GENERAL BANKING LAW ( R.A. NO.

8791), LAW ON
SECRECY OF DEPOSITS AND RELATED LAWS

5. LOAN FUNCTION OF BANKS

5.01 BASIC RULES / RESTRICTIONS

a) A bank shall grant loans and other credit accommodations only in amounts and for the periods
of time essential for the effective completion of the operations to be financed.

b) Such grant of loans and other credit accommodations shall be consistent with safe and sound
banking practices.

c) Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is
capable of fulfilling his commitments to the bank.

d) PAYMENTS

1) Amortization schedule of bank loans and other credit accommodations shall be adapted to the
nature of the operations to be financed ( Sec.44, GBL).
2) Loans and other credit accommodations with maturities of more than five years, provisions must
be made for periodic amortization payments, but such payments must be made at least annually (
Ibid.).
3) A borrower may at any time prior to the agreed maturity date prepay, in whole or in part, the
unpaid balance of any bank loan and other credit accommodation , subject to such reasonable
terms and conditions as may be agreed upon between the bank and its borrower ( Sec.45,GBL).

e) SINGLE BORROWER LIMIT

a) CEILING – the total amount of loans, credit accommodations and guarantees that may be
extended by the bank to any person, partnership, association, corporation or other entity shall
at no time exceed twenty-five (25%) of the net worth of such bank ( as increased by BSP
Circular 425).The basis for determining compliance with single-borrower limit is the total credit
commitment of the bank to the borrower (Sec.35.1,GBL).

The total amount of loans, credit accommodations and guarantees prescribed in the
preceding paragraph may be increased by an additional ten percent (10%) of the net worth of
such bank provided the additional liabilities of any borrower are adequately secured by the
trust receipts, shipping documents, warehouse receipts or other similar documents
transferring or securing title covering readily marketable non-perishable goods which must be
fully covered by insurance ( Sec.35.2,GBL)

5.02. DOSRI ACCOUNTS

Restrictions ( not a total prohibition) are imposed on borrowings and security

arrangement by directors, officers and stockholders of the bank directors, officers,
stockholder and their related interests ( hence, the term DOSRI).
a) REQUISITES UNDER ART. 26, NCBA

1) The borrower is a director, officer or any stockholder of a bank ( and related interests);
2) He contracts a loan or any form of financial accommodation;
3) The loan or financial accommodation is from: (1) his bank, or (2) a bank that is a subsidiary of
a bank holding company of which both his bank and lending bank are subsidiaries;(3) a bank
in which a controlling proportion of the shares is owned by the same interest that owns a
controlling proportion of the shares of his bank; and
4) The loan or financial accommodation of the director, officer or stockholder, singly or with that
of his related interest, is in excess of 5% of the capital and surplus of the lending bank or in
the maximum amount permitted by law, whichever is lower.

b) RESTRICTIONS UNDER THE GBL

DOSRI Accounts are subject to the following rules under Section 36 of the GBL:

1) Procedural Requirement. The account should be upon written approval of the majority of
all the directors of the lending bank excluding the director concerned.
2) Arms Length Rule. The account should be upon terms not less favorable to the bank
than those offered to others.
3) Reportorial Requirement. The resolution approving the loan shall be entered in the
records of the bank and a copy of the entry shall be transmitted forthwith to the
Supervising and Examination Sector of the BSP.
4) Aggregate Ceilings. 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 interest, as well as investments of
such bank in enterprises owned or controlled by said directors, officers, stockholders and
their related interests. The Manual of Regulations for Banks provide that the aggregate if
fifteen (15%) of the total loan portfolio of the bank or one hundred percent (100%) of the
combined capital accounts whichever is lower.
5) Individual Ceilings. The outstanding loans, credit 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.

It should be noted however that the ceilings do not apply to loans, credit accommodations
and guarantees (1) secured by assets considered by the Monetary Board as non-risk
items, (2) under a fringe benefit plan approved by the BSP, and (3) extended by
cooperative banks to its cooperative stockholders.

c) RESTRICTIONS UNDER SEC. 26, NCBA

1) The borrower shall be required by the lending bank to waive the secrecy of his deposits of
whatever nature in all banks in the Philippines. The directors, officers or stockholders are
required to make such waiver if they themselves are the borrower.
2) The accounts are subject to examination but any information obtained from an examination of
his deposits shall be held strictly confidential and may be used by examiners only in
connection with the supervisory and examination responsibility or by the Bangko Sentral in an
appropriate legal action it has initiated involving the deposit account.

5.03. COLLATERALS
A. VALUE OF COLLATERALS
The loan shall not exceed 75% of the appraised value of the real
property plus 60% of the appraised value of the improvement or 75% of the
appraised value of the chattel (Secs. 37 and 38, GBL)
B. FORECLOSURE OF MORTGAGE (Sec. 47, GBL)
a) Redemption Period
 1) Redemption Period for Natural Persons
The mortgagor or debtor, who is a natural person, whose real property
has been sold for the full or partial payment of his obligation shall have the right within
one year after the sale of the real estate, to redeem the property. The one-year redemption
period should be counted from the date of the registration of the certificate of sale with the
Register of Deeds (See Section 1[3] of Supreme Court Circular A.M. No. 99-10-05, as further
amended on Aug. 7, 2001).

2) Redemption Period for Juridical Persons

A juridical person, whose property has been sold pursuant to an extrajudicial
foreclosure, shall have the right to redeem the property but not after the registration of the
certificate of foreclosuresale with the proper Register of Deeds which in no case shall be
more than three (3) months after foreclosure, whichever is earlier.

b) Redemption Price
Redemption may be exercised by paying the amount due under the mortgage deed, with
interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred
by the bank or institution from the sale and custody of said property less the income derived
therefrom (Sec. 47, GBL)

c) Possession
The purchaser at the auction sale concerned whether in a judicial or extrajudicial
foreclosure shall have the right to enter upon and take possession of such property
immediately after the datye of the confirmation of the auction sale and administer the same in
accordance with law (Ibid).

d) Injunction and Bond

Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted
pursuant to this provision shall be given due course only upon the filing by the petitioner of a
bond in an amount fixed by the court conditioned that he will pay all the damages which the
bank may suffer by the enjoining or the restraint of the foreclosure proceeding (Ibid.).

6. PROHIBITED ACTS OF BORROWERS (Sec. 55.2)

No borrower of a bank shall:
a) Fraudulently overvalue property offered as security for a loan or other credit accommodation
from the bank;
b) Furnish false or make misrepresentation or suppression of material facts for the purpose of
obtaining, renewing, or increasing a loan or other credit accommodation or extending the
period thereof;
c) Attempt to defraud the said bank in the event of a court action to recover a loan or other
credit accommodation; or
d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any
other form of compensation in order to influence such persons into approving a loan or other
credit accommodation application.

PART V

CREDIT TRANSACTIONS
 A. WAREHOUSE RECEIPTS LAW (Act No. 2137)
10) DEFINITIONS
a) Document of title to goods- include any bill of lading, dock warrant, “quedan”, or warehouse
receipt or order for delivery of goods, or any other document used in the ordinary course of
business in the sale or transfer of goods, as proof of possession or control of the goods, or
authorizing or purporting to authorize the possessor of the document to transfer or receive either
by indorsement or by delivery, goods represented by such document (Art. 1636. NCC)
b) Common Types
a) Bill of Lading- a document that serves as evidence of redeipt of goods for shipment
issued by a common carrier.
b) Warehouse Receipt- a document of title which is issued by a warehouseman. Under the
said law, the term “warehouseman” is defined as a person lawfully engaged in the
business of storing goods for profit (Sec. 58[a], Warehouse Receipts Law, WRL for
short).
c) Quedan- a warehouse receipt that covers sugar.
d) Dock Warrant- a warrant given by dock-owners to the owner of merchandise imported
and warehoused on the dock, upon the faith of the bills of lading, as a recognition of his
title to the goods (Black’s Law Dictionary, p.432).

11) THREE FUNCTIONS OF DOCUMENTS OF TITLE

a) It is a contract- the underlying contract may be contract of carriage (bill of lading) or deposit
(warehouse of receipt).
b) Evidence of receipt of goods.
c) Represents the goods and therefore operates as transferable document that carries with it
control over the goods. It is used to pass title to the goods. It can be a negotiable document
of title.
Note: The Supreme Court, in a number of cases limited the functions of two-fold—a contract,
and a receipt (Telengtan Bros. & Sons v. CA, 236 SCRA 617).

12) NEGOTIABILITY OF WAREHOUSE RECEIPTS

a) A receipt in which it is stated that the goods received will be delivered: (a) to the bearer, or (b) to
the order of any person named in such receipt is a negotiable receipt (Sec. 5, WRL).
a) No provision shall be inserted in a negotiable receipt that it is non- negotiable. Such
provision, if inserted shall be void.

13) FORMALITIES
Additional terms for warehouse receipts are prescribed in Sections 2 and 3 of the WRL.
However, the absence of any of the provisions will not necessarily invalidate the receipt. As a rule,
receipts should be liberally constructed in order for ……………their purpose.

SECTION 2. Form of receipts; essential terms.----Warehouse receipts need not be in any

particular form but every such receipt must embody within its written or printed terms:

(a) The location of the warehouse where the goods are stored,
(b) The date of the issue of the receipt,
(c) The consecutive number of the receipt,
(d) A statement whether the goods received will be delivered to the bearer, to a
specified person or to a specified person or his order,
(e) The rate of storage charges,
(f) A description of the goods or of the packages containing them,
(g) The signature of the warehouseman which may be made by his authorized
agent,
(h) If the receipt is issued for goods of which the warehouseman is owner, either
solely or jointly or in common with others, the fact of such ownership, and
(i) A statement of the amount of advances made and of liabilities incurred for
which the warehouseman claims a lien. If the precise amount of such advances
 made or of such liabilities incurred is, at the time of the issue, unknown to the
warehouseman or to his agent who issues it, a statement of the fact that
advances have been made or liabilities incurred and the purpose thereof is
sufficient.

A warehouseman shall be liable to any person injured thereby for all damages
caused by the omission from a negotiable receipt of any of the terms herein
required.
SECTION 3. Form of receipts. What terms may be inserted---A warehouseman may insert in
a receipt issued by him any other terms and conditions provided that such
terms and conditions shall not:
(a) Be contrary to the provisions of this Act.
(b) In any wise impair his obligation to exercise that degree of care in the
safekeeping of the goods entrusted to him which a reasonably careful man
would exercise in regard to similar goods of his own.
14) NEGOTIATION OF WAREHOUSE RECEIPTS
a) Negotiation by delivery only (Sec. 37, WRL)
a) Where, by terms of the receipt, the warehouseman undertakes to deliver the goods to the
bearer, or
b) Where, by the terms of the receipt, the warehouseman undertakes to deliver the goods to
the order of a specified person, and such person or a subsequent indorsee of the receipt
has indorsed it in blank or to bearer.

Note: A bearer document of title is NOT ALWAYS A BEARER DOCUMENT in the sense
that a special indorsement has the effect of converting the bearer instrument into an
order instrument (Sec. 37, WRL).
Example: A negotiable document of title states that the goods are to be delivered to “A or
bearer”. A delivered the document to B, who in turn specially indorsed the same to C. C
cannot negotiate the document by mere delivery thereafter and indorsement is necessary
for its negotiation.

b) Indorsement coupled with delivery

a) A warehouse receipt is an order document if it states that the goods are to be delivered to
the order of a person named therein. It can only be negotiated through the indorsement
of the specified person so named (indorsement plus delivery).
b) EFFECTS: If indorsement is necessary but the negotiable receipt was only delivered:
1) The transferee acquires title against the transferor;
2) There is no direct obligation of the warehouseman;
3) The transferee can compel the transferor to complete the negotiation by indorsing the
instrument (Sec. 43, WRL). The negotiation takes effect on the date of indorsement
only.
15) EFFECTS OF NEGOTIATION OF WR
a) Negotiation of the document has the effect of manual delivery so as to constitute the transferee
the owner of the goods. Negotiation carries with it both the title to and possession of the property
(Philippine Trust Co. v. National Bank, 42 Phil.413 [1922]).
b) Transfer of title and possession is accomplished because the person to whom the instrument is
negotiated acquires the following rights (Sec. 41, WRL):
a) Such title to the goods as the person negotiating the receipt 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
depositors or person to whose order the goods were to be delivered by the terms of the
receipts had or had ability to convey to a purchaser in good faith for value; and
b) The direct obligation of the warehouseman to hold possession of the goods for him
according to the terms of the receipts as fully as f the warehouseman had contracted
directly with him.
PROBLEMS:

1. Maingat deposit her personal computer (PC) machine in the warehouse of Boreguero who
issued a negotiable receipt undertaking the delivery of the computer to mayaman or bearer.
Mayaman entrusted the receipt to secretario, his secretary who, in turn, delivered the receipt
to bumibili, a purchaser fer value and good faith. Sercretario needed the money to pay his
gambling depts.
a) Who has the better title to the computer, the Mayaman or bumibili?
b) Would be the answer be the same if, by terms Bodeguero’s receipt the computer is
deliverable to the order of Mayaman?
A: (a) Bumibili has the better title. The negotiable receipt involved is a better receipt has title
over the property covered by the receipt. A direct obligation of the warehouseman is owned
to be the bearer of the receipt.
(b) The answer would be different. If the receipt is an order receipt, indorsement is
necessary to acquire the direct obligation of the warehouseman. In addition, Bumibili would
not be shielded from the previous transfer which was in breach of faith (1986 Bar)

2. X stole certain goods from Y. the goods were then deposit by X with W, a warehouseman, for
which W issued to X negotiable warehouse receipt. Thereafter, X negotiated the receipt to Z,
a purchaser in good faith and value. W, upon being informed of the theft of the goods, upon
demand by Y, delivered the goods to Y, without the receipt being surrendered to him. Can W
be held liable by Z for his subsequent failure to deliver the goods to him?
A: NO, the warehouseman would only be liable for his failure to deliver the goods , to Z if the
negotiation would transfer the right to the possession of the goods. The negotiation of the
receipt by X to Z did not transfer such right of possession to Z, the goods having been stolen
by X. Furthermore, a person to whom a negotiable warehouse receipt has been negotiated
acquires only such title to the goods as the person negotiating the receipt to him had or had
the ability to convey to a purchase in good faith for value.

c) The transfer of title to the purchaser for value is not affected by the rights of the vendors (Sec.49,
WRL).
PROBLEM
1. A purchased from S 150 cavans of palay on credit. A deposited the palay in W’s
warehouse. W issued to A a negotiable warehouse receipt in the name of A. Thereafter,
A negotiated the receipt to B who purchased the said receipt for value and in good faith.
(a) Who has better right to the deposit, S, the unpaid seller, or B, the purchaser of the
receipt for value and in good faith? Why? (b) When can the warehouseman be obliged
to deliver the palay to A?

A : (a) B has the better right. Section 49 of the WRL provides that where a negotiable
receipt has been issued for goods, no seller’s lien or right of stoppage in transitu shall defeat
the right of any purchaser for value in good faith to whom such receipt has been negotiated,
whether such negotiation be prior or subsequent to the notification to the warehouseman
who issued such receipt of the seller’s claim to a lien or right of stoppage in transitu.

(b) The warehouseman cannot be obliged to deliver the goods to an unpaid seller
unless the receipt is first validly surrendered for cancellation ( Sec.49,WRL). This means
that the unpaid seller has validly reacquired the receipt from the holder for value (1993
Bar).
d) PLEDGE OF RECEIPT

Negotiation of the receipt may only be by way of pledge. In which case, the pledgee may
also enjoy preference. However, the Supreme Court observed in Bank of the Philippines Islands
v. J.R. Heritage (47 Phil.57), that Section 58 provides within the meaning of the WRL, ”to
purchase “ includes to take as mortgage or pledge and “purchaser” includes mortgagee and
pledgee. Thus, ‘ as to legal title to the property covered by a warehouse receipt, a pledgee is on
the same footing as a vendee except that the former is under obligation of surrendering his title
upon the payment of the debt secured.” The Court believed that to hold otherwise would defeat
one of the principal purposes of the law ,i.e., to furnish a basis for commercial credit.

PROBLEMS:

1. X sold a quantity of hemp by quedan to Y who took possession of said quedan. X was not
paid by Y for the quedan for it was their agreement that the price of the hemp would be
charged against such quedans. Y delivered the quedans to A Bank to secure his
indebtedness. The day after delivery, Y died. May X recover the quedans or their
corresponding values?

A: NO. X may not recover the quedans. A Bank is a pledgee of the quedan for value and the
right of the pledgee cannot be defeated by the unpaid seller.

X may, however, still recover the price of the goods from the estate of Y. Death of Y will
not excuse him from his contractual liability up to the extent of his properties.

WHO MAY NEGOTIATE A WAREHOUSE RECEIPT

a) By the owner thereof, or

b) By any person to whom the possession or custody of the receipt has been entrusted by
the owner, if, by the terms of the receipt, the warehouseman undertakes to deliver the
goods to the order of the person to whom the possession or custody of the receipt has
been entrusted, or if, at the time of such entrusting, the receipt is in such form that it may
be negotiated by delivery ( Sec.40, WRL).

Note : Under the second paragraph, even a thief of the receipt or one who
defrauds another can negotiate the receipt but it should be in such a form that
he need not forge any signature ( See also, Sec.47, WRL )

Examples :

1. X deposited certain goods with W for which the latter issued a negotiable
warehouse receipt by the terms of which the goods are to be delivered to
bearer. The receipt was stolen by Y and Y delivered the instrument to Z
who has no knowledge of the theft. In this case, Z who is a bonafide
transferee may be protected under Sections 40 and 47 of the WRL.

2. In the first example, the conclusion would be different if the receipt is not a
bearer receipt. If the goods are to be delivered to the order of X, it would be
necessary for Y to forge the signature of X in order to completely negotiate
the instrument to Z. Hence, the transfer to Z would be inoperative if it is based on
a forged indorsement (1989 Bar).
 WARRANTIES

8.01 NOT GUARANTOR

If the warehouseman failed to deliver the goods, the indorser or one who
negotiates for value shall not be liable to the bona fide purchaser. He does
not guarantee the performance of the obligation of the warehouseman as the
case may be (Sec.45.WRL).

8.02. WARRANTIES OF TRANSFEROR ( Sec.44)

A person who, for value, negotiates or transfers a receipt by indorsement or delivery,

including one who assigns for value a claim secured by a receipt, unless a contrary intention
appears, warrants:

a) That the receipts is genuine;

b) That he has a legal right to negotiate or transfer it;
c) That he has knowledge of no fact which would impair the validity or worth of the receipt;
and
d) That he has a right to transfer the title to the goods and that the goods are merchantable
or fit for a particular purpose whenever such warranties would have been to transfer
without a receipt of the goods represented thereby.

9. NON- NEGOTIABLE RECEIPTS

Warehouse receipts is a non- negotiable receipt if its states that the goods
received will be delivered to the depositor or to any other specified person
(Sec.4, WRL).

A non- negotiable receipt shall have plainly placed upon its face by the
warehouseman issuing it “ non- negotiable “, or “not negotiable.” In case of
the warehouseman ‘s failure to do so, a holder of the receipt who purchased it for
value supposing it to be negotiable, may, at his option, treat such receipt as
imposing upon the warehouseman the same liabilities he would have incurred had
the receipt been negotiable (Sec.7,WRL)

9.01 RIGHTS OF TRANSFEREE OF NON-NEGOTIABLE RECEIPT

a) The title of the goods subject to the terms of any agreement with the transferor.
b) The right to notify the warehouseman of the transfer to him of such receipt and thereby to
acquire the direct obligation of the warehouseman to hold possession of the goods for
him according to the terms of the receipt.

Note: Prior to the notification of the warehouseman by the transferor or transferee of a

non-negotiable receipt, the title of the transferee to the goods and the right to acquire the
obligation of the warehouseman may be defeated by the levy of an attachment or execution
upon the goods by a creditor of the transferor or a subsequent sale of the goods by the
transferor.

PROBLEMS:
1. On January 5, 1984, Juan delivered sic (6) crates of goods to Acme Warehousing Co. and
received a non-negotiable warehouse receipt. On January 14, 1984, Juan transferred for
value the receipt to Manuel. Meanwhile, Jose obtained a judgment against Juan unpaid dept.
A writ of execution followed, by virtue of which the sheriff on June 18, 1984 levied on the six
(6) crates of goods covered by the above receipt. What are the obligations of Acme
Warehousing Co. under the circumstances?
 A. Acme Warehousing must honor the writ. Te non-negotiable warehouse receipt does
not confer upon the transferee the direct obligation of the warehouseman. Prior to the
notice to the warehouseman, the right of the transferee may be defeated by a writ
validly issued by a competent court (1984 Bar).
10. WAREHOUSEMAN’S DEFENSES FOR NON-DELIVERY OF MISDELIVERY

a) Loss or destruction of the goods without the fault of the bailee;

b) Failure to satisfy the Bailee’s Lien (Sec.8);
c) Failure to surrender the negotiable document of title (Sec. 8);
d) Lack of willingness to sign acknowledgement (Sec. 8);
e) Receipt by the bailee of a request by or on behalf of the person lawfully entitled to a right
of property or possession in the goods, not to make such delivery (Sec. 10);
f) The bailee has information that the delivery about to be made was to one not lawfully
entitled to the possession of the goods (Sec.10);
g) Delivery to a claimant with better right;
h) Attachment of levy of the goods by a creditor where the document is surrendered or its
negotiation is enjoined or the document is impounded (Sec. 25);
i) Where the document of the title is attached by a creditor (Sec. 26).

10.01. In Philippine National bank v. Sayo, Jr (G.R.No.129918, July 9, 1998), the Supreme Court
adopted the following enumeration of the reasons which a warehouseman may invoke to
legally refuse to effect delivery of the goods covered by the document of title:
a) That the holder of the receipt does not satisfy the conditions prescribed in Section 8
of the Act (See Sec. 8, Act No. 2137).
b) That the warehouseman has legal title in himself on the goods, such title of 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).
c) That the warehouseman has legally set up the title or the right of third persons as
lawful defense for non-delivery of the goods as follows:
1) 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
non-delivery of the goods, or as an original suit, whichever is appropriate,
require all known claimants to interplead (Sec. 17, Act No. 2137).
2) 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 of 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
 3) Where the goods have already been lawfully sold to third persons satisfy a
warehouseman’s lien, or have been lawfully sold or disposed of because of
their perishable of hazardous nature (Sec. 36, Act No. 2137).
d) 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).
e) 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 of
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 532).
10.02. Of the warehouseman withholds delivery of the goods without any valid reason, he is
liable for the loss of the goods and the liability cannot be eliminated by proof of exercise
of due diligence
11. WAREHOUSEMAN’S LIEN
11.01 What claims are included in the warehouseman’s lien?

Subject to the provisions of section thirty, a warehouseman shall have a lien on

goods deposited or charges for storage and preservation of the goods; also for (2) all lawful
claims for money advanced, interest, insurance, transportation, labor, weighing, coopering
and other charges and expenses in relation to such goods; also for (3) all reasonable charges
and expenses for notice, and advertisements for sale, and for sale of the goods where default
had been made in satisfying the warehouseman’s lien (Sec. 27, WRL).
a) Must be stated. It is necessary, however, that the charges that are present at the
time of the issuance of the receipt with must be so stated in the receipt with the
amounts thereof specified. If the existing charges are not stated, the
warehouseman shall have no lien thereon. He shall have a lien only for charges for
storage of goods subsequent to the date of the receipt unless the receipt expressly
enumerated other charges for which a lien is claimed (Sec.30,WRL)

11.02. Properties that are subject to lien (Sec.28, WRL)

a) Against all goods, whenever deposited, belonging to the person

who is liable as debtor for the claims in regard to which
the lien is asserted; and

b) Against all goods belonging to others which have been deposited

at any time by
the person who is liable as debtor for the claims in regard to
which the lien is asserted if such person had been so
entrusted with the possession of goods that a
pledge of the same by him at the time of the deposit to one took the goods in
good faith for value would have been valid.

11.03. Loss of Lien (Sec.29, WRL)

a) By surrendering possession thereof; or

b) By refusing to deliver the goods when a demand is made with

which he is bound to comply.
12. ADVERSE CLAIMANT

If more than one person claims the title or possession of the goods, the
warehouseman may, either as a defense to an action brought against him for non-
delivery of the goods or as an original suit, whichever is appropriate, require all
known claimants to interplead ( Sec.17, WRL).

PROBLEM :

1. What actions may be taken by the warehouseman in case two or more persons
claim the same goods in his warehouse?

A. The warehouseman may perform the following: (1) he can refuse to

deliver the goods to anyone of them until he had reasonable time to check
the validity of the claims; (2) he may file an action for interpleader and allow the
claims to prove their claim or in case an action is filed against him, set up the
defense that there are two or more claimants (1976 Bar)

13. ATTACHMENT OR LEVY

If goods are delivered to a warehouseman by the owner or by a person whose

act in conveying the title to them to a purchaser in good faith for value would bind
the owner, and a negotiable receipt is issued for them, they cannot thereafter, while
in the possession of the warehouseman, he attached by garnishment or otherwise,
or be levied upon under an execution unless the receipt be first surrendered to the
warehouseman or its negotiation enjoined (Sec.25, WRL).

13.01. Creditor’s remedies to reach negotiable receipts

A creditor whose debtor is the owner of a negotiable receipt shall be entitled to

such aid from courts of appropriate jurisdiction, by injunction and otherwise, in
attaching such receipt or in satisfying the claim by means thereof as is allowed at
law or in equity in these islands in regard to property which cannot readily be
attached or levied upon by ordinary legal process ( Sec.26,WRL)

PROBLEM :

1. XYZ Corporation receives from A30 bales of cotton for deposit in the said
warehouse for which a negotiable receipt was issued. While the goods were stored
in the warehouse, C obtains judgment against A for the recovery of a sum of
money. The sheriff proceeded to levy upon the goods and directed the
warehouseman to deliver the goods. a) Is the warehouseman under obligation to
comply with the sheriff’s order? b) What is the remedy of the attaching creditor?

A: a) NO, the warehouseman is not under obligation to comply. The

warehouseman can be compelled to comply only if the
negotiable receipt is surrendered to him or if its `
negotiation is enjoined (Sec.25,WRL)
 b) The creditor may seek for the attachment of the receipt or compel A to
deliver the receipt by injunction or otherwise (
Sec.26,WRL; see 1981 Bar )

B. GENERAL BONDED WAREHOUSE LAW

(Act No. 3893, R.A. No. 247)

1. OBLIGATIONS OF WAREHOUSEMAN
A Warehouseman cannot receive goods for storage, milling or commingling
without performing the following :

a) He must secure a license from Bureau of Commerce ( Dept. of

Trade and Industry).

b) He must file a bond equivalent to 33 1/3% of the market value of

maximum quantity of goods to be received for the
protection of the depositors.

c) He must not discriminate and must open his warehouse to the

public.

d) In case of damage to the goods because the warehouseman

accepts goods in excess of the capacity of his warehouse,
the latter is liable in the amount equivalent to
double the market value of the goods.

e) The goods must be insured against fire.

2. The warehouse is not covered by the law if the owner merely rents space to a
certain group of persons because the law covers warehouses that accepts goods
for : (a) storage, (b) milling, and (c) commingling with obligation to return the same
quantity or to pay their value (1974 Bar)

C. LETTERS OF CREDIT
1. LETTERS OF CREDIT
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 ( Prudential
Bank v. IAC, 216 SCRA 257 [1992]).

2. GOVERNING LAWS

a) Code of Commerce on Letters of Credit.

Article 568 provides that a letter of credit shall be:

1) Issued in favor of s definite person and not to order; and

2) Limited to a fixed and specified amount or to one or more

undetermined amount but with maximum limit stated
exactly.

b) Customs, primarily those embodied in the Uniform Customs and Practice for
Documentary Credits (UCP for short) which was adopted by the International
Chamber of Commerce (Bank of America, NT & SA v. CA,228 SCRA 357 [1993]).

3. PARTIES
There are at least three (3) parties in a Letter of Credit Transactions:
a) 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 credit known as “Issuing bank,” which
undertakes to pay the seller upon receipt of the drafts and
proper documents of titles and to surrender the documents
to the buyer upon reimbursement; and

c) the seller, who in compliance with the contact of sale ships the goods
to the buyer and delivers the documents of title and draft to the
issuing bank to recover payment (Ibid.).

i) An advising (notifying) bank which may utilized to convey to

the seller the existence of the credit;

ii) A advising (notifying) bank which will lend credence to the

letter of credit issued by a lesser known issuing bank;
the confirming bank is directly liable to pay the seller-
beneficiary;

iii) A paying bank which undertakes to encash the drafts drawn

by the exporter/seller;

Further, instead of going to the place of the issuing bank to claim payment,
the buyer may approach another bank, termed the negotiating bank to have
the draft discounted (Ibid.; see also Charles Lee v. CA, G.R. No. 117913, Feb.
1, 2002).

Note: Unless the contrary is expressly provided for, the liability of the issuing
bank is solidary with the buyer-applicant (MWSS v. Daway, G.R. No.
160732, June 21, 2004).

4. INDEPENDENT CONTRACTS
 There are at least three (3) distinct and independent contracts involved in a letter
of credit namely: (1) the contract of sale between the buyer and the seller, (2) the
contract of the buyer with the issuing bank, and (3) the letter of credit proper. In the
second contract- between the buyer and the issuing bank – the bank agrees to
issue the letter of credit in favor of the seller subject to reimbursement or payment
by the buyer of whatever is paid to the seller plus proper consideration agreed
upon by the parties. In the third contract which is the letter of credit proper, the
bank obligates itself to pay the seller or to order of the seller (that is, it will honor
the bills or drafts drawn by the seller) after presentation to the bank of tender
documents stipulated upon, which normally includes the document of title (Keng
Hua Paper Products v. 286 SCRA 257 [1998]).

4.01 INDEPENDENCE PRINCIPLE

It is important to emphasize in this connection that few things are more
clearly settled I law than that the contracts involved in a letter of credit arrangement
are to be maintained in a state of perpetual separation. The undertakings of the
bank to pay, accept, and pay drafts or negotiate and/or fulfill any obligation under
the Credit is not subject to claims or defenses by the Applicant resulting from his
relationship with the issuing bank or the beneficiary. In the same manner, the
beneficiary can, in no case, avail himself of the contractual relationships existing
between the banks or between the applicant and the issuing bank (Keng Hua
Paper Products v. CA, Ibid).

4.02 A direct consequences of the “independence principle” is the rule that books
only deal with documents and not with goods, services or obligations to which they
relate (BPI v. De Reny Fabric,35 SCRA 256). Example: the bank has no duty to
verify whether what has been described in the letters of credit or drafts or shipping
documents actually tallies with what was loaded abroad ship (See Transfield Phils.
V. Luzon Hyro Corp., 443 SCRA 307 [2004]; Land Bank v. Monet’s Export Mfg.
Corp., G.R. No. 161865, March 10, 2005).

4.03. Fraud Exception

Under the “independence principle,” the applicant cannot enjoin the payment of
the obligation of the issuing bank under the Letter of Credit based on any
irregularity or non-performance of an obligation. The exception is when there is
fraud or forgery in the ……..transaction or the tender documents (See Transfield
Phils. V. Luzon Hyro Corp., 443 SCRA 307 [2004]).

4.04. Doctrine of Strict Compliance

The Issuing Bank or the Confirming Bank, as the case may be, must examine the
Tender Documents (including shipping documents) and must make sure that the
terms and conditions of the Letter of Credit are strictly complied with. There is no
discretion on the part of the bank to waive any requirement. The tender documents
must not only be complete but they must on their faces be in compliance with the
terms of the Credit. Documents that are not stipulated as tender documents will not
be examined (Art. 13, UCP 500; Feati Bank & Trust Co. v. CA, G.R. No. 94209,
April 30, 1991).

5. KINDS OF LETTERS OF CREDIT

a) Confirmed LC – whenever the beneficiary stipulates that the obligation of the

opening bank shall also be made the obligation of another bank (also bank that
notifies) to himself.
 b) Irrevocable LC – 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,
provide that all the terms and conditions of the credit are complied with.

c) Revolving Letter of Credit - one that provides for renewed credit to become
available as soon as the opening bank has advised that the negotiating or paying
bank that the drafts already drawn by the beneficiary have been reimburse d to the
opening bank by the buyer.

d) Back-to-Back Letter of Credit – a credit with identical documentary

requirements and covering the same merchandise as another letter of credit,
except for a difference in the price of the merchandise as shown by the invoice and
the draft. The second letter of credit can be negotiated only after the first is
negotiated.

e) Standby Letter of Credit – a security arrangement for the performance of

certain obligations. It can be drawn against only if another business transaction is
not performed. It may be issued in lieu of a performance bond.
1) Thus, this should be distinguished from an ordinary commercial credit
where the beneficiary will recover if he can show that he performed his
obligation (delivery of the purchased goods). In a Standby LC, the beneficiary will
prove that the obligor failed to perform the secured obligation. Example: The
contractor failed to construct the building on time.

D. TRUST RECEIPTS LAW

(P.D. No. 115)
1. BACKGROUND
A bank that issues a letter of credit has the right
to ask for reimbursement from the applicant-buyer. This obligation to
pat the issuing bank may also be secured by trust receipts. Under the
law, the bank becomes the entruster of the goods while the buyer-
importer is he entrustee. The goods will in effect be released by the
bank to the buyer by the delivery of the document of title/bill of lading
covering the goods. The buyer as entrustee is obligated to sell the
goods and to apply the proceeds thereof to the payment of the loan
extended by the entruster-bank. The buyer will only get the balance
of the proceeds of the sale after making such application.

a) “Entrustee” shall refer to the person having or

taking possession of goods, documents, or instruments under a trust
receipt transaction, and any successor-in-interest of such person for
the purpose or purposes specified in the trust receipt
agreement.

b) “Entruster” shall refer to the person holding the

title over the goods, documents, or instruments subject of a trust
receipt transaction, and any successor-in-interest of such person.
 c.) “Goods” shall include chattels and personal
property other than money, things in action, or things so affixed to
land as to become a part thereof.

d.) “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 or retained for
security only

2. WHAT IS A TRUST RECEIPT?

A trust receipt is a security transaction intended

to aid in financing importers or dealers in a merchandise by allowing
them to obtain delivery of goods under certain covenants.

2.01. The sale of goods, documents or instruments by

a person in the business of selling goods, documents and
instruments for profit who, at the outset of the transaction, has, as
against the buyer, general property rights in such goods,
documents and 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 the Trust Receipt Law (Sec. 4, Trust Receipts Law
or TRL for short).

2.02. Usually the entruster releases the goods to the

entrustee so that the latter may sell the goods. However, the
purpose is not limited to sale (DBP v. Prudential Bank, 475
SCRA 623 [2005]; Ching v. Secretary of Justice, 481 SCRA 601
[2006]). Hence, the goods may also be released for other
purposes substantially equivalent to the
following:

1.) Their sale or the procurement of their sale;

2.) Their manufacture or processing with the

purpose of ultimate sale, in which case the entruster retains his title
over the said goods whether in their original or processed form
until the entrustee has complied fully with his obligation under the
trust receipt; or
 3.) The loading, unloading, shipment or
transshipment or otherwise dealing with them in a manner
preliminary or necessary to their sale.

Note: The entrustee may still be criminally liable

under the TRL even if the goods that were released by virtue of
the trust receipt were not resold but were used as spare parts
for machineries.

3. OBLIGATION OF: (A) ENTRUSTER AND (B) ENTRUSTEE

a) Entruster- releases the possession of the

goods to the entrustee upon the latter’s execution of the trust
receipt.

b) Entrustee-
1) Binds himself to hold the goods in trust for the entrustor;
2) Sell or otherwise dispose of the goods and turn over to the entrustor
the amount still owing; and
3) To return the goods if unsold.

Note: The entrustee is still liable to pay the entruster (bank) even if
the goods were returned to the latter (Landl & Co. [Phil.] v.
Metrobank, G.r. No. 159622, July 30, 2004).

3.01. Remedies of the Entruster

a) If the goods are sold or disposed by the entrustee and the latter did
not remit the proceeds: (1) file estafa case against entrustee; or (2)
file a separate case to collect the proceeds or the money obligation
secured by the trust receipt.
b) If the goods are unsold and are still with the entrustee: (1) cancel the
trust and take possession of the goods, documents or instruments
subject of the trust; (2) after taking possession, sell the goods and
apply the proceeds of the sale to the expenses of the sale and
retaking of the goods and the indeptedness; and (3) as an alternative
to retaking possession and sale, the entruster can file a case to
collect the indeptedness secured by the trust receipt.
Note: The obligations of the entrustee is not extinguished in
case of repossession and sale of the goods, the entrustee is entitled
to any surplus while the entruster can still recover the balance of the
indeptedness incase there is a deficiency.

4. NO AGENCY IS ESTABLISHED
No agency relationship is established when the entrustee executes the trust
receipt. However, an entrustee’s breach will make him liable for estafa. As held
by the Supreme Court in People v. Cuervo (104 SCRA 312), the enactment of
 Presidential Decree No. 115 within its penal sanction is in reality, merely
confirmatory of existing jurisprudence on situation covered by Article 315 (1)(b) of
the Revised Penal Code. The entrustee in a trust receipt who failed to account
for the proceeds of the goods sold or to return the goods, as the case may be, is
guilty of estafa even where the offense was committed before the promulgation
of Presidential Decree No. 115 on June 29, 1973. But unlike the old rule,
Presidential Decree No. 115 now expresses a criminal liability on the part of
responsible officers of corporations and juridical entities.

5. NATURE OF ENTRUSTER’S TITLE

a) The entruster-bank acquires “security interest” in the goods as holder of the
security title for the advances it had made to the entrustee (Melvin Colinares v. CA,
G.R. No. 90828, Sept. 5, 2000). By fiction of law, 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 been already sold, the proceeds of the sale
should be turned over to him by the importer. To secure that the bank shall be paid,
it takes full title to the goods at the very beginning and continues to hold that title as
his indispensable security until the goods are sold and the vendee is called upon to
pay for them; hence, the importer has never owned the goods and is not able to
deliver possession (Ibiid.)
b) However, since the interest of the entruster is a mere security interest:
1) The entruster shall not, merely by virtue of such interest, be responsible
as principal or vendor under any sale or contract to sell made by
entrustee (Sec. 8, P.D. No. 115).
2) The entrustee bears the loss of the goods after delivery to him (Sec. 11,
P.D. No. 115).
c) Note, however, that in Development Bank of the Philippines v. Prudential Bank
(G.R. No. 143772, Nov. 22, 2005), the Supreme Court sustained the view that the
entrustee is not the owner of the property in question. Hence, the entrustee cannot
mortgage the property. However, it is believed that the entrustee is still the owner
and the entruster acquires only security interest. The entrustee cannot mortgage
the property not because he is not the owner but because he does not have free
disposal of the property to be mortgaged.

5.01. Security Interest

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
or retained for security only (Sec. 3[h], P.D. No. 115).

a) A purchaser in good faith and for value (from an entrustee with a right to sell)
acquires the goods, documents or instrument free from the entruster security
interest. (Sec. 11, P.D. No. 115).
b) The security interest of the entruster prevails as against all creditors of the
entrustee for the duration of the Trust Receipt Agreement (Sec. 12, P.D. No. 115).

PROBLEMS:
1. In 1973, LTM opened an irrevocable commercial letter of credit with P Bank for US$498,000. This
was in connection with its importation of 5,000 spindles for spinning machinery with drawing
 frame, simplex fly frame, ring spinning frame and various accessories, spare parts and tool
gauge. These were released to LTM under covering “trust receipts” it executed in favor of P Bank.
LTM installed and used the items in its textile mill. On Sept. 10, 1980, D Bank granted a foreign
currency loan in the amount of US$4,807,551 to LTM. To secure the loan, Litex executed real
estate and chattel mortgages on its plant site in Montalban, Rizal, including the buildings and
other improvements, machineries, and equipment there. Among the machineries and equipment
mortgaged in favor of D Bank were the articles covered by the “trust receipt.” Was the mortgage
over the properties covered by trust receipt valid?

A: NO. The mortgage was not valid with respect to the machineries and equipment covered by the
trust receipt. LTM did not have free disposal nor the authority to freely dispose of the articles. Hence,
the inclusion in the mortgage was void and had no legal effect (DBP v. Prudential Bank, G.R. No.
143772, Nov. 22, 2005).

2. Sometime in 1989, RTMC was granted a credit line by H Bank for a credit line of P8 million.
RTMC availed of the credit line by making numerous drawdowns for the importation of raw
materials, each drawdown being covered by a separate promissory note and trust receipt over
the raw materials. When the notes became due, RTMC offered to turn over the imported
materials arguing that the importation of raw materials under the credit line was with a grant of
option to them to turnover to the bank the imported raw materials should these fail to meet their
manufacturing requirements. However, the bank refuse to accept the same, until the materials
were destroyed by a fire which gutted down RTMC’s premises. RTMC claims that its obligation
was extinguish with the destruction of the materials. Is RMTC still liable?
A: YES, RMTC is still liable despite the destruction of the goods. The entruster bank did not
become the owner of the goods and the trust receipt was merely signed as a security for the loan.
Loss of property that served as a security did not extinguish the obligation. The entrustee will then
bear the loss of the goods or property (Rosario Textile Mills Corporation v. Home Bankers Saving and
Trust Co., supra)

6. NOVATION OF AGREEMENT
In Pilipinas Bank v. Alfredo T. Ong (G.R. No. 133176, Aug. 8,2002), the Supreme
Court ruled that a Memorandum of Agreement entered into between the bank (entruster) and
the entrustee extinguish the obligation under the existing trust receipt because the agreement
did not only reschedule the debts of the entrustee but it provides principal conditions which are
incompatible with the trust agreement. For instance, the agreement provides for a term of 7
years; it is secured by mortgage, and it provides for different rates of interest and charges.
Hence, the liability for breach of Memorandum of Agreement would be purely civil in nature and
no criminal liability under the Trust Receipts Law can be imposed.

F. MORTGAGE
1. REQUISITES COMMON TO REAL ESTATE MORTGAGE, CHATTEL MORTGAGE
AND PLEAGE (art. 2085, New Civil Code for short)
a) The mortgage must be constituted to secure the fulfillment of a principal
obligation.
b) The mortgagor must be the absolute owner of the thing mortgaged.
c) The mortgagor must have free disposal of the property.

1.01. FEATURES OF MORTGAGE

a) The mortgage cannot exist without valid principal obligation (Arts. 2086 and
2052, NCC).
 b) The consideration of the principal obligation is the consideration for the
mortgage (Filipinas Marble Corporation v. Intermediate Appellate Court, 142
SCRA 180 [1986]).
C) A third person who is not a party to the principal obligation may mortgage his
property to secure the obligation of the debtor. It is not required that he
benefited from the principal contract. (Vda. De Jayme v. CA, 380 [2002]).

d) The mortgage is indivisible. When several things are given to secure the same
debt in its entirely, all of them are liable for the debt and the creditor does not
have to divide his action by distributing the debt among the various things
mortgaged. Even if only part of the debt remains unpaid, all the things are liable
for such balance. . (Vda. De Jayme v. CA, ibid.).
e) The mortgage secures only the amount stated in the mortgage deed which
may be less than the amount of the principal obligation. (Landrito, Jr. v. CA,
466 SCRA [2005]).

2. REAL ESTATE MORTGAGE (NCC and ACT NO. 3135)

2.01. SUBJECT
Only immovable properties or real right over such immovable may be the
subject of a real estate mortgage. Buildings are immovable properties, hence
they can be separately mortgaged.

2.02. REGISTRATION
A real estate mortgage must be registered with the Register of Deeds
where the subject property is located in order to affect third persons. However,
an unregistered mortgage is valid between the parties.

2.03. MOI TGAGEE IN GOOD FAITH

A mortgage will be considered in good faith if he relies on the face of the
Torrens title. A mortgage without notice will not be affected by the claim of third
persons.
Exception: Banks cannot rely merely on the title by the nature of their
functions, bank are required to go beyond the title because they are required to
exercise the highest degree of diligence. For example, they are required to
investigate the title and the property (Ursal v. CA, 473 SCRA 58 [2005]).

2.04. NATURE
The mortgage constitutes an encumbrance on the real property. The
right of the mortgage is a right in rem. The registered mortgage follows the
property even if there is a change of ownership.

a) Since only security interest is acquired, the right to possession

and jus disponendi is not included unless otherwise stipulated
(Ramirez v. CA, 409 SCRA 133 [2003]).
 b) The first registered mortgage has superior right over junior mortgagees
or attaching creditors (Rizal Commercial banking Corp. v. CA, 289 SCRA
292 [1998]). The Manual of Regulations for banks (MORB) provides that
banks may also grant loans on the security of junior mortgages on real
estate. However, the sum total of the loan to be granted and the
outstanding loan on the senior mortgage must not exceed the loan value
of the subject real estate based on the appraisal to be made by the junior
mortgage (Sec. X311.1, MORB).

2.05. AFTER-ACQUIRED PROPERTY

The partied may stipulate that after-acquired properties are automatically

included in the mortgage. Thus, the parties may stipulate that buildings, machineries, and
equipment to the mortgaged property shall be subject to the mortgage (Mendoza v. CA,
G.R. No.116710, June 25, 2001).

2.06. AFTER-INCURRED OF FUTURE OBLIGATIONS

The Deed of Real Estate Mortgage may expressly provide that it may secure
future advancements. In the absence of stipulation, the general rule is that the mortgage
must be limited to the amount mentioned in the mortgage (Quintanilla c. CA, 279, SCRA
397 [1997]).

2.07. FORECLOSURE OF MORTGAGE

The three (3) common types of forced sales arising from a failure to pay a
mortgage dept are:

1) An extrajudicial foreclosure sale, governed by Act No. 3135;

2) A judicial sale, regulated by Rule 68 of the Rules of Court; and
3) An ordinary execution sale, covered by Rule 39 of the Rules of Court
(Concepcion v. CA, 274 SCRA 614 [1997]).

An ordinary execution sale covered by Rule 39 of the Rules of the Court is the result
of a personal action for collection of dept or specific performance. This remedy is
alternative to foreclosure. If the mortgage, either judicially or extrajudicially, he
thereby waives the action for collection of the debt or vice versa (BPI Saving Bank,
Inc. v. Vda. de Coscolluela, 43 SCRA 472 [2006]).

2.08. EXTRAJUDICIAL FORECLOSURE (ACT NO. 3135 AND SUPREME

COURT CIRCULAR A.M NO. 99-10-05-0)

a) Special Power Necessary. Extrajudicial foreclosure under Act No. 3135 is

available only if there is an express authority in the real estate mortgage
authorizing such extrajudicial sale (Sec. 1, Act No. 3135; Casano v. Magat, 374
SCRA 508 [2002]).
b) Petition. The extrajudicial foreclosure of the real estate mortgage is initiated by
filling a Petition with the Executive Judge through the Clerk of Court who is also
Ex Officio Sheriff of the City or Province where the property is located (A.M.99-
10-05-0).
Note: The same procedure is prescribed for the extrajudicial foreclosed of
chattel mortgage and pledge.
c) There is only one filing fee regardless of the number of properties to e
foreclosed. However, the venue of the extrajudicial foreclosure proceedings is the
place where each of the mortgage property is located. (A.M.99-10-05;Benguet
Management Corporation v. CA,411 SCRA 347, 354 [2003]).

d) Requirements of Notice and Publication

In extrajudicial foreclosure under Act No. 3135, what the Act requires are :

1) The posting of notices of sale in three public places; and

2) The publication of the notice of sale in a newspaper of general circulation

( Concepcion v. CA, supra).

e) Other Rules on Notice and Posting

1) Non- compliance with the posting and publication requirement will render the
sale null and void.

However, the mortgagor may be barred by stopped or laches from claiming that
the required posting in three (3) public places has not been complied with (MTBTC
v. Wong, G.R.No.120859, June 26,2001).

2) Posting must be in three (3) public places but it is not necessary that notice is
posted in the mortgaged property.

3) If the original date of the sale stated in the notice of sale is transferred to another
date, there must be another posting and publication of the notice of sale for the
new date, otherwise the sale will be considered invalid ( Ouano v. CA,398 SCRA
525 [2003]).

4) Personal notice to the mortgagor-debtor is NOT necessary.

5) While posting is necessary, a Certificate of posting is not indispensable. The

certificate may be an evidence if the fact that there was posting is an issue or in
question.

f) Price. The fact that the mortgaged property is sold at an amount less than its
actual market value is not a ground to invalidate the foreclosure sale so long as the
price is not shocking to the conscience ( Suico Rattan & Buri Interiors, Inc.
v.CA,490 SCRA 560 [2006]).

a) The mortgagee-creditor can recover the deficiency if the price of the sale
is not sufficient to pay for the entire or obligation.

g) Possession after Foreclosure. The mortgagor shall remain in possession of the

real property even after foreclosure. However, the winning bidder or purchaser may
file a petition in court for a writ of possession to obtain possession of demption
period. ( Sec.7, Act No. 3135).

h) Redemption. The debtor-mortgagor can redeem the property within one (1) year
from the date the certificate of sale is registered with the Register of Deeds (
Sec.6,Act No.3135).
 Note: If the mortgagee is a bank, the same rule applies but not only for natural
persons. If the mortgagee is a juridical person, the mortgagor can redeem the
property within three (3) months from foreclosure but not later than the registration
of the certificate of sale.

1. The redemption price under Act No. 3135 is the purchase price plus interest of one
percent (1%) per month and taxes.

Exception : The redemption price is the whole obligation secured by the

mortgage if the mortgagee is a bank.

2). There must be tender of the whole redemption price plus interest in order to
validly exercise the right of redemption. However, tender using a check is sufficient.

3. CHATTEL MORTGAGE ( Act No. 1508)

A chattel mortgage is an accessory contract by virtue of which a personal

property is recorded in the Chattel Mortgage Register as security for the performance of
an obligation ( Art.2140, NCC).

a) Not Conditional Sale. The original provisions of the Chattel Mortgage Law consider
chattel mortgage as a conditional sale. This old view has been expressly repudiated by
Article 2140 of the New Civil Code ( Serra v. Rodriguez, 56 SCRA 538 ).

There is no real analogy between a chattel mortgage and a conditional sale, as

understood in Civil Law. It is merely a security. To regard it as a conditional sale is to rattle
the bones if an antiquated skeleton from which all semblance of animate life has long
since departed ( Bachrach Motor Co. v. Summers, 4 Phil.3).

3.01. SUBECT MATTER

a) It covers personal or movable properties contempiated under Articles 416

and 417 of the New Civil Code including shares of stocks and interest in
business.
b) Shares of stocks- chattel mortgage thereon need to be registered in the
stock and transfer book.
c) Machinery- if any of the following is absent: (1) installed by the owner;
(2)intended by the owner of the tenement for an industry or work being
carried on in a building or piece of lands; and (3) which tends directly to
meet the needs of the said industry or works (Art.415[b], NCC). If all of the
requisites are present, the machinery is real and is not, as a rule, proper
subject of a chattel mortgage.

Thus, machinery installed by the lessee on the leased premises may be

the subject of a chattel mortgage ( Davao Sawmill v. Castillo, 61Phil. 709).

d) Vessels – mortgage is recorded in the office of the Philippine Coast Guard (

now the Maritime Industry Authority ) to be effective as to third persons;
not necessary to be recorded in the office of the Registry of Deeds.

e) Motor Vehicles – mortgage registered in LTO ( for vehicles used for public
services).
 f) Buildings – they cannot, as a rule, be subject of chattel mortgage. They are
real properties under Article 415 (1) of the New Civil Code even
if they are houses of mixed materials ( Tumalad v. Vicencio, 41
SCRA 143 [1971]) or if the building is on rented land ( Makati
Leasing and Finance Corp. v. Wearever Textile Mills,122 SCRA
296 [1983]).

Exception : The chattel mortgage over a building is considered valid as

between the parties on the basis of estoppel but not against third (
Evangelista v. Alto Surety & Ins. Co., 103 Phil. 401 [1958]).

3.02. AFTER – ACQUIRED PROPERTIES

a) Chattel mortgage shall be deemed to cover only the property described

therein and not like or substituted property thereafter acquired ( Sec.7[4],
Act No. 1508; Tsai v. CA, 336 SCRA 324 [2001]).
b) The rule regarding after- acquired properties does not apply to stores that
are open to the public. A stipulation in the chattel mortgage which includes
goods that are acquired in renewal of or in substitution of goods on hand
when the mortgage was executed is valid and binding (Northern Motors,
Inc. v. Coquia, 66 SCRA 415[1975]).

3.03. AFTER-INCURRED OBLIGATIONS

A chattel mortgage can cover only obligations existing at the time the
mortgage is constituted. It cannot cover after-incurred obligations.

In a pledge, real estate mortgage, or antichresis, after-incurred

obligations may be secured so long as these future debts are accurately
described. A chattel mortgage can only cover obligations existing at the time the
mortgage is constituted. Promise expressed in a chattel mortgage to cover debts
yet to be contracted may be binding but security itself arises only after amending
the old contract conformably with the form prescribed by the Chattel Mortgage
Law. This rule is the inference from the language of the affidavit of Good Faith
(Acme Shoe Rubber and Plastic Corp. v. CA, 260 SCRA 714 [1996]).

3.04. FORMALITIES

a) Registration. It must be registered in the Chattel Mortgage Register

of Deeds where the mortgagor resides or if he resides in the Philippines
in the place where the property is situated (Sec. 4, Act No. 1508). If the
place where the property is situated are different, they must be
registered in the registers of both province or city (Ibid.).

1.) Registration creates a lien that follows the property and serves
as notice to third persons (Northern Motors, Inc. v. Coquia, 68
SCRA 374 [1975]).

2.) Unregistered mortgage is binding between the parties but not on

third persons (Filipinas Marble Corp. v. IAC, 142 SCRA 180
[1986]).
 b) Affidavit of Good Faith. It is a subscribed statement in a contract of
chattel mortgage wherein the parties severally sear that the mortgage is
made for the purpose of securing the obligation specified in conditions
thereof, and for no other purpose, and that the same is a just and valid
obligation and one not entered into for the purpose of fraud. (Sec. 5 Act
No. 1508).

1.) The Affidavit of Good Faith gives the mortgage a preferred

status, that is, it enjoys preference of the claim of third persons
(Cebu International Finance corp. v. CA, 268 SCRA 178 [1997]).

2.) Even in the absence of affidavit, the chattel mortgage is valid as

between the parties. However, it is not valid as to third persons including
other creditors or mortgagees or pledgee (Phil. Refining Co. v. Jarque,
61 Phil. 229 [1935]).

3.05. Right of Redemption

a.) The following may redeem if the condition of the mortgage is

broken: (1) the mortgagor; (2) a person holding a subsequent
mortgage; or (3) a subsequent attaching creditor (Sec. 13, Act
No. 1508).

b.) However, there is no right of redemption after the foreclosure

sale (Cabral v. Evangelista, 28 SCRA 1000 [1969]).

3.06. Deficiency after Foreclosure

Since, a chattel mortgage is just a security, fore-closure thereof will not
prevent the mortgagee from recovering any deficiency that may result after
applying the proceeds of the foreclosure sale to the obligation. (Bicol Savings &
Loan Association v. Guinhawa, 188 SCRA 642 [1990]).

Exception: When the transaction secured is a sale of personal on

installment basis under Article 1484 of the New Civil Code, otherwise known as the
“RECTO LAW”.

G. RECTO LAW
(Art. 1484, NCC)

1. In a contract of sale of personal property on installment basis, the vendor may exercise any of
the following remedies: (a) exact fulfillment of the obligation, should the vendee fail to pay; (b)
cancel the sale, should the vendee’s failure to pay cover two or more installments; and (c)
foreclosure the chattel mortgage.

2. RULES:
a) When Applicable: The law applies only to sale of personal property in installments
(hence, it does not apply to a simple loan).

1) However, the law applies to contracts that are in substance, sale of personal property
in installments. Thus, it applies to “financial lease” or “financial leasing” where a financing
company would, in effect, initially purchase a mobile equipment and turn around to lease
it to a client who gets, in addition, an option to purchase the property at the expiry of the
 lease period. The Recto Law applies where the supposed lessee will retain the thing if he
fully paid the obligation.(PCI Leasing v. Giraffe-X Creative Imaging, Inc., G.R. No.
142618, July 12, 2007).

b) Alternative Remedies. The remedies are alternatives, not cumulative- the exercise of one
bars exercise of another unless it was not actually fully exercised. For instance, the filing
of the collection case bars foreclosure. However, recovery of the property through a
replevin case preparatory to foreclosure will not bar the other remedies if there was no
actual foreclosure.

c) Effect of foreclosure on deficiency. Foreclosure of chattel mortgage on the things sold

shall recovery of any deficiency. Thus, seller cannot recover from guarantor. However, if
there is a real estate mortgage over another property, the foreclosure thereof will not bar
recovery of any deficiency because he is in effect availing of the remedy of exacting
fulfillment of the obligation rather than foreclosure of the mortgage.

d) Waiver. If seller-mortgage opts to exercise remedy of exacting fulfillment of the obligation,

he shall be deemed to have waived his right as a mortgagee but may still levy on the
mortgaged property.