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LETTERS OF CREDIT

DEFINITION

Letters of credit (L/C) are those issued by one merchant to another, or for the purpose of
attending to a commercial transaction. [Art. 567, Code of Commerce]
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 [Prudential Bank v. Intermediate Appellate Court, G.R. No. 74886 (1992)]

PURPOSE

Its purpose is to substitute for, and support, the agreement of the buyer-importer to pay
money under a contract or other arrangement, but does not necessarily constitute as a condition
for the perfection of such arrangement [Reliance Commodities, Inc. v. Daewoo Industrial Co.,
Ltd., G.R. No.L-100831 (1993)]

ESSENTIAL REQUISITES OF LETTERS OF CREDIT


1. Issued in favor of a definite person and not to order.
2. Limited to a fixed and specified amount, or to one or more undetermined amounts, but
within a maximum sum, the limit of which must be exactly stated.

Those which do not have one of these conditions shall be mere letters of recommendation.
[Art. 568, Code of Commerce]

NATURE

1. Financial device - L/Cs are 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 paying [Bank of America, NT&SA v. Court of Appeals,
G.R. No. L-105395 (1993)]
2. Composite of three (3) distinct and independent contracts – An L/C transaction
involves three distinct but intertwined relationships:
a) the contract of sale between the buyer and the seller;
b) the contract of the buyer and the issuing bank; and
c) the letter of credit proper.

DURATION OF LETTERS OF CREDIT

1. Period stipulated by the parties; or


2. If no period is fixed;
• 6 months from date if used in the Philippines
• 12 months if abroad

If the holder of a letter of credit does not make us thereof within the period agreed upon
with the drawer of the same, or, in the absence of a fixed period, within six months from tis date
in any point in the Philippines, and within twelve months outside thereof, it shall be void in fact
and in law. [Art. 572, Code of Commerce]

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KINDS OF LETER OF CREDIT

1. Confirmed L/C – 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.
2. Irrevocable L/C – 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.
3. Revolving L/C – 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 to the opening bank by the buyer.
4. Back-to-Back L/C – 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.
5. Standby L/C – a security arrangement for the performance of certain obligations. It can
be drawn against only if another business transaction is not performed.

RIGHTS AND OBLIGATIONS OF THE PARTIES

There would be at least three parties to a letter of credit:

1. Buyer/Exporter/Account Party – one who procures the letter of credit and obliges
himself to reimburse the issuing bank upon receipt of documents of title.
2. Issuing Bank – the bank which undertakes: (1) to pay the seller upon receipt of the draft
and proper documents of title; and (2) to surrender the documents to the buyer upon
reimbursement. The obligation of the issuing bank to pay the seller is direct, primary,
absolute, definite and solidary with the buyer, in the absence of stipulation in the letter of
credit [Metropolitan Waterworks and Sewerage System v. Daway, G.R. No. 160732
(2004)]
3. Seller/Importer/Beneficiary – one who ships the goods to the buyer in compliance with
a contract of sale and delivers the documents of title and draft to the issuing bank to
recover payment

Depending on the transaction, the number of parties to the letter of credit may be
increased and may include:
1. Advising/Notifying Bank – the bank which conveys to the seller the existence of the
credit.
2. Confirming Bank – the bank which lends credence to the letter of credit issued by a
lesser known issuing bank.
3. Negotiating Bank – the bank which discounts the draft resented by the seller.
4. Paying Bank – the bank which undertakes to encash the drafts drawn by the seller.

BASIC PRINCIPLES OF LETTERS OF CREDIT

1. Doctrine of Independence

The principle of independence 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.

The independent nature of the letter of credit may be—


a) Independent in toto - the credit is independent from the justification
aspect and is a separate obligation from the underlying agreement;

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b) 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. [Transfield Philippines v. Luzon Hydro, G.R. No.
146717 (2004]

2. Fraud Exception Principle

The principle that limits the application of the independence principle only to
instances where it would serve the commercial function of the credit and not when fraud
attends the transaction.

In the case of Transfield Philippines v. Luzon Hydro [G.R. No. 146717 (2004)],
the petitioner alleged misrepresentation as constituting fraud. The Court, however, made
no ruling as to whether the same indeed constitutes fraud.

Petitioner asserts that the "fraud exception“ exists when the beneficiary, for the
purpose of drawing on the credit, fraudulently presents to the confirming bank,
documents that contain, expressly or by implication, material representations of fact that
to his knowledge are untrue. In such a situation, petitioner insists, injunction is
recognized as a remedy available to it.

Citing Dolan's treatise on letters of credit, petitioner argues that the independence
principle is not without limits and it is important to fashion those limits in light of the
principle's purpose, which is to serve the commercial function of the credit. If it does not
serve those functions, application of the principle is not warranted, and the common law
principles of contract should apply [Transfield Philippines v. Luzon Hydro, G.R. No.
146717 (2004)]

The untruthfulness of a certificate accompanying a demand for payment under a


standby credit may qualify as fraud sufficient to support an injunction against payment.
The remedy of injunction is available when the following are present:
a) Clear proof of fraud;
b) Fraudulent abuse of the independent purpose of the letter of credit and
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

3. Doctrine of Strict Compliance

The settled rule in commercial transactions involving letters of credit requires that
the documents tendered by the seller must strictly conform to the terms of the letter of
credit. Otherwise, the issuing bank or the concerned correspondent bank is not obliged to
perform its undertaking under the contract.

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GENERAL BANKING LAW

 RA 8791
 AN ACT PROVIDING FOR THE REGULATION OF THE ORGANIATION AND
OPERATIONS OF BANKS, QUASI-BANKS, TRUST ENTITIES AND FOR OTHER
PURPOSES
 Banks are entities engaged in:
- The lending funds
- Obtained in the form of deposits from the public (Section 3.1, GBL)
 Requirements:
- Stok Corporation
- Funds obtained from public

A. Degree of Diligence Required of Banks


Extraordinary Diligence. The appropriate standard of diligence must be very high, if not
the highest, degree of diligence; highest degree of care (PCI Bank vs. CA, 350 SCRA 446,
PBCom vs. CA, GR No. 121413, January 2001).

Cases:
1. Ursal vs. CA, October 14, 2005

Banks cannot merely rely on certificates of title in ascertaining the status of


mortgaged properties; as their business is impressed with public interest, they are
expected to exercise more care and prudence in their dealings than private individuals.
Indeed, the rule that persons dealing with registered lands can rely solely on the
certificate of title does not apply to banks.

2. China Banking vs. Lagon, July 11, 2006

Petitioner could not be considered a mortgagee in good faith. It had knowledge


that respondent was in the United States at the time the SPAs were allegedly executed,
yet, it did not questions their due execution. Though petitioner is not expected to
conduct an exhaustive investigation on the history of the mortgagor’s title, it cannot be
excused from the duty of exercising due diligence required of a banking institution.
Banks are expected to exercise more care and prudence than private individuals in their
dealings, even those that involve registered lands, for their business is affected with
public interest.

3. Citibank vs. Cabamongan, May 2, 2006

The Court has repeatedly emphasized that, since the baking business is
impressed with public interest, of paramount importance thereto is the trust and
confidence of the public in general. Consequently, the highest degree of diligence is
expected, and high standards of integrity and performance are even required, of it. By
nature of its functions, a bank is “under obligation to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of their relationship.”
In this case, it has been sufficiently shown that the signatures of Carmelita in the
forms of pretermination of deposits are forgeries. Citibank, with its signature
verification procedure, failed to detect forgery. Its negligence consisted in the omission
of that degree of diligence required of banks. The Court has held that a bank is “bound
to know the signatures of its customers; and if it pays a forged check, it must be
considered as making the payment out of its own funds, and cannot ordinarily charge
the amount so paid to the account of the depositor whose name was forged.” Such
principle equally applies here.
The Court agrees with the observation of the CA that Citibank, thru Accountant
Officer San Pedro, openly courted disaster when despite noticing discrepancies on the
signature and photograph of that person claiming the be Carmelita and the failure to

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surrender the original certificate of time deposit, the pretermination of the account was
allowed. Even the waiver document was not notarized, a procedure meant to protect
the bank. For not observing the degree of diligence required of banking institutions,
whose business is impressed with public interest, Citibank is liable for damages.

B. Nature of Business
 Rule on Strikes and Lockouts (Section 22, GBL)
 If unsettled after seven (7) calendar days, Bangko Sentral reports to
the Secretary of Labor who has two options:
(1) assumption jurisdiction; or
(2) certify to the NLRC for compulsory arbitration.
 The President of the Philippines may, at any time, intervene and
assume jurisdiction over such labor dispute in order to settle or
terminate the same.
 REAOSON: INDISPENSABLE TO NATIONAL INTEREST

C. Authority to Incorporate and Operate


 TO INCORPORATE: Articles of Incorporate must be accompanied by a
certificate of authority issued by the MB, under its seal.
 TO OPERATE: Certificate of Authority from the BSP.
 Same rule if there is amendment.
 Banks should be public held. Not allowed to be registered as close corporations.

Other Matters:
 Section 64. Unauthorized Advertisement or Business Representation. – No
person, association, or corporation unless duly authorized to engaged in the
business of a bank, quasi-bank, trust entity, or savings and loan association as
defined in this Act, or other banking laws, shall advertise or hold itself out as
being engaged in the business of such bank, quasi-bank, trust entity, or
association, or use in connection with its business life, the word or words “bank”,
“banking”, “banker”, “quasi-bank”, “quasi-banking”, “quasi-banker”, “savings
and loan association”, “trust corporation”, “trust company” or words of similar
import or transact in any manner of business of any such bank, corporation or
association.

D. Classification of Banks
 Universal Bank (UB) – banks that have the authority to exercise, in additional to
the powers authorized for a commercial bank, the powers of an investment house
and the power to invest in non-allied enterprises (Section 23).
 Commercial Banks (CB) – banks that have, in addition to the general powers
incident to corporations, all such powers as may be necessary to carry on the
business and commercial banking (Section 29).
e.g. Bank of Commerce, Citibank, Maybank Phil., PBC, Veterans, BDO
Private Bank
 Rural Banks – banks that are created to make needed credit available and readily
accessible in the rural areas for purposes of promoting comprehensive rural
development. RA No. 7353
e.g. Providence Rural Bank, Rural Bank of Gattaran, Claveria Rural
Bank, Rural Bank of Sanchez Mira, Rural Bank of Cauayan,
Golden Rural Bank of the Philippines, Banco Agricula
 Thrift Banks – banks that include (1) savings and mortgage banks; (2) private
development banks; and (3) stock savings and loan associations.
e.g. Allied Savings Bank, Bank of Makati, BPI Direct Savings Bank,
Century Savings Bank, Express Savings Bank, Malayan Bank,
Win Bank

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 Cooperative Banks – banks that primarily provide financial, banking and credit
services to cooperative organizations and their members (Section 11, R.A. 6938 as
amended by RA 9520)
e.g. Cooperative Bank of Cagayan, Coop of Bulacan, Coop of La Union,
Coop of Bohol
 Islamic Banks – Charter of Al Amanah Islamic Invest Bank of the Philippines

E. Classification of Banks

UNIVERSAL BANKS COMMERCIAL BANKSE


As to Powers
1. The powers authorized for a 1. The general powers incident to
Commercial Bank; corporations.
2. The powers of an investment 2. All such powers may be necessary
house as provided in existing to carry on the business of
laws; and commercial banking, such as
3. The power to invest in non-allied accepting drafts and issuing letters
enterprises as provided in the GBL of credit, discounting and
(Section 23) negotiating promissory notes,
drafts, bills of exchange and other
evidences of debt.
3. Subject to such rules as the MB
may promulgate, these rules may
include the determination of bonds
and other debt securities eligible
for investment, the maturities and
aggregate amount of such
investment (Section 20).

FUNCTIONS OF BANKS
1. Deposit Function

 Simple Loan
 Fixed, savings and current deposits of money in banks and similar institutions
shall be government by the provisions concerning simple loan (Article 1980, Civil
Code of the Philippines).
 Consequences:
Problem:
 A deposited in Bank X;
 Bank used the money;
 A would like to withdraw but the Bank cannot pay;
 Is the Bank liable for estafa?

Answer: NO. (Guingona vs. City Fiscal of Manila, 128 SCRA 577)
Since the bank is the borrower, it can make use as its own the money
deposited, and the amount is not held in trust for the depositor nor it
is kept for safekeeping. (Tang Tiong Tick vs. American
Aphothecaries, 65 Phol. 414).

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Problem:
 A deposited in Bank X;
 B alleges that the money deposited by A belongs to him;
 A withdraws from the bank;
 Is Bank X liable?

Answer: NO. Third persons who may have the right to the money deposited
cannot hold the bank responsible unless there is a court order or
garnishment, since the duty of the bank is to the creditor-depositor
and not to third persons.

Problem:
 A deposits in Bank X;
 Bank X loans out money to A;
 If A defaults in payment, can Bank X set-off the deposits in its hands for
the payments of A’s indebtedness?

Answer: YES. A bank has a right to set off deposits in its hands for payment of
any indebtedness to it on the part of a depositor. (Gullas vs. PNB, 1935)

MINORS AS DEPOSITORS
 Section 1. Minors who are at least seven years of age, are able to read and write,
have sufficient discretion, and are not otherwise disqualified by any other
incapacity, are hereby vested with special capacity and power, in their own right
and in their own names, to make savings or time deposits with and withdraw the
same as well as receive interests thereon from banking institutions, without the
assistance of their parents or guardians, the provisions of existing laws and
regulations to the contrary notwithstanding. Parents may nevertheless deposit for
their minor children and guardians for their wards. (PD 734)

BASIC RULES IN MAKING DEPOSITS


 A deposit may be maintained either by an individual or an entity.
 Could also be held by two or more persons either juridical or natural.
 The words and/or relate only to authority to withdraw. Ownership is another
matter. Presumption is equal.
 If the depositor dies, deposit will form part of his estate (subject to estate tax).
Note that no withdrawal yet until taxes are paid.
 If deposit is held jointly, only up to 50% will form part of the estate of the
depositors. (Note in survivorship agreement – the depositors permit each other to
withdraw the whole amount deposited with the caveat that upon the demise of
anyone, the remaining balance goes to the survivorship)

LEGISLATION TO PROCTECT THE DEPOSITS


 RA 1405, Bank Secrecy Law
 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 the 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. (Also, Anti-Graft, AMLA,
Human Security Act, Inquiry of CIR to determine the net estate of deceased depositor).
 Note in Foreign Currency Act, exception is only with the written permission of the
depositor, UNCLAIMED BALANCES ACT.

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Case: Ejercito vs. Sandiganbayan, GR Nos. 157294-95

 In lieu of the Criminal Case “People vs. Estrada” for plunder, the Special
Prosecution filed before the Sandiganbayan a request for issuance of Subpoena
Duces Tecum directing the President of Export and Industry Bank or his/her
authorized representative to produce documents namely, Trust Account and
Savings Account belonging to the petitioner and statement of accounts of one
named “Jose Velarde” and to testify during the hearings.
 Sandiganbayan granted both requests and subpoenas were accordingly issued.
Sandiganbayan also granted and issued subpoenas prayed for by the
Prosecution Panel in another later date. Petitioners now assisted by his counsel
filed two separate motions to quash the two subpoenas issued. Sandiganbayan
denied both motions and the consequent motions for reconsideration of
petitioner. (Emphasis on violation of Bank Secrecy Law).

Whether or not the trust accounts of petitioner are covered by the term “deposits”
as used in RA No. 1405.

 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.
 Section 2 of the same law in fact even more clearly shows that the term
“deposits” was intended to be understood broadly. 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.”
 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.
 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 expresses the
notion that a public office is a public trust and nay 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.
 Plunder being thus analogous to bribery, the exception to RA 1405 applicable in
cases of bribery must also apply to cases of plunder.

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UNCLAIMED BALANCES, PD 679

 Banks to report to the treasurer of the Philippines the so-called dormant accounts.
 Dorman accounts are accounts where depositor is known to be dead or if not, he has not
made any further transaction for the past ten years or even more.
 Banks have to prepare a report and refer it to the treasurer. (So that treasurer recommends
the escheat proceedings through the Sol-Gen).

REQUIREMENTS (ESCHEAT)

If the petition is sufficient in form and substance, the court, by an order reciting the
purpose of the petition, shall fix a date and place for the hearing thereof, which date shall be not
more than six (6) months after the entry of the order, and shall direct that a copy of the order be
published before the hearing at least once a week for six (6) successive weeks in some
newspaper of general circulation published in the province, as the court shall be deem best.
(Everyone is put on notice, i.e., heirs, creditors).

NOTE: unavoidability to disclose the accounts of depositors. Thus, exempt from the Bank
Secrecy Law.

FOREIGN CURRENCY DEPOSIT ACT, RA 6426

 Section 8. Secrecy of foreign currency deposits. – All foreign currency deposits


authorized under this Act, as amended by PD No. 1305, as well as foreign currency
deposits authorized under PD No. 1034, are hereby declared as an considered of an
absolutely confidential nature and except upon the written permission of the
depositor, in no instance shall foreign currency deposits be examined, inquired or looked
into by any person, government official, bureau or office whether judicial or
administrative or legislative, or any other entity whether public or provided; Provided,
however, That said foreign currency deposits shall be except 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
1305, and further amended by PD No. 1246, Nov. 21, 1977).

Case: Salvacion vs. Central Bank, August 21, 1997

 Greg Bartelli, an American tourist, was arrested for committing four accounts of
rape and serious illegal detention against Karen Salvacion. Police recovered
from him several dollar checks and a dollar account in the China Bank Corp. He
was, however, able to escape from prison. In a civil case filed against him, the
trial court awarded Salvacion moral, exemplary and attorney’s fees amounting
to almost P1,000,000.00.
 Salvacion tried to execute the judgement on the dollar deposit of Bartelli with
the China Banking Corp. but the latter refused arguing that Section 18 of the
Foreign Currency Act exempts foreign currency deposits from attachment,
garnishment, or any other order or process of any court, legislative body,
government agency, or any administrative body whatsoever. Salvacion therefore
filed this action for declaratory relief in the Supreme Court.

ISSUE: Section 8 of RA 6426, as amended by PD 1246, otherwise known as the


Foreign Currency Deposit Act be made applicable to a foreign transient?

• NO. Section 8 of Republic Act No. 6426 is hereby held to be


INAPPLICABE to this case because of its peculiar circumstances.
Respondents are hereby required to comply with the writ of execution
issued in the civil case and to release to petitioners the dollar deposit of
Bartelli in such amount as would justify the judgment.

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• Here is a child, a 12-year old girl, who in her belief that all Americans
are good and in her gesture of kindness by teaching his alleged niece the
Filipino language as requested by the American, trustingly went with
said stranger to his apartment, and there she was raped by said American
tourist Greg Bartelli. Not once, but ten times. She was detained therein
for four (4) days. This American tourist was able to escape from jail and
avoid punishment. On the other hand, the child, having received
favorable judgment in the Civil Case for damages in the amount of more
than P1, 000, 000.00, which amount could alleviate the humiliation,
anxiety, and besmirched reputation she had suffered and may continue
to suffer for a long, long time; and knowing that this person who had
wronged her as the money, could not, however get the award of
damages because of this unreasonable law. This questioned law,
therefore makes futile the favorable judgment and award of damages
that she and her parents fully deserve.
• If Karen’s sad fate had happened to anybody’s own kin, it would be
difficult from him to fathom how the incentive for foreign currency
deposit could be more important than his child’s rights to said award of
damages; in this case, the victim’s claim for damages from this alien
who had the gall to wrong a child of tender years of a country where he
is a mere visitor. This further illustrates the flaw in the questioned
provisions.
• It is worth mentioning that RA No. 6426 was enacted in 1983 or at a
time when the country’s economy was in a shambles; when foreign
investments were minimal and presumably, this was the reason why said
statute was enacted. But the realities of the present times show that the
country has recovered economically; and even if not, the questioned law
still denies those entitled to due process of law for being unreasonable
and oppressive. The intention of the questioned law may be good when
enacted. The law failed to anticipate the iniquitous effects producing
outright injustice and inequality such as the case before us.
• It has thus been said that:

“But I also know, that laws and institutions must go hand in hand with the
progress of human mind. As that becomes more developed, more enlightened,
as new discoveries are made, new truths are disclosed and manners and
opinions change with the change of circumstances, institutions must advance
also, and keep pace with the times. . . We might as well require a man to wear
still the coat which fitted him when a boy, as civilized society to remain
even under the regimen of their barbarous ancestors.

• In fine, the application of the law depends on the extent of its justice.
Eventually, if we rule that the questioned provision 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.” Simply stated, when the statue is silent or ambiguous, this is
one of those fundamental solutions that would respondent to the
vehement urge of conscience. (Padilla vs. Padilla, 74 Phil. 377).
• It would be unthinkable, that the questioned provision would be used as
a device by the accused Greg Bartelli for wrongdoing, and in doing so,

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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 judgement 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 against legal tyranny.

2. Loan Function (first two, are basic functions)


3. Other Functions
4. Prohibited Acts
DEPOSIT INSURANCE

WHAT IS THE PHILIPPINE DEPOSIT INSURANCE CORPORATION (PDIC)?

 PDIC is a government instrumentality created in 1963 by virtue of RA 3591 to insure the


deposits of all banks which are entitled to the benefits of insurance. The latest
amendments to RA 3591 are contained in RA 10846 signed into law on May 23, 2016.
RA 10846 empowered PDIC with stronger authorities to protect the depositing public and
promote financial stability. The new law also includes important provisions to ensure that
the PDIC remains financially and institutionally strong to fulfill its mandate under its
Charter.
 The PDIC now has the authority to help depositors to have quicker access to their insured
deposits should their bank close; resolve problem banks while still open; hasten the
liquidation process for closed banks; and mete out stiffer sanctions and penalties against
those who engage in unsafe and unsound banking practices.
 The PDIC is an attached agency of the Department of Finance.

WHAT IS PDIC’S OVERALL MANDATE?

 PDIC exists to provide deposit insurance coverage for the depositing public to help
promote public confidence and stability in the economy. It ensures prompt payment of
insured deposits, exercises complementary supervision of banks, adopts responsive
resolution methods, and applies efficient management of receivership and liquidation
functions.

WHAT IS PDIC’S MAXIMUM DEPOSIT INSURANCE COVERAGE?

 Effective June 1, 2009, the maximum deposit insurance coverage is P500, 000 per
depositor. All deposit accounts by a depositor in a closed bank maintained in the same
right and capacity shall be added together.
 Under RA No. 9576, the PDIC may propose to adjust the MDIC, subject to the approval
of the President of the Philippines, in case of a condition that threatens the monetary and
financial stability of the banking system that may have systematic consequences.

WHAT IS AN INSURED DEPOSIT?

 The term “insured deposit” means the amount due to any bona fide depositor for
legitimate deposits in an insured bank net of any obligation of the depositor to the insured
bank as of date of closure, but not to exceed P500, 000.00.

NOTE: That if a depositor has different accounts with the same bank, the aggregate amount of all
deposits shall be the basis for the maximum insurable amount.

Example

If X has different accounts with Bank X, savings, demand (checking), time, all in his name and

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in his personal capacity, and not for account of others, the aggregate amount of which is P3M,
the insurance proceeds that X can claim is P500, 000.00.

Question: If X has deposits in several different insured banks, will his deposits be added
together for insurance purposes?

Answer: NO. Deposits in different banking institutions are insured separately. However,
if a bank has one or more branches, the main office and all branch offices are considered as
one bank. Thus, if you have deposits at the main office and at one or more branch offices of
the same bank, the deposits are added together, when determining deposit insurance coverage,
the total of which shall not exceed P500, 000.00.

Question: Shall the depositor pay any insurance premium to PDIC?

Answer: NO. Insurance premium is paid by the banks, not by depositors. The bank is assessed
1/5 of 1% per annum of the assessment base of the bank.

Question: Suppose the bank fails to pay the premium, can the PDIC deny the depositor of its
claim?

Answer: The PDIC cannot revoke the insurance coverage despite the non-payment. But PDIC
can go after the bank for payment of premium.

Question: Supposed X has three bank accounts, one of which is a joint account with Y, is it
included in the PDIC coverage of just P500, 000.00?

Answer:
 A joint account (whether and/or is used) shall be insured separately from any
individually-owned deposit account. (RA 9576).
 Provided, That (1) If the account is held jointly by two or more naturally persons, or by
two or more juridical persons or entities, the maximum insured deposit shall be divided
into as many equal shares as there are individuals, juridical persons, or entities, unless
a different sharing is stipulated in the document of deposit; and (2) If the account was
held by a juridical person or entity jointly with one or more natural persons, the
maximum insured deposits shall be presumed to belong entirely to such juridical
person or entity.

Question: Suppose, there are several joint accounts? Will it be separately insured?

Answer: NO. Provided, further, That the aggregate of the interest of each co-owner over
several joint accounts, whether owned by the same or different combination of individuals,
juridical persons or entities, it shall likewise be subject to the maximum insured deposit of
P500, 000.00.

NOTA BENE: Suppose a different combinations of personalities, same rule?

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EXCLUDED FROM THE MANDATORY COVERAGE OF PDIC

Section 2 of RA No. 9576 stipulates that PDIC will not pay deposit insurance for the
following accounts or transactions:

 Investment products such as bonds, securities, and trust accounts;


 Deposit accounts which are founded, fictitious or fraudulent;
 Deposit products constituting or emanating from unsafe and unsound banking practices;
 Deposits that are determined to be proceeds of an unlawful activity as defined under the
Anti-Money Laundering Law.

PAYMENT (MUST BE EFFECTED WITHIN 6 MONTHS FROM THE FILING OF


CLAIM)

 Cash
 Making available to each depositor a transfer deposit in another insured bank (designated
by PDIC)
 In case of doubtful claim, PDIC may hold the processing of claim and may require that
claim be properly substantiated; and if PDIC is still not satisfied by proof shown, then
PDIC may opt to require the final determination of the claim by a court of competent
jurisdiction before actual payment of insurance proceeds.

Note: Effect of delay of payment and when period of delay will not apply (justifiable grounds).

RULE ON SUBROGATION

 PDIC upon payment of any depositor shall be considered subrogated to all the rights of
the depositor against the bank.
 However, depositor may still claim the uninsured portion of his deposit.
 All payments made by the PDIC of insured deposits in a closed bank, partake of the
nature of public funds and as such, must be considered a preferred credit, similar to taxes.
 However, preference shall be effected only after liquidation proceedings subject to the
approval by the Central Bank.

FILING OF CLAIM WITH PDIC

 Within 2 years from actual take-over of the bank, otherwise barred forever.
 Denial of claim by PDIC is final and executory. Only remedy is for special civil action of
Certiorari. However, RA 9576 requires only 30 days to file certiorari from notice of
denial of insurance claim.

DEFINITION OF “SPLITTING OF DEPOSITS” SECTION 11, RA 9576

 Splitting of deposits occurs whenever a deposit account with an outstanding balance of


more than the statutory maximum amount of insured deposit maintained under the name
of natural or juridical persons broken down and transferred into two (2) or more
accounts in the name/s of natural or juridical persons or entities who have no
beneficial ownership on transferred deposits in their names within one hundred
twenty days immediately preceding or during a bank-declared bank holiday, or
immediately preceding a closure order issued by the Monetary Board of the BSP for the
purpose of availing of the maximum deposit insurance coverage.

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