent Monetary
Board. Six (6) of these cases, namely, G.R. Nos. 68878,
77255-58, 78766, 81303, 81304 and 90473 involve the
common issue of whether or not the liquidator appointed
by the respondent Central Bank (CB for brevity) 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 in G.R. No.
70054. Corollary to this issue is whether the CB can be
sued to fulfill financial commitments of a closed bank
pursuant to Section 29 of the Central Bank Act. On the
other hand, the other three (3) cases, namely, G.R. Nos.
71

70054, which is the main case, 78767 and 78894 all seek
to annul and set aside M.B. Resolution No. 75 issued by
respondents Monetary Board and Central Bank on
January 25, 1985.
ISSUES are discussed with SC’s ruling.
HELD
We find the motions for reconsideration in G.R. Nos.
68878 and 81303 and the petitions in G.R. Nos. 77255--
58, 78766, 81304 and 90473 devoid of merit.
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 im
mediately take chargeof the bank's assets and liabilities,
as expeditiously as possible, collect and gather all the as
sets and administer the same for thebenefit of its creditor
s, and represent the bank personally or through counsel
as he may retain in all actions or proceedings for oragain
st the institution, exercising all the powers necessary for
these purposes including, but not limited
to, bringing andforeclosing 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 receiverpreviously appointed by the Mo
netary 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 as
sets ofsuch institution or defend any action filed against t
he 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 We adopted a resolution on August
25, 1985 and issued a restraining order to respondents
Monetary Board and Central Bank, We 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. We
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 debtors of the bank by the liquidator are
among the usual and ordinary transactions pertaining
to the administration of a bank. Neither did Our order
in the same resolution dated August 25, 1985 for the
Virtus in infirmitate perficitur! 2 Cor. 12:9
designation by the Central Bank of a comptroller for
Banco Filipino alter the powers and functions of the
liquidator insofar as the management of the assets of the
bank is concerned. The mere duty of the comptroller is to
supervise accounts and finances undertaken by the
liquidator and to determine the propriety of the latter's
expenditures incurred in behalf of the
bank. Notwithstanding this, the liquidator is still
empowered under the law to continue the functions of the
receiver in preserving and keeping intact the assets of the
bank in substitution of its former management, and to
prevent the dissipation of its assets to the detriment of the
creditors of the bank. These powers and functions of the
liquidator in directing the operations of the bank in place
of the former management or former officials of the bank
include the retaining of counsel of his choice in actions
and proceedings for purposes of administration.
Clearly, in G.R. Nos. 68878, 77255-58, 78766 and 90473,
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. In G.R. No. 81303, 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. Similarly, in G.R. No. 81304, due
to the aforestated reasons, the Central Bank cannot be
compelled to fulfill financial transactions entered into by
Banco Filipino when the operations of the latter were
suspended by reason of its closure. The Central Bank
possesses those powers and functions only as provided
for in Sec. 29 of the Central Bank Act.
While We recognize the actual closure of Banco Filipino
and the consequent legal effects thereof, on its
operations, We cannot uphold the legality of its closure
and thus, find the petitions in G.R. Nos. 70054, 78767 and
78894 impressed with merit. We hold that the closure
and receivership of petitioner bank, which was ordered by
respondent Monetary Board on January 25, 1985, is null
and void.
It is a well-recognized principle that administrative and
discretionary functions may not be interfered with by the
courts. In general, courts have no supervising power over
the proceedings and actions of the administrative
departments of the government. This is generally true
with respect to acts involving the exercise of judgment or
discretion, and findings of fact. But when there is a grave
abuse of discretion which is equivalent to a capricious and
whimsical exercise of judgment or where the power is
exercised in an arbitrary or despotic manner, then there is
a justification for the courts to set aside the administrative
determination reached (Lim, Sr. v. Secretary of
Agriculture and Natural Resources, L-26990, August 31,
1970, 34 SCRA 751).
The jurisdiction of this Court is called upon, once again,
through these petitions, to undertake the delicate task of
ascertaining whether or not an administrative agency of
the government, like the Central Bank of
the Philippines and the Monetary Board, has committed
grave abuse of discretion or has acted without or in
excess of jurisdiction in issuing the assailed
72

order. Coupled with this task is the duty of this Court not
only to strike down acts which violate constitutional
protections or to nullify administrative decisions contrary
to legal mandates but also to prevent acts in excess of
authority or jurisdiction, as well as to correct manifest
abuses of discretion committed by the officer or tribunal
involved.
The law applicable in the determination of these issues is
Section 29 of Republic Act No. 265, as amended, also
known as the Central Bank Act, which provides:
"SEC. 29. Proceedings upon insolvency (this law,
although in effect when this case was decided, had
already been amended as ruled in the case of RBSM v.
MB, 2007).
Based on the aforequoted provision, the Monetary Board
may order the cessation of operations of a bank in
the Philippinesand place it under receivership upon a
finding of insolvency or when its continuance in business
would involve probable loss to its depositors or
creditors. If the Monetary Board shall determine and
confirm within sixty (60) days that the bank is insolvent or
can no longer resume business with safety to its
depositors, creditors and the general public, it shall, if
public interest will be served, order its liquidation.
Specifically, the basic question to be resolved in G.R.
Nos. 70054, 78767 and 78894 is whether or not the
Central Bank and the Monetary Board acted arbitrarily
and in bad faith in finding and thereafter concluding that
petitioner bank is insolvent, and in ordering its closure
on January 25, 1985.
As We have stated in Our resolution dated August 3,
1989, the documents pertinent to the resolution of these
petitions are the Teodoro Report, Tiaoqui Report, and the
Valenzuela, Aurellano and Tiaoqui Report and the
supporting documents made as bases by the supporters
of their conclusions contained in their respective
reports. We will focus Our study and discussion however
on the Tiaoqui Report and the Valenzuela, Aurellano and
Tiaoqui Report. The former recommended the closure
and receivership of petitioner bank while the latter report
made the recommendation to eventually place the
petitioner bank under liquidation. This Court shall
likewise take into consideration the findings contained in
the reports of the two commissioners who were appointed
by this Court to hold the referral hearings, namely the
report by Judge Manuel Cosico submitted February 20,
1988 and the report submitted by Justice Consuelo
Santiago on January 28, 1991.
There is no question that under Section 29 of the Central
Bank Act, the following are the mandatory
requirements to be complied with before a bank found
to be insolvent is ordered closed and forbidden to do
business in the Philippines: Firstly, an examination
shall be conducted by the head of the appropriate
supervising or examining department or his examiners or
agents into the condition of the bank; secondly, it shall
be disclosed in the examination that the condition of the
Virtus in infirmitate perficitur! 2 Cor. 12:9
bank is one of insolvency, or that its continuance in
business would involve probable loss to its depositors or
creditors; thirdly, the department head concerned shall
inform the Monetary Board in writing, of the facts; and
lastly, the Monetary Board shall find the statements of the
department head to be true.
Tiaoqui based his report on an incomplete examination of
petitioner bank and outrightly concluded therein that the
latter's financial status was one of insolvency or
illiquidity. He arrived at the said conclusion from the
following facts: that as of July, 31, 1984, total capital
accounts consisting of paid-in capital and other capital
accounts such as surplus, surplus reserves and undivided
profits aggregated P351.8 million; that capital
adjustments, however, wiped out the capital accounts and
placed the bank with a capital deficiency amounting to
P334.956 million; that the biggest adjustment which
contributed to the deficit is the provision for estimated
losses on accounts classified as doubtful and loss which
was computed at P600.4 million pursuant to the
examination. This provision is also known as valuation
reserves which was set up or deducted against the capital
accounts of the bank in arriving at the latter's financial
condition.
It is evident from the foregoing circumstances that the
examination contemplated in Sec. 29 of the CB Act as a
mandatory requirement was not completely and fully
complied with. Despite the existence of the partial list of
findings in the examination of the bank, there were still
highly significant items to be weighed and determined
such as the matter of valuation reserves, before these can
be considered in the financial condition of the bank. It
would be a drastic move to conclude prematurely that a
bank is insolvent if the basis for such conclusion is lacking
and insufficient, especially if doubt exists as to whether
such bases or findings faithfully represent the real
financial status of the bank.
The actuation of the Monetary Board in closing petitioner
bank on January 25, 1985 barely four days after a
conference with the latter on the examiners' partial
findings on its financial position is also violative of what
was provided in the CB Manual of Examination
Procedures. Said manual provides that only after the
examination is concluded, should a pre-closing
conference led by the examiner-in-charge be held with the
officers/representatives of the institution on the
findings/exception, and a copy of the summary of the
findings/violations should be furnished the institution
examined so that corrective action may be taken by them
as soon as possible (Manual of Examination Procedures,
General Instruction, p. 14). It is hard to understand how
a period of four days after the conference could be a
reasonable opportunity for a bank to undertake a
responsive and corrective action on the partial list of
findings of the examiner-in-charge.
We recognize the fact that it is the responsibility of the
Central Bank of the Philippines to administer the
monetary, banking and credit system of the country and
that its powers and functions shall be exercised by the
73

Monetary Board pursuant to Rep. Act. No. 265, known as
the Central Bank Act. Consequently, the power and
authority of the Monetary Board to close banks and
liquidate them thereafter when public interest so requires
is an exercise of the police power of the state. Police
power, however, may not be done arbitrarily or
unreasonably and could be set aside if it is either
capricious, discriminatory, whimsical, arbitrary, unjust or
is tantamount to a denial of due process and equal
protection clauses of the Constitution (Central Bank v.
Court of Appeals, Nos. L-50031-32, July 27, 1981, 106
SCRA 143).
In the instant case, the basic standards of substantial due
process were not observed. Time and again, We have
held in several cases, that the procedure of administrative
tribunals must satisfy the fundamentals of fair play and
that their judgment should express a well-supported
conclusion.
The second requirement provided in Section 29, R.A. 265
before a bank may be closed is that the examination
should disclose that the condition of the bank is one of
insolvency.
As to the concept of whether the bank is solvent or not,
the respondents contend that under the Central Bank
Manual of Examination Procedures, Central Bank
examiners must recommend valuation reserves, when
warranted, to be set up or deducted against the
corresponding asset account to determine the bank's true
condition or net worth. In the case of loan accounts, to
which practically all the questioned valuation reserves
refer, the manual provides that:
1. For doubtful loans, or loans the ultimate collection of
which is doubtful and in which a substantial loss is
probable but not yet definitely ascertainable as to extent,
valuation reserves of fifty per cent (50%) of the accounts
should be recommended to be set up.
2. For loans classified as loss, or loans regarded by the
examiner as absolutely uncollectible or worthless,
valuation reserves of one hundred percent (100%) of the
accounts should be recommended to be set up (p. 8,
Objections to Santiago report).
The foregoing criteria used by respondents in determining
the financial condition of the bank is based on Section 5
of RA 337, known as the General Banking Act which
states:
"Sec. 5. The following terms shall be held to be
synonymous and interchangeable:
x x x.
f. ‘Unimpaired Capital and Surplus,’ 'Combined capital
accounts,' and 'Net worth,' which terms shall mean for the
purposes of this Act, the total of the 'unimpaired paid-in
capital, surplus, and undivided profits net of such
valuation reserves as may be required by the Central
Bank."
Virtus in infirmitate perficitur! 2 Cor. 12:9
There is no doubt that the Central Bank Act vests authority
upon the Central Bank and Monetary Board to take
charge and administer the monetary and banking system
of the country and this authority includes the power to
examine and determine the financial condition of banks
for purposes provided for by law, such as for the purpose
of closure on the ground of insolvency stated in Section
29 of the Central Bank Act. But express grants of power
to public officers should be subjected to a strict
interpretation, and will be construed as conferring those
powers which are expressly imposed or necessarily
implied (Floyd Mechem, Treatise on the Law of Public
Offices and Officers, p. 335).
In this case, there can be no clearer explanation of the
concept of insolvency than what the law itself states. Sec.
29 of the Central Bank Act provides that insolvency under
the Act, shall be understood to mean that
"the realizable assets of a bank or a non-bank financial
intermediary performing quasi-banking functions as
determined by the Central
Bank are insufficient to meet itsliabilities."
Hence, the contention of the Central Bank that a bank's
true financial condition is synonymous with the terms
"unimpaired capital and surplus," "combined capital
accounts" and net worth after deducting valuation
reserves from the capital, surplus and unretained
earnings, citing Sec. 5 of RA 337 is misplaced.
Firstly, it is clear from the law that a solvent bank is one in
which its assets exceed its liabilities. It is a basic
accounting principle that assets are composed of
liabilities and capital. The term "assets" includes capital
and surplus" (Exley v. Harris, 267 p. 970, 973, 126 Kan.,
302). On the other hand, the term "capital" includes
common and preferred stock, surplus reserves, surplus
and undivided profits. (Manual of Examination
Procedures, Report of Examination on Department of
Commercial and Savings Banks, p. 3-C). If valuation
reserves would be deducted from these items, the result
would merely be the networth or the unimpaired capital
and surplus of the bank applying Sec. 5 of RA 337 but not
the total financial condition of the bank.
Secondly, the statement of assets and liabilities is used in
balance sheets. Banks use statements of condition to
reflect the amounts, nature and changes in the assets and
liabilities. The Central Bank Manual of Examination
Procedures provides a format or checklist of a statement
of condition to be used by examiners as guide in the
examination of banks. The format enumerates the items
which will compose the assets and liabilities of a
bank. Assets include cash and those due from banks,
loans, discounts and advances, fixed assets and other
property owned or acquired and other miscellaneous
assets. The amount of loans, discounts and advances to
be stated in the statement of condition as provided for in
the manual is computed after deducting valuation
reserves when deemed necessary. On the other hand,
liabilities are composed of demand deposits, time and
savings deposits, cashier's, manager's and certified
checks, borrowings, due to head office, branches and
74

agencies, other liabilities and deferred credits (Manual of
Examination Procedure, p. 9). The amounts stated in the
balance sheets or statements of condition including the
computation of valuation reserves when justified, are
based however, on the assumption that the bank or
company will continue in business indefinitely, and
therefore, the networth shown in the statement is in no
sense an indication of the amount that might be realized
if the bank or company were to be liquidated immediately
(Prentice Hall Encyclopedic Dictionary of Business
Finance, p. 48). Further, based on respondents'
submissions, the allowance for probable losses on loans
and discounts represents
the amount set up against current operations to provide
for possible losses arising from non-collection of loans
and advances, and this account is also referred to as
valuation reserve (p. 9, Objections to Santiago
report). Clearly, the statement of condition which
contains a provision for recommended valuation reserves
should not be used as the ultimate basis to determine the
solvency of an institution for the purpose of termination of
its operations.
Respondents acknowledge that under the said CB
manual, CB examiners must recommend valuation
reserves, whenwarranted, to be set up against the
corresponding asset account (p. 8, Objections to Santiago
report). Tiaoqui himself, as author of the report
recommending the closure of petitioner bank admits that
the valuation reserves should still be discussed with the
petitioner bank in compliance with standard examination
procedure. Hence, for the Monetary Board to unilaterally
deduct an uncertain amount as valuation reserves from
the assets of a bank and to conclude therefrom without
sufficient basis that the bank is insolvent, would be totally
unjust and unfair.
The test of insolvency laid down in Section 29 of the
Central Bank Act is measured by determining whether the
realizable assets of a bank are less than its
liabilities. Hence, a bank is solvent if the fair cash value
of all its assets, realizable within a reasonable time by a
reasonable prudent person, would equal or exceed its
total liabilities exclusive of stock liability; but if such fair
cash value so realizable is not sufficient to pay such
liabilities within a reasonable time, the bank is
insolvent. (Gillian v. State, 194 N.E. 360, 363, 207 Ind.
661). Stated in other words, the insolvency of a bank
occurs when the actual cash market value of its assets is
insufficient to pay its liabilities, not considering capital
stock and surplus which are not liabilities for such purpose
(Exley v. Harris, 267 p. 970, 973, 126 Kan. 302; Alexander
v. Llewellyn, Mo. App., 70 S.W. 2n 115, 117).
In arriving at the computation of realizable assets of
petitioner bank, respondents used its books which
undoubtedly are not reflective of the actual cash or fair
market value of its assets. This is not the proper
procedure contemplated in Sec. 29 of the Central Bank
Act. Even the CB Manual of Examination Procedures
does not confine examination of a bank solely with the
determination of the books of the bank. The latter is part
of auditing which should not be confused with
Virtus in infirmitate perficitur! 2 Cor. 12:9
examination. Examination appraises
the soundness of the institution's assets, the quality and
character of management and determines the institution'
scompliance with laws, rules and regulations. Audit is a
detailed inspection of the institution's books, accounts,
vouchers, ledgers, etc. to determine the recording of all
assets and liabilities. Hence, examination concerns itself
with review and appraisal, while audit concerns itself with
verification (CB Manual of Examination Procedures,
General Instructions, p. 5). This Court however, is not in
the position to determine how much cash or market value
shall be assigned to each of the assets and liabilities of
the bank to determine their total realizable value. The
proper determination of these matters by using the actual
cash value criteria belongs to the field of fact-finding
expertise of the Central Bank and the Monetary
Board. Notwithstanding the fact that the figures arrived at
by the respondent Board as to assets and liabilities do not
truly indicate their realizable value as they were merely
based on book value, We will however, take a look at the
figures presented by the Tiaoqui Report in concluding
insolvency as of July 31, 1984 and at the figures
presented by the CB authorized deputy receiver and by
the Valenzuela, Aurellano and Tiaoqui Report which
recommended the liquidation of the bank by reason of
insolvency as of January 25, 1985.
The Tiaoqui report dated January 23, 1985, which was
based on partial examination findings on the bank's
condition as of July 31, 1984, states that total liabilities of
P5,282.1 million exceeds total assets of P4,947.2 million
after deducting from the assets valuation reserves of
P612.2 million. Since, as We have explained in our
previous discussion that valuation reserves can not be
legally deducted as there was no truthful and complete
evaluation thereof as admitted by the Tiaoqui report itself,
then an adjustment of the figures will show that the
liabilities of P5,282.1 million will not exceed the total
assets which will amount to P5,559.4 if the 612.2 million
allotted to valuation reserves will not be deducted from the
assets. There can be no basis therefore for both the
conclusion of insolvency and for the decision of the
respondent Board to close petitioner bank and place it
under receivership.
Concerning the financial position of the bank as of
January 25, 1985, the date of the closure of the bank, the
consolidated statement of condition thereof as of the
aforesaid date shown in the Valenzuela, Aurellano and
Tiaoqui report on the receivership of petitioner bank,
dated March 19, 1985, indicates that total liabilities of
4,540.84 million does not exceed the total assets of
4,981.53 million. Likewise, the consolidated statement of
condition of petitioner bank as of January 25, 1985
prepared by the Central Bank Authorized Deputy
Receiver Artemio Cruz shows that total assets amounting
to P4,981,522,996.22 even exceeds total liabilities
amounting to P4,540,836,834.15. Based on the
foregoing, there was no valid reason for the Valenzuela,
Aurellano and Tiaoqui report to finally recommend the
liquidation of petitioner bank instead of its rehabilitation.
We take note of the exhaustive study and findings of the
Cosico report on the petitioner bank’s having engaged in
75

unsafe, unsound and fraudulent banking practices by the
granting of huge unsecured loans to several subsidiaries
and related companies. We do not see, however, that
this has any material bearing on the validity of the
closure. Section 34 of the RA 265, Central Bank Act
empowers the Monetary Board to take action under
Section 29 of the Central Bank Act when a bank "persists
in carrying on its business in an unlawful or unsafe
manner." There was no showing whatsoever that the bank
had persisted in committing unlawful banking practices
and that the respondent Board had attempted to take
effective action on the bank's alleged activities. During
the period from July 27, 1984 up to January 25, 1985,
when petitioner bank was under conservatorship no
official of the bank was ever prosecuted, suspended or
removed for any participation in unsafe and unsound
banking practices, and neither was the entire
management of the bank replaced or substituted. In fact,
in her testimony during the second referral hearing,
Carlota Valenzuela, CB Deputy Governor, testified that
the reason for petitioner bank's closure was not unsound,
unsafe and fraudulent banking practices but the alleged
insolvency position of the bank (TSN, August 3, 1990, p.
3315, Rollo, Vol. VIII).
Finally, another circumstance which point to the solvency
of petitioner bank is the granting by the Monetary Board
in favor of the former a credit line in the amount of P3
billion along with the placing of petitioner bank under
conservatorship by virtue of M.B. Resolution No. 955
dated July 27, 1984. This payed the way for the
reopening of the bank on August 1, 1984 after a self-
imposed bank holiday on July 23, 1984.
On emergency loans and advances, Section 90 of RA 265
provides two types of emergency loans that can be
granted by the Central Bank to a financially distressed
bank:
"Sec. 90. x
x. In periods of emergency or of imminent financial pani
c which directly threaten monetary and banking stability,
the Central Bank may grant banking institutions
extraordinary advances secured by any assets which are
defined as acceptable security by a concurrent vote of at
least five members of the Monetary Board. While such
advances are outstanding, the debtor institution may not
expand the total volume of its loans or investments
without the prior authorization of the Monetary Board."
"The Central Bank may, at its
discretion, likewise grant advances to banking institution
s, even during normal
periods, for the purpose of assisting a bank in a precario
us financial condition or under serious financialpressures
brought about by unforseen events, or events which,
though forseeable, could not be prevented by the bank
concerned. Provided,
however, That the Monetary Board has ascertained that
the bank is notinsolvent and has clearly realizable assets
to secure the advances. Provided, further, That a
concurrent vote of at least five members of the Monetary
Board is obtained."
Virtus in infirmitate perficitur! 2 Cor. 12:9
The first paragraph of the aforequoted provision
contemplates a situation where the whole banking
community is confronted with financial and economic
crisis giving rise to serious and widespread confusion
among the public, which may eventually threaten and
gravely prejudice the stability of the banking
system. Here, the emergency or financial confusion
involves the whole banking community and not one bank
or institution only. The second situation on the other
hand, provides for a situation where the Central Bank
grants a loan to a bank with uncertain financial condition
but not insolvent.
As alleged by the respondents, the following are the
reasons of the Central Bank in approving the resolution
granting the P3 billion loan to petitioner bank and the
latter's reopening after a brief self-imposed banking
holiday.
A perusal of the foregoing "Whereas" clauses
unmistakably show that the clear reason for the decision
to grant the emergency loan to petitioner bank was that
the latter was suffering from financial distress and severe
bank "run" as a result of which it closed on July 23, 1984
and that the release of the said amount is in accordance
with the Central Bank's full support to meet Banco
Filipino's depositors' withdrawal requirements (Excerpts
of minutes of meeting on MB Min. No. 35, p. 25, Rollo,
Vol. IX). Nothing therein shows an extraordinary
emergency situation exists affecting most banks, not only
as regards petitioner bank. This Court thereby finds that
the grant of the said emergency loan was intended from
the beginning to fall under the second paragraph of
Section 90 of the Central Bank Act, which could not have
occurred if the petitioner bank was not solvent. Where
notwithstanding knowledge of the irregularities and
unsafe banking practices allegedly committed by the
petitioner bank, the Central Bank even granted financial
support to the latter and placed it under conservatorship,
x such actuation means that petitioner bank could still be
saved from its financial distress by adequate aid and
management reform, which was required by Central
Bank's duty to maintain the stability of the banking system
and the preservation of public confidence in it (Ramos v.
Central Bank, No. L-29352, October 4, 1971, 41 SCRA
565).
In view of the foregoing premises, We believe that the
closure of the petitioner bank was arbitrary and committed
with grave abuse of
discretion. Granting in gratia argumenti that the closure
was based on justified grounds to protect the public, the
fact that petitioner bank was suffering from serious
financial problems should not automatically lead to its
liquidation. Section 29 of the Central Bank provides that
a closed bank may be reorganized or otherwise placed in
such a condition that it may be permitted to resume
business with safety to its depositors, creditors and the
general public.
We are aware of the Central Bank's concern for the safety
of Banco Filipino's depositors as well as its creditors
including itself which had granted substantial financial
76

assistance up to the time of the latter's closure. But there
are alternatives to permanent closure and liquidation to
safeguard those interests as well as those of the general
public for the failure of Banco Filipino or any bank for that
matter may be viewed as an irreversible decline of the
country's entire banking system and ultimately, it may
reflect on the Central Bank's own viability. For one thing,
the Central Bank and the Monetary Board should exercise
strict supervision over Banco Filipino. They should take
all the necessary steps not violative of the laws that will
fully secure the repayment of the total financial assistance
that the Central Bank had already granted or would grant
in the future.
ACCORDINGLY, decision is hereby rendered as follows:
1. The motion for reconsideration in G.R. Nos. 68878 and
81303, and the petitions in G.R. Nos. 77255-58, 78766,
81304 and 90473 are DENIED;
2. The petitions in G.R. No. 70054, 78767 and 78894 are
GRANTED and the assailed order of the Central Bank and
the Monetary Board dated January 25, 1985 is hereby
ANNULLED AND SET ASIDE.
The Central Bank and the Monetary Board are ordered to
reorganize petitioner Banco Filipino Savings and
Mortgage Bank and allow the latter to resume business in
the Philippines under the comptrollership of both the
Central Bank and the Monetary Board and under such
conditions as may be prescribed by the latter in
connection with its reorganization until such time that
petitioner bank can continue in business with safety to its
creditors, depositors and the general public.
Central Bank of the Philippines vs. Court of Appeals,
208 SCRA 652 (1992)
It must be stressed here that a bank retains its juridical
personality even if placed under conservatorship; it is
neither replaced nor substituted by the conservator.
*** from the discussion of the case above, an additional
issue is hereby asked and answered:
Is petitioner’s view that once a bank is placed under
conservatorship, no action may be filed on behalf of
the bank without prior approval of the conservator
correct?
We cannot, however, subscribe to the petitioner's
view that: (a) once a bank is placed under
conservatorship, no action may be filed on behalf of
the bank without prior approval of the conservator,
and (b) since in this case such approval was not
secured prior to the filing of Civil Case No. 17692, the
latter must also be dismissed on that ground. No such
approval is necessary where the action was instituted by
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. It must be stressed here that a bank
retains its juridical personality even if placed under
[44]
conservatorship; it is neither replaced nor substituted
Virtus in infirmitate perficitur! 2 Cor. 12:9
by the conservator who, per Section 28-A of the Central
Bank Act, as amended by P.D. No 1932, shall only:
“x x x take charge of the assets, liabilities, and the
management of that institution, collect all monies and
debts due said institution and exercise all powers
necessary to preserve the assets of the institution,
reorganize the management thereof, and restore its
viability. He shall have the power to overrule, or revoke
the actions of the previous management and board of
directors x x x, any provision of law to the contrary
notwithstanding, and such other powers as the Monetary
Board shall deem necessary.”
PREMISES CONSIDERED, the writ of preliminary
injunction issued by the trial court in its Order dated 21
September 1987 is hereby LIFTED.
Rural Bank of San Miguel vs. Monetary Board
G.R. No. 150886, February 16, 2007 (CORONA)
In RA 7653, only a “report of the head of the supervising
or examining department” is necessary. It is an
established rule in statutory construction that where the
words of a statute are clear, plain and free from ambiguity,
it must be given its literal meaning and applied without
attempted interpretation.
FACTS
RBSM’s designated comptroller, Ms. Zenaida Cabais of
the BSP, submitted to the Department of Rural Banks,
BSP, a Comptrollership Report on her findings on the
financial condition and operations of the bank as of
October 31, 1999. Another set of findings was submitted
by said comptroller [and] this second report reflected the
financial status of RBSM as of December 31, 1999.
Based on these comptrollership reports, the director of the
Department of Rural Banks Supervision and Examination
Sector, Wilfredo B. Domo-ong, made a report to the MB
[10]
dated January 20, 2000. The MB, after evaluating and
deliberating on the findings and recommendation of the
Department of Rural Banks Supervision and Examination
Sector, issued Resolution No. 105 on January 21,
[11]
2000. Thereafter, PDIC implemented the closure order
and took over the management of RBSM’s assets and
affairs.
[12]
In their petition before the CA, petitioners claimed that
respondents MB and BSP committed grave abuse of
discretion in issuing Resolution No. 105.
ISSUE
Was Resolution No. 105 issued with grave abuse of
discretion?
HELD
NO. It is well-settled that the closure of a bank may be
[15]
considered as an exercise of police power. The action
[16]
of the MB on this matter is final and executory. Such
77

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
[17]
lack or excess of jurisdiction.
Petitioners argue that Resolution No. 105 was bereft of
any basis considering that no complete examination had
been conducted before it was issued. This case
essentially boils down to one core issue: whether Section
30 of RA 7653 (also known as the New Central Bank Act)
and applicable jurisprudence require a current and
complete examinationof the bank before it can be closed
and placed under receivership.
Section 30 of RA 7653 provides:
SECTION 30. Proceedings in Receivership and
Liquidation. — Whenever, upon report of the head of
the supervising or examining department, the
Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in
the ordinary course of business: Provided, That this shall
not include inability to pay caused by extraordinary
demands induced by financial panic in the banking
community;
(b) has insufficient realizable assets, as determined by the
[BSP] to meet its liabilities; or
(c) cannot continue in business without involving probable
losses to its depositors or creditors; or
(d) has willfully violated a cease and desist order under
Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation of the
assets of the institution; in which cases, the Monetary
Board may summarily and without need for prior
hearing forbid the institution from doing business in
the Philippines and designate the Philippine Deposit
Insurance Corporation as receiver of the banking
institution.
Petitioners contend that there must be a current, thorough
and complete examination before a bank can be closed
under Section 30 of RA 7653. They argue that this
section should be harmonized with Sections 25 and 28 of
the same law.
Petitioners’ contention has no merit. Banco Filipino and
[22]
other cases petitioners cited were decided using
Section 29 of the old law (RA 265).
Thus in Banco Filipino, we ruled that an “examination
[conducted] by the head of the appropriate supervising or
examining department or his examiners or agents into
[23]
the condition of the bank” is necessary before the MB
can order its closure.
However, RA 265, including Section 29 thereof, was
expressly repealed by RA 7653 which took effect in
1993. Resolution No. 105 was issued on January 21,
2000. Hence, petitioners’ reliance on Banco
Virtus in infirmitate perficitur! 2 Cor. 12:9
Filipino which was decided under RA 265 was misplaced.
In RA 7653, only a “report of the head of the supervising
or examining department” is necessary. It is an
established rule in statutory construction that where the
words of a statute are clear, plain and free from ambiguity,
it must be given its literal meaning and applied without
[24]
attempted interpretation:
This plain meaning rule or verba legis derived from the
maxim index animi sermo est (speech is the index of
intention) rests on the valid presumption that the words
employed by the legislature in a statute correctly express
its intention or will and preclude the court from construing
it differently. The legislature is presumed to know the
meaning of the words, to have used words advisedly, and
to have expressed its intent by use of such words as are
found in the statute. Verba legis non est recedendum, or
from the words of a statute there should be no
[25]
departure.
The word “report” has a definite and unambiguous
meaning which is clearly different from “examination.” A
report, as a noun, may be defined as “something that
gives information” or “a usually detailed account or
[26]
statement.” On the other hand, an examination is “a
[27]
search, investigation or scrutiny.”
This Court cannot look for or impose another meaning
on the term “report” or to construe it as synonymous with
“examination.” From the words used in Section 30, it is
clear that RA 7653 no longer requires that an examination
be made before the MB can issue a closure order. We
cannot make it a requirement in the absence of legal
basis.
Indeed, the court may consider the spirit and reason of
the statute, where a literal meaning would lead to
absurdity, contradiction, injustice, or would defeat the
[28]
clear purpose of the lawmakers. However, these
problems are not present here. Using the literal meaning
of “report” does not lead to absurdity, contradiction or
injustice. Neither does it defeat the intent of the
legislators. The purpose of the law is to make the closure
of a bank summary and expeditious in order to protect
public interest. This is also why prior notice and hearing
[29]
are no longer required before a bank can be closed.
Laying down the requisites for the closure of a bank under
the law is the prerogative of the legislature and what its
wisdom dictates. The lawmakers could have easily
retained the word “examination” (and in the process also
preserved the jurisprudence attached to it) but they did
not and instead opted to use the word “report.” The
insistence on an examination is not sanctioned by RA
7653 and we would be guilty of judicial legislation were
we to make it a requirement when such is not supported
by the language of the law.
What is being raised here as grave abuse of discretion on
the part of the respondents was the lack of an examination
and not the supposed arbitrariness with which the
conclusions of the director of the Department of Rural
78

Banks Supervision and Examination Sector had been
reached in the report which became the basis of
Resolution No. 105.
The absence of an examination before the closure of
RBSM did not mean that there was no basis for the
closure order. Needless to say, the decision of the MB
and BSP, like any other administrative body, must have
something to support itself and its findings of fact must be
supported by substantial evidence. But it is clear under
RA 7653 that the basis need not arise from an
examination as required in the old law.
We thus rule that the MB had sufficient basis to arrive at
a sound conclusion that there were grounds that would
justify RBSM’s closure. It relied on the report of Mr.
Domo-ong, the head of the supervising or examining
department, with the findings that: (1) RBSM was unable
to pay its liabilities as they became due in the ordinary
course of business and (2) that it could not continue in
business without incurring probable losses to its
[30]
depositors and creditors. The report was a 50-page
memorandum detailing the facts supporting those
grounds, an extensive chronology of events revealing the
multitude of problems which faced RBSM and the
recommendations based on those findings.
In short, MB and BSP complied with all the requirements
of RA 7653. By relying on a report before placing a bank
under receivership, the MB and BSP did not only follow
the letter of the law, they were also faithful to its spirit,
which was to act expeditiously. Accordingly, the issuance
of Resolution No. 105 was untainted with arbitrariness.
Having dispensed with the issue decisive of this case, it
becomes unnecessary to resolve the other minor issues
[31]
raised.
WHEREFORE, the petition is hereby DENIED.
BSP Monetary Board vs. Hon. Antonio-Valenzuela,
ibid.
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.
***facts are under No. 2 supra.
As to the third requirement, the respondent banks have
shown no necessity for the writ of preliminary injunction to
prevent serious damage. The serious damage
contemplated by the trial court was the possibility of the
imposition of sanctions upon respondent banks, even the
sanction of closure. 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
Virtus in infirmitate perficitur! 2 Cor. 12:9
MB. This was the ruling in Central Bank of the Philippines
[11]
v. Court of Appeals. This "close now, hear later"
scheme is grounded on practical and legal considerations
to prevent unwarranted dissipation of the bank's 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 ROEs and worse, by preventing the MB
from acting on such ROEs.
The trial court required the MB to respect the respondent
banks' right to due process by allowing the respondent
banks to view the ROEs and act upon them to forestall
any sanctions the MB might impose. Such procedure has
no basis in law and does in fact violate the "close now,
hear later" doctrine. We held in Rural Bank of San Miguel,
Inc. v. Monetary Board, Bangko Sentral ng Pilipinas:
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
[12]
lack or excess of jurisdiction.
The respondent banks cannot--through seeking a writ of
preliminary injunction by appealing to lack of due process,
in a roundabout manner-- prevent their closure by the MB.
Their remedy, as stated, is a subsequent one, which will
determine whether the closure of the bank was attended
by grave abuse of discretion. Judicial review enters the
picture only after the MB has taken action; it cannot
prevent such action by the MB. The threat of the
imposition of sanctions, even that of closure, does not
violate their right to due process, and cannot be the basis
for a writ of preliminary injunction.
The "close now, hear later" doctrine has already been
justified as a measure for the protection of the public
interest. Swift action is called for on the part of the BSP
when it finds that a bank is in dire straits. Unless adequate
and determined efforts are taken by the government
against distressed and mismanaged banks, public faith in
the banking system is certain to deteriorate to the
prejudice of the national economy itself, not to mention
the losses suffered by the bank depositors, creditors, and
stockholders, who all deserve the protection of the
[13]
government.
The respondent banks have failed to show their
entitlement to the writ of preliminary injunction. It must be
emphasized that an application for injunctive relief is
[14]
construed strictly against the pleader. The respondent
banks cannot rely on a simple appeal to procedural due
process to prove entitlement. The requirements for the
issuance of the writ have not been proved. No invasion of
the rights of respondent banks has been shown, nor is
their right to copies of the ROEs clear and unmistakable.
There is also no necessity for the writ to prevent serious
damage. Indeed the issuance of the writ of preliminary
injunction tramples upon the powers of the MB and
79

prevents it from fulfilling its functions. There is no right that
the writ of preliminary injunction would protect in this
particular case. In the absence of a clear legal right, the
issuance of the injunctive writ constitutes grave abuse of
[15]
discretion. In the absence of proof of a legal right and
the injury sustained by the plaintiff, an order for the
issuance of a writ of preliminary injunction will be nullified.
WHEREFORE, the petition is hereby GRANTED.
SPOUSES JAIME and MATILDE POON vs. PRIME
SAVINGS BANK represented by the PHILIPPINE
DEPOSIT INSURANCE CORPORATION as Statutory
Liquidator
G.R. No. 183794, June 13, 2016 (SERENO, CJ)
The period during which the bank cannot do business due
to insolvency is not a fortuitous event, unless it is shown
that the government's action to place a bank under
receivership or liquidation proceedings is tainted with
arbitrariness, or that the regulatory body has acted
without jurisdiction.
FACTS
Petitioners owned a commercial building in Naga City,
which they used for their bakery business. On 3
November 2006, Matilde Poon and respondent executed
[4]
a 10-year Contract of Lease (Contract) over the building
for the latter's use as its branch office in Naga City. They
agreed to a fixed monthly rental of P60,000, with an
advance payment of the rentals for the first 100 months in
the amount of P6,000,000. As agreed, the advance
payment was to be applied immediately, while the rentals
for the remaining period of the Contract were to be paid
[5]
on a monthly basis.
In addition, paragraph 24 of the Contract provides: Should
the lease[d] premises be closed, deserted or vacated by
the LESSEE, the LESSOR shall have the right to
terminate the lease without the necessity of serving a
court order and to immediately repossess the leased
premises.
Barely three years later, however, the BSP placed
respondent under the receivership of the Philippine
Deposit Insurance Corporation (PDIC) by virtue of BSP
Monetary Board Resolution No. 22. The BSP eventually
ordered respondent's liquidation under Monetary Board
[9]
Resolution No. 664.
On 12 May 2000, respondent vacated the leased
premises and surrendered them to
[10]
petitioners. Subsequently, the PDIC issued petitioners
[11]
a demand letter asking for the return of the unused
advance rental amounting to P3,480,000 on the ground
that paragraph 24 of the lease agreement had become
inoperative, because respondent's closure
constituted force majeure. The PDIC likewise invoked the
principle of rebus sic stantibus under Article 1267 of
Republic Act No. 386 (Civil Code) as alternative legal
basis for demanding the refund.
Virtus in infirmitate perficitur! 2 Cor. 12:9
Petitioners, however, refused the PDIC's
[12]
demand. They maintained that they were entitled to
retain the remainder of the advance rentals following
paragraph 24 of their Contract. Consequently, respondent
sued petitioners before the RTC of Naga City for a partial
rescission of contract and/or recovery of a sum of money.
Respondent posits that it should be released from its
contract with petitioners, because the closure of its
business upon the BSP's order constituted a fortuitous
event as the Court held in Provident Savings Bank.
ISSUE
Is the closure of respondent’s business by virtue of
BSP’s order a fortuitous event that will release it from
its obligations to petitioner?
HELD
NO. The cited case, however, must always be read in the
context of the earlier Decision in Central Bank v. Court of
[30]
Appeals. The Court ruled in that case that the Monetary
Board had acted arbitrarily and in bad faith in ordering the
closure of Provident Savings Bank. Accordingly, in the
subsequent case of Provident Savings Bank it was held
that fuerza mayor had interrupted the prescriptive period
to file an action for the foreclosure of the subject
[31]
mortgage.
In contrast, there is no indication or allegation that the
BSP's action in this case was tainted with arbitrariness or
bad faith. Instead, its decision to place respondent under
receivership and liquidation proceedings was pursuant to
[32]
Section 30 of Republic Act No. 7653. Moreover,
respondent was partly accountable for the closure of its
banking business. It cannot be said, then, that the closure
of its business was independent of its will as in the case
of Provident Savings Bank. The legal effect is analogous
to that created by contributory negligence in quasi-delict
actions.
The period during which the bank cannot do business due
[33]
to insolvency is not a fortuitous event, unless it is
shown that the government's action to place a bank under
receivership or liquidation proceedings is tainted with
arbitrariness, or that the regulatory body has acted
[34]
without jurisdiction.
As an alternative justification for its premature termination
of the Contract, respondent lessee invokes the doctrine of
unforeseen event under Article 1267 of the Civil Code,
which provides:
Art. 1267. When the service has become so difficult as to
be manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in
part.
The theory of rebus sic stantibus in public international
law is often cited as the basis of the above article. Under
this theory, the parties stipulate in light of certain
80

prevailing conditions, and the theory can be made to apply
[35]
when these conditions cease to exist. The Court,
however, has once cautioned that Article 1267 is not an
absolute application of the principle of rebus sic stantibus,
otherwise, it would endanger the security of contractual
relations. After all, parties to a contract are presumed to
have assumed the risks of unfavorable developments. It
is only in absolutely exceptional changes of circumstance,
therefore, that equity demands assistance for the debtor.
WHEREFORE, premises considered, the Petition for
Review on Certiorari is DENIED.
c. Receivership
Abacus Real Estate Development Center, Inc.,vs.
Manila Banking Corp.
G.R. No. 162270, April 06, 2005 (GARCIA)
FACTS
Petitioner insists that the option to purchase the lot and
building in question granted to it by the late Vicente G.
Puyat, then acting president of Manila Bank, was binding
upon the latter. On the other hand, respondent has
consistently maintained that the late Vicente G. Puyat had
no authority to act for and represent Manila Bank, the
latter having been placed under receivership by the
Central Bank at the time of the granting of the "exclusive
option to purchase."
ISSUES
1. Did Puyat had the authority to grant exclusive
option to purchase the lot and building in
question?
2. Was the "exclusive option to purchase" ratified
by Manila Bank's receiver, Atty. Renan Santos?
HELD
Did Puyat had the authority to grant exclusive option
to purchase the lot and building in question?
NO. There can be no quibbling that respondent Manila
Bank was under receivership, pursuant to Central Bank's
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
[12]
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
Virtus in infirmitate perficitur! 2 Cor. 12:9
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.
Was the "exclusive option to purchase" ratified by
Manila Bank's receiver, Atty. Renan Santos?
NO. Concededly, a contract unenforceable for lack of
authority by one of the parties may be ratified by the
person in whose name the contract was executed.
However, even assuming, in gratia argumenti, that Atty.
Renan Santos, Manila Bank's receiver, approved the
"exclusive option to purchase" granted by Vicente G.
Puyat, the same would still be of no force and effect.
Section 29 of the Central Bank Act, as
[14]
amended, pertinently provides:
Sec. 29. Proceedings upon insolvency. - Whenever,
upon examination by the head of the appropriate
supervising and examining department or his examiners
or agents into the condition of any banking institution, it
shall be disclosed that the condition of the same is one of
insolvency, or that its continuance in business would
involve probable loss to its depositors or creditors, it shall
be the duty of the department head concerned forthwith,
in writing, to inform the Monetary Board of the facts, and
the Board may, upon finding the statements of the
department head to be true, forbid the institution to do
business in the Philippines and shall designate an official
of the Central Bank as receiver to immediately take
charge of its assets and liabilities, as expeditiously as
possible collect and gather all the assets and administer
the same for the benefit of its creditors, exercising all the
powers necessary for these purposes including, but not
limited to, bringing suits and foreclosing mortgages in the
name of the banking institution.
Clearly, the receiver appointed by the Central Bank to
take charge of the properties of Manila Bank only had
authority to administer the same for the benefit of its
creditors. Granting or approving an "exclusive option to
purchase" is not an act of administration, but an act of
strict ownership, involving, as it does, the disposition of
property of the bank. Not being an act of administration,
the so-called "approval" by Atty. Renan Santos amounts
to no approval at all, a bank receiver not being authorized
to do so on his own.
For sure, Congress itself has recognized that a bank
receiver only has powers of administration. Section 30 of
81

[15]
the New Central Bank Act expressly provides that "[t]he
receiver shall immediately gather and take charge of all
the assets and liabilities of the institution, administer the
same for the benefit of its creditors, and exercise the
general powers of a receiver under the Revised Rules of
Court but shall not, with the exception of administrative
expenditures, pay or commit any act that will involve the
transfer or disposition of any asset of the institution.."
In all, respondent bank's receiver was without any power
to approve or ratify the "exclusive option to purchase"
granted by the late Vicente G. Puyat, who, in the first
place, was himself bereft of any authority, to bind the bank
under such exclusive option. Respondent Manila Bank
may not thus be compelled to sell the land and building in
question to petitioner Abacus under the terms of the
latter's "exclusive option to purchase".
WHEREFORE, the instant petition is DENIED
Alfeo D. Vivas, vs. Monetary Board and PDIC
G.R. No. 191424, August 7, 2013 (MENDOZA)
FACTS
Vivas 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 BSP’s power is limited only
to supervision and management take-over of banks.
He contends that the implementation of the questioned
resolution was tainted with arbitrariness and bad faith,
stressing that ECBI was placed under receivership
without due and prior hearing in violation of his and the
bank’s right to due process. He adds that respondent
PDIC actually closed ECBI even in the absence of any
directive to this effect. Lastly, 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.”
ISSUES
1. Did Vivas avail of the right remedy?
2. Did MB commit grave abuse of discretion?
3. Is Close Now Hear Later scheme violative of the
due process clause?
HELD
Virtus in infirmitate perficitur! 2 Cor. 12:9
Did Vivas avail of the right remedy?
NO. To begin with, Vivas availed of the wrong remedy.
The MB issued Resolution No. 276, dated March 4, 2010,
in the exercise of its power under R.A. No. 7653. Under
Section 30 thereof, any act of the MB placing a bank
under conservatorship, receivership or liquidation may not
be restrained or set aside except on a petition
for certiorari. Pertinent portions of R.A. 7653 read:
Section 30. – The actions of the Monetary Board taken
under this section or under Section 29 of this Act shall be
final and executory, and may not be restrained or set
aside by the court except on petition for certiorari on
the ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion as to
amount to lack or excess of jurisdiction. The petition for
certiorari may only be filed by the stockholders of record
representing the majority of the capital stock within ten
(10) days from receipt by the board of directors of the
institution of the order directing receivership, liquidation or
conservatorship.xxx
The Petition Should Have Been Filed in the CA
Even if treated as a petition for certiorari, the petition
should have been filed with the CA. Section 4 of Rule 65
reads:
Section 4. When and where petition filed. — The petition
shall be filed not later than sixty (60) days from notice of
the judgment, order or resolution. In case a motion for
reconsideration or new trial is timely filed, whether such
motion is required or not, the sixty (60) day period shall
be counted from notice of the denial of said motion.
The petition shall be filed in the Supreme Court or, if it
relates to the acts or omissions of a lower court or of a
corporation, board, officer or person, in the Regional Trial
Court exercising jurisdiction over the territorial area as
defined by the Supreme Court. It may also be filed in the
Court of Appeals whether or not the same is in aid of its
appellate jurisdiction, or in the Sandiganbayan if it is in aid
of its appellate jurisdiction. If it involves the acts or
omissions of a quasi-judicial agency, unless otherwise
provided by law or these Rules, the petition shall be filed
in and cognizable only by the Court of Appeals.
That the MB is a quasi-judicial agency was already settled
and reiterated in the case of Bank of Commerce v.
Planters Development Bank And Bangko Sentral Ng
[30]
Pilipinas.
Doctrine of Hierarchy of Courts
Even in the absence of such provision, the petition is also
dismissible because it simply ignored the doctrine of
hierarchy of courts. True, the Court, the CA and
the RTC have original concurrent jurisdiction to issue
writs of certiorari, prohibition and mandamus. The
concurrence of jurisdiction, however, does not grant the
party seeking any of the extraordinary writs the absolute
82

freedom to file a petition in any court of his choice. The
petitioner has not advanced any special or important
reason which would allow a direct resort to this Court.
Under the Rules of Court, a party may directly appeal to
[31]
this Court only on pure questions of law. In the case at
bench, there are certainly factual issues as Vivas is
questioning the findings of the investigating team.
Strict observance of the policy of judicial hierarchy
demands that where the issuance of the extraordinary
writs is also within the competence of the CA or the RTC,
the special action for the obtainment of such writ must be
presented to either court. As a rule, the Court will not
entertain direct resort to it unless the redress desired
cannot be obtained in the appropriate lower courts; or
where exceptional and compelling circumstances, such
as cases of national interest and with serious implications,
justify the availment of the extraordinary remedy of writ of
certiorari, prohibition, or mandamus calling for the
[32]
exercise of its primary jurisdiction. The judicial policy
must be observed to prevent an imposition on the
precious time and attention of the Court.
Did MB commit grave abuse of discretion?
NO. The MB Committed No Grave Abuse of Discretion
In any event, no grave abuse of discretion can be
attributed to the MB for the issuance of the assailed
Resolution No. 276.
The thrust of Vivas’ argument is that ECBI did not commit
any financial fraud and, hence, its placement under
receivership was unwarranted and improper. He asserts
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 BSP’s power is limited only
to supervision and management take-over of banks, and
not receivership.
Vivas argues that implementation of the questioned
resolution was tainted with arbitrariness and bad faith,
stressing that ECBI was placed under receivership
without due and prior hearing, invoking Section 11 of R.A.
No. 7353 which states that the BSP may take over the
[33]
management of a rural bank after due hearing. He adds
that because R.A. No. 7353 is a special law, the same
should prevail over R.A. No. 7653 which is a general law.
The Court has taken this into account, but it appears from
all over the records that ECBI was given every opportunity
to be heard and improve on its financial standing. The
records disclose that BSP officials and examiners met
with the representatives of ECBI, including Vivas, and
[34]
discussed their findings. There were also reminders
that ECBI submit its financial audit reports for the years
2007 and 2008 with a warning that failure to submit them
and a written explanation of such omission shall result in
[35]
the imposition of a monetary penalty. More importantly,
ECBI was heard on its motion for reconsideration. For
failure of ECBI to comply, the MB came out with
Resolution No. 1548 denying its request for
Virtus in infirmitate perficitur! 2 Cor. 12:9
reconsideration of Resolution No. 726. Having been
heard on its motion for reconsideration, ECBI cannot
claim that it was deprived of its right under the Rural Bank
Act.
Is Close Now Hear Later scheme violative of the due
process clause?
NO. At any rate, if circumstances warrant it, the MB may
forbid a bank from doing business and place it under
receivership without prior notice and hearing. Section 30
of R.A. No. 7653 provides, viz:
Sec. 30. Proceedings in Receivership and Liquidation. –
Whenever, upon report of the head of the supervising or
examining department, the Monetary Board finds that a
bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in
the ordinary course of business: Provided, That this shall
not include inability to pay caused by extraordinary
demands induced by financial panic in the banking
community;
(b) has insufficient realizable assets, as determined by the
Bangko Sentral, to meet its liabilities; or
(c) cannot continue in business without involving probable
losses to its depositors or creditors; or
(d) has wilfully violated a cease and desist order under
Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation of the
assets of the institution; in which cases, the Monetary
Board may summarily and without need for prior
hearing forbid the institution from doing business in the
Philippines and designate the Philippine Deposit
Insurance Corporation as receiver of the banking
institution. [Emphases supplied.]
x x x x.
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 bank’s
continuance in business would probably result in the loss
to depositors or creditors. In the case of Bangko Sentral
Ng Pilipinas Monetary Board v. Hon. Antonio-
[36]
Valenzuela, the Court reiterated the doctrine of “close
now, hear later,” stating that it was justified as a measure
for the protection of the public interest. Thus:
83

The "close now, hear later” doctrine has already been
justified as a measure for the protection of the public
interest. Swift action is called for on the part of the BSP
when it finds that a bank is in dire straits. Unless adequate
and determined efforts are taken by the government
against distressed and mismanaged banks, public faith in
the banking system is certain to deteriorate to the
prejudice of the national economy itself, not to mention
the losses suffered by the bank depositors, creditors, and
stockholders, who all deserve the protection of the
[37]
government. [Emphasis supplied]
[38]
In Rural Bank of Buhi, Inc. v. Court of Appeals,
Court also wrote that
x x x due process does not necessarily require a prior
hearing; a hearing or an opportunity to be heard may be
subsequent to the closure. One can just imagine the dire
consequences of a prior hearing: bank runs would be the
order of the day, resulting in panic and hysteria. In the
process, fortunes may be wiped out and disillusionment
[39]
will run the gamut of the entire banking community.
The doctrine is founded on practical and legal
considerations to obviate unwarranted dissipation of the
bank’s assets and as a valid exercise of police power to
protect the depositors, creditors, stockholders, and the
[40]
general public. Swift, adequate and determined actions
must be taken against financially distressed and
mismanaged banks by government agencies lest the
public faith in the banking system deteriorate to the
prejudice of the national economy.
Accordingly, the MB can immediately implement its
resolution prohibiting a banking institution to do business
in the Philippines and, thereafter, appoint the PDIC as
receiver. The procedure for the involuntary closure of a
bank is summary and expeditious in nature. Such action
of the MB shall be final and executory, but may be later
subjected to a judicial scrutiny via a petition
for certiorari to be filed by the stockholders of record of
the bank representing a majority of the capital stock.
Obviously, this procedure is designed to protect the
interest of all concerned, that is, the depositors, creditors
and stockholders, the bank itself and the general public.
The protection afforded public interest warrants the
exercise of a summary closure.
In the case at bench, the ISD II submitted its
memorandum, dated February 17, 2010, containing the
findings noted during the general examination conducted
on ECBI with the cut-off date of September 30, 2009. The
memorandum underscored the inability of ECBI to pay its
liabilities as they would fall due in the usual course of its
business, its liabilities being in excess of the assets held.
Also, it was noted that ECBI’s continued banking
operation would most probably result in the incurrence of
additional losses to the prejudice of its depositors and
creditors. On top of these, it was found that ECBI had
willfully violated the cease-and-desist order of the MB
issued in its June 24, 2009 Resolution, and had
disregarded the BSP rules and directives. For said
reasons, the MB was forced to issue the assailed
Virtus in infirmitate perficitur! 2 Cor. 12:9
Resolution No. 276 placing ECBI under receivership. In
addition, the MB stressed that it accorded ECBI ample
time and opportunity to address its monetary problem and
to restore and improve its financial health and viability but
it failed to do so.
In light of the circumstances obtaining in this case, the
application of the corrective measures enunciated in
Section 30 of R.A. No. 7653 was proper and justified.
Management take-over under Section 11 of R.A. No.
7353 was no longer feasible considering the financial
quagmire that engulfed ECBI showing serious conditions
the of insolvency and illiquidity. Besides, placing ECBI under
receivership would effectively put a stop to the further
draining of its assets.
WHEREFORE, the petition for prohibition is DENIED.
d. Liquidation
Apollo M. Salud vs. Central Bank of the Philippines
G.R. No. L-17620, August 19, 1986
FACTS
Jerry Ong vs. Court of Appeals
G.R. No. 112830, February 1, 1996
FACTS
Domingo Manalo vs. Court of Appeals
G.R. No. 141297, October 8, 2001
Rural Bank of Sta. Catalina vs. Land
Bank of the Philippines, G.R. No.
148019, July 26, 2004
Leticia G. Miranda vs. Philippine
Deposit Insurance Corporation, G.R.
No. 169334, September 8, 2006
In Re : Petition for Assistance in the
Liquidation in the Rural Bank of Bokod
(Benguet), PDIC vs. Bureau of Internal
Revenue, 511 SCRA 123 (2006)
Cu v. Small Business Guarantee and
Finance Corp., G.R. No. 211222,
August 7, 2017, Justice Caguioa New
Central Bank Act, Liquidation of
Banks
APEX BANCRIGHTS HOLDINGS, INC.,
LEAD BANCFUND HOLDINGS, et al., v.
BANGKO SENTRAL NG PILIPINAS
and PHILIPPINE DEPOSIT
INSURANCE CORPORATION, G.R. No.
214866, October 2, 2017, Second
Division, PERLAS-BERNABE, J.
Yuseco vs PDIC, August 2016
84
Virtus in infirmitate perficitur! 2 Cor. 12:9

85

B. Law on Secrecy of Bank Deposits (R.A. No.
1405, as amended)
1. Purpose
BSB Group, Inc. vs. Sally Go
G.R. No. 168644, February 16, 2010 (PERALTA)
FACTS
The fact in issue appears to be that respondent has taken
away cash in the amount of P1,534,135.50 from the
coffers of petitioner.
In support of this allegation, petitioner seeks to establish
the existence of the elemental act of taking by adducing
evidence that respondent, at several times between 1988
and 1989, deposited some of its checks to her personal
account with Security Bank. Petitioner addresses the
incongruence between the allegation of theft of cash in
the Information, on the one hand, and the evidence that
respondent had first stolen the checks and deposited the
same in her banking account, on the other hand, by
impressing upon the Court that there obtains no
difference between cash and check for purposes of
prosecuting respondent for theft of cash.
Respondent claimed that the money represented by the
Security Bank account was neither relevant nor material
to the case, because nothing in the criminal information
suggested that the money therein deposited was the
subject matter of the case. She invited particular attention
to that portion of the criminal Information which averred
that she has stolen and carried away cash money in the
total amount of P1,534,135.50. She advanced the notion
that the term "cash money" stated in the Information was
not synonymous with the checks she was purported to
have stolen from petitioner and deposited in her personal
banking account. Thus, the checks which the prosecution
had Marasigan identify, as well as the testimony itself of
Marasigan, should be suppressed by the trial court at
least for violating respondent's right to due
[28]
process. More in point, respondent opined that
admitting the testimony of Marasigan, as well as the
evidence pertaining to the Security Bank account, would
violate the secrecy rule under R.A. No. 1405.
ISSUES
1. Is there no difference between a check and a
cash for purposes of prosecuting the
respondent for theft of cash?
2. Would admitting the testimony of Marasigan, as
well as the evidence pertaining to the Security
Bank account, violate the secrecy rule under
R.A. No. 1405?
HELD
Is there no difference between a check and a cash for
purposes of prosecuting the respondent for theft of
cash?
Virtus in infirmitate perficitur! 2 Cor. 12:9
THERE IS. In estafa by conversion, for instance, whether
the thing converted is cash or check, is immaterial in
relation to the formal allegation in an information for that
offense; a check, after all, while not regarded as legal
tender, is normally accepted under commercial usage as
a substitute for cash, and the credit it represents in stated
monetary value is properly capable of appropriation. And
it is in this respect that what the offender does with the
check subsequent to the act of unlawfully taking it
becomes material inasmuch as this offense is a
[37]
continuing one. In other words, in pursuing a case for
this offense, the prosecution may establish its cause by
the presentation of the checks involved. These checks
would then constitute the best evidence to establish their
contents and to prove the elemental act of conversion in
support of the proposition that the offender has indeed
[38]
indorsed the same in his own name.
Theft, however, is not of such character. Thus, for our
purposes, as the Information in this case accuses
respondent of having stolen cash, proof tending to
establish that respondent has actualized her criminal
intent by indorsing the checks and depositing the
proceeds thereof in her personal account, becomes not
only irrelevant but also immaterial and, on that score,
inadmissible in evidence.
ISSUE
What are the purposes of R.A. No. 1405?
HELD
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
[41]
development. Owing to this piece of legislation, the
confidentiality of bank deposits remains to be a basic state
[42]
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. It
declares:
Section 2. All deposits of whatever nature with banks or
banking institutions in the Philippines including
investments in bonds issued by the Government of the
Philippines, its political subdivisions and its
instrumentalities, are hereby considered as of an
absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official,
bureau or office, except upon written permission of the
depositor, or in cases of impeachment, or upon order of a
competent court in cases of bribery or dereliction of duty
of public officials, or in cases where the money deposited
or invested is the subject matter of the litigation.
It is then perceivable that the present legal order is obliged
to conserve the absolutely confidential nature of bank
[45]
deposits. **see continuation of the case infra.
86

2. Prohibited Acts
Oñate vs. Abrogar
G.R. No. 107303, February 23, 1995 (MENDOZA)
FACTS
The records show that, on January 21, 1992, respondent
judge ordered the examination of the books of accounts
and ledgers of Brunner at the Urban Bank, Legaspi Village
branch, and on January 30, 1992 the records of account
of petitioner Oñate at the BPI, even as he ordered the
PNB to produce the records regarding certain checks
deposited in it.
Sun Life defends these court orders on the ground that
the money paid by it to Brunner was subsequently
withdrawn from the Urban Bank after it had been
deposited by Brunner and then transferred to petitioner
Oñate's account in the BPI and to the unnamed account
in the PNB.
ISSUE
Is the money in question the subject matter of the
transaction which therefore can be inquired into by
the court?
HELD
NO. 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 § 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.
WHEREFORE, the decision dated February 21, 1994 is
RECONSIDERED and SET ASIDE.
Philippine Commercial International Bank vs. Court of
Appeals, 255 SCRA 299
G.R. No. 97785, March 29, 1996 (FRANCISCO)
FACTS
In his complaint, private respondent alleged that as a
result of petitioner’s total disregard and gross violation of
its contractual obligation to remit and deliver the sum of
Two Hundred Thousand Pesos (P200,000.00) covered by
T/T No. 284 to Equitable Banking Corporation, Cagayan
de Oro Branch, private respondent’s checks were
dishonored for insufficient funds thereby causing his
business and credit standing to suffer considerably for
[7]
which petitioner should be ordered to pay damages.
Answering the complaint, petitioner denied any liability to
private respondent and interposed as special and
affirmative defense the lack of privity between it and
private respondent as it was not private respondent
Virtus in infirmitate perficitur! 2 Cor. 12:9
himself who purchased the telegraphic transfer from
petitioner. Additionally, petitioner pointed out that private
respondent is nevertheless bound by the stipulation in the
[8]
telegraphic transfer application/form receipt which
provides:
"x x x. In case of fund transfer, the undersigned hereby
agrees that such transfer will be made without any
responsibility on the part of the BANK, or its
correspondents, for any loss occasioned by errors or
delays in the transmission of message by telegraph or
cable companies or by correspondents or agencies,
necessarily employed by this BANK in the transfer of this
money, all risks for which are assumed by the
undersigned."
Petitioner mainly argues that even assuming that the
disputed provision is a contract of adhesion, such fact
alone does not make it invalid because this type of
contract is not absolutely prohibited. Moreover, the terms
thereof are expressed clearly, leaving no room for doubt,
and both contracting parties understood and had full
knowledge of the same.
ISSUE
Is the disputed provision valid?
HELD
NO. A contract of adhesion is defined as one in which one
of the parties imposes a ready-made form of contract,
which the other party may accept or reject, but which the
[16]
latter cannot modify. One party prepares the stipulation
in the contract, while the other party merely affixes his
[17]
signature or his "adhesion" thereto, giving no room
for negotiation and depriving the latter of the opportunity
[18]
to bargain on equal footing. Nevertheless, these types
of contracts have been declared as binding as ordinary
contracts, the reason being that the party who adheres to
[19]
the contract is free to reject it entirely. It is equally
important to stress, though, that the Court is not precluded
from ruling out blind adherence to their terms if the
attendant facts and circumstances show that they should
[20]
be ignored for being obviously too one-sided.
On previous occasions, it has been declared that a
contract of adhesion may be struck down as void and
unenforceable, for being subversive to public policy, only
when the weaker party is imposed upon in dealing with
the dominant bargaining party and is reduced to the
alternative of taking it or leaving it, completely deprived of
[21]
the opportunity to bargain on equal footing. And when
it has been shown that the complainant is knowledgeable
enough to have understood the terms and conditions of
the contract, or one whose stature is such that he is
expected to be more prudent and cautious with respect to
his transactions, such party cannot later on be heard to
complain for being ignorant or having been forced into
merely consenting to the contract.
[23]
In Geraldez vs. Court of Appeals, it was unequivocally
declared that notwithstanding the enforceability of a
87

contractual limitation, responsibility arising from a
fraudulent act cannot be exculpated because the same is
contrary to public policy. Indeed, Article 21 of the Civil
Code is quite explicit in providing that "[a]ny person who
willfully causes loss or injury to another in a manner that
is contrary to morals, good customs or public policy shall
compensate the latter for the damage." Freedom of
contract is subject to the limitation that the agreement
must not be against public policy and any agreement or
contract made in violation of this rule is not binding and
[24]
will not be enforced.
The prohibition against this type of contractual stipulation
is moreover treated by law as void which may not be
ratified or waived by a contracting party. Article 1409 of
the Civil Code states:
"ART. 1409. The following contracts are inexistent and
void from the beginning:
(1) Those whose cause, object or purpose is contrary to
law, morals, good customs, public order or public policy;
xxx xxx xxx
These contracts cannot be ratified. Neither can the right
to set up the defense of illegality be waived."
Undoubtedly, the services being offered by a banking
institution like petitioner are imbued with public
[25]
interest. The use of telegraphic transfers have now
become commonplace among businessmen because it
facilitates commercial transactions. Any attempt to
completely exempt one of the contracting parties from any
liability in case of loss notwithstanding its bad faith, fault
or negligence, as in the instant case, cannot be
sanctioned for being inimical to public interest and
therefore contrary to public policy. Resultingly, there
being no dispute that petitioner acted fraudulently and in
[26]
bad faith, the award of moral and exemplary damages
were proper.
WHEREFORE, subject to the foregoing modification
reducing the amount awarded as moral damages to the
sum of Two Hundred Thousand Pesos (P200,000.00), the
appealed decision is hereby AFFIRMED.
Union Bank of the Philippines vs. Court of Appeals
G.R. No. 134699, December 23, 1999 (KAPUNAN)
FACTS
On March 21, 1990, a check dated March 31, 1990 in the
amount of One Million Pesos (P1,000,000.00) was drawn
against Account No. 0111-01854-8 with private
respondent Allied Bank payable to the order of one Jose
Ch. Alvarez. The payee deposited the check with
petitioner Union Bank who credited the P1,000,000.00 to
the account of Mr. Alvarez. On May 21, 1990, petitioner
sent the check for clearing through the Philippine Clearing
House Corporation (PCHC). When the check was
presented for payment, a clearing discrepancy was
committed by Union Bank’s clearing staff when the
Virtus in infirmitate perficitur! 2 Cor. 12:9
amount of One Million Pesos (P1,000,000.00) was
erroneously “under-encoded” to One Thousand Pesos
(P1,000.00) only.
Petitioner only discovered the under-encoding almost a
year later. Thus, on May 7, 1991, Union Bank Notified
Allied Bank of the discrepancy by way of a charge slip for
Nine Hundred Ninety-Nine Thousand Pesos
(P999,000.00) for automatic debiting against the account
of Allied Bank. The latter, however, refused to accept the
charge slip “since [the] transaction was completed per
your [Union Bank’s] original instruction and client’s
account is now insufficiently funded.”
Subsequently, Union Bank filed a complaint against Allied
Bank before the PCHC Arbitration Committee (Arbicom).
Thereafter, Union Bank filed in the Regional Trial court
(RTC) of Makati a petition for the examination of Account
No. 111-01854-8.
Union Bank is now before this Court insisting that the
money deposited in Account No. 0111-01854-8 is the
subject matter of the litigation.
ISSUE
Is the case at bar falls under the last exception of R.A.
No. 1405, Sec. 2 (6): i.e., in cases where the money
deposited or invested in the subject matter of the
litigation?
HELD
NO. Petitioner contends that the Court of Appeals
confuses the “cause of action” with the “subject of the
[6]
action.” In Yusingco vs. Ong Hing Lian, petitioner points
out, this Court distinguished the two concepts.
xxx “The cause of action is the legal wrong threatened or
committed, while the object of the action is to prevent or
redress the wrong by obtaining some legal relief; but the
subject of the action is neither of these since it is not the
wrong or the relief demanded, the subject of the action is
the matter or thing with respect to which the controversy
has arisen, concerning which the wrong has been done,
and this ordinarily is the property, or the contract and its
subject matter, or the thing in dispute.”
The argument is well taken. We note with approval the
difference between the “subject of the action” from the
“cause of action.” We also find petitioner’s definition of the
phrase “subject matter of the action” is consistent with the
term “subject matter of the litigation,” as the latter is used
in the Bank Deposits Secrecy Act.
However, the petition before this court reveals that the
true purpose for the examination is to aid petitioner in
proving the extent of Allied Bank’s liability.
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
88

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 latter’s alleged failure to
inform the former of the discrepancy; but it is not the
P999,000.00 deposited in the drawer’s 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.
WHEREFORE, the petition is DENIED.
3. Deposits Covered
Intengan vs. Court of Appeals
G.R. No. 128996, February 15, 2002 (DE LEON, JR.)
FACTS
On September 21, 1993, Citibank filed a complaint for
[4] [5]
violation of section 31, in relation to section 144 of the
Corporation Code against two (2) of its officers, Dante L.
Santos and Marilou Genuino. Attached to the complaint
[6]
was an affidavit executed by private respondent Vic Lim,
a vice-president of Citibank.
As evidence, Lim annexed bank records purporting to
establish the deception practiced by Santos and Genuino.
Some of the documents pertained to the dollar deposits of
petitioners Carmen Ll. Intengan, Rosario Ll. Neri, and Rita
P. Brawner.
ISSUE
Did Lim validly disclose the dollar deposits of
petitioners?
HELD
NO. 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,” section
8 of which provides:
Sec. 8. Secrecy of Foreign Currency Deposits.- All foreign
currency deposits authorized under this Act, as amended
by Presidential Decree No. 1035, as well as foreign
currency deposits authorized under Presidential Decree
No. 1034, are hereby declared as and considered of an
absolutely confidential nature and, except upon the
written permission of the depositor, in no instance shall
such foreign currency deposits be examined, inquired or
looked into by any person, government official bureau or
office whether judicial or administrative or legislative or
Virtus in infirmitate perficitur! 2 Cor. 12:9
any other entity whether public or private: Provided,
however, that said foreign currency deposits shall be
exempt from attachment, garnishment, or any other order
or process of any court, legislative body, government
[21]
agency or any administrative body whatsoever.
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 latter’s written permission. It
does not matter if that such disclosure was necessary to
establish Citibank’s case against Dante L. Santos and
Marilou Genuino. Lim’s act of disclosing details of
petitioners’ bank records regarding their foreign currency
deposits, with the authority of Reyes, would appear to
belong to that species of criminal acts punishable by
special laws, called malum prohibitum.
Ordinarily, the dismissal of the instant petition would have
been without prejudice to the filing of the proper charges
against private respondents. The matter would have
ended here were it not for the intervention of time,
specifically the lapse thereof.
It may well be argued that the foregoing disquisition would
leave petitioners with no remedy in law. We point out,
however, that the confidentiality of foreign currency
deposits mandated by Republic Act No. 6426, as
amended by Presidential Decree No. 1246, came into
effect as far back as 1977. Hence, ignorance thereof
cannot be pretended. On one hand, the existence of laws
[32]
is a matter of mandatory judicial notice; on the
[33]
other, ignorantia legis non excusat. Even during the
pendency of this appeal, nothing prevented the petitioners
from filing a complaint charging the correct offense
against private respondents. This was not done, as
everyone involved was content to submit the case on the
basis of an alleged violation of Republic Act No. 1405
[34]
(Bank Secrecy Law), however, incorrectly invoked.
WHEREFORE, the petition is hereby DENIED.
Ejercito vs. Sandiganbayan
G.R. Nos. 157294-95, November 30, 2006
FACTS
Petitioner, claiming to have learned from the media that
the Special Prosecution Panel had requested for the
issuance of subpoenas for the examination of bank
accounts belonging to him, attended the hearing of the
case on January 27, 2003 and filed before the
89

Sandiganbayan a letter of even date expressing his
concerns. From the present petition, it is gathered that the
"accounts" referred to by petitioner in his above-quoted
letter
are Trust Account No. 858 and Savings Account No. 011
6-17345-9.
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 under any of the
exceptions stated therein. He further claimed that the
specific identification of documents in the questioned
subpoenas, including details on dates and amounts, could
only have been made possible by an earlier illegal
disclosure thereof by the EIB and the Philippine Deposit
Insurance Corporation (PDIC) in its capacity as receiver
of the then Urban Bank.
The disclosure being illegal, petitioner concluded, the
prosecution in the case may not be allowed to make use
of the information.
ISSUES
1. Are “trusts accounts” covered by the term
“deposits”?
2. Are petitioner’s trust accounts the “subject
matter” of the litigation?
HELD
Are “trusts accounts” covered by the term
“deposits”?
YES. The contention that trust accounts are not covered
by the term "deposits," as used in R.A. 1405, by the mere
fact that they do not entail a creditor-debtor relationship
between the trustor and the bank, does not lie. 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.
The policy behind the law is laid down in Section 1:
SECTION 1. It is hereby declared to be the policy of the
Government to give encouragement to the people to
deposit their money in banking institutions
and to discourage private hoarding so that the same ma
y beproperly utilized by banks in authorized loans to assi
st in the economic development of the country.
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
Virtus in infirmitate perficitur! 2 Cor. 12:9
"deposit, placement or investment of
funds" by Urban Bank for and in behalf of
[6]
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 cases where 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."
Clearly, therefore, R.A. 1405 is broad enough to cover
Trust Account No. 858.
The protection afforded by the law is, however, not
absolute, there being recognized exceptions thereto, as
above-quoted Section 2 provides. In the present case,
two exceptions apply, to wit: (1) the examination of bank
accounts is upon order of a competent court in cases of
bribery or dereliction of duty of public officials, and (2) the
money deposited or invested is the subject matter of the
litigation.
Petitioner contends that since plunder is neither bribery
nor dereliction of duty, his accounts are not excepted from
the protection of R.A. 1405. Philippine National Bank v.
[7]
Gancayco holds otherwise:
Cases of unexplained wealth are similar to cases of bri
bery or dereliction of duty and no reason is seenwhy the
se two classes of cases cannot be excepted from the rul
e making bank deposits confidential. The policy as to one
cannot be different from the policy as to the other. This
policy expresses the notion that a public office is a
public trust and any person who enters upon its
90

discharge does so with the full knowledge that his life, so
far as relevant to his duty, is open to public scrutiny.
Undoubtedly, cases for plunder involve unexplained
wealth. Section 2 of R.A. No. 7080 states so.
SECTION 2. Definition of the Crime of Plunder; Penalties
— Any public officer who, by himself or inconnivance w
ith members of his family, relatives by affinity or consang
uinity, business associates,subordinates or other person
s, amasses, accumulates or acquires ill-
gotten wealth through acombination or series of overt o
r criminal acts as described in Section 1(d) hereof, in the
aggregate amount or total value of at least Seventy-five
million pesos (P75,000,000.00), shall be guilty of
the crime of plunderand shall be punished by life
imprisonment with perpetual absolute disqualification
from holding any public office. Any person who
participated with said public officer in the commission of
plunder shall likewise be punished. In the imposition of
penalties, the degree of participation and the attendance
of mitigating and extenuating circumstances shall be
considered by the court. The court shall declare any and
all ill-gotten wealth and their interests and other incomes
and assets including the properties and shares of stock
derived from the deposit or investment thereof forfeited in
favor of the State. (Emphasis and underscoring supplied)
An examination of the "overt or criminal acts as described
in Section 1(d)" of R.A. No. 7080 would make the similarity
between plunder and bribery even more pronounced
since bribery is essentially included among these criminal
acts. Thus Section 1(d) states:
2) By receiving, directly or indirectly, any
commission, gift, share, percentage, kickbacks or
any other form of pecuniary benefit from any person
and/or entity in connection with any government
contract or project or by reason of the office or
position of the public officer concerned; xxx
Indeed, all the above-enumerated overt acts are similar to
bribery such that, in each case, it may be said that "no
reason is seen why these two classes of cases cannot be
excepted from the rule making bank deposits
[8]
confidential."
The crime of bribery and the overt acts constitutive of
plunder are crimes committed by public officers, and in
either case the noble idea that "a public office is a public
trust and any person who enters upon its discharge does
so with the full knowledge that his life, so far as relevant
Virtus in infirmitate perficitur! 2 Cor. 12:9
to his duty, is open to public scrutiny" applies with equal
force.
Plunder being thus analogous to bribery, the exception to
R.A. 1405 applicable in cases of bribery must also apply
to cases of plunder.
Are petitioner’s trust accounts the “subject matter” of
the litigation?
YES. The meaning of the phrase "subject matter of the
litigation" as used in R.A. 1405 is explained in Union Bank
[9]
of the Philippines v. Court of Appeals, thus:
Petitioner contends that the Court of Appeals confuses
the "cause of action" with the "subject of the action".
In Yusingco v. Ong Hing Lian, petitioner points out, this
Court distinguished the two concepts.
x x x "The cause of action is the legal wrong threatened
or committed, while the object of the action is to prevent
or redress the wrong by obtaining some legal relief; but
the subject of the action is neither of these since it is not
the wrong or the relief
demanded, the subject of theaction is the matter or thing
with respect to which the controversy has arisen, concer
ning whichthe wrong has been done, and this ordinarily i
s the property or
the contract and its subject matter,or the thing in dispute.
"
In Mellon Bank, N.A. v. Magsino, where the petitioner ba
nk inadvertently caused the transfer of the amount ofUS
$1,000,000.00 instead of only US$1,000.00, the Court s
anctioned the examination of the bankaccounts wher
e part of the money was subsequently
caused to be deposited:
'x x x Section 2 of [Republic Act No. 1405] 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 isaimed
at recovering the amount converted by the Javiers fo
r their own benefit, necessarily,an inquiry into the w
hereabouts of the illegally acquired amount extends
to whatever isconcealed by being held or recorded i
n the name of persons other than the oneresponsibl
e for the illegal acquisition."
Clearly, Mellon Bank involved a case where the money d
eposited was the subject matter of the litigation sincethe
money deposited was the very thing in dispute. x x x
The plunder case now pending with the Sandiganbayan
necessarily involves an inquiry into the whereabouts of
the amount purportedly acquired illegally by former
President Joseph Estrada.
In light then of this Court's pronouncement in Union
Bank, the subject matter of the litigation cannot be limited
to bank accounts under the name of President Estrada
alone, but must include those accounts to which the
money purportedly acquired illegally or a portion thereof
was alleged to have been transferred. Trust Account No.
91

858 and Savings Account No. 0116-17345-9 in the name
of petitioner fall under this description and must thus be
part of the subject matter of the litigation.
Moreover,
Petitioner's attempt to make the exclusionary rule
applicable to the instant case fails. R.A. 1405, it bears
noting, nowhere provides that an unlawful examination of
bank accounts shall render the evidence obtained
therefrom inadmissible in evidence. Section 5 of R.A.
1405 only states that "[a]ny violation of this law will subject
the offender upon conviction, to an imprisonment of not
more than five years or a fine of not more than twenty
thousand pesos or both, in the discretion of the court."
IN SUM, the Court finds that the Sandiganbayan did not
commit grave abuse of discretion in issuing the
challenged subpoenas for documents pertaining to
petitioner's Trust Account No. 858 and Savings Account
No. 0116-17345-9 for the following reasons:
1. These accounts are no longer protected by the Secrecy
of Bank Deposits Law, there being two exceptions to the
said law applicable in this case, namely: (1) the
examination of bank accounts is upon order of a
competent court in cases of bribery or dereliction of duty
of public officials, and (2) the money deposited or invested
is the subject matter of the litigation. Exception (1) applies
since the plunder case pending against former President
Estrada is analogous to bribery or dereliction of duty,
while exception (2) applies because the money deposited
in petitioner's bank accounts is said to form part of the
subject matter of the same plunder case.
2. The "fruit of the poisonous tree" principle, which states
that once the primary source (the "tree") is shown to have
been unlawfully obtained, any secondary or derivative
evidence (the "fruit") derived from it is also inadmissible,
does not apply in this case. In the first place, R.A. 1405
does not provide for the application of this rule. Moreover,
there is no basis for applying the same in this case since
the primary source for the detailed information regarding
petitioner's bank accounts — the investigation previously
conducted by the Ombudsman — was lawful.
3. At all events, even if the subpoenas issued by the
Sandiganbayan were quashed, the Ombudsman may
conduct on its own the same inquiry into the subject bank
accounts that it earlier conducted last February-March
2001, there being a plunder case already pending against
former President Estrada. To quash the challenged
subpoenas would, therefore, be pointless since the
Ombudsman may obtain the same documents by another
route. Upholding the subpoenas avoids an unnecessary
delay in the administration of justice.
WHEREFORE, the petition is DISMISSED
Virtus in infirmitate perficitur! 2 Cor. 12:9
4. Exceptions
PNB vs. Gancayco, 15 SCRA 91
G.R. No. L-18343, September 30, 1965 (REGALA)
FACTS
This question arose when defendants Emilio A. Gancayco
and Florentino Flor, as special prosecutors of the
Department of Justice, required the plaintiff Philippine
National Bank to produce at a hearing to be held at 10
a.m. on February 20, 1961 the records of the bank
deposits of Ernesto T. Jimenez, former administrator of
the Agricultural Credit and Cooperative Administration,
who was then under investigation for unexplained wealth.
In declining to reveal its records, the plaintiff bank invoked
Republic Act No. 1405.
ISSUE
Can a bank be compelled to disclose the records of
accounts of a depositor who is under investigation for
unexplained wealth?
HELD
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
that no reconciliation is possible. Thus, while Republic Act
No. 1405 provides that bank deposits are "absolutely
confidential x x x 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 Anti-Graft Law is intended to amend section 2 of
Republic Act No. 1405 by providing an additional
exception to the rule against the disclosure of bank
deposits.
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.
With regard to the claim that disclosure would be contrary
to the policy making bank deposits confidential, it is
enough to point out that while section 2 of Republic Act
No. 1405 declares bank deposits to be "absolutely
92

confidential" it nevertheless allows such disclosure in the
following instances: (1) Upon written permission of the
depositor; (2) In cases of impeachment; (3) Upon order of
a competent court in cases of bribery or dereliction of duty
of public officials; (4) In cases where the money deposited
is the subject matter of the litigation. Cases of unexplained
wealth are similar to cases of bribery or dereliction of duty
and no reason is seen why these, two classes of cases
cannot be excepted from the rule making bank deposits
confidential. The policy as to one cannot be different from
the policy as to the other. This policy expresses the notion
that a public office is a public trust and any person who
enters upon its discharge does so with the full knowledge
that his life, so far as relevant to his duty, is open to public
scrutiny.
WHEREFORE, the decision appealed from is affirmed.
Banco Filipino Saving and Mortgage Bank vs.
Purisima, 161 SCRA 576
G.R. No. 56429, May 28, 1988 (NARVASA)
FACTS
Tanodbayan required production by Banco Filipino of the
bank records in all its branches and extension offices, of
Siargao Agro-Industrial Corporation, Pedro Escuyos or
his wife, Emeterio Escuyos, Purita Caturla, Lucia Escuyos
or her husband, Romeo Escuyos, Emerson Escuyos,
Fraterno Caturla, Amparo Montilla, Cesar Caturla, Manuel
Caturla or his children, Manuel Jr., Marilyn and Michael,
LTD Pub/Restaurant, and Jose Buo or his wife, Evelyn.
Two other subpoenae of substantially the same tenor as
the second were released by the Tanodbayan
[8]
'sOffice. The last required obedience under sanction of
contempt.
The Banco Filipino Savings & Mortgage Bank, hereafter
referred to simply as BF Bank, took over from Caturla in
the effort to nullify the subpoenae. It filed a complaint for
declaratory relief with the Court of First Instance of Manila.
ISSUE
Is the inquiry extended to cases where such property
is concealed by being held by or recorded in the name
of other persons?
HELD
YES. 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,
[16]
relatives or any other persons.
Virtus in infirmitate perficitur! 2 Cor. 12:9
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.
The power of the Tanodbayan to issue subpoenae ad
testificandum and subpoenae duces tecum at the time in
question is not disputed, and at any rate does not admit
[17]
of doubt. The subpoenae issued by him. will be
sustained against the petitioner's impugnation.
WHEREFORE, the petition for certiorari is DISMISSED,
Mellon Bank, N.A. vs. Magsino
G.R. No. 71479, October 18, 1990 (FERNAN)
FACTS
Mellon Bank alleged that it had mistakenly and
inadvertently caused the transfer of the sum of
$999,000.00 to Jane Doe Javier; that it believes that the
defendants had withdrawn said funds; that "the
defendants and each of them have used a portion of said
funds to purchase real property located in Kern County,
California"; and that because of defendants' knowledge of
Mellon Bank's mistake and inadvertence and their use of
the funds to purchase the property, they and "each of
them are involuntary or constructive trustees of the real
property and of any profits therefrom, with a duty to
convey the same to plaintiff forthwith." It prayed that the
defendants and each of them be declared as holders of
the property in trust for the plaintiff; that defendants be
compelled to transfer legal title and possession of the
property to the plaintiff; that defendants be made to pay
the costs of the suit, and that other reliefs be granted
them.
Petitioner's theory therein is that after the Javiers had
maliciously appropriated unto themselves $999,000, the
other private respondents conspired and participated in
the concealment and dissipation of said amount. The
testimonies of Baylosis and Red are therefore needed to
establish the scheme to hide the erroneously sent
amount.
Private respondents' protestations is 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.
ISSUE
Would allowing the questioned testimonies to remain
on record be in violation of the provisions of Republic
Act No. 1405 on the secrecy of bank deposits?
93

HELD
NO. Section 2 of said law allows the disclosure of bank
deposits in cases where the money deposited is the
[24]
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.
We cannot dispose of this case without condemning in the
strongest terms possible the acts of chicanery
so apparent from the records. The respective liabilities of
the respondents are still being determined by the court
below. We must warn, however, against the use of
technicalities and obstructive tactics to delay a just
settlement of this case. The taking advantage of the
petitioner's mistake to gain sudden and undeserved
wealth is marked by circumstances so brazen and
shocking that any further delay will reflect poorly on the
kind of justice our courts dispense.
The possible involvement of lawyers in this sorry scheme
stamps a black mark on the legal profession. The
Integrated Bar of the Philippines (IBP) must be made
aware of the ostensible participation, if not instigation, in
the spiriting away of the missing funds. The IBP must
take the proper action at the appropriate time against all
lawyers involved in any misdeeds arising from this case.
WHEREFORE, the resolution of September 10, 1982 and
the orders of October 28, 1982 and July 9, 1985 are
hereby annulled. The lower court is ordered to proceed
with dispatch in the disposition of Civil case No. 26899,
considering that thirteen (13) years have gone by since
the original erroneous remittance.
PCIB vs. Court of Appeals
G.R. No. 84526, January 28, 1991 (SARMIENTO)
FACTS
[8]
The instant case originated from an action filed with the
National Labor Relations Commission (NLRC) by a group
of laborers who obtained therefrom a favorable judgment
for the payment of backwages amounting to P205,853.00
against the private respondent.
On April 26, 1976, the said Commission issued a writ of
execution directing the Deputy Sheriff of Negros
Occidental, one Damian Rojas, to enforce the
aforementioned judgment.
Sheriff prepared on his own a Notice of Garnishment
dated April 29, 1976 addressed to six (6) banks, all
located in Bacolod City, one of which being the petitioner
herein, directing the bank concerned to immediately issue
a check in the name of the Deputy Provincial Sheriff of
Virtus in infirmitate perficitur! 2 Cor. 12:9
Negros Occidental in an amount equivalent to the amount
of the garnishment and that proper receipt would be
issued therefore.
Petitioner bank issued a check from the account of private
respondent which the deputy sheriff encashed.
Private respondent filed a complaint before the RTC of
Manila, Branch II, 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, and
notwithstanding the alleged unauthorized disclosure of
the said current deposit and unlawful release thereof, the
latter have failed and refused to restore the amount of
P37,466.18 to the former's account despite repeated
demands.
ISSUE
Did petitioners violate RA. No. 1405 in releasing
private respondent’s deposit to the custody of the
deputy sheriff?
HELD
NO. we find no violation whatsoever by the petitioners of
Republic Act No. 1405, otherwise known as the Secrecy
of Bank Deposits Act. The Court in China Banking
[18]
Corporation vs. Ortega had the occasion to dispose of
this issue when it stated, thus:
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.
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 or 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.
The petitioners are therefore absolved from any liability
for the disclosure and release of the private respondent's
deposit to the custody of the deputy sheriff in satisfaction
of the final judgment for the laborers’ backwages.
WHEREFORE, the petition is GRANTED
94

Van Twest vs. Court of Appeals, 230 SCRA 42
G.R. No. 106253, February 10, 1994 (FELICIANO)
FACTS
Petitioner alleged in his complaint that in 1989, he and
private respondent 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." Petitioner further
alleged that withdrawals from the account were always
made through their joint signatures; that when his
business relationship with private respondent turned sour,
private respondent unilaterally closed their joint account,
withdrew the remaining balance of Deutschmark (DM)
269,777.37 and placed the money in her own personal
[2]
account with the same bank. Petitioner thus sought an
injunctive writ to prevent private respondent from
withdrawing the money at any time and thereby defeat
petitioner's main and pending action in Civil Case No. 90-
659.
Petitioner seeks to restrain private respondent from
effecting withdrawals from her personal account, into
which she had transferred the foreign currency, in order
not to defeat his main action seeking recovery of said
fund.
Private respondent contends for the first time in this
proceeding 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 statute in force on 26
February 1990, the date she withdrew the foreign
exchange fund from her joint account with petitioner and
[22]
transferred the same to her personal account. Private
respondent adds that the Court has plenary authority to
disregard the procedural defect attending private
respondent's new contention; since this case cannot be
resolved adequately without a ruling on the nature of the
exemption from court processes granted by the statute.
ISSUE
Is private respondent’s personal foreign currency
deposit exempt from processes issued by the courts,
pursuant to Section 8 of R.A. 6426 as amended by
P.D. 1246?
HELD
NO. the Court holds that the privileges extended by the
statute cited by private respondent are actually enjoyed,
and are invocable only, by the petitioner, both because
private respondent's transactions fall outside the ambit of
the statute, and because petitioner is the owner of the
foreign exchange fund subject of this case. This
conclusion is anchored on the consistent and
contemporaneous administrative construction by the
Central Bank of the basic statute, as manifested in the
Virtus in infirmitate perficitur! 2 Cor. 12:9
relevant circulars issued by it in implementation of that
[25]
law, which are entitled to great respect by the courts.
Section 8 of R.A. No. 6426 (the Foreign Currency Deposit
Act), as amended by P.D. No. 1246, which is still in force,
provides:
"Sec. 8. Secrecy of Foreign Currency Deposits -- All
foreign currency deposits authorized under this Act, as
amended by Presidential Decree No. 1035, as well as
foreign currency deposits authorized under Presidential
Decree No. 1034, are hereby declared as and considered
of an absolutely confidential nature and, except upon the
written permission of the depositor, in no instance shall
such foreign currency deposits be examined, inquired or
looked into by any person, government official, bureau or
office, whether judicial or administrative or legislative or
any other entity whether public or private: Provided,
however, that said foreign currency shall be exempt from
attachment, garnishment, or any other order or process of
any court, legislative body, government agency or any
[26]
administrative body whatsoever."
Section one hundred-two of Circular No. 960, Series of
1983, provides in relevant part:
"x x x xxx xxx
Sec. 102. Foreign currency funds ineligible for deposits.
a. Foreign exchange purchased from authorized agent
banks in accordance with existing regulations such as
excess travel funds; unspent financial assistance of
dependents abroad of Philippine residents; foreign
exchange acquired from any resident persons, firm,
association and corporation; and transfers to a foreign
currency deposit account or receipt from another
foreign currency deposit account, whether for payment
of legitimate obligation or otherwise, are not eligible for
deposit under the System.
[27]
xxx xxx x x x"
This Circular 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.
Circular No. 960 was superseded by Circular No. 1318,
Series of 1992, which did not reenact and continue the
administrative provision above-mentioned (Section 102).
Nevertheless, Section seventy-four, Chapter seven of
Circular No. 1318, which deals with the foreign currency
deposit system, provides in relevant part:
"Section 74. Definition of Terms. As used in this Chapter,
the following terms shall have the meaning indicated
unless the context clearly indicates otherwise: x x x
95

The definition of such other terms used in this Chapter
shall be consistent with the definition of terms used under
[28]
the Chapter on Offshore Banking System." x x x
Section forty-nine, Chapter five of the same Circular,
dealing with the Offshore Banking System, stated in part:
"Section 49. Definition of Terms. x x x
d. 'Deposits' shall refer to funds in foreign
currencies which are accepted and held by an
OBU (offshore banking unit) in the regular course of
business, with the obligation to return an equivalent
amount to the owner thereof, with or without interest; x x
[29]
x"
In other words, 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 owner of
such foreign currency funds and her personal deposit
account is not, under Section 49 of Circular No. 1318,
protected by this Circular.
Circular No. 1318 was superseded for a brief period by
Circular No. 1353, Series of 1992, which in turn was
superseded by Circular No. 1389, Series of 1993. Circular
No. 1389 is the current implementing issuance for R.A.
No. 6426; the relevant provisions (Sections 74 and 49) of
Circular No. 1318 have been incorporated en toto in the
[30]
current Circular.
ACCORDINGLY, the Petition for Review is hereby
GRANTED.
Marquez vs. Desierto
G.R. No. 135882, June 27, 2001 (PARDO)
FACTS
Sometime in May 1998, petitioner Marquez received an
Order from the Ombudsman Aniano A. Desierto dated
April 29, 1998, to produce several bank documents for
purposes of inspection in camera relative to various
accounts maintained at Union Bank of the Philippines,
Julia Vargas Branch, where petitioner is the branch
manager. The accounts to be inspected are Account Nos.
011-37270, 240-020718, 245-30317-3 and 245-30318-1,
involved in a case pending with the Ombudsman entitled,
Fact-Finding and Intelligence Bureau (FFIB) v. Amado
Lagdameo, et. al.
ISSUE
Is the order of the Ombudsman to have an in camera
inspection of the questioned account allowed as an
exception to the law on secrecy of bank deposits (R.
A. No. 1405)?
Virtus in infirmitate perficitur! 2 Cor. 12:9
HELD
NO. An examination of the secrecy of bank deposits law
(R. A. No. 1405) would reveal the following exceptions:
1. Where the depositor consents in writing;
2. Impeachment case;
3. By court order in bribery or dereliction of duty
cases against public officials;
4. Deposit is subject of litigation;
5. Sec. 8, R. A. No. 3019, in cases of unexplained
wealth as held in the case of PNB vs.
[26]
Gancayco
The order of the Ombudsman to produce for in
camera inspection the subject accounts with the Union
Bank of the Philippines, Julia Vargas Branch, is based on
a pending investigation at the Office of the Ombudsman
against Amado Lagdameo, et. al. for violation of R. A. No.
3019, Sec. 3 (e) and (g) relative to the Joint Venture
Agreement between the Public Estates Authority and
AMARI.
We rule that before an in camera inspection may be
allowed:
(1) there must be a pending case before a court of
competent jurisdiction;
(2) further, the account must be clearly identified;
(3) the inspection limited to the subject matter of the
pending case before the court of competent
jurisdiction; and
(4) the bank personnel and the account holder must
be notified to be present during the inspection,
and such inspection may cover only the account
identified in the pending case.
In Union Bank of the Philippines v. Court of Appeals, we
held that “Section 2 of the Law on Secrecy of Bank
Deposits, as amended, declares bank deposits to be
“absolutely confidential” except:
(1) In an examination made in the course of a special or
general examination of a bank that is specifically
authorized by the Monetary Board after being satisfied
that there is reasonable ground to believe that a bank
fraud or serious irregularity has been or is being
committed and that it is necessary to look into the
deposit to establish such fraud or irregularity,
(2) In an examination made by an independent auditor
hired by the bank to conduct its regular audit provided
that the examination is for audit purposes only and the
results thereof shall be for the exclusive use of the
bank,
(3) Upon written permission of the depositor,
(4) In cases of impeachment,
(5) Upon order of a competent court in cases of bribery or
dereliction of duty of public officials, or
96

(6) In cases where the money deposited or invested is the
[27]
subject matter of the litigation”
In the case at bar, there is yet no pending litigation before
any court of competent authority. What is existing is an
investigation by the office of the Ombudsman. In short,
what the Office of the Ombudsman would wish to do is to
fish for additional evidence to formally charge Amado
Lagdameo, et. al., with the Sandiganbayan. Clearly, there
was no pending case in court which would warrant the
opening of the bank account for inspection.
Zones of privacy are recognized and protected in our
laws. The Civil Code provides that "[e]very person shall
respect the dignity, personality, privacy and peace of mind
of his neighbors and other persons" and punishes as
actionable torts several acts for meddling and prying into
the privacy of another. It also holds a public officer or
employee or any private individual liable for damages for
any violation of the rights and liberties of another person,
and recognizes the privacy of letters and other private
communications. The Revised Penal Code makes a crime
of the violation of secrets by an officer, the revelation of
trade and industrial secrets, and trespass to dwelling.
Invasion of privacy is an offense in special laws like the
Anti-Wiretapping Law, the Secrecy of Bank Deposits
[28]
Act, and the Intellectual Property Code.
IN VIEW WHEREOF, we GRANT the petition.
Office of the Ombudsman vs. Ibay
G. R. No. 137538, September 3, 2001 (QUISUMBING)
FACTS
Sometime in 1998, petitioner conducted an investigation
on the alleged "scam" on the Public Estates Authority-
Amari Coastal Bay Development Corporation. The case,
entitled Fact-Finding and Intelligence Bureau vs. Amadeo
Lagdameo, et al., was docketed as OMB-0-97-0411.
Initial result of the investigation revealed that the alleged
anomaly was committed through the issuance of checks
which were subsequently deposited in several financial
institutions. On April 29, 1998, petitioner issued an Order
directing private respondent Lourdes Marquez, branch
manager of Union Bank of the Philippines branch at Julia
Vargas Avenue, Pasig City, to produce several bank
documents for inspection relative to Account Nos. 011-
37270-5, 240-020718, 245-30317-3 and 245-30318-1,
reportedly maintained in the said branch. The documents
referred to include bank account application forms,
signature cards, transactions history, bank statements,
bank ledgers, debit and credit memos, deposit and
withdrawal slips, application for purchase of manager's
checks, used manager's checks and check microfilms.
In this case, the controversy concerns the extent of the
power of petitioner to examine bank accounts under
Section 15 (8) of R.A. 6770 vis-à-vis the duty of banks
under Republic Act 1405 not to divulge any information
relative to deposits of whatever nature. The interests of
Virtus in infirmitate perficitur! 2 Cor. 12:9
the parties are adverse considering the antagonistic
assertion of a legal right on one hand, that is the power of
Ombudsman to examine bank deposits, and on the other,
the denial thereof apparently by private respondent who
refused to allow petitioner to inspect in camera certain
bank accounts. The party seeking relief, private
respondent herein, asserts a legal interest in the
controversy. The issue invoked is ripe for judicial
determination as litigation is inevitable. Note that
petitioner has threatened private respondent with "indirect
contempt" and "obstruction" charges should the latter not
comply with its order.
ISSUE
Is the Ombudsman’s order for the opening of the
subject bank account for inspection legally justified?
HELD
NO. This issue has been squarely addressed by our
[8]
decision in Marquez vs. Desierto. In that case, 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. 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.
WHEREFORE, the instant petition is DISMISSED.
China Bank Corporation vs. CA 511 SCRA 110
G.R. No. 140687, December 18, 2006 (CHICO-
NAZARIO)
FACTS
The following facts are established: (1) Jose Gotianuy and
Mary Margaret Dee are co-payees of various Citibank
[15]
checks; (2) Mary Margaret Dee withdrew these checks
[16]
from Citibank; (3) Mary Margaret Dee admitted in her
Answer to the Request for Admissions by the Adverse
[17]
Party sent to her by Jose Gotianuy that she withdrew
the funds from Citibank upon the instruction of her father
Jose Gotianuy and that the funds belonged exclusively to
the latter; (4) these checks were endorsed by Mary
Margaret Dee at the dorsal portion; and (5) Jose Gotianuy
discovered that these checks were deposited with China
Bank as shown by the stamp of China Bank at the dorsal
side of the checks.
Thus, with this, there is no issue as to the source of the
funds. Mary Margaret Dee declared the source to be Jose
Gotianuy. There is likewise no dispute that these funds in
97

the form of Citibank US dollar Checks are now deposited
with China Bank. There is, however, a need to inquire into
Jose Gotianuy’s (as substituted by Elizabeth) right to
inquire into such deposits.
ISSUE
May the funds in the form of Citibank US dollar
Checks, now deposited with China Bank, be inquired
into by the petitioner?
HELD
YES. As amended by Presidential Decree No. 1246, the
law reads:
SEC. 8. Secrecy of Foreign Currency Deposits. – All
foreign currency deposits authorized under this Act, as
amended by Presidential Decree No. 1035, as well as
foreign currency deposits authorized under Presidential
Decree No. 1034, are hereby declared as and considered
of an absolutely confidential nature and, except upon the
written permission of the depositor, in no instance
shall such foreign currency deposits be examined,
inquired or looked into by any person, government official,
bureau or office whether judicial or administrative or
legislative or any other entity whether public or
private: Provided, however, that said foreign currency
deposits shall be exempt from attachment, garnishment,
or any other order or process of any court, legislative
body, government agency or any administrative body
whatsoever. (As amended by PD No. 1035, and further
amended by PD No. 1246, prom. Nov. 21, 1977)
Under the above provision, the law provides that all
foreign currency deposits authorized under Republic Act
No. 6426, as amended by Sec. 8, Presidential Decree No.
1246, Presidential Decree No. 1035, as well as foreign
currency deposits authorized under Presidential Decree
No. 1034 are considered absolutely confidential in nature
and may not be inquired into. There is only one exception
to the secrecy of foreign currency deposits, that is,
disclosure is allowed upon the written permission of
the depositor.
This much was pronounced in the case of Intengan v.
[10]
Court of Appeals, where it was held that the only
exception to the secrecy of foreign currency deposits is in
the case of a written permission of the depositor.
It must be remembered that under the whereas clause of
Presidential Decree No. 1246 which amended Sec. 8 of
Republic Act No. 6426, the Foreign Currency Deposit
System including the Offshore Banking System under
Presidential Decree 1034 were intended to draw deposits
from foreign lenders and investors, and we quote:
Whereas, in order to assure the development and speedy
growth of the Foreign Currency Deposit System and the
Offshore Banking System in the Philippines, certain
incentives were provided for under the two Systems such
as confidentiality of deposits subject to certain exceptions
and tax exemptions on the interest income of depositors
Virtus in infirmitate perficitur! 2 Cor. 12:9
who are nonresidents and are not engaged in trade or
business in the Philippines;
Whereas, making absolute the protective cloak of
confidentiality over such foreign currency deposits,
exempting such deposits from tax, and guaranteeing the
vested rights of depositors would better encourage the
inflow of foreign currency deposits into the banking
institutions authorized to accept such deposits in the
Philippines thereby placing such institutions more in a
position to properly channel the same to loans and
investments in the Philippines, thus directly contributing to
the economic development of the country.
As to the deposit in foreign currencies entitled to be
protected under the confidentiality rule, Presidential
[11]
Decree No. 1034, defines deposits to mean funds in
foreign currencies which are accepted and held by an
offshore banking unit in the regular course of business,
with the obligation to return an equivalent amount to the
[12]
owner thereof, with or without interest.
It is in this light that the court in the case of Salvacion v.
[13]
Central Bank of the Philippines, allowed the inquiry of
the foreign currency deposit in question mainly due to the
peculiar circumstances of the case such that a strict
interpretation of the letter of the law would result to rank
injustice. Therein, Greg Bartelli y Northcott, an American
tourist, was charged with criminal cases for serious illegal
detention and rape committed against then 12 year-old
Karen Salvacion. A separate civil case for damages with
preliminary attachment was filed against Greg Bartelli.
The trial court issued an Order granting the Salvacions'
application for the issuance of a writ of preliminary
attachment. A notice of garnishment was then served on
China Bank where Bartelli held a dollar account. China
Bank refused, invoking the secrecy of bank deposits. The
Supreme Court ruled: "In fine, the application of the law
depends on the extent of its justice x x x It would be
unthinkable, that the questioned law exempting foreign
currency deposits from attachment, garnishment, or any
other order or process of any court, legislative body,
government agency or any administrative body
whatsoever would be used as a device by an accused x x
x for wrongdoing, and in so doing, acquitting the guilty at
[14]
the expense of the innocent.
With the foregoing, we are now tasked to determine the
single material issue of whether or not petitioner China
Bank is correct in its submission that the Citibank dollar
checks with both Jose Gotianuy and/or Mary Margaret
Dee as payees, deposited with China Bank, may not be
looked into under the law on secrecy of foreign currency
deposits. As a corollary issue, sought to be resolved is
whether Jose Gotianuy may be considered a depositor
who is entitled to seek an inquiry over the said deposits.
The Court of Appeals, in allowing the inquiry, considered
Jose Gotianuy, a co-depositor of Mary Margaret Dee. It
reasoned that since Jose Gotianuy is the named co-
payee of the latter in the subject checks, which checks
were deposited in China Bank, then, Jose Gotianuy is
98

likewise a depositor thereof. On that basis, no written
consent from Mary Margaret Dee is necessitated.
We agree in the conclusion arrived at by the Court of
Appeals.
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
[18]
beneficiary of the funds held by the bank as trustee.
On this score, the observations of the Court of Appeals
are worth reiterating:
Furthermore, it is indubitable that the Citibank checks
were drawn against the foreign currency account with
Citibank, NA. The monies subject of said checks originally
came from the late Jose Gotianuy, the owner of the
account. Thus, he also has legal rights and interests in the
CBC account where said monies were deposited. More
importantly, the Citibank checks (Exhibits "AAA" to
"AAA-5") readily demonstrate (sic) that the late Jose
Gotianuy is one of the payees of said checks. Being a
co-payee thereof, then he or his estate can be
considered as a co-depositor of said checks. Ergo,
since the late Jose Gotianuy is a co-depositor of the CBC
account, then his request for the assailed subpoena is
tantamount to an express permission of a depositor for
the disclosure of the name of the account holder. The April
[19]
16, 1999 Order perforce must be sustained.
One more point. It must be remembered that in the
complaint of Jose Gotianuy, he alleged that his US dollar
deposits with Citibank were illegally taken from him. On
the other hand, China Bank employee Cristuta Labios
testified that Mary Margaret Dee came to China Bank and
deposited the money of Jose Gotianuy in Citibank US
dollar checks to the dollar account of her sister Adrienne
[20]
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.
All things considered and in view of the distinctive
circumstances attendant to the present case, we are
constrained to render a limited pro hac
[21]
vice ruling. Clearly it was not the intent of the legislature
when it enacted the law on secrecy on foreign currency
deposits to perpetuate injustice. This Court is of the view
that the allowance of the inquiry would be in accord with
[22]
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
[23]
justice.
WHEREFORE, premises considered, the Petition
is DENIED.
Virtus in infirmitate perficitur! 2 Cor. 12:9
BSB Group, Inc., vs. Sally Go
G.R. No. 168644, February 16, 2010 (PERALTA)
FACTS (*this is the continuation of the case supra)
ISSUE
Would admitting the testimony of Marasigan, as well
as the evidence pertaining to the Security Bank
account, violate the secrecy rule under R.A. No.
1405?
YES. The measure of protection afforded by the law has
been explained in China Banking Corporation v.
[46]
Ortega. That case principally addressed the issue of
whether the prohibition against an examination of bank
deposits precludes garnishment in satisfaction of a
judgment. Ruling on that issue in the negative, the Court
found guidance in the relevant portions of the legislative
deliberations on Senate Bill No. 351 and House Bill No.
3977, which later became the Bank Secrecy Act, and it
held that the absolute confidentiality rule in R.A. No. 1405
actually aims at protection from unwarranted inquiry or
investigation if the purpose of such inquiry or investigation
is merely to determine the existence and nature, as well
as the amount of the deposit in any given bank account.
Thus:
Mr. Ramos: It is only prohibited to the extent that the
inquiry... is made only for the purpose of satisfying a tax
liability already declared for the protection of the right in
favor of the government; but when the object is merely
to inquire whether he has a deposit or not for
purposes of taxation, then this is fully covered by the
law. x x x
Mr. Marcos: The law prohibits a mere investigation
into the existence and the amount of the deposit.
Mr. Ramos: Into the very nature of such deposit. x x x
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.
[50]
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.
It can hardly be inferred from the indictment itself that the
Security Bank account is the ostensible subject of the
prosecution's inquiry. Without needlessly expanding the
scope of what is plainly alleged in the Information, the
subject matter of the action in this case is the money
amounting to P1, 534, 135.50 alleged to have been stolen
by respondent, and not the money equivalent of the
checks which are sought to be admitted in evidence.
Thus, it is that, which the prosecution is bound to prove
with its evidence, and no other.
It comes clear that the admission of testimonial and
documentary evidence relative to respondent's Security
Bank account serves no other purpose than to establish
99

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.
In sum, we hold that the testimony of Marasigan on the
particulars of respondent's supposed bank account with
Security Bank and the documentary evidence
represented by the checks adduced in support thereof,
are not only incompetent for being excluded by operation
of R.A. No. 1405. They are likewise irrelevant to the case,
inasmuch as they do not appear to have any logical and
reasonable connection to the prosecution of respondent
for qualified theft. We find full merit in and affirm
respondent's objection to the evidence of the prosecution.
The Court of Appeals was, therefore, correct in reversing
the assailed orders of the trial court.
A final note. In any given jurisdiction where the right of
privacy extends its scope to include an individual's
financial privacy rights and personal financial matters,
there is an intermediate or heightened scrutiny given by
courts and legislators to laws infringing such
[52]
rights. Should there be doubts in upholding the
absolutely confidential nature of bank deposits against
affirming the authority to inquire into such accounts, then
such doubts must be resolved in favor of the former. This
attitude persists unless congress lifts its finger to reverse
the general state policy respecting the absolutely
confidential nature of bank deposits.
WHEREFORE, the petition is DENIED.
Rizal Commercial Banking Corporation vs. Hi-Tri
Development Corporation, 672 SCRA 514
G.R. No. 192413, June 13, 2012 (SERENO)
FACTS
Luz [R.] Bakunawa and her husband Manuel, now
deceased (“Spouses Bakunawa”) are registered owners
of six (6) parcels of land.
Teresita Millan (“Millan”), through her representative,
Jerry Montemayor, offered to buy said lots for
“P6,724,085.71”, with the promise that she will take care
of clearing whatever preliminary obstacles there may[]be
to effect a “completion of the sale”. The Spouses
Bakunawa gave to Millan the Owner’s Copies of said
TCTs and in turn, Millan made a down[]payment of
“P1,019,514.29” for the intended purchase. However, for
one reason or another, Millan was not able to clear said
obstacles. As a result, the Spouses Bakunawa rescinded
the sale and offered to return to Millan her down[]payment
of P1,019,514.29. However, Millan refused to accept back
the P1,019,514.29 down[]payment. Consequently, the
Spouses Bakunawa, through their company, the Hi-Tri
Development Corporation (“Hi-Tri”) took out on October
Virtus in infirmitate perficitur! 2 Cor. 12:9
28, 1991, a Manager’s Check from RCBC-Ermita in the
amount of P1,019,514.29, payable to Millan’s company
Rosmil Realty and Development Corporation (“Rosmil”)
c/o Teresita Millan and used this as one of their basis for
a complaint against Millan and Montemayor which they
filed with the Regional Trial Court.
On January 31, 2003, during the pendency of the
abovementioned case and without the knowledge of [Hi-
Tri and Spouses Bakunawa], x x x RCBC reported the
“P1,019,514.29-credit existing in favor of Rosmil” to the
Bureau of Treasury as among its “unclaimed balances” as
of January 31, 2003. Allegedly, a copy of the Sworn
Statement executed by Florentino N. Mendoza, Manager
and Head of RCBC’s Asset Management, Disbursement
& Sundry Department (“AMDSD”) was posted within the
premises of RCBC-Ermita.
On December 14, 2006, x x x Republic, through the
[Office of the Solicitor General (OSG)], filed with the RTC
the action below for Escheat [(Civil Case No. 06-244)].
[Manuel Bakunawa, through Hi-Tri] inquired from RCBC-
Ermita the availability of the P1,019,514.29 under RCBC
Manager’s Check No. ER 034469. [Hi-Tri and Spouses
Bakunawa] were however dismayed when they were
informed that the amount was already subject of the
escheat proceedings before the RTC.
ISSUE
May the allocated funds may be escheated in favor of
the Republic?
HELD
NO. Escheat proceedings refer to the judicial process in
which the state, by virtue of its sovereignty, steps in and
claims abandoned, left vacant, or unclaimed property,
without there being an interested person having a legal
[15]
claim thereto. 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
[16]
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
[17]
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
[18]
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.
[19]
Act No. 3936, as amended, outlines the proper procedure
to be followed by banks and other similar institutions in
filing a sworn statement with the Treasurer concerning
dormant accounts.
100

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
[20]
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.
In case the bank complies with the provisions of the law
and the unclaimed balances are eventually escheated to
the Republic, the bank “shall not thereafter be liable to any
person for the same and any action which may be brought
by any person against in any bank xxx for unclaimed
balances so deposited xxx shall be defended by the
Solicitor General without cost to such
[21]
bank.” Otherwise, should it fail to comply with the
legally outlined procedure to the prejudice of the
depositor, the bank may not raise the defense provided
under Section 5 of Act No. 3936, as amended.
It is undisputed that there was no effective delivery of the
check, rendering the instrument incomplete. In addition,
we have already settled that respondents retained
ownership of the funds. As it is obvious from their
foregoing actions that they have not abandoned their
claim over the fund, we rule that the allocated deposit,
subject of the Manager’s Check, should be excluded from
the escheat proceedings. We reiterate our
pronouncement that the objective of escheat proceedings
is state forfeiture of unclaimed balances. We further note
that there is nothing in the records that would show that
the OSG appealed the assailed CA judgments. We take
this failure to appeal as an indication of disinterest in
pursuing the escheat proceedings in favor of the
Republic.
WHEREFORE the Petition is DENIED.
Dona Adela Export International Inc., vs. Trade and
Investment Development Corporation and the Bank
of the Philippine Islands
G.R. No. 201931, February 11, 2015 (VILLARAMA)
FACTS
Petitioner Doña Adela Export International, Inc.,
(petitioner, for brevity) filed a Petition for Voluntary
[4]
Insolvency. The case was docketed as SEC Case No.
MC06-103 and raffled off to the RTC of Mandaluyong City,
Branch 211.
Virtus in infirmitate perficitur! 2 Cor. 12:9
Atty. Arlene Gonzales was appointed as receiver. After
taking her oath, Atty. Gonzales proceeded to make the
necessary report, engaged appraisers and required the
creditors to submit proof of their respective claims.
On October 22, 2010, Atty. Gonzales filed a Motion for
Parties to Enter Into Compromise
[6]
Agreement incorporating therein her proposed terms of
compromise.
On May 26, 2011, petitioner, through its President
Epifanio C. Ramos, Jr., and Technology Resource Center
(TRC) entered into a Dacion En Pago by Compromise
[8]
Agreement. On August 11, 2011, creditors TIDCORP
and BPI also filed a Joint Motion to Approve
[10]
Agreement which contained 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. Accordingly, the petitioner and the members of
its Board of Directors by these presents grant TIDCORP
and BPI access to any deposit or other accounts
maintained by them with any bank.For this purpose, the
petitioner and the members of its Board of Directors shall
authorize TIDCORP and BPI to make, sign, execute and
deliver any document of whatever kind or nature which
may be necessary or proper to allow them access to such
deposits or other accounts.
ISSUE
Is the waiver of confidentiality provision in the
Agreement between TIDCORP and BPI valid despite
petitioner not being a party and signatory to the
same?
HELD
NO. Section 2 of R.A. No. 1405, the Law on Secrecy of
Bank Deposits enacted in 1955, was first amended by
Presidential Decree No. 1792 in 1981 and further
amended by R.A. No. 7653 in 1993. It now reads:
SEC. 2. All deposits of whatever nature with banks or
banking institutions in the Philippines including
investments in bonds issued by the Government of the
Philippines, its political subdivisions and its
instrumentalities, are hereby considered as of an
absolutely confidential nature and may not be examined,
inquired or looked into by any person, government official,
bureau or office, except when the examination is made in
the course of a special or general examination of a bank
and 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, or when the
examination is made by an independent auditor hired by
the bank to conduct its regular audit provided that the
101

examination is for audit purposes only and the results
thereof shall be for the exclusive use of the bank, or upon
written permission of the depositor, or in cases of
impeachment, or upon order of a competent court in
cases of bribery or dereliction of duty of public officials, or
in cases where the money deposited or invested is the
subject matter of the litigation.
R.A. No. 1405 provides for exceptions when records of
deposits may be disclosed. These are under any of the
following instances: (a) upon written permission of the
depositor, (b) in cases of impeachment, (c) upon order of
a competent court in the case of bribery or dereliction of
duty of public officials or, (d) when the money deposited
or invested is the subject matter of the litigation, and (e)
in cases of violation of the Anti-Money Laundering Act, the
Anti-Money Laundering Council may inquire into a bank
[23]
account upon order of any competent court.
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. The provision on the
waiver of the confidentiality of petitioner’s bank deposits
was merely inserted in the agreement. It is clear therefore
that petitioner is not bound by the said provision since it
was without the express consent of petitioner who was not
a party and signatory to the said agreement.
Neither can petitioner be deemed to have given its
permission by failure to interpose its objection during the
proceedings. It is an elementary rule that the existence of
a waiver must be positively demonstrated since a waiver
by implication is not normally countenanced. 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
[24]
validity of such waiver.
In addition, considering that petitioner was already
declared insolvent by the RTC, all its property, assets and
belongings were ordered delivered to the appointed
receiver or assignee. Thus, in the order of the RTC
appointing Atty. Gonzales as receiver, petitioner was
directed to assign and convey to Atty. Gonzales all its real
and personal property, monies, estate and effects with all
[25]
the deeds, books and papers relating thereto, pursuant
[26] [27]
to Section 32 of the Insolvency Law. Such
assignment shall operate to vest in the assignee all of the
estate of the insolvent debtor not exempt by law from
[28]
execution. 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
[29]
petitioner have been assigned and conveyed to her and
Virtus in infirmitate perficitur! 2 Cor. 12:9
she has the right to recover all the estate, assets, debts
[30]
and claims belonging to or due to the insolvent debtor.
While it was Atty. Gonzales who filed the Motion for
Parties to Enter Into Compromise Agreement, she did not
sign or approve the Joint Motion to Approve Agreement
submitted by TIDCORP and BPI. In her Manifestation
and Comment (on Dacion En Pago by Compromise
Agreement with TRC and Joint Motion to Approve
Agreement of BPI and TIDCORP) there is no showing that
Atty. Gonzales signified her conformity to the waiver of
confidentiality of petitioner’s bank deposits.
Clearly, the waiver of confidentiality of petitioner’s bank
deposits in the BPI-TIDCORP Joint Motion to Approve
Agreement lacks the required written consent of petitioner
and conformity of the receiver. We, thus, hold that
petitioner is not bound by the said provision.
WHEREFORE, premises considered, the petition is
hereby GRANTED.
5. Garnishment of Deposits, Including Foreign
Deposits
De la Rama vs. Villarosa, 8 SCRA 413
G.R. No. L-17927, June 29, 1963 (LABRADOR)
FACTS
Plaintiff-lessor Lourdes de la Rama brought an action in
the Court of First Instance of Negros Occidental, against
defendant lessee Augusto R. Villarosa and the latter's
surety, the Luzon Surety Co., Inc. for judicial confirmation
of the cancellation, rescission and annullment of a
contract of lease of sugar land, Annex "A", and the
payment of the unpaid balance of the rental for a specified
number of sugarcane crop years. After trial the court
rendered a decision dated March 28, 1957' ordering the
lessee and his surety to pay.
Accordingly, the sheriff of Manila garnished the deposit of
defendant-appellant with the Philippine Trust Co. to the
amount of P71,533.99.
The garnishee, the Philippine Trust Co., refused to deliver
to the sheriff of Manila, the amount garnished by the latter
to satisfy the writ of execution, so the lower court on
September 3, 1959, ordered said company to pay the
sheriff out of the deposit of the Luzon Surety Co., Inc. the
amount stated in the amended garnishment dated August
18, 1959. On September 18, 1959, before the order could
be complied with by the garnishee, the defendant Luzon
Surety Co. filed a petition for certiorari with preliminary
injunction with the Court of Appeals (CA-G.R. No. 25322-
R) against plaintiff-appellee, the Court of First Instance of
Negros Occidental, the sheriff of Manila and the Philippine
Trust Co.
102

ISSUE
May the petition for interest on the balance of the
amount garnished be awarded to the defendant-
appellant?
HELD
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 issued on appeal.
In the second place, the mere garnishment of funds
belonging to a 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 or 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." (6 Am.
Jur. 14)
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
an order to deliver the full amount garnished to the
plaintiff-appellee; 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.
In the third place, the motion by the defendant-appellant
for the payment of damages or interest was presented
when the judgment had already become final. Damages
incident to the issuance of an attachment may only be
claimed before final judgment. (Rule 59, Sec. 20). In the
case at bar the judgment of the Court of Appeals was
issued on January 14, 1960. But the defendant-
appellant's request for interest or damages is dated July
22, 1960. The defendant-appellant's awn record on
appeal shows that the decision of the Court of Appeals
had already become final and executory at the time of the
perfection of the appeal to this Court.
Virtus in infirmitate perficitur! 2 Cor. 12:9
A last reason is the absence of any allegation to the affect
that the garnishment of appellant's funds in the Philippine
Trust Company caused actual damages to defendant-
appellant, for example that the funds could not be utilized
to pay a pending obligation as a result of which interest
was paid on such obligation.
FOR ALL THE FOREGOING, the judgment of the court
below denying defendant-appellant's petition for interest
on its funds garnished is affirmed, with costs against
defendant-appellant.
PCIB vs. Court of Appeals
G.R. No. 84526, January 28, 1991
(**refer to the discussion supra)
Salvacion vs. Central Bank of the Philippines
G.R. No. 94723, August 21, 1997 (TORRES, JR.)
FACTS
On February 4, 1989, Greg Bartelli y Northcott, an
American tourist, coaxed and lured petitioner Karen
Salvacion, then 12 years old to go with him to his
apartment. Therein, Greg Bartelli detained Karen
Salvacion for four days, or up to February 7, 1989 and
was able to rape the child once on February 4, and three
times each day on February 5, 6, and 7, 1989. On
February 7, 1989, after policemen and people living
nearby, rescued Karen, Greg Bartelli was arrested and
detained at the Makati Municipal Jail.
Makati Investigating Fiscal Edwin G. Condaya filed
against Greg Bartelli, for Serious Illegal Detention and for
four (4) counts of Rape. On the same day, petitioners filed
with the Regional Trial Court of Makati Civil Case for
damages with preliminary attachment against Greg
Bartelli. On February 24, 1989, the day there was a
scheduled hearing for Bartelli’s petition for bail the latter
escaped from jail.
Judge issued an Order dated February 22, 1989 granting
the application of herein petitioners, for the issuance of
the writ of preliminary attachment. Deputy Sheriff of
Makati served a Notice of Garnishment on China Banking
Corporation.
China Banking Corporation, in a letter dated March 20,
1989, invoked Section 113 of Central Bank Circular No.
960 to the effect that the dollar deposits of defendant Greg
Bartelli are exempt from attachment, garnishment, or any
other order or process of any court, legislative body,
government agency or any administrative body,
whatsoever.
ISSUE
May Bartelli’s dollar deposits with CBC be garnished
to satisfy petitioner’s claim for damages against him?
103
 Virtus in infirmitate perficitur! 2 Cor. 12:9

HELD

YES. In fine, the application of the law depends on the

extent of its justice. Eventually, 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 like accused Greg Bartelli. This would negate
Article 10 of the New Civil Code which provides that “in
case of doubt in the interpretation or application of laws,
it is presumed that the lawmaking body intended right and
justice to prevail. “Ninguno non deue enriquecerse
tortizerzmente con damo de otro.” Simply stated, when
the statute is silent or ambiguous, this is one of those
fundamental solutions that would respond to the
vehement urge of conscience. (Padilla vs. Padilla, 74 Phil.
377)

It would be unthinkable, that the questioned Section 113

of Central Bank No. 960 would be used as a device by
accused Greg Bartelli for wrongdoing, and in so doing,
acquitting the guilty at the expense of the innocent.

Call it what it may – but is there no conflict of legal policy

here? Dollar against Peso? Upholding the final and
executory judgment of the lower court against the Central
Bank Circular protecting the foreign depositor? Shielding
or protecting the dollar deposit of a transient alien
depositor against injustice to a national and victim of a
crime? This situation calls for fairness legal tyranny.

We definitely cannot have both ways and rest in the belief

that we have served the ends of justice.

IN VIEW WHEREOF, the provisions of Section 113 of CB

Circular No. 960 and PD No. 1246, insofar as it amends
Section 8 of R.A. 6426 are hereby held to
be INAPPLICABLE to this case because of its peculiar
circumstances.

104

C. General Banking Law of 2000 (R.A. No. 8791)
1. Definition and Classification of Banks
Republic of the Philippines vs. Security Credit and
Acceptance Corporation
G.R. No. L-20583, January 23, 1967
FACTS
2. Distinction of Banks from Quasi-Banks and
Trust Entities
Teodoro Bañas vs. Asia Pacific Finance Corporation
G.R. No. 128703, October 18, 2000
FACTS
First Planters Pawnshop, Inc.,vs.
Commissioner of Internal Revenue, G.R. No.
174134, July 30, 2008
3. Bank Powers and Liabilities
a. Corporate Powers
Register of Deeds of Manila vs. China
Banking Corporation, 4 SCRA 1145
(1962)
Banco de Oro-EPCI, Inc. vs. JAPRL
Development Corporation, G.R. No.
179901, April 14, 2008
b. Banking and Incidental Powers
Virtus in infirmitate perficitur! 2 Cor. 12:9
Spouses Raul and Amalia Panlilio vs.
Citibank, N.A., G.R. No. 156335,
November 28, 2007
4. Diligence Required of Banks—Relevant
Jurisprudence
Simex International (Manila) Inc. vs. Court
of Appeals, 183 SCRA 360 (1990)
Luzan Sia vs. Court of Appeals, G.R. No.
102970, May 13, 1993
Gregorio Reyes vs. Court of Appeals, G.R.
No. 118492, August 15, 2001
Philippine National Bank vs. Erlando T.
Rodriguez, et. al., G.R. No. 170325,
September 26, 2008
Central Bank of the Philippines vs.
Citytrust Banking Corporation, G.R. No.
141835, February 4, 2009
Bank of America, NT and SA vs.
Associated Citizens Bank, G.R. No.
141018, May 21, 2009
DRA. MERCEDES OLIVER, Petitioner, v.
PHILIPPINE SAVINGS BANK AND LILIA
CASTRO,Respondents. (G.R. No. 214567,
April 04, 2016,
MA. LORENA FLORES and ALEXANDER
CRUZ vs. NARCISO L. KHO (G.R. No.
205840, July 7, 2016,
ANNA MARIE L. GUMABON vs.
PHILIPPINE NATIONAL BANK (G.R. No.
202514, July 25, 2016,
PHILIPPINE NATIONAL BANK vs. JUAN F.
VILA (G.R. No. 213241, August 1, 2016,
PEREZ
PHILIPPINE NATIONAL BANK, Petitioner,
-versus- PABLO V. RAYMUNDO,
Respondents. (G.R. No. 208672, THIRD
DIVISION, December 7, 2016,
SPOUSES CRISTINO and EDNA
CARBONELL v. METROPOLITAN BANK
and TRUST COMPANY, G.R. No. 178467,
April 26, 2017, Third Division,
5. Nature of Bank Funds and Bank Deposits
Consolidated Bank and Trust Corporation
vs. Court of Appeals, G.R. No. 138569,
September 11, 2003
105

Suan vs. Gonzales, 518 SCRA 82 (2007)
6. Stipulation on Interests
Fidelity Savings and Mortgage Bank vs.
Hon. Pedro Cenzon, G.R. No. L-46208,
April 5, 1990
Ileana Macalinao vs. Bank of the
Philippine Islands, G.R. No. 175490,
September 17, 2009
Heirs of Estelita Burgos-Lipat namely:
Alan B. Lipat and Alfredo B. Lipat, Jr. vs.
Heirs of Eugenio D. Trinidad namely:
Asuncion R. Trinidad, et. al., G.R. No.
185644, March 2, 2010
Asia Trust Development Bank vs. Carmelo
H. Tuble, G.R. No. 183987, July 25, 2012
Advocates for Truth in Lending vs. BSP,
G.R. No. 192986, January 15, 2013
7. Grant of Loans and Security Requirements
a. Single Borrower’s Limit
b. Restrictions on Bank Exposure to DOSRI
(Directors, Officers, Stockholders and
their Related Interests
Banco de Oro vs. Bayuga, 93 SCRA 443
(1979)
Jose C. Go vs. BSP, G.R. No. 178429,
October 23, 2009
Hilario P. Soriano vs. People of the
Philippines, et. al., G.R. No. 162336,
February 1, 2010
Republic of the Philippines vs.
Sandiganbayan, et. al., G.R. No.
166859/G.R. No. 169203/G.R. No. 180702,
April 12, 2011
Philippine Amanah Bank (Now Al-Amanah
Islamic Investment Bank of the
Philippines, also known as Islamic Bank)
vs. Evangelista Contreras, G.R. No.
173168, September 29, 2014
c. Loan Values of Property
C.1 Redemption right
WHITE MARKETING DEVELOPMENT
CORPORATION, Petitioner, - versus -
GRANDWOOD FURNITURE & Commission. Respondents. (G.R. No.
Virtus in infirmitate perficitur! 2 Cor. 12:9
WOODWORK, INC., Respondent. (G.R.
No. 222407, SECOND DIVISION,
November 23, 2016,
Golden gateway merchandising vs
Equitable PCI Bank, GR No. 195540, March
13, 2013
c. Anti-Money Laundering Act (R.A.
No. 9160, as amended)
a. Unlawful Activities or Predicate Crimes
Republic of the Philippines vs. Glasgow
Credit and Collection Services, Inc., G.R.
No. 170281, January 18, 2008
Republic of the Philippines vs. Hon.
Antonio Eugenio, G.R. No. 174629,
February 14, 2008
REPUBLIC OF THE PHILIPPINES,
represented by the ANTI-MONEY
LAUNDERING COUNCIL v.JOCELYN I.
BOLANTE, OWEN VINCENT D. BOLANTE,
MA. CAROL D. BOLANTE, ALEJO
LAMERA, CARMEN LAMERA, EDNA
CONSTANTINO, ARIEL C. PANGANIBAN,
KATHERINE G. BOMBEO, SAMUEL S.
BOMBEO, MOLUGAN FOUNDATION,
SAMUEL G. BOMBEO, JR., and
NATIONAL LIVELIHOOD DEVELOPMENT
CORPORATION (Formerly Livelihood
Corporation), G.R. No. 186717, April 17,
2017, First Division, SERENO, CJ.
b. Freezing of Monetary Instrument or
Property
Republic of the Philippines vs. Cabrini
Green & Ross, Inc., G.R. No. 154522, May
5, 2006
Ret. Lt. Gen. Jacinto Ligot, et. al. vs.
Republic of the Philippines, G.R. No.
176944, March 6, 2013
SUBIDO PAGENTE CERTEZA MENDOZA
and BINAY LAW OFFICES, Petitioner, -
versus - THE COURT OF APPEALS, HON.
ANDRES B. REYES, JR., in his capacity as
Presiding Justice of the Court of Appeals,
and the ANTI-MONEY LAUNDERING
COUNCIL, represented by its members,
HON. AMANDO M. TETANGCO, JR.,
Governor of the BANGKO SENTRAL NG
PILIPINAS, HON. TERESITA J. HERBOSA,
Chairperson of the Securities and
Exchange Commission, and HON.
EMMANUEL F. DOOC, Insurance
Commissioner of the Insurance
106
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