banking - ibl-reviewer

8/13/2019 BANKING - IBL-Reviewer

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BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN

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BANKING LAW I

I. GENERAL CONCEPTS

A. CONCEPT OF BANKINGa. Definition: Banks shall refer to entities engaged in the lending of

funds obtained in the form of deposits (Sec. 3.1, GBL)

b. Elements:i. Engaged in lending of funds

ii. Obtained in the form of deposits iii. From the public, which shall mean 20 or more persons

(Sec. 8.2, GBL)

REPUBLIC v SECURITY CREDIT AND ACCEPTANCE CORPORATION, 19SCRA 58 (1967)

DOCTRINE: A bank is a moneyed institute founded to facilitate theborrowing, lending and safekeeping of money and to deal in notes, bills ofexchange and credits. An investment company, which lends out the moneyof its customers, collects the interest and charges a commission to bothlender and borrower, is a bank.

FACTSThis is a quo warranto proceeding, initiated by the Solicitor General, todissolve the Security and Acceptance Corporation for allegedly engaging inbanking operations without the authority required therefor by the GeneralBanking Act (Republic Act No. 337).

Security Credit and Acceptance Corporation is a duly registered corporationwith the SEC. It’s articles of incorporation authorize it to o engage primarilyin financing agricultural, commercial and industrial projects, andsecondarily, in buying and selling stocks and bonds of any corporation.

The Superintend of Banks of the Central Bank of the Philippines thru its legalcounsel rendered an opinion that Security Credit and AcceptanceCorporation is a banking institution within the purview of Republic Act No.337. Central Bank advised the corporation to comply with the requirementsof the General Banking Act.

Notwithstanding, the corporation, as well as the members of its Board ofDirectors and the officers of the corporation, continued performing thefunctions and activities which had been declared to constitute illegal bankingoperations; the corporation established 74 branches in principal cities andtowns throughout the Philippines; that through a systematic and vigorous

campaign undertaken by the corporation, the same had managed to inducethe public to open 59,463 savings deposit accounts.

ISSUEWhether the corporation is engaged in banking

RULINGYES. It is clear that these transactions partake of the nature of banking, asthe term is used in Section 2 of the General Banking Act. Indeed, a bankhas been defined as:

... a moneyed institute [Talmage vs. Pell 7 N.Y. (3 Seld. ) 328, 347,348] founded to facilitate the borrowing, lending and safe-keepingof money (Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243,255 U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills ofexchange, and credits (State vs. Cornings Sav. Bank, 115 N.W. 937,139 Iowa 338). (Banks & Banking, by Zellmann Vol. 1, p. 46).

Moreover, it has been held that:

An investment company which loans out the money of its customers,collects the interest and charges a commission to both lender and borrower,is a bank. (Western Investment Banking Co. vs. Murray, 56 P. 728, 730,731; 6 Ariz 215.)

... any person engaged in the business carried on by banks ofdeposit, of discount, or of circulation is doing a banking business,although but one of these functions is exercised. (MacLaren vs.State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas.826; 9 C.J.S. 30.)

Accordingly, defendant-corporation has violated the law by engaging inbanking without securing the administrative authority required in RepublicAct No. 337.

That the illegal transactions thus undertaken by defendant corporationwarrant its dissolution is apparent from the fact that the foregoing misuserof the corporate funds and franchise affects the essence of its business, thatit is willful and has been repeated 59,463 times, and that its continuanceinflicts injury upon the public, owing to the number of persons affectedthereby.

CENTRAL BANK v MORFE, 20 SCRA 507 (1967)

DOCTRINE: The law requiring compliance with certain requirements beforeanybody can engage in banking obviously seeks to protect the public againstactual, as well as potential, injury.





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FACTSFirst Mutual Savings and Loan Organization (Organization) is a registerednon-stock corporation, whose main purpose is “to encourage x x x andimplement savings and thrift among its members, and to extend financialassistance in the form of loans” to them.

In 1962, the Central Bank Legal Department rendered an opinion finding theOrganization as a banking institution, falling within the purview of theCentral Bank Act. Hence, it applied for a search warrant with the MunicipalCourt of Manila against the Organization, alleging that it was engaged inillegal banking activities, “by receiving deposits of money for deposit,disbursement, safekeeping or otherwise or transacts the business of asavings and mortgage bank and/or building and loan association x x xwithout having first complied with the provisions of RA 337.

Judge Cancino issued the warrant applied for there being “good andsufficient reasons to believe” that the Organization has under its control thearticles/items subject of the offense complained of. On the same day, theOrganization commenced an action with the CFI of Manila against theMunicipal Court, the sheriff, the Manila Police Department and the CentralBank to annul the search warrant on the ground that it was issued withGADLEJ. After due hearing, Judge Morfe (CFI Manila) issued an order infavor of the Organization.

Accordingly, the Bank moved for reconsideration but was denied andcommenced the present action.

ISSUEWhether the Organization is a banking institution within the purview of theCentral Bank Act

RULINGYES. The records suggested clearly that the transactions objected to by the

Central Bank constitute the general pattern of the business of theOrganization. Indeed, the main purpose thereof, according to its By-Laws, is “to extend financial assistance , in the form of loans, to its members, withfunds deposited by them.

It is true that such funds are referred to as their “savings” and that thedepositors thereof are designated as “members,” but, even a cursoryexamination of said documents will readily show that anybody can be adepositor and thus be “participating member.” In other words, theOrganization is open to the public for deposit accounts, and the funds soraised may be lent by the Organization.

Moreover, the power to dispose of said funds is placed under the exclusiveauthority of the “founding members,” and “participating members” are

expressly denied the right to vote or be voted for, their privileges andbenefits being limited to those, which the BoT may in its discretion,determine from time to time. Thus, the membership of the “participatingmembers” is purely nominal in nature. This situation is fraught, precisely,with the very dangers or evils, which RA 337 seeks to forestall, by exactingcompliance with the requirements of said Act, before the transactions inquestion could be undertaken.

BANAS v ASIA PACIFIC FINANCE CORPORATION, 343 SCRA 527(2000)

DOCTRINE: An investment company refers to any issuer, which is or holdsitself out as being engaged or proposes to engage primarily in the businessof investing, reinvesting or trading in securities. What is prohibited by law isfor investment companies to lend funds obtained from the public throughreceipts of deposit, which is a function of banking institutions.

FACTSTeodoro Banas issued a Promissory Note (P.N.), amounting to 390k payablein installments, in favor of C. G. Dizon Construction. Later, DizonConstruction endorsed the P.N to Asia Pacific Finance Corporation, aninvestment house. As security for the endorsement, Dizon Constructionmade a Chattel Mortgage over 3 heavy equipment units. As additionalsecurity, Cenen Dizon, president of Dizon Construction, executed aContinuing Undertaking , bounding himself to pay the obligation jointly andseverally.

At first, Dizon Construction complied with the installments. However, itdefaulted in its payment of the remaining installments. Asia Pacific suedBanas and Dizon Construction for payment of the P.N.. Banas and DizonConstruction argue that the transaction was never intended to be legal but asubterfuge to conceal the loan of 390k with usurious interest. They bothclaim that Asia Pacific proposed the scheme with them involved because

Asia Pacific could not engage in banking business.

RTC ruled in favor of Asia Pacific. CA affirmed the decision.

ISSUEWhether the transaction violated banking laws, hence null and void

RULINGNO , it did not violate banking laws.

An investment company refers to any issuer which is or holds itself out asbeing engaged or proposes to engage primarily in the business of investing,reinvesting or trading in securities. securities include commercial papers

evidencing indebtedness of any person, financial or non-financial entity,





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irrespective of maturity, issued, endorsed , sold, transferred or in anymanner conveyed to another with or without recourse , such as promissorynotes . The transaction between the two was a purchase of receivables at adiscount and not a loan. Such act is within the purview of the functions of aninvestment company.

Moreover, Sec 2 of the General Banking Act provides,

Sec. 2. Only entities duly authorized by the Monetary Board of theCentral Bank may engage in the lending of funds obtained from thepublic through the receipt of deposits of any kind, and all entitiesregularly conducting such operations shall be considered as bankinginstitutions and shall be subject to the provisions of this Act, of theCentral Bank Act, and of other pertinent laws

What is prohibited by law is for investment companies to lend fundsobtained from public through receipts of deposit. However, the fundsobtained by Asia Pacific have not been shown to have been obtained fromthe public through deposits. Thus, no banking laws were violated.

Upon further inspection of the 3 documents ( Promissory Note / ChattelMortgage / Continuing Undertaking) , the documents failed to prove thetheory that the transaction was a loan. Petitioners are still liable for theunpaid balance of the P.N.

B. BANKING DISTINGUISHED FROM QUASI-BANKINGa. Elements of Quasi-Banking : "Quasi-Banks" shall refer to

entities engaged in the borrowing of funds through the issuance,endorsement or assignment with recourse or acceptance ofdeposit substitutes as defined in Section 95 of Republic Act No.7653 (hereafter the "New Central Bank Act") for purposes ofrelending or purchasing of receivables and other obligations(Sec. 4, Par. 3, GBL)

i. Borrowing of funds for borrower’s own accountii. From 20 or more lenders at any one time

iii. Through issuance, endorsement or assignment with recourseof acceptance of deposit substitutes (Sec. 95, NCBA)

iv. For purposes of relending or purchasing of receivables andother obligations

b. Requirement of Separate License: No person or entity shallengage in banking operations or quasi-banking functions withoutauthority from the Bangko Sentral: Provided, however, That anentity authorized by the Bangko Sentral to perform universal orcommercial banking functions shall likewise have the authority toengage in quasi-banking functions.

The determination of whether a person or entity is performingbanking or quasi-banking functions without Bangko Sentralauthority shall be decided by the Monetary Board. To resolve suchissue, the Monetary Board may, through the appropriatesupervising and examining department of the Bangko Sentral,examine, inspect or investigate the books and records of such

person or entity. Upon issuance of this authority, such person orentity may commence to engage in banking operations or quasi-banking functions and shall continue to do so unless such authorityis sooner surrendered, revoked, suspended or annulled by theBangko Sentral in accordance with this Act or other special laws (Sec. 6, Par. 1-2, GBL)

C. BANKS DISTINGUISHED FROM OTHER FINANCIALINSTITUTIONSa. Investment Houses: Sec. 2-3, PD 129

Section 2. Scope. Any enterprise, which engages in theunderwriting of securities of other corporations, shall beconsidered an "Investment House" and shall be subject to theprovisions of this Decree and of other pertinent laws.

Nothing in this Decree shall be understood to preclude otherenterprises from engaging in the mere buying and selling ofshort-term securities of other persons or enterprises.

Section 3. Definitions. For the purpose of this Decree, unless thecontext otherwise indicates, the following definition of terms arehereby adopted:

(a) "Underwriting" is the act or process of guaranteeing thedistribution and sale of securities of any kind issued byanother corporation.

(b) "Securities" are written evidences of ownership, interest,or participation, in an enterprise, or written evidences ofindebtedness of a person or enterprise. It includes, but isnot limited to the instruments enumerated in Section 2 ofthe Securities Act (Commonwealth Act No. 83, as amended).

b. Financing Companies: "Financing companies," hereinaftercalled companies, are corporations, or partnerships, except thoseregulated by the Central Bank of the Philippines, the InsuranceCommissioner and the Cooperatives Administration Office, whichare primarily organized for the purpose of extending creditfacilities to consumers and to industrial, commercial, or

agricultural enterprises, either by discounting or factoring





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commercial papers on accounts receivable, or by buying andselling contracts, leases, chattel mortgages, or other evidences ofindebtedness, or by leasing of motor vehicles, heavy equipmentand industrial machinery, business and office machine andequipment, appliances and other movable property ( Sec. 3(a),RA 5980, as amended by RA 8556)

c. Investment Companies: "Investment Company" means anyissuer which is or holds itself out as being engaged primarily, orproposes to engage primarily, in the business of investing,reinvesting, or trading in securities (Sec. 4, RA 2629)

d. Non-Stock Savings and Loans Associations: Non-stocksavings and loan association shall mean a non-stock, non-profitcorporation engaged in the business of accumulating the savingsof its members and using such accumulations for loans tomembers to service the needs of households by providing longterm financing for home building and development and forpersonal finance (Sec. 3, RA 8367)

e. Cooperatives: A cooperative is a duly registered association ofpersons, with a common bond of interest, who have voluntarily

joined together to achieve a lawful common social or economicend, making equitable contributions to the capital required andaccepting a fair share of the risks and benefits of the undertakingin accordance with universally accepted cooperative principles (Art. 3, RA 6938)

A cooperative bank is one organized by the majority shares ofwhich is owned and controlled by cooperatives primarily toprovide financial and credit services to cooperatives. The term"cooperative bank" shall include cooperative rural banks (Art.100, RA 6983)

f. Insurance Companies: The term "doing an insurance business"or "transacting an insurance business", within the meaning of thisCode, shall include (a) making or proposing to make, as insurer,any insurance contract; (b) making or proposing to make, assurety, any contract of suretyship as a vocation and not asmerely incidental to any other legitimate business or activity ofthe surety; (c) doing any kind of business, including areinsurance business, specifically recognized as constituting thedoing of an insurance business within the meaning of this Code;(d) doing or proposing to do any business in substanceequivalent to any of the foregoing in a manner designed to evadethe provisions of this Code (Sec. 2, PD 612)

g. Pawnshops: "Pawnshop" shall refer to a person or entityengaged in the business of lending money on personal propertydelivered as security for loans and shall be synonymous, and maybe used interchangeably, with pawnbroker or pawnbrokerage (Sec. 3, PD 114)

FIRST PLANTERS PAWNSHOP, INC. v CIR, 560 SCRA 606 (2008)

DOCTRINE: A pawnshop's business and operations are governed byPresidential Decree (P.D.) No. 114 or the Pawnshop Regulation Act andCentral Bank Circular No. 374 (Rules and Regulations for Pawnshops).Section 3 of P.D. No. 114 defines pawnshop as “a person or entity engagedin the business of lending money on personal property delivered as securityfor loans and shall be synonymous, and may be used interchangeably, withpawnbroker or pawn brokerage.”

That pawnshops are to be treated as non-bank financial intermediaries isfurther bolstered by the fact that pawnshops are under the regulatorysupervision of the Bangko Sentral ng Pilipinas and covered by its Manual ofRegulations for Non-Bank Financial Institutions.

FACTS!n a Pre-Assessment Notice, petitioner was informed by the BIR that it hasan existing tax deficiency on its VAT and DST liabilities for the year2000. The deficiency assessment was at P541,102.79 for VATand P23,646.33 for DST. Petitioner protested the assessment for lack oflegal and factual bases. Petitioner subsequently received a FormalAssessment Notice, directing payment of VAT deficiency in the amountof P541,102.79 and DST deficiency in the amount of P24,747.13, inclusiveof surcharge and interest. Petitioner filed another protest but was denied.Petitioner then filed a petition for review with the Court of Tax Appeals(CTA) but it was denied. Petitioner later sought reconsideration from theCTA En Banc but was still denied thus this case.

First Planters Pawnshop, Inc. (petitioner) contests the deficiency value-added and documentary stamp taxes imposed upon it by the Bureau ofInternal Revenue (BIR) for the year 2000. The core of petitioner's argumentis that it is not a lending investor within the purview of Section 108(A) ofthe National Internal Revenue Code (NIRC), as amended, and therefore notsubject to value-added tax (VAT). Petitioner also contends that a pawnticket is not subject to documentary stamp tax (DST) because it is not proofof the pledge transaction, and even assuming that it is so, still, it is notsubject to tax since a documentary stamp tax is levied on the documentissued and not on the transaction.





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ISSUEWhether Petitioner is liable for the assessed VAT and DST deficiency

RULINGThe tax liability shall be based on the tax treatment of pawnshops. TheCourt has ruled that they shall be treated as non-bank financialintermediaries and reasons as follows:

R.A. No. 337, as amended, or the General Banking Act characterizes theterms banking institution and bank as synonymous and interchangeable andspecifically include commercial banks, savings bank, mortgage banks,development banks, rural banks, stock savings and loan associations, andbranches and agencies in the Philippines of foreign banks. R.A. No. 8791 orthe General Banking Law of 2000, meanwhile, provided that banks shallrefer to entities engaged in the lending of funds obtained in the form ofdeposits. R.A. No. 8791 also included cooperative banks, Islamic banks andother banks as determined by the Monetary Board ofthe Bangko Sentral ng Pilipinas in the classification of banks.

Financial intermediaries , on the other hand, are defined as “persons orentities whose principal functions include the lending, investing orplacement of funds or evidences of indebtedness or equity deposited withthem, acquired by them, or otherwise coursed through them, either for theirown account or for the account of others.”

It need not be elaborated that pawnshops are non-banks/bankinginstitutions. Moreover, the nature of their business activities partakes thatof a financial intermediary in that its principal function is lending.

A pawnshop's business and operations are governed by Presidential Decree(P.D.) No. 114 or the Pawnshop Regulation Act and Central Bank CircularNo. 374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114defines pawnshop as “a person or entity engaged in the business of lending

money on personal property delivered as security for loans and shall besynonymous, and may be used interchangeably, with pawnbroker or pawnbrokerage.”

That pawnshops are to be treated as non-bank financial intermediaries isfurther bolstered by the fact that pawnshops are under the regulatorysupervision of the Bangko Sentral ng Pilipinas and covered by its Manual ofRegulations for Non-Bank Financial Institutions. The Manual includespawnshops in the list of non-bank financial intermediaries,

Coming now to the issue at hand - Since petitioner is a non-bank financialintermediary, it is subject to 10% VAT for the tax years 1996 to2002; however, with the levy, assessment and collection of VAT from non-bank financial intermediaries being specifically deferred by law, [34] then

petitioner is not liable for VAT during these tax years. But with the fullimplementation of the VAT system on non-bank financial intermediariesstarting January 1, 2003, petitioner is liable for 10% VAT for said taxyear. And beginning 2004 up to the present, by virtue of R.A. No. 9238,petitioner is no longer liable for VAT but it is subject to percentage tax ongross receipts from 0% to 5 %, as the case may be.

Regarding the liability on DST, the court ruled that petitioner is liable forsaid tax. The Court has settled this issue in Michel J. Lhuillier Pawnshop,Inc. v. Commissioner of Internal Revenue, in which it was ruled that thesubject of DST is not limited to the document alone. Pledge, which is anexercise of a privilege to transfer obligations, rights or properties incidentthereto, is also subject to DST.

In the instant case, there is no law specifically and expressly exemptingpledges entered into by pawnshops from the payment of DST. Section 199of the NIRC enumerated certain documents, which are not subject to stamptax; but a pawnshop ticket is not one of them. Hence, petitioner’s nebulousclaim that it is not subject to DST is without merit.

D.

NATURE OF BANKING BUSINESSThe State recognizes the vital role of banks in providing anenvironment conducive to the sustained development of the nationaleconomy and the fiduciary nature of banking that requires highstandards of integrity and performance. In furtherance thereof, theState shall promote and maintain a stable and efficient banking andfinancial system that is globally competitive, dynamic and responsiveto the demands of a developing economy (Sec. 2, GBL)

a. Vital Role in Economy

SIMEX INTERNATIONAL (MANILA) INC. v CA, 183 SCRA 360 (1992)

DOCTRINE: As a business affected with public interest and because of thenature of its functions, the bank is under obligation to treat the accounts ofits depositors with meticulous care, always having in mind the fiduciarynature of their relationship.

FACTSSimex was a food exporter that drew stock in the Philippines then sold itabroad. It deposited 100k in Traders Royal Bank , raising the balance toP190,380.74, then later issued checks that were suddenly dishonored –California Manufacturing and others issued demand letters for thedishonored check. Simex’s credit line was canceled because of thedishonored check – Traders bank said the deposit of 100k was not credited,the error was rectified but Simex filed a case against the bank anddemanded reparation for gross and wanton negligence: not met – complaint





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for 1m moral and 500k exemplary damages + 25% atty. fees and costs –CFI: moral and exemplary damages not called for, but nominal damages20k plus 5k atty. fees – affirmed by CA

ISSUEWas there Gross negligence in not crediting the deposit?RULINGYES . Banking system: indispensable institution in modern world; plays vitalrole in economic life of every civilized nation. – Trusted and active associate– depositor expects bank to treat account with utmost fidelity, must recordeach transaction accurately – Fiduciary nature of relationship – Traders wasremiss in duty – 20k moral damages, 50k exemplary (by way of example orcorrection for the public good)

Subject to Reasonable Regulation by the StateCENTRAL BANK OF THE PHILIPPINES v CA, 208 SCRA 652 (1992)

DOCTRINE: It is the Government’s responsibility to see to it that thefinancial interests of those who deal with banks and banking institutions, asdepositors or otherwise, are protected—this task is delegated to the CentralBank, which is authorized to administer monetary, banking and creditsystem in the Philippines.

FACTSDuring the regular examination of the Producers Bank of the Philippines,Central Bank examiners stumbled upon some highly questionable loanswhich had been extended by the PBP management to several entities. Uponfurther examination, it was discovered that these loans, totallingapproximately P300 million, were "fictitious" as they were extended, withoutcollateral, to certain interests related to PBP owners themselves. Said loanswere deemed to be anomalous particularly because the total paid-in capitalof PBP at that time was only P 140.544 million. This means that the entirepaid-in capital of the bank, together with some P160 million of depositors'

money, was utilized by PBP management to fund these unsecured loans.

Several blind items about a family-owned bank in Binondo which grantedfictitious loans to its stockholders appeared in major newspapers. Thesenews items triggered a bank-run in PBP which resulted in continuous over-drawings on the bank's demand deposit account with the Central Bank.

The Monetary Board (MB), pursuant to its authority under Section 28-A ofR.A. No. 265 and by virtue of MB Board Resolution No. 164, placed PBPunder conservatorship.

The Monetary Board gave PBP several opportunities to submit a viablerehabilitation plan in order to salvage the bank and lift the conservatorship.PBP failed to respond to the notices of the Monetary Board, hence the

conservatorship was maintained.

Later on, PBP filed an action for damages against CB and MB. The suitprayed for the lifting of the conservatorship and payment of damagesallegedly suffered by PBP due to the malicious and untimely declaration ofconservatorship. It also prayed for a preliminary injunction /TRO against theconservatorship. RTC granted the injunction.ISSUEWhether the conservatorship was proper

HELDYES . It must be stressed in this connection that the banking business isproperly subject to reasonable regulation under the police power of the statebecause of its nature and relation to the fiscal affairs of the people and therevenues of the state. 55 Banks are affected with public interest becausethey receive funds from the general public in the form of deposits. Due tothe nature of their transactions and functions, a fiduciary relationship iscreated between the banking institutions and their depositors. Therefore,banks are under the obligation to treat with meticulous care and utmostfidelity the accounts of those who have reposed their trust and confidence inthem.

It is then Government's responsibility to see to it that the financial interestsof those who deal with banks and banking institutions, as depositors orotherwise, are protected. In this country, that task is delegated to theCentral Bank which, pursuant to its Charter, 57 is authorized to administerthe monetary, banking and credit system of the Philippines. Under both the1973 and 1987 Constitutions, the Central Bank is tasked with providingpolicy direction in the areas of money, banking and credit; corollarily, it shallhave supervision over the operations of banks. 58 Under its charter, the CBis further authorized to take the necessary steps against any bankinginstitution if its continued operation would cause prejudice to its depositors,creditors and the general public as well. This power has been expressly

recognized by this Court. In Philippine Veterans Bank Employees Union-NUBE vs. Philippine Veterans Bank, 59 this Court held that:. . . Unless adequate and determined efforts are taken by thegovernment against distressed and mismanaged banks, public faithin the banking system is certain to deteriorate to the prejudice ofthe national economy itself, not to mention the losses suffered bythe bank depositors, creditors, and stockholders, who all deservethe protection of the government. The government cannot simplycross its arms while the assets of a bank are being depleted throughmismanagement or irregularities. It is the duty of the Central Bankin such an event to step in and salvage the remaining resources ofthe bank so that they may not continue to be dissipated orplundered by those entrusted with their management.





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Strikes and LockoutsThe banking industry is hereby declared as indispensable to the nationalinterest and, not withstanding the provisions of any law to the contrary, anystrike or lockout involving banks, if unsettled after seven (7) calendar daysshall be reported by the Bangko Sentral to the Secretary of Labor who mayassume jurisdiction over the dispute or decide it or certify the same to theNational Labor Relations Commission for compulsory arbitration. However,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 (Sec. 22, GBL)

When, in his opinion, there exists a labor dispute causing or likely to cause astrike or lockout in an industry indispensable to the national interest, theSecretary of Labor and Employment may assume jurisdiction over thedispute and decide it or certify the same to the Commission for compulsoryarbitration. Such assumption or certification shall have the effect ofautomatically enjoining the intended or impending strike or lockout asspecified in the assumption or certification order. If one has already takenplace at the time of assumption or certification, all striking or locked outemployees shall immediately return-to-work and the employer shallimmediately resume operations and readmit all workers under the sameterms and conditions prevailing before the strike or lockout. The Secretaryof Labor and Employment or the Commission may seek the assistance oflaw enforcement agencies to ensure compliance with this provision as wellas with such orders as he may issue to enforce the same.

In line with the national concern for and the highest respect accorded to theright of patients to life and health, strikes and lockouts in hospitals, clinicsand similar medical institutions shall, to every extent possible, be avoided,and all serious efforts, not only by labor and management but governmentas well, be exhausted to substantially minimize, if not prevent, their adverseeffects on such life and health, through the exercise, however legitimate, bylabor of its right to strike and by management to lockout. In labor disputes

adversely affecting the continued operation of such hospitals, clinics ormedical institutions, it shall be the duty of the striking union or locking-outemployer to provide and maintain an effective skeletal workforce of medicaland other health personnel, whose movement and services shall beunhampered and unrestricted, as are necessary to insure the proper andadequate protection of the life and health of its patients, most especiallyemergency cases, for the duration of the strike or lockout. In such cases,therefore, the Secretary of Labor and Employment may immediatelyassume, within twenty four (24) hours from knowledge of the occurrence ofsuch a strike or lockout, jurisdiction over the same or certify it to theCommission for compulsory arbitration. For this purpose, the contendingparties are strictly enjoined to comply with such orders, prohibitions and/orinjunctions as are issued by the Secretary of Labor and Employment or the

Commission, under pain of immediate disciplinary action, including dismissal

or loss of employment status or payment by the locking-out employer ofbackwages, damages and other affirmative relief, even criminal prosecutionagainst either or both of them.

The foregoing notwithstanding, the President of the Philippines shall not beprecluded from determining the industries that, in his opinion, areindispensable to the national interest, and from intervening at any time andassuming jurisdiction over any such labor dispute in order to settle orterminate the same (Art. 263 (g), Labor Code)

b. Fiduciary Nature of Banking Businessi. Degree of Diligence Required

SIMEX INTERNATIONAL (MANILA) INC. v CA, 183 SCRA 360 (1992)

DOCTRINE: As a business affected with public interest and because of thenature of its functions, the bank is under obligation to treat the accounts ofits depositors with meticulous care, always having in mind the fiduciarynature of their relationship.

FACTSSimex was a food exporter that drew stock in the Philippines then sold itabroad. It deposited 100k in Traders Royal Bank , raising the balance toP190,380.74, then later issued checks that were suddenly dishonored –California Manufacturing and others issued demand letters for thedishonored check. Simex’s credit line was canceled because of thedishonored check – Traders bank said the deposit of 100k was not credited,the error was rectified but Simex filed a case against the bank anddemanded reparation for gross and wanton negligence: not met – complaintfor 1m moral and 500k exemplary damages + 25% atty. fees and costs –CFI: moral and exemplary damages not called for, but nominal damages20k plus 5k atty. fees – affirmed by CA

ISSUEWas there Gross negligence in not crediting the deposit?

RULINGYES . Banking system: indispensable institution in modern world; plays vitalrole in economic life of every civilized nation. – Trusted and active associate– depositor expects bank to treat account with utmost fidelity, must recordeach transaction accurately – Fiduciary nature of relationship – Traders wasremiss in duty – 20k moral damages, 50k exemplary (by way of example orcorrection for the public good)





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BANK OF THE PHILIPPINE ISLANDS v IAC, 206 SCRA 408 (1992)

DOCTRINE: The is no merit in the argument that a bank should not beconsidered negligent, much less held liable for damages on account of theinadvertence of its bank employees for Article 1173 of the Civil Code onlyrequires it to exercise the diligence of a good father of the family.

While the bank’s negligence may not have been attended with malice andbad faith, nevertheless, it caused serious anxiety, embarrassment andhumiliation to the depositors for which they are entitled to reasonable moraldamages.

FACTSThe spouses Arthur and Vivienne Canlas opened a joint account in CBTCQ.C. with an initial deposit of P2,250. Before that, Arthur Canlas had anexisting separate personal checking account there.

When they opened this account, the "new accounts" teller of the bank pulledout from the bank's files the old signature card of Arthur Canlas for use as ID and reference. By mistake, she placed the old personal account number ofArthur Canlas on the deposit slip for the new joint checking account of thespouses so that the initial deposit of P2,250 for the joint checking accountwas miscredited to Arthur's personal account. The spouses subsequentlydeposited other amounts in their joint account.

When Vivienne Canlas issued a check for Pl,639.89 in April 1977 andanother check for P1,160.00 on June 1, 1977, one of the checks wasdishonored by the bank for insufficient funds and a penalty of P20 wasdeducted from the account in both instances. Thereafter, the spouses filed acase for damages agaisnt the bank for serious anxiety, embarrassment andhumiliation by reason of the dishonor of the checks. The RTC and the IACfound that the bank had been seriously negligent and awarded damages tothe spouses Canlas.

ISSUEWhether the mistake of the teller can be considered as serious negligenceentitling the spouses Canlas to an award of damages.

RULINGYES. There is no merit in CBTC's argument that it was only required toexercise the diligence of a good father of family. The fiduciary nature of therelationship between a bank and its depositors and the extent of diligenceexpected of it in handling the accounts entrusted to its care is a greatresponsibility.

"In every case, the depositor expects the bank to treat his account with the

utmost fidelity, whether such account consists only of a few hundred pesos

or of millions. The bank must record every single transaction accurately,down to the last centavo, and as promptly as possible. This has to be done ifthe account is to reflect at any given time the amount of money thedepositor can dispose of as he sees fit, confident that the bank will deliver itas and to whomever he directs. A blunder on the part of the bank, such asthe dishonor of a check without good reason, can cause the depositor not alittle embarrassment if not also financial loss and perhaps even civil andcriminal litigation."

The bank is not expected to be infallible but it must bear the blame for notdiscovering the mistake of its teller despite the established procedurerequiring the papers and bank books to pass through a battery of bankpersonnel whose duty it is to check and countercheck them for possibleerrors. Apparently, the officials and employees tasked to do that did notperform their duties with due care, as may be gathered from the testimonyof the bank's lone witness, Antonio Enciso, who casually declared that "theapproving officer does not have to see the account numbers and all thosethings. Those are very petty things for the approving manager to look into."Unfortunately, it was a "petty thing," like the incorrect account number thatthe bank teller wrote on the initial deposit slip for the newly-opened jointcurrent account of the Canlas spouses, that sparked this half-a-million-pesodamage suit against the bank.

While the bank's negligence may not have been attended with malice andbad faith, nevertheless, it caused serious anxiety, embarrassment andhumiliation to the private respondents for which they are entitled to recoverreasonable moral damages.

ii. When Utmost Diligence Required1. In dealing with Accounts of Depositors

PHILIPPINE BANKING CORPORATION v CA, 419 SCRA 487 (2004)

DOCTRINE: Sec. 2 of RA 8791 (GBL) expressly imposes a fiduciary duty onthe banks when it declares that the State recognizes the “fiduciary nature ofbanking that requires high standards of integrity and performance.”

The fiduciary relationship means that the bank’s obligation to observe highstandards of integrity and performance is deemed written into every depositagreement between a bank and its depositor.

FACTSFlorencio Pagsaligan, a close friend and officer of the bank, persuadedLeonilo Marcos to deposit money with Philippine Banking Corporation(BANK). Marcos yielded and made a time deposit with the Bank on twooccasions.





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Later, Marcos wanted to withdraw from the Bank to buy material for hisconstruction business. However, the bank convinced him to keep his timedeposit and instead, open several domestic letters of credit. Trusting thebank and Pagsaligan, he again yielded. Marcos executed 3 Trust ReceiptAgreements totaling 851k. He deposited 30% of the amount of TrustAgreement as marginal deposit. He believed that the remaining 70% wouldbe credited from his time deposit and accumulated interest.

However, the bank did not offset his time deposit due to an allegedpromissory note amount to 500k. The Bank demanded for the balance of theTrust Agreement from him. Due to failure to pay, several penalties andinterest accumulated against Marcos. Marcos now files a complaint againstthe Bank.

In their defense, the bank argues that the complaint was only an attempt toavoid liability under several trust receipt agreements that were subject of acriminal complaint.

The RTC ruled in favor of Marcos. The CA modified the decision only byreducing the damages.

ISSUEWhether the Bank is liable for damages

RULINGYES , the bank is liable.

The bank is liable on the ground of offsetting Marcos’s time deposit with afictitious promissory note. The Bank failed to present the original copy of thenote. They only presented machine copies of the duplicate. But these copieshave no evidentiary value, contradicting the Best Evidence Rule.

Sec 2 of the General Banking law of 2000 expressly imposes the fiduciary

duty of on banks. The fiduciary nature of banking requires high standards ofintegrity and performance. Although the GBL only took effect in 2000, jurisprudence has already imposed the same high standard of diligence frombanks at the time the Bank transacted with Marcos. This fiduciaryrelationship means that the bank’s obligation to observe high standards ofintegrity is deemed written into every deposit agreement between a bankand its depositor.

The business of banking is imbued with public interest. The stability ofbanks largely depends on the confidence of the people in the honesty andefficiency of banks. As its depositor, Marcos had the right to expect the bankwas accurately recording his transactions. He also had a right to withdrawthe amount in his time deposit upon maturity. Due to the bank’s failure to

produce the original copies of the promissory note and ledges, it failed totreat Marcos’s account with meticulous care.

Whether it was Pagsaligan who caused such fictitious loan agreement, it willnot excuse the bank from its obligation to return the correct amount toMarcos. As stated before, a bank is liable for the wrongful acts of its officersdone in the interest of the bank or in their dealings as bank representativesbut not for acts outside the scope of their authority.

BANK OF THE PHILIPPINE ISLANDS v CASA MONTESSORI INTERNATIONALE, 430 SCRA 261 (2004)

DOCTRINE: Since the banking business is impressed with public interest, ofparamount importance thereto is the trust and confidence of the public ingeneral, the highest degree of diligence is expected and high standards ofintegrity and performance are even required of it.FACTSCASA Montessori International (CASA for brevity) opened a current accountwith defendant BPI, with CASA’s President Ms. Ma. Carina C. Lebron as oneof its authorized signatories.

In 1991, after conducting an investigation, plaintiff discovered that nine (9)of its checks had been encashed by a certain Sonny D. Santos since 1990 inthe total amount of P782,000.00

It turned out that ‘Sonny D. Santos’ with account at BPI’s Greenbelt Branch[was] a fictitious name used by third party defendant Leonardo T. Yabutwho worked as external auditor of CASA. Third party defendant voluntarilyadmitted that he forged the signature of Ms. Lebron and encashed thechecks. "The PNP Crime Laboratory conducted an examination of the nine(9) checks and concluded that the handwritings thereon compared to thestandard signature of Ms. Lebron were not written by the latter

On March 4, 1991, respondent filed the herein Complaint for Collection withDamages against defendant bank praying that the latter be ordered toreinstate the amount of P782,500.00 7 in the current and savings accounts ofthe plaintiff with interest at 6% per annum.

CA apportioned the loss between BPI and CASA. The appellate court tookinto account CASA’s contributory negligence that resulted in the undetectedforgery. It then ordered Leonardo T. Yabut to reimburse BPI half the totalamount claimed; and CASA, the other half. It also disallowed attorney’s feesand moral and exemplary damages.

ISSUE Were any of the parties negligent and therefore precluded from setting up

forgery as a defense? Whether BPI is liable?





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RULING BPI is solely liable. (skipped the Negotiable Instruments part- it wasestablished that there was indeed a forgery) xxx Having established theforgery of the drawer’s signature, BPI -- the drawee -- erred in makingpayments by virtue thereof. The forged signatures are wholly inoperative,and CASA -- the drawer whose authorized signatures do not appear on thenegotiable instruments -- cannot be held liable thereon. Neither is the latterprecluded from setting up forgery as a real defense.

We have repeatedly emphasized that, since the banking business isimpressed with public interest, of paramount importance thereto isthe trust and confidence of the public in general. Consequently, thehighest degree of diligence is expected, and high standards ofintegrity and performance are even required, of it. By the nature ofits functions, a bank is "under obligation to treat the accounts of itsdepositors with meticulous care, always having in mind the fiduciarynature of their relationship.”

BPI contends that it has a signature verification procedure, in which checksare honored only when the signatures therein are verified to be the samewith or similar to the specimen signatures on the signature cards.Nonetheless, it still failed to detect the eight instances of forgery. Itsnegligence consisted in the omission of that degree of diligence required 78 ofa bank. It cannot now feign ignorance, for very early on we have alreadyruled 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 thepayment out of its own funds, and cannot ordinarily charge theamount so paid to the account of the depositor whose name wasforged. "79 In fact, BPI was the same bank involved when we issued thisruling seventy years ago.

2. In Selection and Supervision of Employees

PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK v CA, 350SCRA 446 (2001)

DOCTRINE: Banks are expected to exercise the highest degree of diligencein the selection and supervision of their employees. By the very nature oftheir work, the degree of responsibility, care and trustworthiness expectedof their employees and officials is far greater than those of ordinary clerksand employees.

FACTSFord Philippines instituted actions against Citibank (drawee bank) and PCIBank (collecting bank) –

- Action #1: Ford drew and issued a Citibank check for P4.7m in

1977 in favor of the CIR for manufacturer’s sales tax – deposited

with IBAA (later merged with PCI) and cleared by CB – proceedsnever reached CIR – Ford forced to make 2nd payment to CIR whichwas received – check was a crossed check for ‘payee’s account only’– Ford wrote separate demand letters to the banks - both banksrefused to pay – NBI discovered that Godofredo Rivera, GeneralLedger Accountant of Ford recalled the check, supposedly becausethere was a computation error – Rivera instructed PCI Bank toreplace the check with 2 manager’s checks – syndicate membersdeposited MCs with Pacific Banking Corp. – Rivera could not befound, “fugitive from justice” –- TC: Both banks liable, IBAA (PCI) should reimburse Citi – CA:only IBAA (PCI) liable

- Action #2: Ford drew Citibank checks in 1978 (P5.851m) and1979 (P6.311m) payable to CIR for percentage taxes – both crossedchecks - never reached CIR – though receipts were issued,considered by BIR as “fake and spurious” – Ford paid BIR again –Godofredo Rivera (the legend returns) as Ledger Accountantprepared the check - delivered it to Remberto Castro, pro-managerof PCIB San Andres – Castro and Dulay, an assistant manager of theMeralco Branch of PCI, opened a account in the name of a fictitious

“Reynaldo Reyes” – deposited a worthless Bank of America check inthe same amount as the Ford check – replaced the worthless checkwith the Ford check for clearing – Reynaldo Reyes account wascredited with amount – same procedure with 2nd check – Castrothen distributed checks drawn from Reynaldo Reyes account toother conspirators – RTC held Citibank liable, absolved PCI – CA:affirmed

ISSUEWere the banks negligent?

RULING

YES . The direct perpetrators are fugitives – present parties must bear theburden of loss – although employees of Ford initiated the transactions, theiractions are not the proximate cause of encashing the checks – BoD of forddid not confirm Rivera’s recall of the check – PCI neglected to verifyauthority of Rivera – crossed check is a warning that it should be depositedonly in CIR’s account – PCI liable for 4.7m check – although no consciousparticipation, PCI is responsible frauds perpetrated by its officers – Citibankshould have scrutinized the checks: no clearing stamps, no initials – bothbanks negligent in selection and supervision of their employees for 2nd and3rd check – equally liable for the loss – by very nature of banking business,degree of responsibility, care and trustworthiness of bank employees is fargreater than those of ordinary clerks and employees – banks are expectedto exercise the highest degree of diligence in the selection and supervision

of employees.





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3. To be Mortgagees in Good Faith

CRUZ v BANCOM FINANCE CORPORATION, 379 SCRA 490 (2002)

DOCTRINE: Mortgagee-banks, unlike private individuals, are expected toexercise greater care and prudence in their dealings, including thoseinvolving registered lands. A banking institution is expected to exercise duediligence before entering into a mortgage contract. The ascertainment of thestatus or condition of a property offered to it as security for a loan must bea standard and indispensable part of its operations.

FACTSEdilberto Cruz and Simplicio Cruz offered to sell their parcel of land toNorma Sulit. In order to facilitate the sale, the Cruz’s executed a deed ofsale in favor of Candelaria Sanchez, but no consideration was paid. On thesame day Candelaria Sanchez conveyed the land to Norma Sulit. Unknownto the plaintiffs, Norma managed to obtain a loan from Bancom secured bya mortgage over the land now titled in her name.

Norma defaulted on her obligations to the plaintiffs and later on alsodefaulted on her payments with Bancom. The land was foreclosed andauctioned, Bancom was the highest bidder.

Cruz then filed for reconveyance of the land. While Bancom claimed priorityright over Cruz, alleging it was a mortgagee in good faith.

ISSUEWhether Bancom is a mortgagee in good faith

HELDNO. As a general rule, every person dealing with registered land may safelyrely on the correctness of the certificate of title and is no longer required tolook behind the certificate in order to determine the actual owner.

Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is expected to exercise greatercare and prudence in its dealings, including those involving registered lands.A banking institution is expected to exercise due diligence before enteringinto a mortgage contract. The ascertainment of the status or condition of aproperty offered to it as security for a loan must be a standard andindispensable part of its operations.

In Rural Bank of Compostela v. CA, we held that a bank that failed toobserve due diligence was not a mortgagee in good faith. In the words ofthe ponencia:

“x x x [T]he rule that persons dealing with registered lands can rely

solely on the certificate of title does not apply to banks.

“Banks, indeed, should exercise more care and prudence in dealingeven with registered lands, than private individuals, for theirbusiness is one affected with public interest, keeping in trust moneybelonging to their depositors, which they should guard against lossby not committing any act of negligence which amounts to lack ofgood faith by which they would be denied the protective mantle ofthe land registration statute, Act [No.] 496, extended only topurchasers for value and in good faith, as well as to mortgagees ofthe same character and description.” (Citations omitted)

Recently, in Adriano v. Pangilinan, we said that the due diligence required ofbanks extended even to persons regularly engaged in the business oflending money secured by real estate mortgages.

The evidence before us indicates that respondent bank was not a mortgageein good faith. First, at the time the property was mortgaged to it, it failed toconduct an ocular inspection. Judicial notice is taken of the standard practicefor banks before they approve a loan: to send representatives to thepremises of the land offered as collateral and to investigate the ownershipthereof. As correctly observed by the RTC, respondent, before constitutingthe mortgage over the subject property, should have taken intoconsideration the following questions:

“1) Was the price of P150,000.00 for a 33.9 hectare agriculturalparcel of land not too cheap even in 1978?

“2) Why did Candelaria Sanchez sell the property at the same priceof P150,000.00 to Norma Sulit on the same date, June 21, 1978when she supposedly acquired it from the plaintiffs?

“3) Being agricultural land, didn’t it occur to the intervenors thatthere would be tenants to be compensated or who might pose asobstacles to the mortgagee’s exercise of acts of dominion?

“4) In an area as big as that property, [why] did they not verify ifthere were squatters?

“5) What benefits or prospects thereof could the ultimate ownerexpect out of the property?

“Verily, the foregoing circumstances should have been looked into,for if either or both companies did, they could have discovered thatpossession of the land was neither with Candelaria nor withNorma.”[43]

Respondent was clearly wanting in the observance of the necessary

precautions to ascertain the flaws in the title of Sulit and to examine the





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condition of the property she sought to mortgage.[44] It should not havesimply relied on the face of the Certificate of Title to the property, as itsancillary function of investing funds required a greater degree ofdiligence.[45] Considering the substantial loan involved at the time, itshould have exercised more caution.

OMENGAN v PHILIPPINE NATIONAL BANK, 512 SCRA 305 (2007)

DOCTRINE: A mortgagee can rely on what appears on the certificate of titlepresented by the mortgagor and an innocent mortgagee is not expected toconduct an exhaustive investigation on the history of the mortgagor’s title.This rule is strictly applied to banking institutions.

Banks should exercise more care and prudence in dealing even withregistered lands, than private individuals, as their business is one affectedwith public interest. Thus, the rule that persons dealing with registeredlands can rely solely on the certificate of title does NOT apply to banks.

FACTSThe PNB approved the Omengan's application for a revolving credit line ofP3 million. The loan was secured by two residential lots in the name ofEdgar Omengan. The first P2.5 million was released on three separatedates. The release of the final half million was, however, withheld byMontalvo because of a letter allegedly sent by Edgarís sisters, praying thatthe last half million not be realeased since:

"the property mortgaged, while in the name of Edgar Omengan, isowned in co-ownership by all the children of the late Roberto andElnora Omengan. The lawyer who drafted the document registeringthe subject property under Edgarís name can attest to this fact. Wehad a prior understanding with Edgar in allowing him to make use ofthe property as collateral, but he refuses to comply with such

arrangement. Hence, this letter."Nevertheless, the half million was released.

Subsequently, the Omengans applied for an increase in credit line from 3 to5 mil. This was approved subject to the condition that Edgarís sisters gavetheir conformity. But petitioners failed to secure the consent of Edgaríssisters; hence, PNB put on hold the release of the additional P2 million. Still,Edgar Omengan demanded the release of the P2 million. He claimed thatthe condition for its release was not part of his credit line agreement withPNB because it was added without his consent. PNB denied his request.

Thus the present complaint for breach of contract and damages.

ISSUEWhether there was Breach of contract in this case

RULINGNO . In this case, the parties agreed on a P3 million credit line. This sumwas completely released to petitioners who subsequently applied10 for anincrease in their credit line. This was conditionally approved by PNBís creditcommittee. For all intents and purposes, petitioners sought an additionalloan.

The condition attached to the increase in credit line requiring petitioners toacquire the conformity of Edgarís sisters was never acknowledged andaccepted by petitioners. Thus, as to the additional loan, no meeting of theminds actually occurred and no breach of contract could be attributed toPNB. There was no perfected contract over the increase in credit line.

The business of a bank is one affected with public interest, for which reasonthe bank should guard against loss due to negligence or bad faith. Inapproving the loan of an applicant, the bank concerns itself with properinformation regarding its debtors. Any investigation previously conducted onthe property offered by petitioners as collateral did not preclude PNB fromconsidering new information on the same property as security for asubsequent loan. The credit and property investigation for the original loanof P3 million did not oblige PNB to grant and release any additional loan. Atthe time the original P3 million credit line was approved, the title to theproperty appeared to pertain exclusively to petitioners. By the time theapplication for an increase was considered, however, PNB already hadreason to suspect petitionersí claim of exclusive ownership.

Banks, indeed, should exercise more care and prudence in dealing even withregistered lands, than private individuals, as their business is one affectedwith public interest. Thus, this Court clarified that the rule that personsdealing with registered lands can rely solely on the certificate of title does

not apply to banks.4. In the custody of documents; Integrity of Records, Security

of Premises

HEIRS OF EDUARDO MANLAPAT v CA, 459 SCRA412 (2005)

DOCTRINE: A mortgagee-bank has no right to deliver to any stranger anyproperty entrusted to it other than those contractually and legally entitled toits possession. The act of a bank of allowing complete strangers to takepossession of the owner’s duplicate certificate even if the purpose is merelyfor photocopying constitutes manifest negligence which would hold it liablefor damages under Article 1170 and other relevant provisions of the Civil

Code.





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FACTSLot 2204 was originally in possession of Jose Alvarez (Eduardo’sgrandfather). Eduardo Manalapat, Alvarez’s successor-in-interest, sold aportion of it to Ricardo Cruz executing a Kasulatan and SinumpaangSalaysay to document it. In 1976, the lot became registered only under thename of Eduardo Manalapat pursuant to a free patent. The sale ofManalapat and Cruz was forgotten, as Cruz did not even know an OCT wasalready issued to Manalapat.

Leon Banaag, as atty-in-fact of Eduardo, executed a mortgage with RuralBank of San Pascual for 100k with Lot 2204 as collateral. Banaag depositedthe owner’s duplicate OCT with the bank.

However, when the Cruz’s heirs learned of such sale, they wanted to securethe OCT for presentation to the Register of Deeds and for issuance of aseparate OCT. They urged to obtain the OCT from Manalapat’s heirs butwere denied. Then, they went to the Rural Bank to photocopy the owner’sduplicate OCT deposited with the bank. The Rural bank’s Manager, JoseSalazar, allowed them to borrow the OCT for photocopying. Ultimately, theheirs secured a TCT for a portion of the Lot.

When Banaag went to the Rural bank to tender payment of the mortgage,he learned of the actions of the Cruz’s heirs that led to the subdivision of thelot and the issuance of two separate titles.

3 cases were filed with the trial court, all involving the issuance of the TCT.RTC ruled in favor of Manalapat. CA reversed and ruled in favor of Cruz andRural Bank.

ISSUE1. Whether the cancellation of the OCT and the splitting into two

separate titles may be accorded legal recognition.2. Whether the bank is liable for letting the mortgaged document be

borrowed by 3rd

persons.RULINGYES , the two separate titles are valid.

The heirs of Cruz have sufficiently proven their claim of ownership over aportion of Lot 2204. The fact that the Oct was not registered with theirname is immaterial. Registration is not a requirement for validity of contractbetween parties. The principal purpose of registration is merely to notifyother persons that a transaction involving the property has been enteredinto. The issuance of the OCT in favor of Manalapat does not disregard thefact that the Cruz owned a portion of the land. The principle ofindefeasibility of a Torrens title does not apply where fraud attended the

issuance of the title.

The issuance of the two TCT was valid. The Cruz’s heirs presented to the RDthe original owners duplicate of the OCT. aside from that, they presentedthe Kasulatan and Sinumpaang Salaysay where Manalapat acknowledge thesale in favor of Cruz. The manner of obtaining the OCT did not invalidate theTCT.

The bank is liable for damages. A mortgagee-bank has no right to deliver toany stranger any property entrusted to it other than to those contractuallyand legally entitled to its possession. Though they rightfully acknowledgedthe ownership of Cruz’s heirs, the bank lent the original OCT w/o priorinvestigation and did not even notified Manalapat’s heirs of the transaction.The bank should not have lent the certificate even only for the purpose ofphotocopying it. Such act constitutes manifest negligence on the part of thebank, which would necessarily hold it liable for damages under Art 1170 andother relevant provisions of the Civil Code. Thus, the bank is liable for 50kas nominal damages to Manalapat’s heirs.

iii. Applicability to Commercial Transactions Outside of CoreBanking Functions

REYES v CA, 363 SCRA 51 (2001)

DOCTRINE: The same higher degree of diligence is NOT expected to beexerted by banks in commercial transactions that do not involve theirfiduciary relationship with their depositors.

FACTSIn view of the 20 th Asian Racing Conference then scheduled to be held inSeptember, 1988 in Sydney, Australia, the Philippine Racing Club, Inc.(PRCI, for brevity) sent four (4) delegates to the said conference. PetitionerGregorio H. Reyes, as vice-president for finance, racing manager, treasurer,

and director of PRCI, sent Godofredo Reyes, the club's chief cashier, to therespondent bank to apply for a foreign exchange demand draft in Australiandollars.

Godofredo went to respondent bank's Buendia Branch in Makati City toapply for a demand draft in the amount One Thousand Six Hundred TenAustralian Dollars (AU$1,610.00) payable to the order of the 20 th AsianRacing Conference Secretariat of Sydney, Australia.

Godofredo asked if there could be a way for respondent bank toaccommodate PRCI's urgent need to remit Australian dollars to Sydney.Yasis of respondent bank then informed Godofredo of a roundabout way ofeffecting the requested remittance to Sydney thus: the respondent bank

would draw a demand draft against Westpac Bank in Sydney, AustraliaDemand draft to sydney bank then have them reimburse fromrespondent bank's a count insydney

FAR EAST BANK AND TRUST COMPANY





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(Westpac-Sydney for brevity) and have the latter reimburse itself from theU.S. dollar account of the respondent in Westpac Bank in New York, U.S.A.(Westpac-New York for brevity). This arrangement has been customarilyresorted to since the 1960's and the procedure has proven to be problem-free. PRCI and the petitioner Gregorio H. Reyes, acting through Godofredo,agreed to this arrangement or approach in order to effect the urgenttransfer of Australian dollars payable to the Secretariat of the 20 th AsianRacing Conference.

Petitioners later went to Austraila to attend the said racing conference.Geofredo, together with other delegates, went to the Hotel Regent Sydneyto register only to find out that their demand draft was dishonored. Shortlyafter, his wife followed and met the same fate. They were greatlyinconvenienced and embarassed of the incident. Although things eventuallywent well, damage was already done.

As soon as the demand draft was dishonored, the respondent bank, thinkingthat the problem was with the reimbursement and without any idea that itwas due to miscommunication, re-confirmed the authority of Westpac-NewYork to debit its dollar account for the purpose of reimbursing Westpac-Sydney.Respondent bank also sent two (2) more cable messages toWestpac-New York inquiring why the demand draft was not honored.

It was later found out that the source of the problem was Westpac-Sydney’sdecoding error. (“7” was encoded as “1” in the SWIFT message)

They sued the respondent bank for damages for the said incident.

ISSUEWhether the respondent bank is liable for damages

RULING NO . There is no basis to hold the respondent bank liable for damages for

the reason that it exerted every effort for the subject foreign exchangedemand draft to be honored. It was in fact due to erroneous decoding onthe part of Westpac-Sydney of the Bank's SWIFT message which led to theproblem.

Also, The peitioners were briefed by a representative of the respondent bankregarding the porcedure thus they are estopped from the denying the saidprocedure.

The petitioners contend that due to the fiduciary nature of the relationshipbetween the respondent bank and its clients, the respondent should haveexercised a higher degree of diligence than that expected of an ordinaryprudent person in the handling of its affairs as in the case at bar.

In Philippine Bank of Commerce v. Court of Appeals 15 upholding along standing doctrine, we ruled that the degree of diligencerequired of banks, is more than that of a good father of afamily where the fiduciary nature of their relationship with theirdepositors is concerned. In other words banks are duty bound totreat the deposit accounts of their depositors with the highestdegree of care . But the said ruling applies only to cases where banksact under their fiduciary capacity, that is, as depositary of thedeposits of their depositors. But the same higher degree of diligenceis not expected to be exerted by banks in commercial transactionsthat do not involve their fiduciary relationship with their depositors.

iv. Applicability to Government Financial Institutions

GSIS v SANTIAGO, 414 SCRA 563 (2003)Due diligence required of banks extend even to persons, or institutionsregularly engaged in the business of lending money secured by real estatemortgages, such as government financial institutions. These are likewiseexpected to exercise greater care and prudence in its dealings, includingthose involving registered land.

v. Applicability to those Engaged in Lending Money Securedby Real Estate Mortgages

ADRIANO v PANGILINAN, 373 SCRA 544 (2002)While it is true that a person dealing with registered lands need not gobeyond the certificate of title, it is likewise a well-settled rule that apurchaser or mortgagee cannot close his eyes to facts which should put areasonable man on his guard, and then claim that he acted in good faithunder the belief that there was no defect in the title of the vendor ormortgagor.

vi. Liability for Negligence

1.

Applicable Rules on Determination of Negligence PHILIPPINE BANK OF COMMERCE v CA, 269 SCRA 695 (1997)

DOCTRINE: Negligence is the omission to do something which a reasonableman, guided by those considerations which ordinarily regulate the conductof human affairs, would do, or the doing of something which a prudent andreasonable man would do. The seventy-eight (78)-year-old, yet stillrelevant, case of Picart v . Smith , provides the test by which to determinethe existence of negligence in a particular case which may be stated asfollows: Did the defendant in doing the alleged negligent act use thatreasonable care and caution which an ordinarily prudent personwould have used in the same situation? If not, then he is guilty of

negligence. The law here in effect adopts the standard supposed to be





15

supplied by the imaginary conduct of the discreet paterfamilias of theRoman law. The existence of negligence in a given case is not determinedby reference to the personal judgment of the actor in the situation beforehim. The law considers what would be reckless, blameworthy, or negligentin the man of ordinary intelligence and prudence and determines liability bythat.

FACTS

RMC had account in P; RMC gave funds to secretary to deposit in P insteadof doing so, secretary deposited funds in name of her husband modusoperandi: wrote the name of husband and his account number on originaldeposit slip, then, on duplicate slip, left name blank but filled in husband’saccount number when teller asked why, she said it was because the 2nd slipwould only be for personal records when teller approved slip, she’d fill inRMC under the name then change the account number R filed action forrecovery against P.

ISSUE

RULING1. Negligence = omission to do something that a reasonable man would do here, teller negligent in stamping slips w/o asking for name to be put on theduplicate bank also negligent in not exercising proper supervision over theteller (since they didn’t know until they conducted an investigation that theteller was doing that)2. The negligence of the bank was the proximate cause since even if thesecretary filled out the slip wrong, she would never have gotten away with ithad the slips not been approved by the teller3. Bank also liable under “last clear chance”4. But, since RMC contributorily negligent, damages reduced

CONSOLIDATED BANK AND TRUST CORPORATION v CA, 410 SCRA562 (2003)

DOCTRINE: In culpa contractual (negligence), once the plaintiff proves abreach of contract, there is a presumption that the defendant was at fault ornegligent. The Doctrine of Last Clear Chance is inapplicable in culpacontractual because neither the contributory negligence of one party (bank)nor its last chance to avoid the loss would exonerate the other party(depositor) from liability. Such contributory negligence or last chancemerely serves to reduce the recovery of damages by the plaintiff but doesNOT exculpate the depositor from his breach of contract.

FACTSLC Diaz, an accounting firm, through its cashier Macaraya, filled up adeposit slip and a savings deposit slip. Macaraya instructed the messenger,Calapre to deposit the money with Solidbank. Macaraya also gave Calapre

the Solidbank passbook.

At the bank, Calapre gave the passbook to the teller and went out to doanother errand. When Calapre returned and asked for the passbook, theteller told (redundant teller-told) him that somebody got the passbook.Calapre reported the incident to Macaraya.

Later on, it was discovered that an unauthorized withdrawal of P300,000.00was made using the lost passbook. LC Diaz demanded from Solidbank thereturn of the money. Solidbank solidly refused prompting LC Diaz to file arecovery suit. RTC absolved Solidbank based on the rules on savingsaccount which gives presumption that the holder of the passbook is theowner. CA held Solidbank liable based on negligence and culpa aquiliana.

ISSUEWhether Solidbank is liable for the loss

HELD YES . The contract between the bank and its depositor is governed by theprovisions of the Civil Code on simple loan.[17] Article 1980 of the CivilCode expressly provides that “x x x savings x x x deposits of money inbanks and similar institutions shall be governed by the provisionsconcerning simple loan.” There is a debtor-creditor relationship betweenthe bank and its depositor. The bank is the debtor and the depositor is thecreditor. The depositor lends the bank money and the bank agrees to paythe depositor on demand. The savings deposit agreement between thebank and the depositor is the contract that determines the rights andobligations of the parties.

The law imposes on banks high standards in view of the fiduciary nature ofbanking. Section 2 of Republic Act No. 8791 (“RA 8791”),[18] which tookeffect on 13 June 2000, declares that the State recognizes the “fiduciarynature of banking that requires high standards of integrity and

performance.”[19] This new provision in the general banking law,introduced in 2000, is a statutory affirmation of Supreme Court decisions,starting with the 1990 case of Simex International v. Court of Appeals,[20]holding that “the bank is under obligation to treat the accounts of itsdepositors with meticulous care, always having in mind the fiduciary natureof their relationship.”[21]

This fiduciary relationship means that the bank’s obligation to observe “highstandards of integrity and performance” is deemed written into everydeposit agreement between a bank and its depositor. The fiduciary nature ofbanking requires banks to assume a degree of diligence higher than that ofa good father of a family. Article 1172 of the Civil Code states that thedegree of diligence required of an obligor is that prescribed by law or

contract, and absent such stipulation then the diligence of a good father of a

ROMMEL'S MARKETING CORP





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family.[22] Section 2 of RA 8791 prescribes the statutory diligence requiredfrom banks – that banks must observe “high standards of integrity andperformance” in servicing their depositors. Although RA 8791 took effectalmost nine years after the unauthorized withdrawal of the P300,000 fromL.C. Diaz’s savings account, jurisprudence[23] at the time of the withdrawalalready imposed on banks the same high standard of diligence requiredunder RA No. 8791.

However, the fiduciary nature of a bank-depositor relationship does notconvert the contract between the bank and its depositors from a simple loanto a trust agreement, whether express or implied. Failure by the bank topay the depositor is failure to pay a simple loan, and not a breach oftrust.[24] The law simply imposes on the bank a higher standard of integrityand performance in complying with its obligations under the contract ofsimple loan, beyond those required of non-bank debtors under a similarcontract of simple loan.

The fiduciary nature of banking does not convert a simple loan into a trustagreement because banks do not accept deposits to enrich depositors but toearn money for themselves. The law allows banks to offer the lowestpossible interest rate to depositors while charging the highest possibleinterest rate on their own borrowers. The interest spread or differentialbelongs to the bank and not to the depositors who are not cestui que trustof banks. If depositors are cestui que trust of banks, then the interestspread or income belongs to the depositors, a situation that Congresscertainly did not intend in enacting Section 2 of RA 8791.

2. Award of Actual, Moral, Compensatory or TemperateDamages

ARANETA v BANK OF AMERICA, 40 SCRA 144 (1970)

DOCTRINE: The financial credit of a businessman is a prized and valuable

asset, it being a significant part of the foundation of his business. Anyadverse reflection thereon constitutes some material loss to him. In the US,temperate damages are allowed. There were cases where from the nature ofthe case, definite proof of pecuniary loss cannot be offered, although thecourt is convinced that there has been such loss.

FACTSLeopoldo Araneta, a local merchant, issued a check for $500 payable to cashand drawn against Bank of America (San Francisco branch). At that time, hehad a credit balance of $523.81 in his account. Unfortunately, when it wasreceived by the bank a day after, it was dishonored due to a closed account.

Upon inquiry, the Bank of America acknowledged that it was due to an errorand that for some reason, the check had been encoded with the wrongaccount number.

Months after, Araneta issued 2 checks for $500 and $150 payable to cashand drawn against Bank of America. When these checks were presented forpayment, they were again dishonored due to a closed account.

The check of $500 was actually paid by the Bank of America to First NationalCity Bank. However, Bank of America claimed that such had beeninadvertently made and returned the check to First National City Bank, withthe request that the amount be credited to Bank of America. In turn, FirstNational City Bank informed the depositor (Saldana) about the check’sreturn. However, before Saldana even replied, Bank of America recalled thecheck and honored it.

Because of these incidents, Araneta, through counsel, sent a letter to theBank of America demanding damages in the sum of $20,000. Although itadmitted its responsibility for the inconvenience, the bank claimed that thedamages sought were excessive and instead offered to ay $2,000.

Thus, in 1962, Araneta filed a complaint against the Bank of America for therecovery of (1) actual damages, (2) moral damages, (3) temperatedamages, (4) exemplary damages, and (5) attorney’s fees for an aggregatetotal of $120,000.

The trial court awarded all the damages prayed for, but the Court of Appealseliminated the award of compensatory and temperate damages, andreduced the amount of moral damages, exemplary damages, and attorney’sfees.

ISSUEWhether temperate and moral damages should be awarded to Araneta

RULINGTEMPERATE DAMAGES: YES. The financial credit of a businessman is aprized and valuable asset, it being a significant part of the foundation of hisbusiness. Any adverse reflection thereon constitutes some material loss tohim. The incidents obviously affected the credit of Araneta with Saldana andwith any other person who would come to know about the refusal of thedefendant to honor said checks.

It cannot hardly be possible that a customer’s check can be wrongfullyrefused payment without some impeachment of his credit, which must infact be an actual injury x x x.The first check appeared to have come into the hands of

Rufina Saldana, who deposited it to her account the First

National City Bank of New York.





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In the US, temperate damages are allowed. There were cases where fromthe nature of the case, definite proof of pecuniary loss cannot be offered,although the court is convinced that there has been such loss. For instance,injury to one’s commercial credit or to the goodwill of the business firm isoften hard to show with certainty in terms of money.

MORAL DAMAGES: YES . Under Art. 2217 of the Civil Code, “besmirchedreputation” is a ground upon which moral damages can be claimed, but the

Court of Appeals did take this element into consideration. Quoting from itsdecision, “ x x x the damages to his reputation as an established and well-known international trader entitled him to recover moral damages x x x hiswounded feelings and the mental anguish suffered by him cause his bloodpressure to rise beyond normal limits, x x x”

PRUDENTIAL BANK v CA, 328 SCRA 264 (2000)

DOCTRINE: The bank’s negligence was the result of a lack of due care andcaution required of managers and employees of a firm engaged in sosensitive and demanding business as banking. While the bank’s negligencemay not have been attended with malice and bad faith, nevertheless, itcaused serious anxiety, embarrassment, and humiliation. Hence, theoffended party is entitled to recover reasonable moral damages.

The law allows the grant of exemplary damages by way of example for thepublic good. The public relies on the banks’ sworn profession of diligenceand meticulousness in giving irreproachable service. This meticulousnessmust be maintained at all times by the banking sector.

FACTSLeticia Tupasi-Valenzula opened a Savings Account and Current Accountwith Prudential Bank. Initially, she deposited a check amounting to 35k onJune 1, 1988.

As payment for purchasing jewelry, Leticia issued a check amounting to11.5k in favor of Belen Legaspi. Belen then endorsed the check to PhilipLhuillier. When Philip deposited the check in his account, the check wasdishonored due to insufficient funds. Leticia was surprised to learn of thedishonor of the check. She inquired with Prudential Bank, showing herpassbook indicating she had sufficient funds. However, Albert Angeles Reyes(OIC of her account) ignored the passbook, stating that the bank ledger wasthe best proof that she did not have enough funds.

However, it was found out that the 35k check initially deposited by Leticiawas credited only on June 24, 1988, or after 23 days. The 11k check wasredeposited and properly cleared only on June 27, 1988. Leticia filed acomplaint against Prudential Bank due to the incident for causing

embarrassment and humiliation.

RTC dismissed the complaint. However, CA reversed the decision, makingPrudential Bank liable for damages.

ISSUEWhether Prudential bank is liable for damages

RULING

YES , the bank is liable.

It is the bank’s fault for misposting the initial check to another account anddelayed the posting of the same to the Leticia’s account. Although themistake was not attended with malice and bad faith, there is still clear proofof lack of supervision or due care and caution expected of a bank.

The relationship between a bank and depositor is fiduciary in nature. Theextent of diligence expected from the bank is with utmost fidelity. As abusiness affected with public interest and due to its nature, a bank is underobligation to treat the account of its depositors with meticulous care. It doesnot matter whether the account consists of only a few hundred pesos or ofmillions of pesos.

In this case, even if there was no malice, the fact still remain that Leticiaexperienced serious anxiety, embarrassment and humiliation. Thus, she isentitled to recover damages; 100k for moral, 20k for exemplary 30k foratty’s fees.

CITYTRUST BANKING CORPORATION v VILLANUEVA, 361 SCRA 446(2001)

DOCTRINE: Moral damages include physical suffering, mental anguish,fright, serious anxiety, besmirched reputation, wounded feelings, moral

shock, social humiliation, and similar injury. Although incapable of pecuniarycomputation, moral damages may be recovered if they are the proximateresult of the defendant’s wrongful act or omission.

Requisites for the award of moral damages:1. There must be an injury, whether physical, mental, or psychological,

clearly sustained by the claimant2. There must be a culpable act or omission factually established3. The wrongful act or omission of the defendant is the proximate

cause of the injury sustained by the claimant4. The award of damages is predicated on any of the cases stated in

Art. 2219 of the Civil Code

Art. 2219 : Moral damages may be recovered in the following and





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analogous cases:

1. A criminal offense resulting in physical injuries;2. Quasi-delicts causing physical injuries;3. Seduction, abduction, rape, or other lascivious acts;4. Adultery or concubinage;5. Illegal or arbitrary detention or arrest;6. Illegal search;

7. Libel, slander or any other form of defamation;8. Malicious prosecution;9. Acts mentioned in Article 309;10. Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32,

34, and 35.

The parents of the female seduced, abducted, raped, or abused, referred toin No. 3 of this article, may also recover moral damages.

The spouse, descendants, ascendants, and brothers and sisters may bringthe action mentioned in No. 9 of this article, in the order named.

FACTSSometime in February, 1984, the respondent opened a savings and acurrent account with the petitioner bank. On May 21, 1986, respondent ranout of checks so he requested a new checkbook from one of the respondentbank’s customer service representative. He then filled up a checkbookrequisition slip with the obligatory particulars, except for his current accountnumber which he could not remember. Respondent expressed hispredicament and the representative assured that the bank shall look intothe bank’s account records. Villanueva was thus later on issued a newcheckbook.

On June 17, 1986, Respondent Villanueva issued a P50,000 check payableto the order of Kingly Commodities Traders and Multi Resources, Inc.

(hereafter Kingly) Respondent had sufficient funds in his account by thetime the Kingly representative deposited his check. Despite this, the checkwas dishonoured for insufficient funds. Respondent notified the bankregarding the matter and the bank representative told him that they willlook into the matter and instructed the former to advise Kingly to redepositthe check. The representative assured Villanueva that the check would behonoured after the sufficiency of the funds was ascertained. The check wasthen re-deposited but was again dishonoured. Due to this, Villanueva prayedto Kingly Commodities to give him until 5:30pm that same day to makegood his check. Respondent went to the bank to personally inquire on thematter. It was found out that respondent was issued a check under another

“Isagani Villanueva” with a different middle initial. Upon knowing this fact,the bank branch manager issued a managers check which the respondent

was able to give before the above-said deadline.

After the incident, Respondent demanded that he be paid indemnity for thealleged losses and damage suffered by him as a result of the repeateddishonour of his well-funded check. The bank apologized but refused to paysuch indemnity, so respondent filed a complaint against the bank claimingP240,000 actual damages, P2M as moral damages and P500,000 forexemplary damages, attorney’s fees, litigation expenses and costs of thesuit.

RTC did not grant any damages. CA partly reversed and granted a smalleramount as damages thus this case.

ISSUEWhether Villanueva is entitled to damages

RULINGNO . The issue whether respondent suffered actual or compensatorydamages in the form of loss of profits is factual. Bothe CA and the RTC haveascertained that Villanueva was unable to prove his demand forcompensatory damages arising from loss. His evidence thereon was foundinadequate, uncorroborated, speculative, hearsay and not the bestevidence. Basic is the jurisprudential rule principle that in determining actualdamages, the court cannot rely on mere assertions, speculations,conjectures or guesswork but must depend on competent proof and on thebest obtainable evidence of the actual amount of the loss. Actual damagescannot be presumed but must be duly proved with reasonable certainty.

It may be true that Villanueva may have suffered some form ofinconvenience and discomfort as a result of the dishonour of his check.However, the same could not have been so grave or intolerable as heattempts to portray or impress upon the Court. Furthermore, the allegedembarrassment or inconvenience caused to Villanueva as a result of theincident was timely and adequately contained, corrected, mitigated, if not

entirely eradicated. Villanueva, thus, failed to support his claim fordamages. Also, respondent is not entitled to Attorney’s fees because therewas no presence of bad faith.

The SC did not see it fit to discuss whose negligence was the proximatecause of the respondent’s injury because, in the first place, he did notsustain any compensable injury.

(RTC, however, touched on this matter. RTC pointed out that Villanueva wasthe proximate cause, amongst others, for failure to state his accountnumber. The bank may have been negligent but its negligence was onlycontributory.)

Bank voluntarily process the req.slip

Ask foranextension forpayet

He did not suffered any compensable injury





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3. Reliance on Judgment of Other Banks

METROBANK v CABLIZO, 510 SCRA 259 (2006)It owes the highest degree of fidelity to its client and should not thereforelightly rely on the judgment of other banks on occasions where its clients’money were involved, no matter how small or substantial the amount atstake.

4. Recovery Against Erring Employee

PACIFIC BANKING CORPORATION v CA, 173 SCRA 102 (1989)Article 2181 of the Civil Code merely gives the employer the right toreimbursement from the employee for what is paid to the offended party. Itdoes NOT make recovery from the employee a mandatory requirement. Aright to relief shall be recognized only when the party concerned asserts itthrough a proper pleading filed in court.

E. AUTHORITY TO OPERATEa. Incorporation

Section 17. Grounds when articles of incorporation oramendment may be rejected or disapproved. - The Securities andExchange Commission may reject the articles of incorporation ordisapprove any amendment thereto if the same is not incompliance with the requirements of this Code: Provided, Thatthe Commission shall give the incorporators a reasonable timewithin which to correct or modify the objectionable portions ofthe articles or amendment. The following are grounds for suchrejection or disapproval:

1. That the articles of incorporation or any amendmentthereto is not substantially in accordance with the formprescribed herein;2. That the purpose or purposes of the corporation arepatently unconstitutional, illegal, immoral, or contrary togovernment rules and regulations;3. That the Treasurer's Affidavit concerning the amount ofcapital stock subscribed and/or paid is false;4. That the percentage of ownership of the capital stock tobe owned by citizens of the Philippines has not beencomplied with as required by existing laws or theConstitution.

No articles of incorporation or amendment to articles ofincorporation of banks, banking and quasi-bankinginstitutions, building and loan associations, trustcompanies and other financial intermediaries, insurancecompanies, public utilities, educational institutions, and

other corporations governed by special laws shall be

accepted or approved by the Commission unlessaccompanied by a favorable recommendation of theappropriate government agency to the effect that sucharticles or amendment is in accordance with law.(Corporation Code, BP 68)

Section 46. Adoption of by-laws. - Every corporation formedunder this Code must, within one (1) month after receipt of

official notice of the issuance of its certificate of incorporation bythe Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For theadoption of by-laws by the corporation the affirmative vote of thestockholders representing at least a majority of the outstandingcapital stock, or of at least a majority of the members in case ofnon-stock corporations, shall be necessary. The by-laws shall besigned by the stockholders or members voting for them and shallbe kept in the principal office of the corporation, subject to theinspection of the stockholders or members during office hours. Acopy thereof, duly certified to by a majority of the directors ortrustees countersigned by the secretary of the corporation, shallbe filed with the Securities and Exchange Commission which shallbe attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in suchcase, such by-laws shall be approved and signed by all theincorporators and submitted to the Securities and ExchangeCommission, together with the articles of incorporation.

In all cases, by-laws shall be effective only upon the issuance bythe Securities and Exchange Commission of a certification thatthe by-laws are not inconsistent with this Code.

The Securities and Exchange Commission shall not acceptfor filing the by-laws or any amendment thereto of anybank, banking institution, building and loan association,trust company, insurance company, public utility,educational institution or other special corporationsgoverned by special laws, unless accompanied by acertificate of the appropriate government agency to theeffect that such by-laws or amendments are in accordancewith law. (Corporation Code, BP 68)

Section 14. The Securities and Exchange Commission shall notregister the articles of incorporation of any bank, or anyamendment thereto, unless accompanied by a certificate of

authority issued by the Monetary Board, under its seal. Such





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certificate shall not be issued unless the Monetary Board issatisfied from the evidence submitted to it:

14.1 That all requirements of existing laws and regulations toengage in the business for which the applicant isproposed to be incorporated have been complied with;

14.2. That the public interest and economic conditions, bothgeneral and local, justify the authorization; and

14.3. That the amount of capital, the financing, organization,

direction and administration, as well as the integrity andresponsibility of the organizers and administratorsreasonably assure the safety of deposits and the publicinterest.

The Securities and Exchange Commission shall not register theby-laws of any bank, or any amendment thereto, unlessaccompanied by a certificate of authority from the BangkoSentral (GBL).

b. Operation:i. Authority Required: No person or entity shall engage in banking

operations or quasi-banking functions without authority fromthe Bangko Sentral: Provided, however, That an entityauthorized by the Bangko Sentral to perform universal orcommercial banking functions shall likewise have the authorityto engage in quasi-banking functions (Sec. 6, Par. 1, GBL)

ii. MB Determination: The determination of whether a person orentity is performing banking or quasi-banking functions withoutBangko Sentral authority shall be decided by the MonetaryBoard. To resolve such issue, the Monetary Board may, throughthe appropriate supervising and examining department of theBangko Sentral, examine, inspect or investigate the books andrecords of such person or entity. Upon issuance of thisauthority, such person or entity may commence to engage inbanking operations or quasi-banking functions and shallcontinue to do so unless such authority is sooner surrendered,revoked, suspended or annulled by the Bangko Sentral inaccordance with this Act or other special laws (Sec. 6, Par. 2,GBL)

iii. Unauthorized Advertisement/Business Representation: Noperson, association, or corporation unless duly authorized toengage in the business of a bank, quasi-bank, trust entity, orsavings and loan association as defined in this Act, or otherbanking laws, shall advertise or hold itself out as beingengaged in the business of such bank, quasi-bank, trust entity,

or association, or use in connection with its business title, the

word or words "bank", "banking", "banker", "quasi-bank","quasi- banking", "quasi-banker", "savings and loanassociation", "trust corporation", "trust company" or words ofsimilar import or transact in any manner the business of anysuch bank, corporation or association (Sec. 64, GBL).

iv. Change in Name

v. Sanctions for Operating Without Authority: Persons or entitiesfound to be performing banking or quasi-banking functionswithout authority from the Bangko Sentral shall be subject toappropriate sanctions under the New Central Bank Act andother applicable laws (Sec. 6, Par. 5, GBL).

Unless otherwise herein provided, the violation of any of theprovisions of this Act shall be subject to Sections 34, 35, 36and 37 of the New Central Bank Act. If the offender is adirector or officer of a bank, quasi-bank or trust entity, theMonetary Board may also suspend or remove such director orofficer. If the violation is committed by a corporation, suchcorporation may be dissolved by quo warranto proceedingsinstituted by the Solicitor General (Sec. 66, GBL).

REPUBLIC v SECURITY CREDIT AND ACCEPTANCE CORPORATION, 19SCRA 58 (1967)

DOCTRINE: A corporation, which misused its corporate funds and franchiseby engaging in illegal banking, may be dissolved. Its acts were willful, wererepeated 59,643 times and the continuance of its illegal operations causespublic injury owing to the number of persons affected thereby. A writ of quowarranto for its dissolution is proper.

FACTSThis is a quo warranto proceeding, initiated by the Solicitor General, todissolve the Security and Acceptance Corporation for allegedly engaging inbanking operations without the authority required therefor by the GeneralBanking Act (Republic Act No. 337).

Security Credit and Acceptance Corporation is a duly registered corporationwith the SEC. It’s articles of incorporation authorize it to o engage primarilyin financing agricultural, commercial and industrial projects, andsecondarily, in buying and selling stocks and bonds of any corporation.

The Superintend of Banks of the Central Bank of the Philippines thru its legalcounsel rendered an opinion that Security Credit and AcceptanceCorporation is a banking institution within the purview of Republic Act No.

337. Central Bank advised the corporation to comply with the requirements





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of the General Banking Act.

Notwithstanding, the corporation, as well as the members of its Board ofDirectors and the officers of the corporation, continued performing thefunctions and activities which had been declared to constitute illegal bankingoperations; the corporation established 74 branches in principal cities andtowns throughout the Philippines; that through a systematic and vigorouscampaign undertaken by the corporation, the same had managed to induce

the public to open 59,463 savings deposit accounts.

ISSUEWhether the corporation is engaged in banking

RULINGYES. It is clear that these transactions partake of the nature of banking, asthe term is used in Section 2 of the General Banking Act. Indeed, a bankhas been defined as:

... a moneyed institute [Talmage vs. Pell 7 N.Y. (3 Seld. ) 328, 347,

348] founded to facilitate the borrowing, lending and safe-keepingof money (Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243,255 U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills ofexchange, and credits (State vs. Cornings Sav. Bank, 115 N.W. 937,139 Iowa 338). (Banks & Banking, by Zellmann Vol. 1, p. 46).

Moreover, it has been held that:An investment company which loans out the money of its customers,

collects the interest and charges a commission to both lender and borrower,is a bank. (Western Investment Banking Co. vs. Murray, 56 P. 728, 730,731; 6 Ariz 215.)

... any person engaged in the business carried on by banks ofdeposit, of discount, or of circulation is doing a banking business,although but one of these functions is exercised. (MacLaren vs.State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas.826; 9 C.J.S. 30.)

Accordingly, defendant-corporation has violated the law by engaging inbanking without securing the administrative authority required in RepublicAct No. 337.

That the illegal transactions thus undertaken by defendant corporationwarrant its dissolution is apparent from the fact that the foregoingmisuser of the corporate funds and franchise affects the essence of itsbusiness, that it is willful and has been repeated 59,463 times, and thatits continuance inflicts injury upon the public, owing to the number ofpersons affected thereby.

CENTRAL BANK v MORFE, 20 SCRA 507 (1967)

DOCTRINE: The law requiring compliance with certain requirements beforeanybody can engage in banking obviously seeks to protect the public againstactual, as well as potential, injury.

FACTSFirst Mutual Savings and Loan Organization (Organization) is a registerednon-stock corporation, whose main purpose is “to encourage x x x andimplement savings and thrift among its members, and to extend financialassistance in the form of loans” to them.

In 1962, the Central Bank Legal Department rendered an opinion finding theOrganization as a banking institution, falling within the purview of theCentral Bank Act. Hence, it applied for a search warrant with the MunicipalCourt of Manila against the Organization, alleging that it was engaged inillegal banking activities, “by receiving deposits of money for deposit,disbursement, safekeeping or otherwise or transacts the business of a

savings and mortgage bank and/or building and loan association x x xwithout having first complied with the provisions of RA 337.

Judge Cancino issued the warrant applied for there being “good andsufficient reasons to believe” that the Organization has under its control thearticles/items subject of the offense complained of. On the same day, theOrganization commenced an action with the CFI of Manila against theMunicipal Court, the sheriff, the Manila Police Department and the CentralBank to annul the search warrant on the ground that it was issued withGADLEJ. After due hearing, Judge Morfe (CFI Manila) issued an order infavor of the Organization.

Accordingly, the Bank moved for reconsideration but was denied andcommenced the present action.

ISSUEWhether the Organization is a banking institution within the purview of theCentral Bank Act

RULINGYES. The records suggested clearly that the transactions objected to by theCentral Bank constitute the general pattern of the business of theOrganization. Indeed, the main purpose thereof, according to its By-Laws, is

“to extend financial assistance, in the form of loans, to its members, withfunds deposited by them.

It is true that such funds are referred to as their “savings” and that thedepositors thereof are designated as “members,” but, even a cursory

examination of said documents will readily show that anybody can be a





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depositor and thus be “participating member.” In other words, theOrganization is open to the public for deposit accounts, and the funds soraised may be lent by the Organization.

Moreover, the power to dispose of said funds is placed under the exclusiveauthority of the “founding members,” and “participating members” areexpressly denied the right to vote or be voted for, their privileges andbenefits being limited to those, which the BoT may in its discretion,

determine from time to time. Thus, the membership of the “participatingmembers” is purely nominal in nature. This situation is fraught, precisely,with the very dangers or evils, which RA 337 seeks to forestall, by exactingcompliance with the requirements of said Act, before the transactions inquestion could be undertaken.

II. CLASSIFICATION OF BANKS

A. Universal Banks (UB): Sec. 3.2 (a), GBL (a) Governing Law: General Banking Law

(b) PowersSec. 23, GBL: A universal bank shall have the authority toexercise, in addition to the powers authorized for a commercialbank in Section 29, the powers of an investment house asprovided in existing laws and the power to invest in non-alliedenterprises as provided in this Act.

Sec. X101 (b)(1), MRB and BSP Circular No. 271, Series of2001A UB shall have the authority to exercise, in addition to thepowers and services authorized for a KB as enumerated in Item

“b(2)” and those provided by other laws, the fo llowing:

(a) The powers of an investment house (IH) as providedunder existing laws;

(b) The power to invest in non-allied enterprises;(c) The power to own up to one hundred percent (100%) of

the equity in a TB, an RB, a financial allied enterprise, ora non- financial allied enterprise; and

(d) In case of publicly-listed UBs, the power to own up toone hundred percent (100%) of the voting stock of onlyone (1) other UB or KB.

A UB may perform the functions of an IH either directly orindirectly through a subsidiary IH; in either case, the underwritingof equity securities and securities dealing shall be subject to

pertinent laws and regulations of the Securities and ExchangeCommission (SEC): Provided, That if the IH functions areperformed directly by the UB, such functions shall be undertakenby a separate and distinct department or other similar unit in theUB: Provided, further, That a UB cannot perform such functionsboth directly and indirectly through a subsidiary.

i. Commercial Banks (KB) Powers

Sec. 29, GBL: A commercial bank shall have, in addition tothe general powers incident to corporations, all such powersas may be necessary to carry on the business of commercialbanking such as accepting drafts and issuing letters of credit;discounting and negotiating promissory notes, drafts, bills ofexchange, and other evidences of debt; accepting or creatingdemand deposits; receiving other types of deposits anddeposit substitutes; buying and selling foreign exchange andgold or silver bullion; acquiring marketable bonds and otherdebt securities; and extending credit, subject to such rules asthe Monetary Board may promulgate. These rules may includethe determination of bonds and other debt securities eligiblefor investment, the maturities and aggregate amount of suchinvestment.

Sec. X101 (b)(2), MRBIn addition to the general powers incident to corporations andthose provided in other laws, a KB shall have the authority toexercise all such powers as may be necessary to carry on thebusiness of commercial banking, such as accepting drafts andissuing letters of credit; discounting and negotiatingpromissory notes, drafts, bills of exchange, and otherevidences of debt; accepting or creating demand deposits;receiving other types of deposits and deposit substitutes;buying and selling foreign exchange and gold or silver bullion;acquiring marketable bonds and other debt securities; andextending credit, subject to such rules as the Monetary Boardmay promulgate. These rules may include the determinationof bonds and other debt securities eligible for investment, thematurities and aggregate amount of such investment.

It may also exercise or perform any or all of the following:(a) Invest in the equities of allied enterprises as provided

in Sections 31 and 32 of R.A. No. 8791;(b) Purchase, hold and convey real estate as specified

under Sections 51 and 52 of R.A. No. 8791;(c) Receive in custody funds, documents and valuable

objects;

(d) Act as financial agent and buy and sell, by order of and





23

for the account of their customers, shares, evidences ofindebtedness and all types of securities;

(e) Make collections and payments for the account ofothers and perform such other services for theircustomers as are not incompatible with bankingbusiness;

(f) Upon prior approval of the Monetary Board, act asmanaging agent, adviser, consultant or administrator of

investment management/ advisory/ consultancyaccounts;(g) Rent out safety deposit boxes; and(h) Engage in quasi-banking functions.

ii. Investment House powersSec. 7, Investment Houses LawIn addition to the powers granted to corporations in general,an Investment House is authorized to do the following:

1. Arrange to distribute on a guaranteed basis securitiesof other corporations and of the Government or itsinstrumentalities;

2. Participate in a syndicate undertaking to purchase andsell, distribute or arrange to distribute on a guaranteedbasis securities of other corporations and of theGovernment or its instrumentalities;

3. Arrange to distribute or participate in a syndicateundertaking to purchase and sell on a best-efforts basissecurities of other corporations and of the Governmentor its instrumentalities;

4. Participate as soliciting dealer or selling group memberin tender offers, block sales, or exchange offering orsecurities; deal in options, rights or warrants relating tosecurities and such other powers which a dealer mayexercise under the Securities Act (Act No. 83, asamended);

5. Promote, sponsor, or otherwise assist and implementventures, projects and programs that contribute to theeconomy's development;

6. Act as financial consultant, investment adviser, orbroker;

7. Act as porfolio manager, and/or financial agent, but notas trustee of a trust fund or trust property as providedfor in Chapter VII of Republic Act No. 337, asamended;

8. Encourage companies to go public, and initiate and/orpromote, whenever warranted, the formation, merger,consolidation, reorganization, or recapitalization of

productive enterprises, by providing assistance or

participation in the form of debt or equity financing orthrough the extension of financial or technical advice orservice;

9. Undertake or contract for researches, studies andsurveys on such matters as business and economicconditions of various countries, the structure offinancial markets, the institutional arrangements formobilizing investments;10. Acquire, own, hold, lease or

obtain an interest in real and/or personal property asmay be necessary or appropriate to carry on itsobjectives and purposes;

10. Design pension, profit-sharing and other employeebenefits plans; and

11. Such other activities or business ventures as aredirectly or indirectly related to the dealing in securitiesand other commercial papers, unless otherwisegoverned or prohibited by special laws, in which casethe special law shall apply.

Nothing in this section shall preclude other enterprises notcovered by this Decree from engaging in the activities listedunder subsections (3) to (11) of this section, except as mayotherwise be governed by special laws.

SEC Omnibus Rules and Regulations for InvestmentHouses and Universal Banks Registered as Underwriterof Securities “Investment House” is any enterprise, which primarilyengages, whether regularly or on an isolated basis, in theunderwriting of securities of another person or enterprise,including securities of the Government or its instrumentalities.

“Underwriting of Securities” is the act or process ofguaranteeing by an Investment House duly licensed under PD129 or a Universal Bank registered as an Underwriter ofSecurities with the Commission, the distribution and sale ofsecurities issued by another person or enterprise, includingsecurities of the Government or its instrumentalities. Thedistribution and sale may be on a public or private placementbasis: Provided , that nothing shall prevent an InvestmentHouse or Universal Bank registered as Underwriter ofSecurities from entering into a contract with another entity tofurther distribute securities that it has underwritten.

1. Definition/Function of Investment HouseSec. 3, Investment Houses Law

For the purpose of this Decree, unless the context





24

otherwise indicates, the following definition of terms arehereby adopted:

(a) "Underwriting" is the act or process of guaranteeingthe distribution and sale of securities of any kindissued by another corporation.

(b) "Securities" are written evidences of ownership,

interest, or participation, in an enterprise, or writtenevidences of indebtedness of a person or enterprise.It includes, but is not limited to the instrumentsenumerated in Section 2 of the Securities Act(Commonwealth Act No. 83, as amended).

Sec. 2 (a), IRR of Investment Houses Law“Investment House” is any enterprise, which primarilyengages, whether regularly or on an isolated basis, inthe underwriting of securities of another person orenterprise, including securities of the Government or itsinstrumentalities.

2. Limitations on UB’s exercise of investment housepowersSec. X101 (b)(1), MRB…in either case, the underwriting of equity securities andsecurities dealing shall be subject to pertinent laws andregulations of the Securities and Exchange Commission(SEC): Provided , That if the IH functions are performeddirectly by the UB, such functions shall be undertakenby a separate and distinct department or other similarunit in the UB: Provided , further, That a UB cannotperform such functions both directly and indirectlythrough a subsidiary.

iii. To invest in equity o f non-allied enterprisesSec. 27, GBL: The equity investment of a universal bank, orof its wholly or majority-owned subsidiaries, in a single non-allied enterprise shall not exceed thirty-five percent (35%) ofthe total equity in that enterprise nor shall it exceed thirty-fivepercent (35%) of the voting stock in that enterprise.

Sec. 1381, MRB: Only UBs may invest in the equity of anenterprise engaged in non-allied or non-related activities.

B. Commercial Banks (KB): Sec. 3.2 (b), GBL (a) Governing Law: General Banking Law

(b) PowersSec. 101 (b)(2), MRB and BSP Circular No. 271, Series o2001 In addition to the general powers incident to corporations andthose provided in other laws, a KB shall have the authority to

exercise all such powers as may be necessary to carry on thebusiness of commercial banking, such as accepting drafts andissuing letters of credit; discounting and negotiating promissorynotes, drafts, bills of exchange, and other evidences of debt;accepting or creating demand deposits; receiving other types ofdeposits and deposit substitutes; buying and selling foreignexchange and gold or silver bullion; acquiring marketable bondsand other debt securities; and extending credit, subject to suchrules as the Monetary Board may promulgate. These rules mayinclude the determination of bonds and other debt securitieseligible for investment, the maturities and aggregate amount ofsuch investment.

It may also exercise or perform any or all of the following:(a) Invest in the equities of allied enterprises as provided in

Sections 31 and 32 of R.A. No. 8791;(b) Purchase, hold and convey real estate as specified under

Sections 51 and 52 of R.A. No. 8791;(c) Receive in custody funds, documents and valuable

objects;(d) Act as financial agent and buy and sell, by order of and for

the account of their customers, shares, evidences ofindebtedness and all types of securities;

(e) Make collections and payments for the account of othersand perform such other services for their customers as are

not incompatible with banking business;(f) Upon prior approval of the Monetary Board, act asmanaging agent, adviser, consultant or administrator ofinvestment management/ advisory/ consultancy accounts;

(g) Rent out safety deposit boxes; and(h) Engage in quasi-banking functions.

i. KB PowersSec. 29, GBL: A commercial bank shall have, in addition tothe general powers incident to corporations, all such powersas may be necessary to carry on the business of commercialbanking such as accepting drafts and issuing letters of credit;discounting and negotiating promissory notes, drafts, bills of

exchange, and other evidences of debt; accepting or creating





25

demand deposits; receiving other types of deposits anddeposit substitutes; buying and selling foreign exchange andgold or silver bullion; acquiring marketable bonds and otherdebt securities; and extending credit, subject to such rules asthe Monetary Board may promulgate. These rules may includethe determination of bonds and other debt securities eligiblefor investment, the maturities and aggregate amount of suchinvestment.

1. Accepting drafts2. Issuing letters of credit (L/Cs)3. Discounting and negotiating promissory notes (PNs),

drafts, bills of exchange, and other evidences of debt4. Accepting or creating demand deposits5. Receiving other types of deposits and deposit substitutes6. Buying and selling foreign exchange and gold or silver

bullion7. Acquiring marketable bonds and other debt securities8. Extending credit

ii. Engage in quasi-banking functionsSec. 6, par. 1, GBL: No person or entity shall engage inbanking operations or quasi-banking functions withoutauthority from the Bangko Sentral: Provided , however, Thatan entity authorized by the Bangko Sentral to performuniversal or commercial banking functions shall likewise havethe authority to engage in quasi-banking functions.

iii. To invest in equity of allied enterprisesSec. 31, GBL: A commercial bank may own up to onehundred percent (100%) of the equity of a thrift bank or arural bank. Where the equity investment of a commercial bankis in other financial allied enterprises, including anothercommercial bank, such investment shall remain a minorityholding in that enterprise.

Sec. 32, GBL: A commercial bank may own up to onehundred percent (100%) of the equity in a non-financial alliedenterprise.

iv. To purchase, hold and convey real estateSec. 51, GBL: Any bank may acquire real estate as shall benecessary for its own use in the conduct of its business:Provided, however, That the total investment in such realestate and improvements thereof including bank equipment,shall not exceed fifty percent (50%) of combined capital

accounts: Provided, further, That the equity investment of a

bank in another corporation engaged primarily in real estateshall be considered as part of the bank's total investment inreal estate, unless otherwise provided by the Monetary Board.

Sec. 52, GBL: Notwithstanding the limitations of thepreceding Section, a bank may acquire, hold or convey realproperty under the following circumstances:

52.1. Such as shall be mortgaged to it in good faith by way

of security for debts;52.2. Such as shall be conveyed to it in satisfaction of debtspreviously contracted in the course of its dealings, or52.3. Such as it shall purchase at sales under judgments,decrees, mortgages, or trust deeds held by it and such as itshall purchase to secure debts due it.

Any real property acquired or held under the circumstancesenumerated in the above paragraph shall be disposed of bythe bank within a period of five (5) years or as may beprescribed by the Monetary Board: Provided, however, Thatthe bank may, after said period, continue to hold the propertyfor its own use, subject to the limitations of the precedingSection.

v. Other servicesSec. 53, GBL: In addition to the operations specificallyauthorized in this Act, a bank may perform the followingservices:

53.1. Receive in custody funds, documents and valuableobjects;53.2. Act as financial agent and buy and sell, by order ofand for the account of their customers, shares, evidences ofindebtedness and all types of securities;53.3. Make collections and payments for the account ofothers and perform such other services for their customersas are not incompatible with banking business;53.4 Upon prior approval of the Monetary Board, act asmanaging agent, adviser, consultant or administrator ofinvestment management/advisory/consultancy accounts;and53.5. Rent out safety deposit boxes.

The bank shall perform the services permitted underSubsections 53.1, 53.2,53.3 and 53.4 as depositary or as anagent. Accordingly, it shall keep the funds, securities andother effects which it receives duly separate from the bank'sown assets and liabilities: The Monetary Board may regulate

the operations authorized by this Section in order to ensure





26

that such operations do not endanger the interests of thedepositors and other creditors of the bank. In case a bank orquasi-bark notifies the Bangko Sentral or publicly announcesa bank holiday, or in any manner suspends the payment ofits deposit liabilities continuously for more than thirty (30)days, the Monetary Board may summarily and without needfor prior hearing close such banking institution and place itunder receivership of the Philippine Deposit Insurance

Corporation.

1. Receive in custody funds, documents and valuableobjects

2. Act as financial agent and buy and sell, by order of andfor the account of customers, shares, evidences ofindebtedness and all types of securities

3. Make collections and payments for the account of othersand perform such other services for their customers asare not incompatible with banking business

4. Upon prior MB approval, act as managing agent,adviser, consultant or administrator of investment andmanagement/advisory/consultancy accounts

5. Rent out safety deposit boxes

vi. To issue guaranteesSec. 74, General Banking Act: No bank or bankinginstitution shall enter, directly or indirectly, into any contractof guaranty or suretyship, or shall guarantee the interest orprincipal of any obligation of any person, co-partnership,association, corporation or other entity. The provisions of thissection shall, however, not be held to apply to the borrowingof money by any such bank or institution through therediscounting of its receivables, or otherwise, as may bepermitted by law, nor to the granting or guaranteeing ofacceptance credits in the ordinary course of its business. Norshall the provisions of this section apply to the certification ofchecks or to transactions involving the release of documentsattached to items received for collection, nor to any othertransaction, which may properly be regarded as commonusage and accepted banking practice.

C. Thrift Banks (TB): Sec. 3.2 (c), GBL (a) Governing Law

Sec. 71, par. 1 and 3, GBL: The organization, the ownership andcapital requirements, powers, supervision and general conduct ofbusiness of thrift banks, rural banks and cooperative banks shallbe governed by the provisions of the Thrift Banks Act, the Rural

Banks Act, and the Cooperative Code, respectively. The

organization, ownership and capital requirements, powers,supervision and general conduct of business of Islamic banks shallbe governed by special laws. The provisions of this Act, however,insofar as they are not in conflict with the provisions of the ThriftBanks Act, the Rural Banks Act, and the Cooperative Code shalllikewise apply to thrift banks, rural banks, and cooperative banks,respectively. However, for purposes of prescribing the minimumratio which the net worth of a thrift bank must bear to its total risk

assets, the provisions of Section 33 of this Act shall govern.

i. Organization, ownership, capital requirements, powers,supervision, and general conduct of business

ii. Net worth to risk assets ratioSec. 71, par. 3: …However, for purposes of prescribing theminimum ratio which the net worth of a thrift bank must bearto its total risk assets, the provisions of Section 33 of this Actshall govern.

Sec. 33, GBL: A bank other than a universal or commercialbank cannot accept or create demand deposits except uponprior approval of, and subject to such conditions and rules asmay be prescribed by the Monetary Board.

iii. Other matters—GBL suppletory application

(b) Declaration of PolicySec. 2, Thrift Banks ActIt is hereby declared the policy of the State to:

a. Recognize the indispensable role of the private sector, toencourage private enterprise, and to provide incentives toneeded investments;

(b) Promote economic development pursuant to thesocioeconomic program of the government, to expandindustrial and agricultural growth, to encourage theestablishment of more private thrift banks in order tomeet the needs for capital, personal and investment creditor medium- and long-term loans for Filipinoentrepreneurs;

(c) Encourage and assist the establishment of thrift banksystem which will promote agriculture and industry and atthe same time place within easy reach of the people themedium-and long-term credit facilities at reasonable cost;

(d) Encourage industry, frugality and the accumulation ofsavings among the public, and the members andstockholders of thrift banks; and

(e) Regulate and supervise the activities of thrift banks in

order to place their operations on a sound, stable and





27

efficient basis and to curtail or prevent acts or practices,which are prejudicial to the public interest.

(c) Definition/Purpose: Sec. 3.2 (c), GBL Sec. 3 (a), Thrift Banks Act"Thrift banks" shall include savings and mortgage banks, privatedevelopment banks, and stock savings and loans associationsorganized under existing laws, and any banking corporation that

may be organized for the following purposes:(1) Accumulating the savings of depositors and investingthem, together with capital loans secured by bonds,mortgages in real estate and insured improvementsthereon, chattel mortgage, bonds and other forms ofsecurity or in loans for personal or household finance,whether secured or unsecured, or in financing forhomebuilding and home development; in readilymarketable and debt securities; in commercial papers andaccounts receivables, drafts, bills of exchange,acceptances or notes arising out of commercialtransactions; and in such other investments and loanswhich the Monetary Board may determine as necessary inthe furtherance of national economic objectives;

(2) Providing short-term working capital, medium- and long-term financing, to businesses engaged in agriculture,services, industry and housing; and

(3) Providing diversified financial and allied services for itschosen market and constituencies specially for small andmedium enterprises and individuals.

(d) PowersSec. 10, Thrift Banks ActIn addition to powers granted it by this Act and existing laws, anythrift bank may:

(a) Accept savings and time deposits;(b) Open current or checking accounts: Provided, That the thrift

bank has net assets of at least Twenty million pesos(P20,000,000) subject to such guidelines as may beestablished by the Monetary Board; and shall be allowed todirectly clear its demand deposit operations with the BangkoSentral and the Philippine Clearing House Corporation;

(c) Act as correspondent for other financial institutions;(d) Act as collection agent for government entities, including but

not limited to, the Bureau of Internal Revenue, SocialSecurity System, and the Bureau of Customs;

(e) Act as official depository of national agencies and ofmunicipal, city or provincial funds in the municipality, city or

province where the thrift bank is located, subject to such

guidelines as may be established by the Monetary Board;(f) Rediscount paper with the Philippine National Bank, the Land

Bank of the Philippines, the Development Bank of thePhilippines, and other government-owned or -controlledcorporations. Said institutions shall specify the nature ofpaper deemed acceptable for rediscount, as well asrediscounting rate to be charged by any of theseinstitutions; and

(g) Issue mortgage and chattel mortgage certificates, buy andsell them for its own account or for the account of others, oraccept and receive them in payment or as amortization of itsloan.

Such mortgage and chattel mortgage certificates shall beissued exclusively in national currency and exclusively forthe financing of equipment loans, mortgage loans for theacquisition of machinery and other fixed installations,conservation, enlargement or improvement of productiveproperties and real estate mortgage loans for: (1) theconstruction, acquisition, expansion or improvement of ruraland urban properties; (2) the refinancing of similar loansand mortgages; and (3) such other purposes as may beauthorized by the Monetary Board.

A thrift bank shall coordinate the amounts and maturities ofits certificates with those of its loans, so as to ensureadequate cash receipts for the payment of principal andinterest at the time they become due. The bank shall acceptits own certificates at least at the actual price of issue, inany prepayment of loans which mortgage or chattelmortgage debtors may wish to make: Provided, That thedate of maturity of the certificates is not later than the dateon which the payment would otherwise become due, in theabsence of the aforesaid prepayment;

(h) Purchase, hold and convey real estate under the sameconditions as those governing commercial banks as specifiedunder Section 25 of Republic Act No. 337;

(i) Engage in quasi-banking and money market operations;(j) Open domestic letters of credit;(k) Extend credit facilities to private and government

employees: Provided, That in the case of a borrower who isa permanent employee or wage earner, the treasurer,cashier or paymaster of the office employing him isauthorized, notwithstanding the provisions of any existinglaw, rules and regulations to the contrary, to make

deductions from his salary, wage or income pursuant to the





28

terms of his loan, to remit deductions to the thrift bankconcerned, and collect such reasonable fee for his services;

(l) Extend credit against the security of jewelry, precious stonesand articles of similar nature, subject to such rules andregulations as the Monetary Board may prescribe; and

(m) Offer other banking services as provided in Section 72 ofRepublic Act No. 337 and Republic Act No. 6426, asamended.

Thrift banks may perform the services under subsections(b), (d), (e), (g) and (i) only upon prior approval of theMonetary Board.

Nothing in this Section shall be construed as precluding athrift bank from performing, with prior approval of theMonetary Board, commercial banking services, or fromoperating under an expanded banking authority, nor fromexercising, whenever applicable and not inconsistent withthe provisions of this Act and Bangko Sentral regulations,and such other powers incident to a corporation.

Sec. 101 (b)(3), MRB and BSP Circular No. 271, Series of2001In addition to the powers provided in other laws, a TB mayperform any or all of the following services:

(a) Grant loans, whether secured or unsecured;(b) Invest in readily marketable bonds and other debt

securities, commercial papers and accounts receivable,drafts, bills of exchange, acceptances or notes arising out ofcommercial transactions;

(c) Issue domestic letters of credit;(d) Extend credit facilities to private and government

employees;(e) Extend credit against the security of jewelry, precious stones

and articles of similar nature, subject to such rules andregulations as the Monetary Board may prescribe;

(f) Accept savings and time deposits;(g) Rediscount paper with the Land Bank of the Philippines

(LBP), Development Bank of the Philippines (DBP), andother government-owned or-controlled corporations;

(h) Accept foreign currency deposits as provided under R.A. No.6426, as amended;

(i) Act as correspondent for other financial institutions;(j) Purchase, hold and convey real estate as specified under

Sections 51 and 52 of R.A. No. 8791; and(k) Offer other banking services as provided in Section 53 of

R.A. No. 8791.

With prior approval of the Monetary Board, and subject tosuch guidelines as may be established by it, TBs may alsoperform the following services:

(l) Open current or checking accounts;(m) Engage in trust, quasi-banking functions and money market

operations;(n) Act as collection agent for government entities, including but

not limited to, the Bureau of Internal Revenue (BIR), Social

Security System (SSS) and the Bureau of Customs (BOC);(o) Act as official depository of national agencies and ofmunicipal, city or provincial funds in the municipality, city orprovince where the TB is located;

(p) Issue mortgage and chattel mortgage certificates, buy andsell them for its own account or for the account of others, oraccept and receive them in payment or as amortization of itsloan; and

(q) Invest in the equity of allied undertakings.

D. Rural Banks (RB): Sec. 3.2 (d), GBL (a) Governing Law

Sec. 71, par. 1 and 3, GBL: The organization, the ownership andcapital requirements, powers, supervision and general conduct ofbusiness of thrift banks, rural banks and cooperative banks shallbe governed by the provisions of the Thrift Banks Act, the RuralBanks Act, and the Cooperative Code, respectively. Theorganization, ownership and capital requirements, powers,supervision and general conduct of business of Islamic banks shallbe governed by special laws. The provisions of this Act, however,insofar as they are not in conflict with the provisions of the ThriftBanks Act, the Rural Banks Act, and the Cooperative Code shalllikewise apply to thrift banks, rural banks, and cooperative banks,respectively. However, for purposes of prescribing the minimumratio which the net worth of a thrift bank must bear to its total riskassets, the provisions of Section 33 of this Act shall govern.


ii. Other matters—GBL of suppletory application

(b) Declaration of PolicySec. 2, Rural Banks Act: The State hereby recognizes the needto promote comprehensive rural development with the end in viewof attaining acquitable distribution of opportunities, income andwealth; a sustained increase in the amount of goods and servicesproduced by the nation of the benefit of the people; and inexpanding productivity as a key raising the quality of life for all,

especially the underprivileged.





29

Towards these ends, the State hereby encourages and assists inthe establishment of rural banking system designed to makeneeded credit available and readily accessible in the rural areas onreasonable terms

(c) PowersSec. 12, Rural Banks Act: In addition to the operations

especially authorized in this Act, any rural bank may:• Accept saving and time deposit;• Open current or checking accounts, provided the rural

bank has net assets of at least Five million(P5,000,000) subject to such guidelines as may beestablished by the Monetary Board:

• Act as correspondent for other financial institutions;• Act as a collection agent;• Act as official depositary of municipal, city or provincial

funds in the municipality, city or province where it islocated, subject to such guidelines as may beestablished by the Monetary Board;

• Rediscount paper with the Philippine National Bank, theLand Bank of the Philippines, the Development Bank ofthe Philippines, or any other banking institution,including its branches and agencies. Said institutionshall specify the nature of paper deemed acceptable forrediscount, as well as the rediscount rate to be chargedby any of these institutions;

• Offer other banking service as provided in Section 72 ofRepublic Act No. 337, as amended, and

• Extend financial assistance to public and privateemployees in accordance with the provisions of Section5 of Republic Act No. 3779, as amended.

With written permission of the Monetary Board of the Centralbank, any rural bank may act as trustee over estates or propertiesof farmer and merchants.

Nothing in this section shall be construed as precluding a ruralbank from performing, with prior approval of the Monetary Board,all the services authorized and mortgage banks, of for commercialbanks, under an expanded banking authority as provided inSection 21-B of the same Act

Sec. 101 (b)(4), MRB and BSP Circular No. 271, Series of2001In addition to the powers provided in other laws, an RB may

perform any or all of the following services:

(a) Extend loans and advances primarily for the purpose ofmeeting the normal credit needs of farmers, fishermenor farm families as well as cooperatives, merchants,private and public employees;

(b) Accept savings and time deposits;(c) Act as correspondent of other financial institutions;(d) Rediscount paper with the LBP, DBP or any other bank,

including its branches and agencies. Said banks shall

specify the nature of paper deemed acceptable forrediscount, as well as the rediscount rate to be chargedby any of these banks;

(e) Act as collection agent;(f) Offer other banking services as provided in Section 53

of R.A. No. 8791.With prior approval of the Monetary Board, an RB mayperform any or all of the following services:

(g) Accept current or checking accounts: Provided, Thatsuch RB has net assets of at least P5 million;

(h) Accept NOW accounts;(i) Act as trustee over estates or properties of farmers and

merchants;(j) Act as official depository of municipal, city or provincial

funds in the municipality, city or province where it islocated;

(k) Sell domestic drafts; and(l) Invest in allied undertakings.

E. Cooperative Banks (Coop Banks): Sec. 3.2 (e), GBL (a) Governing Law

Sec. 71, par. 1 and 3, GBL: The organization, the ownership andcapital requirements, powers, supervision and general conduct ofbusiness of thrift banks, rural banks and cooperative banks shallbe governed by the provisions of the Thrift Banks Act, the RuralBanks Act, and the Cooperative Code, respectively. Theorganization, ownership and capital requirements, powers,supervision and general conduct of business of Islamic banks shallbe governed by special laws. The provisions of this Act, however,insofar as they are not in conflict with the provisions of the ThriftBanks Act, the Rural Banks Act, and the Cooperative Code shalllikewise apply to thrift banks, rural banks, and cooperative banks,respectively. However, for purposes of prescribing the minimumratio which the net worth of a thrift bank must bear to its total riskassets, the provisions of Section 33 of this Act shall govern.

Art. 99, Cooperative Code: (1) The provisions of this Chaptershall primarily govern cooperative banks registered under this

Code and the other provisions of this Code shall apply to them





30

only insofar as they are not inconsistent with the provisionscontained in this Chapter.

(2) Cooperatives duly established and registered under theprovisions of this Code may organize among themselves acooperative bank, which shall likewise be considered a cooperativeregisterable under the provision of this Code subject to therequirements of and requisite authorization from the Central Bank.


ii. Other matters—GBL of suppletory application

(b) Declaration of Policy Art. 2, Cooperative Code:

(c) Definitions/Functions Art. 100, Cooperative CodeA cooperative bank is one organized by the majority shares ofwhich is owned and controlled by cooperatives primarily to providefinancial and credit services to cooperatives. The term"cooperative bank" shall include cooperative rural banks.

A cooperative bank may perform the following functions:(1) To carry on banking and credit services for the

cooperatives;(2) To receive financial aid or loans from the Government and

the Central Bank of the Philippines for and in behalf of thecooperative banks and primary cooperatives and theirfederations engaged in business and to supervise thelending and collection of loans;

(3) To mobilize savings of its members for the benefit of thecooperative movement;

(4) To act as a balancing medium for the surplus funds ofcooperatives and their federations;

(5) To discount bills and promissory notes issued and drawn bycooperatives;

(6) To issue negotiable instruments to facilitate the activities ofcooperatives;

(7) To issue debentures subject to the approval of and underconditions and guarantees to be prescribed by theGovernment;

(8) To borrow money from banks and other financialinstitutions within the limit to be prescribed by the CentralBank; and

(9) To carry out all other functions as may be prescribed by the

Authority: Provided , That the performance of any bankingfunction shall be subject to prior approval by the CentralBank of the Philippines.

(d) Powers: same as RB Sec. 101 (b)(5), MRB and BSP Circular No. 271, Series o2001A Coop Bank shall be organized primarily to provide financial and

credit services to cooperatives and may perform any or all of theservices offered by RBs.

F. Islamic Banks (IB): Sec. 3.2 (f), GBL (a) Governing Law

Sec. 71, par. 2, GBL: …The organization, ownership and capitalrequirements, powers, supervision and general conduct ofbusiness of Islamic banks shall be governed by special laws.

i. Organization, ownership, capital requirements, powers,supervision and general conduct of business

(b) PurposeSec. 3, Islamic Bank Charter: The primary purpose of theIslamic Bank shall be to promote and accelerate the socio-economic development of the Autonomous Region by performingbanking, financing and investment operations and to establish andparticipate in agricultural, commercial and industrial venturesbased on the Islamic concept of banking.

All business dealings and activities of the Islamic Bank shall besubject to the basic principles and rulings of Islamic Shari'a withinthe purview of the aforementioned declared policy. Any zakat or"ithe" paid by the Islamic Bank on behalf of its shareholders anddepositors shall be its obligation to appropriate said zakat fundand to disburse it in legitimate channels to be ascertained first bythe Shari'a Advisory Council.

(c) PowersSec. 6, Islamic Bank Charter: The Al-Amanah IslamicInvestment Bank of the Philippines, upon its organization, shall bea body corporate and shall have the power:

(1) To prescribe its bylaws and its operating policies;(2) To adopt, alter and use a corporate seal;(3) To make contracts, to sue and be sued;(4) To borrow money; to own real or personal property and

introduce improvements thereon, and to sell, mortgage orotherwise dispose of the same;

(5) To employ such officers and personnel, preferably from the





31

qualified Muslim sector, as may be necessary to carryIslamic banking business;

(6) To establish such branches and agencies in provinces andcities in the Philippines, particularly where Muslims arepredominantly located, and such correspondent offices inother areas in the country or abroad as may be necessaryto carry on its Islamic banking business, subject to theprovisions of Section 2 hereof;

(7) To perform the following banking services:(a) Open current or checking accounts;(b) Open savings accounts for safekeeping or custody with

no participation in profit and losses except unlessotherwise authorized by the account holders to beinvested;

(c) Accept investment account placements and invest thesame for a term with the Islamic Bank's funds inIslamically permissible transactions on participationbasis;

(d) Accept foreign currency deposits from banks,companies, organizations and individuals, includingforeign governments;

(e) Buy and sell foreign exchange;(f) Act as correspondent of banks and institutions to

handle remittances or any fund transfers;(g) Accept drafts and issue letters of credit or letters of

guarantee, negotiate notes and bills of exchange andother evidence of indebtedness under the universallyaccepted Islamic financial instruments;

(h) Act as collection agent insofar as the payment orders,bills of exchange or other commercial documents areexclusive of riba or interest prohibitions;

(i) Provide financing with or without collateral by way ofleasing, sale and leaseback, or cost plus profit salesarrangement;

(j) Handle storage operations for goods or commodityfinancing secured by warehouse receipts presented tothe Bank;

(k) Issue shares for the account of institutions andcompanies assisted by the Bank in meetingsubscription calls or augmenting their capital and/orfund requirements as may be allowed by law;

(l) Undertake various investments in all transactionsallowed by Islamic Shari'a in such a way that shall notpermit the haram (forbidden), nor forbid the halal(permissible);

(8) To act as an official government depository, or its

branches, subdivisions and instrumentalities and of

government-owned or controlled corporations, particularlythose doing business in the autonomous region;

(9) To issue investment participation certificates, muquaradah(non-interest-bearing bonds), debentures, collateralsand/or the renewal or refinancing of the same, with theapproval of the Monetary Board of the Central Bank of thePhilippines, to be used by the Bank in its financingoperations for projects that will promote the economic

development primarily of the Autonomous Region;(10) To carry out financing and joint investmentoperations by way of mudarabah partnership, musharaka

joint venture or by decreasing participation, murabahapurchasing for others on a cost-plus financingarrangement, and to invest funds directly in variousprojects or through the use of funds whose owners desireto invest jointly with other resources available to theIslamic Bank on a joint mudarabah basis;

(11) To invest in equities of the following alliedundertakings:(a) Warehousing companies;(b) Leasing companies;(c) Storage companies;(d) Safe deposit box companies;(e) Companies engaged in the management of mutual

funds but not in the mutual funds themselves; and(f) Such other similar activities as the Monetary Board of

the Central Bank of the Philippines has declared ormay declare as appropriate from time to time, subjectto existing limitations imposed by law;

(12) To exercise the powers granted under this Charterand such incidental powers as may be necessary to carryon its business, and to exercise further the general powersmentioned in the Corporation Law and the General BankingAct, insofar as they are not inconsistent or incompatiblewith the provisions of this Charter.

Sec. 101 (b)(6), MRB and BSP Circular No. 271, Series o2001In addition to the general powers incident to corporations andthose provided in other laws, as well as in Circular No. 105(Appendix 44), insofar as they are not inconsistent or incompatiblewith the provisions of R.A. No. 6848, an IB may perform any or allof the following services:

(a) Open savings accounts for safekeeping or custody with noparticipation in profit and losses except unless otherwise

authorized by the account holders to be invested;





32

(b) Accept investment account placements and invest the samefor a term with the IB’s funds in Islamically permissibletransactions on participation basis;

(c) Accept foreign currency deposits from banks, companies,organizations and individuals, including foreigngovernments;

(d) Buy and sell foreign exchange;(e) Act as correspondent of banks and institutions to handle

remittances or any fund transfers;(f) Accept drafts and issue letters of credit or letters ofguarantee, negotiate notes and bills of exchange and otherevidence of indebtedness under the universally acceptedIslamic financial instruments;

(g) Act as collection agent in so far as the payment orders, billsof exchange or other commercial documents are exclusiveof riba or interest prohibitions;

(h) Provide financing with or without collateral by way ofleasing, sale and leaseback, or cost plus profit salesarrangement;

(i) Handle storage operations for goods or commodityfinancing secured by warehouse receipts presented to thebank;

(j) Issue shares for the account of institutions and companiesassisted by the bank in meeting subscription calls oraugmenting their capital and/or fund requirements as maybe allowed by law;

(k) Undertake various investments in all transactions allowedby the Islamic Shari’a in such a way that shall not permitthe haram (forbidden), nor forbid the halal (permissible);

(l) Act as an official government depository, or its branches,subdivisions and instrumentalities and of government-owned or -controlled corporations, particularly those doingbusiness in the autonomous region;

(m) Issue investment participation certificates, muquaradah(non-interest- bearing bonds), debentures, collaterals and/or the renewal and refinancing of the same, with theapproval of the Monetary Board to be used by the IB in itsfinancing operations for projects that will promote theeconomic development primarily of the AutonomousRegion;

(n) Carry out financing and joint investment operations by wayof mudarabh purchasing for others on a cost-plus financingarrangement, and invest funds directly in various projectsor through the use of funds whose owners desire to invest

jointly with other resources available to the IB on a jointmudarabh basis; and

(o) Invest in equities of the following allied undertakings:

i. Warehousing companies;ii. Leasing companies;

iii. Storage companies;iv. Companies engaged in the management of mutual

funds but not in the mutual funds themselves; andv. Such other similar activities as the Monetary Board

has declared or may declare as appropriate fromtime to time, subject to existing limitations imposed

by law.

G. Other Classification of Banks: Sec. 3.2 (g), GBL

(a) Land Bank of the PhilippinesCode of Agrarian Reform of the Philippines

Section 74. Creation - To finance the acquisition by the Government oflanded estates for division and resale to small landholders, as well as thepurchase of the landholding by the agricultural lessee from the landowner,there is hereby established a body corporate to be known as the "Land Bankof the Philippines", hereinafter called the "Bank", which shall have itsprincipal place of business in Manila. The legal existence of the Bank shall befor a period of fifty years counting from the date of the approval hereof. TheBank shall be subject to such rules and regulations as the Central Bank mayfrom time to time promulgate.

Section 75. Powers in General - To carry out this main purpose, the Bankshall have the power:

(1) To prescribe, repeal, and alter its own by laws, to determine itsoperating policies, and to issue such rules and regulations as maybe necessary to achieve the main purpose for the creation of theBank;

(2) To adopt, alter and use a corporate seal;(3) To acquire and own real and personal property and to sell, mortgage

or otherwise dispose of the same;(4) To sue and be sued, make contracts, and borrow money from both

local and foreign sources. Such loans shall be subject to approval bythe President of the Philippines and shall be fully guaranteed by theGovernment of the Philippines;

(5) Upon recommendation of the Committee on Investments, to hold,own, purchase, acquire, sell or otherwise invest, or reinvest instocks, bonds or other securities capable of giving the Bank areasonably assured income sufficient to support its financingactivities and give its private stockholders a fair return on theirholdings: Provided, however, That pending the organization of theCommittee on Investments, the Bank may exercise the powersherein provided without the recommendation of said Committee onInvestments: Provided, further, That in case of the dissolution of the

Land Bank all unsold public lands transferred to it which may be





33

allocated to the Government of the Philippines in the course ofliquidation of the business of the Bank shall revert to theDepartment of Agriculture and Natural Resources; and

(6) To provide, free of charge, investment counselling and technicalservices to landowners whose lands have been acquired by the LandBank. For this purpose, the Land Bank may contract the services ofprivate consultants.

Section 76. Issuance of Bonds - The Land Bank shall, uponrecommendation by the Board of Trustees and approval of the MonetaryBoard of the Central Bank, issue bonds, debentures and other evidences ofindebtedness at such terms, rates and conditions as the Bank maydetermine up to an aggregate amount not exceeding, at any one time, fivetimes its unimpaired capital and surplus. Such bonds and other obligationsshall be secured by the assets of the Bank and shall be fully tax exemptboth as to principal and income. Said income shall be paid to the bondholderevery six (6) months from the date of issue. These bonds and otherobligations shall be fully negotiable and unconditionally guaranteed by theGovernment of the Republic of the Philippines and shall be redeemable atthe option of the Bank at or prior to maturity, which in no case shall exceedtwenty-five years. These negotiable instruments of indebtedness shall bemortgageable in accordance with established banking procedures andpractices to government institutions not to exceed sixty per centum of theirface value to enable the holders of such bonds to make use of them ininvestments in productive enterprises. They shall also be accepted aspayments for reparation equipment and materials.

The Board of Trustees shall have the power to prescribe rules andregulations for the registration of the bonds issued by the Bank at therequest of the holders thereof.

Section 77. Issuance of Preferred Shares of Stock to Finance Acquisition ofLanded Estates - The Land Bank shall issue, from time to time, preferredshares of stock in such quantities not exceeding six hundred million pesosworth of preferred shares as may be necessary to pay the owners of landedestates in accordance with Sections eighty and eighty-one of this Code. Theamount of shares that the Bank may issue shall not exceed the aggregateamount need to pay for acquired estates in the proportions prescribed insaid Section eighty of this Code. The Board of Trustees shall include as anecessary part of the by-laws that it shall issue under Section seventy-fiveof this Code, such formula as it deems adequate for determining the netasset value of its holdings as a guide and basis for the issuance of preferredshares. The shares of stock issued under the authority of this provision shallbe guaranteed a rate of return of six per centum per annum. In the eventthat the earnings of the Bank for any single fiscal year are not sufficient toenable the Bank, after making reasonable allowance for administration,

contingencies and growth, to declare dividends at the guaranteed rate, the

amount equivalent to the difference between the Bank's earnings availablefor dividends and that necessary to pay the guaranteed rate shall be paid bythe Bank out of its own assets but the Government shall, on the same daythat the Bank makes such payment, reimburse the latter in full, for whichpurpose such amounts as may be necessary to enable the Government tomake such reimbursements are hereby appropriated out of any moneys inthe National Treasury not otherwise appropriated. The Bank shall givesufficient notice to the Budget Commissioner and the President of the

Philippines in the event that it is not able to pay the guaranteed rate ofreturn on any fiscal period. The guaranteed rate of return on these sharesshall not preclude the holders thereof from participating at a percentagehigher than six per centum should the earnings of the Bank for thecorresponding fiscal period exceed the guaranteed rate of return. The Boardof Trustees shall declare and distribute dividends within three months afterthe close of each fiscal year at the guaranteed rate unless a higher rate ofreturn in justified by the Bank's earnings after making reasonable allowancefor administration, contingencies and growth, in which case dividends shallbe declared and distributed at a higher rate. The capital gains derived fromthe sale or transfer of such shares and all income derived therefrom in theform of dividends shall be fully exempt from taxes.

Section 78. Special Guaranty Fund - In the event that the Bank shall beunable to pay the bonds, debentures, and other obligations issued by it, afixed amount thereof shall be paid from a special guaranty fund to be set upby the Government, to guarantee the obligation of the Land Bank, andestablished in accordance with this Section, and thereupon, to the extent ofthe amounts so paid, the Government of the Republic of the Philippines shallsucceed to all the rights of the holders of such bonds, debentures or otherobligations: Provided, however, That for the next four years after theestablishment of the Bank, the payment to the special guaranty fund shouldnot exceed one million pesos per year, after which period, the Governmentshall pay into the guaranty fund the sum of five hundred thousand pesoseach year until the cumulative total of such guaranty fund is no less thantwenty percent of the outstanding net obligation of the Land Bank at theend of any single calendar year.

The guaranty fund shall be administered by the Central Bank of thePhilippines in the manner most consistent with its charter. For the purposeof such fund, there shall be appropriated annually the sum of one millionpesos out of any moneys in the National Treasury not otherwiseappropriated, until the total amount of twenty million pesos shall have beenattained.

Section 79. Receiving Payments and Time Deposits - The Bank, under thesupervision of the Monetary Board and subject to the provisions of theGeneral Banking Act, shall receive savings and time deposits from the small

landholders in whose favor public lands or landed estates acquired by the





34

Land Authority have been sold and, for this purpose, establish, and maintainbranches and offices in such areas as may be necessary to service suchdeposits. The Monetary Board shall supervise and authorize the Bank toreceive savings and time deposits from the public in areas where facilitiesfor such a service do not exist or cannot be adequately provided by otherdeposit institutions.

Section 80. Making Payment to Owners of Landed Estates - The Land bank

shall make payments in the form herein prescribed to the owners of landacquired by the Land Authority for division and resale under this Code. Suchpayment shall be made in the following manner: ten per centum in cash andthe remaining balance in six percent, tax-free, redeemable bonds issued bythe Bank in accordance with Section seventy-six, unless the landownerdesires to be paid in shares of stock issued by the Land Bank in accordancewith Section seventy-seven in an amount not exceeding thirty per centum ofthe purchase price.

In the event there is an existing lien on encumbrance on the land in favor ofany Government institution at the time of acquisition by the Land Bank, thebonds and/or shares, in that order, shall be accepted as substitutecollaterals to secure the indebtedness.

The profits accruing from payment shall be exempt from the tax on capitalgains.

Section 81. Capital - The authorized capital stock of the Bank shall be onebillion five hundred million pesos divided into ninety million shares with apar value of ten pesos each, which shall be fully subscribed by theGovernment and sixty million preferred shares with a par value of ten pesoseach which shall be issued in accordance with the provisions of Sectionsseventy-seven and eighty-three of this Code. Of the total capital subscribedby the Government, two hundred million pesos shall be paid by theGovernment within one year from the approval of this Code, and onehundred million pesos every year thereafter for two years for which purposethe amount of two hundred million pesos is hereby appropriated upon theeffectivity of this Code, and one hundred million pesos every year for thenext two years thereafter, out of the funds in the National Treasury nototherwise appropriated for the purpose: Provided, That if there are notenough funds in the National Treasury for the appropriation herein made,the Secretary of Finance, with the approval of the President of thePhilippines, shall issue bonds or other evidence of indebtedness to benegotiated either locally or abroad in such amount as may be necessary tocover any deficiency in the amount above-appropriated but not exceedingfour hundred million pesos, the proceeds of which are hereby appropriated:Provided, further, That the bonds to be issued locally shall not be supportedby the Central Bank: Provided, finally, That there is automatically

appropriated out of the unappropriated funds in the National Treasury such

amounts as is necessary to cover the losses which shall include among otherthings loss of earnings occasioned by the limitation of the resale cost hereinprovided such that said amount together with the administrative expensesmentioned in Section ninety hereof shall not exceed in the aggregate theequivalent of two and one-half per centum of its assets limited therein.

Section 82. Government Shares - All shares of stock in the Banksubscribed or owned by the Government shall not be entitled to participate

in the income earned by the Bank from its investments and otheroperations, whether in the form of cash or stock dividends or otherwise.Amounts expended for the administration of the Bank shall not be deemedas a participation of the Government in income.

Section 83. Preferred Shares - All preferred shares of stock issued underSection seventy-seven of this Code shall be entitled to the income earned bythe Bank on its investments and other operations and shall have a limitedright to elect annually one member of the Board of Trustees and onemember of the Committee on Investments: Provided, That the holders ofsuch preferred shares of stock shall not bring derivative suits against theBank. Such preferred shares shall be fully transferable: Provided, further,That upon the liquidation of the Bank, the redemption of such preferred

shares shall be given priority and shall be guaranteed at par value.

Section 84. Voting of Shares - The voting power of all the shares of stockof the Land Bank owned or controlled by the Government shall be vested inthe President of the Philippines or in such person or persons as he may fromtime to time designate.

Section 85. Use of Bonds - The bonds issued by the Land Bank may beused by the holder thereof and shall be accepted in the amount of their facevalue as any of the following:

(1) Payment for agricultural lands or other real properties purchasedfrom the Government;

(2) Payment for the purchase of shares of stock of all or substantially allof the assets of the following Government owned or controlledcorporations: The National Development Company; Cebu PortlandCement Company; National Shipyards and Steel Corporation; ManilaGas Corporation; and the Manila Hotel Company.

Upon offer by the bondholder, the corporation owned or controlled bythe Government shall, through its Board of Directors, negotiate withsuch bondholder with respect to the price and other terms andconditions of the sale. In case there are various bondholders makingthe offer, the one willing to purchase under terms and conditionsmost favorable to the corporation shall be preferred. If no price isacceptable to the corporation, the same shall be determined by a

Committee of Appraisers composed of three members, one to be





35

appointed by the corporation, another by the bondholder making thehighest or only offer, and the third by the two members so chosen.The expenses of appraisal shall be borne equally by the corporationand the successful purchaser.

Should the Government offer for sale to the public any or all of theshares of stock or the assets of any of the Government owned orcontrolled corporations enumerated herein, the bidder who offers to

pay in bonds of the Land Bank shall be preferred provided that thevarious bids be equal in every respect except in the medium ofpayment.

(3) Surety or performance bonds in all cases where the Government mayrequire or accept real property as bonds; and

(4) Payment for, reparations goods.

Section 86. Board of Trustees - The affairs and business of the Bank shallbe directed, its powers exercised and its property managed and preservedby a Board of Trustees. Such Board shall be composed of one Chairman andfour members, one of whom shall be the head of the Land Authority whoshall be an ex-officio member of such Board and another to be elected by

the holders of preferred shares. The Chairman and two members of theBoard of Trustees shall serve on full-time basis with the Bank. With theexception of the head of the Land Authority and the member elected by theholders of preferred shares, the Chairman and all members of the Boardshall be appointed by the President with the consent of the Commission onAppointments for a term of seven years, except that the first Chairman andmembers to be appointed under this Code shall serve for a period of three,five and seven years, such terms to be specified in their respectiveappointments. Thereafter the Chairman and members, with the exception ofthe ex-officio member, appointed after such initial appointment shall servefor a term of seven years including any Chairman or member who isappointed in place of one who resigns or is removed or otherwise vacateshis position before the expiration of his seven-year term. The Chairman andthe two full-time members of the Board shall act as the heads of suchoperating departments as may be set up by the Board under the authoritygranted by Section eighty-seven of this Code. The Chairman shall haveauthority, exerciseable at his discretion, to determine from time to time theorganizational divisions to be headed by each member serving full time andto make the corresponding shifts in designations pursuant thereto. Thecompensation of the Chairman and the members of the Board of Trusteesserving full time shall be twenty-four thousand and eighteen thousandpesos, respectively. The other members of the Board shall receive a perdiem of one hundred pesos for each session of the Board that they attend.

Section 87. The Chairman and Vice-Chairman - The Chairman of the Board

shall be the chief executive officer of the Bank. He shall have direct control

and supervision of the business of the Bank in all matters which are not bythis Code or by the by-laws of the Bank specifically reserved to be done bythe Board of Trustees. He shall be assisted by an Executive Vice-Chairmanand one or more vice-chairman who shall be chosen and may be removedby the Board of Trustees. The salaries of the Vice-Chairmen shall be fixed bythe Board of Trustees with the approval of the President of the Philippines.

Section 88. Qualifications of Members - No person shall be appointed

Chairman or member of the Board unless he is a man of accepted integrity,probity, training and experience in the field of banking and finance, at leastthirty-five years of age and possessed of demonstrated administrative skilland ability.

Section 89. Committee on Investments - There shall be a Committee onInvestments composed of three members; the member of the Board ofTrustees elected by the holders of preferred shares as Chairman, onemember to be appointed by the President of the Philippines from among thegovernment members of the Board of Trustees, and another member to beselected by the holders of preferred shares under Section eighty-three ofthis Code. The Committee on Investments shall recommend to the Board ofTrustees the corporations or entities from which the Land Bank shall

purchase shares of stock.

The Land Bank shall not invest in any corporation, partnership or companywherein any member of the Board of Trustees or of the Committee onInvestments or his spouse, direct descendant or ascendant has substantialpecuniary interest or has participation in the management or control of theenterprise except with the unanimous vote of the members of the Board ofTrustees and of the Committee on Investments, excluding the memberinterested, in a joint meeting held for that purpose where full and fairinformation of the extent of such interest or participation has beenadequately disclosed in writing and recorded in the minutes of the meeting:Provided, That such interested member shall not in any manner participatein the deliberations and shall refrain from exerting any pressure or influencewhatever on any official or member of the Bank whose functions bear on orrelate to the investment of the funds of the Bank in the enterprise:Provided, further, That the total investment in any single corporation,partnership, company, or association shall not exceed five per centum of thetotal investible funds.

Section 90. Personnel; Cost of Administration - The Administrativeexpenses of the Bank during any single fiscal year shall not in any caseexceed two and one-half per centum of its total assets. The Board ofTrustees shall provide for an organization and staff of officers andemployees necessary to carry out the functions of the Bank, fix theircompensation, and appoint and remove such officers and employees for

cause. The Bank officers and employees shall be subject to the rules and





36

regulations issued by the Civil Service Commission but shall not fall underthe Wage and Position Classification Office. The Board of Trustees shallrecommend to the Civil Service Commission rules and regulations for therecruitment, appointment, compensation, administration, conduct,promotion and removal of all Bank officers and employees under a strictmerit system and prepare and conduct examinations under the supervisionof said Commission.

Section 91. Legal counsel - The Secretary of Justice shall be ex-officio legaladviser of the Bank. Any provision of law to the contrary notwithstanding,the Land Bank shall have its own Legal Department, the chief and membersof which shall be appointed by the Board of Trustees. The composition,budget and operating expenses of the Office of the Legal Counsel and thesalaries and traveling expenses of its officers and employees shall be fixedby the Board of Trustees and paid by the Bank.

Section 92. Auditor - The Auditor General shall be the ex-officio auditor ofthe Bank and shall appoint a representative, who shall be the auditor incharge of the auditing office of the Bank. The Auditor General shall, uponthe recommendation of the auditor of the Bank, appoint or remove thepersonnel of the auditing office. The compensation, budget and operating

expenses of the auditing office and the salaries and traveling expenses ofthe officers and employees thereof shall be fixed by the Board of Trusteesand paid by the Bank notwithstanding any provision of law to the contrary.

Section 93. Report on Condition of Bank - The representative of the AuditorGeneral shall make a quarterly report on the condition of the Bank to thePresident of the Philippines, to the Senate through its President, to theHouse of Representatives through its Speaker, to the Secretary of Finance,to the Auditor General and to the Board of Trustees of the Bank. The reportshall contain, among other things, a statement of the resources andliabilities including earnings and expenses, the amount of capital stock,surplus, reserve and profits, as well as losses, bad debts, and suspendedand overdue paper carried in the books as assets of the Bank, and aplantilla of the Bank.

Section 94. Auditing Rules and Regulations - The Auditor General shall,with respect to the Bank, formulate improved and progressive auditing rulesand regulations designed to expedite the operations of the Bank andprevent the occurrence of delays and bottlenecks in its work.

Section 95. Removal of Members - The President of the Philippines may, atany time, remove the Chairman or any member of the Board appointed byhim if the interest of the Bank so requires, for any of the following causes:

(1) Mismanagement, grave abuse of discretion, infidelity in the conductof fiduciary relations, or gross neglect in the performance of duties;

(2) Dishonesty, corruption, or any act involving moral turpitude; and

(3) Any act or performance tending to prejudice or impair thesubstantial rights of the stockholders.

Conviction of the Chairman or a member for a crime carrying with it apenalty greater than arresto mayor shall cause the removal of suchChairman or member without the necessity of Presidential action.

The Chairman or member may, in any of the above cases, be civilly liable

for any damage that may have been suffered by the stockholders.

Section 96. Transfer of Claims and Liabilities - The assets of the formerLand Tenure Administration and the National Resettlement andRehabilitation Administration in the form of claims and receivables arisingfrom the sale or transfer of private and public lands, agricultural equipment,machinery, tools and work animals, but excluding advances made forsubsistence, to small landholders shall, after an exhaustive evaluation todetermine their true asset value, be irrevocably transferred to the Bankunder such arrangements as the Land Authority and the Bank shall agreeupon. Thereafter, the Bank shall have authority and jurisdiction toadminister the claims, to collect and make adjustments on the same and,generally, to do all other acts properly pertaining to the administration of

claims held by a financial institution. The Land Authority, upon request ofthe Bank, shall assist the latter in the collection of such claims. The LandAuthority shall be entitled to collect from the Bank no more than the actualcost of such collection services as it may extend. The claims transferredunder this Section shall not be considered as part of the Government'ssubscription to the capital of the Bank.

Section 97. Regulation - The Bank shall not be subject to the laws, rulesand regulations governing banks and other financial institutions of whatevertype except with respect to the receipt of savings and time deposits inaccordance with Section seventy-nine of this Code, in which case the legalreserve and other requirements prescribed by the Central Bank for suchdeposits shall apply. The Bank shall be operated as an autonomous bodyand shall be under the supervision of the Central Bank.

Section 98. Tax Exemption - The operations, as well as holdings,equipment, property, income and earnings of the Bank from whateversources shall be fully exempt from taxation.

Section 99. Organization of Bank - The Bank shall be organized within oneyear from the date that this Code takes effect.

Section 100. Penalty for Violation of the Provisions of this Chapter - Anytrustee, officer, employee or agent of the Bank who violates or permits theviolation of any of the provisions of this Chapter, or any person aiding or

abetting the violations of any of the provisions of this Chapter, shall be





37

punished by a fine not to exceed ten thousand pesos or by imprisonment ofnot more than five years, or both such fine and imprisonment at thediscretion of the Court.

(b) Development Bank of the PhilippinesRevised Charter of DBP

Sec. 2. Name, Purpose and Domicile. The Development Bank of thePhilippines, hereinafter called the Bank, operating under the provisions of

Republic Act No. 85, as amended, shall henceforth operate under theprovisions of this 1986 Revised Charter. The Bank shall be a body corporateand shall exist for a period of fifty years.

The primary purpose of the Bank shall be to provide banking servicesprincipally to service the medium and long term needs of agricultural andindustrial enterprises, particularly in the country-side and preferably forsmall and medium scale enterprises; Provided, however, that the pursuit ofthese objectives shall be undertaken within the context of a financiallyviable and stable banking institutions; Provided, further that the Bank shallcontinue to be classified as a development Bank, Provided, finally, thatunless otherwise provided herein, the Bank may perform all other functionsof a thrift bank.

The Bank's principal office and place of business shall be in the NationalCapital Region, also known as Metro Manila. It may open and maintainbranches, agencies or other offices at such places in the Philippines as itsBoard of Directors may deem advisable, with the prior approval of theMonetary Board of the Central Bank of the Philippines.

Sec. 3. Corporate Powers. The Development Bank of the Philippines shallhave the power.

(a) To accept such deposits as are allowed thrift banks under existinglaw and Central Bank regulations, including but not limited todemand, savings, and time deposits.

(b) To grant loans for the establishment, development or expression ofany agricultural or industrial enterprise;

(c) To accept and manage trust funds and properties and carry on thebusiness of a trust corporation;

(d) To act as official government depository with authority to maintaindeposits of the government, its subdivisions, branches, andinstrumentalities, and of government-owned or controlledcorporations, subject to such rules and regulations as the MonetaryBoard may prescribe;

(e) To acquire, assign, or otherwise dispose of marketable securitiesand other debt instruments which are essential to the effectiveconduct of its general banking activities;

(f) To enter into such contracts of guaranty on suretyship as are

generally allowed domestic banking institutions under the General

Banking Act; and(g) To adopt, amend, or charge its By-laws; to adopt, alter and use a

seal; to make contracts; to sue and be sued; and to exercise thegeneral powers of a corporation mentioned in the Corporation Codeof the Philippines, and of a thrift bank under the General BankingAct, insofar as such powers are not inconsistent or incompatible withthe provisions of this Charter.

Unless otherwise provided in this Charter, the exercise of the above-mentioned powers on banking shall be subject to applicable law, as well asregulations promulgated by the Central Bank of the Philippines.

Sec. 4. Loans and other Investments. Loans and other investments of theBank shall be subject to the same limits and ceilings applicable to thriftbanks under existing provisions of law and regulations promulgated by theMonetary Board, including but not limited to prescribed limits and ceilings;Provided, that loans and investments existing as of the date of theeffectivity of this Charter and which loans and investments would exceedthe prescribed limits as a result of the implementation of its rehabilitationprogram, as well as those investment authorized under Section 6 hereofwhich are in excess of the prescribed limits shall be reduced within five

years in accordance with such program of reduction as may be approved bythe Monetary Board. The period of reduction may be extended up to anotherfive years by the President of the Philippines upon recommendation by theMonetary Board.

Sec. 5. Issuance of Bonds. The Bank may issue all kinds of bonds,debentures, and securities, and/or the renewal or refunding thereof(hereinafter called "Bonds"), within and/or outside the Philippines, at suchterms, rates, and conditions as the Board of Directors of the Bank maydetermine, subject to compliance with the provisions of applicable law, andrules and regulations promulgated by the Monetary Board.

The Bank shall provide for appropriate reserves for the redemption orretirement of the bonds. These bonds and other obligations shall beredeemable at the option of the Bank at or before maturity and in suchmanner as may be stipulated therein and shall bear such rate of interest asmay be fixed by the Bank.

Such obligations shall be secured by the assets of the Bank, including thestocks, bonds, debentures, and other securities purchased or held by itunder the provisions of this Charter. These bonds and debentures may belong-term, medium, or short-term, with fixed interest rate or floatinginterest rate.

Sec. 6. Private Development Banks, Other Thrift Banks and Rural Banks.

The Bank may assist private development banks and other privately owned

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38

banks in the thrift bank category, as well as rural banks, through generalcredit accommodations including but not limited to conduit lending andrediscounting operations, and extension of technical and managerialassistance; Provided, That the Bank may likewise make equity investmentsin private development banks and other private owned banks in the thriftbank category, as well as rural banks, if such investment is in connectionwith the privatization of certain branches of the Bank; Provided, further,That the extent of such equity investment may, with the prior approval of

the Monetary Board, exceed the ceilings prescribed in Section 4 hereof; and,Provided, finally, That after five years from effectivity of this Charter, anyequity investment shall not exceed thirty (30%) per cent of the equity inany such bank nor shall its total equity investments exceed the prescribedaggregate ceiling on such investments.

Sec. 7. Authorized Capital Stock Par value. The capital stock of the Bankshall be Five Billion Pesos to be divided into Fifty Million common shareswith par value of P100 per share. These are available for subscription by theNational Government. Upon the effectivity of this Charter, the NationalGovernment shall subscribe to Twenty-Five Million common shares of stockworth Two Billion Five Hundred Million which shall be deemed paid for by theGovernment with the net asset values of the Bank remaining after the

transfer of assets and liabilities as provided in Section 30 hereof.

Sec. 8. Board of Directors Composition Tenure Per Diems. The affairs andbusiness of the Bank shall be directed and its properties managed andpreserved and its corporate powers exercised, unless otherwise provided inthis Charter, by a Board of Directors consisting of nine members, to beappointed by the President of the Philippines. The term of office of theChairman, Vice-Chairman, and the members of the Board of Directors shallbe for a period of one year or until such time as their successors areappointed.

The Chairman and the Vice Chairman of the Board shall be appointed by thePresident of the Philippines. The Vice Chairman of the Board shall assist theChairman and act in his stead in case of absence or incapacity. In case ofincapacity or absence of both the chairman and vice-chairman, the Board ofDirectors shall designate a temporary chairman from among its members.

No person shall be elected director of the Bank unless he is a natural-borncitizen of the Philippines, not less than thirty-five years of age, of goodmoral character and has attained proficiency, expertise and recognizedcompetence in one or more of the following: banking, finance, economics,law, agriculture, business management, public utility or governmentadministration.

At least four of the members of the Board shall come from the privatesector.

Except for the Chairman and the Vice Chairman of the Board, no officer oremployee of the Bank may be appointed as a member of the Board ofDirectors of the Bank; nor shall any director, officer, or employee of anyother bank be eligible as a member of the Board of Directors of the Bank.

Unless otherwise set by the Board and approved by the President of thePhilippines, members of the Board shall be paid a per diem of one thousand

pesos for each meeting of the Board of Directors actually attended:Provided, that the total amount of per diems for every single months shallnot exceed the sum of Five Thousand Pesos.

Sec. 9. Powers and Duties of the Board of Directors. The Board of Directorsshall have, among others, the following duties, powers and authority:

(a) To formulate policies necessary to carry out effectively theprovisions of this Charter and to prescribe, amend, and repeal by-laws, rules and regulations for the effective operation of the Bank,and the manner in which the general business of the Bank may beconducted and the powers granted by law to the Bank exercised;

(b) To approve loans, to fix rates of interest on loans and to prescribesuch terms and conditions for loans and credits as may be deemed

necessary, consistent with the provisions of this Charter; Provided,that the Board may delegate the authority to approve loans to suchofficers as may be deemed necessary;

(c) To adopt an annual budget for the effective operation andadministration of the Bank;

(d) To create and establish a "Provident Fund" which shall consist ofcontributions, made both by the Bank and its officers or employees,to a common fund for the payment of benefits to such officers oremployees, or their heirs, under such terms and conditions as theBoard of Directors may fix;

(e) To compromise or release, in whole or in part, any claim or settledliability to the Bank regardless of the amount involved, under suchterms and conditions it may impose to protect the interests of theBank. This authority to compromise shall extend to claims againstthe Bank; and

(f) To appoint, promote or remove officers from the rank of VicePresident or its equivalent, and other more senior officer positions,excluding the Chairman and the Vice Chairman.

Sec. 10. Chairman and Chief Executive Officer. The Chairman shall be theChief Executive Officer of the Bank and, as such, shall, on behalf of theBoard, have the direction and control of the business affairs and propertiesof the Bank in all matters which are not by this Charter or by the By-Laws ofthe Bank specifically reserved to be done by the Board or other officers ofthe Bank. For this purpose, he shall, among other powers and duties,execute, carry out, and administer the policies, measures, orders, and

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resolutions approved by the Board; direct and supervise the operation andadministration of the Bank; and exercise such other powers and performsuch other functions or duties as may be directed or assigned to him by lawor by the Board from time to time.

Particularly, he shall have the power and duty:(a) To sign and execute all contracts concluded by the Bank and enter

into all necessary obligations required or permitted by this Charter,

upon proper authorization by the Board; and sign all notes,securities certificates, and other major documents of the Bank;(b) To exercise, as Chief Executive Officer of the Bank, the powers of

control and supervision over decisions and actions of subordinateofficers and all other powers that may be granted by the Board;

(c) To report to the Board the main facts concerning the operations ofthe Bank and to recommend changes in policies which he may deemadvisable;

(d) To submit an annual report to the President of the Philippines on theresult of the operations of the Bank;

(e) To recommend to the Board the appointment, promotion, orremoval of all officers of the Bank, with the rank of at least vice-president or its equivalent;

(f) To appoint, promote or remove employees and officers below therank of vice-president or its equivalent; Provided, that promotions,transfers, assignments or reassignments of officers and personnel ofthe Bank are personnel actions deemed made in the interest of theservice and not disciplinary, any provision of the Civil Service Law tocontrary notwithstanding; and

(g) As required by circumstances, to delegate any of his powers, dutiesor functions to any officer or director of the Bank, with the approvalof the Board.

Sec. 11. Vice Chairman and Chief Operating Officer. The Vice Chairmanshall be the Chief Operating Officer of the Bank and shall assume andexercise such specific duties and responsibilities as may be delegated to himby the Chairman.

Sec. 12. Legal Matters and Cases. The Bank shall have its own LegalDepartment, the head of which shall be appointed by the Board of Directorsof the Bank upon recommendation of the Chairman.

In appropriate cases, the Bank may avail also of the legal services of anygovernment legal office authorized to render such services to government-owned or controlled corporations.

The Bank may, upon the recommendation of its Chief Legal Counsel,deputize any member of its legal staff to act as special sheriff in foreclosurecases, in the sale or attachment of the debtor's properties and in the

enforcement of court writs and processes in cases involving the Bank. Thespecial sheriff of the Bank shall make a report to the proper court after anyaction taken by him, which shall treat such action as if it were an act of itsown sheriffs in all respects.

Sec. 13. Other Officers and Employments. The Board of Directors shallprovided for an organization and staff of officers and employees of the Bankand upon recommendation of the Chairman of the Board, fix their

remunerations and other emoluments.No Officer or employee of the Bank subject to Civil Service Law shall bedismissed except as provided by law.

Sec. 14. Exemption from Attachment. The provisions of any law to thecontrary notwithstanding, securities on loans and/or other accommodationgranted by the Bank or its predecessors-in-interest shall not be subject toattachment, execution or any other court process, nor shall they be includedin the property of insolvent persons or institutions, unless all debts andobligations of the debtor to the Bank and its predecessors-in-interest havebeen previously paid, including accrued interest, penalties, collectionexpenses, and other charges, subject to the provisions of paragraph (e) ofSection 9 of this Charter.

Sec. 15. Officer to Conduct Sale. In case of sale of mortgaged propertiesunder the provisions of existing laws or of this Charter, such sale shall beconducted under the direction of the sheriff of the Province or any specialsheriff of the Bank, or of a municipal judge or notary public of the City orMunicipality where the sale is to be made, who shall be entitled to collectthe fees provided for in the Rules of the Court with respect to sale ofproperties under execution.

Sec. 16. Right of Redemption. Any mortgagor of the Bank whose realproperty has been extrajudicially sold at public auction shall, within one (1)year counted from the date of registration of the certificate of sale, have theright to redeem the real property by paying to the Bank all of the latter'sclaims against him, as determined by the Bank.

The Bank may take possession of the foreclosed property during theredemption period. When the Bank takes possession during such period, itshall be entitled to the fruits of the property with no obligation to accountfor them, the same being considered compensation for the interest thatwould otherwise accrue on the account. Neither shall the Bank be obliged topost a bond for the purpose of such possession.

Sec. 17. Inhibition from Board Meeting of Member with Personal Interest.Whenever any member attending a meeting of the Board of Directors has adirect personal interest in the discussion or resolution of any given matter,or any of his relatives within the second civil degree or consanguinity or






40

second civil degree of affinity has such an interest, said member shall notparticipate in the discussion or resolution of the matter and must retire fromthe meeting during the deliberation thereon. The minutes of the meeting,which shall note the subject matter, when resolve, the fact that a memberhad a personal interest in it, and the withdrawal of the member concerned,may be made available to the public.

For this purpose, the member of the Board shall, at the beginning of their

respective terms, disclose to the board any and all interests they may havein any corporation, partnership. or association and shall, thereafter,disclosed to the Board, any charges thereto.

Sec. 18. Prohibition on Persons with Personal Interest. No member of theBoard, officer, attorney, agent, or employee of the Bank shall in anymanner, directly participate in the deliberation upon or the determination ofany question affecting his direct personal interest or the personal interestsof his relatives within the second civil degree of consanguinity or second civildegree of affinity, or of any corporation, partnership, or association in whichhe has a direct interest. Any person violating the provisions of this sectionshall be summarily removed from office and shall upon conviction bepunished with a not less than one thousand pesos nor more than ten

thousand pesos or with imprisonment of not less than one year nor morethan five years, or by both fine and imprisonment at the discretion of thecourt.

Sec. 19. Borrowing by Directors, Officer and Employees Restriction andLimitation. No director or officer or employees of the Bank or anycorporation, partnership, or company wherein any member of the Board ofDirectors, officer or employee, and/or their respective immediate family is acontrolling shareholder, or wherein he is a director or officer shall, eitherdirectly or indirectly, for himself or as representative or agent of others,borrow any of the deposits of funds from the bank, nor shall he become aguarantor, or in any manner be an obligator for money borrowed from thebank or loaned by it: Provided, That this prohibition on loans to directors,officers and employees shall not include loans allowed in the form of fringebenefits granted in accordance with rules and regulations as may beprescribed by the Monetary Board of the Central Bank.

Sec. 20. Rules and Regulations on Conflict of Interest. The foregoingprovisions notwithstanding and in addition thereto, the Board of Directors ishereby authorized to issue rules and regulations for the purposes ofdetermining and resolving conflict of interest questions, which rules shall, inparticular, include the requirement on all officers and employees of the Bankto disclose any shareholdings they, or their relatives within the second civildegree of consanguinity or second civil degree of affinity, may have in anycorporation, partnership, or company in excess of 2% of the equity of saidcorporation, partnership, or company.

Sec. 21. Examination of the Bank. The Bank shall be subject to supervisionand examination by the appropriate department of the Central Bank of thePhilippines.

Sec. 22. Prohibition on Officers and Employees of the Bank. Except asrequired by law, or upon order of a court of competent jurisdiction, or theexpress order of the President of the Philippines or written permission of theclient, no officer or employee of the Bank shall reveal to, nor allow to be

examined, inquired or looked into, by any third person, government official,bureau or office any information relative to details of individual accounts orspecific banking transactions: Provided, that in respect to deposits orwhatever nature, the provisions of existing law shall apply.

This prohibition shall not apply to the exchange of confidential creditinformation among government financial institutions or among banks, inaccordance with established banking practices or as may be allowed by law.

Sec. 23. Exaction of Fee, Commission, Gift or Charge. No authorized fee,commission, gift, or charge of any kind shall be exacted, demanded, or paid,for obtaining loans from the Bank, and any officer, employee, or agent ofthe Bank found guilty of exacting, demanding, or receiving any fee services

in obtaining a loan, shall be punished by a fine of not less than onethousand nor more than twenty thousand pesos, imprisonment for not lessthan one year nor more than ten years, and perpetual disqualification frompublic office.

Sec. 24. Penal Provisions of General Banking Act. The penal provisions ofSection 87-A of the General Banking Act shall be applicable to officers,employees and borrowers of the Bank.

Sec. 25. General Penal Provisions. Any officer or employee of the Bank whoviolates, or permits any of the officers, employees or agents of said Banksor any other person to violate, any of the provision of this Chapter notspecifically punished in the preceding section and any person violating anyprovision of this Charter or aiding and abetting the violation thereof, shall bepunished with a fine not less than one thousand nor more than ten thousandpesos and with imprisonment not less than one year nor more than fiveyears.

Sec. 26. Other Liability of Guilty Officer or Employee. Any member of theBoard of Directors or officer or employee of the Bank who willfully violatesany of the provisions of this Charter shall in, addition to the criminal andadministrative liability resulting from such act, be held liable for any loss orinjury suffered by the Bank as a result of such violation.

Sec. 27. Liability of Directors, Officers or Partners of Offending Corporationor Partnership. If the violation of the provisions of this Charter is committed






41

by a corporation or partnership, the directors, officers or partners hereofwho participated in the violation shall be criminally liable for such violation.

Sec. 28. Applicability of Banking Laws. The provisions of Republic Act No.265, as amended, and Republic Act No. 337, as amended, insofar asapplicable and not in conflict with any provision of this Charter, shall applyto the Bank.

TRANSITORY PROVISIONSSec. 29. Preparatory Work. Upon the effectivity of this Charter, the Board ofDirectors and management of the Bank shall undertake the appropriatesteps to establish its current financial condition for the purpose ofdetermining its net asset values and the book value of shares thereof. Theshares of stock held by the Government of the Philippines in the Bank aredeemed cancelled and exchange for common voting shares of the Bank.

Sec. 30. Transfer of Assets and Liabilities of the Development Bank of thePhilippines. The Bank shall transfer to the National Government such of itsassets and liabilities as may be necessary to rehabilitate the bank and tostart its operations under the Revised Charter on a viable basis, asdetermined by the appropriate authorities, such assets to include but need

not be limited to its acquired assets and non-performing accounts and suchliabilities to include real as well as contingent liabilities. The NationalGovernment is hereby authorized to accept the same under terms andconditions as may be mutually acceptable to the Bank and the NationalGovernment.

Sec. 31. Maintenance, Care and Preservation of Assets Transferred to theNational Government. The Bank is hereby authorized to enter into anagreement with the National Government as transferee of assets from theBank as hereinabove provided, either as an interim arrangement orotherwise and under such terms and conditions as may be necessary topreserve and/or to maintain and/or to dispose of such assets transferred tothe National Government.

Sec. 32. Authority to Reorganize. In view of the new scope of operations ofthe Bank, a reorganization of the Bank and a reduction in force are herebyauthorized to achieve simplicity and economy in operations, includingadopting a new staffing pattern to suit the reduced operations envisioned.The formulation of the program of reorganization shall be completed withinsix months after the approval of this Charter, and the full implementation ofthe reorganization program within thirty months thereafter.

Sec. 33. Implementing Details; Organization and Staffing of the Bank. Uponthe effectivity of this Charter, the Board of Directors of the Bank shall beconstituted and its Chairman appointed. The Chairman is hereby authorized,subject to the approval of the Board of Directors as appropriate, to issue

such orders, rules and regulations as may be necessary to implement theprovisions of this Charter including those relative to the financial aspects, ifany, and to the reorganization of the Bank as hereinabove authorized whichwill involve the determination and adoption of (1) the new internal structureof the Bank as reorganized down to the divisional section or lowestorganizational levels, including such appropriate units as may be needed tohandle caretaking activities such as the disposition of certain assets and thecollection of certain accounts; (2) a new staffing pattern including

appropriate salary rates, and (3) the initial operating budget.In the implementation of the reorganization of the Bank, as authorizedunder the preceding section, qualified personnel of the Bank may beappointed to appropriate positions in the new staffing pattern thereof andthose not so appointed are deemed separated from the service. Nopreferential or priority rights shall be given to or enjoyed by any officer orpersonnel of the Bank for appointment to any position in the new staffingpattern nor shall any officer or personnel be considered as having prior orvested rights with respect to retention in the Bank or in any position as mayhave been created in its new staffing pattern, even if he should be theincumbent of a similar position thereon.

Pending the completion of the personnel actions above provided and theissuance of the appropriate implementing orders, all present remainingincumbents of position in the Bank shall continue to exercise their usualfunctions, duties and responsibilities.

Sec. 34. Separation Benefits. All those who shall retire from the service orare separated therefrom on account of the reorganization of the Bank underthe provisions of this Charter shall be entitled to all gratuities and benefitsprovided for under existing laws and/or supplementary retirement plansadopted by and effective in the Bank: Provided, that any separation benefitsand incentives which may be granted by the Bank subsequent to June 1,1986, which may be in addition to those provided under existing laws andprevious retirement programs of the Bank prior to the said date, for thosepersonnel referred to in this section shall be funded by the NationalGovernment; Provided, further, that, any supplementary retirement planadopted by the Bank after the effectivity of this Chapter shall require theprior approval of the Minister of Finance.

Sec. 35. Banking Operations under 1986 Revised Charter, GovernmentLaws. The banking operations of the Bank shall be governed by theprovisions of the 1986 Revised Charter beginning on January 2, 1987 onsuch subsequent date as may be determined by the President of thePhilippines upon the recommendation of the Minister of Finance.






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(c) Philippine Veterans BankPhilippine Veterans Bank Act

Section 1. Name Domicile and place of business. There is hereby created abank to be known as the Philippine Veterans Bank, which shall be commonlycalled the Veterans Bank. Its principal domicile and place of business shallbe in the City of Manila but branches or agencies may be established in theprovinces and cities as the Board of Directors may decide.

CORPORATE POWERS

Section 2. Corporate powers and duties. The said Veterans Bank shall be abody corporate and shall have the power:

(a) To prescribe is by-laws;

(b) To adopt and use a seal;

(c) To sue and be sued;

(d) To carry on a trust business is accordance with the provisions of lawsgoverning trust corporations;

(e) To grant long-term loans and advances preferably to veterans, theirwidows, orphans or compulsory heirs against security and real estate and/orother acceptable assets including backpay certificates issued by the NationalTreasurer pursuant to Republic Act No. 304 and Republic Act No. 897 at thediscretion of the Board of Directors for the establishment, rehabilitation orexpansion of agriculture, industrial, and other productive enterprises:Provided , That the aggregate of such loans shall not exceed the sum total ofthe paid-up capital and unimpaired surplus, long-term indebtedness andthirty per cent of the total deposits: Provided, further , That notarial servicesin connection with loan applications of not more than one thousand pesos(P1,000.00) shall be furnished by the Bank free of charge and in case where

the Veterans Bank has no lawyers, notarial services shall be performed bythe justice of the peace and other government notaries public, free ofcharge;

(f) To invest in stocks other than shares of stock in mining companies,government guaranteed bonds, and secured collaterals having maturities ofnot more than thirty (30) years: Provided , That the priorities in the grant ofloans for secured collaterals having maturities of not more than thirty yearsshall be in accordance with the rules and regulations established by theCentral Bank;

(g) With the approval of the President of the Philippines, to issue bonds andother certificates of indebtedness against its credits secured by real estate

but not in excess of ninety per cent of the value thereof. The proceeds from

the sale of such bonds and/or certificates of indebtedness are to be used inits lending operations for the industrial and agricultural development of thecountry.

The Board of Directors shall determine the interest rates, maturities, andother requirements of said obligations;

(h) To contract any obligation, or enter into any agreement essential to theproper management of its corporate powers and to carry out its aims andpurposes;

(i) To appoint and dismiss its officers and employees;

(j) To grant loans to cooperative associations to facilitate production, themarketing of crops, and the acquisition of essential commodities: Provided ,That preference should be given to such cooperative associations which areowned or controlled by the veterans, their widows, orphans or compulsoryheirs;

(k) To grant loans to government employees and employees of government-owned or controlled corporations, and to employees of private corporationsor entities for the purpose of enabling said employee to buy shares of stocksin corporations or industries engaged in the development and/or expansionof agriculture and industries: Provided , That the yearly amortization of suchloans shall not exceed ten per cent (10%) of the total annual salaries andwages of the employees: Provided, further , That such loan shall be payablein full within a period of not exceeding five years and that preference begiven to employees who are veterans;

(l) To exercise the powers granted in this Act and such incidental owners asmay be necessary to carry on and engage in the business of generalbanking;

(m) To exercise the general powers mentioned in the Corporation Law and

the General Banking Act, insofar as they are not inconsistent orincompatible with the provisions of this Act.

Section 3. Authorized capital stock Par value.

(a) The capital stock of the Veterans shall be one hundred million pesos(P100,000,000.00) divided into five hundred ten thousand (510,000)common shares and four hundred ninety thousand (490,000) preferredshares with a par value of one hundred (P100.00) pesos each.

(b) At least fifty-one per cent (51%) of the capital stock of the VeteransBank shall be divided into common shares which shall be fully subscribed bythe government of the Republic of the Philippines for and in behalf of the

veterans, their widows, orphans or compulsory heirs as defined and

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determined under Section 4, subsection (e) of this Act, and shall be initiallypaid from the Veterans Trust Fund provided for in Section 2, subsection (d)of Republic Act Numbered Seventeen hundred and eighty-nine as amended,and from or out of earnings, dividends, or profits from the operations of theVeterans Bank; and for the payment of said subscription, all the availablecash deposits with the Philippine National Bank and/or any other banks tothe credit of the Veterans Trust Fund shall be transferred immediately to theVeterans Bank: Provided , That after the approval of this Act and

notwithstanding the provisions of any existing law and/or executive orders,rules and regulations to the contrary, every and all additional cashpayments on account of the said Veterans' Trust Fund shall be remitted andpaid directly and exclusively to the said Veterans' Bank to be applied asadditional paid-up payments of the aforesaid common shares subscription:Provided, further , That nothing shall be transferred to, or received by, thesaid Veterans' Bank representing any portion of the proceeds of theaforesaid Veterans' Trust Fund except cash payments only of the pesoequivalent thereof at the prevailing rate of exchange: And provided, finally ,That within five years from the organization of the Bank all shares of stockequivalent to fifty-one per cent subscription of the capital stock held by thegovernment of the Republic of the Philippines for and in behalf of theveterans, their widows, orphans or compulsory heirs shall be transferred to

and in the name of the veterans who shall thereafter vote said commonshares. The shares shall be divided equally among the veterans at the rateof one share of one hundred pesos for each veteran or fraction thereof. Thebalance of about forty-nine (49%) per cent shall be divided into preferredshares which shall be opened for subscription by any recognized veteran,widow, orphans or compulsory heirs of said veteran at the rate of one (1)preferred share per veteran: Provided , That in case of failure of anyparticular veteran to subscribe for any preferred share of stock so offered tohim as herein provided, within thirty (30) days from the date of receipt ofnotice, said share of stock shall be available for subscription to otherveterans in accordance with such rules or regulations as may bepromulgated by the Board of Directors. Any share of stock corresponding tothe capital stock subscribed and paid by the Republic of the Philippines inthe manner aforementioned, shall be issued in the name of the Republic ofthe Philippines, in trust for the benefit of veterans, their widows, orphans orcompulsory heirs as determined in this Act, and any share of stocksubscribed and paid by individual veteran shall be issued in the name of theindividual veteran, his widow, orphan or compulsory heir. The sale ortransfer of a share or stock of a veteran, widow, orphan or compulsory heirof a veteran to a party not a veteran, widow, orphan or compulsory heir of aveteran shall not be allowed under any circumstances. Any share may besold or transferred to the Bank which shall issue the same to thestockholders who are veterans, their widows, orphans or compulsory heirs:Provided , That no veterans, widow, orphan or compulsory heir shall beissued a total of more than twenty shares.

Section 4. Determination of veterans entitled to benefit from this Act.

(a) The term "veteran or veterans" shall include any person or persons whoserved in the regularly constituted air, land, or naval services or arms, or insuch non-regularly organized military units in the Philippines during WorldWar II, and whose services with such units are duly recognized by theRepublic of the Philippines or by the Government of the United States:Provided , That for the purposes of this Act, the term "veteran or veterans"also include the widow, orphan or a compulsory heir of a deceased veteran,as determined by existing laws;

(b) The term "organized or acknowledged veterans organizations" as used inthis Act shall mean a veterans organization duly recognized oracknowledged as such by the Philippine Veterans Administration which shallkeep an official roster of such veterans organizations;

(c) On the basis of the acknowledged or duly established official records anddata from the Treasury of the Philippines and any other record or evidenceadmissible under the rules of evidence, such as the records of the PhilippineVeterans Administration and of the Armed Forces of the Philippines, thePhilippine Veterans Administration shall determine immediately after the

approval of this Act, who and how many are the veterans of the Philippinesof World War II and their widows, orphans or compulsory heirs asdetermined by existing laws who are entitled to the benefits of this Act. Thedecision of the Philippine Veterans Administration on the matter shall befinal, unless appeal for review, within fifteen days from notice thereof, ismade to the President of the Philippines or to the Supreme Court whosedecision shall be final. The appeal shall be perfected in the same manner asin other proceedings and it may be prosecuted by the interested party or bythe head of any acknowledged veterans organization;

(d) The reckoning day for determining the status and number of suchveterans, their widows, orphans or compulsory heirs shall be the date ofapproval of this Act;

(e) The share of each beneficiary, war veteran or widow, orphan orcompulsory heir of a deceased veteran, in the distribution of the benefitsaccruing to the Republic of the Philippines, will be equal regardless of rankand services rendered: Provided , That in the case of orphan or orphans of adeceased veteran, they shall be counted as one unit only and the share ofall of them regardless of their number will be the same or equal to that of asurviving war veteran or surviving widow;

(f) Notice of the decision of the Philippine Veterans Administration on thequestion of who are entitled to participate in the benefits accruing to theVeterans Trust Fund shall immediately be served on the interested parties,either directly on thru the organization to which they belong in writing and

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by registered mail. In addition, the Philippine Veterans Administration shallpublish for three consecutive weeks a notice in two newspapers of generalcirculation in the Philippines to the effect that the Philippine VeteransAdministration has already completed its work of determining the numberand the identity of those entitled to participate in the trust fund and advisingany party interested who has not received yet the notice of the decisionserved upon him that he may verify his inclusion or exclusion from theofficial register in the Philippine Veterans Administration. This Office shall

keep a complete list and official register of those included and excluded fromthe enjoyment of the benefit, which list shall be available for inspectionduring office hours. The official registry book shall constitute an irrevocablepublic record, certified true copies of which may be released by thecustodian of records for official purpose only.

BANKING OPERATION IN GENERAL

Section 5. Loans, investigation and liabilities. The Veterans Bank is herebyauthorized:

(a) To grant loans for the establishment, rehabilitation, expansion ordevelopment of any agricultural, commercial or industrial enterprise, or

personal service including public utilities, under such rules and regulationsas may be prescribed by the Board of Directors and that preference be givento applicants who are veterans;

(b) To make loans on, or to discount notes and/or receipts secured by,harvested and stored crops: Provided , That no loans on the security of suchharvested and stored crops shall exceed eighty per cent of the market valuethereof on the date of the loans: Provided, further , That the crops somortgaged shall be insured by the mortgagor for the benefit of the VeteransBank for their entire market value at the discretion of the Board ofDirectors: Provided, furthermore , That if owing to any circumstances thevalue of the crops given as security shall diminish, the mortgagor shallfurnish the Veterans Bank with additional security or refund such part of the

loan as the Bank may deem necessary: Provided, finally , That such loansshall be granted for a period of not to exceed one year, subject toextension, in the discretion of the Board of Directors;

(c) To make loans to agriculturists in installments, on standing crops of thenatural products of the Philippines such as palay, copra, sugar, tobacco,corn, abaca and maguey, of not exceeding seventy per centum of theestimated value of such crops: Provided, however , That before grantingsuch loans, the Veterans Bank may require additional security in the natureof mortgage on landed estate duly registered in the name of the debtor, orchattel mortgage including those upon livestock, machineries andagricultural implements or personal bonds with sufficient surety or suretiessatisfactory to the bank;

(d) Generally, to make advances or discount paper for agricultural,manufacturing, industrial or commercial purposes: Provided , That loans,discounts, or advances made under this section shall have maturities of notexceeding one year, renewable from year to year, in the discretion of theBoard of Directors:

(e) The aggregate amount of loans for any single industry shall at no timeexceed twenty per cent of the Banks lending capacity;

The total liabilities to the bank of any person, or of any company,corporation, or firm for money borrowed, including in the liabilities of thecompany or firm, the liabilities of the several members thereof, shall at notime exceed fifteen per centum of the unimpaired capital and surplus of theBank. But the discount of bills of exchange drawn in good faith againstactually existing values owned by the person negotiating the same shall notbe considered as money borrowed, and in addition to the fifteen per centumof the unimpaired capital and surplus of the Bank, hereinbefore providedfor, the total liabilities of any borrower, may amount to a further fifteen percentum of the unimpaired capital and surplus of the Bank provided suchadditional liabilities are secured by shipping documents, warehouse receiptsor other similar documents transferring or securing title covering readily

marketable, nonperishable stocks, when such staples are fully covered byinsurance and when such staples have a market value equal to at least onehundred twenty-five per centum of such additional liabilities.

The Bank shall not make any loan upon the security of the stock of anyother corporation if the aggregate market value of all such stocks ascollateral exceeds an amount equal to ten per centum of the unimpairedcapital stock and surplus of the Bank. The term "loan" whenever used in thisAct shall include overdrafts and the limitations contained in this section shallapply to any loan of any kind whenever secured wholly or party by realestate mortgage.

BOARD OF DIRECTORS COMPOSITION AND ORGANIZATION

Section 6. Qualifications and per diems of the Board of Directors.

(a) Within the first five years from the organization of the Veterans Bank oruntil the transfer of the common shares of its capital stock to the veteransas provided in Section three of this Act, the affairs and business of theVeterans Bank shall be directed and its property managed, controlled andpreserved, unless otherwise provided in this Act, by a Board of Directorsconsisting of eleven (11) members to be composed of three ex-officiomembers to wit: the Philippine Veterans Administrator, the President of theVeterans Federation of the Philippines, and the Secretary of NationalDefense, and the remaining members who shall be veterans of goodstanding with formal business training and/or experience in banking and

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finance, shall, upon the recommendation of the Supreme Council of theVeterans Federation of the Philippines, be appointed by the President of thePhilippines with the consent of the Commission on Appointments. TheSupreme Council of the Veterans Federation of the Philippines shall submitto the President of the Philippines a list of sixteen veterans from which listthe President shall choose eight who shall hold office for one year and untiltheir successors are duly appointed and qualified. After the transfer of thecommon shares of the capital stock of the Veterans Bank to the veterans as

provided for in Section three of this Act, the members of the Board ofDirectors shall be elected annually by the stockholders in the mannerprescribed by the Corporation Law: Provided , That no director, officer, oremployee of any bank shall be eligible as member of the Board of Directorsof the Veterans Bank: Provided, further , That no member of the SupremeCouncil of the Veterans Federation of the Philippines who participated in theelection of a member of the Board of Directors other than the FederationPresident who is an ex officio member can be appointed to the Board unlesshe first resigns as a member of the Supreme Council. The members of theBoard shall receive a per diem allowance of fifty pesos (P50.00) for everymeeting of the Board actually attended by them.

(b) The Board of Directors, shall upon a majority vote of all its members,

elect its Chairman, Vice-Chairman, and Secretary which Secretary may ormay not be a member of the Board, at such a time and place as shall beprovided for in its By-Laws. Pending the election of its Chairman, thePresident of the Veterans Bank shall preside over the Board of Directors.

POWER AND AUTHORITY OF THE BOARD OF DIRECTORS

Section 7. The Board of Directors shall

(a) Formulate policies necessary to carry out effectively the provisions ofthis Act and adopt such By-Laws rules and regulations for the effectiveoperation of the Bank in conformity with this Act and other existing laws;

(b) Determine the organization of the Bank by creating the necessarydepartments or offices as are essential for the efficient operation of theBank;

(c) Subject to prior approval of the Monetary Board, establish branches oragencies in other countries; and,

(d) That during the first five years of transition; mentioned in Section three(a) of this Act, with the authorization of the proper Department Secretaryfirst had, the Board of Directors may appoint as agents of the Bank theprovincial or municipal treasurers, who shall receive such additionalcompensation as the Board may determine.

THE EXECUTIVE OFFICERS

Section 8. President and Vice-Presidents Appointment and removalSalaries. The chief executive of the Bank shall be the President who shall bechosen by the Board of Directors and, during the first five years ofTransition already mentioned, with the advice and consent of the Presidentof the Philippines. He shall be assisted by an Executive Vice-President andsuch number of Vice-Presidents who shall be elected and may be removedby the Board of Directors. The President and the Executive Vice-Presidentshall possess practical experience in banking or finance as executives for atleast five years. The salaries of the President and the Executive Vice-President shall be fixed by the Board of Directors but, in no case, shall it bemore than thirty thousand (P30,000.00) pesos and twenty-five thousand(P25,000.00) pesos yearly, respectively.

THE PRESIDENT POWERS AND DUTIES

Section 9. Duties and powers of the President. The President of the Bankshall among others, execute and administer the policies, measures, orders,and resolutions approved by the Board of Directors, and direct andsupervise the operation and administration of the Bank.

Particularly, he shall have the power and duty:

(a) To make loans on commercial paper for such period of time not toexceed four months, in sums not exceeding ten thousand pesos(P10,000.00) to anyone person, company, corporations, or firm, but he isrequired to submit a report on such loans to the Board of Directors at itssucceeding session: Provided , That the total amount of such loans shall notexceed five (5%) per cent of the paid-up capital and surplus;

(b) To make, with the advice and consent of the Board of Directors, allcontracts on behalf of the said Bank and to enter into all necessaryobligations that this Act requires or permits:

(c) To report weekly to the Board of Directors the main facts concerning theoperations of the Bank during the preceding week and to suggest changes inrates of discount of interest, exchange, or policy which to him may seembest;

(d) To exercise such other powers and perform such other duties as may bedirected by the Board of Directors from time to time.

LEGAL DEPARTMENT

Section 10. Legal Counsel. The Veterans Bank shall have its own legaldepartment, the chief and members of which shall be appointed by the

Board of Directors.




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AUDITING DEPARTMENT

Section 11. Bank Auditor Reports. The Veterans Bank shall have its ownauditing department, the chief of which shall be appointed by the Board ofDirectors from among recognized veterans of good standing who arecertified public accountants and with actual experience in the work of acomptroller. The auditor may not be removed except for cause and neithermay his salary be reduced during his term of office. All other employees ofthe auditing department shall be appointed by the auditor with the adviceand consent of the Board of Directors. Unless otherwise prescribed by theBoard of Directors, the auditor of the Veterans Bank shall have the rank andpay of a Vice-President and shall receive a salary of eighteen thousandpesos (P18,000.00) per annum. The auditor, with the approval of the Boardof Directors, shall fix the salaries of the employees of the auditingdepartment.

The auditor shall make an annual report of the condition of the Bank to theBoard of Directors, to the President of the Veterans Federation of thePhilippines, and to the Administrator of the Philippine VeteransAdministration. The report shall contain among other things a statement ofthe resources and liabilities, including earnings and expenses, the amount of

capital stock, dividends paid, surplus reserved, and undivided profits, as wellas the losses, bad debts and suspend and overdue papers carried in theBank's assets as of the day in which the statements are compiled.

APPOINTMENTS, REMOVAL AND SALARIES OF THE OTHER OFFICERSAND EMPLOYEES OF THE VETERANS

Section 12. Appointments, removal and salaries of other officers andemployees. All other officers and employees of the Bank shall be appointedand removed by the Board of Directors upon recommendation of thePresident of the Bank: Provided, however , That all other circumstancesbeing equal, preference shall be given to veterans, or their widows, orphansor compulsory heirs in the appointment of said personnel. Said officers and

employees shall have duties and compensation which shall be fixed by thePresident with the approval of the Board of Directors.

Section 13. Fidelity bond of officers and employees. The Board of Directorsmay require any officer and employees of the Bank and its branches, beforeentering upon the performance of their duties, to furnish a fidelity bond forthe benefit of the Bank, in the form and amount prescribed by the Board ofDirectors. For this purpose, and for this purpose only, all officers andemployees of whom a bond, is required shall be deemed public officers andemployees, respectively, and the provisions of the Public Bonding Law,Chapter Fifteen of the Administrative Code and related legislations arehereby made applicable to them.

Section 14. Inspection by Department of Supervision and Examination othe Central Bank. The Veterans Bank shall be subject to inspection by theDepartment of Supervision and Examination of the Central Bank inaccordance with Republic Act Numbered Two hundred sixty-five andRepublic Act Numbered Three hundred thirty-seven.

Section 15. Prohibition against owing stock in or incurring indebtedness tothe Bank. The Secretary of Finance. the Governor of the Central Bank, allother members of the Monetary Board, and the Chief of the AuditingDepartment of the Veterans Bank are hereby prohibited from owing stock inthe Veterans Bank, or from becoming indebted to said Bank, directly orindirectly.

PROHIBITED LOANS

Section 16. Loans to officers, directors, and employees; restriction andlimitation. The Veterans Bank shall not directly or indirectly, grant loans toany director, officer, employee, or agent of the Bank, and no loans shall begranted to a corporation, partnership, or company wherein any member ofthe Board of Directors is a shareholder, agent or employee in any matter,except by the unanimous vote of the members of the Board present,

excluding the member interested: Provided , That the total liabilities to theBank of any corporation wherein any member of the Board of Directors ofthe Veterans Bank is a shareholder, agent or employee in any manner, shallat no time exceed five (5%) per centum of the surplus and paid-up capitalof the Bank.

ACQUISITION AND DISPOSAL OF REAL ESTATE

Section 17. The Veterans Bank is hereby authorized to purchase and ownsuch real estate as may be necessary for the purpose of carrying on itsbusiness. It is also authorized to hold such real estate as it may findnecessary to acquire in the collection of debts due to the said Bank or to itsbranches, but real estate acquired in the collection of debts shall be sold by

the Bank within five (5) years after the date of its acquisition.REDEMPTION OF MORTGAGED PROPERTY

Section 18. Right of redemption of property foreclosed. The mortgagorshall have the right, within one year after the sale of the real estate as aresult of the foreclosure of a mortgage, to redeem the property by payingthe amount fixed by the court in the order of execution, with interestthereon at the rate specified in the mortgaged, and all the costs and other

judicial expenses incurred by the Bank by reason of the execution and sa le,and for the custody of said property.

Section 19. Right to demand additional securities; disposal of same

Advanced maturity of credits Right to collect deficiency. If, from any cause




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47

whatsoever, any of the securities specified for the loans provided for in thisAct or accepted by said Bank as security for loans or discounts shoulddecline or depreciate in market value in part or as a whole, or upon non-performance of any promise made to secure the loan or discount, or bill ofexchange, notes, and checks, the said Bank may demand additionalsecurities or may forthwith declare any such obligation due and payable andupon three days' notice, demand, sell, assign, transfer, and deliver thewhole of said securities or any part thereof, or any substitute therefor, orany addition thereto, or any other securities given unto or left in thepossession of, or hereafter given unto or left in the possession of the saidBank for safekeeping or otherwise, at any broker's board or at public orprivate sale, at the option of said Bank, and at such sale, if public, the saidBank may itself purchase the whole or any part of the property sold, freefrom any right of redemption on the part of the mortgagor or pledgor. Incase of sale for any cause, after deducting all costs, or expenses of any kindfor collection, sale or delivery, the said Bank may apply the residue of theproceeds of the sale so made, to pay the said Bank, as its President shalldeem proper whether then due or not due, making proper rebate forinterest or liabilities not then due, returning the overplus, if any, to themortgagor or pledgor, who shall remain liable to and pay to said Bank anydeficiency arising upon such sale or sales.

Section 20 . Action to collect balance of indebtedness. If the proceeds of thesale of securities held as collateral for loans by said Bank do not cover thefull amount of the loan, together with the interest and other chargesthereon, the Bank may proceed against the debtor for the difference, butany amount exceeding the full indebtedness to the Bank shall be paid to thedebtor.

PROHIBITED REMUNERATION

Section 21 . Prohibition against charging fees in securing loans Penalties forviolation. No fee, charge or commission in any form shall be exacted,demanded, or paid, for obtaining loans, directly or indirectly, by any

director, officer, employee, or agent of the Veterans Bank. Any director,officer, employee or agent so exacting, demanding or receiving any fee forhis service or for the use of his influence in obtaining a loan shall bepunished as hereinafter provided for, for the violation of this Act.

NET PROFIT

Section 22. Allocation of net Profits. At the close of each calendar year, theBank shall determine the net result of its operations, in the calculation ofwhich, adequate allowances shall be made for probable losses, and the netprofit arrived thereat shall be distributed as follows:

(a) Twenty (20%) per cent of such net profit shall accrue to the reserveaccount: Provided , That should the accumulated reserves equal to or inexcess of the authorized capital of the Bank, the twenty per cent hereinauthorized to be accumulated shall be distributed under the subsectionimmediately following:

(b) From the remaining eighty (80%) per cent of the net profit shall bededucted the guaranteed earning of the preferred shares of stock owned byindividual veterans, their widows, orphans or compulsory heirs: Provided ,That the share in the net profits corresponding to the Republic of thePhilippines shall first be applied in payment of its capital stock subscription,until said shares shall have been fully paid. Thereafter, twenty per centumof the net profits after deducting the guaranteed earnings of the preferredshares shall be paid in cash to the Board of Trustees as hereinafter providedin Section 23 hereof for disposition and shall be available for 'grants-in-aid'to veterans, their widows, orphans, or compulsory heirs, for educational,social, charitable, and rehabilitation purposes, to organization doing servicefor the cause of the veterans, and for such other purposes beneficial to theveterans.

The remaining profits shall be paid as dividends on common shares held by

the individual veterans as provided in Section three of this Act.Section 23. Board of Trustees of World War II. There is hereby created aBoard of Trustees for the veterans of World War II to be known as "TheBoard of Trustees of the Veterans of World War II", consisting of eleven (11)members to be selected from among the veterans of World War II by theSupreme Council of the Veterans Federation of the Philippines organizedpursuant to Republic Act Numbered Twenty-six hundred and forty.

The Board of Trustees shall be organized within ninety (90) days after theapproval of this Act. Immediately after its organization the members of theBoard of Trustees shall elect from among themselves a Chairman and aVice-Chairman. The members of the Board of Trustees shall serve without

compensation other than actual and necessary expenses incurred either inattendance upon meetings of the Board or upon other official businessauthorized by resolution thereof, but a vote of the majority of all themembers shall be necessary to authorize the disposal of the funds held bythe Board.

The Board shall appoint a secretary and such necessary other officials andemployees and fix their compensations.





8

LEGAL EXISTENCE

Section 24 . Term of legal existence. The legal existence of the Bank underthis Act shall be for a period of fifty (50) years, from and after the date ofthe approval of this Act.

Section 25 . Prohibition against the use of the word "Veterans" Penalty forviolation. All banks other than the Veterans Bank, and such other banks nowlicensed to do business in the Philippines whose names already include theword "veterans" are prohibited from using the word "veterans" as a portionof their names or titles. Any party violating this provision shall be subject toa fine of not less than one hundred (P100.00) pesos for each day duringwhich said violation is committed or repeated.

PENALTIES

Section 26. Penalties for violation of the provisions of this Act. Anydirector, officer, employee, or agent of the Bank who violates or permits theviolation of any of the provisions of this Act, or any person aiding orabetting the violation of any provision of this Act, shall be punished by a finenot exceeding ten thousand (P10,000.00) pesos or imprisonment of notmore than five (5) years, or both, in the discretion of the court.

VETERANS BANK A GOVERNMENT DEPOSITORY

Section 27 . Veterans Bank authorized to receive deposit of governmentfunds as a Government Depository. The Secretary of Finance, the NationalTreasurer and his authorized representatives, city and municipal treasurersas well as official custodians of public funds or those belonging togovernment-owned or controlled corporations are hereby authorized if theyso desire to make and actually maintain deposits of any government orcorporate funds with the Veterans Bank, which is hereby declared to be agovernment depository.

GENERAL PROVISIONS

Section 28. Articles of incorporation. This Act, upon its approval, shall bedeemed and accepted to all legal intents and purposes as the statutoryarticles of incorporation or Charter of the Philippine Veterans' Bank; andthat, notwithstanding the provisions of any existing law to the contrary, saidBank shall be deemed registered and duly authorized to do business andoperate as a commercial bank as of the date of approval of this Act.

Section 29 . By-laws. Within one month after the approval of this Act, theby-laws of the Philippine Veterans' Bank for its organizational, functionaland operational government and procedures shall be adopted by theaffirmative vote of the stockholders representing a majority of all the

subscribed capital stock entitled to vote, whether paid or unpaid, subject to

certification by the Monetary Board pursuant to Section ten of Republic ActNumbered Three hundred thirty-seven.

The by-laws, duly certified by the Monetary Board as aforesaid, shall besigned by the stockholders voting for them and shall be kept in the principaloffice of the Bank, subject to the inspection of the stockholders during officehours, and a copy thereof, duly certified by a majority of the directors andcountersigned by the Bank secretary, shall be filed and registered with theSecurities and Exchange Commissioner.

An Act of Rehabilitat e the PVBSection 1. Declaration of Policy . – In order to give meaning and realizationto the constitutional mandate to provide immediate and adequate care,benefits and other forms of assistance to war veterans and veterans ofmilitary campaigns, their surviving spouses and orphans, it is herebydeclared the policy of the Government to provide the necessary mechanismsto rehabilitate the Philippine Veterans Bank, hereinafter known as theVeterans Bank, a bank owned by the Filipino veterans of World War II anddeeply imbued and impressed with public interest.

Section 2. Settlement of Liabilities . – The National Government deposit of

One billion four hundred eighty-nine million pesos (P1,489,000,000.00) withthe Veterans Bank is hereby restructured into a seven-year promissory noteof the said bank, carrying an interest rate of four percent (4%) per annumeffective on the date of actual operation: Provided, That only the interestshall be paid in the first three (3) years: Provided, further, That repaymentof the principal shall be divided into four (4) equal amortizations: Provided,finally, that the said promissory note shall be exempted from the reserveequipment rule of commercial banks. 1awphi1©

The accrued interests due to the National Government deposits up to andduring the time of the Veterans Bank's closure in 1985 and the tax liabilitiesincurred by the Veterans Bank also up to and during the time of theVeterans Bank's closure are hereby condoned and extinguished.

The obligations of the Veterans Bank with the Central Bank of thePhilippines and the Philippine Deposit Insurance Corporation are herebyrestructured in the same manner governing National Government depositsprovided in the first paragraph of this section.

With respect to deposits of local government units and other privatedeposits with the Veterans Bank, the terms and conditions for the retentionor withdrawal thereof shall be negotiated individually but may carry morefavorable terms in favor of the Veterans Bank.

Section 3. Operations and Changes in the Capital Structure of the VeteransBank and other Amendments . – The operations and changes in the capital





structure of the Veterans Bank, as well as other amendments to its articlesof incorporation and bylaws as prescribed under Republic Act No. 3518, shallbe in accordance with the Corporation Code, the General Banking Act, andother related laws. 1awphi1©

Section 4 . Repeal of Amendatory Presidential Decrees . – PresidentialDecree Nos. 236, 1637, 919 and 1906 which are inconsistent with this Actare hereby repealed, thus restoring the full force and legal effect of RepublicAct No. 3518.

Section 5. Reopening of the Veterans Bank and Its Branches . – Pursuant toand within ninety (90) days from the effectivity of this Act, the Central Bankis hereby authorized to reopen within the period of three (3) years from thedate of the reopening of the head office with no branch licensing cost to thesaid bank.

Section 6 . Veterans Bank as a Government Depository . – The Secretary ofFinance, the National Treasurer and his authorized representatives, city andmunicipal treasurers, as well as custodians of public funds or thosebelonging to government-owned or controlled corporations, are herebyauthorized if they so desire to make and actually maintain deposits, of anygovernment of corporate funds with the Veterans Bank, which is herebydeclared to be a government depository.

Section 7. Rehabilitation Committee . – To facilitate the implementation ofthe provisions of this Act, there is hereby created a rehabilitation committeewhich shall have a term of three (3) months from the date of the approvalof this Act composed of the following: the Executive Secretary, as Chairman,and the Administrator of the Philippine Veterans Affairs Office, the Presidentof the Veterans Foundation of the Philippines, a representative from theexecutive board of the Veterans Federation of the Philippines and arepresentative from the Board of Trustees of the Veterans of World War IIor their respective representatives, as members.

Specifically, the committee shall:(a) Prepare, finance and submit a viable rehabilitation plan to the MonetaryBoard of the Central Bank;

(b) Select and organize an initial manning force headed by a managementteam to be composed of competent, experienced and professional managerswho must possess all qualifications and none of the disqualificationsprovided under Central Bank rules and regulations. The management teamshall be staffed by a trained work force: Provided, That preference shall begiven to the veterans and their dependents, other qualifications being equal;

(c) Exercise management oversight and liaison with Central Bank officers fora period which shall not exceed three (3) months reckoned from the date ofapproval by the Monetary Board to reopen the Veterans Bank; and

(d) Submit to the Monetary Board of the Central Bank otherrecommendations for the successful reopening and operations of theVeterans Bank.

Section 8. Transitory Provisions . – Without requiring new capital infusioneither from the Government or from outside investigators, the Filipinoveterans of World War II who are real owners-stockholders of the VeteransBank shall cause the said bank to have at least Seven hundred fifty millionpesos (P750,000,000.00) in total unimpaired capital accounts prior toreopening pursuant to this Act as a commercial bank.

It is hereby provided that the Board of Trustees of the Veterans of WorldWar II (BTVWW II) created under Republic Act No. 3518 is herebydesignated as trustee of all issued but undelivered shares of stock.

(d) Philippine National BankRevised Charter of PNB

SEC.2 . Name; Place of Business; Branches; Agencies and Other Offices- ThePhilippine National Bank (hereinafter referred to as the "Bank"), a bankcreated under Act No. 2612, as amended, and operating under theprovisions of Presidential Decree No. 694, as amended, shall henceforthoperate under the provisions of this 1986 Revised Charter.

The Bank's principal office and place of business shall be in the NationalCapital Region, also known as Metro Manila. It may open and maintain otherbranches, agencies or other offices at such places in the Philippines orabroad as its Board of Directors may deem advisable, with the priorapproval of the Monetary Board of the Central Bank of the Philippines.

SEC. 3. Corporate Powers and Purposes- The Bank shall be a bodycorporate and shall have the following powers and purposes:

(a) To perform commercial banking, as well as expandedcommercial banking functions; and, within the context of afinancially viable and stable baking institution, to provide bankingservices for the development of agriculture and small and mediumscale commercial and industrial enterprises particularly in the in thecountryside, as provided in Section 4; to provide banking services tothe National Government, other government entities and localgovernments; and to engage in international banking activities,particularly in the promotion of exports;

b) To accept foreign deposits and operate a foreign currency deposit

unit as established under Republic Act No. 6426, as amended;





(c) To accept and administer trusts and to carry on a general trustbusiness;

(d) To act as official government depository with authority tomaintain deposits of the government, its branches, subdivisions andinstrumentalities, and of government owned or controlledcorporations, subject to the provisions of Section 6 hereof and suchrules and regulations as the Monetary Board may prescribe; and

(e) To adopt, amend or change its By-laws; to adopt, alter and usea seal, to make contracts; to sue and be sued; and to exercise thegeneral powers of a corporation as provided in the Corporation Codeof the Philippines and the powers of a bank of its category under theGeneral Banking Act.

The exercise of the above-mentioned powers on banking shall be subject toapplicable law, as well as regulations promulgated by the Central Bank ofthe Philippines.

SEC. 4 . Granting of Loans; Exposure Ceilings and Limits on EquityInvestments. -- In the exercise of its lending authority, the Bank shall givepreference to loans for agricultural and small-and medium-scale commercialand industrial enterprises, particularly in the countryside.

Unless otherwise provided in this Charter, loans and other creditaccommodations granted by the Bank shall be subject to the appropriateapplicable loan limits to any single borrower as provided for under RepublicAct No. 337, as amended.

The aggregate amount of loans, guarantees and contingent accounts, toGovernment agencies and entities including government owned andcontrolled corporations shall at no time exceed the deposits and book valueof the shareholdings of the Government, including government agencies andentities, government owned or controlled corporations plus twenty percent(20%) of such total.

The authority of the Bank to invest in equities of allied undertakings,financial or non-financial, as well as in non-allied undertakings, shall begoverned by the provisions of Republic Act No. 337, as amended.

SEC. 5 . Authorized Capital Stock; Par Value; Sale of Shares. -- Theauthorized capital stock of the Bank shall be Ten Billion Pesos to be dividedinto One Hundred Million common shares with par value of P100 per sharewhich are available for subscription by the National Government. Thecommon shares may be offered for sale to or subscription by private;investors; Provided, That, the investment of private investors shall besubject to the applicable provisions of the General Banking Act.

The Board of Directors shall have authority to convert such number ofunissued common voting shares into preferred non-voting shares to beissued for sale or subscription, with such features, terms, and restrictions asit may determine.

The issue and offering for sale of additional shares to private investorswhich will result in more than one-third of the common voting shares beingeligible for acquisition by such investors shall require prior approval of thePresident of the Philippines; provided, that, where the sale of shares willresult in a majority ownership by the private sector, the prior approval ofthe President shall also be required.

SEC. 6 . Change in Ownership of the Majority of the Voting Equity of theBank. -- When the ownership of the majority of the issued common votingshares passes to private investors, the stockholders shall cause the adoptionand registration with the Securities and Exchange Commission of theappropriate Articles of Incorporation and revised by-laws within three (3)months from such transfer of ownership. Upon the issuance of the certificateof incorporation under the provisions of the Corporation Code, this Chartershall cease to have force and effect, and shall be deemed repealed. Anyspecial privileges granted to the Bank such as the authority to act as official

government depository, or restrictions imposed upon the Bank, shall bewithdrawn, and the Bank shall thereafter be considered a privatelyorganized bank subject to the laws and regulations generally applicable toprivate banks. The Bank shall likewise cease to be a government owned orcontrolled corporation subject to the coverage of service-wide agencies suchas the Commission on Audit and the Civil Service Commission.

The fact of the change of the nature of the Bank from a government-ownedand controlled financial institution to a privately-owned entity shall be givenpublicity.

SEC. 7 . National Government Subscription. -- Upon the effectivity of thisCharter, the National Government shall subscribe to Twenty-Five Million

common shares of stock worth Two Billion Five Hundred Million Pesos whichshall be deemed paid for by the Government with the net asset values ofthe Bank remaining after the transfer of assets and liabilities as provided inSection 29 hereof.

SEC. 8 . Who may Vote Government-Owned Stock. -- The voting rights of allthe stock of the Bank owned and controlled by the National Governmentshall be vested in the President of the Philippines, or in such person orpersons as the President may from time to time designate.

SEC. 9 . Board of Directors; Composition; Tenure; Per Diems. -- The affairsand business of the Bank shall be directed and its properties managed andpreserved and its corporate powers exercised, unless otherwise provided in





this Charter, by a Board of Directors consisting of nine members, dulyelected as herein provided for a term of one year or until their successorsare duly elected and qualified.

The Chairman of the Board shall be appointed by the President of thePhilippines from among members of the Board: Provided, That the positionof Chairman of the Board and President of the Bank shall not be held by thesame person.

The Chairman shall preside at meetings of the Board and of thestockholders.

The President of the Bank shall be vice-chairman of the Board and, as suchshall assist the chairman and act in his stead in case of absence orincapacity. In case of incapacity or absence of both the chairman and vice-chairman, the Board of Directors shall designate a temporary chairman fromamong its members.

Unless otherwise set by the Board and approved by the President of thePhilippines, members of the Board shall be paid a per diem of one thousandpesos for each meeting of the Board of Directors actually attended:Provided, That the total amount of per diems for every single month shallnot exceed the sum of Five Thousand Pesos.

SEC. 10 . Election and Qualification of Members of the Board of Directors. --Annually on the first Tuesday after the first Monday in March, thestockholders shall meet to elect the members of the Board of Directors forthe current year. Each stockholder or proxy will be entitled to as many votesas he may have shares of stock registered in his name on the thirty-first ofJanuary last preceding and held by him at the time of the election multipliedby the number of directors to be elected. In the election of the members ofthe Board, stockholders shall have the right of cumulative voting asrecognized by law.

No person shall be elected director of the Bank unless he is a natural-borncitizen of the Philippines, not less than thirty-five years of age, of goodmoral character and has attained proficiency, expertise and recognizedcompetence in one or more of the following: banking, finance, economics,law, agriculture, business management, public utility or governmentadministration.

At least four of the elective members of the Board shall not concurrentlyhold appointive or elective positions in the National Government, anygovernment-owned or controlled corporation, or in any local government.

No director, officer on employee of any other bank shall be eligible as amember of the Board of Directors of the Bank.

SEC. 11. Powers of the Board of Directors. -- The Board of Directors shallhave, among others, the following duties, powers and authority:

(a) To formulate policies necessary to carry out effectively theprovisions of this Charter;

(b) To adopt, amend or change the by-laws as well as such rulesand regulations as may be necessary for the effective operation ofthe Bank, in conformity with this Charter and existing laws;

(c) To prescribe such terms and conditions to govern the granting ofloans and credits, consistent with the provisions of this Charter;

(d) To adopt an annual budget for the effective operation andadministration of the Bank;

(e) To create, establish and operate a "Self-Insurance System" inorder to effect possible damage or loss of cash-in-transit that theBank may suffer on account of cash and check remittances to itsbranches and agencies and vice-versa, as well as those that mayarise from irregular encashment or negotiation of checks, drafts,telegraphic transfers and similar instruments, or losses arising fromother forms of fraud;

(f) To create and establish a Provident Fund which shall consist ofcontributions made both by the Bank and its officers or employeesto a common fund for the payment of benefits to such officer oremployee or his heirs under such terms and conditions as the Boardof Directors may fix;

(g) To compromise or release, in whole or in part, any claim,liability, or demand for or against the Bank, regardless of theamount involved, under such terms and conditions as it may imposeto protect the interests of the Bank

(h) To determine the procedure and requirements for the acquisitionof properties necessary for the business of the Bank and

(i) To dispose of properties of the Bank, whether used in theconduct of its business or acquired as a result of its bankingoperations, by public bidding or private negotiations as provided inSec. 21 of this Charter.

The Board shall meet as frequently as necessary and the presence of fivemembers shall constitute a quorum.

SEC. 12 . President of the Bank. - The Chief Executive Officer of the Bankshall be the President who shall be elected by the Board of Directors from





among themselves with the advise and consent of the President of thePhilippines. No person shall be appointed President of the Bank unless he isat least forty years of age, of good moral character and reputation, with atleast ten years previous experience in banking, and has a reputedproficiency, expertise and recognized competence in banking or financialmanagement.

The President of the Bank shall, among other powers and duties, executeand administer the policies, measures, order and resolutions approved bythe Board of Directors, and direct and supervise the operations andadministration of the Bank. Particularly, he shall have the power and duty:

(a) To execute all contracts and to enter into all authorizedtransactions in behalf of the Bank;

(b) To exercise, as Chief Executive Officer, the power of supervisionand control over decisions or actions of subordinate officers and allother powers that may be granted by the Board.

(c) To recommend to the Board the appointment, promotion, orremoval of all officers of the Bank with the rank of at least VicePresident or its equivalent;

(d) To appoint, promote or remove employees and officers belowthe rank of Vice President;

(e) To transfer, assign or reassign officers and personnel of theBank in the interest of the service;

(f) To report periodically to the Board of Directors on the operationsof the Bank;

(g) To submit annually a report on the result of the operations ofthe Bank to the President of the Philippines and to privateshareholders in the Bank, if any; and

(h) To delegate any of his powers, duties or functions to unto anyofficial of the Bank, with the approval of the Board of Directors.

SEC. 13 . Legal Matters and Cases. -- The Bank shall have its own LegalDepartment, the head of which shall be appointed by the Board of Directorsof the Bank upon recommendation of the President of the Bank.

The Bank may, subject to court approval, deputize any member of its legalstaff to act as Special Sheriff in the enforcement of court writs andprocesses in cases involving the Bank.

SEC. 14 . Bank Auditor. -- The Commission on Audit shall be ex-officioauditor of the Bank and shall designate a representative to the Bank.

SEC. 15. Other Officers and Employees. - The Board of Directors shallprovide for an organization and staff of officers and employees of the Bankand upon recommendation of the President of the Bank, fix theirremunerations and other emoluments.

No officer or employee of the Bank subject to the Civil Service Law shall bedismissed or suspended except as provided by law.

SEC. 16 . Examination of the Bank. -- The Bank shall be subject tosupervision and examination by the appropriate department of the CentralBank of the Philippines.

SEC. 17 . Inhibition from Board Meeting of Member with Personal Interest. --Whenever any member attending a meeting of the Board of Directors has apersona interest directly or indirectly, in the discussion or resolution of anygiven matter, said member shall not participate in the discussion orresolution of the matter and must retire from the meeting during thedeliberation thereon. The minutes of the meeting which shall not the subjectmatter, when resolved, the fact that a member had a personal interest in it,and the withdrawal of the members concerned, may be made available tothe public.

SEC. 18 . Prohibition on Officers and Employees of the Bank. -- Excepts asrequired by law, or upon order of a court of competent jurisdiction, orexpress order of the President of the Philippines or writ of permission of theclient, no officer or employee of the Bank shall reveal to, nor allow, to beexamined, inquired or looked into by any relative to details of individualaccounts or specific banking transactions: Provided, that in respect todeposits of whatever nature, the provisions of existing laws shall apply.

This prohibition shall not apply to the exchange of confidential creditinformation among government financial institutions or among banks, inaccordance with established banking practices or as may be allowed by law.

SEC. 19 . Borrowings by Directors, Officers and Employees - Restrictions andLimitations. -- No director of officer or employee of the Bank or anycorporation, partnership, or company wherein any member of the Board ofDirectors, officer or employee, and/or their respective relatives within thesecond degree of consanguinity or affinity, is a director, officer, orcontrolling shareholder, shall either directly or indirectly, for himself or asrepresentative or agent of others, borrow any of the deposits of funds fromthe Bank, nor shall he become a guarantor, indorser, or surety for loansfrom the Bank to others, or in any manner be an obligor for moneyborrowed from the Bank or loaned by it: Provided, That this provision on





loans to directors, officers and employees shall not include loans allowed inthe form of fringe benefits granted in accordance with rules and regulationsas may be prescribed by the Monetary Board of the Central Bank.

The Bank shall not grant, directly or indirectly, any loans or creditaccommodations to the head or to any officer or personnel directlyexercising supervisory or regulatory authority over the activities of the Banksuch as those of the Central Bank of the Philippines or of the Commission onAudit.

SEC. 20. Prohibited Interest or Fees with Reference to Obtaining Loans. --No Director, officer or employee of the Bank shall, except as provided in thepreceding Section, directly or indirectly, have any pecuniary interest in anyloan from the Bank. Neither shall he charge, exact, demand or receive anyfee, charge or commission in any form for his service or the use of hisinfluence in obtaining a loan. Any violation of this Section shall be punishedas hereinafter provided in Section 27 of this Charter.

SEC. 21. Disposal of Real Estate and Other Properties in the Collection ofDebts. -- Real and other properties acquired by the Bank in the collection ofdebts, receivables or investments by way of foreclosure or other meansshall be sold or otherwise disposed of in accordance with the policies andguidelines adopted by the Board of Directors within five years after date oftheir acquisition.

SEC. 22. Rights of Redemption of Foreclosed Property - Right of PossessionDuring Redemption Period. - Within one year from the registration of theforeclosure sale of real property, the mortgagor shall have the right toredeem the property by paying the principal, interests, charges,commissions and all claims of whatever nature of the Bank outstanding anddue as of the date of the sale including all the costs and other expensesincurred by reason of the foreclosure sale and custody of the property, aswell as charges and accrued interest.

The Bank may take possession of the foreclosed property during theredemption period. When the Bank takes possession during such period, itshall be entitled to the fruits of the property with no obligation to accountfor them, the same being considered compensation for the interest thatwould otherwise accrue on the account. Neither shall the Bank be obliged topost a bond for the purpose of such possession.

SEC. 23. Allocation of Current Net Profits. -- At the close of the calendaryear, the Bank shall determine the net results of its operations in thecalculation of which adequate allowances shall be made for probable losses.Of the net profits arrived at, at least fifty percent (50%) shall be set asideand accumulated in the earned surplus account. The remaining current netprofits may after an examination of the financial condition of the Bank be

used for the declaration of Dividends corresponding to the shares of theGovernment and the private stockholders. Dividends may either be in theform of cash or stock as the Board of Directors shall determine.

SEC. 24 . Payment of Cash Dividends Corresponding to Government-OwnedShares. -- Cash Dividends corresponding to the shares of the NationalGovernment shall first be set aside and used for the purpose of retiring thegovernment securities which may have been issued by the Minister ofFinance for additional Government subscriptions to the unissued shares ofthe capital stock of the Bank prior to the effectivity of this Charter.Thereafter, cash dividends corresponding to the Government-owned sharesshall be paid unto the Treasury of the Philippines to become part of thegeneral funds.

SEC. 25 . Term of Legal Existence. -- The legal existence of the Bank shallbe for a period of fifty years, counted from the date the Bank operatesunder the provisions of this Charter.

SEC. 26. Applicability of Banking Laws. - The provisions of Republic Acts No.265, as amended, and No. 337, as amended, insofar as applicable and notin conflict with any provisions of this Charter shall apply to the Bank.

SEC. 27. Penalties for Violation of the Provisions of this Charter. -- Anydirector, officer or employee of the Bank who violates or knowingly permitsthe violation and any person aiding or abetting any violations of any of theprovisions of this Charter, shall be punished by a fine not to exceed tenthousand pesos or by imprisonment or not more than five years or bothsuch fine and imprisonment.

TRANSITORY PROVISIONS

SEC. 28 . Preparatory Work. -- Upon the effectivity of this Executive Order,the Board of Directors and management of the Bank shall undertake theappropriate steps to establish its current financial condition for the purposeof determining its net asset values and the book value of shares thereof.

All shares of stock held by the Government of the Philippines in the Bankare deemed cancelled and exchanged for Twenty Five Million commonshares of stock subscribed and paid-in by the Government, pursuant toSection 7 hereof.

The ratio of the shareholdings of the Government of the Philippines to theshareholdings of the private shareholders before the effectivity of thisCharter shall be maintained.

Private shareholders of the Bank, including holders of Common "A" shares,shall exchange their shares for such number of shares of stock of the Bankcomputed on the basis of the ratio of the common shares held by the





Government immediately prior to the effectivity of this Charter to the newshares of stock subscribed and paid-in by the Government pursuant toSection 7 hereof.

SEC. 29. Transfer of Assets and Liabilities of the Philippine National Bank. --The Bank shall transfer to the National Government such of its assets andliabilities as may be necessary to rehabilitate the Bank and to start itsoperations under the Revised Charter on a viable basis, as determined bythe appropriate authorities, such assets to include but not necessarily belimited to its acquired assets and non-performing accounts, and suchliabilities to include real as well as contingent liabilities. The NationalGovernment is hereby authorized to accept the same under terms andconditions as may be mutually acceptable to the Bank and the NationalGovernment.

SEC. 31 . Banking Operations under the 1986 Revised Charters; GoverningLaws. -- The Banking operations of the Bank shall be governed by theprovisions of this Charter beginning on January 1, 1987, or on suchsubsequent date as may be determine by the President of the Philippinesupon the recommendation of the Minister of Finance.

SEC. 32. Loans and Other Investments, and Liabilities is Excess ofPrescribed Limits. -- Loans and other investments as well as liabilitiesexisting as of the date of the effectivity of this Revised Charter which as aresult of the assets and liabilities transfer under Section 29 hereof willexceed the limits prescribed under the provisions of this Act, the GeneralBanking Act or Central Bank regulations shall not be subject to suchprescribed limits but shall be reduced within a period of two years unless alonger period is prescribed by the Monetary Board, and once reduced, shallnot be increased beyond the prescribed limits.

SEC. 33. Authority to Reorganize. -- In view of reduced operationscontemplated under this Charter in pursuance of the national policyexpressed in the "whereas" clauses hereof, a reorganization of the Bank and

a reduction in force are hereby authorized to achieve greater efficiency andeconomy in operations, including the adoption. The program orreorganization shall begin immediately after the approval of this Order, andshall be completed within six months and shall be fully implemented withineighteen months thereafter.

SEC. 34 . Implementing Details; Organization and Staffing of the Bank. --Upon the effectivity of this Charter, the incumbent Board of Directors andPresident of the Bank shall continue in office unless or until replaced by thePresident of the Philippines, provided that the provisions of Section 10 ofthis Charter shall be observed. The President of the Bank is herebyauthorized, subject to the approval of the Board of Directors as appropriate,to issue such orders, rules and regulations as may be necessary to

implement the provisions of this Charter, including those relative to thefinancial aspects, if any, and to the reorganization of the Bank ashereinabove authorized under Section 33 which will involve thedetermination and adoption of (1) the new internal structure of the Bank asreorganized down to the divisional, section or lowest organizational levels,including such appropriate units as may be needed to handle caretakingactivities such the disposition of certain assets and the collection of certainaccounts; (2) a new staffing pattern including appropriate salary rates; and(3) the initial operating budget.

In the implementation of the reorganization of the Bank as authorized underSection 33, and in appointments to appropriate positions in the new staffingpattern of the Bank, no personnel of the Bank shall have vested rights toany position in the new staffing pattern or to be otherwise retained in theBank even if he should be the incumbent of the same or similar position inthe new staffing pattern.

SEC. 35. Recall of External Personnel in the Bank. -- Effective on the datethe Bank commences to operate in accordance with this Charter, allrepresentatives and/or personnel of other government offices, Commissionand government corporations assigned to or on detail with the bank areconsidered recalled to their respective offices and/or units. Newdesignations to the Bank shall be made by the respective governmentoffices or Commissions conformably with the mandate of law and therequirements of the Bank.

SEC. 36 . Separation Benefits. -- All those who are separated from the Bankas a result of its reorganization in pursuance of Section 33 hereof shall beentitled to all gratuities and benefits provided for under existing laws and/orsupplementary retirement plans adopted by and effective in the Bank.

SEC. 37. No legal action or suit brought by or on behalf of any aggrievedofficer or personnel of the Bank in connection with any matter treated inthese Transitory Provisions shall be received in any court unless the verified

complaint shows on its face that the cause has first been submitted to, andadversely resolved by, the Civil Service Commission.

PNB v. Velasco, 564 SCRA 512 (2008)

H. Foreign Banks(a) Entry of Foreign Banks

i. Modes of Entry1. By acquiring, purchasing or owning up to 60% of the

voting stock of an existing domestic bank2. By investing in up to 60% of a new banking subsidiary

incorporated under the laws of the Philippines3. By establishing branches with full banking authority





Sec. 2, Foreign Banks Liberalization ActThe Monetary Board may authorize foreign banks to operate inthe Philippine banking system through any of the followingmodes of entry: (i) by acquiring, purchasing or owning up tosixty percent (60%) of the voting stock of an existing bank;(ii) by investing in up to sixty percent (60%) of the votingstock of a new banking subsidiary incorporated under the lawsof the Philippines; or (iii) by establishing branches with fullbanking authority: Provided, That a foreign bank may availitself of only one (1) mode of entry: Provided, further, That aforeign bank or a Philippine corporation may own up to a sixtypercent (60%) of the voting stock of only one (1) domesticbank or new banking subsidiary.

ii. Subject to MB Approval, GuidelinesSec. 2, Foreign Banks Liberalization ActThe Monetary Board may authorize foreign banks to operate inthe Philippine banking system through any of the followingmodes of entry: (i) by acquiring, purchasing or owning up tosixty percent (60%) of the voting stock of an existing bank;(ii) by investing in up to sixty percent (60%) of the voting

stock of a new banking subsidiary incorporated under the lawsof the Philippines; or (iii) by establishing branches with fullbanking authority: Provided, That a foreign bank may availitself of only one (1) mode of entry: Provided, further, That aforeign bank or a Philippine corporation may own up to a sixtypercent (60%) of the voting stock of only one (1) domesticbank or new banking subsidiary.

Sec. 3, Foreign Banks Liberalization ActIn approving entry applications of foreign banks, the MonetaryBoard shall: (i) ensure geographic representation andcomplementation; (ii) consider strategic trade and investmentrelationships between the Philippines and the country of

incorporation of the foreign bank; (iii) study the demonstratedcapacity, global reputation for financial innovations andstability in a competitive environment of the applicant; (iv)see to it that reciprocity rights are enjoyed by Philippine banksin the applicant's country; and (v) consider willingness to fullyshare their technology. chan robles virtual law library

Only those among the top one hundred fifty (150) foreignbanks in the world or the top five (5) banks in their country oforigin as of the date of application shall be allowed entry inaccordance with Section 2 (ii) and (iii) hereof.

In the exercise of this authority, the Monetary Board shalladopt such measures as may be necessary to: (i) ensure thatat all times the control of seventy percent (70%) of theresources or assets of the entire banking system is held bydomestic banks which are at least majority-owned byFilipinos; (ii) prevent a dominant market position by one bankor the concentration of economic power in one or morefinancial institutions, or in corporations, participations,partnerships, groups or individuals with related interests; and(iii) secure the listing in the Philippine Stock Exchange of theshares of stocks of banking corporations established underSection 2(i) and (ii) of this Act: Provided, That said bankingcorporations shall establish stock option plans for their officersand employees as the resources or assets of thesecorporations may allow in the best business judgment of theirrespective boards of directors, pursuant to the CorporationCode of the Philippines.

To qualify to establish a branch or a subsidiary, the foreignbank applicant must be widely-owned and publicly-listed in itscountry of origin, unless the foreign bank applicant is owned

by the government of its country of origin. iii. Limitation on Availment of Mode of Entry

Sec. 2, Foreign Banks Liberalization ActThe Monetary Board may authorize foreign banks to operate inthe Philippine banking system through any of the followingmodes of entry: (i) by acquiring, purchasing or owning up tosixty percent (60%) of the voting stock of an existing bank;(ii) by investing in up to sixty percent (60%) of the votingstock of a new banking subsidiary incorporated under the lawsof the Philippines; or (iii) by establishing branches with fullbanking authority: Provided, That a foreign bank may availitself of only one (1) mode of entry: Provided, further, That a

foreign bank or a Philippine corporation may own up to a sixtypercent (60%) of the voting stock of only one (1) domesticbank or new banking subsidiary.

Subsec. X121.10, MRBa. As a general rule, a foreign bank which has been authorizedto operate in the Philippines through any one of the allowablemodes of entry may change to another mode by giving up thefirst mode it availed of.

b. A foreign bank which pursuant to Items “a” and “b” ofSubsec. X121.1, has established or acquired a bankingsubsidiary may sell its stockholdings therein and may apply for





authority to establish a branch subject to the provisions ofSubsec. X121.9c and to the following conditions:

(i) That the disposition/sale of its stockholdings in thesubsidiary is done within five (5) years from June 5,1994;

(ii) That the foreign bank qualifies under the provisionsof Subsec. X121.2b; and

(iii) That the limit of ten (10) foreign banks establishingbranches as a mode of entry has not yet beenreached.

c. Foreign banks with existing branches in the Philippines, aswell as those that may be allowed to establish branches underR.A. No. 7721, may incorporate under Philippine laws, inwhich case said foreign banks may own up to sixty percent(60%) of the voting stock of the new bank.

iv. Limitation of Foreign PenetrationSec. 73, par. 3, GBL: In the exercise of the authority, theMonetary Board shall adopt measures as may be necessary toensure that at all times the control of seventy percent (70%)of the resources or assets of the entire banking system is heldby banks which are at least majority-owned by Filipinos.

Sec. 3, par. 3, Foreign Banks Liberalization ActIn the exercise of this authority, the Monetary Board shalladopt such measures as may be necessary to: (i) ensure thatat all times the control of seventy percent (70%) of theresources or assets of the entire banking system is held bydomestic banks which are at least majority-owned byFilipinos; (ii) prevent a dominant market position by one bankor the concentration of economic power in one or more

financial institutions, or in corporations, participations,partnerships, groups or individuals with related interests; and(iii) secure the listing in the Philippine Stock Exchange of theshares of stocks of banking corporations established underSection 2(i) and (ii) of this Act: Provided, That said bankingcorporations shall establish stock option plans for their officersand employees as the resources or assets of thesecorporations may allow in the best business judgment of theirrespective boards of directors, pursuant to the CorporationCode of the Philippines.

v. Equal TreatmentSec. 73, par. 4, GBL: Any right, privilege or incentivegranted to a foreign bank under this Section shall be equallyenjoyed by and extended under the same conditions to banksorganized under the laws of the Republic of the Philippines.

Sec. 8, Foreign Banks Liberalization ActForeign banks authorized to operate under Section 2 of thisAct, shall perform the same functions, enjoy the sameprivileges, and be subject to the same limitations imposedupon a Philippine bank of the same category. These limitsinclude, among others, the single borrower's limit and capitalto risk asset ratio as well as the capitalization required forexpanded commercial banking activities under the GeneralBanking Act and other related laws of the Philippines.

The basis for computing the ratio shall be the capital of theforeign bank branch in the Philippines.

The foreign banks shall guarantee the observance of the rightsof their employees under the Constitution.

Any right, privilege or incentive granted to foreign banks ortheir subsidiaries or affiliates under this Act, shall be equallyenjoyed by and extended under the same conditions toPhilippine banks. Philippine corpora tions whose shares ofstocks are listed in the Philippine Stock Exchange or are oflong standing for at least ten (10) years shall have the right toacquire, purchase or own up to sixty percent (60%) of thevoting stock of a domestic bank.

(b) Rules on Acquisition of Voting Stock in Existing DomesticBanki. Extent of Acquisition

Sec. 2, Foreign Banks Liberalization ActThe Monetary Board may authorize foreign banks to operate inthe Philippine banking system through any of the followingmodes of entry: (i) by acquiring, purchasing or owning up tosixty percent (60%) of the voting stock of an existing bank;(ii) by investing in up to sixty percent (60%) of the votingstock of a new banking subsidiary incorporated under the lawsof the Philippines; or (iii) by establishing branches with fullbanking authority: Provided, That a foreign bank may availitself of only one (1) mode of entry: Provided, further, That aforeign bank or a Philippine corporation may own up to a sixtypercent (60%) of the voting stock of only one (1) domesticbank or new banking subsidiary.





ii. Further acquisition of voting stockSec. 73, par. 1, GBL: Within seven (7) years from theeffectivity of this act and subject to guidelines issued pursuantto the Foreign Banks Liberalization Act, the Monetary Boardmay authorize a foreign bank to acquire up to one hundredpercent (100%) of the voting stock of only one (1) bankorganized under the laws of the Republic of the Philippines.

Sec. 73, par. 2, GBL: Within the same period, the MonetaryBoard may authorize any foreign bank, which prior to theeffectivity of this Act availed itself of the privilege to acquireup to sixty percent (60%) of the voting stock of a bank underthe Foreign Banks Liberalization Act and the Thrift Banks Act,to further acquire voting shares such bank to the extentnecessary for it to own one hundred percent (100%) of thevoting stock thereof.

iii. Listing in PSESec. 3, par. 3, Foreign Banks Liberalization ActIn the exercise of this authority, the Monetary Board shalladopt such measures as may be necessary to: (i) ensure that

at all times the control of seventy percent (70%) of theresources or assets of the entire banking system is held bydomestic banks which are at least majority-owned byFilipinos; (ii) prevent a dominant market position by one bankor the concentration of economic power in one or morefinancial institutions, or in corporations, participations,partnerships, groups or individuals with related interests; and(iii) secure the listing in the Philippine Stock Exchange of theshares of stocks of banking corporations established underSection 2(i) and (ii) of this Act: Provided, That said bankingcorporations shall establish stock option plans for their officersand employees as the resources or assets of thesecorporations may allow in the best business judgment of their

respective boards of directors, pursuant to the CorporationCode of the Philippines.

iv. License to Do BusinessSec. 3(d), Foreign Investments Act of 1991The praise "doing business" shall include soliciting orders,service contracts, opening offices, whether called "liaison"offices or branches; appointing representatives or distributorsdomiciled in the Philippines or who in any calendar year stayin the country for a period or periods totalling one hundredeighty (180) days or more; participating in the management,supervision or control of any domestic business, firm, entity orcorporation in the Philippines; and any other act or acts that

imply a continuity of commercial dealings or arrangements,and contemplate to that extent the performance of acts orworks, or the exercise of some of the functions normallyincident to, and in progressive prosecution of, commercial gainor of the purpose and object of the business organization:Provided, however, That the phrase "doing business: shall notbe deemed to include mere investment as a shareholder by aforeign entity in domestic corporations duly registered to dobusiness, and/or the exercise of rights as such investor; norhaving a nominee director or officer to represent its interestsin such corporation; nor appointing a representative ordistributor domiciled in the Philippines which transactsbusiness in its own name and for its own account;

(c) Rules on Acquisition of Voting Stock in New Domestic Banki. Extent of Acquisition

Sec. 2, Foreign Banks Liberalization ActThe Monetary Board may authorize foreign banks to operate inthe Philippine banking system through any of the followingmodes of entry: (i) by acquiring, purchasing or owning up tosixty percent (60%) of the voting stock of an existing bank;

(ii) by investing in up to sixty percent (60%) of the votingstock of a new banking subsidiary incorporated under the lawsof the Philippines; or (iii) by establishing branches with fullbanking authority: Provided, That a foreign bank may availitself of only one (1) mode of entry: Provided, further, That aforeign bank or a Philippine corporation may own up to a sixtypercent (60%) of the voting stock of only one (1) domesticbank or new banking subsidiary.

ii. QualificationsSec. 3, par. 2, Foreign Banks Liberalization ActOnly those among the top one hundred fifty (150) foreignbanks in the world or the top five (5) banks in their country of

origin as of the date of application shall be allowed entry inaccordance with Section 2 (ii) and (iii) hereof.

Sec. 3, par. 4, Foreign Banks Liberalization ActTo qualify to establish a branch or a subsidiary, the foreignbank applicant must be widely-owned and publicly-listed in itscountry of origin, unless the foreign bank applicant is ownedby the government of its country of origin.

Sec. 4(i), Foreign Banks Liberalization ActFor Locally Incorporated Subsidiaries. — The minimum capitalrequired for locally incorporated subsidiaries of foreign banks





shall be equal to that prescribed by the Monetary Board fordomestic banks of the same category.

iii. Listing in PSESec. 3, par. 3, Foreign Banks Liberalization ActIn the exercise of this authority, the Monetary Board shalladopt such measures as may be necessary to: (i) ensure thatat all times the control of seventy percent (70%) of theresources or assets of the entire banking system is held bydomestic banks which are at least majority-owned byFilipinos; (ii) prevent a dominant market position by one bankor the concentration of economic power in one or morefinancial institutions, or in corporations, participations,partnerships, groups or individuals with related interests; and(iii) secure the listing in the Philippine Stock Exchange of theshares of stocks of banking corporations established underSection 2(i) and (ii) of this Act: Provided, That said bankingcorporations shall establish stock option plans for their officersand employees as the resources or assets of thesecorporations may allow in the best business judgment of theirrespective boards of directors, pursuant to the Corporation

Code of the Philippines.iv. License to Do Business

Sec. 3(d), Foreign Investments Act of 1991The praise "doing business" shall include soliciting orders,service contracts, opening offices, whether called "liaison"offices or branches; appointing representatives or distributorsdomiciled in the Philippines or who in any calendar year stayin the country for a period or periods totalling one hundredeighty (180) days or more; participating in the management,supervision or control of any domestic business, firm, entity orcorporation in the Philippines; and any other act or acts thatimply a continuity of commercial dealings or arrangements,

and contemplate to that extent the performance of acts orworks, or the exercise of some of the functions normallyincident to, and in progressive prosecution of, commercial gainor of the purpose and object of the business organization:Provided, however, That the phrase "doing business: shall notbe deemed to include mere investment as a shareholder by aforeign entity in domestic corporations duly registered to dobusiness, and/or the exercise of rights as such investor; norhaving a nominee director or officer to represent its interestsin such corporation; nor appointing a representative ordistributor domiciled in the Philippines which transactsbusiness in its own name and for its own account;

(d) Rules on Establishing Branchesi. Governing Laws

1. Creation, formation, organization or dissolution ofcorporations; fixing of relations, liabilities,responsibilities, or duties of stockholders, members,directors or officers of corporations to each other andthe corporation

Sec. 77, GBL: In all matters not specifically covered byspecial provisions applicable only to a foreign bank or itsbranches and other offices in the Philippines any foreignbank licensed to do business in the Philippines shall bebound by the provisions of this Act, all other laws, rulesand regulations applicable to banks organized under thelaws of the Philippines of the same class, except thosethat provide for the creation, formation, organization ordissolution of corporations or for the fixing of therelations, liabilities, responsibilities, or duties ofstockholders, members, directors or officers ofcorporations to each other or to the corporation.

2. Entry into the Philippines through establishment ofbranchesSec. 72, par. 1, GBL: The entry of foreign banks in thePhilippines through the establishment of branches shallbe governed by the provisions of the Foreign BanksLiberalization Act.

3. Conduct of offshore banking businessSec. 72, par. 2, GBL: The conduct of offshore bankingbusiness in the Philippines shall be governed by theprovisions of the Presidential Decree No. 1034,otherwise known as the "Offshore Banking SystemDecree."

4. All other mattersSec. 77, GBL: In all matters not specifically covered byspecial provisions applicable only to a foreign bank or itsbranches and other offices in the Philippines any foreignbank licensed to do business in the Philippines shall bebound by the provisions of this Act, all other laws, rulesand regulations applicable to banks organized under thelaws of the Philippines of the same class, except thosethat provide for the creation, formation, organization ordissolution of corporations or for the fixing of therelations, liabilities, responsibilities, or duties of




compensation under Article 1278 of the Civil Code since, petitioner Citibankitself admitted that Citibank-Geneva is a distinct and separate entity. As forthe dollar accounts, respondent was the creditor and Citibank-Geneva is thedebtor; and as for the outstanding loans, petitioner Citibank was thecreditor and respondent was the debtor. The parties in these transactionswere evidently not the principal creditor of each other.

It is true that the afore-quoted Section 20 of the General Banking Law of2000 expressly states that the bank and its branches shall be treated as one

unit. It should be pointed out, however, that the said provision applies to auniversal 9 or commercial bank, duly established and organized as aPhilippine corporation in accordance with Section 8 of the same statute, 11 and authorized to establish branches within or outside the Philippines.

The General Banking Law of 2000, however, does not make the samecategorical statement as regards to foreign banks and their branches in thePhilippines. What Section 74 of the said law provides is that in case of aforeign bank with several branches in the country, all such branches shall betreated as one unit . As to the relations between the local branches of aforeign bank and its head office, Section 75 of the General Banking Law of2000 and Section 5 of the Foreign Banks Liberalization Law provide for a"Home Office Guarantee," in which the head office of the foreign bank shall

guarantee prompt payment of all liabilities of its Philippine branches. Whilethe Home Office Guarantee is in accord with the principle that these localbranches, together with its head office, constitute but one legal entity, itdoes not necessarily support the view that said principle is true andapplicable in all circumstances.

The Home Office Guarantee is included in Philippine statutes clearly for theprotection of the interests of the depositors and other creditors of the localbranches of a foreign bank. Since the head office of the bank is located inanother country or state, such a guarantee is necessary so as to bring thehead office within Philippine jurisdiction, and to hold the same answerablefor the liabilities of its Philippine branches. Hence, the principle of thesingular identity of that the local branches and the head office of a foreignbank are more often invoked by the clients in order to establish theaccountability of the head office for the liabilities of its local branches. It isunder such attendant circumstances in which the American authorities and

jurisprudence presented by petitioners in their Motion for PartialReconsideration were rendered.

Now the question that remains to be answered is whether the foreign bankcan use the principle for a reverse purpose, in order to extend the liability ofa client to the foreign bank’s Philippine branch to its head office, as well asto its branches in other countries. Thus, if a client obtains a loan from theforeign bank’s Philippine branch, does it absolutely and automatically makethe client a debtor, not just of the Philippine branch, but also of the headoffice and all other branches of the foreign bank around the world? ThisCourt rules in the negative.

Section 25 of the United States Federal Reserve Act states that –

Every national banking association operating foreign branches shallconduct the accounts of each foreign branch independently of theaccounts of other foreign branches established by it and of its homeoffice, and shall at the end of each fiscal period transfer to itsgeneral ledger the profit or loss accrued at each branch as aseparate item.

v. Head Office GuaranteeSec. 75, GBL: In order to provide effective protection of theinterests of the depositors and other creditors of Philippinebranches of a foreign bank, the head office of such branchesshall fully guarantee the prompt payment of all liabilities of itsPhilippine branch. (69) Residents and citizens of thePhilippines who are creditors of a branch in the Philippines of aforeign bank shall have preferential rights to the assets ofsuch branch in accordance with the existing laws.

Sec. 5, Foreign Banks Liberalization ActThe head office of foreign bank branches shall guarantee

prompt payment of all liabilities of its Philippine branches.

vi. License to Do BusinessSec. 133, Corporation CodeNo foreign corporation transacting business in the Philippineswithout a license, or its successors or assigns, shall bepermitted to maintain or intervene in any action, suit orproceeding in any court or administrative agency of thePhilippines; but such corporation may be sued or proceededagainst before Philippine courts or administrative tribunals onany valid cause of action recognized under Philippine laws.

Hang Lung Bank, Ltd. v. Saulog, 201 SCRA 137 (1991)FACTSHang Lung Bank, Ltd., which was not doing business in the Philippines,entered into a guarantee agreement with Cordova Chin San in Hongkongwhereby the latter agreed to pay on demand all sums of money which maybe due the bank from Worlder Enterprises to the extent of HK $250,000.Worlder Defaulted, HLB sued for collection, and the HK Supreme Courtrendered judgment against Cordova and Worlder.

HLB then filed a case for enforcement and recognition of the HK judgment,since Cordova was a Philippine resident. Cordova Chin San filed a motion todismiss on the basis of lack of capacity to sue, grounded on Section 14 ofthe General Banking Act: "No foreign bank or banking corporation formed,





organized or existing under any laws other than those of the Republic of thePhilippines, shall be permitted to transact business in the Philippines, ormaintain by itself any suit for the recovery of any debt, claims or demandswhatsoever until after it shall have obtained, upon order of the MonetaryBoard, a license for that purpose."

The motion to dismiss was granted. Hence, this petition for certiorari.

ISSUE Can HLB, a foreign bank not doing business in the Philippines, sue in thePhilippines without a license?

RULINGYES , they can. The court looked at both Section 69 of the Old CorporationLaw and Section 133 of the Corp Code which says "No foreign corporationtransacting business in the Philippines without a license, or its successors orassigns, shall be permitted to maintain or intervene in any action, suit orproceeding in any court or administrative agency of the Philippines." Theprovision in the General Banking Act and the corporation Code mean thesame thing: it is not the lack of the prescribed license (to do business in thePhilippines) but doing business without license, which bars a foreign

corporation from access to our courts.Thusly, like any corporation, a bank not doing business in the Philippinesneed not possess a SEC license to sue before our courts.

Since petitioner foreign banking corporation was not doing business in thePhilippines, it may not be denied the privilege of pursuing its claims againstprivate respondent for a contract which was entered into and consummatedoutside the Philippines. Otherwise we will be hampering the growth anddevelopment of business relations between Filipino citizens and foreignnationals. Worse, we will be allowing the law to serve as a protective shieldfor unscrupulous Filipino citizens who have business relationships abroad.

vii. Summons and Legal ProcessesSec. 76, GBL: Summons and legal process served upon thePhilippine agent or head of any foreign bank designated toaccept service thereof shall give jurisdiction to the courts oversuch bank, and service of notices on such agent or head shallbe as binding upon the bank which he represents as if madeupon the bank itself. Should the authority of such agent orhead to accept service of summons and legal processes for thebank or notice to it be revoked, or should such agent or headbecome mentally incompetent or otherwise unable to acceptservice while exercising such authority, it shall be the duty ofthe bank to name and designate promptly another agent orhead upon whom service of summons and processes in legal

proceedings against the bank and of notices affecting the bankmay be made, and to file with the Securities and ExchangeCommission a duly authenticated nomination of such agent. Inthe absence of the agent or head or should there be no personauthorized by the bank upon whom service of summons,processes and all legal notices may be made, service ofsummons, processes and legal notices may be made upon theBangko Sentral Deputy Governor In-Charge of the supervisingand examining departments and such service shall be aseffective as if made upon the bank or its duly authorized agentor head. In case of service for the bank upon the BangkoSentral Deputy Governor In-charge of the supervising andexamining departments, the said deputy Governor shillregister and transmit by mail to the president or the secretaryof the bank at its head or principal office a copy, duly certifiedby him, of the summons, process, or notice. The sending ofsuch copy of the summons, process, or notice shall be anecessary part of the services and shall complete the service.The registry receipt of mailing shall be prima facie evidence ofthe transmission of the summons, process or notice. All costsnecessarily incurred by the said Deputy Governor for the

making and mailing and sending of a copy of the summons,process, or notice to the president or the secretary of the bankat its head or principal office shall be paid in advance by theparty at whose instance the service is made.

Sec. 12, Rule 14, Rules of CivPro: When the defendant is aforeign private juridical entity which has transacted businessin the Philippines, service may be made on its resident agentdesignated in accordance with law for that purpose, or, ifthere be no such agent, on the government official designatedby law to that effect, or on any of its officers or agents withinthe Philippines.

viii. Revocation of LicenseSec. 78, GBL: The Monetary Board may revoke the license totransact business in the Philippines of, any foreign bank, if itfinds that the foreign bank is insolvent or in imminent dangerthereof or that its continuance in business will involve

probable loss to those transacting business with it. After therevocation of its license, it shall be unlawful for any suchforeign banks to transact business in the Philippines unless itslicense is renewed or reissued. After the revocation of suchlicense, the Bangko Sentral shall take the necessary action to

protect the creditors of such foreign bank and the public. The provisions of the New Central Bank Act on sanctions and penalties shall likewise be applicable.




2. manage the operations of its OBU soundly and with prudence.

3. train continually a specific number of Filipinos in international bankingand foreign exchange trading with a view to reducing the number ofexpatriates;

4. provide and maintain in its offshore banking unit at all times net officefunds in the minimum amount of US$1 million.

5. start operations of its OBU within one hundred eighty (180) days from

receipt of its certificate of authority to operate such unit.6. comply with applicable local laws relating to labor and employment.

7. submit before start of operations, other documents as may be requiredby the Central Bank such as certification or similar documents showing thatit is duly authorized by the proper Government entity of its country toengage in offshore banking business in the Philippines.

SECTION 49. Annual Fee. — Upon issuance of a certificate of authority tooperate an OBU in the Philippines, and yearly thereafter, the authorizedbank shall pay the Central Bank a fee of not less than US$20,000.00.

SECTION 50. Transactions with Non-Residents and/or with OBUs. —An OBU may freely engage in all normal banking transactions with non-residents and/or with other OBUs, involving any currency other than thePhilippine peso.

SECTION 51. Transactions with Foreign Currency Deposit Units(FCDUs). — Subject to Central Bank regulations, an OBU may engage inthe following transactions with local banks incorporated or registered in thePhilippines as FCDU(s) in any currency other than the Philippine peso:

1. Accept time, demand and call deposits or issue negotiable certificates oftime deposits.

2. Borrow with maturities not exceeding 360 days.

3. Deposit.

4. Extend loans and advances.

5. Deal in foreign currency instruments.

6. Discount bills, acceptances, and negotiable certificates of deposits.

7. Engage in foreign exchange trading.

8. Engage in such other transactions as are authorized under this sectionbetween OBUs and resident banks authorized to accept foreign currencydeposits under the provisions of R.A. No. 6426, a s amended. Interbankshort-term transactions of not exceeding 360 days such as credit lines ofPhilippine banks with correspondent banks, interbank call loans andinterbank loans for general liquidity purposes shall not require prior Central

Bank approval.

SECTION 52. Transactions with Residents which are not Banks. — AnOBU may engage in the following transactions with residents which are notbanks:

1. Deal in foreign currency instruments.

2. Extend foreign currency loans and advances, subject to existingregulations on foreign borrowings.

3. Open letters of credit (L/Cs) for importations of resident-borrowersprovided such importations shall be funded by a Central Bank-approved OBUforeign currency loan to the resident borrower involved.

4. Negotiate inward (export) Letters of Credit (L/Cs) and handle otherexport transactions (including documents against acceptance [D/A] anddocuments against payments ([D/P] and open account arrangements [O/A])coursed thru their worldwide network of branches and correspondentssubject to the following conditions:

a. OBUs shall bring in foreign exchange sourced outside of the Trade Facilitywhich shall be sold to the domestic banking system; and

b. OBUs' share in the total export L/C negotiation business shall be limitedto ! of the growth (incremental) element in the country's total annualexport. This limit shall be observed yearly until this equals 10 percent oftotal exports. Exports not covered by L/Cs, i.e., done thru documentsagainst acceptance/open account arrangements shall be considered subjectto this overall limit;

5. Provide full foreign exchange service for all foreign currency non-traderemittances and trade remittances resulting from or related to their ownnegotiations of export L/Cs.

6. Render financial, advisory and related services.

7. Refinance trust receipts without prior Central Bank approval arising fromimport transactions of Philippine residents in U.S. dollars or in otheracceptable foreign currencies. The refinancing shall be evidenced by bankersacceptances.

SECTION 53. Peso Deposits. — OBUs may open and maintain pesodeposit accounts with domestic agent banks exclusively for the followingpurposes:

1. To meet administrative and other operating expenses, such as salaries,rentals and the like.

2. To pay the peso equivalent of foreign exchange sold by beneficiaries ofinward remittances of Filipino overseas workers or of Filipino ormultinational companies, coursed through the OBUs' correspondent banksabroad.





3. To pay to the designated benefic iaries in the Philippines the pesoequivalent of foreign exchange inward remittances other than remittancesrelated to trade.

4. To pay the peso equivalent of foreign exchange sold by beneficiaries ofexport L/Cs negotiated with the OBUs.

The peso deposit accounts shall be funded exclusively by inward remittancesof foreign exchange eligible to form part of the Philippine internationalreserves.

OBUs may also sell inward remittances of foreign exchange for pesos to theCentral Bank through the Treasury Department, for credit to the demanddeposit account of the designated commercial bank for account of the OBU.

SECTION 54. Financial Assistance to Officers/Employees. — OBUsmay extend financial assistance (real estate, car, personal loans, etc.) inlocal or foreign currency to their Filipino officers and employees as part oftheir fringe benefit program.

They may likewise grant foreign currency loans to their expatriate officerswithout need of Central Bank approval.

SECTION 55. Secrecy of Deposits. — The provisions of R.A. No. 6426

(Foreign Currency Deposit Act), as amended, shall apply to deposits inOBUs; Provided, however, that numbered deposit accounts shall not beused.

SECTION 56. Exemption from Certain Laws. — The provisions of Act No.2655 (Usury Law) as amended, R.A. No. 529 (Uniform Currency Law) asamended, and R.A. No. 3591 (Deposit Insurance Law) as amended, shallnot apply to transactions and/or deposits in OBUs in the Philippines.

SECTION 57. Accounting and Reporting. — OBUs shall maintain anaccounting system in accordance with guidelines prescribed by the CentralBank. Periodically or as required, existing reports shall continue to besubmitted in the prescribed forms to the Central Bank.

SECTION 58. Supervision. — The operations and activities of offshorebanking units shall be conducted under the supervision of the Central Bankof the Philippines.

SECTION 59. Taxes, Customs Duties. — Transactions of OBUs in thePhilippines shall be subject to such taxes as are prescribed in PresidentialDecree No. 1034, as implemented by regulations of the Bureau of InternalRevenue.

SECTION 60. Revocation/Suspension. — The Monetary Board, by therecommendation of the Governor, may revoke or suspend the authority ofan Offshore Banking Unit to operate in the Philippines for violation of P. D.No. 1034 or these regulations.

i. QualificationSec. 2, Offshore Banking System DecreeSubject to such regulatory guidelines as the Monetary Boardmay prescribe, only banks which are organized under any lawother than those of the Republic of the Philippines theirbranches, subsidiaries or affiliates, shall be qualified tooperate offshore banking units in the Philippines. However,local branches of foreign banks already authorized to acceptforeign currency deposits under the provisions of R.A. No.6426 may opt to apply for authority to operate an offshorebanking unit under the provisions of this Decree: Provided,that, upon their receipt of a corresponding certificate ofauthority to operate as an offshore banking unit, the license totransact business under the provisions of R.A. No. 6426 shallbe deemed automatically withdrawn.

ii. Certificate of Authority to OperateSec. 3, Offshore Banking System Decree The Monetary Board of the Central Bank of the Philippines ishereby authorized to issue certificates of authority to operateoffshore banking units: Provided, however, that, in issuing

such certificates, the Monetary Board shall take intoconsideration the applicant's liquidity and solvency position,networth and resources, management, international bankingexpertise, contribution to the Philippine economy, and otherrelevant factors such as participation in equity of localcommercial banks and appropriate geographic representation.

The Central Bank of the Philippines is hereby authorized tocollect a fee of not less than US$ 20,000.00 upon issuing anycertificate of authority to operate and annually thereafter onthe anniversary date of such certificate.

iii. Head Office GuaranteeSec. 4, Offshore Banking System Decree No application to operate as an offshore banking unit underthe provisions of this Decree shall be considered unless theapplicant shall have first submitted to the Central Bank of thePhilippines a sworn undertaking of its head office or parent orholding company, duly supported by an appropriate resolutionof its board of directors, that, among other things: (a) it will,on demand, provide the necessary specified currencies tocover liquidity needs that may arise or other shortfall that isoffshore banking unit may incur; (b) the operations of itsoffshore banking unit shall be managed soundly and withprudence; (c) it will train and continually educate a specificnumber of Filipinos in international banking and foreignexchange trading with a view to reducing the number of





expatriates; (d) it will provide and maintain in its offshorebanking unit net office funds in the minimum amount of US$1,000,000.00 and (e) it will start operations of its offshorebanking unit within 180 days from receipt of its certificate ofauthority to operate such unit.

iv. Effects of Certain LawsSec. 8, Offshore Banking System DecreeThe provisions of Act No. 2566 (Usury Law), Republic Act No.529, as amended (Uniform Currency Law), and Republic ActNo. 3591, as amended (Deposit Insurance Law), shall notapply to transactions and/or deposits in offshore banking unitsin the Philippines: Provided, however, that the provisions ofR.A. No. 1405 (Secrecy of Bank Deposits Law) shall apply todeposits in offshore banking units.

III. DEPOSIT FUNCTIONA. Nature of Deposit

a. Deposits as Simple Loans

ART. 1953, NCC: A person who receives a loan of money or any otherfungible thing acquires the ownership thereof, and is bound to pay tothe creditor an equal amount of the same kind and quality.

ART. 1980, NCC: Fixed, savings, and current deposits of money inbanks and similar institutions shall be governed by the provisionsconcerning simple loan.

SERRANO v. CENTRAL BANK, 96 SCRA 96 (1980)

DOCTRINE: Bank deposits are in the nature of irregular deposits. They arereally loans because they earn interest. All kinds of bank deposits, whetherfixed, savings, or current are to be treated as loans and are to be coveredby the law on loans. Current and savings deposits are loans to a bank

because it can use the same.

FACTSManuel Serrano made a time deposit (TD) for 1 year with 6% interest ofP150,000 with the Overseas Bank of Manila, while Concepcion Maneja madea similar deposit for 1 year with 6.5% interest of P200,000 with the samebank.

When Concepcion Maneja married Felixberto Serrano (presumably thebrother of Manuel Serrano), she assigned and conveyed to Manuel her TD ofP200,000.

When Serrano presented the TD certificates for encashment to OverseasBank of Manila, none was honored by said bank.

Serrano alleged that the Central Bank failed to strictly supervise the acts ofOverseas Bank of Manila and protect the interests of its depositors by virtueof the constructive trust created when Central Bank required the bank toincrease its collaterals for its overdrafts and emergency loans, saidcollaterals allegedly acquired through the use of depositors money.

Hence, Serrano prayed for Central Bank’s solidary liability with OverseasBank of Manila to him for the P350,000 TDs made, among others.

ISSUEWhether Central Bank should be held solidarily liable

RULINGNO. Serrano’s claims of mandamus and prohibition are not proper as thereis no shown clear abuse of discretion by the Central Bank in its exercise ofsupervision over the bank. If there was, the proper party to invoke in thiscase was Overseas Bank of Manila, not the Central Bank.

Furthermore, both parties overlooked one fundamental principle in thenature of bank deposits when Serrano claimed that there should be createda constructive trust in his favor when Overseas Bank of Manila increased itscollaterals in favor of Central Bank for its overdrafts and emergency loans,since these collaterals were acquired by the use of depositors’ money.

Bank deposits are in the nature of irregular deposits. They are really loansbecause they earn interest. All kinds of bank deposits, whether fixed,savings, or current are to be treated as loans and are to be covered by thelaw on loans. Current and savings deposits are loans to a bank because itcan use the same. Serrano, in making TDs that earn interests with the bank,was in reality its creditor. Failure of the bank to honor the TD is failure topay its obligation as debtor and not a breach of trust arising from a

depositary’s failure to return the subject matter of the deposit.

b. Bank as Debtori. Deposit is voluntary agreement; “Know Your Customer”

standards

SEC. X262.1, MRB: All banking institutions are required to seta minimum of three (3) specimen signatures to besimultaneously required from each of their depositors and toupdate the specimen signatures of their depositors every five(5) years or sooner, at the discretion of the bank. Banks may,





at their option, require their depositors to submit ID photostogether with the specimen signatures.

ii. Ownership of money deposited

GUINGONA, JR. v. CITY FISCAL OF MANILA, 128 SCRA 577 (1984)

DOCTRINE: The relationship between the depositor and the bank is that ofcreditor and debtor. Consequently, the ownership of the amount depositedwas transmitted to the Bank upon the perfection of the contract and it canmake use of the amount deposited for its banking operations, such as topay interests on deposits and to pay withdrawals.

FACTSFrom March 20, 1979 to March, 1981, David invested with the NationSavings and Loan Association, (hereinafter called NSLA) the sum ofP1,145,546.20 on nine deposits, P13,531.94 on savings account deposits(jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit,US$15,000.00 under a receipt and guarantee of payment and US$50,000.00under a receipt dated June 8, 1980 (au jointly with Denise Kuhne), thatDavid was induced into making the aforestated investments by RobertMarshall an Australian national who was allegedly a close associate ofpetitioner Guingona Jr., then NSLA President, petitioner Martin, then NSLAExecutive Vice-President of NSLA and petitioner Santos, then NSLA GeneralManager; that on March 21, 1981 N LA was placed under receivership bythe Central Bank, so that David filed claims therewith for his investmentsand those of his sister; that on July 22, 1981 David received a report fromthe Central Bank that only P305,821.92 of those investments were enteredin the records of NSLA; that, therefore, the respondents in I.S. No. 81-31938 misappropriated the balance of the investments, at the same timeviolating Central Bank Circular No. 364 and related Central Bank regulationson foreign exchange transactions; that after demands, petitioner GuingonaJr. paid only P200,000.00, thereby reducing the amounts misappropriated toP959,078.14 and US$75,000.00.

Guingona, Martin and Santos were charged with estafa before the City Fiscalof Manila. The herein petitioners (Guingona et al) contend that the Fiscalhas no authority to conduct a preliminary investigation and to prosecutethem because the acts alleged by David was only civil in nature and notcriminal.

ISSUEWhether the charges against Guingona (estafa and violation of CB CircularNo. 364 and related regulations regarding foreign exchange transactions) iswithin the jurisdiction of the City Fiscal?

RULINGFiscal has no jurisdiction over the subject matter. It must be pointed

out that when private respondent David invested his money on nine. andsavings deposits with the aforesaid bank, the contract that was perfectedwas a contract of simple loan or mutuum and not a contract of deposit.Thus, Article 1980 of the New Civil Code provides that:

Article 1980. Fixed, savings, and current deposits of-money in banksand similar institutions shall be governed by the provisionsconcerning simple loan.

Hence, the relationship between the private respondent and the NationSavings and Loan Association is that of creditor and debtor; consequently,the ownership of the amount deposited was transmitted to the Bank uponthe perfection of the contract and it can make use of the amount depositedfor its banking operations, such as to pay interests on deposits and to paywithdrawals. While the Bank has the obligation to return the amountdeposited, it has, however, no obligation to return or deliver the samemoney that was deposited. And, the failure of the Bank to return theamount deposited will not constitute estafa through misappropriationpunishable under Article 315, par. l(b) of the Revised Penal Code, but it willonly give rise to civil liability over which the public respondents have no-

jurisdiction.

BPI FAMILY BANK v. FRANCO, 538 SCRA 184 (2007)

DOCTRINE: Money bears no earmarks of peculiar ownership. Its primaryfunction is to pass from hand to hand as a medium of exchange, withoutother evidence of its title. Money, which passed through various transactionsin the general course of banking business, even if of traceable origin, bearsno earmarks of peculiar ownership.

FACTSIn 1989, Tevesteco Arrastre-Stevedoring Co. (Tevesteco) opened a savingsand current account with BPI-FB. Soon thereafter, First Metro InvestmentCorporation (FMIC) opened a time deposit account with the same branch ofBPI-FB with a deposit of P100M to mature 1 year after. Subsequently,Franco opened savings (P500K), current (P500K) and time deposit (P1M)

accounts with BPI-FB. The funding of Franco’s checks was part of the P80Mdebited by BPI-FB from FMIC’s TD account and credited to Tevesteco’scurrent account pursuant to an Authority to Debit signed by FMIC’s officers.This, however, was found to be forged, as declared by Antonio Ong, one ofthe alleged signatories.

Although Tevesteco already made some withdrawals from the P80M creditedto its account, BPI-FB debited Franco’s savings and current accounts for theamounts remaining therein. His accounts were also garnished pursuant toan Order of Attachment issued by the RTC Makati. Due to this, his checksdrawn against the current account were dishonored (stamped with “Accountunder garnishment”). However, when Franco issued the checks, neither washe furnished a Notice of Garnishment nor impleaded in the case instituted





by BPI-FB to recover the amount. It was only about a year after that he wasimpleaded in the case. Thus, he filed a Motion to Discharge Attachment,which was granted. But this cannot be complied since the amount hadalready been debited due to the forgery.

As to his savings account, it appears that he agreed to an arrangementwhere P400K from his savings account was temporarily transferred toQuiaoit’s savings account, subject to immediate return upon issuance of acertificate of deposit which Quiaoit needed for his Taiwan visa application.

FMIC filed a complaint against BPI-FB to recover the P80M debited from itsaccount, infra , where BPI-FB was found liable to FMIC due to its failure toexercise the degree of diligence required of banks in treating the accounts ofits depositors with meticulous care.

Franco filed a suit against BPI-FB to cease freezing his accounts and torelease the deposits therein. The lower court ruled in favor of Franco, whichthe CA affirmed with modification.

ISSUEWho has a better right to the deposits in Franco’s account—Franco or BPI-FB?

HELDBPI-FB. The deposit in Franco’s accounts consists of money, which isgeneric and fungible. The quality of being fungible depends upon thepossibility of the property, because of its nature or the will of the parties,being substituted by others of the same kind, not having a distinctindividuality.

It bears emphasizing that money bears no earmarks of peculiar ownership,and this characteristic is manifest in the case which involves money in abanking transaction gone awry. It primary function is to pass from hand tohand as a medium of exchange, without other evidence of its title. Money,which passed through various transactions in the general course of bankingbusiness,, even if traceable origin, is no exception.

There is no doubt that BPI-FB owns the deposited money in the accounts ofFranco, but not as a legal consequence of its unauthorized transfer of FMIC’sdeposits to Tevesteco’s account. BPI-FB conveniently forgets that thedeposit of money in banks is governed by the NCC provision on simple loanor mutuum. As there is a creditor-debtor relationship between a depositorand a bank, BPI-FB ultimately acquired ownership of Franco’s deposits, butsuch ownership is coupled with a corresponding obligation to pay him anequal amount on demand.

BPI-FB does not have the right to unilaterally freeze the accounts of Francobased on its mere suspicion that the funds therein were proceeds of the

multi-million peso scam Franco was allegedly involved in. To grant that rightwould open floodgates of public distrust in the banking industry.

iii. Payment to proper party-depositor

FULTON IRON WORKS CO. v. CHINA BANKING CORP., 55 PHIL. 208(1930)

DOCTRINE: A depositor is presumed to be the owner of funds standing inhis name in a bank deposit, and where a bank is not chargeable with noticethat the money deposited therein is the property of another person, it is

justified in paying out the money to the depositor, or upon his order, and inso doing cannot be held liable to any other person as the true owner.

FACTSFulton Iron Works Co. (Fulton) sold to Binalbagan Estate Inc.(Binalbagan)machinery for a sugar mill. As payment, Binalbagan executed 3 notesamounting to 80,000 dollars.

The notes were never paid at maturity because Binalbagan suspendedpayments in favor of its other creditor. As a result, Fulton employed theservices of a law firm, which S. C. Schwarzkopf was a member then, for thecollection of the payment. The firm was subsequently dissolved andSchwarzkopf was alone in handling the case. He opened a personal account(ACCOUNT 1) in China Banking Corp and deposited a modest amount.

Later on, Binalbagan Estate’s financial condition began to improve. Itexecuted a check amounting to 10,000 to Schwarzkopf as part payment ofthe original transaction. Schwarzkopf deposited the check in a new account(ACCOUNT 2) in China Bank. But was subsequently withdrawn and used forindividual purposes. Binalbagan again executed a check amounting to61,000 and delivered it to Schwarzkopf in favor of Fultan. He deposited it ina new account again in China Bank entitled “Schwarzkopf, Atty-in-fact,Fulton Iron Works” (ACCOUNT 3).

When Schwarzkopf’s ACCOUNT 2 was overdrawn, he transferred the moneyfrom ACCOUNT 2 to settle the discrepancy. Ultimately, he remitted only30,000 to Fulton.

Fulton now argues that the both Schwarzkopf and China bank is liable forthe amount misappropriated. (Schwarzkopf was already convicted of estafain a criminal case and made civilly liable, so this case is simply againstChina Bank.)ISSUE Whether the bank is liable for the amount misappropriated by Schwarzkopf.





RULING Party . The Bank is only liable for compensating the overdraft of ACCOUNT 2with ACCOUNT 3. But the Bank is not liable for the whole amount ofmisappropriation by Schwarzkopf specifically for withdrawals in ACCOUNT 2.

Bank accounts and commercial papers can have earmarks. And earmarksgive notice that the money/credit rightfully belongs to some other personthen the one having control of the account. ACCOUNT 3 clearly indicatesthat the account was for his client Fulton, as indicated in the name. Thus,the bank cannot offset the overdraft of the personal account of Schwarzkopffrom the Account in favor of Fulton. For this transaction, the Bank is liable.However, the bank cannot be held liable for the money drawn bySchwarzkopf from Account 2 for individual purposes. There was no proofthat the bank had any knowledge of the misappropriation of the money, asthere was no indication the account was also for Fulton. Thus, there was noduty for the bank to intervene especially from the first few deposits.

The specialized function of bank is to serve as a place of deposit for money,to keep it safely while on deposit, and to pay it out, upon demand to theperson who effected the deposit or upon his order. A bank is not a guardianof trust funds deposited with it in the sense that it must see to their properapplication nor is it its business to pry into the uses to which moneys ondeposit in its vault are being put; and so long as it serves its function andpays the money out in good faith to the person who deposited it, or uponhis order, without knowledge or notice that it is in fact assisting in themisappropriation of the fund, the bank will be protected.

Thus, the mere act of a bank in entering a trust fund to the personalaccount of the fiduciary, knowing it to be a trust fund, will not make thebank liable in case of the subsequent misappropriation of the money by thefiduciary

BPI v. CA, 232 SCRA 302 (1994)

DOCTRINE: A bank is under no duty or obligation to make the application.To apply the deposit to the payment of the loan is a privilege, a right to set-off which the bank has the option to exercise.

FACTS Benigno Lim had 2 accounts at CBTC (BPI's predecessor): One jointly withEastern Plywood Corporation, of which he was an officer, and another jointchecking account with Mariano Velasco. Subsequently, Velasco died in April1977.

In August 1977, Eastply and Lim obtained a loan from CBTC for P73,000evidenced by a promissory note and secured by a Holdout Agreement givingCBTC the power to take funds from the joint account with Velasco (approxP331,000) and apply the same as payment for the loan.

In the meantime, a case for the settlement of Velasco's estate was filedwherein the whole balance in the joint account of Velasco and Lim wasclaimed as part of Velasco's estate. The intestate court granted the urgentmotion of the heirs of Velasco to withdraw the deposit under the jointaccount.

In 1980, CBTC merged with BPI.

In 1987, BPI filed a complaint against Lim and Eastern demanding paymentof the promissory note for P73,000.00. Lim and Eastern, in turn, filed acounterclaim against BPI for the return of the balance in the disputedaccount subject of the Holdout Agreement. The Court of Appeals rendered adecision stating:

1) On the claim: It was the duty of BPI to debit the account of thedefendants under the promissory note to set off the loan even though thesame has no fixed maturity.

2) On the counterclaim: The settlement of Velasco's estate had nothing todo with the claim of the defendants for the return of the balance of theiraccount with BPI as they were not privy to that case, and that thedefendants, as depositors of CBTC/BPI, are the latter's creditors; hence, BPIshould have protected the defendants' interest in the case when the saidaccount was claimed by Velasco's estate. It then ordered BPI to paydefendants the amount of representing the outstanding balance in the bankaccount of defendants.

ISSUES1) Whether BPI was duty-bound to debit the account of the defendants toset off the loan because of the Holdout Agreement, and2) Whether the counterclaim for the amount in the joint account can beawarded despite the same being given to the heirs of Velasco already.

RULING1) NO . It is clear from the Holdout Agreement that BPI had every right todemand that Eastern and Lim settle their liability under the promissory note.It cannot be compelled to retain and apply the deposit in Lim and Velasco's

joint account to the payment of the note. What the agreement conferred onCBTC was a power, not a duty. Generally, a bank is under no duty orobligation to make the application. To apply the deposit to the payment of aloan is a privilege, a right of set-off which the bank has the option toexercise.

2) YES . In Serrano vs. Central Bank of the Philippines it was held that bankdeposits are in the nature of irregular deposits; they are really loansbecause they earn interest. The relationship then between a depositor and a





bank is one of creditor and debtor. The deposit under the questionedaccount was an ordinary bank deposit; hence, it was payable on demand ofthe depositor.

BPI cannot be relieved of its duty to pay Eastern simply because it alreadyallowed the heirs of Velasco to withdraw the whole balance of the account.The petitioner should not have allowed such withdrawal because it hadadmitted in the Holdout Agreement the unceertain ownership of the moneydeposited in the account.

Moreover, the order of the court in the intestate case merely authorized theheirs of Velasco to withdraw the account. BPI was not specifically ordered torelease the account to the said heirs; hence, it was under no judicialcompulsion to do so. The authorization given to the heirs of Velasco cannotbe construed as a final determination or adjudication that the accountbelonged to Velasco. We have ruled that when the ownership of a particularproperty is disputed, the determination by a probate court of whether thatproperty is included in the estate of a deceased is merely provisional incharacter and cannot be the subject of execution.

Because the ownership of the deposit remained undetermined, BPI, as thedebtor with respect thereto, had no right to pay to persons other than thosein whose favor the obligation was constituted or whose right or authority toreceive payment is indisputable. The payment of the money deposited withBPI that will extinguish its obligation to the creditor-depositor is payment tothe person of the creditor or to one authorized by him or by the law toreceive it. Payment made by the debtor to the wrong party does notextinguish the obligation as to the creditor who is without fault ornegligence, even if the debtor acted in utmost good faith and by mistake asto the person of the creditor, or through error induced by fraud of a thirdperson. The payment then by BPI to the heirs of Velasco, even if done ingood faith, did not extinguish its obligation to the true depositor, Eastern.

iv. Whether or not preferred creditsCENTRAL BANK v. MORFE, 63 SCRA 114 (1975)

FACTSMonetary Board found the Fidelity Savings Bank to be insolvent. The Boarddirected the Superintendent of Banks to take charge of its assets, forbade itto do business and instructed the Central Bank Legal Counsel to take legalactions.

Prior to the institution of the liquidation proceeding but after the declarationof insolvency, or, specifically, the spouses Job Elizes and Marcela P. Elizesfiled a complaint in the Court of First Instance of Manila against the FidelitySavings Bank for the recovery of the sum of P50, 584 as the balance of their

time deposits. In the judgment rendered in that case on December 13, 1972the Fidelity Savings Bank was ordered to pay the Elizes spouses the sum ofP50,584 plus accumulated interest.

In another case, assigned to Branch XXX of the Court of First Instance ofManila, the spouses Augusta A. Padilla and Adelaida Padilla secured on April14, 1972 a judgment against the Fidelity Savings Bank for the sums ofP80,000 as the balance of their time deposits, plus interests, P70,000 asmoral and exemplary damages and P9,600 as attorney's fees (Civil Case No.84200 where the action was filed on September 6, 1971).

The Central Bank appealed to SC by certiorari . It contends that the final judgments secured by the Elizes and Padilla spouses do not enjoy anypreference because (a) they were rendered after the Fidelity Savings Bankwas declared insolvent and (b) under the charter of the Central Bank andthe General Banking Law, no final judgment can be validly obtained againstan insolvent bank.

The lower court, in justifying the award for damages to the spouses,reasoned out that, because such actions are not suspended, judgmentsagainst insolvent banks could be considered as preferred credits underarticle 2244(14)(b) of the Civil Code. It further noted that, in contrast withthe Central Act, section 18 of the Insolvency Law provides that upon theissuance by the court of an order declaring a person insolvent "all civilproceedings against the said insolvent shall be stayed."

On the other hand, the Central Bank argues that after the Monetary Boardhas declared that a bank is insolvent and has ordered it to cease operations,the Board becomes the trustee of its assets "for the equal benefit of all thecreditors, including the depositors". The Central Bank cites the ruling that"the assets of an insolvent banking institution are held in trust for the equalbenefit of all creditors, and after its insolvency, one cannot obtain anadvantage or a preference over another by an attachment, execution orotherwise"

ISSUE 1) Whether deposits are deemed as preferred credits and if not, 2) maythey be elevated to the level of preferred credits by acquiring a court

judgment?

RULING NO to both. It should be noted that fixed, savings, and current deposits ofmoney in banks and similar institutions are not true deposits. They areconsidered simple loans and, as such, are not preferred credits.

Evidently, one purpose in prohibiting the insolvent bank from doing businessis to prevent some depositors from having an undue or fraudulent


f h di d d i B k’ i h i




preference over other creditors and depositors.

That purpose would be nullified if, as in this case, after the bank is declaredinsolvent, suits by some depositors could be maintained and judgmentswould be rendered for the payment of their deposits and then such

judgments would be considered preferred c redits under article 2244 (14) (b)of the Civil Code.

A contrary rule or practice would be productive of injustice, mischief andconfusion. To recognize such judgments as entitled to priority would meanthat depositors in insolvent banks, after learning that the bank is insolventas shown by the fact that it can no longer pay withdrawals or that it hasclosed its doors or has been enjoined by the Monetary Board from doingbusiness, would rush to the courts to secure judgments for the payment oftheir deposits.

In such an eventuality, the courts would be swamped with suits of thatcharacter. Some of the judgments would be default judgments. Depositorsarmed with such judgments would pester the liquidation court with claimsfor preference on the basis of article 2244(14)(b). Less alert depositorswould be prejudiced. That inequitable situation could not have beencontemplated by the framers of section 29.

The general principle of equity that the assets of an insolvent are to bedistributed ratably among general creditors applies with full force to thedistribution of the assets of a bank. A general depositor of a bank is merelya general creditor, and, as such, is not entitled to any preference or priorityover other general creditors

Considering that the deposits in question, in their inception, werenot preferred credits, it does not seem logical and just that theyshould be raised to the category of preferred credits simply becausethe depositors, taking advantage of the long interval between thedeclaration of insolvency and the filing of the petition for judicial

assistance and supervision, were able to secure judgments for thepayment of their time deposits.

The circumstance that the Fidelity Savings Bank, having stopped operationssince February 19, 1969, was forbidden to do business (and that ban wouldinclude the payment of time deposits) implies that suits for the payment ofsuch deposits were prohibited. What was directly prohibited should not beencompassed indirectly.

v. Bank’s right to compensation

GULLAS v. PNB, 62 PHIL. 519 (1935)

DOCTRINE: A bank has the right of set off of the deposit in its hands forthe payment of any indebtedness to it on the part of the depositor.

FACTS (Version 1)The treasurer of the US for the US Veterans Bureau issued a treasurerwarrant in the amount of $361, which was indorsed by Paulino Gullas and

Pedro Lopez, payable to Francisco Bacos. PNB encashed the warrant, butwas dishonored by the Insular Treasurer. Gullas had $509 in his bankaccount, which was sequestered by the bank. At the time the notice ofdishonor was sent, he was still in Manila and did not receive the notice. Dueto such event, he was not able to pay the fees for his insurance forinsufficient balance, and he was greatly humiliated by such event.

ISSUEWhether PNB has the right to apply Gullas’s deposit against his debt to thebank

RULINGNO. According to the NCC, compensation shall take place upon the

existence of two persons being a creditor and debtor to each other. Gullas,being a depositor of the bank, is considered a creditor of the bank and thebank being the debtor. Under the Negotiable Instruments Law, when acheck has been dishonored, a general indorser becomes liable to theamount of the check upon the knowledge of the dishonor. Gullas, being ageneral indorser, became a debtor to the bank for the dishonor of the check,upon knowledge of the dishonor, and the bank becomes the creditor.Compensation should have taken place, except that Gullas DID NOT haveknowledge of the dishonor. Such action became prejudicial to Gullas, and hemay therefore claim from the bank any damages sustained by him fromsuch event. However, since no actual damages was proved, nominaldamages in the amount of $250 is awarded to him.

FACTS (Version 2) • Attorney Paulino Gullas has a current account with PNB.• On August 2, 1933, the Treasurer of the United States for the United

States Veterans Bureau issued a Warrant in the amount of $361,payable to the order of Francisco Sabectoria Bacos. Paulino Gullas andPedro Lopez signed as endorsers of this check.

• The warrant was cashed by PNB but the Insular Treasurer dishonoredthe warrant. At that time the outstanding balance of Gullas on thebooks of the bank was P509. Against this balance Gullas had issuedcertain cheeks which could not be paid when the money wassequestered.

• On August 20, 1933, Gullas left his Cebu residence for Manila.


Wh PNB l d f th di h f th t it t ti b 2 G ll i titl d t i l d




• When PNB learned of the dishonor of the warrant, it sent notices bymail to Atty. Gullas. However, the notices could not be delivered toGullas because he was in Manila. In its letter dated Aug. 21, 1933,PNB informed Gullas and Lopez that the United States Treasurywarrant No. 20175 in the name of Francisco Sabectoria Bacos for$361 or P722, the payment for which had been received has beenreturned by its Manila office with the notation that the payment of hischeck has been stopped by the Insular Treasurer. PNB stated thatbecause of this, it applied the outstanding balances in their currentaccounts (Gullas - P509).

• When Gullas returned to Cebu on August 31, 1933, he received thenotice of dishonor and he immediately paid the unpaid balance of theUnited States Treasury warrant.

• Because of this incident, (1) checks that Gullas issued, including onefor his insurance, were not paid because of lack of funds standing tohis credit in the bank; (2) periodicals in the vicinity gave prominenceto the news to the great mortification of Gullas.

• CFI: PNB should return the sum of P5098 to Gullas, with legal interestand costs. Gullas is entitled to damages in the amount of P10K moreor less.

ISSUES (1) WON PNB has the right to apply a deposit to the debt of depositor to thebank(2) What amount of damages, if any, should be awarded to Gullas

RULING1. PNB has the right to apply the deposit.

• Art. 1195 Civil Code provides that compensation shall take place whentwo persons are reciprocally creditor and debtor of each other. It hasbeen held that the relation existing between a depositor and a bank isthat of creditor and debtor.

• Sec. 66 Negotiable Instruments Law provides that the generalindorser of negotiable instrument engages that if he be dishonored

and the necessary proceedings of dishonor be duly taken, he will paythe amount thereof to the holder. It has been held that notice ofdishonor is in order to charge all indorser and that the right of actionagainst him does not accrue until the notice is given.

• As a general rule, a bank has a right of set off of the deposits in itshands for the payment of any indebtedness to it on the part of adepositor.

• [In Louisiana, a bank has no right, without an order from or specialassent of the depositor to retain out of his deposit an amountsufficient to meet his indebtedness. This rule is based on the theory ofconfidential contracts arising from irregular deposits, e. g., the depositof money with a banker.]

2. Gullas is entitled to nominal damages.• PNB did not enforce the remedy properly.

o PNB made use of the money in Gullas’ account to makegood for the treasury warrant even prior to the mailing ofthe notice of dishonor and without waiting for any action byGullas.

o It has been held that a depositor who has funds sufficient tomeet payment of a check drawn by him in favor of a thirdparty, has a right of action against the bank for its refusal topay such a check in the absence of notice to him that thebank has applied the funds so deposited in extinguishmentof past due claims held against him.

o As to an indorser, notice should actually have been givenhim in order that he might protect his interests.

• PNB’s action was prejudicial to Gullas.o PNB is not primarily liable for the alleged libelous articles

against Gullas. The same same remark could be maderelative to the loss of business which Gullas claims but whichcould not be traced definitely to this occurrence. Also Gullashad been reimbursed.

o On the other hand, it was not agreeable for one to drawchecks in all good faith, then, leave for Manila, and onreturn find that those checks had not been cashed becauseof the action taken by the bank.

o Gullas should be awarded nominal damages worth P250because of the premature action of the bank against whichGullas had no means of protection.

REPUBLIC v. CA, 65 SCRA 186 (1975)

DOCTRINE: Since the relation between a depositor and a bank is that of acreditor and debtor, the depositor has the right to apply his deposits/creditwith the bank against the loans he had obtained from his deposits.

FACTS Shortly after the liberation of the Philippines in 1945, all the assetsbelonging to the enemy government, were confiscated by the Governmentof the United States. The assets located in the Philippines weresubsequently turned over to the Philippines by agreement between the twoGovernments. Among these assets are 20 promissory notes secured by achattel mortgage executed by Cuaycong in favor of the Bank of Taiwan.

Based on the Ballyntine schedule, the money value of these promissorynotes adds up to P4,986, and, including the stipulated interest accumulatedup to September 30, 1961, the total indebtedness amounts to P14,654.17.


The Republic then filed suit against Cuaycong to recover the value of the 20 drawn by the Court of Appeals as to the existence and extent of such




The Republic then filed suit against Cuaycong to recover the value of the 20promissory notes executed by Cuaycong in favour of the Bank of Taiwan.

Based on the findings of the trial court which were adopted by the Court ofAppeals, it would appear that during the Japanese occupation of NegrosOccidental, the military administration commandeered all available stocks ofsugar in that province, including those belonging to Cuaycong; that norecord of the precise amount of sugar taken from Cuaycong has survivedthe war but Cuaycong claimed that the same was valued at P10,242.60; andthat Cuaycong's stocks of sugar were mortgaged at the time with thePhilippine National Bank (the PNB, at the beginning of the Japaneseoccupation, was taken over by the Bank of Taiwan) to guarantee payment ofa likewise undetermined amount of crop loan(s) granted prior to theoutbreak of the war.

the stocks of sugar belonging to Cuaycong were sold by the VictoriesPlanters' Association, acting as agent for the Bank of Taiwan, to the MitsuiBussan Kaisha of Japan. The proceeds of this sale were, in effect, retainedby the Bank of Taiwan to constitute a deposit of Cuaycong and made part ofthe so-called "Farmers Rehabilitation Fund" mentioned in the militarydirective. The Fund allowed the planters to borrow money therefrom,against their respective deposits, in order to finance new plantings of sugarcane and cotton in their haciendas. The twenty promissory notes subject ofthe present action by the Government were executed by Cuaycong betweenApril 16, 1943 and March 25, 1944 under the above-mentioned financingscheme.

Upon the foregoing facts, the Court of Appeals held, among others, that (a)the right of action of the Government against Cuaycong has alreadyprescribed, and (b) Cuaycong's indebtedness to the Bank of Taiwan may beconsidered set off against the proceeds of the sale of his sugar retained bythe same bank. The Government disputes these rulings.

ISSUE

Whether the government may still collect on the promissory notes againstCuaycong

RULING: NO. 1. On the matter of prescription, the SC held that the statute of limitationsdoes not operate against the Government as to bar it from collecting thesums owing to the Bank of Taiwan during the last war for, in recoveringthese loans, the Government is merely acting "in the exercise of itssovereign functions to protect the interests of the State over a publicproperty."2. The Court of Appeals is correct in allowing a set-off of Cuaycong'sindebtedness to the Bank of Taiwan against his money-deposit with thesame bank. No record of Cuaycong's deposit is available but the inference

drawn by the Court of Appeals as to the existence and extent of suchdeposit cannot be flawed. The fact is clear that all the proceeds derived fromthe sale or confiscation of the sugar stocks belonging to the planters inNegros Occidental were retained as deposits by the Bank of Taiwan andmade part of the "Farmers Rehabilitation Fund." Planters like Cuaycong wereallowed to borrow money from the Fund but only to the extent of theirdeposits with the Bank of Taiwan or, as the military directive adverted tostates, "Within the limit of the proceeds of sugar sale of each planter." Theconclusion is logical and inevitable that the sums covered by the promissorynotes drawn by Cuaycong were well within the size of his then existingdeposit. And since the relation between a depositor in a bank and the bank isthat of creditor and debtor, 3 Cuaycong has every right to apply hiscredit with the Bank of Taiwan against the loans he had obtainedfrom his deposit. All the elements necessary for a set-off are present, andunder the law then obtaining, 4 compensation takes place ipso jure from theday all the necessary requisites concur, without need of any conscious intenton the part of the parties.

Moreover, the Court is satisfied with the explanation proffered byCuaycong that, under the abnormal conditions then prevailing, theonly way by which he could utilize the proceeds from the sale of thestocks of sugar seized from him was for him to make use of the loansmade available by the very agency that arbitrarily retained the saidproceeds. In ultimate effect, it was as though Cuaycong had merelywithdrawn his deposits with the Bank of Taiwan.

BPI v. CA, 512 SCRA 620 (2007)

DOCTRINE: A bank generally has the right of set-off over the depositstherein for the payment of any withdrawals on the part of a depositor—theright of a collecting bank to debit a client’s account for the value of adishonored check that has previously been credited has fairly beenestablished by jurisprudence.

FACTSJulio Templonuevo demanded from BPI payment of P267,000 (approx.)representing the aggregate amount of 3 checks, payable to him, butdeposited with Annabelle Salazar’s BPI account without his knowledge andcorresponding indorsement.

Accepting Templonuevo’s claim as a valid one, BPI froze the account of AASalazar Construction and Engineering Services (ASCES), instead ofAnnabelle Salazar’s, where the checks were deposited, as this was alreadyclosed due to insufficiency of funds.

Salazar was advised to settle this with Templonuevo, but no settlement wasarrived at. Hence, BPI decided to debit the amount of P267,000 (approx.)


from her account and paid this in turn to Templonuevo by means of a vi No breach of trust; Mandamus not a remedy




from her account and paid this, in turn, to Templonuevo by means of acashier’s check.

Hence, Salazar instituted an action against BPI for the recovery of the sumof P267,000. The RTC rendered a decision in favor of Salazar, which the CAaffirmed on the ground that Salazar and Templonuevo had previouslyagreed that the checks payable to JRT Construction and Trading actuallybelonged to Salazar and would be deposited to her account, withTemplonuevo acquiescing to the arrangement.

ISSUEWhether it was proper for BPI to withdraw unilaterally from the depositor’saccount the amount it had previously paid upon certain unendorsed orderinstruments deposited by the depositor to another account that she closed

HELDNO. Although as the collecting bank, BPI had the right to debit Salazar’saccount for the value of the checks it previously credited in her favor, it wasimproper for it to do so. It is of no moment that the account debited by BPIwas different from the original account to which the proceeds of the checkwere credited because both admittedly belonged to Salazar, the formerbeing the account of the sole proprietorship which had no separate anddistinct personality form her, and that the latter being her personal account.

As business affected with public interest, and because of the nature of theirfunctions, banks are under obligation to treat the accounts of theirdepositors with meticulous care, always having in mind the fiduciary natureof their relationship. In this regard, BPI was clearly remiss in its duty toSalazar as its depositor.

Despite the obvious lack of indorsement on the checks, BPI permitted theencashment of these checks three times on 3 separate occasions. Thisnegates BPI’s contention that it merely made a mistake in crediting thevalue of the checks to Salazar’s account and instead bolsters the conclusion

of the CA that BPI recognized Salazar’s claim of ownership of checks andacted deliberately in paying the same, contrary to ordinary banking policyand practice.

Although the Court ordered the return of the amount of the checks toTemplonuevo, it affirmed CA’s award of damages to Salazar. This wouldhave been avoided had BPI adhered to the standard of diligence expected ofone engaged in the banking business. A depositor has the right to recoverreasonable moral damages even if the bank’s negligence may not have beenattended with malice or bad faith, if the former suffered mental anguish,serious anxiety, embarrassment, and humiliation.

vi. No breach of trust; Mandamus not a remedy

LUCMAN v. MALAWI, 511 SCRA 268 (2006)Bank deposits are in the nature of irregular deposits—they are really loansbecause they earn interest. All kinds of bank deposits are to be treated asloans and are to be covered by the law on loans. Mandamus does NOT lie toenforce the performance of contractual obligations.

c. Bank’s Duty of Utmost Care

SEC. 2, GBL: The State recognizes the vital role of banks inproviding an environment conducive to the sustained developmentof the national economy and the fiduciary nature of banking thatrequires high standards of integrity and performance. In furtherancethereof, the State shall promote and maintain a stable and efficientbanking and financial system that is globally competitive, dynamicand responsive to the demands of a developing economy.

CONSOLIDATED BANK AND TRUST COMPANY v. CA, 410 SCRA 562(2003)

DOCTRINE: The fiduciary relationship means that the bank’s obligation to

observe “high standards of integrity and performance” is deemed writteninto every deposit agreement between a bank and its depositors. It requiresbanks to assume a degree of diligence higher than that of a good father of afamily.

FACTS(Similar with the earlier case where the messenger left the passbook in thebank)

ISSUEWho should bear the loss, Consolidated Bank or L.C. Diaz?

RULINGBoth will share in the losses- 60% to Consolidated Bank, 40% to L.C. Diaz.The Bank was made liable because of its duty to its depositors.

This fiduciary relationship means that the bank’s obligation to observe “highstandards of integrity and performance” is deemed written into everydeposit agreement between a bank and its depositor. The fiduciary nature ofbanking requires banks to assume a degree of diligence higher than that ofa good father of a family.

The fiduciary nature of banking does not convert a simple loan into a trustagreement because banks do not accept deposits to enrich depositors but toearn money for themselves. The law allows banks to offer the lowestpossible interest rate to depositors while charging the highest possible


interest rate on their own borrowers The interest spread or differential however That a check which has been cleared and credited to the




interest rate on their own borrowers. The interest spread or differentialbelongs to the bank and not to the depositors who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interestspread or income belongs to the depositors, a situation that Congresscertainly did not intend in enacting Section 2 of RA 8791.

Solidbank’s tellers must exercise a high degree of diligence in insuring thatthey return the passbook only to the depositor or his authorizedrepresentative. The tellers know, or should know, that the rules on savingsaccount provide that any person in possession of the passbook ispresumptively its owner. If the tellers give the passbook to the wrongperson, they would be clothing that person presumptive ownership of thepassbook, facilitating unauthorized withdrawals by that person. For failingto return the passbook to Calapre, the authorized representative of L.C.Diaz, Solidbank and Teller No. 6 presumptively failed to observe such highdegree of diligence in safeguarding the passbook, and in insuring its returnto the party authorized to receive the same.

In culpa contractual , once the plaintiff proves a breach of contract, there isa presumption that the defendant was at fault or negligent. The burden ison the defendant to prove that he was not at fault or negligent. In contrast,in culpa aquiliana the plaintiff has the burden of proving that the defendantwas negligent. In the present case, L.C. Diaz has established that Solidbankbreached its contractual obligation to return the passbook only to theauthorized representative of L.C. Diaz. There is thus a presumption thatSolidbank was at fault and its teller was negligent in not returning thepassbook to Calapre. The burden was on Solidbank to prove that there wasno negligence on its part or its employees.

B. Kinds of Deposita. Demand Deposits

SEC. 58, NCBA: For purposes of this Act, the term "demanddeposits" means all those liabilities of the Bangko Sentral and ofother banks, which are denominated in Philippine currency and aresubject to payment in legal tender upon demand by the presentationof checks.

SEC. 59, NCBA: Only banks duly authorized to do so may acceptfunds or create liabilities payable in pesos upon demand by thepresentation of checks, and such operations shall be subject to thecontrol of the Monetary Board in accordance with the powersgranted it with respect thereto under this Act.

SEC. 60, NCBA: Checks representing demand deposits do not havelegal tender power and their acceptance in the payment of debts,both public and private, is at the option of the creditor: Provided,

however, That a check which has been cleared and credited to theaccount of the creditor shall be equivalent to a delivery to thecreditor of cash in an amount equal to the amount credited to hisaccount.

SEC. X201, MRB: Banks may accept or create demand depositssubject to withdrawal by check.

A UB/KB may accept or create demand deposits subject towithdrawal by check, without prior authority from the BSP.

A TB/RB/Coop Bank may accept or create demand deposits uponprior authority of the BSP.

SEC. X202, MRB: The following regulations shall govern temporaryover-drawings and drawings against uncollected deposits (DAUDs).

a. Temporary over-drawings. Temporary over-drawings againstcurrent account shall not be allowed, unless caused by normalbank charges and other fees incidental to handling suchaccounts. Banks which violate these regulations shall be subjectto a fine of one-tenth of one percent (1/10 of 1%) per day ofviolation, computed on the basis of the amount of overdrawing

or fines in amounts as may be determined by the MonetaryBoard, but not to exceed P30,000 a day for each violation,whichever is lower.

Technical over-drawings arising from “force posting” in-clearingchecks shall be debited by banks under “Returned Checks andOther Cash Items Not in Process of Collection” which is part of

“Other Assets” in the Statement of Condition. Items to belodged under this account shall consist only of in-clearing checkswhich may result in “technical overdrawn” accounts and shall beimmediately reversed the following day.

The checks lodged under “Returned Checks, etc.” shall either be

returned or honored the following day before clearing. The itemsto be used as cover for the honored checks should only consistof any of the following:(1) Cash(2) Cashier’s, Manager’s or Certified Checks(3) Bank Drafts(4) Postal Money Orders(5) Treasury Warrants(6) Duly funded “On us” Checks(7) Fund transfers/credit memos within the same bankrepresenting proceeds of loans granted under existingregulations.


Peso demand deposit accounts maintained by foreign integrated Metro Manila area served by the PCHC and the BSP




Peso demand deposit accounts maintained by foreigncorrespondent banks with commercial banks shall not besubject to the above-mentioned regulations: Provided, That:(a) The maintenance of non-resident correspondent bank’s pesochecking accounts and overdrawings therefrom are covered byreciprocal arrangement;(b) Temporary overdrawings are covered within fifteen (15)days from the date overdrawings are incurred; and(c) Such accounts are credited only through foreign exchangeinward remittance.b. Drawings against uncollected deposits. DAUDs shall beprohibited except when the drawings a re made againstuncollected deposits representingmanager’s/cashier’s/treasurer’s checks, treasury warrants,postal money orders and duly funded “on us” checks, whichmay be permitted at the discretion of each bank.

SEC. X203, MRB: To complement the provisions of Batas PambansaBlg. 22, (An Act Penalizing the Making or Drawing and Issuance of a CheckWithout Sufficient Funds or Credit), the following regulations shall govern:

a. The drawee bank shall stamp, write or print on a dishonored checkor on a paper attached thereto the date the check is presented forpayment and the reason for the refusal to pay the same to the holderthereof.b. Where the reason for the dishonor of a check is stamped, written orprinted on a paper attached to the checks, the drawee bank shallindicate the pertinent details, such as the names of the drawer, thepayee and the drawee bank, the date and amount of the check, thecheck number and the date of dishonor.c. The drawee bank shall use only the remark or notation “DrawnAgainst Insufficient Funds”, “No Funds”, or “Insufficient Funds”stamped, written, or printed on, or attached to the check dishonoredor returned byreason of insufficiency of funds or credit.d. Notwithstanding receipt of an order to stop payment, the drawee

bank shall likewise stamp, write, or print on, or attach to the checkany of the remarks or notations mentioned in Item “c” hereofindicating that there were no sufficient funds in or credit with suchbank for the payment in full of such check, if such be the fact. Thebank shall also indicate receipt of a stop payment order.e. A check and other clearing item (COCI) dishonored by reason ofinsufficiency of funds or credit shall be returned by the drawee bankto the negotiating bank not later than the next clearing for returnedCOCI.

(1) For Local ExchangesThere shall be two (2) separate clearing windows for COCIs returneddue to insufficient funds or credit in the local exchanges in the

integrated Metro Manila area served by the PCHC and the BSPRegional Clearing Centers (RCCs). (The settlement of interbanktransactions vis-à-vis covering reserve requirement/deficiency ofbanks’ DDA is shown in Appendix 39.)

(a) AM Returned COCI Clearing - The AM returned COCI clearing inthe integrated Metro Manila local exchange shall be conducted from7:30 AM to 10:00 AM on the banking day immediately following theoriginal date of presentation of the COCI to PCHC.

The AM returned COCI clearing window for local exchanges in theBSP RCCs shall be conducted from 8:00 AM to 9:30 AM on thebanking day immediately following the original date of presentationof the COCI to the RCC.

Returned COCI in the AM clearing windows shall be given value onthe same date as the date of original presentation of the COCI toPCHC and RCC. The amount of debits and credits on the date oforiginal presentation shall be reversed to the extent of the amountof credits and debits arising from the returned COCI. The processrestores the balances of the demand deposits of banks with the BSPto their position prior to the settlement of the clearing resultsaffected by the COCI later returned due to insufficient funds orcredit.

(b) PM Returned COCI Clearing - The PM returned COCI clearingwindow shall coincide with the afternoon regular clearing. Otherdishonored COCI not returned in the morning clearing session shallbe presented by the drawee bank to the negotiating bank in theafternoon regular clearing. Such returned COCI shall be given valueon the date the returned COCI was presented to PCHC for theintegrated Metro Manila area and to BSP RCCs.

Return of Dishonored COCI - A COCI dishonored by reason ofinsufficiency of funds or credit shall be returned by the drawee bank

to the negotiating bank not later than the next clearing for returnedCOCI.

(2) For Out-of-town ExchangesFor out-of-town exchanges, a COCI so dishonored shall be returnedby the drawee bank to the negotiating bank within the periodspecified in the clearing Circular Letters issued by BSP.

(3) COCI not coursed through the Clearing SystemA COCI dishonored by reason of insufficiency of funds or creditwhich was not coursed through the clearing system shall bereturned by the drawee bank to the holder or the negotiating bank,as the case may be, not later than the business day following the


date the COCI is presented for payment with the drawee bank by Ong and Ma Theresa David Senior Manager of FMIC BPI FB transferred




date the COCI is presented for payment with the drawee bank.

The negotiating bank shall, in turn, return a COCI dishonored byreason of insufficiency of funds or credit to the holder not later thanthe business day following its receipt of the dishonored COCI fromthe drawee bank.

SEC. X204, MRB: The following officers and employees of banks areprohibited from maintaining demand deposits or current accounts withthe banking office in which they are assigned:

a. All officers;b. Employees of the bank’s cash department/cash units; andc. Other employees who have direct and immediateresponsibility in the handling of transactions and/or recordspertaining to demand deposits or current accounts.

The above-mentioned prohibition shall include the spouses andrelatives within the second degree of consanguinity and affinity of theofficers and employees covered by the prohibition, and the businessinterests of such officers and employees, their spouses and relativeswithin the second degree of consanguinity and affinity, in singleproprietorships, or partnerships or corporations in which such officersand employees, individually or as a group, own or control at least amajority of the capital of the partnership or the outstandingsubscribed capital stock (voting and non-voting) of the corporation.

BPI FAMILY SAVINGS BANK v. FIRST METRO INVESTMENT CORP,429 SCRA 30 (2004)

DOCTRINE: Demand Deposits are “all those liabilities of the Bangko Sentraland of other banks which are denominated in the Philippine currecncy andare subject to payment in legal tender upon demand by the presentation ofdepositor’s checks. Under CB Circular No. 22 (Series of 1994), “demanddeposits shall not be subject to any interest rate ceiling.” This, in effect, isan open authority to pay interest on demand deposits, such interest notbeing subject to any rate ceiling.

FACTSFMIC, through its Executive Vice President Antonio Ong, opened a currentaccount and deposited a METROBANK check P100 million with BPI FamilyBank* (BPI FB). BPI FB, guaranteed the payment of P14,667,687.01representing 17% per annum interest of P100 million deposited by FMIC.The latter, in turn, assured BPI FB that it will maintain its deposit of P100million for a period of one year on condition that the interest of 17% perannum is paid in advance. Subsequently, BPI FB paid FMIC 17% interest orP14,667,687.01 upon clearance of the latter’s check deposit.

However, on August 29, 1989, on the basis of an Authority to Debit signed

by Ong and Ma. Theresa David, Senior Manager of FMIC, BPI FB transferredP80 million from FMIC’s current account to the savings account of TevestecoArrastre – Stevedoring, Inc.

FMIC denied having authorized the transfer of its funds to Tevesteco,claiming that the signatures of Ong and David were falsified. To recoverimmediately its deposit, FMIC, on September 12, 1989, issued BPI FB checkno. 129077 for P86,057,646.72 payable to itself and drawn on its depositwith BPI FB SFDM branch. But upon presentation for payment on September13, 1989, BPI FB dishonored the check as it was "drawn against insufficientfunds" (DAIF).

FMIC filed with the RTC a civil case against BPI FB. RTC ruled in favor ofFMIC, ordering BPI to pay P80M + interest at legal rate. CA modifiedamount to P65M + interest at 17%

ISSUE Is it a Time Deposit or interest-bearing current account?

HELD Time Deposit . The parties did not intend the deposit to be treated as ademand deposit but rather as an interest-earning time deposit notwithdrawable any time. Both agreed that the deposit of P100 million wasnon-withdrawable for one year upon payment in advance of the17% per annum interest .

Ordinarily, a time deposit is defined as "one the payment of which cannotlegally be required within such a specified number of days." In contrast,demand deposits are "all those liabilities of the Bangko Sentral and ofother banks which are denominated in Philippine currency and are subjectto payment in legal tender upon demand by the presentation of(depositor’s) checks. "4 While it may be true that barely one month andseven days from the date of deposit, respondent FMIC demanded thewithdrawal of P86,057,646.72 through the issuance of a check payable to

itself, the same was made as a result of the fraudulent and unauthorizedtransfer by petitioner BPI FB of its P80 million deposit to Tevesteco’s savingsaccount. Certainly, such was a normal reaction of respondent as a depositorto petitioner’s failure in its fiduciary duty to treat its account with thehighest degree of care. Under this circumstance, the withdrawal of depositby respondent FMIC before the one-year maturity date did not change thenature of its time deposit to one of demand deposit.

i. For UB and KB

SEC. 33, GBL: A bank other than a universal or commercialbank cannot accept or create demand deposits except upon


prior approval of, and subject to such conditions and rules as




prior approval of, and subject to such conditions and rules asmay be prescribed by the Monetary Board.

ii. For TB

SEC. 10 (B), THRIFT BANKS ACT: Open current or checkingaccounts: Provided, That the thrift bank has net assets of atleast Twenty million pesos (P20,000,000) subject to suchguidelines as may be established by the Monetary Board; andshall be allowed to directly clear its demand deposit operationswith the Bangko Sentral and the Philippine Clearing HouseCorporation;

iii. For RB/Coop Bank

SEC. 12 (B), RURAL BANKS ACT: In addition to the operationsespecially authorized in this Act, any rural bank may:

x x x

Open current or checking accounts, provided the rural bank hasnet assets of at least Five million (P5,000,000) subject to suchguidelines as may be established by the Monetary Board;

iv. For Islamic Banks

SEC. 6, PAR. 7 (A), ISLAMIC BANK CHARTER: To performthe following banks services:

x x x

Open current or checking accounts;

b. Savings Deposits

SEC. X213, MRB : Banks may be authorized by the BSP to solicitand accept deposits outside their bank premises, subject to thefollowing conditions:

a. The financial condition of the bank applying for authority to solicitand collect savings deposits outside its bank premises is sound andthe operations and the quality of the management thereof couldreasonably assure the safety of the funds which may be entrusted toits deposit collectors and/or solicitors;

b. The proposed area where applicant bank intends to solicit shall beclearly defined;

c. Solicitation of deposits shall only be confined within a localitywhere there are no other banks in operation, or where it can beclearly established that the deposit potentials of the said locality arestill untapped; and

d. Applicant bank shall institute and maintain the following minimumsafeguards:

(1) All deposit solicitors shall be initially bonded for at leastP1,000 subject to the increase thereof to approximate theirdaily collections;(2) Deposit solicitors shall be provided with proper identificationcards with photograph and signature of each respectivesolicitor, certified to by the appropriate officer of the bank. Saididentification cards shall be worn by each solicitor at all times atthe upper breast of his outer garment when soliciting deposits;(3) Adequate insurance coverage for funds in transit(representing deposits collected outside banking premises) shallbe secured by applicant bank from insurance companies notincluded in the list of companies blacklisted by the InsuranceCommissioner;(4) Deposit slips shall be in booklet form, pre-numbered,intriplicate copies and in three (3) colors - the original to beissued to the depositor, the second copy to be used for postingreference, and the third copy to be retained in the booklet;(5) All collections shall be turned over to the cashier at the endof each day accompanied by a Collection Summary Report to beaccomplished in duplicate which shall contain the followingminimum information:

(a) Date of the report(b) Names and addresses of the depositors(c) Deposit slip numbers(d) Amounts of deposit(e) Savings account and passbook numbers(f) Name and signature of solicitor rendering the report

(6) Depositors shall always be required to accomplish aSignature Card when opening an account, which card shall beused always as reference in checking thegenuineness/authenticity of signatures affixed on withdrawal

slips or authorizations for withdrawal;(7) Deposits/withdrawals shall be recorded by the bookkeeperor any ledger clerk, except any bank solicitor, in the depositor’sledger cards and passbooks on the same day that suchdeposits/withdrawals are accepted. Passbooks shall be returnedto the depositors not later than the following business day;(8) At the end of each month, depositors shall be advised inwriting of the balances of their deposits with the bank, theadvise slips of which shall never be handcarried by the solicitorsthemselves; and(9) Places of assignments of bank solicitors shall be rotated atleast quarterly.


SEC. X214, MRB: Banks are prohibited from issuing/accepting




, p g p gwithdrawal slips or any other similar instruments designed to effectwithdrawals of savings deposits without requiring the depositorsconcerned to present their passbooks and accomplishing thenecessary withdrawal slips, except for banks authorized by the BSPto adopt the no passbook withdrawal system: Provided, That bankswhich are already adopting the no passbook withdrawal system shallbe given six (6) months from effectivity of this Manual ofRegulations (MOR) to seek approval from the BSP.

The provisions of Sec. X202b shall also apply to withdrawals fromsavings deposits.

INTERNATIONAL EXCHANGE BANK v. CIR, 520 SCRA 688 (2007)

DOCTRINE: A Fixed Savings Deposit (FSD), like a time deposit, provides fora higher interest rate when the deposit is not withdrawn within the requiredfixed period, otherwise, it earns interest pertaining to a regular savingsdeposit.

FACTS International Exchange Bank served a Letter of Authority by theCommissioner of Internal Revenue, directing the examination of the bank’sbook of accounts and other account records. The CIR found that it was liablefor tax deficiencies, mostly Documentary Stamp Tax (DST). The Bankprotested the assessment, arguing that there is no law imposing DST onSavings Account-Fixed Savings Deposit.

CTA Division decided that the bank was not liable for the whole assessmentbut still liable for the DST. CTA En Banc affirmed.

ISSUE Whether a Savings Account-Fixed Savings Deposit evidenced by a passbookis subject to Documentary Stamp TaxRULING

YES , it is subject to DST.Section 180 of the Tax Code provides DST shall be imposed on “…certificates of deposits drawing interest, or orders for the paymentof any sum of money otherwise than at sight or on demand…” a passbookrepresenting an interest earning deposit account issued by a bank qualifiesas a certificate of deposit drawing interest.

A document to be deemed a certificate of deposit requires no specific formas long as there is some written memorandum that the bank accepted adeposit of a sum of money from a depositor. What is important andcontrolling is the nature or meaning conveyed by the passbook and not theparticular label or nomenclature attached to it, inasmuch as substance, notform, is paramount.

A depositor of a savings deposit-FSD is required to keep the money with thebank for at least thirty (30) days in order to yield a higher interest rate.Otherwise, the deposit earns interest pertaining only to a regular savingsdeposit. The same feature is present in a time deposit. A depositor isallowed to withdraw his time deposit even before its maturity subject tobank charges on its pre-termination and the depositor loses his entitlementto earn the interest rate corresponding to the time deposit. Instead, heearns interest pertaining only to a regular savings deposit. (Question) Sinosuperhero mahilig mag promise?) In both cases, the deposit may bewithdrawn anytime but the depositor gets to earn a lower rate of interest.The only difference lies on the evidence of deposit, a savings deposit-FSD isevidenced by a passbook, while a time deposit is evidenced by a certificateof time deposit." In order for a depositor to earn the agreed higher interestrate in a SA-FSD, the amount of deposit must be maintained for a fixedperiod. Thus, SA-FSD is a deposit account with a fixed term. Withdrawalbefore the expiration of said fixed term results in the reduction of theinterest rate. Having a fixed term and reduction of interest rate in case ofpre-termination are essentially the features of a time deposit. Ultimately,the Bank’s SA-FSD and time deposit are substantially the same

It bears emphasis that DST is levied on the exercise by persons of certainprivileges conferred by law for the creation, revision, or termination ofspecific legal relationships through the execution of specific instruments. Itis an excise upon the privilege, opportunity or facility offered at exchangesfor the transaction of the business.

While tax avoidance schemes and arrangements are not prohibited, tax lawscannot be circumvented in order to evade payment of just taxes. (Answer:eh di si Peksman!)To claim that time deposits evidenced by passbooksshould not be subject to DST is a clear evasion of the rule on equality anduniformity in taxation that requires the imposition of DST on documentsevidencing transactions of the same kind, in this particular case, on allcertificates of deposits drawing interest.

In addition, further amendments to Section 180 includes provisions with thepurpose to eliminate precisely the scheme used by banks of issuingpassbooks to "cloak" its time deposits as regular savings deposits.

CHINA BANKING CORP. v. CIR, 602 SCRA 316 (2009)A certificate of deposit is a written acknowledgment by a bank or banker ofthe receipt of a sum of money on deposit which the bank or bankerpromises to pay to the depositor, to the order of the depositor, or to someother person or his order, whereby the relation of debtor and creditorbetween the bank and the depositor is created.


c. Negotiable Order of Withdrawal (NOW) Accounts The provision of Sec. X202 shall also apply for withdrawals on NOW




g ( )

SEC. X223, MRB: Negotiable Order of Withdrawal (NOW) accountsare interest-bearing deposit accounts that combine the payable ondemand feature of checks and investment feature of savingsaccounts.

A UB/KB may offer NOW accounts without prior authority of theMonetary Board.

A TB/RB/Coop Bank may accept NOW accounts upon prior approvalof the Monetary Board.

SEC. X224, MRB: The following rules shall be observed in servicingNOW accounts:

a. Prior to or simultaneous with the opening of a NOW account,the bank shall inform the depositor of its terms and conditions.b. The bank shall be responsible for the proper identification ofits depositors; it shall require, among other things, two (2)specimen signatures and such other pertinent information.c. Deposits shall be covered by deposit slips in duplicate dulyvalidated and initialed by the teller receiving the deposit. A copyof the deposit slip shall be furnished the depositor.d. NOW accounts shall be kept and maintained separately fromthe regular savings deposits.e. Blank NOW forms shall be pre-numbered and shall becontrolled as in the case of unissued blank checks.f. A bank statement shall be sent to each depositor at the endof each month for confirmation of balances.g. Banks must use the form prescribed by present rules forNOW accounts.

Nothing herein shall be construed as precluding a TB, RB or CoopBank from applying for authority to accept both demand depositsand NOW accounts.

SEC. X225, MRB: The order of withdrawal form shall have a size ofthree (3) inches by seven (7) inches, and shall be printed onsecurity/check paper. It shall contain as a minimum the features ofthe proforma order of withdrawal shown in Appendix 11.

SEC. X226, MRB: Any NOW which may be deposited with a bankother than the drawee bank may be cleared through the PCHC inManila and the Regional Clearing Units in regional clearing centersdesignated by the BSP in accordance with the clearing procedures.Nothing in this Section shall prevent direct settlement between theparties concerned.

p pp yaccounts.

PEOPLE v. REYES, 454 SCRA 635 (2005)

DOCTRINE: NOW Accounts are defined as interest-bearing deposit accountsthat combine the payable on demand feature of checks and the investmentfeature of savings accounts.

FACTS Aloma Reyes and her daughter Tricha (at large) were convicted for ESTAFA.Private complainant Jules Alabastro bases his complaint on one subjectcheck (for P280,000); each time a check issued by the Reyes's (a total of 5or 6) bounced, he would return it, and it would be replaced by them withcash, except this last one, which they refused to replace with cash.

Complainant claims that the transactions between himself and the Reyes'sinvolved the rediscounting of checks. Defendant claims that she issued theinstruments as payment for loans she obtained from Alabastro with respectto her and her daughter's softdrinks business, which eventually went under.

She allegedly issued 16 instruments, one for P6k and the rest for P13k, topay for the (232k) obligation. These would come from a NOW (NegotiableOrder of Withdrawal) Account, described as "a savings account where thedrawer may issue instrument payable only to a specific payee. A NOW checkcannot be issued payable to “BEARER.” Hence, it cannot be furthernegotiated.

On appeal to the SC, she raises the following issues: 1) whether the natureof a NOW instrument is a "check" within the meaning of Art. 315 of theRevised Penal Code, since the NOW check is drawn against the savings, notthe current account, of appellant, and it is payable only to a specific personor the “payee” and is not valid when made payable to “bearer” or to

“cash.and 2) whether her and her daughter's liability should be merely civ il,since the check was issued in payment of a pre-existing obligation.

ISSUE 1) Whether the nature of a NOW instrument is a "check" within the meaningof Art. 315 of the Revised Penal Code, and2) Whether the Reyes's liability should be merely civil, since the check wasissued in payment of a pre-existing obligation.

RULING1) NO . Section X223 of the Manual of Regulations for Banks definesNegotiable Order of Withdrawal (NOW) Accounts as "interest-bearingdeposit accounts that combine the payable on demand feature of checks andthe investment feature of savings accounts."


The fact that a NOW check shall be payable only to a specific person, and




not valid when made payable to “BEARER” or to “CASH” or when indorsedby the payee to another person, is inconsequential. The same restriction isproduced when a check is crossed: only the payee named in the check maydeposit it in his bank account. If a third person accepts a cross check andpays cash for its value despite the warning of the crossing, he cannot beconsidered in good faith and thus not a holder in due course. The purpose ofthe crossing is to ensure that the check will be encashed by the rightfulpayee only. Yet, despite the restriction on the negotiability of cross checks,

we held that they are negotiable instruments.

2) YES . Conviction Reversed. A careful examination of the recordsestablishes that appellant issued him the subject check in payment of a pre-existing obligation. It puzzles the Court that after the NOW check datedAugust 31, 1997 bounced on September 3, 1997 for the reason “ACCOUNTCLOSED,” private complainant would still discount appellant’s checks insuccession. It baffles us more that private complainant would discount aP280,000.00-check in February 1998 despite knowledge of the closure ofappellant’s NOW Account.

In the case at bar, private complainant knew that appellant did not onlyhave insufficient funds; he knew her NOW Account was closed at the timehe allegedly discounted the subject check. There is no estafa throughbouncing checks when it is shown that private complainant knew that thedrawer did not have sufficient funds in the bank at the time the check wasissued to him. Such knowledge negates the element of deceit andconstitutes a defense in estafa through bouncing checks.

d. Time Deposits

SEC. X231, MRB: Time deposits shall be issued for a specific periodof term.

BPI FAMILY SAVINGS BANK v. FIRST METRO INVESTMENT CORP.,

429 SCRA 30 (2004)DOCTRINE: A Time Deposit is defined as “one the payment of which cannotlegally be required within such a specified number of days.

FACTSFMIC, through its Executive Vice President Antonio Ong, opened a currentaccount and deposited a METROBANK check P100 million with BPI FamilyBank* (BPI FB). BPI FB, guaranteed the payment of P14,667,687.01representing 17% per annum interest of P100 million deposited by FMIC.The latter, in turn, assured BPI FB that it will maintain its deposit of P100million for a period of one year on condition that the interest of 17% perannum is paid in advance. Subsequently, BPI FB paid FMIC 17% interest orP14,667,687.01 upon clearance of the latter’s check deposit.

However, on August 29, 1989, on the basis of an Authority to Debit signedby Ong and Ma. Theresa David, Senior Manager of FMIC, BPI FB transferredP80 million from FMIC’s current account to the savings account of TevestecoArrastre – Stevedoring, Inc.

FMIC denied having authorized the transfer of its funds to Tevesteco,claiming that the signatures of Ong and David were falsified. To recoverimmediately its deposit, FMIC, on September 12, 1989, issued BPI FB check

no. 129077 for P86,057,646.72 payable to itself and drawn on its depositwith BPI FB SFDM branch. But upon presentation for payment on September13, 1989, BPI FB dishonored the check as it was "drawn against insufficientfunds" (DAIF).

FMIC filed with the RTC a civil case against BPI FB. RTC ruled in favor ofFMIC, ordering BPI to pay P80M + interest at legal rate. CA modifiedamount to P65M + interest at 17%

ISSUE Is it a Time Deposit or interest-bearing current account?

HELD Time Deposit . The parties did not intend the deposit to be treated as ademand deposit but rather as an interest-earning time deposit notwithdrawable any time. Both agreed that the deposit of P100 million wasnon-withdrawable for one year upon payment in advance of the17% per annum interest .

Ordinarily, a time deposit is defined as "one the payment of which cannotlegally be required within such a specified number of days." In contrast,demand deposits are "all those liabilities of the Bangko Sentral and ofother banks which are denominated in Philippine currency and are subjectto payment in legal tender upon demand by the presentation of(depositor’s) checks. "4 While it may be true that barely one month and

seven days from the date of deposit, respondent FMIC demanded thewithdrawal of P86,057,646.72 through the issuance of a check payable toitself, the same was made as a result of the fraudulent and unauthorizedtransfer by petitioner BPI FB of its P80 million deposit to Tevesteco’s savingsaccount. Certainly, such was a normal reaction of respondent as a depositorto petitioner’s failure in its fiduciary duty to treat its account with thehighest degree of care. Under this circumstance, the withdrawal of depositby respondent FMIC before the one-year maturity date did not change thenature of its time deposit to one of demand deposit.


INTERNATIONAL EXCHANGE BANK v. CIR, 520 SCRA 688 (2007) rate in a SA-FSD, the amount of deposit must be maintained for a fixed




DOCTRINE: Having a fixed term and the reduction of interest rate in caseof pre-termination are essential features of a time deposit.

FACTS International Exchange Bank served a Letter of Authority by theCommissioner of Internal Revenue, directing the examination of the bank’sbook of accounts and other account records. The CIR found that it was liablefor tax deficiencies, mostly Documentary Stamp Tax (DST). The Bankprotested the assessment, arguing that there is no law imposing DST onSavings Account-Fixed Savings Deposit.

CTA Division decided that the bank was not liable for the whole assessmentbut still liable for the DST. CTA En Banc affirmed.

ISSUE Whether a Savings Account-Fixed Savings Deposit evidenced by a passbookis subject to Documentary Stamp Tax

RULING YES , it is subject to DST.Section 180 of the Tax Code provides DST shall be imposed on

“…certificates of deposits drawing interest, or orders for the paymentof any sum of money otherwise than at sight or on demand…” a passbookrepresenting an interest earning deposit account issued by a bank qualifiesas a certificate of deposit drawing interest.

A document to be deemed a certificate of deposit requires no specific formas long as there is some written memorandum that the bank accepted adeposit of a sum of money from a depositor. What is important andcontrolling is the nature or meaning conveyed by the passbook and not theparticular label or nomenclature attached to it, inasmuch as substance, notform, is paramount.

A depositor of a savings deposit-FSD is required to keep the money with thebank for at least thirty (30) days in order to yield a higher interest rate.Otherwise, the deposit earns interest pertaining only to a regular savingsdeposit. The same feature is present in a time deposit. A depositor isallowed to withdraw his time deposit even before its maturity subject tobank charges on its pre-termination and the depositor loses his entitlementto earn the interest rate corresponding to the time deposit. Instead, heearns interest pertaining only to a regular savings deposit. (Question) Sinosuperhero mahilig mag promise?) In both cases, the deposit may bewithdrawn anytime but the depositor gets to earn a lower rate of interest.The only difference lies on the evidence of deposit, a savings deposit-FSD isevidenced by a passbook, while a time deposit is evidenced by a certificateof time deposit." In order for a depositor to earn the agreed higher interest

period. Thus, SA-FSD is a deposit account with a fixed term. Withdrawalbefore the expiration of said fixed term results in the reduction of theinterest rate. Having a fixed term and reduction of interest rate in case ofpre-termination are essentially the features of a time deposit. Ultimately,the Bank’s SA-FSD and time deposit are substantially the same

It bears emphasis that DST is levied on the exercise by persons of certainprivileges conferred by law for the creation, revision, or termination of

specific legal relationships through the execution of specific instruments. Itis an excise upon the privilege, opportunity or facility offered at exchangesfor the transaction of the business.

While tax avoidance schemes and arrangements are not prohibited, tax lawscannot be circumvented in order to evade payment of just taxes. (Answer:eh di si Peksman!)To claim that time deposits evidenced by passbooksshould not be subject to DST is a clear evasion of the rule on equality anduniformity in taxation that requires the imposition of DST on documentsevidencing transactions of the same kind, in this particular case, on allcertificates of deposits drawing interest.

In addition, further amendments to Section 180 includes provisions with thepurpose to eliminate precisely the scheme used by banks of issuingpassbooks to "cloak" its time deposits as regular savings deposits.

e. Foreign Currency Deposits

SEC. 2, FCDA: Any person, natural or juridical, may, in accordancewith the provisions of this Act, deposit with such Philippine banks ingood standing, as may, upon application, be designated by theCentral Bank for the purpose, foreign currencies which areacceptable as part of the international reserve, except those whichare required by the Central Bank to be surrendered in accordancewith the provisions of Republic Act Numbered two hundred sixty-five

(Now Rep. Act No. 7653).SEC. 3, FCDA: The banks designated by the Central Bank underSection two hereof shall have the authority:

(1) To accept deposits and to accept foreign currencies intrust Provided , That numbered accounts for recording andservicing of said deposits shall be allowed;(2) To issue certificates to evidence such deposits;(3) To discount said certificates;(4) To accept said deposits as collateral for loans subject tosuch rules and regulations as may be promulgated by theCentral Bank from time to time; and(5) To pay interest in foreign currency on such deposits.


f. Money Market Placements recover the proceeds of her first money market placement. Allied filed a




ALLIED BANKING CORP. v. LIM SIO WAN, 549 SCRA 504 (2008)

DOCTRINE: A Money Market is a market dealing in standardized short-termcredit instruments (involving large amounts) where lenders and borrowersdo not deal directly with each other by through a middle man or dealer inopen market—in a money market transaction, the investor is a lender wholoans his money to a borrower through a middleman or dealer.

FACTS Respondent Lim Sio Wan deposited with petitioner Allied BankingCorporation (Allied) at its Quintin Paredes Branch in Manila a money marketplacement of PhP 1,152,597.35 for a term of 31 days to mature onDecember 15, 1983,

On December 5, 1983, a person claiming to be Lim Sio Wan called upCristina So, an officer of Allied, and instructed the latter to pre-terminateLim Sio Wan's money market placement, to issue a manager's checkrepresenting the proceeds of the placement, and to give the check to oneDeborah Dee Santos who would pick up the check. Lim Sio Wan describedthe appearance of Santos so that So could easily identify her.

Later, Santos arrived at the bank and signed the application form for amanager's check to be issued. The bank issued a Manager's Check for PhP1,158,648.49, representing the proceeds of Lim Sio Wan's money marketplacement in the name of Lim Sio Wan, as payee. The check was cross-checked "For Payee's Account Only" and given to Santos.

Thereafter, the manager's check was deposited in the account of FilipinasCement Corporation (FCC) at respondent Metropolitan Bank and Trust Co.(Metrobank), with the forged signature of Lim Sio Wan as indorser.

the Allied check was deposited with Metrobank in the account of FCC asProducers Bank's payment of its obligation to FCC.

Metrobank stamped a guaranty on the check, which reads: "All priorendorsements and/or lack of endorsement guaranteed."

The check was sent to Allied through the PCHC. Upon the presentment ofthe check, Allied funded the check even without checking the authenticity ofLim Sio Wan's purported indorsement. Thus, the amount on the face of thecheck was credited to the account of FCC and as a result Producers Bank’sobligation to the former was extinguished.

On December 14, 1983, upon the maturity date of the first money marketplacement, Lim Sio Wan went to Allied to withdraw it. She was theninformed that the placement had been pre-terminated upon her instructions.Allied refused to pay Lim Sio Wan, claiming that the latter had authorizedthe pre-termination of the placement and its subsequent release to SantosConsequently, Lim Sio Wan filed with the RTC a Complaint against Allied to

third party complaint against Metrobank and Santos. In turn, Metrobankfiled a fourth party complaint against FCC. FCC for its part filed a fifth partycomplaint against Producers Bank. Lim Sio Wan thereafter filed an amendedcomplaint to include Metrobank as a party-defendant, along with Allied.

MTC made Allied solely liable

RTC modified the decision as follows:

Allied Banking Corporation to pay sixty (60%) percent and defendant-appellee Metropolitan Bank and Trust Company forty (40%) of the amountof P1,158,648.49 plus 12% interest per annum from March 16, 1984 untilfully paid. The moral damages, attorney's fees and costs of suit shalllikewise be paid in 60-40 ratio.

ISSUES

1) Kind of deposit present in the case (relevant to the banking)

2) Who are liable? (Main issue of the case- not relevant to banking)

RULING

(Relevant)

1) Money Market Placement. The Court discusses is as follows:

Thus, we have ruled in a line of cases that a bank deposit is in the nature ofa simple loan or mutuum. More succinctly, in Citibank, N.A. (Formerly FirstNational City Bank) v. Sabeniano , this Court ruled that a money marketplacement is a simple loan or mutuum. [43] Further, we defined a moneymarket in Cebu International Finance Corporation v. Court of Appeals , asfollows:

[A] money market is a market dealing in standardized short-term credit instruments (involving large amounts) where lenders and borrowers do notdeal directly with each other but through a middle man or dealer in openmarket. In a money market transaction, the investor is a lender who loans

his money to a borrower through a middleman or dealer.In the case at bar, the money market transaction between the petitionerand the private respondent is in the nature of a loan.

Lim Sio Wan, as creditor of the bank for her money market placement, isentitled to payment upon her request, or upon maturity of the placement, oruntil the bank is released from its obligation as debtor. Until any such event,the obligation of Allied to Lim Sio Wan remains unextinguished.

Since there was no effective payment of Lim Sio Wan's money marketplacement, the bank still has an obligation to pay her at six percent (6%)interest from March 16, 1984 until the payment thereof.


2) (Not important but will mention the summary of it anyway) Allied and (3) Women shall have equal rights to act as incorporators




Metrobank liable in 60-40 ratio. Producer’s Bank shall reimburse the amountpaid by both Allied and Metrobank. Allied Bank is liable as negligent draweebank who issued the manager’s check to Santos. MetroBank is liable as thenegligent collecting bank who certified the authenticity of the signatures.Producers bank liable because it was unjustly enriched the amount was paidto FCC, which extinguished the obligation of the former to the latter.

C. Capacity of Depositorsa. Minors

SEC. 1, PD 734: Minors who are at least seven years of age, areable to read and write, have sufficient discretion, and are nototherwise disqualified by any other incapacity, are hereby vestedwith special capacity and power, in their own right and in their ownnames, to make savings or time deposits with and withdraw thesame as well as receive interests thereon from banking institutions,without the assistance of their parents or guardians, the provisionsof existing laws and regulations to the contrary notwithstanding.Parents may nevertheless deposit for their minor children andguardians for their wards.

SEC. 22, THRIFT BANKS ACT: Minors in their own rights and intheir own names may make deposits and withdraw the same, andmay receive dividends and interest: Provided, however, That, if anyguardian shall give notice in writing to any thrift bank not to makepayments of deposits, dividends, or interest to the minor of whomhe is the guardian, then such payment shall be made only to theguardian.

b. Married Women

SEC. 5, RA 7192: Women of legal age, regardless of civil status,shall have the capacity to act and enter into contracts which shall inevery respect be equal to that of men under similar circumstances.

In all contractual situations where married men have the capacity toact, married women shall have equal rights.

To this end:(1) Women shall have the capacity to borrow and obtainloans and execute security and credit arrangement underthe same conditions as men;(2) Women shall have equal access to all government andprivate sector programs granting agricultural credit, loansand non-material resources and shall enjoy equal treatmentin agrarian reform and land resettlement programs;

and enter into insurance contracts; and(4) Married women shall have rights equal to those ofmarried men in applying for passport, secure visas andother travel documents, without need to secure the consentof their spouses.

In all other similar contractual relations, women shall enjoy equalrights and shall have the capacity to act, which shall in every

respect be equal to those of men under similar circumstances.

c. Corporations

SEC. 23, CORPORATION CODE: Unless otherwise provided in thisCode, the corporate powers of all corporations formed under thisCode shall be exercised, all business conducted and all property ofsuch corporations controlled and held by the board of directors ortrustees to be elected from among the holders of stocks, or wherethere is no stock, from among the members of the corporation, whoshall hold office for one (1) year until their successors are electedand qualified.

Every director must own at least one (1) share of the capital stockof the corporation of which he is a director, which share shall standin his name on the books of the corporation. Any director whoceases to be the owner of at least one (1) share of the capital stockof the corporation of which he is a director shall thereby cease to bea director. Trustees of non-stock corporations must be membersthereof. a majority of the directors or trustees of all corporationsorganized under this Code must be residents of the Philippines.

d. Bank Officers and Employees

SEC. X204, MRB: : The following officers and employees of banksare prohibited from maintaining demand deposits or currentaccounts with the banking office in which they are assigned:

a. All officers;b. Employees of the bank’s cash department/cash units; andc. Other employees who have direct and immediateresponsibility in the handling of transactions and/or recordspertaining to demand deposits or current accounts.

The above-mentioned prohibition shall include the spouses andrelatives within the second degree of consanguinity and affinity ofthe officers and employees covered by the prohibition, and thebusiness interests of such officers and employees, their spouses andrelatives within the second degree of consanguinity and affinity, in


single proprietorships, or partnerships or corporations in which suchffi d l i di id ll l

ART. 379, NCC: The employment of pen names or stage namesi i d id d i i d i d f i h d h i




officers and employees, individually or as a group, own or control atleast a majority of the capital of the partnership or the outstandingsubscribed capital stock (voting and non-voting) of the corporation.

D. OPENING OF DEPOSIT ACCOUNTS1. Know Your Customer Standards

SUBSEC. X262.1, MRB: Specimen signatures, ID photos. Allbanking institutions are required to set a minimum of three (3)specimen signatures to be simultaneously required from each oftheir depositors and to update the specimen signatures of theirdepositors every five (5) years or sooner, at the discretion of thebank. Banks may, at their option, require their depositors to submitID photos together with the specimen signatures.

2. Prohibitionsa. Anonymous Accounts/Fictitious Names

SEC. 9 (A), AMLA: Prevention of Money Laundering; CustomerIdentification Requirements and Record Keeping. –(a) Customer Identification, - Covered institutions shall establishand record the true identity of its clients based on officialdocuments. They shall maintain a system of verifying the trueidentity of their clients and, in case of corporate clients, requirea system of verifying their legal existence and organizationalstructure, as well as the authority and identification of allpersons purporting to act on their behalf.

The provisions of existing laws to the contrary notwithstanding,anonymous accounts, accounts under fictitious names, and allother similar accounts shall be absolutely prohibited. Peso andforeign currency non-checking numbered accounts shall beallowed. The BSP may conduct annual testing solely limited tothe determination of the existence and true identity of the

owners of such accounts.b. Pseudonyms

ART. 178, RPC: Using fictitious name and concealing truename. — The penalty of arresto mayor and a fine not to exceed500 pesos shall be imposed upon any person who shall publiclyuse a fictitious name for the purpose of concealing a crime,evading the execution of a judgment or causing damage.

Any person who conceals his true name and other personalcircumstances shall be punished by arresto menor or a fine notto exceed 200 pesos.

is permitted, provided it is done in good faith and there is noinjury to third persons. Pen names and stage names cannot beusurped.

ART. 380, NCC: Except as provided in the preceding article, noperson shall use different names and surnames.

c. Exception: NUMBERED ACCOUNTS

SEC. 9 (A), AMLA: Prevention of Money Laundering; CustomerIdentification Requirements and Record Keeping. –(a) Customer Identification, - Covered institutions shall establishand record the true identity of its clients based on officialdocuments. They shall maintain a system of verifying the trueidentity of their clients and, in case of corporate clients, requirea system of verifying their legal existence and organizationalstructure, as well as the authority and identification of allpersons purporting to act on their behalf.

The provisions of existing laws to the contrary notwithstanding,anonymous accounts, accounts under fictitious names, and allother similar accounts shall be absolutely prohibited. Peso andforeign currency non-checking numbered accounts shall beallowed. The BSP may conduct annual testing solely limited tothe determination of the existence and true identity of theowners of such accounts.

SEC. 3 (1), FDCA: Authority of banks to accept foreigncurrency deposits. – The banks designated by the Central Bankunder Section two hereof shall have the authority:(1) To accept deposits and to accept foreign currencies in trustProvided , That numbered accounts for recording and servicing ofsaid deposits shall be allowed.

3. Joint AccountsART. 485, NCC: The share of the co-owners, in the benefits as wellas in the charges, shall be proportional to their respective interests.Any stipulation in a contract to the contrary shall be void.

The portions belonging to the co-owners in the co-ownership shallbe presumed equal, unless the contrary is proved.

ART. 1207, NCC: The concurrence of two or more creditors or oftwo or more debtors in one and the same obligation does not implythat each one of the former has a right to demand, or that each oneof the latter is bound to render, entire compliance with theprestation. There is a solidary liability only when the obligation


expressly so states, or when the law or the nature of the obligationi lid it

RTC dismissed the case. CA affirmed.




requires solidarity.

ART. 1208, NCC: If from the law, or the nature or the wording ofthe obligations to which the preceding article refers the contrarydoes not appear, the credit or debt shall be presumed to be dividedinto as many shares as there are creditors or debtors, the credits ordebts being considered distinct from one another, subject to theRules of Court governing the multiplicity of suits.

E. ADMINISTRATION OF DEPOSIT ACCOUNTS1. Deposit of Funds

a. Delivery RequiredART. 1934, NCC: An accepted promise to deliver something byway of commodatum or simple loan is binding upon parties, butthe commodatum or simple loan itself shall not be perfecteduntil the delivery of the object of the contract.

b. Acceptability of Withdrawal Slips as DepositsCasesFirestone Tire & Rubber Co. of the Phil. v CADOCTRINE: A bank is under the obligation to treat the accounts of itsdepositors with meticulous care, whether such account consists only of afew hundred pesos or millions of pesos. The fact that the other withdrawalslips were honored and paid by the other bank was no license for the bankto presume that subsequent slips would be honored and paid immediately.By doing so, it failed in its fiduciary duty to treat the accounts of its clientswith the highest degree of care.

FACTSFojas-Arca is one of the client depositors of Luzon Development Bank (LDB).Fojas-Arca has an arrangement with LDB, where the latter authorized andallowed withdrawal of its funds through special deposit slips, which aresupplied by LDB to Fojas-Arca.

In January to May 1978, Fojas-Arca purchased on credit from Firestoneamounting to P4M. In payment, Fojas-Arca delivered to Firestone six (6)special withdrawal slips drawn upon defendant. These were deposited byFirestone with its current account with Citibank. All of them were honoredand paid by LDB. Relying on the same arrangement, Firestone extendedother purchases on credit to Fojas-Arca.

In December 1978, Firestone was informed by Citibank that several specialwithdrawal slips were dishonored for “NO ARRANGEMENT.” Citibank debitedthe amount from Firestone’s account. Firestone then filed an action fordamages against LDB alleging that it suffered pecuniary losses.

ISSUEWhether LDB is liable for damages suffered by Firestone, due to its allegedlybelated notice of non-payment of the subject withdrawal slip?RULINGNO. At the outset, we note that petitioner admits that the withdrawal slipsin question were non-negotiable. Hence, the rules governing the giving ofimmediate notice of dishonor of negotiable instruments do not apply in this

case. Petitioner itself concedes this point. Thus, respondent bank was underno obligation to give immediate notice that it would not make payment onthe subject withdrawal slips. Citibank should have known that withdrawalslips were not negotiable instruments. It could not expect these slips to betreated as checks by other entities. Payment or notice of dishonor fromrespondent bank could not be expected immediately, in contrast to thesituation involving checks.

A bank is under obligation to treat the accounts of its depositors withmeticulous care, whether such account consists only of a few hundred pesosor of millions of pesos. The fact that the other withdrawal slips werehonored and paid by respondent bank was no license for Citibank topresume that subsequent slips would be honored and paid immediately. Bydoing so, it failed in its fiduciary duty to treat the accounts of its clients withthe highest degree of care.

In the ordinary and usual course of banking operations, current accountdeposits are accepted by the bank on the basis of deposit slips prepared andsigned by the depositor, or the latter's agent or representative, whoindicates therein the current account number to which the deposit is to becredited, the name of the depositor or current account holder, the date ofthe deposit, and the amount of the deposit either in cash or in check.

The withdrawal slips deposited with petitioner's current account withCitibank were not checks, as petitioner admits. Citibank was not bound toaccept the withdrawal slips as a valid mode of deposit. But havingerroneously accepted them as such, Citibank — and petitioner as account-holder — must bear the risks attendant to the acceptance of theseinstruments. Petitioner and Citibank could not now shift the risk and holdprivate respondent liable for their admitted mistake.

c. Acceptability of Checks Without Indorsement of PayeeCasesPNB v Rodriguez DOCTRINE: A bank that regularly processes checks that are neitherpayable to the customer nor duly indorsed by the payee is apparentlygrossly negligent in its operations.


In a checking transaction, the drawee bank has the duty to verify theg i f th ig t f th d d t th h k t i tl i

duty to them as depositors.




genuineness of the signature of the drawer and to pay the check strictly inaccordance with the drawer’s instructions, i.e., to the named payee in thecheck.

FACTSRespondent spouses erlando and norma Rodriguez were clients of petitionerPNB, Cebu City. They maintained savings and demand/checking accounts.The spouses were engaged in the informal lending business. They had a

discounting arrangement with Philnabank Employees Savings and LoanAssociation (PEMSLA), an association of PNB employees. Naturally, PEMSLAwas likewise a client of PNB.

PEMSLA regularly granted loans to its members, spouses Rodriguez wouldrediscount the postdated checks issued to members whenever theassociation was short of funds. As was customary, the spouses wouldreplace the postdated checks with their own checks issued in the name ofthe members.

It was PEMSLA’s policy not to approve applications for loans of memberswith outstanding debts. To subvert this policy, some PEMSLA officersdevised a scheme to obtain additional loans despite their outstanding loanaccounts. They took out loans in the names of unknowing members, withoutthe knowledge or consent of the latter. The PEMSLA checks issued for theseloans were then given to the Rodriguez spoues for rediscounting. Theofficers carried this out by forging the indorsement of the named payees inthe checks. In return, the spouses issued their personal checks (Rodriguezchecks) in the name of the members and delivered the checks to an officerof PEMSLA. The PEMSLA checks, on the other hand, were despited by thespouses to their account.

Meanwhile, the Rodriguez checks were despotied directly by PEMSLA to itssavings account without any indorsement from the named payees. This wasan irregular procedure made possible through the treasurer of PEMSLA whowas also a bank teller in the PNB branch of Cebu. This because the usualpractice for the two.

For the period of November 1998 and February 1999, sixty-nine (69)checks, in the amount of 2.345 million pesos were issued payable to 47individual payees. PNB got wind of the scheme and closed the currentaccount of PEMSLA which led the checks deposited by the Rodriguez fromPEMSLA into their account to bounce.

The checks from the Rodriguezes to PEMSLA though were still debited fromthe account of the spouses, hence, they went to court to have PNB returnthe money debited from their account stating that PNB credited the checksto PEMSLA even if they were without indorsements, thus breaching their

PNB argued that the spouses did not intend to give the checks to theinvidual payees, only to PEMSLA, hence, the payees were fictitious, thus thechecks became bearer instruments based on the Negotiable Instrumentslaw. The checks could be negotiated with just delivery.

RTC rendered in favour of the spouses, CA reversed stating that the spousesreally intended the checks to go PEMSLA, not the payees, hence, the payees

were fictitious, thus converting the check into a bearer intrument, thus theydid not require indorsement for negotiation. Spouses filed and Motion forReconsideration, and the CA reversed itself due to the argument of thespouses that the checks, on their face, were payable to order, hence, PNBbreached their contract of deposit.

ISSUE Are the checks payable to order or to bearer?

HELD: Payable to order.

As a rule, when the payee is fictitious or not intended to be the truerecipient of the proceeds, the check is considered as a bearer instrumentbased on Sections 8 and 9 of the NIL. The drawee bank is then absolvedfrom liability and the drawer bears the loss. However, there is a commercialbad faith exception to the fictitious-payee rule. A showing of commercial badfaith on the part of the drawee bank, or any trasnferee of the check for thatmatter, will work to strip it of this defense.

For the fictitious-payee rule to be available as a defense, PNB must showthat the makers did not intend for the named payees to be part of thetransaction involving the checks. At most, the bank’s thesis shows that thepayees did not have knowledge of the existence of the checks. This lack ofknowledge on the part of the payees, however, was not tantamount to alack of intention on the part of respondents-spouses that the payees wouldnot receive the checks’ proceeds. Considering that the respondents weretransacting with PEMSLA and not the individual payees, it is understandablethat they relied on the finformation given by the officers of PEMSLA that thepayees would be receiving the checks.

Verily, the subject checks are presumed order instruments. PNB failed topresent sufficient evidence to defeat the claim of respondent spouses thatthe named payees were the intended recipients of the check proceeds. ThusPNB was remiss as the drawee bank

2. Withdrawal of Fundsa. From Current Accounts

i. When funds insufficient


CasesMoran v CA

insufficient to pay off the checks. This would lead to dishonoring of thechecks There is a presumption in law that the ordinary course of business




Moran v CADOCTRINE: A bank is under no obligation to make part payment on acheck, up to only the amount of the drawer's funds, where the check isdrawn for an amount larger than what the drawer has on deposit. Such apractice of paying checks in part has never existed. Upon partial payment,the check holder could not be called upon to surrender the check, and thebank would be without a voucher affording a certain means of showing thepayment. The rule is based on commercial convenience, and any rule that

would work such manifest inconvenience should not be recognized. A checkis intended not only to transfer a right to the amount named in it, but toserve the further purpose of affording evidence for the bank of the paymentof such amount when the check is taken up.

FACTSSpouses Moran are the owners of the Wack-Wack Petron Gasoline. They buyfuel and other related products from Petrophil on a cash on delivery basis.They maintain three accounts with Citytrust, one current account allowed tohave zero balance, and two savings account. One of the savings accountwas allowed to have automatic transfer of funds whenever the currentaccount was insufficient to pay withdrawals, and the other needsauthorization to transfer funds. On December 12, 1983, Librada Moranissued a check for P50,576 payable to Petrophil. On the next day, she issuedanother check for 56,090, payable to the same corporation. On December14, 1983, the checks were deposited to PNB, which presented both forclearing. On this day, the current account had zero balance, while thesavings account covered by the automatic transfer only had P26,104.30,both accounts being insufficient to pay the issued checks. (The othersavings account, where authorization is needed only had P43,268.39.) OnDecember 15, 1983, George Moran deposited some funds which weresupposed to be used to pay the earlier transaction. However, Libradainformed George that Petrophil refused to deliver their orders, and that thechecks issued were dishonored due to insufficiency of funds. The branchmanager tried to fix the problem by bringing a manager's check to besigned by the spouses to pay off the balance with Petrophil. The bank alsotried to apologize to Petrophil, stating in the the letter that it committed"operational error". 6 months later, the spouses demanded that the bankpay them P1M for moral damages, which the bank refused to pay. They fileda case, which the RTC dismissed, and affirmed by the CA.

ISSUEWhether the spouses had sufficient funds when the bank dishonored thecheck

RULINGNO . When PNB presented the check for collection, the current account hadzero balance, while the savings account had P26,104.30, which is

checks. There is a presumption in law that the ordinary course of business(clearing and withdrawing) has ben followed. Where the spouses failed toshow that the checks underwent a different process of clearing, it ispresumed that the acts of clearing underwent the same process. Also, thereis no obligation with the bank to release amount in the savings account,when the balance being collected is higher. They cannot partially honor acheck, being insufficient to pay the whole amount. Neither can they transferfrom the other savings account the balance to pay off the check, since

authority is needed to be able to transfer such amount. The bank had noobligation to settle the spouses account with Petrophil, but they still tried toin order that they would not have stained relations with the spouses.

Villanueva v NiteDOCTRINE: If a bank refuses to pay a check (notwithstanding thesufficiency of funds), the payee-holder cannot sue the bank—the payeeshould instead sue the drawer who might in turn sue the bank. Sec. 189 issound law based on logic and established legal principles—no privity ofcontract exists between the drawee-bank and the payee.

FACTS Nite borrowed P409k from Villanueva secured by an Asian Bank check forP325k dated February 8, 1994.The date was later changed to June 8, 1994with the consent and concurrence of Villanueva. The check was, however,dishonored due to a material alteration when Villanueva deposited the checkon due date. On August 24, 1994, Nite remitted P235k to petitioner aspartial payment of the loan, through a representative, since she was out ofthe country. The balance of P174k was now due on or before December 8,1994.

On August 30, 1994, however, petitioner filed an action for a sum of moneyand damages against Asian Bank for the full amount of the dishonoredcheck. The RTC ruled in his favor. Pursuant thereto, Asian Bank issued aP325k check to Villanueva. When respondent later on went to Asian Bank towithdraw money from her account, she was unable to do so because thetrial court had ordered Asian Bank to pay petitioner the value ofrespondent’s ABC check.

She went to the CA and filed a petition for annulment of judgment (Rule47), which was granted on the ground of extrinsic fraud. The CA found that6 days after receipt of the partial payment of P235k and agreeing that thebalance of P174k shall be paid on or before December 8, 1994, Villanuevafiled his complaint against Asian Bank for the full amount of the dishonoredcheck without impleading Nite. The apparent haste by which he filed hiscomplaint and his failure to implead Nite showed his intent to prevent herfrom opposing his action.


Thus this petition for certiorari. with the bank. This check was issued to him by Willy Cheng from Tarlac andwas duly entered into his bank record




ISSUE 1) Whether the CA was correct to annul judgment despite the fact that

Nite was not a party to the original collection case;2) Whether Villanueva could properly sue the bank for non payment of

the check in the first place.

RULING

1) YES . A petition for annulment of judgment can be properly filed by aperson not a party to the case. In this case, there was no speedy oradequate remedy available to Marlyn Nite because she was not a party tothe collection proceedings. Extrinsic fraud existed in this case since suchrefers to acts committed by a party to keep the other away from the courts,as where there is a false promise of a compromise.

In fact, the RTC had no jurisdiction in this case. The contract of loan wasbetween Villanueva and Nite; as debtor, Nite was an indispensible party tothe case, and any judgment rendered without impleading such a party isvoid.

2) NO . Sec 185 of the Negotiable Instruments Law provides: "A check is abill of exchange drawn on a bank payable on demand. Except as hereinotherwise provided, the provisions of this Act applicable to a bill of exchangepayable on demand apply to a check." Furthermore, Sec. 189. provides: "Acheck of itself does not operate as an assignment of any part of the funds tothe credit of the drawer with the bank, and the bank is not liable to theholder, unless and until it accepts or certifies the check."

If a bank refuses to pay a check (notwithstanding the sufficiency of funds),the payee-holder cannot sue the bank. The payee should instead sue thedrawer who might in turn sue the bank. No privity of contract existsbetween the drawee-bank and the payee. There was no such privity ofcontract between Asian Bank and Villanueva.

ii. Prior to clearingCases

Associated Bank v TanDOCTRINE: Although a collecting bank has the right to debit a client’saccount for the value of a dishonored check that has previously beencredited, it should nevertheless exercise such right with the highest degreeof diligence, as it is a business impressed with public interest.

FACTSVicente Tan is a businessman and regular depositor-creditor of theAssociated Bank. In 1990, he deposited a postdated UCPB check (P101,000)

was duly entered into his bank record.

Upon advice and instructions by the bank that the check was alreadycleared, Tan withdrew P240,000 on the same day, and on the next day, hedeposited P50,000 (account thereafter has approx. P108,000) because heissued several checks amounting to approx. P75,000.

Unfortunately, his suppliers and business partners went back to him alleging

that the checks he issued bounced for insufficiency of funds. Thereafter, he,through his lawyer, informed the bank to take steps regarding the matterfor he has adequate funds to pay the amount of the checks issued. But thebank did not bother or offer any apology regarding the incident. Thus, Taninstituted a complaint for damages against the bank.

The RTC ruled in favor of Tan on the ground that he was not informed aboutthe debiting of the P101,000 from his existing balance and that the bankmerely allowed him to use the fund prior to clearing merely foraccommodation because it considered him as one of its valued clients.Hence, it held that the bank manager was negligent in handling theparticular check account of Tan. On appeal, the CA affirmed the RTC’sdecision.

ISSUE1) Whether the bank, as collecting bank, has the right to debit the

account of Tan for a check deposit, which was dishonored by thedrawee bank

2) Whether the bank properly exercised its right to debit/setoff

RULING 1. YES. A bank generally has the right to setoff over the deposits therein

for the payment of any withdrawals on the part of the depositor. Theright of a collecting bank to debit a client’s account for the value of adishonored check that has previously been credited has fairly beenestablished by jurisprudence.

2. NO. The degree of diligence required of banks is more than that of agood father of a family where the fiduciary nature of their relationshipwith their depositors is concerned. By the nature of its functions, a bankis under obligation to treat the accounts of its depositors withmeticulous care.

It is undisputed that purportedly as an act of accommodation to avalued client, the bank allowed the withdrawal of the face value of thedeposited check prior to its clearing. That act certainly disregarded theclearance requirement of the banking system. Such a practice isunusual, because a check is not legal tender or money, and its value can


properly be transferred to a depositor’s account only after the check hasbeen cleared by the drawee bank

RULING YES The crossing of one of the subject checks should have put TRB on




been cleared by the drawee bank.

Reasonable business practice and prudence dictates that the bankshould NOT have advised and authorized Tan’s withdrawal of P240,000as this amount was over and above his outstanding cleared balance ofaround P197,000.

When the bank came to know of the checks’ dishonor, it should have

immediately and duly informed Tan of the debiting of his account. Noticewas proper and ought to be expected. As a valued client, Tan deservednothing less than an official notice of the precarious condition of hisaccount.

iii. When check crossedCasesTraders Royal Bank v Radio Philippine Network Inc.DOCTRINE: The crossing of a check should put a bank on guard. It wasduty bound to ascertain the indorser’s title to the check or the nature of hispossession. Its effects are that (a) the check may not be encashed but onlydeposited in the bank; (b) the check may be negotiated only once to onewho has an account with a bank; and (c) the act of crossing the checkserves as a warning to the holder that the check has been issued for adefinite purpose so that he must inquire if he has received the checkpursuant to that purpose, otherwise, he is not a holder in due course.

FACTSOn April 1985, the BIR assessed Radio Philippines Network (RPN) for theirtax obligations for the taxable years 1978 to 1983.

Mrs. Vera, RPN’s comptroller, purchased from Trader’s Royal Bank (TRB)three manager’s checks to be used as payment for their tax liabilities. Thechecks issued were made payable to the order of BIR and one of the checkswas also crossed. Mrs. Vera personally received the checks and wassupposed to deliver the same to BIR in payment of RPN’s tax liabilities.

Shortly thereafter, RPN was assessed again by BIR for their tax liabilities forthe years 1972-1978. As RPN learned the three manager’s checks neverreached BIR and was supposedly deposited and withdrawn by threeunknown individuals in Security Bank (SB).

RPN sent letters to TRB and SB demanding that the amounts covered by thechecks be reimbursed or credited to their account. The two banks refused.

ISSUE Whether TRB is liable for the wrongful payment of a check made payable toBIR.

YES . The crossing of one of the subject checks should have put TRB onguard; it was duty bound to ascertain the indorser’s title to the check. TRBshould have known the effects of a crossed check: (a) the check may not beencashed but only deposited in the bank; (b) the check may be negotiatedonly once to one who has an account with the bank; (c) the act of crossingthe check serves as a warning to the holder that the heck has been issuedfor a definite purpose so that he must inquire if he has received the checkpursuant to that purpose.

By encashing in favor of unknown persons checks which were on their facepayable to the BIR. A government agency which can only act through itsagents, TRB did so in at its peril and must suffer the consequences of theunauthorized endorsement. TRB cannot exculpate itself from liability byclaiming that RPN was itself negligent.

iv. In contrast with manager’s checkCasesEquitable PCI Bank v OngDOCTRINE: A manager’s check is an order of the bank to pay, drawn uponitself, committing in effect its total resources, integrity and honor behind itsissuance, and by its peculiar character and general use in commerce, amanager’s check is regarded substantially to be as good as the money itrepresents.

FACTSWarliza Sarande deposited a check of 225k in her account at PhilippineCommercial International Bank (Davao City). She inquired about the statusof the check and the bank said it has been cleared.

Relying on the assurance of the clearance, she issued two checks. One ofthose check was issued to Rowena Ong, amounting to 180k due to abusiness transaction. On the same day, Ong claimed the check the amountof the check from PCI Bank. Instead of encashing it, Ong requested toconvert the proceeds into a manager’s check.

The next day, Ong deposited the check in her account in Equitable PCI Bank(Davao City). a few days later, she received a notice that PCI Bank hasstopped the payment of her check on the ground of irregular issuance.Despite several demands to PCI Bank for the payment of the check, therewas no positive result. Thus, Ong filed a case against PCI Bank.

PCI Bank argues that it did nothing wrong because the account againstwhich the check was drawn (Sarande) was already closed. The bank alsosaid that it gave notice to Sarande and Ong about the return of the check.

The Trial Court ruled in favor of Ong. The Court of Appeals affirmed the


decision. development of the national economy and the fiduciary nature ofbanking that requires high standards of integrity and performance




ISSUE 1. Whether Ong was not a holder in due course and whether there was

a lack of consideration in issuing the manager’s check, ultimatelyabsolving PCI from liability.

2. Whether PCI Bank exercised the requisite degree of diligencerequired of it.

RULING (1) The argument of PCI Bank is out of synch because, by operation of law,it assumed the liabilities of an acceptor under the Negotiable InstrumentsLaw (NIL)

A manager's check is an order of the bank to pay, drawn upon itself,committing in effect its total resources, integrity and honor behind itsissuance. By its peculiar character and general use in commerce, amanager's check is regarded substantially to be as good as the money itrepresents. Said check stands on the same footing as a certified check. Asstated in Sec 187 of the NIL, when the manager’s check is certified by thebank on which it was drawn, the certification is equivalent to anacceptance.

Jurisprudence adds that a manager's check is one drawn by the bank'smanager upon the bank itself. It is similar to a cashier's check both as toeffect and use. A cashier's check is a check of the bank's cashier on his ownor another check. In effect, it is a bill of exchange drawn by the cashier of abank upon the bank itself, and accepted in advance by the act of itsissuance. It is really the bank's own check and may be treated as apromissory note with the bank as a maker. The check becomes the primaryobligation of the bank which issues it and constitutes its written promise topay upon demand. The mere issuance of it is considered an acceptancethereof.

By accepting the check issued by Sarande to Ong and issuing in turn amanager’s check in exchange thereof, PCI Bank assumed the liabilities of anacceptor under the Negotiable Instruments Law. By operation of law underSection 62 of the NIL, the Bank admits the existence of the drawer,genuineness of his signature, capacity to draw the instrument and theexistence of the payee and his capacity to indorse. Thus, the argument thatOng is not a holder in due course and failure of consideration for theissuance of the Manager’s check is untenable.

(2) NO , it did not exercise the standard of diligence required from it.In Section 2 of the General Banking Law states that• SEC. 2. Decla ration of Policy. – The State recognizes the vital role of

banks in providing an environment conducive to the sustained

banking that requires high standards of integrity and performance.In furtherance thereof, the State shall promote and maintain astable and efficient banking and financial system that is globallycompetitive, dynamic and responsive to the demands of adeveloping economy.

In this case, PCI bank distinctly admitted that the check deposited bySarande was inadvertently send by the PCI bank through the “local

clearing” when it should have been sent th rough “inter-regiona l” clearingcheck since the check was drawn in General Santos City. It also admittedthe mistake in assuring Sarande that the check has been cleared upon herinquiry, because they were not aware that it was inadvertently sent in the

“local clearing”. Both uncontested admissions prove that PCI failed toexercise the highest degree of care required of it under the law.

*Non-banking issue: Summary Judgmentthe summary judgment of the trial court is proper because the facts aspleaded appear uncontested, all that is required is a judgment of the court.This is evident when PCI bank admitted it committed an error in clearing thecheck of Sarande.

*Non-banking issue: Award of Moral and Exemplary Damages.The bank is liable for moral damages because Ong suffered embarrassmentand humiliation arising from the dishonor of the check. The bank is alsoliable for exemplary damages because of failure to guard against injuryattributable to negligence or bad faith, considering the banking system playsa vital role in the economic life.

b. From Savings AccountsCasesBPI v CA (2000)DOCTRINE: The requirement of presentation of the passbook whenwithdrawing an amount cannot be given mere lip service even though theperson making the withdrawal is authorized by the depositor to do so.

FACTSPrivate respondent deposited in Foreign Currency Deposit Unit (FCDU)Savings Account which he maintained in petitioner bank's Buendia AvenueExtension Branch, Continental Bank Manager's Check payable to "cash" inthe amount of $2 ,500.00 and du ly endorsed by private respondent. Itappears that the check belonged to a certain Henry who went to the officeof private respondent and requested him to deposit the check in his dollaraccount by way of accommodation and for the purpose of clearing the same.Private respondent acceded, and agreed to deliver to Chan a signed blankwithdrawal slip, with the understanding that as soon as the check is cleared,both of them would go to the bank to withdraw the amount of the check


upon private respondent's presentation to the bank of his passbook. Considering petitioner's clear admission that the withdrawal slip was a blankone except for private respondent's signature, the unavoidable conclusion is




Using the blank withdrawal slip given by private respondent to Chan, oneRuben Gayon, Jr, petitioner’s employee was able to withdraw the amount of$2,541.67 from FCDU Savings Account. Notably, the withdrawal slip showsthat the amount was payable to” Ramon A. de Guzman and Agnes C. deGuzman” and was duly initialed by the branch assistant manager. Thewithdrawal was made even before the amount of the check was credited inthe account of the private respondent and without the presentation of the

passbook of the respondent.

Thereafter, petitioner bank received communication from the Wells FargoBank International of New York that the said check deposited by privaterespondent was a counterfeit check because it was "not of the type or styleof checks issued by Continental Bank International."

Now the petitioner is asking the private respondent, through his son (who isemployed by the petitioner bank), to return the amount of 2,500. Theprivate respondent, in his letter to the petitioner, refused to do so statingthat he is not primarily liable. Because of this, petitioner was constrained tofile a suit to collect the said balance.

ISSUE Whether petitioner was grossly negligent in allowing the withdrawal

RULING YES . Petitioner anchors its argument on the fact that the respondent as anindorser guaranteed the validity of the check and the signatures therein andthat the private respondent signed a blank withdrawal slip bearing only 2 ofhis signatures and payee de Guzmans therein.

To hold private respondent liable for the amount of the check he depositedby the strict application of the law and without considering the attendingcircumstances in the case would result in an injustice and in the erosion ofthe public trust in the banking system

Under the rules issued by the petitioner in the private respondent’spassbook, to be able to withdraw from the savings account deposit underthe Philippine foreign currency deposit system, two requisites must bepresented to petitioner bank by the person withdrawing an amount: (a) aduly filled-up withdrawal slip, and (b) the depositor's passbook. Moreover,the withdrawal slip contains a boxed warning that states: "This receipt mustbe signed and presented with the corresponding foreign currency savingspassbook by the depositor in person. Despite the fact that privaterespondent’s passbook was not presented at the time of the withdrawal, thepetitioner still allowed the said withdrawal in violation of their rules.

one except for private respondent s signature, the unavoidable conclusion isthat the typewritten name of "Ruben C. Gayon, Jr." was intercalated andthereafter it was signed by Gayon or whoever was allowed by petitioner towithdraw the amount.

In allowing the withdrawal, petitioner likewise overlooked another rule thatis printed in the passbook. Thus:

2. All deposits will be received as current funds and will be repaid in thesame manner; provided , however, that deposits of drafts, checks , moneyorders, etc. will be accented as subject to collection only and credited to theaccount only upon receipt of the notice of final payment . xxx

In depositing the check in his name, private respondent did notbecome the outright owner of the amount stated therein. Under theabove rule, by depositing the check with petitioner, privaterespondent was, in a way, merely designating petitioner as thecollecting bank. This is in consonance with the rule that a negotiableinstrument, such as a check, whether a manager's check or ordinarycheck, is not legal tender. As such, after receiving the deposit, underits own rules, petitioner shall credit the amount in privaterespondent's account or infuse value thereon only after the draweebank shall have paid the amount of the check or the check has beencleared for deposit.

A bank is under obligation to treat the accounts of its depositors "withmeticulous care, always having in mind the fiduciary nature of theirrelationship." 27 As such, in dealing with its depositors, a bank shouldexercise its functions not only with the diligence of a good father of a familybut it should do so with the highest degree of care. Petitioner herein failedto do this, and in fact, violated its own rules by allowing the withdrawal ofan amount that is definitely over and above the aggregate amount ofprivate respondent's dollar deposits that had yet to be cleared. In so doing,petitioner assumed the risk of incurring a loss on account of a forged orcounterfeit foreign check and hence, it should suffer the resulting damage.

c. From Time DepositsCasesFar East Bank and Trust Company v QuerimitDOCTRINE: A bank acts at its peril when it pays deposits evidenced by acertificate of deposit, without its production and surrender after properindorsement.

FACTSIn 1986, Estrella Querimit opened a dollar saving account with FEBTCHarrison Plaza Branch. She was issued for certificates of deposit, each


representing $15,000.00 or a total of $60,000.00. The certificates were tomature in 60 days, payable to bearer at 4.5% interest per annum. The

In this case, the certificates of deposit were clearly marked payable to"bearer," which means, to "[t]he person in possession of an instrument,




y , p y pcertificates bore the word “accrued” which meant that if they were notpresented for encashment or pre-terminated, the money deposited withaccrued interest would be rolled-over by the bank and annual interest wouldaccumulate automatically.

In 1993, after her husband died, Querimit went to FEBTC to withdraw herdeposit but she was told that her husband had withdrawn the money in

deposit. FEBTC produced documents showing that the deposits have beenpaid to Querimit’s husband. However Querimit insisted that she was or herhusband have not been paid as evidenced by the Cerificates of Depositwhich are still in her possession. She sent a demand letter but FEBTCrefused to pay. So she filed a collection suit.

RTC and CA both ruled for Querimit.

ISSUEWhether the subject certificates of deposit have already been paid?

RULINGNO. Petitioner bank failed to prove that it had already paid EstrellaQuerimit, the bearer and lawful holder of the subject certificates of deposit.The finding of the trial court on this point, as affirmed by the Court ofAppeals, is that petitioner did not pay either respondent Estrella or herhusband the amounts evidenced by the subject certificates of deposit.

A certificate of deposit is defined as a written acknowledgment by a bank orbanker of the receipt of a sum of money on deposit which the bank orbanker promises to pay to the depositor, to the order of the depositor, or tosome other person or his order, whereby the relation of debtor and creditorbetween the bank and the depositor is created. The principles governingother types of bank deposits are applicable to certificates of deposit, as arethe rules governing promissory notes when they contain an unconditionalpromise to pay a sum certain of money absolutely. The principle thatpayment, in order to discharge a debt, must be made to someoneauthorized to receive it is applicable to the payment of certificates ofdeposit. Thus, a bank will be protected in making payment to the holder of acertificate indorsed by the payee, unless it has notice of the invalidity of theindorsement or the holder's want of title. A bank acts at its peril when itpays deposits evidenced by a certificate of deposit, without its productionand surrender after proper indorsement. As a rule, one who pleads paymenthas the burden of proving it. Even where the plaintiff must allege non-payment, the general rule is that the burden rests on the defendant toprove payment, rather than on the plaintiff to prove payment. The debtorhas the burden of showing with legal certainty that the obligation has beendischarged by payment.

, , [ ] p p ,document of title or security payable to bearer or indorsed inblank."Petitioner should not have paid respondent's husband or any thirdparty without requiring the surrender of the certificates of deposit.

Petitioner claims that it did not demand the surrender of the subjectcertificates of deposit since respondent's husband, Dominador Querimit, wasone of the bank's senior managers. But even long after respondent's

husband had allegedly been paid respondent's deposit and before hisretirement from service, the FEBTC never required him to deliver thecertificates of deposit in question. Moreover, the accommodation given torespondent's husband was made in violation of the bank's policies andprocedures.

Petitioner FEBTC thus failed to exercise that degree of diligence required bythe nature of its business. Because the business of banks is impressed withpublic interest, the degree of diligence required of banks is more than thatof a good father of the family or of an ordinary business firm. The fiduciarynature of their relationship with their depositors requires them to treat theaccounts of their clients with the highest degree of care. A bank is underobligation to treat the accounts of its depositors with meticulous carewhether such accounts consist only of a few hundred pesos or of millions ofpesos. Responsibility arising from negligence in the performance of everykind of obligation is demandable. Petitioner failed to prove payment of thesubject certificates of deposit issued to the respondent and, therefore,remains liable for the value of the dollar deposits indicated thereon withaccrued interest.

d. From Foreign Currency DepositsSEC. 5, FCDA: Withdrawability and transferability of deposits. –There shall be no restriction on the withdrawal by the depositorof his deposit or on the transferability of the same abroadexcept those arising from the contract between the depositorand the bank.

e. If Deceased Depositori. Tax Clearance Required

SEC. 97, NIRC: Payment of Tax Antecedent to the Transferof Shares, Bonds or Rights. - There shall not be transferredto any new owner in the books of any corporation, sociedadanonima, partnership, business, or industry organized orestablished in the Philippines any share, obligation, bond orright by way of gift inter vivos or mortis causa, legacy orinheritance, unless a certification from the Commissioner thatthe taxes fixed in this Title and due thereon have been paid isshown.


If a bank has knowledge of the death of a person, whomaintained a bank deposit account alone, or jointly with

RTC: upheld the validity of this agreement and granted the motion of Vitug




p , j yanother, it shall not allow any withdrawal from the saiddeposit account, unless the Commissioner has certified thatthe taxes imposed thereon by this Title have been paid:Provided, however, That the administrator of the estate orany one (1) of the heirs of the decedent may, uponauthorization by the Commissioner, withdraw an amount notexceeding Twenty thousand pesos (P20,000) without the said

certification. For this purpose, all withdrawal slips shallcontain a statement to the effect that all of the jointdepositors are still living at the time of withdrawal by any oneof the joint depositors and such statement shall be underoath by the said depositors.

ii. Survivorship AgreementsCasesVitug v CA DOCTRINE: Survivorship agreements are permitted by the Civil Code. Thevalidity of the contract seems debatable by reason of its “survivor-take-all”feature. But in reality, the contract imposed a mere obligation with a termbeing death. However, if it be shown that such an agreement is a merecloak to hide an inofficious donation, it may be assailed and annulled onsuch ground.

FACTS• On January 13, 1985, Romarico G. Vitug filed a motion asking for

authority from the probate court to sell certain shares of stock andreal properties belonging to the estate to cover allegedly hisadvances to the estate in the sum of P667,731.66, plus interestswhich he claimed were personal funds.

• He claimed that the advances were spent for the payment of estatetax and other increments thereto. He withdrew the sums ofP518,834.27 and P90,749.99 from savings account No. 35342-038of the Bank of America, Makati, Metro Manila.

• Rowena Corona opposed the motion, on the ground that the fundswithdrawn from savings account No. 35342-038 were conjugalpartnership properties and part of the estate. She also sought hisouster for failure to include the sums in question for inventory andfor “concealment of funds belonging to the estate.”

• Vitug insists that the said funds are his exclusive property havingacquired the same through a survivorship agreement executed withhis late wife and the bank on June 19, 1970. The agreementprovides at the instance of the death of himself or his wife, theamount in the account shall be the sole property of the survivor orsurvivors and shall be payable to and collectible or withdrawable bysuch survivor or survivors.

CA: held that the survivorship agreement constitutes a conveyance mortiscausa which “did not comply with the formalities of a valid will as prescribedby Article 805 of the CC, and evne assuming that it was a mere donationinter vivos, it is a prohibited donation under the provisions of Article 133 ofthe Civil Code

ISSUE

Whether the survivorship agreement is void (No)

HELD The agreement didn’t modify the conjugal funds of the spouse.

Spouses are not prohibited by law to invest conjugal property, say by way ofa joint and several bank account, or an “and/or” account.

When the spouses Vitug opened the savings account, they merely put whatrightfully belonged to them in a money-making venture. They did notdispose of it in favor of the other, which would have arguably beensanctionable as a prohibited donation. And since the funds were conjugal, itcannot be said that one spouse could have pressured the other in placing hisor her deposits in the money pool.

The agreement was in the nature of an aleatory contract. In reality what isinvolved here is a contract with a term the fulfillment of which depends oneither the happening of an event which is (1) “uncertain,” (2) “which is tooccur at an indeterminate time.”

A survivorship agreement, the sale of a sweepstake ticket, a transactionstipulating on the value of currency, and insurance have been held to fallunder the first category, while a contract for life annuity or pension underArticle 2021, et sequential, has been categorized under the second. Ineither case, the element of risk is present, In the case at bar, the risk wasthe death of one party and survivorship of the other.

Warning of the Court But although the survivorship agreement is per se notcontrary to law its operation or effect may be violative of the law. Forinstance, if it be shown in a given case that such agreement is a mere cloakto hide and inofficious donation, to transfer property in fraud of creditors, orto defeat the legitime of a forced heir, it may be assailed and annulled uponsuch grounds. No such vice has been imputed and established against theagreement involved in this case


3. Booking of DepositsSEC. X261, MRB: Booking of Deposits and Withdrawals. The

§ X261.5 Booking of deposits after regular banking hours. Deposits,whether cash or non-cash, received after the close of the regular




g pfollowing regulations shall govern the booking of deposits andwithdrawals of banks.

§ X261.1 Clearing cut-off time . As a general rule, all deposits andwithdrawals during regular banking hours shall be credited ordebited to deposit liability accounts on the date of receipt orpayment thereof: Provided, however, That a bank may set a

clearing cut-off time for its head office not earlier than two (2) hoursbefore the start of clearing at the BSP, and not earlier than threeand one-half (3-1/2) hours before the start of clearing for all itsbranches, agencies and extension offices doing business in thePhilippines, after which time, deposits received shall be booked ashereinafter provided: Provided, further, That banks which arelocated in areas where there are no BSP regional/clearingarrangements may set a clearing cut-off time not earlier than two(2) hours before the start of their local clearing after which time,deposits received shall be booked likewise as hereinafter provided.

§ X261.2 Definitions. As used in this Section, the following termsshall have the following meanings:

a. Regular banking hours shall refer to the banking hoursreported to the BSP pursuant to Sec. X156, including theextended banking hours reported for servicing deposits andwithdrawals; and

b. Clearing cut-off time shall mean the bank’s closing time forthe acceptance of deposits in the form of checks, bills andother demand items for clearing on the day of their receipt.

§ X261.3 Booking of cash deposits . Cash deposits received after theselected clearing cut-off time until the close of the regular bankinghours shall be booked as deposits on the day of receipt.

§ X261.4 Booking of non-cash deposits . Deposits of checks including “on us” checks, manager’s /cashier’s/ treasurer’s checks and demanddrafts, which are drawn against the depository bank and all itsoffices, as well as treasury warrants and postal money orders,received after the selected clearing cut-off time until the close of theregular banking hours, may, at the option of the bank, be booked asdeposits on the day of receipt.

Other non-cash deposits received after the selected clearing cut-offtime shall be treated as contingent accounts on the day of receiptand shall be booked as deposits the following banking day.

gbanking hours shall be treated as contingent accounts on the day ofreceipt and shall be booked as deposits the following banking day.

§ X261.6 Other records required. For record and control purposes,banks shall prepare a daily abstract of deposit transactions treatedas contingent accounts.

§ X261.7 Notice required . Banks shall post at a conspicuous placenear each teller’s window a notice to depositors indicating theirselected clearing cut-off time and a statement to the effect thatnon-cash items deposited after said cut-off time shall be treated astransactions for the next banking day.

4. Interest on DepositsSEC. X242, MRB: Interest on Deposits/Deposit Substitutes. Demand, savings, NOW accounts, time deposits and depositsubstitutes shall not be subject to interest ceilings.

§ X242.1 Time of payment of interest on time deposits/depositsubstitutes . Interest or yield on time deposit/deposit substitute maybe paid at maturity or upon withdrawal or in advance: Provided,however, That interest or yield paid in advance shall not exceed theinterest for one (1) year.

§ X242.2 Treatment of matured time deposits/deposit substitutes a. A time deposit not withdrawn or renewed on its due date shall betreated as a savings deposit and shall earn interest from maturity tothe date of actual withdrawal or renewal at a rate applicable tosavings deposits.

b. A deposit substitute instrument not withdrawn or renewed on itsmaturity date shall from said date become payable on demand andshall earn an interest or yield from maturity to actual withdrawal orrenewal at a rate applicable to a deposit substitute with a maturityof fifteen (15) days.

Banks performing quasi-banking functions shall continue to considermatured and unwithdrawn deposit substitutes as such and subjectto reserves.

CasesCitibank, NA v CabamonganDOCTRINE: In a loan or forbearance of money, the interest due should bethat stipulated in writing and in the absence thereof, the rate shall be 12%per annum counted from the time of demand.


FACTSOn August 16, 1993, spouses Cabamongan opened a joint foreign currency

5. Closing of Account




time deposit for their sons Lito and Luis Jr. in the amount of $55,216.69 fora term of 182 days at 2.5625% (from August 16, 1993 to February14,1994). On November 10, 1993, a person claiming to be CarmelitaCabamongan (the wife) pre-terminated the foreign currency account, forwhich she presented a Bank of America card, passport, an ATM, andMabuhay card. Yeye San Pedro processed the pre-termination. The personexecuted a notarize release and waiver document for failure to surrender

the original Certificate of Deposit. The release and waiver document was notnotarized, but the money was released. The person left an ID card, forwhich San Pedro called the spouses residence. Upon calling, she was toldthat the spouses was in the US, and that she couldn't have pre-terminatedthe account. On September 16, 1994, the spouses demanded that theamount withdrawn be returned, plus interest, which the bank refused. Thespouses filed a complaint, where the RTC ruled in favor of them. The CAaffirmed but ruled that the interest of 12% should run only at the time ofdemand.

ISSUEWhether interest should be 2.5625%, 6%, or 12%

RULING12%. The bank argues that the interest should be 2.5625%, or the interestwhich was agreed upon. In arguendo that they were negligent, it should be6% since the funds did not constitute a loan. The facts show that the bankemployees were negligent when they released the funds upon showing that(1) failure to produce the original certificate of deposit, and in lieu of it, anotarized release and waiver document; (2) there was discrepancy with thesignature; (3) the picture of the depositors did not match the personwithdrawing the funds. However, the Court ruled that under Article 1980 ofthe Civil Code, bank deposits are considered as simple loan. The relationshipbetween a bank and a depositor are really a debtor-creditor relationship,where deposits are treated as loan by the bank from its depositors. As ruledin Eastern Shipping Lines v CA, a loan should have an interest that isstipulated, and in absence, should be 12% per annum from the time ofdemand.

***Therefore, the interest would be 2.5625% per annum from August 16,1993 to February 14, 1994, the same rate from February 14, 1994 toSeptember 16, 1994, and 12% per annum from September 16, 1994 up tothe present date of the case.

CasesFar East Bank and Trust Company v Pacilan, Jr.DOCTRINE: No malice or bad faith could be imputed on a bank for closingthe account of a depositor for frequently drawing checks against insufficientfunds. Neither is there malice or bad faith, but only negligence, when thebank accepted a deposit made by the depositor the day following the closureof his account.

FACTS: Pacilan had a current account with FEBTC. He was in the practice ofissuing several postdated checks against the account. One day in March1988, he issued a postdated check for P680. It was dishonored (on April 4)for insufficiency of funds. The next day, he deposited P800. Subsequently,he called FEBTC to inquire about the dishonor and was informed that hisaccount was closed on the ground that it was "IMPROPERLY HANDLED". Thereason given by the bank was that on the evening of April 4, as a result ofhis practice of issuing postdated checks, Pacilan's account had an overdraftof P428. Thus his account was closed.

He sued the bank for moral and exemplary damages. He claimed that thebank closure was unjustified. His account was closed on the evening of April4; but if FEBTC had followed normal banking procedure, it had until theclose of April 5 to honor the check or return it. He claimed that the closureof his account was done with undue haste. Further, the closure of hisaccount has exposed him to criminal prosecution for BP22. He claimed thathe was a cashier of Prudential Bank just across the street, that the closureof the account was patently malicious, and that it had caused himhumiliation, wounded feelings, insurmountable worries and sleepless nights.

In response, the bank claimed that Pacilan had overdrawn his account closeto 200 times in the past 2 years. The bank's Rules and RegulationsGoverning the Establishment and Operation of Regular Demand Depositsprovide that ìthe Bank reserves the right to close an account if the depositorfrequently draws checks against insufficient funds and/or uncollecteddepositsî and that ìthe Bank reserves the right at any time to return checksof the depositor which are drawn against insufficient funds or for anyreason.î They also alleged that Pacilan had used a signature different fromthe specimen on several occasions.

RTC and CA found for Pacilan. They found that according to the bank's rules,any uncleared check could actually have been subjected to a P10 charge percheck, and could actually have been sent back for clearing one more time.Further, in previous instances, FEBTC notified the respondent when heincurred an overdraft and he would then deposit sufficient funds thefollowing day to cover the overdraft. Petitioner bank thus acted unjustifiablywhen it immediately closed the respondentís account on April 4 and


deprived him of the opportunity to reclear his check or deposit sufficientfunds therefor the following day. It also caused him humiliation and tainted

otherwise, as prescribed by law.




his credit standing. They found the bank liable for damages for violation ofArt. 19 of the Civil Code.

ISSUE Whether the bank properly exercised their right to close Pacilan's account.

RULING YES . REVERSED. Petitioner bank has the right to close the account. TheBank Rules also state that: "...the depositor is NOT ENTITLED, AS A MATTEROF RIGHT, TO OVERDRAW on this deposit and the bank reserves the right atany time to return checks of the depositor which are drawn againstinsufficient funds or for any other reason."

There was no right of the petitioner that was violated. The fact thatpetitioner constantly overdrew his account and used signatures not on filewas sufficient ground to close the account; therefore, there was no badfaith. He had improperly handled his account hundreds of time. Thedepositor is bound by the terms and conditions of the agreement with thebank.

Neither the fact that petitioner bank accepted the deposit made by therespondent the day following the closure of his account constitutes bad faithor malice on the part of petitioner bank. The same could be characterizedas simple negligence by its personnel. Said act, by itself, is not constitutiveof bad faith. No legal right was established nor bad faith proved by Pacilan.Damnum Absque Injuria.

F. SECRECY OF BANK DEPOSITS

1. General Rulesa. Rationale

ART. III, SEC. 2 (CONSTITUTION): The right of the people to besecure in their persons, houses, papers, and effects againstunreasonable searches and seizures of whatever nature and for anypurpose shall be inviolable, and no search warrant or warrant of arrestshall issue except upon probable cause to be determined personally bythe judge after examination under oath or affirmation of thecomplainant and the witnesses he may produce, and particularlydescribing the place to be searched and the persons or things to beseized.

ART. III, SEC. 3 (CONSTITUTION): (1) The privacy ofcommunication and correspondence shall be inviolable except uponlawful order of the court, or when public safety or order requires

(2) Any evidence obtained in violation of this or the preceding sectionshall be inadmissible for any purpose in any proceeding.

ART. III, SEC. 7 (CONSTITUTION): The right of the people toinformation on matters of public concern shall be recognized. Accessto official records, and to documents and papers pertaining to officialacts, transactions, or decisions, as well as to government research

data used as basis for policy development, shall be afforded thecitizen, subject to such limitations as may be provided by law.

ART. II, SEC. 28 (CONSTITUTION): Subject to reasonableconditions prescribed by law, the State adopts and implements apolicy of full public disclosure of all its transactions involving publicinterest.

CasesREPUBLIC v. EUGENIO, 545 SCRA 384 (2008)DOCTRINE: There is a right to privacy governing bank accounts in thePhilippines, as expressed in Sec. 2, RA 1405 (Bank Secrecy Act of 1995).Exceptions provided for in Sec. 2 (may be examined by any person,

government official, bureau or office), are as follows:• Upon written permission of the depositor• In cases of impeachment• Examination of bank accounts is upon order of a competent court in

cases of bribery or dereliction of duty of public officials• Money deposited or invested is the subject matter of litigation

FACTS(This case stemmed from the case of Agan v PIATCO)After the promulgation of the Agan case, a series of investigation wasconducted by the Ombudsman, the Compliance and Investigation Staff, andAnti-Money Laundering Council (AMLC). AMLC issued a resolutionauthorizing the Executive Director of AMLC to examine the bank accounts ofPantaleon Alvarez, Cheng Yong,Wilfredo Trinidad, Alfredo Liongson and theirrelated web accounts. Under the authority of such resolution, AMLC filed anapplication to inquire into or examine the deposits or investments ofAlvarez, Cheng Yong, Trinidad and Liongson with the Makati RTC, which thecourt granted. Months later, Special Prosecutor Dennis Villa-Ignaciorequested AMLC to investigate the accounts of Alvarez, PIATCO and allaccounts related to the annulled contract. AMLC issued another resolution,authorizing the executive director to inquire into the bank accounts namedin the letter. AMLC filed the same application, this time to the Manila RTC,which was raffled to Judge Antonio Eugenio Jr. The court likewise grantedsuch ex parte application. Alvarez filed an Urgent Motion to Stay ofEnforcement of Order, which the Manila RTC granted. The Republic filed a


motion for reconsideration which was granted. Alvarez then filed an UrgentMotion and Manifestation, stating that AMLC was about to implement the

b. Applicable LawCases




Manila RTC bank inquiry even though he intends to appeal such order. TheManila RTC refrained AMLC from implementing such order against Alvarez.Alvarez then filed an Urgent Ex Parte Motion for Clarification, alleging thatAMLC likewise cannot implement such order against the others stated in theorder. Manila RTC issued an order, stating that the ex parte applicationcannot be implemented in its totality (first of four rulings contested in thiscase).

Lilia Cheng, wife of Cheng Yong filed a Petition for Certiorari, TRO andpreliminary injunction against the orders of Makati and Manila RTC statinggrave abuse of discretion that AMLA can only inquire to bank accounts afterthe creation of the Anti-Money Laundering Act (AMLA), and not prior to itspromulgation. The CA issued a TRO, granting such petition (second of fourrulings contested in this case).

With relation to the Urgent Motion for Clarification, the Manila RTC issued anorder reiterated that bank inquiry order it issued cannot be implemented bythe AMLC until the appeal (of Alvarez of the order granting the ex parteapplication) is finally resolved (third of four rulings contested in this case).The CA issued a writ of preliminary injunction with regard to the petition

filed by Lilia Cheng (last ruling contested in this case)

ISSUE Whether a bank inquiry order issued in accordance with section 10 AMLAmay be stayed with injunction

RULING YES. There is a right to privacy governing bank accounts in the Philippines,expressed in RA 1405 known as Bank Secrecy Act of 1955. Section 2 of suchlaw states that all deposits of whatever nature with banks or bankinginstitutions in the Philippines including investments in bonds issued by theGovernment of the Philippines, its political subdivisions and itsinstrumentalities, are herby considered as of an absolutely confidentialnature and may not be examined, inquired, or looked into by any person.Although there may have been subsequent laws that would add to theexceptions, the Bank Secrecy Act remains as the general rule.

However, there are exceptions, such as (1) written permission of hedepositors; (2) in cases of impeachment; (3) upon order of competentcourts in cases of bribery or dereliction of duty of public officials; (4) moneydeposited is the subject matter of litigation. Subsequent laws adding to theexception are the Anti-Graft and Corrupt Practices Act, the Ombudsman Act,and the Anti-Money Laundering Act**.

INTENGAN v. CA, 377 SCRA 63 (2002)DOCTRINE: Where the accounts in question are US dollar deposits, theapplicable law is RA 6426 (FCDA), not RA 1405 (Bank Secrecy Law). Underthe applicable law, the only exception to the secrecy of foreign currencydeposits is upon the written permission of the depositor.

FACTS

In 1993, Citibank filed a complaint for violation of Sec. 31, in relation toSec. 144 of the Corporation Code against its 2 officers, Santos and Genuino.It was alleged in the affidavit executed by its VP Vic Lim that Santos andGenuino managed or caused existing bank clients/depositors to divert theirmoney from Citibank NA to products offered by other companies (TorranceDevelopment Corporation and Global Pacific Corporation) that were yieldinghigher interest rates. In return, Santos and Genuino derived substantialfinancial gains. It was also determined that the bank clients accommodatedby Santos and Genuino include Intengan, Neri and Brawner, who have longstanding accounts with Citibank NA in savings/dollar deposits and/or in trustaccounts and/or money placements.

As evidence, Lim annexed bank records, including dollar deposits of

Intengan, Neri and Brawner, to establish the deception practiced by Santosand Genuino.

In turn, Global Consumer Banking Group of Citibank’s VP/Business ManagerReyes admitted to having authorized Lim to state the names of the clientsinvolved and to attach said bank records.

Intengan, Neri and Brawner filed their respective motions for the exclusionand physical withdrawal of their bank records, which was initially dismissedby 2 nd Asst. Provincial Prosecutor Ubana, Sr. However, Provincial ProsecutorCastro directed the filing of informations against Rajkotwala, Ferguson,Reyes and Lim for alleged violation of the Bank Secrecy Law. On appealbefore the DOJ, this was reversed.

ISSUEWhether the Bank Secrecy Law, RA 1405 applies in this case

HELDNO. The accounts in question are US dollar deposits. Consequently, theapplicable law is RA 6426 known as the Foreign Currency Deposit Act of thePhilippines, and not RA 1405 (Bank Secrecy Law).

Under Sec. 8 of RA 6426, there is only a single exception to the secrecy offoreign currency deposits, that is, disclosure is allowed only upon the writtenpermission of the depositor. Incidentally, the acts of the Citibank officials


complained of happened before the enactment of RA 9160, Anti-MoneyLaundering Act of 2001.

Estrada filed a Motion to Quash alleging that the documents were by R.A.No. 1405 (The Secrecy of Bank Deposits Law). He further claimed that the

ifi id ifi i f d i h i d b i l di




A case for violation of RA 6426 should have been the proper case broughtagainst the bank’s officials. Lim and Reyes admitted that they had discloseddetails of petitioners’ dollar deposits without the latter’s written permission.It does not matter if that such disclosure was necessary to establish thebank’s case against Santos and Genuino. Lim’s act of disclosing details ofpetitioners’ bank records regarding their foreign currency deposits, with the

authority of Reyes, would appear to belong to the species of criminal actspunishable under special laws—malum prohibitum.

a. Applicability of Exclusionary RuleART. III, SEC. 2 (CONSTITUTION): The right of the people to besecure in their persons, houses, papers, and effects againstunreasonable searches and seizures of whatever nature and for anypurpose shall be inviolable, and no search warrant or warrant of arrestshall issue except upon probable cause to be determined personally bythe judge after examination under oath or affirmation of thecomplainant and the witnesses he may produce, and particularlydescribing the place to be searched and the persons or things to beseized.

ART. III, SEC. 3 (CONSTITUTION): (1) The privacy ofcommunication and correspondence shall be inviolable except uponlawful order of the court, or when public safety or order requiresotherwise, as prescribed by law.

(2) Any evidence obtained in violation of this or the preceding sectionshall be inadmissible for any purpose in any proceeding.

CasesEJERCITO v. SANDIGANBAYAN, 509 SCRA 190 (2006)DOCTRINE: RA 1405 nowhere provides that an unlawful examination ofbank accounts shall render the evidence obtained therefrom inadmissible inevidence. Sec. 5 only states that “any violation of this law will subject theoffender upon conviction, to an imprisonment of not more than 5 years orfine of not more than P20,000 or both, in the discretion of the court.”

FACTS This case arose from the plunder charges against former president JosephEjercito Estrada. The Special Prosecution Panel filed before theSandiganbayan a request for issuance of subpoenas directing the Presidentof Export and Industry Bank (EIB) or his/her authorized representative toproduce a number of documents allegedly part of the Jose Velarde account.The Sandiganbayan granted the requests and subpoenas were issued.

specific identification of documents in the questioned subpoenas, includingdetails on dates and amounts, could only have been made possible by anearlier illegal disclosure thereof by the EIB and the Philippine DepositInsurance Corporation (PDIC). The disclosure being illegal, petitionerconcluded, the prosecution in the case may not be allowed to make use ofthe information.

ISSUEWhether the “extremely-detailed” information contained in the SpecialProsecution Panel’s requests for subpoena was obtained through a priorillegal disclosure of petitioner’s bank accounts, in violation of the “fruit ofthe poisonous tree” doctrine

HELD NO . The court first held that the bank documents were not covered by RA1405, hence not fruits of illegal disclosure.

Petitioner’s attempt to make the exclusionary rule applicable to the instantcase fails. R.A. 1405, it bears noting, nowhere provides that an unlawfulexamination of bank accounts shall render the evidence obtained therefrom

inadmissible in evidence. Section 5 of R.A. 1405 only states that “[a]nyviolation of this law will subject the offender upon conviction, to animprisonment of not more than five years or a fine of not more than twentythousand pesos or both, in the discretion of the court.”

Even assuming arguendo , however, that the exclusionary rule applies inprinciple to cases involving R.A. 1405, the Court finds no reason to applythe same in this particular case.

Clearly, the “fruit of the poisonous tree” doctrine 1[13] presupposes a violationof law. If there was no violation of R.A. 1405 in the instant case, then therewould be no “poisonous tree” to begin with, and, thus, no reason to applythe doctrine.

The investigation conducted by the Ombudsman were legal as credited bythe Sandiganbayan. The documents were released pursuant to a letterrequest sent to the officers of EIB and were not obtained through illegalmeans.

In fine, the subpoenas issued by the Ombudsman in this case were legal,hence, invocation of the “fruit of the poisonous tree” doctrine is misplaced.


2. Rules for Peso Depositsa. Coverage

SEC 2 LAW ON SECRECY OF BANK DEPOSITS All d it f

who controls it during his lifetime, after which the balance is payable to aprenominated beneficiary. It may be invested by the bank.




SEC. 2, LAW ON SECRECY OF BANK DEPOSITS: All deposits ofwhatever nature with banks or banking institutions in the Philippinesincluding investments in bonds issued by the Government of thePhilippines, its political subdivisions and its instrumentalities, arehereby considered as of an absolutely confidential nature and may notbe examined, inquired or looked into by any person, governmentofficial, bureau or office, except upon written permission of the

depositor, or in cases of impeachment, or upon order of a competentcourt in cases of bribery or dereliction of duty of public officials, or incases where the money deposited or invested is the subject matter ofthe litigation.

CasesEJERCITO v. SANDIGANBAYAN, 509 SCRA 190 (2006)DOCTRINE: The term “deposits” used therein is to be understood broadlyand not limited only to accounts, which give rise to a creditor-debtorrelationship between the depositor and the bank. If the money depositedunder an account may be used by banks for authorized loans to thirdpersons, then such accounts, regardless of whether it creates a creditor-debtor relationship between the depositor and the bank, falls under the

category of accounts which the law precisely seeks to protect for thepurpose of boosting the economic development of the country.

FACTSIn the ombudsman case PP v. Estrada, the Sandiganbayan issued asubpoena duces tecum for Trust Account no 858, a savings account, certainspecified documents, as well as all accounts pertaining to one "JoseVelarde". ERAP filed motions to quash alleging that the trust account whichwas allegedly his was a "deposit" within the meaning of sec. 2 of RA 1405,and therefore protected; and that since he was charged with plunder, notbribery or dereliction of duty, his case does not fall under any of theexceptions under sec.2. These motions to quash were denied. were denied.Thus this petition for certiorari.

"Section 2. 1 All deposits of whatever nature with banks or bankinginstitutions in the Philippines including investments in bonds issued by theGovernment of the Philippines, its political subdivisions and itsinstrumentalities, are hereby considered as of an absolutely confidentialnature and may not be examined, inquired or looked into by any person,government official, bureau or office, except upon written permission of thedepositor, or in cases of impeachment, or upon order of a competent courtin cases of bribery or dereliction of duty of public officials, or in cases wherethe money deposited or invested is the subject matter of the litigation."

Note: Trust Account: a savings account deposited in the name of a trustee

ISSUES :1) Whether a trust account is a deposit, and2) Whether a plunder charge falls under the exceptions under Section 2

RULING 1) YES , it is a deposit. The contention of the Sandiganbayan that trust

accounts are not covered by the term “deposits,” as used in R.A. 1405, bythe mere fact that they do not entail a creditor-debtor relationship betweenthe trustor and the bank, does not lie. If the money deposited under anaccount may be used by banks for authorized loans to third persons, thensuch account, regardless of whether it creates a creditor-debtor relationshipbetween the depositor and the bank, falls under the category of accountswhich the law precisely seeks to protect for the purpose of boosting theeconomic development of the country.

2) YES , it falls under the exceptions. The protection afforded by the law isnot absolute, there being recognized exceptions thereto, as above-quotedSection 2 provides. Two exceptions apply here: (1) the examination ofbank accounts is upon order of a competent court in cases of bribery or

dereliction of duty of public officials, and (2) the money deposited orinvested is the subject matter of the litigation.

Cases of unexplained wealth are similar to cases of bribery or dereliction ofduty and no reason is seen why these two classes of cases cannot beexcepted from the rule making bank deposits confidential. The crime ofbribery and the overt acts constitutive of plunder are crimes committed bypublic officers, and in either case the noble idea that “a public office is apublic trust and any person who enters upon its discharge does so with thefull knowledge that his life, so far as relevant to his duty, is open to publicscrutiny” applies with equal force.

Plunder being thus analogous to bribery, the exception to R.A. 1405applicable in cases of bribery must also apply to cases of plunder.

b. ProhibitionsSEC. 2, LAW ON SECRECY OF BANK DEPOSITS: All deposits ofwhatever nature with banks or banking institutions in the Philippinesincluding investments in bonds issued by the Government of thePhilippines, its political subdivisions and its instrumentalities, arehereby considered as of an absolutely confidential nature and may notbe examined, inquired or looked into by any person, governmentofficial, bureau or office, except upon written permission of thedepositor, or in cases of impeachment, or upon order of a competentcourt in cases of bribery or dereliction of duty of public officials, or in


cases where the money deposited or invested is the subject matter ofthe litigation.

the bank, or in the maximum amount permitted by law,whichever is lower, shall be required by the lending bankto ai e the secrec of his deposits of hate er nat re




SEC. 3, LAW ON SECRECY OF BANK DEPOSITS: It shall beunlawful for any official or employee of a banking institution todisclose to any person other than those mentioned in Section twohereof any information concerning said deposits.

SEC. 55.1 (B), GBL: No director, officer, employee, or agent of any

bank shall, without order of a court of competent jurisdiction, discloseto any unauthorized person any information relative to the funds orproperties in the custody of the bank belonging to private individuals,corporations, or any other entity: Provided, That with respect to bankdeposits, the provisions of existing laws shall prevail;

SEC. 55.4, GBL: Consistent with the provisions of Republic Act No.1405, otherwise known as the Banks Secrecy Law, no bank shallemploy casual or nonregular personnel or too lengthy probationarypersonnel in the conduct of its business involving bank deposits.

c. Exceptionsi. Under the Law on Secrecy of Bank Deposits

SEC. 2, LAW ON SECRECY OF BANK DEPOSITS: All deposits ofwhatever nature with banks or banking institutions in thePhilippines including investments in bonds issued by theGovernment of the Philippines, its political subdivisions and itsinstrumentalities, are hereby considered as of an absolutelyconfidential nature and may not be examined, inquired or lookedinto by any person, government official, bureau or office, exceptupon written permission of the depositor, or in cases ofimpeachment, or upon order of a competent court in cases ofbribery or dereliction of duty of public officials, or in cases wherethe money deposited or invested is the subject matter of thelitigation.

1. Upon written permission of the depositor or inventor:a. DOSRI loans

SEC. 26, NCBA: Bank Deposits and Investments. -Any director, officer or stockholder who, together withhis related interest, contracts a loan or any form offinancial accommodation from: (1) his bank; or (2) froma bank (a) which is a subsidiary of a bank holdingcompany of which both his bank and the lending bankare subsidiaries or (b) in which a controlling proportionof the shares is owned by the same interest that owns acontrolling proportion of the shares of his bank, inexcess of five percent (5%) of the capital and surplus of

to waive the secrecy of his deposits of whatever naturein all banks in the Philippines. Any information obtainedfrom an examination of his deposits shall be held strictlyconfidential and may be used by the examiners only inconnection with their supervisory and examinationresponsibility or by the Bangko Sentral in an appropriatelegal action it has initiated involving the deposit account.

SEC. X337, MRB: Waiver of Secrecy of DepositAny director, officer or stockholder who, together withhis related interest, contracts a loan or any form offinancial accommodation from:

a. his bank; orb. from a bank

(1) which is a subsidiary of a bank holding company ofwhich both his bank and the lending bank aresubsidiaries; or

(2) in which a controlling proportion of the shares isowned by the same interest that owns a controlling

proportion of the shares of his bank, in excess of fivepercent (5%) of the capital and surplus of the bank, orin the maximum amount permitted by law, whichever islower, shall be required by the lending bank to waive thesecrecy of his deposits of whatever nature in all banks inthe Philippines. Any information obtained from anexamination of his deposits shall be held strictlyconfidential and may be used by the examiners only inconnection with their supervisory and examinationresponsibility or by the BSP in an appropriate legalaction it has initiated involving the deposit account.

b. For loans secured by hold-out or assignment of CTDsSEC. X315 (F), MRB: Loans Secured by Certificates ofTime Deposit. The following rules shall govern the grantof loans secured by holdout on and/or assignment ofCTDs issued by the lending bank, as well as its branchesor subsidiaries abroad:The loan documents shall include a waiver on the part ofthe depositor of his rights under existing law to theconfidentiality of his deposits.

2. In cases of impeachment3. Upon the order of a competent court in cases of bribery or

dereliction of duty of public officials


4. In cases where the money deposited or invested is the subjectof litigation

2 of the Bank Secrecy Law by providing an additional exception to the ruleagainst the disclosure of bank deposits.




ii. Under the Anti-Graft and Corrupt Practices ActSEC. 8, RA 3019: Dismissal due to unexplained wealth. If inaccordance with the provisions of Republic Act Numbered Onethousand three hundred seventy-nine, a public official has beenfound to have acquired during his incumbency, whether in hisname or in the name of other persons, an amount of property

and/or money manifestly out of proportion to his salary and to hisother lawful income, that fact shall be a ground for dismissal orremoval. Properties in the name of the spouse and unmarriedchildren of such public official may be taken into consideration,when their acquisition through legitimate means cannot besatisfactorily shown. Bank deposits shall be taken intoconsideration in the enforcement of this section, notwithstandingany provision of law to the contrary.

CasesPNB v. GANCAYAO, 15 SCRA 91 (1965)DOCTRINE: Sec. 8 of RA 3019 directs in mandatory terms that bankdeposits shall be taken into consideration in the enforcement of this section,

notwithstanding any provision of law to the contrary.

FACTSProsecutor Gancayao required PNB to produce the records of the bankdeposits of Jimenez, the former administrator of the Agricultural Credit andCooperative Administration. Jimenez was under investigation forunexplained wealth. PNB refused to produce the records of the bankdeposits for fear of prosecution under RA 1405 (Bank Secrecy Law).Gancayao on the other hand relied on the provisions of RA 3019 (Anti Graftand Corrupt Practices Act), stating

Sec. 8. Dismissal due to unexplained wealth. – xx xx xx Bankdeposits shall be taken into consideration in the enforcement of thissection, notwithstanding any provision of law to the contrary.

ISSUE Whether RA 3019 prevails over RA 1405?

RULING YES . Anti Graft and Corrupt Practices Act prevails over the Bank SecrecyLaw. The anti graft law directs in mandatory terms that bank deposits “shallbe taken into consideration in the enforcement of this section,notwithstanding any provision of law to the contrary.” The only conclusionpossible is that Section 8 of the Anti Graft Law is intended to amend Section

BANCO FILIPINO SAVINGS AND MORTGAGE BANK v. PURISIMA, 161SCRA 576 (1988)DOCTRINE: By enacting Sec. 8 of RA 3019, Congress intended to providean additional ground for the examination of bank deposits for without suchprovision, the prosecutors would be hampered if not altogether frustrated inthe prosecution of those charged with having acquired unexplained wealth

while in public office.FACTSThe Tanodbayan issued a subpoena duces tecum to the Banco FilipinoSavings & Mortgage Bank, commanding its representative to appear at aspecified time at the Office of the Tanodbayan and furnish the latter withduly certified copies of the records in all its branches and extension offices,of the loans, savings and time deposits and other banking transactions,dating back to 1969, appearing in the names of Caturla, his wife, PuritaCaturla, their children — Manuel, Jr., Marilyn and Michael — and/or PedroEscuyos.

Caturla moved to quash the subpoena duces tecum arguing that compliance

therewith would result in a violation of Sections 2 and 3 of the Law onSecrecy of Bank Deposits. Then Tanodbayan Vicente Ericta not only deniedthe motion for lack of merit, and directed compliance withthe subpoena , but also expanded its scope through a second subpoenaduces tecum, this time requiring production by Banco Filipino of the bankrecords in all its branches and extension offices, of Siargao Agro-IndustrialCorporation, Pedro Escuyos or his wife, Emeterio Escuyos, Purita Caturla,Lucia Escuyos or her husband, Romeo Escuyos, Emerson Escuyos, FraternoCaturla, Amparo Montilla, Cesar Caturla, Manuel Caturla or his children,Manuel Jr., Marilyn and Michael, LTD Pub/Restaurant, and Jose Buo or hiswife, Evelyn. Two other subpoena of substantially the same tenor as thesecond were released by the Tanodbayan's Office. The last requiredobedience under sanction of contempt.

The Banco Filipino Savings & Mortgage Bank, hereafter referred to simply asBF Bank, took over from Caturla in the effort to nullify the subpoenae . Itfiled a complaint for declaratory relief with the Court of First Instance ofManila, which was assigned by raffle to the sala of respondent Judge FidelPurisima. BF Bank prayed for a judicial declaration as to whether itscompliance with the subpoenae duces tecum would constitute aninfringement of the provisions of Sections 2 and 3 of R.A. No. 1405 inrelation to Section 8 of R.A. No. 3019. It also asked that pending finalresolution of the question, the Tanodbayan be provisionally restrained fromexacting compliance with the subpoenae .


Respondent Judge Purisima issued an Order denying for lack of merit theapplication by BF Bank for a preliminary injunction and/or restraining order.It further argues that subpoenae in question are in the nature of "fishing

fact shall be a ground for dismissal or removal. Properties in thename of the spouse and unmarried children of such public officialmay be taken into consideration when their acquisition through




It further argues that subpoenae in question are in the nature of fishingexpeditions" or "general warrants" since they authorize indiscriminateinquiry into bank records; that, assuming that such an inquiry is allowed asregards public officials under investigation for a violation of the Anti-Graft &Corrupt Practices Act, it is constitutionally impermissible with respect toprivate individuals or public officials not under investigation on a charge ofviolating said Act; and that while prosecution of offenses should not, as a

rule, be enjoined, there are recognized exceptions to the principle one ofwhich is here present, i.e. to avoid multiplicity of suits, similar subpoenaehaving been directed to other banks as well.

ISSUE Whether the "Law on Secrecy of Bank Deposits" precludes production bysubpoena duces tecum of bank records of transactions by or in the names ofthe wife, children and friends of a special agent of the Bureau of Customs,accused before the Tanodbayan of having allegedly acquired propertymanifestly out of proportion to his salary and other lawful income, inviolation of the "Anti-Graft and Corrupt Practices Act.

RULING

The provisions of R.A. No. 1405 subject of BF's declaratory action, read asfollows:

Sec. 2. All deposits of whatever nature with banks or bankinginstitutions in the Philippines including investments in bonds issuedby the Government of the Philippines, its political subdivisions andits instrumentalities, are hereby considered as of an absolutelyconfidential nature and may not be examined, inquired or lookedinto by any person, government official, bureau or office, exceptupon written permission of the depositor, or in cases ofimpeachment, or upon order of a competent court in cases ofbribery or dereliction of duty of public officials, or in cases where themoney deposited or invested is the subject matter of litigation.

Sec. 3. It shall be unlawful for any official or employee of a bankinginstitution to disclose to any person other than those mentioned inSection two hereof any information concerning said deposits

The other provision involved in the declaratory action is Section 8 of R.A.No. 3019. It reads:

Sec. 8. Dismissal due to unexplained wealth . — If in accordancewith the provisions of Republic Act Numbered One thousand threehundred seventy-nine, a public official has been found to haveacquired during his incumbency, whether in his name or in the nameof other persons, an amount of property and/or money manifestlyout of proportion to this salary and to his other lawful income, that

may be taken into consideration, when their acquisition throughlegitimate means cannot be satisfactorily shown. Bank deposits shallbe taken into consideration in the enforcement of this section,notwithstanding any prohibition of law to the contrary.

The only conclusion possible is that section 8 of the Anti-Graft Law isintended to amend section 2 of Republic Act No. 1405 by providing an

additional exception to the rule against the disclosure of bank desposits.The inquiry into illegally acquired property — or property NOT"legitimately acquired" — extends to cases where such property isconcealed by being held by or recorded in the name of otherpersons. This proposition is made clear by R.A. No. 3019 which quitecategorically states that the term, "legitimately acquired property ofa public officer or employee shall not include .. property unlawfullyacquired by the respondent, but its ownership is concealed by itsbeing recorded in the name of, or held by, respondent's spouse,ascendants, descendants, relatives or any other persons .

To sustain the petitioner's theory, and restrict the inquiry only to property

held by or in the name of the government official or employee, or his spouseand unmarried children is unwarranted in the light of the provisions of thestatutes in question, and would make available to persons in governmentwho illegally acquire property an easy and fool-proof means of evadinginvestigation and prosecution; all they would have to do would be to simplyplace the property in the possession or name of persons other than theirspouse and unmarried children. This is an absurdity that we will not ascribeto the lawmakers.

iii. Under the Ombudsman ActSEC. 15 (8), RA 6770: Powers, Functions and Duties . — TheOffice of the Ombudsman shall have the following powers,functions and duties:Administer oaths, issue subpoena and subpoena duces tecum, andtake testimony in any investigation or inquiry, including the powerto examine and have access to bank accounts and records;

CasesMARQUEZ v. DESIERTO, 359 SCRA 772 (1991)DOCTRINE: Before an in camera inspection by the Ombudsman may beallowed, there must be a pending case before a court of competent

jurisdiction. Further, the account must be clearly identified, the inspectionlimited to the subject matter of the pending case before the court ofcompetent jurisdiction. The bank personnel and the account holder must be


notified to be present during the inspection, and such inspection may coveronly the account identified in the pending case.

reconsideration.

Grounds used by the lower court: No great or irreparable injury to restrain




FACTSPetitioner is being held in indirect contempt for not allowing in camerainspection of the accounts related to an investigation being done by theOmbudsman relating to pay-offs for the PEA-AMARRI scandal. Petitionerhopes to nullify order for the in camera investigation and to hold her incontempt.

Petitioner is the branch manager of Union Bank, Julio Vargas Branch. Shereceived an Order from the Respondent to produce several bank documentsfor inspection in camera relative to a pending investigation beforeRespondent (Ombudsman Desierto).

Respondent’s case is the Fact Finding and Intelligence Bureau (FFIB) vs.Amado Lagdameo – relative to the JVA between PEA and AMARI. The Orderemphasized Respondent’s power to issue subpoena and subpoena ducestecum and contempt power under RA 6770 aka the Ombudsman Act of1989. The Act is a later legislation to RA 1405 aka Secrecy of Bank Depositslaw; hence amending some provisions of the latter.

• Order’s objective: to trail the managers checks purchased by Triviniorespondent in the pending case)

Trivinio purchased 51 managers checks worth P272.1M from Traders RoyalBank, UN Ave. 11 of these checks, P70.6M, were deposited to an accounthandled by Petitioner’s branch

Though Union Bank’s lawyer told Petitioner to comply with the Order, shehad some difficulty making her ask for some time extensions. She said theaccounts cannot be easily identified and despite diligent efforts and from theaccount numbers presented, she cannot identify these accounts since thechecks were issued in cash or bearer o Surmised that the account has beendormant since it is not covered by the new account number generated bythe Union Bank system o Hence, she has to verify from the Interbankrecords archives for the whereabouts of the account

After two extensions, Respondent issued the controversial orderthreatening to hold Petitioner in indirect contempt for causingdelays in the investigation.

Petitioner and Union Bank filed for declaratory relief in the RTC ofMakati to clarify their rights and duties, seeing complying with theOrder may conflict or violate the Secrecy of Bank Deposits law.

Lower Court Denied the Petition, but Petitioner sought

Grounds used by the lower court: No great or irreparable injury to restrainrespondent The Ombudsman would have to file to the RTC for the indirectcontempt charge Petitioner failed to show prima facie evidence that thesubject matter of the investigation is outside the jurisdiction of Respondent.

Reconsideration was likewise denied.

A motion to cite Petitioner in contempt was filed with the Office of theOmbudsman. Petitioner asserted that such was premature since there was apending case in the lower court, but eventually she was held in contempt

ISSUE(Ombudsman act) whether petitioner may be cited for indirect contempt forher failure to produce the documents requested by the Ombudsman. Andwhether the order of the Ombudsman to have an in camera inspection ofthe questioned account is allowed as an exception to the law on secrecy ofbank deposits (R. A. No. 1405).

RULING NO, she may not be held in contempt or may the Ombudsman have an in

camera inspection.

Examination of the secrecy of bank deposits law (R. A. No. 1405) wouldreveal the following exceptions:1. Where the depositor consents in writing;2. Impeachment case;3. By court order in bribery or dereliction of duty cases against publicofficials;4. Deposit is subject of litigation;5. Sec. 8, R. A. No. 3019, in cases of unexplained wealth as held in thecase of PNB vs. Gancayco

The order of the Ombudsman to produce for in camera inspection thesubject accounts with the Union Bank of the Philippines, Julia VargasBranch, is based on a pending investigation at the Office of the Ombudsmanagainst Amado Lagdameo, et. al. for violation of R. A. No. 3019, Sec. 3 (e)and (g) relative to the Joint Venture Agreement between the Public EstatesAuthority and AMARI.

We rule that before an in camera inspection may be allowed, theremust be a pending case before a court of competent jurisdiction .Further, the account must be clearly identified, the inspection limited to thesubject matter of the pending case before the court of competent

jurisdiction. The bank personnel and the account holder must be notified tobe present during the inspection, and such inspection may cover only the


account identified in the pending case.

In Union Bank of the Philippines v Court of Appeals we held that “Section 2

percentage, kickbacks or any other form of pecuniary benefit fromany person and/or entity in connection with any governmentcontract or project or by reason of the office or position of the




In Union Bank of the Philippines v. Court of Appeals, we held that Section 2of the Law on Secrecy of Bank Deposits, as amended, declares bankdeposits to be “ absolutely confidential” except :

(1) In an examination made in the course of a special or generalexamination of a bank that is specifically authorized by the Monetary Boardafter being satisfied that there is reasonable ground to believe that a bank

fraud or serious irregularity has been or is being committed and that it isnecessary to look into the deposit to establish such fraud or irregularity,

(2 ) In an examination made by an independent auditor hired by thebank to conduct its regular audit provided that the examination isfor audit purposes only and the results thereof shall be for theexclusive use of the bank ,

(3) Upon written permission of the depositor,

(4) In cases of impeachment,

(5) Upon order of a competent court in cases of bribery or dereliction of

duty of public officials, or

(6) In cases where the money deposited or invested is the subject matter ofthe litigation”

In the case at bar, there is yet no pending litigation before any courtof competent authority. What is existing is an investigation by theoffice of the Ombudsman . In short, what the Office of the Ombudsmanwould wish to do is to fish for additional evidence to formally charge AmadoLagdameo, et. al., with the Sandiganbayan. Clearly, there was no pendingcase in court, which would warrant the opening of the bank account forinspection.

iv. Under the Plunder LawSEC. 1 (D), RA 7080: Ill-gotten wealth means any asset,property, business enterprise or material possession of any personwithin the purview of Section Two (2) hereof, acquired by himdirectly or indirectly through dummies, nominees, agents,subordinates and/or business associates by any combination orseries of the following means or similar schemes:

1) Through misappropriation, conversion, misuse, or malversationof public funds or raids on the public treasury;

2) By receiving, directly or indirectly, any commission, gift, share,

contract or project or by reason of the office or position of thepublic officer concerned;

3) By the illegal or fraudulent conveyance or disposition of assetsbelonging to the National Government or any of its subdivisions,agencies or instrumentalities or government-owned or -controlledcorporations and their subsidiaries;

4) By obtaining, receiving or accepting directly or indirectly anyshares of stock, equity or any other form of interest or participationincluding promise of future employment in any business enterpriseor undertaking;

5) By establishing agricultural, industrial or commercial monopoliesor other combinations and/or implementation of decrees and ordersintended to benefit particular persons or special interests; or

6) By taking undue advantage of official position, authority,relationship, connection or influence to unjustly enrich himself orthemselves at the expense and to the damage and prejudice of the

Filipino people and the Republic of the Philippines.

SEC. 4, RA 7080: Rule of Evidence - For purposes ofestablishing the crime of plunder, it shall not be necessary to proveeach and every criminal act done by the accused in furtherance ofthe scheme or conspiracy to amass, accumulate or acquire ill-gotten wealth, it being sufficient to establish beyond reasonabledoubt a pattern of overt or criminal acts indicative of the overallunlawful scheme or conspiracy.

CasesEJERCITO v SANDIGANBAYAN, 509 SCRA 190 (2006)DOCTRINE: The plunder case under the Sandiganbayan necessarilyinvolves an inquiry into the whereabouts of the amount purportedlyacquired illegally by Erap, and the subject matter of the litigation cannot belimited to bank accounts under his name alone, but must include thoseaccounts to which the money purportedly acquired illegally or a portionthereof was alleged to have been transferred. A public office is a publictrust.

FACTSIn the criminal case of People v. Estrada for plunder, the Special ProsecutionPanel filed a request for issuance of Subpeona Duces Tecum for directingthe President of Export and Industry Bank (EIB) to produce the followingdocuments from the following: (1) Trust Account 858 (2) Savings Account


0116-17345-9 (3) Urban Bank Manager’s Check. (4) Account of JoseVelarde. The Sandiganbayan granted the requests and the subpoena wereissued.

"deposits." Moreover, it is clear from the immediately quoted provision thatthe law applies not only to money which is deposited but also to those whichare invested. This further shows that the law was not intended to apply only




issued.

Ejercito contested the issuance of the subpoenas. He opposed such motionon the ground of Bank Secrecy Laws (RA 1405). He filed a motion to quashand urgent motion to quash to such request for subpoena. Sandiganbayan,however, denied all his motion to quash.

ISSUE (1) W/N Ejercito’s Trust Account is covered by the term “deposit” asused in RA 1405.

(2) W/N Ejercito’s Trust Account is excepted from the protection of RA1405.

(3) the request for subpoena was obtained through a prior illegaldisclosure of bank accounts, in violation of “fruit of the poisonoustree” doctrine.

RULING (1) Ejercito’s Account is within the coverage of the term “deposit.

RA 1405 Bank Secrecy Law• SECTION 1. It is hereby declared to be the policy of the Government to

give encouragement to the people to deposit their money in bankinginstitutions and to discourage private hoarding so that the samemay be properly utilized by banks in authorized loans to assist in theeconomic development of the country. (Underscoring supplied)

• SECTION 2. All deposits of whatever nature with banks or bankinginstitutions in the Philippines including investments in bonds issuedby the Government of the Philippines, its political subdivisions andits instrumentalities, are hereby considered as of an absolutelyconfidential nature and may not be examined, inquired or lookedinto by any person, government official, bureau or office, exceptupon written permission of the depositor, or in cases ofimpeachment, or upon order of a competent court in cases ofbribery or dereliction of duty of public officials, or in cases where themoney deposited or invested is the subject matter of the litigation.

If the money deposited under an account may be used by banks forauthorized loans to third persons, then such account, regardless of whetherit creates a creditor-debtor relationship between the depositor and the bank,falls under the category of accounts which the law precisely seeks toprotect. Trust Account No. 858 is, without doubt, one such account. TheTrust Agreement between Ejercito and Urban Bank provides that the trustaccount covers "deposit, placement or investment of funds" by Urban Bankfor and in behalf of petitioner.

The phrase "of whatever nature" proscribes any restrictive interpretation of

are invested. This further shows that the law was not intended to apply onlyto "deposits" in the strict sense of the word. Otherwise, there would havebeen no need to add the phrase "or invested."

(2) Ejercito’s Account is excepted from the protection of RA 1405.The protection given by RA 1405 not absolute. Two exceptions apply (1) theexamination 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 depositedor invested is the subject matter of the litigation.

Cases of unexplained wealth are similar to cases of bribery or dereliction ofduty and no reason is seen why these two classes of cases cannot beexcepted from the rule making bank deposits confidential. The policy as toone cannot be different from the policy as to the other. This policyexpresses the notion that a public office is a public trust and any personwho 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. Thus, cases forplunder involve unexplained wealth.

Cases for plunder involve unexplained wealth, as provided in Section 2 of

the Plunder Law.• Section 2 of R.A. No. 7080 - Definition of the Crime of Plunder; Penalties.— Any public officer who, by himself or in connivance with membersof his family, relatives by affinity or consanguinity, businessassociates, subordinates or other persons, amasses, accumulates oracquires ill-gotten wealth through a combination or series of overtor criminal acts

In addition, the crime of plunder is similar with bribery since it is one of theacts for committing plunder.• Section 1(d) of RA 7080• d) "Ill-gotten wealth" means any asset, property, business enterprise or

material possession of any person within the purview of Section Two(2) hereof, acquired by him directly or indirectly through dummies,nominees, agents, subordinates and or business associates by anycombination or series of the following means or similar schemes.

• 1) Through misappropriation, conversion, misuse, or malversation ofpublic funds or raids on the public treasury;

• 2) By receiving, directly or indirectly, any commission, gift, share,percentage, kickbacks or any other form of pecuniary benefit fromany person and/or entity in connection with any governmentcontract or project or by reason of the office or position of the publicofficer concerned

The crime of bribery and the overt acts constitutive of plunder are crimes


committed by public officers, and in either case the noble idea that "a publicoffice is a public trust and any person who enters upon its discharge does sowith the full knowledge that his life, so far as relevant to his duty, is open to

particular deposit or investment with any banking institution ornon- bank financial institution upon order of any competent court incases of violation of this Act when it has been established that




g , y, ppublic scrutiny" applies with equal force.

Plunder being thus analogous to bribery, the exception to R.A. 1405applicable in cases of bribery must also apply to cases of plunder.

In addition, the money deposited in Ejercito’s Account is said to form part of

the subject matter of the plunder case. Making it again excluded from theprotection of the Bank Secrecy Law.

(3) The “fruit of the poisonous tree” doctrine is misplaced.He relies on Marquez v. Desierto, where the court held for an inspection ofthe bank account is allowed, there must be a pending case because ofcompetent jurisdiction against Ejercito. Having no case filed during theinvestigation of the Ombudsman, the information were illegally acquired.

However, R.A. 1405, it bears noting, nowhere provides that an unlawfulexamination of bank accounts shall render the evidence obtained therefrominadmissible in evidence. Section 5 of R.A. 1405 only states that "anyviolation of this law will subject the offender upon conviction, to an

imprisonment of not more than five years or a fine of not more than twentythousand pesos or both, in the discretion of the court."

Even if the exclusionary rule applies to RA 1405, it is inapplicable to thiscase.

The "fruit of the poisonous tree" doctrine presupposes a violation of law. Ifthere was no violation of R.A. 1405 in the instant case, then there would beno "poisonous tree" to begin with, and, thus, no reason to apply thedoctrine.

Despite the Marquez v. Desierto, the examination of accounts by theOmbudsman, conducted before a case was filed with a court of competent

jurisdiction, was lawful. For the Ombudsman issued the subpoenas bearingon the bank accounts of petitioner about four months before Marquez waspromulgated on June 27, 2001. The doctrine in Marquez would have noretroactive effect. In addition, the recent filing case for plunder empowersthe Ombudsman to investigate such accounts. Thus, the subpoenas werelegal and the invocation of the exclusionary doctrine is misplaced.

v. Under the AMLASEC. 11, AMLA: Authority to Inquire into Bank Deposits. -Notwithstanding the provisions of Republic Act No. 1405, asamended; Republic Act No. 6426, as amended; Republic Act No.8791, and other laws, the AMLC may inquire into or examine any

there is probable cause that the deposits or investments involvedare in any way related to a money laundering offense: Provided,That this provision shall not apply to deposits and investmentsmade prior to the effectivity of this Act.

Cases

REPUBLIC v. EUGENIO, 545 SCRA 384 (2008)DOCTRINE: Even if bank inquiry order may be availed of without need of apre-exisitng case under the AMLA, it does not follow that such order may beavailed of ex parte.

FACTS(This case stemmed from the case of Agan v PIATCO)After the promulgation of the Agan case, a series of investigation wasconducted by the Ombudsman, the Compliance and Investigation Staff, andAnti-Money Laundering Council (AMLC). AMLC issued a resolutionauthorizing the Executive Director of AMLC to examine the bank accounts ofPantaleon Alvarez, Cheng Yong,Wilfredo Trinidad, Alfredo Liongson and theirrelated web accounts. Under the authority of such resolution, AMLC filed an

application to inquire into or examine the deposits or investments ofAlvarez, Cheng Yong, Trinidad and Liongson with the Makati RTC, which thecourt granted. Months later, Special Prosecutor Dennis Villa-Ignaciorequested AMLC to investigate the accounts of Alvarez, PIATCO and allaccounts related to the annulled contract. AMLC issued another resolution,authorizing the executive director to inquire into the bank accounts namedin the letter. AMLC filed the same application, this time to the Manila RTC,which was raffled to Judge Antonio Eugenio Jr. The court likewise grantedsuch ex parte application. Alvarez filed an Urgent Motion to Stay ofEnforcement of Order, which the Manila RTC granted. The Republic filed amotion for reconsideration which was granted. Alvarez then filed an UrgentMotion and Manifestation, stating that AMLC was about to implement theManila RTC bank inquiry even though he intends to appeal such order. TheManila RTC refrained AMLC from implementing such order against Alvarez.Alvarez then filed an Urgent Ex Parte Motion for Clarification, alleging thatAMLC likewise cannot implement such order against the others stated in theorder. Manila RTC issued an order, stating that the ex parte applicationcannot be implemented in its totality (first of four rulings contested in thiscase).

Lilia Cheng, wife of Cheng Yong filed a Petition for Certiorari, TRO andpreliminary injunction against the orders of Makati and Manila RTC statinggrave abuse of discretion that AMLA can only inquire to bank accounts afterthe creation of the Anti-Money Laundering Act (AMLA), and not prior to itspromulgation. The CA issued a TRO, granting such petition (second of four


rulings contested in this case).

With relation to the Urgent Motion for Clarification, the Manila RTC issued an

by an independent auditor hired by the bank to conduct its regular auditprovided that the examination is for audit purposes only and the resultsthereof shall be for the exclusive use of the bank.




g ,order reiterated that bank inquiry order it issued cannot be implemented bythe AMLC until the appeal (of Alvarez of the order granting the ex parteapplication) is finally resolved (third of four rulings contested in this case).The CA issued a writ of preliminary injunction with regard to the petitionfiled by Lilia Cheng (last ruling contested in this case)

ISSUE Whether a bank inquiry order issued in accordance with section 10 AMLAmay be stayed with injunction

RULING YES. Under this section, the AMLC is authorized to inquire into a bankaccount upon establishing probable cause where the deposits are related tokidnapping for ransom, violation of the Dangerous Drugs Act, hijacking,destructive arson and murder. The exception does not dispense the BankSecrecy Act to all deposits, except for cases related to the enumerationsabove. (Take note that the application done by AMLC has no connection withany of the following enumerations above)

Since the application of AMLC has nothing to do with any of the providedenumerations under Section 11, it must prove that there is probable causewith the case, in order to inquire into the bank accounts. Probable causemay only be decided by the courts (Art III, Sec 2 of Constitution). Section10 contains the application for ex parte, but it is connected to freezing ofaccounts. This must be done ex parte, since notifying the accused my causehim to disburse the account before the order freezing the account is issued.Section 11 does not contain the application for ex parte, for the fact thatthere is nothing wrong with the accused knowing that his accounts are beingchecked. It is immaterial for the accused to know that his accounts arebeing checked, since he cannot hide the bank records to prove that theaccounts are linked to the crime imputed against him. Hence, using the exparte application found in section 10 in inquiring into bank accounts (section11) may be stayed with injunction.

1. Upon order of competent court2. BSP inquiry or examination

vi. Independent AuditorDOJ OPINION NO. 243, SERIES OF 1957

CasesMARQUEZ v. DESIERTO, 359 SCRA 772 (2001)DOCTRINE: Sec. 2 of Bank Secrecy Law provides for exceptions to theconfidentiality rule of bank deposits, one of which is in an examination made

FACTSPetitioner is being held in indirect contempt for not allowing in camerainspection of the accounts related to an investigation being done by theOmbudsman relating to pay-offs for the PEA-AMARRI scandal. Petitionerhopes to nullify order for the in camera investigation and to hold her in

contempt.Petitioner is the branch manager of Union Bank, Julio Vargas Branch. Shereceived an Order from the Respondent to produce several bank documentsfor inspection in camera relative to a pending investigation beforeRespondent (Ombudsman Desierto).

Respondent’s case is the Fact Finding and Intelligence Bureau (FFIB) vs.Amado Lagdameo – relative to the JVA between PEA and AMARI. The Orderemphasized Respondent’s power to issue subpoena and subpoena ducestecum and contempt power under RA 6770 aka the Ombudsman Act of1989. The Act is a later legislation to RA 1405 aka Secrecy of Bank Depositslaw; hence amending some provisions of the latter.

• Order’s objective: to trail the managers checks purchased by Triviniorespondent in the pending case)

Trivinio purchased 51 managers checks worth P272.1M from Traders RoyalBank, UN Ave. 11 of these checks, P70.6M, were deposited to an accounthandled by Petitioner’s branch

Though Union Bank’s lawyer told Petitioner to comply with the Order, shehad some difficulty making her ask for some time extensions. She said theaccounts cannot be easily identified and despite diligent efforts and from theaccount numbers presented, she cannot identify these accounts since thechecks were issued in cash or bearer o Surmised that the account has beendormant since it is not covered by the new account number generated bythe Union Bank system o Hence, she has to verify from the Interbankrecords archives for the whereabouts of the account

After two extensions, Respondent issued the controversial orderthreatening to hold Petitioner in indirect contempt for causingdelays in the investigation.

Petitioner and Union Bank filed for declaratory relief in the RTC ofMakati to clarify their rights and duties, seeing complying with theOrder may conflict or violate the Secrecy of Bank Deposits law.


Lower Court Denied the Petition, but Petitioner soughtreconsideration.

(4) In cases of impeachment,

(5) Upon order of a competent court in cases of bribery or dereliction of




Grounds used by the lower court: No great or irreparable injury to restrainrespondent The Ombudsman would have to file to the RTC for the indirectcontempt charge Petitioner failed to show prima facie evidence that thesubject matter of the investigation is outside the jurisdiction of Respondent.

Reconsideration was likewise denied.

A motion to cite Petitioner in contempt was filed with the Office of theOmbudsman. Petitioner asserted that such was premature since there was apending case in the lower court, but eventually she was held in contempt

ISSUEWhether the order of the Ombudsman to have an in camera inspection ofthe questioned account is allowed as an exception to the law on secrecy ofbank deposits (R. A. No. 1405).

RULING NO, she may not be held in contempt or may the Ombudsman have an incamera inspection.

We rule that before an in camera inspection may be allowed, theremust be a pending case before a court of competent jurisdiction .Further, the account must be clearly identified, the inspection limited to thesubject matter of the pending case before the court of competent

jurisdiction. The bank personnel and the account holder must be notified tobe present during the inspection, and such inspection may cover only theaccount identified in the pending case.

In Union Bank of the Philippines v. Court of Appeals, we held that “Section 2of the Law on Secrecy of Bank Deposits, as amended, declares bankdeposits to be “ absolutely confidential” except :

(1) In an examination made in the course of a special or generalexamination of a bank that is specifically authorized by the Monetary Boardafter being satisfied that there is reasonable ground to believe that a bankfraud or serious irregularity has been or is being committed and that it isnecessary to look into the deposit to establish such fraud or irregularity,

(2 ) In an examination made by an independent auditor hired by thebank to conduct its regular audit provided that the examination isfor audit purposes only and the results thereof shall be for theexclusive use of the bank ,

(3) Upon written permission of the depositor,

duty of public officials, or

(6) In cases where the money deposited or invested is the subject matter ofthe litigation”

In the case at bar, there is yet no pending litigation before any court

of competent authority. What is existing is an investigation by theoffice of the Ombudsman . In short, what the Office of the Ombudsmanwould wish to do is to fish for additional evidence to formally charge AmadoLagdameo, et. al., with the Sandiganbayan. Clearly, there was no pendingcase in court, which would warrant the opening of the bank account forinspection.

vii. Under the PDIC CharterSEC. 8, PAR. 8, PDIC CHARTER: The Corporation as a corporatebody shall have the power To conduct examination of banks withprior approval of the Monetary Board: Provided, That noexamination can be conducted within twelve (12) months from thelast examination date: Provided, however, That the Corporation

may, in coordination with the Bangko Sentral, conduct a specialexamination as the Board of Directors, by an affirmative vote of amajority of all of its members, if there is a threatened or impendingclosure of a bank; Provided, further, That, notwithstanding theprovisions of Republic Act No. 1405, as amended, Republic Act No.6426, as amended, Republic Act No. 8791, and other laws, theCorporation and/or the Bangko Sentral, may inquire into orexamine deposit accounts and all information related thereto incase there is a finding of unsafe or unsound banking practice;Provided, finally, That to avoid overlapping of efforts, theexamination shall maximize the efficient use of the relevantreports, information, and findings of the Bangko Sentral, which itshall make available to the Corporation; (As amended by R.A.9302, 12 August 2004, R.A. 9576,29 April 2009)

viii. Under the Human Security ActSEC. 27 . Judicial Authorization Required to Examine BankDeposits, Accounts, and Records. â " “ The provisions of RepublicAct No. 1405 as amended, to the contrary notwithstanding, the

justices of the Court of Appeals designated as a special court tohandle anti-terrorism cases after satisfying themselves of theexistence of probable cause in a hearing called for that purposethat (1) a person charged with or suspected of the crime ofterrorism or conspiracy to commit terrorism, (2) of a judiciallydeclared and outlawed terrorist organization, association, or group


of persons, and (3) of a member of such judicially declared andoutlawed organization, association, or group of persons, mayauthorize in writing any police or law enforcement officer and the

and records have been examined, frozen, sequestered and seizedby law enforcement authorities has the right to be informed of theacts done by the law enforcement authorities in the premises or to




members of his/her team duly authorized in writing by the anti-terrorism council to: (a) examine, or cause the examination of, thedeposits, placements, trust accounts, assets and records in a bankor financial institution; and (b) gather or cause the gathering ofany relevant information about such deposits, placements, trustaccounts, assets, and records from a bank or financial institution.the bank or financial institution concerned shall not refuse to allowsuch examination or to provide the desired information, when soordered by and served with the written order of the Court ofAppeals.

SEC. 28 . Application to Examine Bank Deposits, Accounts, andRecords. â " “ The writ ten order of the Court of Appeals authorizingthe examination of bank deposits, placements, trust accounts,assets, and records: (1) of a person charged with or suspected ofthe crime of terrorism or conspiracy to commit terrorism, (2) ofany judicially declared and outlawed terrorist organization,association, or group of persons, or (3) of any member of suchorganization, association, or group of persons in a bank or financial

institution, and the gathering of any relevant information about thesame from said bank or financial institution, shall only be grantedby the authorizing division of the Court of Appeals upon an ex parteapplication to that effect of a police or of a law enforcement officialwho has been duly authorized in writing to file such ex parteapplication by the Anti-Terrorism Council created in Section 53 ofthis Act to file such ex parte application, and upon examinationunder oath or affirmation of the applicant and the witnesses hemay produce to establish the facts that will justify the need andurgency of examining and freezing the bank deposits, placements,trust accounts, assets, and records: (1) of the person charged withor suspected of the crime of terrorism or conspiracy to committerrorism, (2) of a judicially declared and outlawed terroristorganization, association or group of persons, or (3) of anymember of such organization, association, or group of persons.

SEC. 29 . Classification and Contents of the Court Order Authorizingthe Examination of Bank Deposits, Accounts, and Records. â " “ Thewritten order granted by the authorizing division of the Court ofAppeals as well as its order, if any, to extend or renew the same,the original ex parte application of the applicant, including his exparte application to extend or renew, if any, and the writtenauthorizations of the Anti Terrorism Council, shall be deemed andare hereby declared as classified information: Provided, That theperson whose bank deposits, placements, trust accounts, assets,

challenge, if he or she intends to do so, the legality of theinterference. The written order of the authorizing division of theCourt of Appeals designated to handle cases involving terrorismshall specify: (a) the identity of the said: (1) person charged withor suspected of the crime of terrorism or conspiracy to committerrorism, (2) judicially declared and outlawed terroristorganization, association, or group of persons, and (3) member ofsuch judicially declared and outlawed organization, association, orgroup of persons, as the case may be, whose deposits, placements,trust accounts, assets, and records are to be examined or theinformation to be gathered; (b) the identity of the bank or financialinstitution where such deposits, placements, trust accounts, assets,and records are held and maintained; (c) the identity of thepersons who will conduct the said examination and the gathering ofthe desired information; and, (d) the length of time theauthorization shall be carried out.

SEC. 30 . Effective Period of Court Authorization to Examine andObtain Information on Bank Deposits, Accounts, and Records. â " “

The authorization issued or granted by the authorizing division ofthe Court of Appeals to examine or cause the examination of and tofreeze bank deposits, placements, trust accounts, assets, andrecords, or to gather information about the same, shall be effectivefor the length of time specified in the written order of theauthorizing division of the Court of Appeals, which shall not exceeda period of thirty (30) days from the date of receipt of the writtenorder of the authorizing division of the Court of Appeals by theapplicant police or law enforcement official.The authorizing division of the Court of Appeals may extend orrenew the said authorization for another period, which shall notexceed thirty (30) days renewable to another thirty (30) days fromthe expiration of the original period, provided that the authorizingdivision of the Court of Appeals is satisfied that such extension orrenewal is in the public interest, and provided further that theapplication for extension or renewal, which must be filed by theoriginal applicant, has been duly authorized in writing by the Anti-Terrorism Council.

In case of death of the original applicant or in case he is physicallydisabled to file the application for extension or renewal, the onenext in rank to the original applicant among the members of theteam named in the original written order of the authorizing divisionof the Court of Appeals shall file the application for extension orrenewal: Provided, That, without prejudice to the liability of the


police or law enforcement personnel under Section 19 hereof, theapplicant police or law enforcement official shall have thirty (30)days after the termination of the period granted by the Court of

institution where such deposits, placements, trust accounts, assets,and records are held and maintained; (c) the number of bankdeposits, placements, trust accounts, assets, and records




Appeals as provided in the preceding paragraphs within which tofile the appropriate case before the Public Prosecutorâ " ™s Officefor any violation of this Act.

If no case is filed within the thirty (30)-day period, the applicantpolice or law enforcement official shall immediately notify in writingthe person subject of the bank examination and freezing of bankdeposits, placements, trust accounts, assets and records. Thepenalty of ten (10) years and one day to twelve (12) years ofimprisonment shall be imposed upon the applicant police or lawenforcement official who fails to notify in writing the person subjectof the bank examination and freezing of bank deposits, placements,trust accounts, assets and records.

Any person, law enforcement official or judicial authority whoviolates his duty to notify in writing as defined above shall sufferthe penalty of six (6) years and one day to eight (8) years ofimprisonment.

SEC. 31 . Custody of Bank Data and Information Obtained afterExamination of Deposits, Placements, Trust Accounts, Assets andRecords. â " “ All information, data, excerpts, summaries, notes,memoranda, working sheets, reports, and other documentsobtained from the examination of the bank deposits, placements,trust accounts, assets and records of: (1) a person charged with orsuspected of the crime of terrorism or the crime of conspiracy tocommit terrorism, (2) a judicially declared and outlawed terroristorganization, association, or group of persons, or (3) a member ofany such organization, association, or group of persons shall,within forty-eight (48) hours after the expiration of the period fixedin the written order of the authorizing division of the Court ofAppeals or within forty-eight (48) hours after the expiration of theextension or renewal granted by the authorizing division of theCourt of Appeals, be deposited with the authorizing division of theCourt of Appeals in a sealed envelope or sealed package, as thecase may be, and shall be accompanied by a joint affidavit of theapplicant police or law enforcement official and the persons whoactually conducted the examination of said bank deposits,placements, trust accounts, assets and records.

SEC. 32 . Contents of Joint Affidavit. â " “ The joint affidavit shallstate: (a) the identifying marks, numbers, or symbols of thedeposits, placements, trust accounts, assets, and recordsexamined; (b) the identity and address of the bank or financial

discovered, examined, and frozen; (d) the outstanding balances ofeach of such deposits, placements, trust accounts, assets; (e) allinformation, data, excerpts, summaries, notes, memoranda,working sheets, reports, documents, records examined and placedin the sealed envelope or sealed package deposited with theauthorizing division of the Court of Appeals; (f) the date of theoriginal written authorization granted by the Anti-Terrorism Councilto the applicant to file the ex parte application to conduct theexamination of the said bank deposits, placements, trust accounts,assets and records, as well as the date of any extension or renewalof the original written authorization granted by the authorizingdivision of the Court of Appeals; and (g) that the items enumeratedwere all that were found in the bank or financial institutionexamined at the time of the completion of the examination.

The joint affidavit shall also certify under oath that no duplicates orcopies of the information, data, excerpts, summaries, notes,memoranda, working sheets, reports, and documents acquiredfrom the examination of the bank deposits, placements, trust

accounts, assets and records have been made, or, if made, that allsuch duplicates and copies are placed in the sealed envelope orsealed package deposited with the authorizing division of the Courtof Appeals.

It shall be unlawful for any person, police officer or custodian of thebank data and information obtained after examination of deposits,placements, trust accounts, assets and records to copy, to remove,delete, expunge, incinerate, shred or destroy in any manner theitems enumerated above in whole or in part under any pretextwhatsoever.

Any person who copies, removes, deletes, expunges incinerates,shreds or destroys the items enumerated above shall suffer apenalty of not less than six (6) years and one day to twelve (12)years of imprisonment.

SEC. 33 . Disposition of Bank Materials. â " “ The sealed envelope orsealed package and the contents thereof, which are deposited withthe authorizing division of the Court of Appeals, shall be deemedand are hereby declared classified information, and the sealedenvelope or sealed package shall not be opened and its contentsshall not be divulged, revealed, read, or used as evidence unlessauthorized in a written order of the authorizing division of the Courtof Appeals, which written order shall be granted only upon a


written application of the Department of Justice filed before theauthorizing division of the Court of Appeals and only upon ashowing that the Department of Justice has been duly authorized in

suffer the penalty of ten (10) years and one day to twelve (12)years of imprisonment.




writing by the Anti-Terrorism Council to file the application, withnotice in writing to the party concerned not later than three (3)days before the scheduled opening, to open, reveal, divulge, anduse the contents of the sealed envelope or sealed package asevidence.

Any person, law enforcement official or judicial authority whoviolates his duty to notify in writing as defined above shall sufferthe penalty of six (6) years and one day to eight (8) years ofimprisonment.

SEC. 34 . Application to Open Deposited Bank Materials. â " “ Thewritten application, with notice in writing to the party concernednot later than three (3) days of the scheduled opening, to open thesealed envelope or sealed package shall clearly state the purposeand reason: (a) for opening the sealed envelope or sealed package;(b) for revealing and disclosing its classified contents; and, (c) forusing the classified information, data, excerpts, summaries, notes,memoranda, working sheets, reports, and documents as evidence.

SEC. 35 . Evidentiary Value of Deposited Bank Materials. â " “ Anyinformation, data, excerpts, summaries, notes, memoranda, worksheets, reports, or documents acquired from the examination ofthe bank deposits, placements, trust accounts, assets and recordsof: (1) a person charged or suspected of the crime of terrorism orthe crime of conspiracy to commit terrorism, (2) a judiciallydeclared and outlawed terrorist organization, association, or groupof persons, or (3) a member of such organization, association, orgroup of persons, which have been secured in violation of theprovisions of this Act, shall absolutely not be admissible and usableas evidence against anybody in any judicial, quasi-judicial,legislative, or administrative investigation, inquiry, proceeding, orhearing.

SEC. 36 . Penalty for Unauthorized or Malicious Examination of aBank or a Financial Institution. â " “ Any person, police or lawenforcement personnel who examines the deposits, placements,trust accounts, assets, or records in a bank or financial institutionof: (1) a person charged with or suspected of the crime ofterrorism or the crime of conspiracy to commit terrorism, (2) a

judicially declared and outlawed terrorist organization, association,or group of persons, or (3) a member of such organization,association, or group of persons, without being authorized to do soby the Court of Appeals, shall be guilty of an offense and shall

In addition to the liability attaching to the offender for thecommission of any other offense, the penalty of ten (10) years andone day to twelve (12) years of imprisonment shall be imposedupon any police or law enforcement personnel, who maliciouslyobtained an authority from the Court of Appeals to examine thedeposits, placements, trust accounts, assets, or records in a bankor financial institution of: (1) a person charged with or suspected ofthe crime of terrorism or conspiracy to commit terrorism, (2) a

judicially declared and outlawed terrorist organization, association,or group of persons, or (3) a member of such organization,association, or group of persons: Provided, That notwithstandingSection 33 of this Act, the party aggrieved by such authorizationshall upon motion duly filed be allowed access to the sealedenvelope or sealed package and the contents thereof as evidencefor the prosecution of any police or law enforcement personnel whomaliciously procured said authorization.

SEC. 37 . Penalty of Bank Officials and Employees Defying a CourtAuthorization. â " “ An employee, official, or a member of the board

of directors of a bank or financial institution, who refuses to allowthe examination of the deposits, placements, trust accounts,assets, and records of: (1) a person charged with or suspected ofthe crime of terrorism or the crime of conspiracy to committerrorism, (2) a judicially declared and outlawed terroristorganization, association, or group of persons, or (3) a member ofsuch judicially declared and outlawed organization, association, orgroup of persons in said bank or financial institution, when dulyserved with the written order of the authorizing division of theCourt of Appeals, shall be guilty of an offense and shall suffer thepenalty of ten (10) years and one day to twelve (12) years ofimprisonment.

SEC. 38 . Penalty for False or Untruthful Statement orMisrepresentation of Material Fact in Joint Affidavits. â " “ Any fa lseor untruthful statement or misrepresentation of material fact in the

joint affidavits required respectively in Section 12 and Sec tion 32 ofthis Act shall constitute a criminal offense and the affiants shallsuffer individually the penalty of ten (10) years and one day totwelve (12) years of imprisonment.

SEC. 39 . Seizure and Sequestration. â " “ The deposits and theiroutstanding balances, placements, trust accounts, assets, andrecords in any bank or financial institution, moneys, businesses,transportation and communication equipment, supplies and other




to commit terrorism shall suffer the penalty of ten (10) years andone day to twelve (12) years of imprisonment.

i U d h NIRC

"(b) The amount and the da te of the outstanding unclaimedbalance and whether the same is in money or in security, and if thelatter, the nature of the same;




ix. Under the NIRCSEC. 6 (F), NIRC: Authority of the Commissioner to inquire intoBank Deposit Accounts. - Notwithstanding any contrary provision ofRepublic Act No. 1405 and other general or special laws, theCommissioner is hereby authorized to inquire into the bankdeposits of:

(1) a decedent to determine his gross estate; and

(2) any taxpayer who has filed an application for compromise of histax liability under Sec. 204 (A) (2) of this Code by reason offinancial incapacity to pay his tax liability.

In case a taxpayer files an application to compromise the paymentof his tax liabilities on his claim that his financial positiondemonstrates a clear inability to pay the tax assessed, hisapplication shall not be considered unless and until he waives inwriting his privilege under Republic Act No. 1405 or under othergeneral or special laws, and such waiver shall constitute the

authority of the Commissioner to inquire into the bank deposits ofthe taxpayer.

1. Upon inquiry by the CIR for the purpose of determining thenet estate of a deceased depositor

2. In case a taxpayer files an application to compromise his taxliabilities on the ground of financial incapacity (waiverrequired)

x. Under the Unclaimed Balances LawSEC. 2, ACT NO. 3936 : Immediately after the taking effect of thisAct and within the month of January of every odd year, all banks,building and loan associations, and trust corporations shall forwardto the Treasurer of the Philippines a statement, under oath, of theirrespective managing officers, of all credits and deposits held bythem in favor of persons known to be dead, or who have not madefurther deposits or withdrawals during the preceding ten years ormore, arranged in alphabetical order according to the names ofcreditors and depositors, and showing:

"(a) The names and last known place of residence or post officeaddresses of the persons in whose favor such unclaimed balancesstand;

"(c) The date when the person in whose favor the unclaimedbalance stands died, if known, or the date when he made his lastdeposit or withdrawal; and

"(d) The interest due on such unclaimed balance, if any, and theamount thereof.

"A copy of the above sworn statement shall be posted in aconspicuous place in the premises of the bank, building and loanassociation, or trust corporation concerned for at least sixty daysfrom the date of filing thereof: Provided, That immediately beforefiling the above sworn statement, the bank, building and loanassociation, and trust corporation shall communicate with theperson in whose favor the unclaimed balance stands at his lastknown place of residence or post office address.

"It shall be the duty of the Treasurer of the Philippines to informthe Solicitor General from time to time the existence of unclaimed

balances held by banks, building and loan associations, and trustcorporations.

DOJ OPINION NO. 104, SERIES OF 1975

xi. Under the Rules of Court1. Garnishment

SEC. 9 (C), RULE 39: Garnishment of debts and credits. -The officer may levy on debts due the judgment obligor andother credits, including bank deposits, financial interests,royalties, commissions and other personal property notcapable of manual delivery in the posssession or control ofthird parties. Levy shall be made by serving notice upon theperson owing such debts or having in his possession or controlsuch credits to which the judgment obligor is entitled. Thegarnishment shall cover only such amount as will satisfy the

judgment and all lawful fees. The garnishee shall make awritten report to the court within five (5) days from service ofthe notice of garnishment stating whether or not the judgmentobligor has sufficient funds or credits to satisfy the amount ofthe judgment. If not, the report shall state how much funds orcredits the garnishee holds for the judgment obligor. Thegarnished amount in cash, or certified bank check issued inthe name of the judgment obligee, shall be delivered directlyto the judgment obligee within ten (10) working days from


service of notice on said garnishing requiring such delivery,except the lawful fees which shall be paid directly to the court.In the event there are two or more garnishees holding

d it dit ffi i t t ti f th j dg t th

issued by it, so that the bank would hold the same intact and not allow anywithdrawal until further order.

It i l f th di i f th f itt t f th 2




deposits or credits sufficient to satisfy the judgment, the judgment obligor, if available, shall have the right to indicatethe garnishee or garnishees who shall be required to deliverthe amount due; otherwise, the choice shall be made by the

judgment obligee. The executing sheriff shall observe thesame procedure under paragraph (a) with respect to deliveryof payment to the judgment obligee.

CasesCHINA BANKING CORPORATION v. ORTEGA, 49 SCRA 356 (1973)DOCTRINE: Garnishment of bank deposit judgment debtor is not violativeof RA 1405. The Court merely required the cashier of the bank to inform thecourt whether or not the defendant had a deposit in said bank only forpurposes of the garnishment issued by it, so that the bank would hold thesame intact and not allow any withdrawal until further order.

FACTSIn 1968, Acaban filed a complaint against Bautista Logging Co., Inc., B & BForest Development Corporation and Marino Bautista for the collection of

sum of money. RTC declared the defendants in default for failure to file theirresponsive pleadings within the reglementary period.

To satisfy the judgment, Acaban sought the garnishment of the bankdeposit of B & B Forest Development Corporation with China BankingCorporation. Accordingly, a notice of garnishment was issued and served onthe bank’s cashier, Tan Kim Liong.

In reply, Tan Kim Liong invoked the provisions of the Bank Secrecy Lawprohibiting the disclosure of any information relative to bank deposits.RTC, in denying Acaban’s motion to cite Tan Kim Liong in contempt,nevertheless ordered the latter to inform the court whether or not there is adeposit with China Banking Corporation of B & B Forest Development

Corporation, and if any, to hold the same intact and not to allow anywithdrawal until further orders.

ISSUEWhether there was a violation of the provisions of the Bank Secrecy Lawprohibiting the disclosure of any information relative to bank deposits

HELDNO. The lower court did not order an examination of or inquiry into thedeposit of B&B Forest Development Corporation. It merely required Tan KimLiong to inform the court of the existence of B&B Forest DevelopmentCorporation’s deposit in said bank only for the purpose of the garnishment

It is clear from the discussion of the conference committee report of the 2houses of Congress that the prohibition against examination of or inquiryinto a bank deposit under RA 1405 does NOT preclude its being garnished toinsure satisfaction of a judgment. There is no real inquiry in this case, and ifthe existence of the bank account is disclosed, the disclosure is purelyincidental to the execution process.

2. Preliminary AttachmentSEC. 10, RULE 57: Examination of party whose property isattached and persons indebted to him or controlling hisproperty; delivery of property to sheriff.

Any person owing debts to the party whose property isattached or having in his possession or under his control anycredit or other personal property belonging to such party, maybe required to attend before the court in which the action ispending, or before a commissioner appointed by the court,and be examine on oath respecting the same. The partywhose property is attached may also be required to attend for

the purpose of giving information respecting his property, andmay be examined on oath. The court may, after suchexamination, order personal property capable of manualdelivery belonging to him, in the possession of the person sorequired to attend before the court, to be delivered to theclerk of the court or sheriff on such terms as may be just,having reference to any lien thereon or claim against thesame, to await the judgment in the action.

d. Penalty for ViolationSEC. 5, LAW ON SECRECY OF BANK DEPOSITS: Any violation ofthis law will subject offender upon conviction, to an imprisonment ofnot more than five years or a fine of not more than twenty thousand

pesos or both, in the discretion of the court.

3. Rules for Foreign Currency Depositsa. Coverage

SEC. 8, FCDA: Secrecy of foreign currency deposits. – All foreigncurrency deposits authorized under this Act, as amended by PD No.1035, as well as foreign currency deposits authorized under PD No.1034, are hereby declared as and considered of an absolutelyconfidential nature and, except upon the written permission of thedepositor, in no instance shall foreign currency deposits be examined,inquired or looked into by any person, government official, bureau oroffice whether judicial or administrative or legislative, or any other


entity whether public or private; Provided, however, That said foreigncurrency deposits shall be exempt from attachment, garnishment, orany other order or process of any court, legislative body, governmentagency or any administrative body whatsoever ( As amended by PD

Deposit Act be made applicable to a foreign transient?

RULING NO If Karen's sad fate had happened to anybody's own kin it would be




agency or any administrative body whatsoever. ( As amended by PDNo. 1035, and further amended by PD No. 1246, prom. Nov. 21,1977. )

CasesSALVACION v. CENTRAL BANK, 278 SCRA 27 (1997)DOCTRINE: Sec. 113 of CB Circular No. 960, which exempts fromgarnishment, attachment or any other order or process of any court,legislative body, government agency or any administrative body whatsoeverforeign currency deposits, is NOT applicable to a foreign transient, but onlyto foreign lenders and investors to the development of the Foreign CurrencyDeposit System and Offshore Banking System in the Philippines.

FACTSOn February 4, 1989, Greg Bartelli y Northcott, an American tourist, coaxedand lured petitioner Karen Salvacion, then 12 years old to go with him to hisapartment. Therein, Greg Bartelli detained Karen Salvacion for four days, orup to February 7, 1989 and was able to rape the child. Greg was eventuallyapprehended but he escaped from detention.

The Deputy Sheriff of Makati served a Notice of Garnishment on ChinaBanking Corporation. In a letter dated March 13, 1989 to the Deputy Sheriffof Makati, China Banking Corporation invoked Republic Act No. 1405 as itsanswer to the notice of garnishment served on it. On March 15, 1989,Deputy Sheriff of Makati Armando de Guzman sent his reply to ChinaBanking Corporation saying that the garnishment did not violate the secrecyof bank deposits since the disclosure is merely incidental to a garnishmentproperly and legally made by virtue of a court order which has placed thesubject deposits in custodia legis . In answer to this letter of the DeputySheriff of Makati, China Banking Corporation, in a letter dated March 20,1989, invoked Section 113 of Central Bank Circular No. 960 to the effectthat the dollar deposits of defendant Greg Bartelli are exempt from

attachment, garnishment, or any other order or process of any court,legislative body, government agency or any administrative body,whatsoever.

After hearing the case ex-parte, the court rendered judgment in favor ofpetitioners on March 29, 1990.But China Bank still refuses to garnish the foreign denominated deposits ofGreg.

ISSUE Should Section 113 of Central Bank Circular No. 960 and Section 8 of R.A.6426, as amended by P.D. 1246, otherwise known as the Foreign Currency

NO . If Karen s sad fate had happened to anybody s own kin, it would bedifficult for him to fathom how the incentive for foreign currency depositcould be more important than his child's rights to said award of damages; inthis case, the victim's claim for damages from this alien who had the gall towrong a child of tender years of a country where he is a mere visitor. Thisfurther illustrates the flaw in the questioned provisions.

It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a timewhen the country's economy was in a shambles; when foreign investmentswere minimal and presumably, this was the reason why said statute wasenacted. But the realities of the present times show that the country hasrecovered economically; and even if not, the questioned law still deniesthose entitled to due process of law for being unreasonable and oppressive.The intention of the questioned law may be good when enacted. The lawfailed to anticipate the iniquitous effects producing outright injustice andinequality such as the case before us.

b. ProhibitionSEC. 8, FCDA: Secrecy of foreign currency deposits. – All foreign

currency deposits authorized under this Act, as amended by PD No.1035, as well as foreign currency deposits authorized under PD No.1034, are hereby declared as and considered of an absolutelyconfidential nature and, except upon the written permission of thedepositor, in no instance shall foreign currency deposits be examined,inquired or looked into by any person, government official, bureau oroffice whether judicial or administrative or legislative, or any otherentity whether public or private; Provided, however, That said foreigncurrency deposits shall be exempt from attachment, garnishment, orany other order or process of any court, legislative body, governmentagency or any administrative body whatsoever. ( As amended by PDNo. 1035, and further amended by PD No. 1246, prom. Nov. 21,1977. )

c. Exceptionsi. Upon written consent of the depositor

SEC. 8, FCDA: Secrecy of foreign currency deposits. – All foreigncurrency deposits authorized under this Act, as amended by PD No.1035, as well as foreign currency deposits authorized under PD No.1034, are hereby declared as and considered of an absolutelyconfidential nature and, except upon the written permission of thedepositor, in no instance shall foreign currency deposits beexamined, inquired or looked into by any person, governmentofficial, bureau or office whether judicial or administrative orlegislative, or any other entity whether public or private; Provided,


however, That said foreign currency deposits shall be exempt fromattachment, garnishment, or any other order or process of anycourt, legislative body, government agency or any administrativebody whatsoever ( As amended by PD No 1035 and further

expressed by the words, is to alter the statute, to legislate and not tointerpret, and judicial legislation should be avoided.”

ISSUE




body whatsoever. ( As amended by PD No. 1035, and furtheramended by PD No. 1246, prom. Nov. 21, 1977. )

CasesCHINA BANKING CORP. v. CA, 511 SCRA 110 (2006)DOCTRINE: The only exception to the secrecy of foreign currency depositsis in the case of a written permission of the depositor.

FACTSA Complaint for recovery of sums of money and annulment of sales of realproperties and shares of stocks was filed by Jose "Joseph" Gotianuy againsthis son-in-law, George Dee, and his daughter, Mary Margaret Dee, beforethe RTC.

Jose Gotianuy accused his daughter Mary Margaret Dee of stealing, amonghis other properties, US dollar deposits with Citibank N.A. amounting to notless than P35,000,000.00 and US$864,000.00. Mary Margaret Dee receivedthese amounts from Citibank N.A. through checks which she allegedlydeposited at China Banking Corporation (China Bank). He likewise accused

his son-in-law, George Dee, husband of his daughter, Mary Margaret, oftransferring his real properties and shares of stock in George Dee's namewithout any consideration. Jose Gotianuy, died during the pendency of thecase before the trial court.1 He was substituted by his daughter, ElizabethGotianuy Lo. The latter presented the US Dollar checks withdrawn by MaryMargaret Dee from his US dollar placement with Citibank

The lower court issued a subpoena ad testificandum requiring MS. ISABELYAP and CRISTOTA LABIOS of China Banking Corporation, Cebu MainBranch, corner Magallanes and D. Jakosalem Sts., Cebu City, to appear inperson and to testify with regards to Citibank Checks and other mattersmaterial and relevant to the issues of this case

The petitioner moved for reconsideration and contends (amongst others)that the absolute confidentiality under the law covers even the name of thedepositor and is beyond the compulsive process of the courts.

The CA ruled against the petitioner for the reason amongst others that. “The contention of petitioner that the [prescription] on absoluteconfidentiality under the law in question covers even the name of thedepositor and is beyond the compulsive process of the courts is palpablyuntenable as the law protects only the deposits itself but not the name ofthe depositor. To uphold the theory of petitioner CBC is reading into thestatute "something that is not within the manifest intention of the legislatureas gathered from the statute itself, for to depart from the meaning

ISSUE Whether petitioner China Bank is correct in its submission that the Citibankdollar checks with both Jose Gotianuy and/or Mary Margaret Dee as payees,deposited with China Bank, may not be looked into under the law on secrecyof foreign currency deposits. As a corollary issue, sought to be resolved iswhether Jose Gotianuy may be considered a depositor who is entitled toseek an inquiry over the said deposits.

RULING As amended by Presidential Decree No. 1246, the law reads:SEC. 8. Secrecy of Foreign Currency Deposits . – All foreign currencydeposits authorized under this Act, as amended by Presidential Decree No.1035, as well as foreign currency deposits authorized under PresidentialDecree No. 1034, are hereby declared as and considered of an absolutelyconfidential nature and, except upon the written permission of thedepositor , in no instance shall such foreign currency deposits be examined,inquired or looked into by any person, government official, bureau or officewhether judicial or administrative or legislative or any other entity whetherpublic or private: Provided, however , that said foreign currency deposits

shall be exempt from attachment, garnishment, or any other order orprocess of any court, legislative body, government agency or anyadministrative body whatsoever. ( As amended by PD No. 1035, and furtheramended by PD No. 1246, prom. Nov. 21, 1977 ) (Emphasis supplied.)

Under the above provision, the law provides that all foreign currencydeposits authorized under Republic Act No. 6426, as amended by Sec. 8,Presidential Decree No. 1246, Presidential Decree No. 1035, as well asforeign currency deposits authorized under Presidential Decree No. 1034 areconsidered absolutely confidential in nature and may not be inquired into.There is only one exception to the secrecy of foreign currencydeposits, that is, disclosure is allowed upon the written permissionof the depositor. The following facts are established: (1) Jose Gotianuy

and Mary Margaret Dee are co-payees of various Citibank checks; (2) MaryMargaret Dee withdrew these checks from Citibank; (3) Mary Margaret Deeadmitted in her Answer to the Request for Admissions by the Adverse Partysent to her by Jose Gotianuy that she withdrew the funds from Citibankupon the instruction of her father Jose Gotianuy and that the funds belongedexclusively to the latter; (4) these checks were endorsed by Mary MargaretDee at the dorsal portion; and (5) Jose Gotianuy discovered that thesechecks were deposited with China Bank as shown by the stamp of ChinaBank at the dorsal side of the checks.

Thus, with this, there is no issue as to the source of the funds


As the owner of the funds unlawfully taken and which are undisputably nowdeposited with China Bank, Jose Gotianuy has the right to inquire into thesaid deposits.

iii. Under the PDIC CharterSEC. 8, PAR. 8, PDIC CHARTER: The Corporation as a corporatebody shall have the power To conduct examination of banks withprior approval of the Monetary Board: Provided That no




A depositor, in cases of bank deposits, is one who pays money into the bankin the usual course of business, to be placed to his credit and subject to hischeck or the beneficiary of the funds held by the bank as trustee.

Furthermore, it is indubitable that the Citibank checks were drawn againstthe foreign currency account with Citibank, NA. The monies subject of saidchecks originally came from the late Jose Gotianuy, the owner of theaccount. Thus, he also has legal rights and interests in the CBC accountwhere said monies were deposited. More importantly, the Citibank checksreadily demonstrate that the late Jose Gotianuy is one of the payees of saidchecks . Being a co-payee thereof, then he or his estate can be consideredas a co-depositor of said checks. Ergo, since the late Jose Gotianuy is a co-depositor of the CBC account, then his request for the assailedsubpoena is tantamount to an express permission of a depositor forthe disclosure of the name of the account holder. The April 16, 1999Order perforce must be sustained.

One more point. It must be remembered that in the complaint of Jose

Gotianuy, he alleged that his US dollar deposits with Citibank were illegallytaken from him. On the other hand, China Bank employee Cristuta Labiostestified that Mary Margaret Dee came to China Bank and deposited themoney of Jose Gotianuy in Citibank US dollar checks to the dollar account ofher sister Adrienne Chu. This fortifies our conclusion that an inquiry into thesaid deposit at China Bank is justified. At the very least, Jose Gotianuy asthe owner of these funds is entitled to a hearing on the whereabouts ofthese funds.

ii. Under the AMLA1. Upon order of a competent court2. BSP inquiry or examination

SEC. 11, AMLA: Authority to Inquire into Bank Deposits. -Notwithstanding the provisions of Republic Act No. 1405, asamended; Republic Act No. 6426, as amended; Republic Act No.8791, and other laws, the AMLC may inquire into or examine anyparticular deposit or investment with any banking institution ornon- bank financial institution upon order of any competent court incases of violation of this Act when it has been established thatthere is probable cause that the deposits or investments involvedare in any way related to a money laundering offense: Provided,That this provision shall not apply to deposits and investmentsmade prior to the effectivity of this Act.

prior approval of the Monetary Board: Provided, That noexamination can be conducted within twelve (12) months from thelast examination date: Provided, however, That the Corporationmay, in coordination with the Bangko Sentral, conduct a specialexamination as the Board of Directors, by an affirmative vote of amajority of all of its members, if there is a threatened or impendingclosure of a bank; Provided, further, That, notwithstanding theprovisions of Republic Act No. 1405, as amended, Republic Act No.6426, as amended, Republic Act No. 8791, and other laws, theCorporation and/or the Bangko Sentral, may inquire into orexamine deposit accounts and all information related thereto incase there is a finding of unsafe or unsound banking practice;Provided, finally, That to avoid overlapping of efforts, theexamination shall maximize the efficient use of the relevantreports, information, and findings of the Bangko Sentral, which itshall make available to the Corporation; (As amended by R.A.9302, 12 August 2004, R.A. 9576,29 April 2009)

d. Penalty for Violation

SEC. 10, FCDA: Penal provisions. – Any willful violation of this Act orany regulation duly promulgated by the Monetary Board pursuanthereto shall subject the offender upon conviction to an imprisonmentof not less than one year nor more than five years or a fine of not lessthan five thousand pesos nor more than twenty-five thousand pesos,or both such fine and imprisonment at the discretion of the court.

4. Rules for Deposits in Specific Banks and Financial Institutionsa. Under the GBL

SEC. 55.1 (B), GBL: No director, officer, employee, or agent of anybank shall, without order of a court of competent jurisdiction, discloseto any unauthorized person any information relative to the funds or

properties in the custody of the bank belonging to private individuals,corporations, or any other entity: Provided, That with respect to bankdeposits, the provisions of existing laws shall prevail;

b. Islamic BanksSEC. 33, ISLAMIC BANK CHARTER: Confidential Information . -Banking transactions relating to all deposits of whatever nature areconfidential and may not be examined, inquired or looked into by anyperson, government official, bureau or office except as provided in thepreceding section, or upon written permission by the depositor, or incases where the money deposited or the transaction concerned is thesubject of a court order.


It shall be unlawful for any official or employee of the Islamic Bank orany person as may be designated by the Board of Director to examineor audit the books of the Bank to disclose or reveal to any person anyconfidential information except under the circumstances mentioned in

or dereliction of duty of public officials, or in cases where the moneydeposited or invested is the subject matter of litigation.

It shall be unlawful for any official or employee of an Association to




confidential information except under the circumstances mentioned inthe preceding paragraph.

SEC. 45, ISLAMIC BANK CHARTER: Penalties for Violation . - Anydirector, officer, employee, auditor, or agent of the Islamic Bank whoviolates or permits the violation of any provision of this Act shall bepunished by a fine not exceeding Ten thousand pesos (P10,000.00) oran imprisonment of not more than five (5) years, or both at thediscretion of the court.

c. Rural BanksSEC. 26 (A) (2), RURAL BANKS ACT: Without prejudice to anyprosecution under any law which may have been violated, a fine of notmore than Ten thousand pesos (P10,000), or imprisonment for notless than six (6) months but more than ten (10) years, or both, at thediscretion of the court, shall be imposed upon.

(a) Any officer, employee, or agent of a rural bank who shall:(2) Without order o f a court of competent jurisdiction,disclose any information relative to the funds or properties

in the custody of the bank belonging to private individuals,corporations, or any other entity;

d. Thrift BanksSEC. 21 (A) (2), THRIFT BANKS ACT: Prohibited Acts. — Withoutprejudice to any prosecution under any law which may have beenviolated, a fine of not more than Ten thousand pesos (P10,000) orimprisonment for not less than six (6) months but not more than ten(10) years, or both, at the discretion of the court, shall be imposedupon:

(a) Any officer, employee, or agent of a thrift bank who shall:(2) Without order o f a court of competent jurisdiction,disclose any information relative to the funds or properties

in the custody of the bank belonging to private individuals,corporations, or any other entity;

e. Non-Stock Savings and Loan AssociationSEC. 6, REVISED NON-STOCK SAVINGS AND LOANSASSOCIATION ACT OF 1997: Prohibition against inquiry into ordisclosure of deposits. — All deposits of whatever nature with anAssociation in the Philippines are hereby considered as of anabsolutely confidential nature and may not be examined, inquired orlooked into by any person, government official, bureau or office,except upon written permission of the depositor, or in cases ofimpeachment, or upon order of a competent court in cases of bribery

It shall be unlawful for any official or employee of an Association todisclose to any person any information concerning said deposits,except in the cases mentioned in the preceding paragraph of thissection. Any official or employee of an Association who violates thissection shall be punished under Republic Act No. 1405, as amended.

G. GARNISHMENT

1. ProcedureSEC. 9 (C), RULE 39 OF RULES OF COURT: Garnishment of debts andcredits. - The officer may levy on debts due the judgment obligor andother credits, including bank deposits, financial interests, royalties,commissions and other personal property not capable of manual deliveryin the posssession or control of third parties. Levy shall be made byserving notice upon the person owing such debts or having in hispossession or control such credits to which the judgment obligor isentitled. The garnishment shall cover only such amount as will satisfythe judgment and all lawful fees. The garnishee shall make a writtenreport to the court within five (5) days from service of the notice of

garnishment stating whether or not the judgment obligor has sufficientfunds or credits to satisfy the amount of the judgment. If not, the reportshall state how much funds or credits the garnishee holds for the

judgment obligor. The garnished amount in cash, or certified bank checkissued in the name of the judgment obligee, shall be delivered directlyto the judgment obligee within ten (10) working days from service ofnotice on said garnishing requiring such delivery, except the lawful feeswhich shall be paid directly to the court. In the event there are two ormore garnishees holding deposits or credits sufficient to satisfy the

judgment, the judgment obligor, if available, shall have the right toindicate the garnishee or garnishees who shall be required to deliver theamount due; otherwise, the choice shall be made by the judgmentobligee. The executing sheriff shall observe the same procedure underparagraph (a) with respect to delivery of payment to the judgmentobligee.

2. Exempt Depositsa. Foreign Currency Deposits

SEC. 8, FCDA: Secrecy of foreign currency deposits. – All foreigncurrency deposits authorized under this Act, as amended by PD No.1035, as well as foreign currency deposits authorized under PD No.1034, are hereby declared as and considered of an absolutelyconfidential nature and, except upon the written permission of thedepositor, 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 otherentity whether public or private; Provided, however, That said foreigncurrency deposits shall be exempt from attachment, garnishment, orany other order or process of any court, legislative body, government

(i) So much of the salaries, wages, or earnings of the judgmentobligor of his personal services within the four months preceding thelevy as are necessary for the support of his family;




any other order or process of any court, legislative body, governmentagency or any administrative body whatsoever. ( As amended by PDNo. 1035, and further amended by PD No. 1246, prom. Nov. 21,1977. )

b. Under the Rules of CourtSEC. 13, RULE 39 OF RULES OF COURT: Property exempt fromexecution.

Except as otherwise expressly provided by law, the following property,and no other, shall be exempt from execution:

(a) The judgment obligor's family home as provided by law, or thehomestead in which he resides, and land necessarily used inconnection therewith;

(b) Ordinary tools and implements personally used by him in hs trade,employment, or livelihood;

(c) Three horses, or three cows, or three carabaos, or other beasts ofburden such as the judgment obligor may select necessarily used byhim in his ordinary occupation;

(d) His necessary clothing and articles for ordinary personal use,excluding jewelry;

(e) Household furniture and utensils necessary for housekeeping, andused for that purpose by the judgment obligor and his family, such asthe judgment obligor may select, of a value not exceeding onehundred thousand pesos;

(f) Provisions for individual or family use sufficient for four months;

(g) The professional libraries and equipment of judges, lawyers,physicians, pharmacists, dentists, engineers, surveyors, clergymen,teachers, and other professionals, not exceeding three hundredthousand pesos in value;

(h) One fishing boat and accessories not exceeding the total value ofone hundred thousand pesos owned by a fisherman and by the lawfuluse of which he earns his livelihood;

(j) Lettered gravestones;

(k) Monies benefits, privileges, or annuities accruing or in any mannergrowing out of any life insurance;

(l) The right to receive legal support, or money or property obtainedas such support, or any pension or gratuity from the Government;

(m) Properties specially exempt by law.

But no article or species of property mentioned in his section shall beexempt from executio issued upon a judgment recovered for its priceor upon a judgment of foreclosure of a mortgage thereon.

3. No violation of Law on Secrecy of Bank DepositsCasesCHINA BANKING v. ORTEGA, 49 SCRA 356 (1973)The prohibition against examination of or inquiry into a bank deposit

under Republic Act 1405 does not preclude its being garnished to insuresatisfaction of a judgment. Indeed there is no real inquiry in such acase, and if the existence of the deposit is disclosed the disclosure ispurely incidental to the execution process. It is hard to conceive that itwas ever within the intention of Congress to enable debtors to evadepayment of their just debts, even if ordered by the Court, through theexpedient of converting their assets into cash and depositing the samein a bank.

PCI BANK v. CA, 193 SCRA 452 (1991)It is clear from the discussion of the conference committee report onSenate Bill No. 351 and House Bill No. 3977, which later becameRepublic Act 1405, that the prohibition against examination of or inquiry

into a bank deposit under Republic Act 1405 does not preclude its beinggarnished to insure satisfaction of a judgment. Indeed there is no realinquiry in such a case, and if existence of the deposit is disclosed thedisclosure is purely incidental to the execution process. It is hard toconceive that it was ever within the intention of Congress to enabledebtors to evade payment of their just debts, even if ordered by theCourt, through the expedient of converting their assets into cash anddepositing the same in a bank.


4. Liability for ReleaseCasesRCBC v. DE CASTRO. 168 SCRA 49 (1988)FACTS

amount in check to the sheriff, the RCBC did not thereby make anypayment, for the law mandates that delivery of a check does not producethe effect of payment until it has been cashed. [Article 1249, Civil Code.]




FACTSIn connection with a civil case between Badoc Planters Inc(BADOC) vs.Philippine Virginia Tobacco Administration (PVTA) et al, an action forrecovery of unpaid tobacco deliveries, the Judge issued a partial order,directing PVTA to pay plaintiff BADOC.

BADOC filed a motion to for a writ of execution, which was granted on thesame day. The sheriff then issued a Notice of Garnishment addressed toRCBC asking if PVTA had any proterty in the possession RCBC. to whichRCBC replied in the affirmative. PVTA was notified by RCBC of such notice.

Later on the Judge issued and order directing RCBC to ""to deliver in checkthe amount garnished to the Sheriff and the Sheriff in turn is ordered tocash the check and deliver the amount to BADOC". RCBC complied with theorder, the check was issued, delivered to the Sheriff, and subsequentlyencashed.

PVTA however filed an MR assailing the execution. The court granted theMR, invalidated the execution, and ordered RCBC and BADOC to jointly and

severally restore the account of PVTA.ISSUE Whether RCBC is liable to restore the account of PVTA

HELD NO . RCBC merely obeyed a mandatory directive from the respondent Judge,ordering it "to deliver in check the amount garnished to the Sheriff and theSheriff is in turn ordered to cash the check and deliver the amount toBADOC."

As to the allegation by PVTA that RCBC was negligent in prematurelyreleasing its funds. The court held that the contention by PVTA was without

merit since RCBC was expressly ordered by the court to deliver and encashthe check. RCBC had already filed a reply to the Notice of Garnishmentstating that it had in its custody funds belonging to the PVTA. Also, RCBCpromptly notified PVTA of the existence of the Notice of Garnishment.

It is important to stress, at this juncture, that there was nothing irregular inthe delivery of the funds of PVTA by check to the sheriff, whose custody isequivalent to the custody of the court, he being a court officer. The order ofthe court was composed of two parts, requiring: 1) RCBC to deliver in checkthe amount garnished to the designated sheriff and 2) the sheriff in turn tocash the check and deliver the amount to the plaintiffs representativeand/or counsel on record. It must be noted that in delivering the garnished

Moreover, by virtue of the order of garnishment, the same was placed incustodia legis and therefore, from that time on, RCBC was holding the fundssubject to the orders of the court a quo. That the sheriff, upon delivery ofthe check to him by RCBC encashed it and turned over the proceeds thereofto the plaintiff was no longer the concern of RCBC as the responsibility overthe garnished funds passed to the court. Thus, no breach of trust ordereliction of duty can be attributed to RCBC in delivering its depositor'sfunds pursuant to a court order, which was merely in the exercise of itspower of control over such funds.

The bank had no choice but to comply with the order demanding delivery ofthe garnished amount in check. The very tenor of the order called forimmediate compliance therewith. On the other hand, the bank cannot beheld liable for the subsequent encashment of the check as this was uponorder of the court in the exercise of its power of control over the fundsplaced in custodia legis by virtue of the garnishment.

H. DEPOSIT INSURANCE

1. CoverageSEC. 5, PDIC CHARTER: The deposit liabilities of any bank or bankinginstitution, which is engaged in the business of receiving deposits asherein defined on the effective date of this Act, or which thereafter mayengage in the business of receiving deposits, shall be insured with theCorporation. (As amended by R.A. 6037, 04 August 1969; renumberedfrom Sec. 4 by R.A. 9302, 12 August 2004)

SEC. 9, FCDA: Deposit insurance coverage. – The deposits under thisAct shall be insured under the provisions of Republic Act No. 3591, asamended (Philippine Deposit Insurance Corporation), as well as itsimplementing rules and regulations: Provided , That insurance paymentshall be in the same currency in which the insured deposits aredenominated.

2. Amount InsuredSEC. 4 (G), PDIC CHARTER: The term “insured deposit” means theamount due to any bona fide depositor for legitimate deposits in aninsured bank net of any obligation of the depositor to the insured bankas of the date of closure, but not to exceed Five Hundred ThousandPesos (P500,000.00). 2 Such net amount shall be determined accordingto such regulations as the Board of Directors may prescribe. Indetermining such amount due to any depositor, there shall be addedtogether all deposits in the bank maintained in the same right and




Regent. When Aquero et al filed a claim with the PDIC, it was rejected sincethe check (125k) that Premiere had issued in consideration for the CTDs hadbounced;and said check was not replaced by the Premiere, resulting in thecancellation of the certificates as indebtedness or liabilities of Regent.

Philippines to be used as the National Assembly may direct.

"Banks", "building and loan associations" and "trust corporations",within the meaning of this Act, shall refer to institutions defined under




g

Thus this collection case against PDIC.

ISSUES 1) Are the CTDs negotiable instrument, and does it matter?2) Does the fact that the CTDs state that the same were insured by the

PDIC make PDIC liable?3) Were the CTDs issued for consideration, and if not, what is the

consequence?

HELD 1) It doesn't matter. Whether the CTDs in question are negotiable or not isimmaterial in the present case. The Philippine Deposit InsuranceCorporation was created by law and, as such, is governed primarily by theprovisions of the special law creating it. The liability of the PDIC for insureddeposits therefore is statutory and such liability rests upon the existence ofdeposits with the insured bank, not on the negotiability or non-negotiabilityof the certificates evidencing these deposits.

2) NO . the deposit liability of PDIC is determined by the provisions of thelaw that created it, RA 3519, and statements in the certificates that thesame are insured by PDIC are not binding upon the latter.

3) NO consideration. PDIC not liable. In order that a claim for depositinsurance with the PDIC may prosper, the law requires that a correspondingdeposit be placed in the insured bank. The problem is that Regent did notreceive anything in consideration for the CTDs it issued, since the checkrepresenting the vale of the CTDs (issued by Premiere) bounced; thereforeno deposit ever came into existence. Accordingly, there is nothing here forPDIC to insure.

I. UNCLAIMED BALANCES

1. DefinitionSEC. 1, UNCLAIMED BALANCES LAW: "Unclaimed balances", withinthe meaning of this Act, shall include credits or deposits of money,bullion, security or other evidence of indebtedness of any kind, andinterest thereon with banks, buildings and loan associations, and trustcorporations, as hereinafter defined, in favor of any person known to bedead or who has not made further deposits or withdrawals during thepreceding ten years or more. Such unclaimed balances, together withthe increase and proceeds thereof, shall be deposited with the Treasurerof the Philippines to the credit of the Government of the Republic of the

gSection two, thirty-nine and fifty-six, respectively, of Republic ActNumbered Three Hundred Thirty Seven, otherwise known as the GeneralBanking Act, as amended, whether organized under special charters ornot.

2. Report to Treasurer; Notice, Posting, PublicationSEC. 2, UNCLAIMED BALANCES LAW: Immediately after the takingeffect of this Act and within the month of January of every odd year, allbanks, building and loan associations, and trust corporations shallforward to the Treasurer of the Philippines a statement, under oath, oftheir respective managing officers, of all credits and deposits held bythem in favor of persons known to be dead, or who have not madefurther deposits or withdrawals during the preceding ten years or more,arranged in alphabetical order according to the names of creditors anddepositors, and showing:

"(a) The names and last known place of res idence or post officeaddresses of the persons in whose favor such unclaimed balances stand;

"(b) The amount and the date of the outstanding unclaimed balance andwhether the same is in money or in security, and if the latter, the natureof the same;

"(c) The date when the person in whose favor the unclaimed balancestands died, if known, or the date when he made his last deposit orwithdrawal; and

"(d) The interest due on such unclaimed balance, if any, and the amountthereof.

"A copy of the above sworn statement shall be posted in a conspicuous

place in the premises of the bank, building and loan association, or trustcorporation concerned for at least sixty days from the date of filingthereof: Provided, That immediately before filing the above swornstatement, the bank, building and loan association, and trustcorporation shall communicate with the person in whose favor theunclaimed balance stands at his last known place of residence or postoffice address.

"It shall be the duty of the Treasurer of the Philippines to inform theSolicitor General from time to time the existence of unclaimed balancesheld by banks, building and loan associations, and trust corporations.


CasesRepublic v. CA, 345 SCRA 63 (2000)FACTSOn December 28, 1988, a complaint for escheat filed by petitioner, Republic

of unclaimed balances would only result in additional and unnecessaryexpense to the government.

The court however issued an order that if petitioner fails to comply with the




of the Philippines, with the Regional Trial Court of Davao City againstseveral banks which had branches within the jurisdiction of the said court.

The complaint alleged that pursuant to Act No. 3936 as amended by P.D.679, the respective managers of the defendant banks submitted to theTreasurer of the Republic of the Philippines separate statements preparedunder oath which listed all deposits and credits held by them in favor ofdepositors or creditors either known to be dead, have not been heard from,or have not made depositors or withdrawals for ten years or more sinceDecember 31, 1970.

The complaint prayed that after due notice to the defendant banks, andafter hearing, judgment be rendered declaring that the deposits, credits andunpaid balances in question be escheated to petitioner, commandingdefendant banks to forthwith deposit the same with the Treasurer of thePhilippines.

The lower court issued an order directing petitioner to show cause why the

complaint should not be dismissed for failure to state a cause of action.According to the order, the complaint contained no allegation that defendantbanks have complied with two of the conditions in Section 2 of Act No.3936, compliance with the requirements being necessary for the complaintto prosper

Petitioner submitted amended complaint prayed that judgment be renderedordering that the amount of P97,263.38, deposited with the defendantbanks by depositors who are known to be dead or have not made furtherdeposits or withdrawals during the preceding ten years or more beescheated in favor of the Republic of the Philippines.

The trial court found the amendment sufficient and issued an order requiring

petitioner to publish a notice in the Mindanao Forum Standard once a weekfor two consecutive weeks, containing the summons, notice to the public,the amended petition incorporated in the summons and the list of unclaimedbalances. The notice was estimated to occupy 27 pages of the saidnewspaper at an estimated cost of P50,000.00.

On July 11, 1989, petitioner submitted a manifestation to the lower courtpraying that the publication of the list of the unclaimed balances bedispensed with. Petitioner posited that under Section 3, Act No. 3936, onlythe following are required to be published: (1) summons to respondentbanks; and (2) notice to all persons other than those named defendantstherein. Petitioner submitted that to require it to publish the names and list

publication of unclaimed balances as already ordered, the petition shall bedismissed.

Petitioner filed with the Court of Appeals a petition for mandamus andcertiorari, which was also dismissed.

ISSUE (1) Whether or not respondent RTC judge committed grave abuse ofdiscretion tantamount to lack of jurisdiction in ordering the publication ofthe list of unclaimed balances listed under annexes “A” to “P” of thecomplaint.

HELD The petition is without merit.The publication of the list of unclaimed balances is intended to safeguard theright of the depositors, their heirs and successors to due process. This wasmade clear by the lower court in its assailed Order, to wit:

Moreover, how would other persons who may have an interest inany of the unclaimed balances know what this case is all about andwhether they have an interest in this case if the amended complaintand list of unclaimed balances are not published? Such otherpersons may be heirs of the bank depositors named in the list ofunclaimed balances.

x x x

The fact that the government is in a tight financial situation is not a justification for this Court to dispense with the elementary rule of dueprocess.

As declared by the trial court in its Order dated August 1, 1989, the

dismissal of the petition for escheat is without prejudice. In other words,the State can refile the said petition, notwithstanding the lapse of time.Prescription of action does not run against the government.

WHEREFORE , the petition is DENIED. The decision of the Court of Appealsdated August 14, 1990 is AFFIRMED.

SO ORDERED.

3. Escheat ProceedingsSEC. 3, UNCLAIMED BALANCES LAW: Whenever the Solicitor Generalshall be informed of such unclaimed balances, he shall commence an


action or actions in the name of the People of the Republic of thePhilippines in the Court of First Instance of the province or city wherethe bank, building and loan association or trust corporation is located, inwhich shall be joined as parties the bank, building and loan association

full and complete jurisdiction in the Republic of the Philippines over thesaid unclaimed balances and over the persons having or claiming anyinterest in the said unclaimed balances, or any of them, and shall havefull and complete jurisdiction to hear and determine the issues herein,




or trust corporation and all such creditors or depositors. All or any ofsuch creditors or depositors or banks, building and loan association ortrust corporations may be included in one action. Service of process insuch action or actions shall be made by delivery of a copy of thecomplaint and summons to the president, cashier, or managing officerof each defendant bank, building and loan association or trustcorporation and by publication of a copy of such summons in anewspaper of general circulation, either in English, in Filipino, or in alocal dialect, published in the locality where the bank, building and loanassociation or trust corporation is situated, if there be any, and in casethere is none, in the City of Manila, at such time as the court may order.Upon the trial, the court must hear all parties who have appearedtherein, and if it be determined that such unclaimed balances in anydefendant bank, building and loan association or trust corporation areunclaimed as hereinbefore stated, then the court shall render judgmentin favor of the Government of the Republic of the Philippines, declaringthat said unclaimed balances have escheated to the Government of theRepublic of the Philippines and commanding said bank, building and loan

association or trust corporation to forthwith deposit the same with theTreasurer of the Philippines to credit of the Government of the Republicof the Philippines to be used as the National Assembly may direct.

"At the time of issuing summons in the action above provided for, theclerk of court shall also issue a notice signed by him, giving the title andnumber of said action, and referring to the complaint therein, anddirected to all persons, other than those named as defendants therein,claiming any interest in any unclaimed balance mentioned in saidcomplaint, and requiring them to appear within sixty days after thepublication or first publication, if there are several, of such summons,and show cause, if they have any, why the unclaimed balances involvedin said action should not be deposited with the Treasurer of the

Philippines as in this Act provided and notifying them that if they do notappear and show cause, the Government of the Republic of thePhilippines will apply to the court for the relief demanded in thecomplaint. A copy of said notice shall be attached to, and published withthe copy of, said summons required to be published as above, and atthe end of the copy of such notice so published, there shall be astatement of the date of publication, or first publication, if there areseveral, of said summons and notice. Any person interested may appearin said action and become a party thereto. Upon the publication or thecompletion of the publication, if there are several, of the summons andnotice, and the service of the summons on the defendant banks,building and loan associations or trust corporations, the court shall have

and render the appropriate judgment thereon.

4. Effects of Compliance/Non-ComplianceSEC. 4, UNCLAIMED BALANCES LAW: If the president, cashier ormanaging officer of the bank, building and loan association, or trustcorporation neglects or refuses to make and file the sworn statementrequired by this action, such bank, building and loan association, ortrust corporation shall pay to the Government the sum of five hundredpesos a month for each month or fraction thereof during which suchdefault shall continue.

SEC. 5, UNCLAIMED BALANCES LAW: Any bank, building and loanassociation or trust corporation which shall make any deposit with theTreasurer of the Philippines in conformity with the provisions of this Actshall not thereafter be liable to any person for the same and any actionwhich may be brought by any person against in any bank, building andloan association, or trust corporation for unclaimed balances sodeposited with the Treasurer of the Philippines shall be defended by the

Solicitor General without cost to such bank, building and loanassociation or trust corporation."

J. ANTI-MONEY LAUNDERING ACT

1. Declared PolicySEC. 2, AMLA: Declaration of Policy. - It is hereby declared thepolicy of the State to protect and preserve the integrity andconfidentiality of bank accounts and to ensure that the Philippines shallnot be used as a money laundering site for the proceeds of any unlawfulactivity. Consistent with its foreign policy, the State shall extendcooperation in transnational investigations and prosecutions of personsinvolved in money laundering activities wherever committed.

2. Covered TransactionsSEC. 3 (B), AMLA: "Covered transaction" is a single, series, orcombination of transactions involving a total amount in excess of Fourmillion Philippine pesos (Php4,000,000.00) or an equivalent amount inforeign currency based on the prevailing exchange rate within five (5)consecutive banking days except those between a covered institutionand a person who, at the time of the transaction was a properlyidentified client and the amount is commensurate with the business orfinancial capacity of the client; or those with an underlying legal or tradeobligation, purpose, origin or economic justification.


It likewise refers to a single, series or combination or pattern ofunusually large and complex transactions in excess of Four millionPhilippine pesos (Php4,000,000.00) especially cash deposits andinvestments having no credible purpose or origin, underlying trade

as the authority and identification of all persons purporting to act ontheir behalf.

The provisions of existing laws to the contrary notwithstanding,




obligation or contract.

3. Suspicious TransactionsSEC. 3 (B-1), AMLA: SEC. 3 (B), AMLA: "Covered transaction" is asingle, series, or combination of transactions involving a total amount inexcess of Four million Philippine pesos (Php4,000,000.00) or anequivalent amount in foreign currency based on the prevailing exchangerate within five (5) consecutive banking days except those between acovered institution and a person who, at the time of the transaction wasa properly identified client and the amount is commensurate with thebusiness or financial capacity of the client; or those with an underlyinglegal or trade obligation, purpose, origin or economic justification.

4. Covered InstitutionsSEC. 3 (A), AMLA: "Covered Institution" refers to: 1. banks, non-banks, quasi-banks, trust entities, and all other

institutions and their subsidiaries and affiliates supervised orregulated by the Bangko Sentral ng Pilipinas (BSP);

2. insurance companies and all other institutions supervised orregulated by the Insurance Commission; and

3. securities dealers, brokers, salesmen, investment houses and othersimilar entities managing securities or rendering services asinvestment agent, advisor, or consultant, (ii) mutual funds, closeand investment companies, common trust funds, pre-needcompanies and other similar entities, (iii) foreign exchangecorporations, money changers, money payment, remittance, andtransfer companies and other similar entities, and (iv) other entitiesadministering or otherwise dealing in currency, commodities orfinancial derivatives based thereon, valuable objects, cash

substitutes and other similar monetary instruments or propertysupervised or regulated by Securities and Exchange Commission.

5. Obligations of Covered InstitutionsSEC. 9, AMLA: Prevention of Money Laundering; CustomerIdentification Requirements and Record Keeping. -

1. Customer Identification. - Covered institutions shall establish andrecord the true identity of its clients based on official documents.They shall maintain a system of verifying the true identity of theirclients and, in case of corporate clients, require a system ofverifying their legal existence and organizational structure, as well

anonymous accounts, accounts under fictitious names, and all othersimilar accounts shall be absolutely prohibited. Peso and foreigncurrency non-checking numbered accounts shall be allowed. TheBSP may conduct annual testing solely limited to the determinationof the existence and true identity of the owners of such accounts.

2. Record Keeping. -All records of all transactions of coveredinstitutions shall be maintained and safely stored for five (5) yearsfrom the date of transactions. With respect to closed accounts, therecords on customer identification, account files and businesscorrespondence, shall be preserved and safely stored for at leastfive (5) years from the dates when they were closed.

3. Reporting of Covered Transactions. - Covered institutions shallreport to the AMLC all covered transactions within five (5) workingdays from occurrence thereof, unless the Supervising Authorityconcerned prescribes a longer period not exceeding ten (10)working days.

When reporting covered transactions to the AMLC, covered institutionsand their officers, employees, representatives, agents, advisors,consultants or associates shall not be deemed to have violated RepublicAct No. 1405, as amended; Republic Act No. 6426, as amended;Republic Act No. 8791 and other similar laws, but are prohibited fromcommunicating, directly or indirectly, in any manner or by any means,to any person the fact that a covered transaction report was made, thecontents thereof, or any other information in relation thereto. In case ofviolation thereof, the concerned officer, employee, representative,agent, advisor, consultant or associate of the covered institution, shallbe criminally liable. However, no administrative, criminal or civilproceedings, shall lie against any person for having made a covered

transaction report in the regular performance of his duties and in goodfaith, whether or not such reporting results in any criminal prosecutionunder this Act or any other Philippine law.

When reporting covered transactions to the AMLC, covered institutionsand their officers, employees, representatives, agents, advisors,consultants or associates are prohibited from communicating, directly orindirectly, in any manner or by any means, to any person, entity, themedia, the fact that a covered transaction report was made, thecontents thereof, or any other information in relation thereto. Neithermay such reporting be published or aired in any manner or form by themass media, electronic mail, or other similar devices. In case of


violation thereof, the concerned officer, employee, representative,agent, advisor, consultant or associate of the covered institution, ormedia shall be held criminally liable.

d f

f. Jueteng and Masiao punished as illegal gambling under PresidentialDecree No.1602;

g. Piracy on the high seas under the Revised Renal Code, as amendedand Presidential Decree No.532;

h l f d h f d l f h d l d




a. Customer Identificationb. Record Keepingc. Reporting of Covered and Suspicious Transactions to AMLC

6. Money-Laundering CrimeSEC. 4, AMLA: Money Laundering Offense. - Money laundering is acrime whereby the proceeds of an unlawful activity are transacted,thereby making them appear to have originated from legitimatesources. It is committed by the following:1. Any person knowing that any monetary instrument or property

represents. involves, or relates to the proceeds of any unlawfulactivity, transacts or attempts to transact said monetary instrumentor property.

2. Any person-knowing that any monetary instrument or propertyinvolves the proceeds of any unlawful activity, performs or fails toperform any act as a result of which he facilitates the offense ofmoney laundering referred to in paragraph (a) above.

3. Any person knowing that any monetary instrument or property is

required under this Act to be disclosed and filed with the Anti-MoneyLaundering Council (AMLC), fails to do so.

a. Transacting or attempting to transact, with monetary instrument orproperty, knowing it represents, involves, or related to proceeds ofany Unlawful Activity

b. Facilitating money-laundering referred to in Item (a) above, by failingto perform an act

c. Failing to disclose and file report with AMLC of any monetaryinstrument or property as required under AMLA

7. Unlawful ActivitiesSEC. 3 (i), AMLA: "Unlawful activity" refers to any act or omission or

series or combination thereof involving or having relation to thefollowing:a. Kidnapping for ransom under Article 267 of Act No.3815, otherwise

known as the Revised Penal Code, as amended;b. Sections 3,4,5,7,8 and 9 of Article Two of Republic Act No.6425, as

amended, otherwise known as the Dangerous Drugs Act of 1972;c. Section 3 paragraphs B,C,E,G,H and I of Republic Act No.3019, as

amended; otherwise known as the Anti-Graft and Corrupt PracticesAct;

d. Plunder under Republic Act No.7080, as amended;e. Robbery and extortion under Articles 294,295,296,299,300,301 and

302 of the Revised Penal Code, as amended;

h. Qualified theft under Article 310 of the Revised Penal Code, asamended; (9) Swindling under Article 315 of the Revised Penal Code,as amended;

i. Smuggling under Republic Act Nos. 455 and 1937; j. Violations under Republic Act No.8792, otherwise known as the

Electronic Commerce Act of 2000;k. Hijacking and other violations under Republic Act No.6235; destructive

arson and murder, as defined under the Revised Penal Code, asamended, including those perpetrated by terrorists against non-combatant persons and similar targets;

l. Fraudulent practices and other violations under Republic Act No.8799.otherwise known as the Securities Regulation Code of 2000;

m. Felonies or offenses of a similar nature that are punishable under thepenal laws of other countries.

8. JurisdictionSEC. 5, AMLA: Jurisdiction of Money Laundering Cases. - Theregional trial courts shall have jurisdiction to try all cases on money

laundering. Those committed by public officers arid private persons whoare in conspiracy with such public officers shall be under the jurisdictionof the Sandiganbayan.

9. ProsecutionSEC. 6, AMLA: Prosecution of Money Laundering. –

1. Any person may be charged with and convicted of both the offenseof money laundering and the unlawful activity as herein defined.

2. Any proceeding relating to the unlawful activity shall be givenprecedence over the prosecution of any offense or violation underthis Act without prejudice to the freezing and other remediesprovided.

10. Prohibition against Political HarassmentSEC. 16, AMLA: Prohibitions Against Political Harassment. - ThisAct shall not be used for political prosecution or harassment or as aninstrument to hamper competition in trade and commerce.

No case for money laundering may be filed against and no assets shallbe frozen, attached or forfeited to the prejudice of a candidate for anelectoral office during an election period.


11. Penalties and Other Consequencesa. Penalties

SEC. 14, AMLA: Penal Provisions. -

the same or purposely fails to testify shall suffer the same penaltiesprescribed herein.

4. Breach of Confidentiality. The punishment of imprisonment rangingf h (3) i h (8) d fi f l h Fi




1. Penalties for the Crime of Money Laundering. The penalty ofimprisonment ranging from seven (7) to fourteen (14) years and afine of not less than Three million Philippine pesos (Php ,3,000,000.00) but not more than twice the value of the monetaryinstrument or property involved in the offense, shall be imposedupon a person convicted under Section 4(a) of this Act. The penaltyof imprisonment from four (4) to seven (7) years and a fine of notless than One million five hundred thousand Philippine pesos (Php1,500,000.00) but not more than Three million Philippine pesos (Php3,000,000.00), shall be imposed upon a person convicted underSection 4(b) of this Act. The penalty of imprisonment from six (6)months to four (4) years or a fine of not less than One hundredthousand Philippine pesos (Php 100,000.00) but not more than Fivehundred thousand Philippine pesos (Php 500,000.00), or both, shallbe imposed on a person convicted under Section 4(c) of this Act.

2. Penalties for Failure to Keep Records. The penalty of imprisonmentfrom six (6) months to one (1) year or a fine of not less than One

hundred thousand Philippine pesos (Php100,000.00) but not morethan Five hundred thousand Philippine pesos (Php500,000.00), orboth, shall be imposed on a person convicted under Section 9(b) ofthis Act.

3. Malicious Reporting. Any person who, with malice, or in bad faith,report or files a completely unwarranted or false information relativeto money laundering transaction against any person shall be subjectto a penalty of six (6) months to four (4) years imprisonment and afine of not less than One hundred thousand Philippine pesos (Php100,000.00) but not more than Five hundred thousand Philippinepesos (Php500,000.00), at the discretion of the court: Provided,That the offender is not entitled to avail the benefits of the Probation

Law. If the offender is a corporation, association, partnership or any juridical person, the pena lty shall be imposed upon the responsibleofficers, as the case may be, who participated in the commission ofthe crime or who shall have knowingly permitted or failed to preventits commission. If the offender is a juridical person, the court maysuspend or revoke its license. If the offender is an alien, he shall, inaddition to the penalties herein prescribed, be deported withoutfurther proceedings after serving the penalties herein prescribed. Ifthe offender is a public official or employee, he shall, in addition tothe penalties prescribed herein, suffer perpetual or temporaryabsolute disqualification from office, as the case may be. Any publicofficial or employee who is called upon to testify and refuses to do

from three (3) to eight (8) years and a fine of not less than Fivehundred thousand Philippine pesos (Php 500,000.00) but not morethan One million Philippine pesos (Php 1,000,000.00), shall beimposed on a person convicted for a violation under Section 9 (c).

(i) Money Laundering(ii) Failure to Keep Records(iii) Malicious Reporting(iv) Breach of Confidentiality

b. Civil ForfeitureSEC. 12, AMLA: Forfeiture Provisions. –

1. Civil Forfeiture. - When there is a covered transaction report made,and the court has, in a petition filed for the purpose ordered seizureof any monetary instrument or property, in whole or in part, directlyor indirectly, related to said report, the Revised Rules of Court oncivil forfeiture shall apply.

2. Claim on Forfeited Assets. - Where the court has issued an order offorfeiture of the monetary instrument or property in a criminalprosecution for any money laundering offense defined under Section4 of this Act, the offender or any other person claiming an interesttherein may apply, by verified petition, for a declaration that thesame legitimately belongs to him and for segregation or exclusion ofthe monetary instrument or property corresponding thereto. Theverified petition shall be filed with the court which rendered the

judgement of conviction and order of forfeiture, within fifteen (15)days from the date of the order or forfeiture, in default of which thesaid order shall become final and executory. This provision shallapply in both civil and criminal forfeiture.

3. Payment in Lieu of Forfeiture. - Where the court has issued an orderof forfeiture of the monetary instrument or property subject of amoney laundering offense defined under Section 4, and said ordercannot be enforced because any particular monetary instrument orproperty cannot, with due diligence, be located, or it has beensubstantially altered, destroyed, diminished in value or otherwiserendered worthless by any act or omission, directly or indirectly,attributable to the offender, or it has been concealed, removed,converted or otherwise transferred to prevent the same from beingfound or to avoid forfeiture thereof, or it is located outside thePhilippines or has been placed or brought outside the jurisdiction of


the court, or it has been commingled with other monetaryinstruments or property belonging to either the offender himself or athird person or entity, thereby rendering the same difficult toidentify or be segregated for purposes of forfeiture, the court may,i t d f f i g th d f f f it f th t

relating to an unlawful activity or to a money laundering offense are located.Pasig City, where the account sought to be forfeited in this case is situated,is within the National Capital Judicial Region (NCJR). Clearly, the complaintfor civil forfeiture of the account may be filed in any RTC of the NCJR. Sinceth RTC M il i f th RTC f th NCJR it f th




instead of enforcing the order of forfeiture of the monetaryinstrument or property or part thereof or interest therein,accordingly order the convicted offender to pay an amount equal tothe value of said monetary instrument or property. This provisionshall apply in both civil and criminal forfeiture.

CasesRepublic v. Glasgow Credit and Collection Services, 542 SCRA 384(2008)FACTS Republic filed a complaint for civil forfeiture of assets against the bankdeposits of Glasgow in Citystate Savings Bank (CSB). This is pursuant to theAnti-Money Laundering Act (RA 9160). The court issued summons andseveral alias summons. However, all the summons to Glasgow was leftunserved as it could not be found at its last known address.

Glasgow now files a motion to dismiss on the ground that the court has no jurisdiction over its person due to lack of summons served, the complaintwas premature and there was failure to prosecute by the Republic. The RTCdismissed the case on the grounds of improper venue, insufficiency in formand substance and failure to prosecute.

ISSUE Whether the complaint for Civil Forfeiture was correctly dismissed on thegrounds of (1) improper venue (2) insufficiency in form and substance and(3) failure to prosecute.

RULING (1) NO , the trial court was the proper venue.The Rules of Procedure in Cases of Civil Forfeiture applies to this case.

Sec. 3. Venue of cases cognizable by the regional trial court. – A

petition for civil forfeiture shall be filed in any regional trial court ofthe judicial region where the monetary instrument, property orproceeds representing, involving, or relating to an unlawful activityor to a money laundering offense are located; provided, however,that where all or any portion of the monetary instrument, propertyor proceeds is located outside the Philippines, the petition may befiled in the regional trial court in Manila or of the judicial regionwhere any portion of the monetary instrument, property, orproceeds is located, at the option of the petitioner.

The venue of civil forfeiture cases is any RTC of the judicial region where themonetary instrument, property or proceeds representing, involving, or

the RTC Manila is one of the RTCs of the NCJR, it was a proper venue of theRepublic’s complaint for civil forfeiture of Glasgow’s account.

(2) NO , it was sufficient in form and substance.In a motion to dismiss for failure to state a cause of action, the focus is onthe sufficiency, not the veracity, of the material allegations. Thedetermination is confined to the four corners of the complaint and nowhereelse. The test of the sufficiency of the facts alleged in the complaint iswhether or not, admitting the facts alleged, the court could render a valid

judgment upon the same in accordance with the prayer of the complaint.

Section 4, Title II of the Rule of Procedure in Cases of Civil Forfeitureprovides:

Sec. 4. Contents of the petition for civil forfeiture. - The petition forcivil forfeiture shall be verified and contain the following allegations:(a) The name and address of the respondent;(b) A description with reasonable particularity of the monetaryinstrument, property, or proceeds, and their location; and(c) The acts or omissions prohibited by and the specific provisions ofthe Anti-Money Laundering Act, as amended, which are alleged tobe the grounds relied upon for the forfeiture of the monetaryinstrument, property, or proceeds; and(d) The reliefs prayed for.

Here, the verified complaint of the Republic contained the followingallegations:

(a) the name and address of the primary defendant therein,Glasgow;(b) a description of the proceeds of Glasgow’s unlawful activitieswith particularity, as well as the location thereof, account no. CA-005-10-000121-5 in the amount of P21,301,430.28 maintained with

CSBI;(c) the acts prohibited by and the specific provisions of RA 9160, asamended, constituting the grounds for the forfeiture of the saidproceeds. In particular, suspicious transaction reports showed thatGlasgow engaged in unlawful activities of estafa and violation of theSecurities Regulation Code (under Section 3(i)(9) and (13), RA9160, as amended); the proceeds of the unlawful activities weretransacted and deposited with CSBI in account no. CA-005-10-000121-5 thereby making them appear to have originated fromlegitimate sources; as such, Glasgow engaged in money laundering(under Section 4, RA 9160, as amended); and the AMLC subjectedthe account to freeze order and


(d) the reliefs prayed for, namely, the issuance of a TRO or writ ofpreliminary injunction and the forfeiture of the account in favor ofthe government as well as other reliefs just and equitable under thepremises.

regardless of the absence, pendency or outcome of a criminal prosecutionfor the unlawful activity or for money laundering, an action for civilforfeiture may be separately and independently prosecuted and resolved.

(3) NO there was no failure to prosecute on the part of the Republic




The form and substance of the Republic’s complaint substantially conformedwith Section 4, Title II of the Rule of Procedure in Cases of Civil Forfeiture.In relation thereto, Rule 12.2 of the Revised Implementing Rules andRegulations of RA 9160 states the following:

RULE 12Forfeiture Provisions

xxx xxx xxxRule 12.2. When Civil Forfeiture May be Applied. – When there is aSUSPICIOUS TRANSACTION REPORT OR A COVERED TRANSACTIONREPORT DEEMED SUSPICIOUS AFTER INVESTIGATION BY THEAMLC, and the court has, in a petition filed for the purpose, orderedthe seizure of any monetary instrument or property, in whole or inpart, directly or indirectly, related to said report, the Revised Rulesof Court on civil forfeiture shall apply.

RA 9160, as amended, and its implementing rules and regulations lay downtwo conditions when applying for civil forfeiture:

(1) when there is a suspicious transaction report or a covered transactionreport deemed suspicious after investigation by the AMLC (Anti-MoneyLaundering Council)

(2) the court has, in a petition filed for the purpose, ordered the seizure ofany monetary instrument or property, in whole or in part, directly orindirectly, related to said report.

Since account of Glasgow in CSB was (1) covered by several suspicioustransaction reports and (2) placed under the control of the trial court uponthe issuance of the writ of preliminary injunction, the conditions provided inRA 9160 were satisfied. Hence, the Republic, represented by the AMCL,

properly instituted the complaint for civil forfeiture.

Whether or not there is truth in the allegation that account of Glasgowcontains the proceeds of unlawful activities is an evidentiary matter thatmay be proven during trial. The complaint, however, did not even have toshow or allege that Glasgow had been implicated in a conviction for, or thecommission of, the unlawful activities of estafa and violation of theSecurities Regulation Code.

A criminal conviction for an unlawful activity is not a prerequisite for theinstitution of a civil forfeiture proceeding. Stated otherwise, a finding of guiltfor an unlawful activity is not an essential element of civil forfeiture. Thus,

(3) NO , there was no failure to prosecute on the part of the Republic.Immediately after the complaint was filed, the trial court ordered theprocess server to serve summons to Glasgow. The subpoena to Glasgowwas, however, returned unserved as Glasgow "could no longer be found atits given address" and had moved out of the building. Republic then filed amotion for issuance of alias summons and leave of court to serve summonsby publication. The court archived the case for failure to cause service ofalias summons, still, the Republic motioned the case to be reinstated.Meanwhile, the Republic continued to exert efforts to obtain informationfrom other government agencies on the whereabouts or current status ofrespondent Glasgow. Its efforts, however, proved futile. The alias summonswas again unserved. It was then that Glasgow filed the motion to dismiss.

Given these circumstances, how could the Republic be faulted for failure toprosecute the complaint for civil forfeiture? While there was admittedly adelay in the proceeding, it could not be entirely or primarily ascribed to theRepublic. That Glasgow’s whereabouts could not be ascertained was not onlybeyond the Republic’s control, it was also attributable to Glasgow which leftits principal office address without informing the Securities and ExchangeCommission or any official regulatory body of its new address. Moreover, asearly as October 8, 2003, the Republic was already seeking leave of court toserve summons by publication.

ADDINTIONAL RULING: the service of summons may be made bypublication in cases of civil forfeiture as they are proceedings in rem. TheRules of Procedure in Cases of Civil Forfeiture also allows summons bypublication in cases where the whereabouts of the owner are unknown andcannot be ascertained by diligent inquiry.

12. Freezing of AccountsSEC. 10, AMLA: Authority to Freeze. - Upon determination that

probable cause .exists that any deposit or similar account is in any wayrelated to an unlawful activity, the AMLC may issue a freeze order,which shall be effective immediately, on the account for a period notexceeding fifteen (15) days. Notice to the depositor that his account hasbeen frozen shall be issued simultaneously with the issuance of thefreeze order. The depositor shall have seventy-two (72) hours uponreceipt of the notice to explain why the freeze order should be lifted.The AMLC has seventy-two (72) hours to dispose of the depositor'sexplanation. If it fails to act within seventy-two (72) hours from receiptof the depositor’s explanation, the freeze order shall automatically bedissolved. The fifteen (15)-day freeze order of the AMLC may beextended upon order of the court, provided that the fifteen (15)-day


period shall be tolled pending the court's decision to extend the period.

No court shall issue a temporary restraining order or writ of injunctionagainst any freeze order issued by the AMLC except the Court ofA l th S C t

The CA issued a writ of preliminary injunction with regard to the petitionfiled by Lilia Cheng (last ruling contested in this case)

ISSUE Whether a bank inquiry order issued in accordance with section 10 AMLA




Appeals or the Supreme Court.

CasesRepublic v. EugenioFACTS (This case stemmed from the case of Agan v PIATCO)After the promulgation of the Agan case, a series of investigation wasconducted by the Ombudsman, the Compliance and Investigation Staff, andAnti-Money Laundering Council (AMLC). AMLC issued a resolutionauthorizing the Executive Director of AMLC to examine the bank accounts ofPantaleon Alvarez, Cheng Yong,Wilfredo Trinidad, Alfredo Liongson and theirrelated web accounts. Under the authority of such resolution, AMLC filed anapplication to inquire into or examine the deposits or investments ofAlvarez, Cheng Yong, Trinidad and Liongson with the Makati RTC, which thecourt granted. Months later, Special Prosecutor Dennis Villa-Ignaciorequested AMLC to investigate the accounts of Alvarez, PIATCO and allaccounts related to the annulled contract. AMLC issued another resolution,authorizing the executive director to inquire into the bank accounts named

in the letter. AMLC filed the same application, this time to the Manila RTC,which was raffled to Judge Antonio Eugenio Jr. The court likewise grantedsuch ex parte application. Alvarez filed an Urgent Motion to Stay ofEnforcement of Order, which the Manila RTC granted. The Republic filed amotion for reconsideration which was granted. Alvarez then filed an UrgentMotion and Manifestation, stating that AMLC was about to implement theManila RTC bank inquiry even though he intends to appeal such order. TheManila RTC refrained AMLC from implementing such order against Alvarez.Alvarez then filed an Urgent Ex Parte Motion for Clarification, alleging thatAMLC likewise cannot implement such order against the others stated in theorder. Manila RTC issued an order, stating that the ex parte applicationcannot be implemented in its totality (first of four rulings contested in thiscase).

Lilia Cheng, wife of Cheng Yong filed a Petition for Certiorari, TRO andpreliminary injunction against the orders of Makati and Manila RTC statinggrave abuse of discretion that AMLA can only inquire to bank accounts afterthe creation of the Anti-Money Laundering Act (AMLA), and not prior to itspromulgation. The CA issued a TRO, granting such petition (second of fourrulings contested in this case).

With relation to the Urgent Motion for Clarification, the Manila RTC issued anorder reiterated that bank inquiry order it issued cannot be implemented bythe AMLC until the appeal (of Alvarez of the order granting the ex parteapplication) is finally resolved (third of four rulings contested in this case).

Whether a bank inquiry order issued in accordance with section 10 AMLAmay be stayed with injunction

RULING YES . Under this section, the AMLC may file an application ex parte, withthe CA, and upon determination of probable cause, they may issue a freezeorder effective immediately. This is to prevent funds that is related to anymoney-laundering from being misused while the case is being tried. It is exparte because the fact of freezing the account must be kept secret from theowner, else the funds may just be moved elsewhere before the freeze ordermay be issued.

Since the application of AMLC has nothing to do with any of the providedenumerations under Section 11, it must prove that there is probable causewith the case, in order to inquire into the bank accounts. Probable causemay only be decided by the courts (Art III, Sec 2 of Constitution). Section10 contains the application for ex parte, but it is connected to freezing ofaccounts. This must be done ex parte, since notifying the accused my causehim to disburse the account before the order freezing the account is issued.Section 11 does not contain the application for ex parte, for the fact thatthere is nothing wrong with the accused knowing that his accounts are beingchecked. It is immaterial for the accused to know that his accounts arebeing checked, since he cannot hide the bank records to prove that theaccounts are linked to the crime imputed against him. Hence, using the exparte application found in section 10 in inquiring into bank accounts (section11) may be stayed with injunction.

13. Examination of AccountsSEC. 11, AMLA: Authority to Inquire into Bank Deposits. -Notwithstanding the provisions of Republic Act No. 1405, as amended;Republic Act No. 6426, as amended; Republic Act No. 8791, and other

laws, the AMLC may inquire into or examine any particular deposit orinvestment with any banking institution or non- bank financial institutionupon order of any competent court in cases of violation of this Act whenit has been established that there is probable cause that the deposits orinvestments involved are in any way related to a money launderingoffense: Provided, That this provision shall not apply to deposits andinvestments made prior to the effectivity of this Act.

14. AMLC; Composition and PowersSEC. 7, AMLA: Creation of Anti-Money Laundering Council(AMLC). – The Anti-Money Laundering Council is hereby created andshall be composed of the Governor of the Bangko Sentral ng Pilipinas as


chairman, the Commissioner of the Insurance Commission and theChairman of the Securities and Exchange Commission as members. TheAMLC shall act unanimously in the discharge of its functions as definedhereunder:

15. Mutual Assistance among StatesSEC. 13, AMLA: Mutual Assistance among States. –

1. Request for assistance from a Foreign State. - Where a foreign Statemakes a request for assistance in the investigation or prosecution ofa money laundering offense the AMLC may execute the request or




1. to require and receive covered transaction reports from coveredinstitutions;

2. to issue orders addressed to the appropriate Supervising Authorityor the covered institution to determine the true identity of the ownerof any monetary instrument or property subject of a coveredtransaction report or request for assistance from a foreign State, orbelieved by the Council, on the basis of substantial evidence to be inwhole or in part, wherever located, representing, involving. orrelated to, directly or indirectly, in any manner or by any means. theproceeds of an unlawful activity;

3. to institute civil forfeiture proceedings and all other remedialproceedings through the Office of the Solicitor General;

4. to cause the filing of complaints with the Department of Justice orthe Ombudsman for the prosecution of money laundering offenses;

5. to initiate investigations of covered transactions, money launderingactivities and other violations of this Act;

6. to freeze any monetary instrument or property alleged to beproceed of any unlawful activity;

7. to implement such measures as may be necessary and justifiedunder this Act to counteract money laundering;

8. to receive and take action in respect of, any request from foreignstates for assistance in their own anti-money laundering operationsprovided in this Act;

9. to develop educational programs on the pernicious effects of moneylaundering, the methods and techniques used in money laundering,the viable means of preventing money laundering and the effectiveways of prosecuting and punishing offenders; and

10. to enlist the assistance of any branch, department, bureau, office,agency or instrumentality of the government, including government-owned and -controlled corporations, in undertaking any and all anti-money laundering operations, which may include the use of itspersonnel, facilities and resources for the more resolute prevention,detection and investigation of money laundering offenses andprosecution of offenders.

a money laundering offense, the AMLC may execute the request orrefuse to execute the same and inform the foreign State of any validreason for not executing the request or for delaying the executionthereof. The principles of mutuality and reciprocity shall, for thispurpose, be at all times recognized.

2. Power of the AMLC to Act on a Request for Assistance from aForeign State. - The AMLC may execute a request for assistancefrom a foreign State by: (1) tracking down, freezing, restraining andseizing assets alleged to be proceeds of any unlawful activity underthe procedures laid down in this Act; (2) giving information neededby the foreign State within the procedures laid down in this Act; and(3) applying for an order of forfeiture of any monetary instrument orproperty in the court: Provided, That the court shall not issue suchan order unless the application is accompanied by an authenticatedp copy of the order of a court in the requesting State ordering theforfeiture of said monetary instrument or property of a person whohas been convicted of a money laundering offense in the requestingState, and a certification of an affidavit of a competent officer of therequesting State stating that the conviction and the order offorfeiture are final and then no further appeal lies in respect oreither.

3. Obtaining Assistance from Foreign States. -The AMLC may make arequest to any foreign State for assistance in (1) tracking down,freezing, restraining and seizing assets alleged to be proceeds ofany unlawful activity; (2) obtaining information that it needs relatingto any covered transaction, money laundering offense or any othermatter directly or indirectly, related thereto; (3) to the extentallowed by the law of the Foreign State, applying with the propercourt therein for an order to enter any premises belonging to or in

the possession or control of, any or all of the persons named in saidrequest, and/or search any or all such persons named thereinand/or remove any document, material or object named in saidrequest: Provided, That the documents accompanying the request insupport of the application have been duly authenticated inaccordance with the applicable jaw or regulation of the foreignState; and (4) applying for an order of forfeiture of any monetaryinstrument or property in the proper court in the foreign State:Provided, That the request is accompanied by an authenticated copyof the order of the regional trial court ordering the forfeiture of saidmonetary instrument or property of a convicted offender and anaffidavit of the clerk of court stating that the conviction and the


order of forfeiture are final and that no further appeal lies in respectof either.

4. Limitations on Request for Mutual Assistance. – The AMLC mayrefuse to comply with any request for assistance where the action

IV. LOAN FUNCTION

A. Basic Concepts1. Grant, Purpose and Requirement of Loans




refuse to comply with any request for assistance where the actionsought by the request contravenes any provision of the Constitutionor the execution of a request is likely to prejudice the nationalinterest of the Philippines unless therein is a treaty between thePhilippines and the requesting State relating to the provision ofassistance in relation to money laundering offenses.

5. Requirements for Requests for Mutual Assistance from ForeignStates. - A request for mutual assistance from a foreign State must(1) confirm that an investigation or prosecution is being conductedin respect of a money launderer named therein or that he has beenconvicted of any money laundering offense; (2) state the groundson which any person is being investigated or prosecuted for moneylaundering or the details of his conviction; (3) gives sufficientparticulars as to the identity of said person; (4) give particularssufficient to identify any covered institution believed to have anyinformation, document, material or object which may be ofassistance to the investigation or prosecution; (5) ask from thecovered institution concerned any information, document, materialor object which may be of assistance to the investigation orprosecution; (6) specify the manner in which and to whom saidinformation, document, material or object detained pursuant to saidrequest, is to be produced; (7) give all the particulars necessary forthe issuance by the court in the requested State of the writs, ordersor processes needed by the requesting State; and (8) contain suchother information as may assist in the execution of the request.

6. Authentication of Documents. - For purposes of this Section, adocument is authenticated if the same is signed or certified by a

judge, magistrate or equivalent officer in or of, the requesting State,and authenticated by the oath or affirmation of a witness or sealedwith an official or public seal of a minister, secretary of State, or

officer in or of, the government of the requesting State, or of theperson administering the government or a department of therequesting territory, protectorate or colony. The certificate ofauthentication may also be made by a secretary of the embassy orlegation, consul general, consul, vice consul, consular agent or anyofficer in the foreign service of the Philippines stationed in theforeign State in which the record is kept, and authenticated by theseal of his office.

7. Extradition. -The Philippines shall negotiate for the inclusion ofmoney laundering offenses as herein defined among extraditableoffenses in all future treaties.

a. Grant of LoansSEC. 39, GBL : A bank shall grant loans and other creditaccommodations only in amounts and for the periods of timeessential for the effective completion of the operations to be

financed. Such grant of loans and other creditaccommodations shall be consistent with safe and soundbanking practices.

b. Purpose of LoansSEC. 39, GBL : The purpose of all loans and other creditaccommodations shall be stated in the application and in thecontract between the bank and the borrower. If the bankfinds that the proceeds of the loan or other creditaccommodation have been employed, without its approval,for purposes other than those agreed upon with the bank, itshall have the right to terminate the loan or other creditaccommodation and demand immediate repayment of the

obligation.

c. Requirement of LoansSEC. 40, GBL : Before granting a loan or other creditaccommodation, a bank must ascertain that the debtor iscapable of fulfilling his commitments to the bank.

Toward this end, a bank may demand from its creditapplicants a statement of their assets and liabilities and oftheir income and expenditures and such information as maybe prescribed by law or by rules and regulations of theMonetary Board to enable the bank to properly evaluate thecredit application which includes the corresponding financialstatements submitted for taxation purposes to the Bureau ofInternal Revenue. Should such statements prove to be falseor incorrect in any material detail, the bank may terminateany loan or other credit accommodation granted on thebasis of said statements and shall have the right to demandimmediate repayment or liquidation of the obligation.

In formulating rules and regulations under this Section, theMonetary Board shall recognize the peculiar characteristicsof micro financing, such as cash flow-based lending to thebasic sectors that are not covered by traditional collateral.


CasesUnited Coconut Planters Bank v Ramos, 415 SCRA 596 (2003)FACTS UCPB granted a P2.8M loan to Zamboanga Development Corp. (ZDC) withVIvencio Ramos and the Spouses Teofilo Ramos, Sr. and Amelita Ramos as

(3) Whether the respondent is entitled to damages? YES.

HELD (1) It bears stressing that the petitioner is a banking corporation, a financialinstitution with power to issue its promissory notes intended to circulate as




VIvencio Ramos and the Spouses Teofilo Ramos, Sr. and Amelita Ramos assureties. Teofilo Ramos Sr. was the Executive officer of Iglesia ni Kristo.ZDC defaulted on its obligation. UCPB filed a collection suit and obtained afavorable judgment. A writ of execution was issued for the enforcement ofthe decision ordering Sheriff Villapana to levy and attach all the real andpersonal properties belonging to ZDC and the Ramoses to satisfy the

judgment.

To help the Sheriff implement the writ, UCPB through its employeesascertained if defendants (ZDC et al) had any leviable real and personalproperty. UCPB produced a copy of a Tax Declaration covering a property inQuezon City under the name of Teofilo C. Ramos, President and Chairman ofRamdustrial Corp. married to Rebecca E. Ramos. UCPB informed the Sheriffof the existence of such property and caused the annotation of a notice oflevy on the title thereof.

Meanwhile, Ramdustrial Corporation applied for a loan with UCPBusing thesame property as collateral. Ramdustrial intended to use the proceeds of theloan as additional capital to participate in a bidding project. Teofilo C.Ramos was informed that there was an annotation on said property,because of which the bank had to hold in abeyance any action on its loanapplication. Teofilo C. Ramos was of course surprised. He sent a letter to theSheriff to have the annotation cancelled or else appropriate legal action willbe taken.

The loan was eventually approved. Business was not good so Teofilo C.Ramos and Rebecca Ramos again applied for a loan with Planters Dev’t Bankto pay their obligations with UCPB. Again they encountered problems withthe approval of the loan due to the annotation on their property which untilnow has not been cancelled. Spouses Ramos again demanded UCPB to havethe annotation cancelled. UCPB told the spouses to file a motion to cancel

said annotation and UCPB promised that the will not oppose. The annotationwas eventually cancelled. Still spouses Ramos filed an action for damagesagainst UCPB.

ISSUES (1) Whether the petitioner acted negligently in causing the annotation oflevy on the title of the respondent? YES.

(2) Whether the respondent was the real party-in-interest as plaintiff to filean action for damages against the petitioner considering that the loanapplicant with UCPB and PDB was RAMDUSTRIAL CORPORATION? YES.

institution with power to issue its promissory notes intended to circulate asmoney (known as bank notes); or to receive the money of others on generaldeposit, to form a joint fund that shall be used by the institution for its ownbenefit, for one or more of the purposes of making temporary loans anddiscounts, of dealing in notes, foreign and domestic bills of exchange, coinbullion, credits, and the remission of money; or with both these powers, andwith the privileges, in addition to these basic powers, of receiving specialdeposits, and making collection for the holders of negotiable paper, if theinstitution sees fit to engage in such business.[25] In funding thesebusinesses, the bank invests the money that it holds in trust of itsdepositors. For this reason, we have held that the business of a bank is oneaffected with public interest, for which reason the bank should guard againstloss due to negligence or bad faith.[26] In approving the loan of anapplicant, the bank concerns itself with proper informations regarding itsdebtors. The petitioner, as a bank and a financial institution engaged in thegrant of loans, is expected to ascertain and verify the identities of thepersons it transacts business with.[27] In this case, the petitioner knew thatthe sureties to the loan granted to ZDC and the defendants in Civil Case No.94-1822 were the Spouses Teofilo Ramos, Sr. and Amelita Ramos. Thenames of the Spouses Teofilo Ramos, Sr. and Amelita Ramos were specifiedin the writ of execution issued by the trial court.

The petitioner has access to more facilities in confirming the identity of their judgment debtors. It should have acted more cautiously, especially sincesome uncertainty had been reported by the appraiser whom the petitionerhad tasked to make verifications. It appears that the petitioner treated theuncertainty raised by appraiser Eduardo C. Reniva as a flimsy matter. Itplaced more importance on the information regarding the marketability andmarket value of the property, utterly disregarding the identity of theregistered owner thereof.

(2) It must be underscored that the registered owner of the property whichwas unlawfully levied by the petitioner is the respondent. As owner of theproperty, the respondent has the right to enjoy, encumber and dispose ofhis property without other limitations than those established by law. Theowner also has a right of action against the holder and possessor of thething in order to recover it.[32] Necessarily, upon the annotation of thenotice of levy on the TCT, his right to use, encumber and dispose of hisproperty was diminished, if not negated. He could no longer mortgage thesame or use it as collateral for a loan.

Arising from his right of ownership over the said property is a cause ofaction against persons or parties who have disturbed his rights as an


owner.[33] As an owner, he is one who would be benefited or injured by the judgment, or who is entitled to the avails of the suit[34] for an action fordamages against one who disturbed his right of ownership.

Hence, regardless of the fact that the respondent was not the loan applicant

Banco De Oro-EPCI Inc v JAPRL Development Corporation, 551 SCRA342 (2008)FACTSJPRL obtained a P230M loan from Banco de Oro but soon after defaulted onits obligations. It was later discovered that the loan was obtained by JPRL by




Hence, regardless of the fact that the respondent was not the loan applicantwith the UCPB and PDB, as the registered owner of the property whoseownership had been unlawfully disturbed and limited by the unlawfulannotation of notice of levy on his TCT, the respondent had the legalstanding to file the said action for damages. In both instances, therespondent’s property was used as collateral of the loans applied for byRamdustrial Corporation. Moreover, the respondent, together with his wife,was a surety of the aforesaid loans.

While it is true that the loss of business opportunities cannot be used as areason for an action for damages arising from loss of business opportunitiescaused by the negligent act of the petitioner, the respondent, as aregistered owner whose right of ownership had been disturbed and limited,clearly has the legal personality and cause of action to file an action fordamages. Not even the respondent’s failure to have the annotationcancelled immediately after he came to know of the said wrongful levynegates his cause of action.

(3) For the award of moral damages to be granted, the following must exist:(1) there must be an injury clearly sustained by the claimant, whether

physical, mental or psychological;(2) there must be a culpable act or omission factually established;(3) the wrongful act or omission of the defendant is the proximate cause

of the injury sustained by the claimant; and(4) the award for damages is predicated on any of the cases stated in

Article 2219 of the Civil Code.[35]

In the case at bar, although the respondent was not the loan applicant andthe business opportunities lost were those of Ramdustrial Corporation, allfour requisites were established. First, the respondent sustained injuries inthat his physical health and cardio-vascular ailment were aggravated; his

fear that his one and only property would be foreclosed, hounded himendlessly; and his reputation as mortgagor had been tarnished. Second,the annotation of notice of levy on the TCT of the private respondent waswrongful, arising as it did from the petitioner’s negligent act of allowing thelevy without verifying the identity of its judgment debtor. Third, suchwrongful levy was the proximate cause of the respondent’s misery. Fourth,the award for damages is predicated on Article 2219 of the Civil Code,particularly, number 10 thereof

Liable for Attorneys fees but no exemplary damages.

its obligations. It was later discovered that the loan was obtained by JPRL byfraudulently bloating its sales revenue. Upon knowing of this fraud, BDOdemanded immediate payment of JPRL’s outstanding obligations.

Banco de Oro tried to attach the properties of JPRL but was unsuccessful inall its attempt since no proper officer of JPRL could be found and served withsummonses.

Meanwhile, JPRL filed two applications for corporate rehabilitation. The firstwas denied while the second was granted. By virtue of the grantedrehabilitation, all proceedings against JPRL. Banco de Oro appealed thecase alleging that JPRL maliciously evaded the service of summonses toprevent the court from acquiring jurisdiction. Furthermore, they employedbad faith to delay proceedings by cunningly exploiting proceduraltechnicalities to avoid payment of their obligation.

ISSUESWhether there was malice and bad faith on the part of JPRL by avoidingservice of summons? Whether the court acquired jurisdiction even of thesummons were served only to administrative officers of JPRL and not to theofficers enumerated in the Corp Code?

HELDThe Makati RTC may proceed to hear Civil Case No. 03-991 only againstArollado if there is no ground to go after JAPRL and RFC (as will later bediscussed). A creditor can demand payment from the surety solidarily liablewith the corporation seeking rehabilitation.

Respondents abused procedural technicalities (albeit unsuccessfully) for thesole purpose of preventing, or at least delaying, the collection of theirlegitimate obligations. Their reprehensible scheme impeded the speedy

dispensation of justice. More importantly, however, considering the amountinvolved, respondents utterly disregarded the significance of a stable andefficient banking system to the national economy.

Banks are entities engaged in the lending of funds obtained throughdeposits[45] from the public.[46] They borrow the public's excess money(i.e., deposits) and lend out the same.[47] Banks therefore redistributewealth in the economy by channeling idle savings to profitable investments.

Banks operate (and earn income) by extending credit facilities financedprimarily by deposits from the public.[48] They plough back the bulk of saiddeposits into the economy in the form of loans.[49] Since banks deal with




b. Other Security RequirementsSEC. 42, GBL: Other Security Requirements for BankCredits . - The Monetary Board may, by regulation, prescribefurther security requirements to which the various types ofbank credits shall be subject, and, in accordance with the

Monetary Board, unless the same are welt-secured and inthe process of collection shall be considered bad debtswithin the meaning of this Section.

The Monetary Board may fix, by regulation or by order in a




jauthority granted to it in Section 106 of the New CentralBank Act, the Board may by regulation, reduce themaximum ratios established in Sections 36 and 37 of thisAct, or, in special cases, increase the maximum ratiosestablished therein.

SEC. 106, NCBA: Required Security Against Bank Loans. —In order to promote liquidity and solvency of the bankingsystem, the Monetary Board may issue such regulations as itmay deem necessary with respect to the maximumpermissible maturities of the loans and investments whichthe banks may make, and the kind and amount of securityto be required against the various types of credit operationsof the banks.

c. Terms and ConditionsSEC. 43, GBL: Authority to Prescribe Terms and Conditionsof Loans and Other Credit Accommodations . - The MonetaryBoard, may, similarly in accordance with the authoritygranted to it in Section 106 of the New Central Bank Act,and taking into account the requirements of the economy forthe effective utilization of long-term funds, prescribe thematurities, as well as related terms and conditions forvarious types of bank loans and other creditaccommodations. Any change by the Board in the maximummaturities, as well as related terms and conditions forvarious types of bank loans and other creditaccommodations . Any change by the Board in themaximum maturities shall apply only to loans and othercredit accommodations made after the date of such action.

d. Renewal or ExtensionSEC. 48, GBL: Renewal or Extension of Loans and OtherCredit Accommodations . – The Monetary Board may, byregulation, prescribe the conditions and limitations underwhich a bank may grant extensions or renewals of its loansand other credit accommodations.

e. Provisions for Losses and Write-OffsSEC. 49, GBL: Provisions for Losses and Write-Offs . - Alldebts due to any bank on which interest is past due andunpaid for such period as may be determined by the

y y y g yspecific case, the amount of reserves for bad debts ordoubtful accounts or other contingencies.

Writing off of loans, other credit accommodations, advancesand other assets shall be subject to regulations issued bythe Monetary Board.

4. Development Assistance IncentivesSEC. 46, GBL: Development Assistance Incentives . - The BangkoSentral shall provide incentives to banks which, without governmentguarantee, extend loans to finance educational institutionscooperatives, hospitals and other medical services, socialized or low-cost housing, local government units and other activities with socialcontent.

5. Disclosure RequirementsSEC. 2, RA 3765: Declaration of Policy. It is hereby declared to bethe policy of the State to protect its citizens from a lack ofawareness of the true cost of credit to the user by assuring a fulldisclosure of such cost with a view of preventing the uninformed useof credit to the detriment of the national economy.

SEC. 4, RA 3765: Any creditor shall furnish to each person towhom credit is extended, prior to the consummation of thetransaction, a clear statement in writing setting forth, to the extentapplicable and in accordance with rules and regulations prescribedby the Board, the following information:

(5) The cash price or delivered price of the property or service tobe acquired;

(6) The amounts, if any, to be credited as down payment and/ortrade-in;

(7) The difference between the amounts set forth under clauses(1) and (2);

(8) The charges, individually itemized, which are paid or to bepaid by such person in connection with the transaction butwhich are not incident to the extension of credit;

(9) The total amount to be financed;


(10) The finance charge expressed in terms of pesos andcentavos; and

(11) The percentage that the finance bears to the total amount tobe financed expressed as a simple annual rate on the

CasesNew Sampaguita Builders Construction, Inc. v PNB, 435 SCRA 565(2004)FACTSNSBC obtained a loan with PNB in an aggregate amount of P8M, using or




outstanding unpaid balance of the obligation.

SEC. 6, RA 3765: (a) Any creditor who in connection with anycredit transaction fails to disclose to any person any information inviolation of this Act or any regulation issued thereunder shall beliable to such person in the amount of P100 or in an amount equalto twice the finance charged required by such creditor in connectionwith such transaction, whichever is the greater, except that suchliability shall not exceed P2,000 on any credit transaction. Action torecover such penalty may be brought by such person within oneyear from the date of the occurrence of the violation, in any court ofcompetent jurisdiction. In any action under this subsection in whichany person is entitled to a recovery, the creditor shall be liable forreasonable attorney's fees and court costs as determined by thecourt.

(b) Except as specified in subsection (a) of this section, nothingcontained in this Act or any regulation contained in this Act or anyregulation thereunder shall affect the validity or enforceability of anycontract or transactions.

(c) Any person who willfully violates any provision of this Act or anyregulation issued thereunder shall be fined by not less than P1,00 ormore than P5,000 or imprisonment for not less than 6 months, normore than one year or both.

(d) No punishment or penalty provided by this Act shall apply to thePhilippine Government or any agency or any political subdivisionthereof.

(e) A final judgment hereafter rendered in any criminal proceedingunder this Act to the effect that a defendant has willfully violatedthis Act shall be prima facie evidence against such defendant in anaction or proceeding brought by any other party against suchdefendant under this Act as to all matters respecting which said

judgment would be an estoppel as between the parties thereto.

mortgaging the real estate properties registered in the name of its Pres. Mr.Dee as collateral. Spouses Dee were authorized to secure the loan and tosign any document which may be required by PNB. Further, the spousesshall act as sureties or co- obligors who shall be solidarily liable with NSBCfor the payment of any of the obligations.

Upon request of PNB, the P8M loan was broken down into a revolving creditline of P7.7M and an unadvised line of P0.3M for additional operating andworking capital to mobilize its various construction projects.

The loan was secured by a first mortgage on several parcels of residentialland owned by the spouses Dee. It was further secured by the joint andseveral signatures of spouses Dee, who signed as accommodation-mortgagors since all the collaterals were owned by them.

NSBC also executed 3 promissory notes (PNs) as follows: 1) in the amountof P5M (issued on June 29, 1989 and to mature on: Oct. 27); 2) P2.7M withdue date on Dec.30; 3) in the amount of P300k (issued on Sept 6, 1989,with due date on Jan. 4, 1990). NSBC also signed 2 Credit Agreements.Then, spouses Dee also executed a Joint and Solidary Agreement (JSA) infavor of PNB.

Later on, NSBC failed to pay their obligations under the PNs. Mr. Dee askedfor an extension for the payment of interests and the restructuring of itsloan. Petitioners tried to pay but there are still unpaid obligations.

PNB accepted Mr. Dee’s proposal to remit to the bank post-dated checkscovering interests, penalties and part of the principals of his due account,provided however, that the total payment should be P4M++ which wouldcover the amount of P1M++ as principal, and P3M++ as interests and

penalties! Mr. Dee reiterated his proposal for the settlement of NSBC’s pastdue loan account (P7M++). Then, Mr. Dee tendered 4 post-dated checksaggregating to P1M++. However, 2 of those checks were dishonored andreturned due to a ‘stop payment order’ from petitioners.

PNB demanded for NSBC to fulfill its obligation. But petitioners still failed topay their loan obligations, so to make the story shorter, petitioners’properties were extrajudicially foreclosed and sold at public auction(P10M++) to PNB. Petitioners failed to redeem the properties within 1 year.However, the proceeds of the sale were not sufficient to cover PNB’s totalclaim (12M++) and thus demanded from petitioners the deficiency of


P2M++ plus interest and other charges, until the amount was fully paid.Petitioners refused to pay the same.

CA RULING: “The increases in the interest rates on NSBCI’s loan were alsoheld to be authorized by law and the Monetary Board and -- like the

B. Terms and Conditions1. Amortization

SEC. 44, GBL: Amortization on Loans and Other Credit Accommodations . - The amortization schedule of bank loans andother credit accommodations shall be adapted to the nature of the




increases in penalty rates -- voluntarily and freely agreed upon by theparties in the Credit Agreements they executed. Thus, these increases werebinding upon petitioners. However, after considering that two to three ofPetitioner NSBCI’s projects covered by the loan were affected by theeconomic slowdown in the areas near the military bases in the cities ofAngeles and Olongapo, the appellate court annulled and deleted theadjustment in penalty from 6 percent to 36 percent per annum. Theattorney’s fees were also reduced by the appellate court from 10 percent to1 percent of the total indebtedness. Respondent was also declared to havethe unquestioned right to foreclose the Real Estate Mortgage. It was allowedto recover any deficiency in the mortgage account not realized in theforeclosure sale, since petitioner- spouses had agreed to be solidarily liablefor all sums due and payable to respondent. Finally, the appellate courtconcluded that the extrajudicial foreclosure proceedings and auction salewere valid”

ISSUES 1. W/N the loan accounts were bloated accounts YES.2. W/N the foreclosure and the subsequent claim for deficiency are valid andproper NO.

HELD 1. YES. Petitioner NSBC’s loan accounts with PNB appear to be bloated withsome iniquitous imposition of interests, penalties, other charges andattorney’s fees. The Court primarily held that the increases in interest arebaseless.

The 3 PNs issued specified the interest rate to be charged: 19.5% in thefirst, and 21.5 in the second and third. However, a uniform clause thereinpermitted PNB to increase the rate “within the limits allowed by law at any

time depending on whatever policy it may adopt in the future” without evengiving prior notice to petitioners.

Petitioners’ accessory duty to pay interest did not give PNB unrestrainedfreedom to charge any rate other than that which was agreed upon. Nointerest shall be due, unless expressly stipulated in writing. The “unilateraldetermination and imposition” of increased rates is violative of the principleof mutuality of contracts.

poperations to be financed.

In case of loans and other credit accommodations with maturities ofmore than five (5) years, provisions must be made for periodicamortization payments, but such payments must be made at leastannually: Provided, however, That when the borrowed funds are tobe used for purposes which do not initially produce revenuesadequate for regular amortization payments therefrom, the bankmay permit the initial amortization payment to be deferred untilsuch time as said revenues are sufficient for such purpose, but in nocase shall the initial amortization date be later than five (5) yearsfrom the date on which the loan or other credit accommodation isgranted.

In case of loans and other credit accommodations to micro financesectors, the schedule of loan amortization shall take intoconsideration the projected cash flow of the borrower and adopt thisinto the terms and conditions formulated by banks.

2. Pre-PaymentSEC. 45, GBL: Prepayment of Loans and Other Credit

Accommodations . – A borrower may at any time prior to the agreedmaturity date prepay, in whole or in part, the unpaid balance of anybank loan and other credit accommodation, subject to suchreasonable terms and conditions as may be agreed upon betweenthe bank and its borrower.

3. InterestART. 1956, NCC: No interest shall be due unless it has beenexpressly stipulated in writing.

a. No CeilingCasesBulos Jr v Yasuma, 527 SCRA 727 (2007)FACTS The original loan obtained by the petitioner, together with Dr. Lim and Atty.Tabalingcos, from the respondent amounted to P2,500,000.00 with 4%interest for three months, or from 11 October 1988 up to 10 January 1989,and in case of extension of the loan, the interest of 5% per month will beimposed. The obligation of the petitioner, Dr. Lim and Atty. Tabalingcos was

joint and solidary. Petitioner failed to pay the loan by 10 January 1989;thus, from 11 October 1988 up to February 1989, the loan obligation,


including interest, reached a total amount of P2,700,000.00. Petitionermade a partial payment via a dacion en pago , amounting to P1,630,750.00,which was deducted from the total loan obligation of P2,700,000.00 leavinga balance of P1,069,000.00 as of 24 February 1989. By March 1989, thebalance of the loan began earninga 5% interest per month after all the

interest rate agreed upon by parties does not violate the Usury Law, asamended by P.D. 116. The Court has consistently held that for sometimenow, usury has been legally non-inexistent and that interest can now becharged as lender and borrower may agree upon.




parties agreed to an increase in the interest rate during the extendedperiod. Taking into consideration the outstanding loan balance ofP1,069,000.00, plus interest, and minus a discount granted by respondent,the amount still due respondent was determined by the parties to beP2,240,000.00. And to pay the remaining indebtedness, Atty. Tabalingcosissued a check covering the amount but it was dishonored, therefore, theindebtedness remains at P2,240,000.00 .

ISSUE Whether or not the imposed interest (4% per month imposed originally bythe bank and the lowered rate of 21% p.a. imposed by the RTC) has legaland factual basis.

RULING NO, the interest is highly unconscionable and inordinate. The agreedinterest rate of 4% per month or 48% per annum is unconscionable andmust be mitigated.Following established jurisprudence, the legal interestrate of 12% should apply, computed from the date of judicial demand, thatis, 7 April 1990.The aforequoted paragraph 3 of the guidelines is alsoappropriate herein, and a 12% interest per annum is imposed on petitionersmonetary liability to respondent.

Bacolor v Bangko Filipino Savings and Mortgage Bank, 515 SCRA 79(2007)FACTS On February 11, 1982, spouses Zacarias and Catherine Bacolor, hereinpetitioners, obtained a loan of P244,000.00 from Banco Filipino Savings andMortgage Bank, Dagupan City Branch, respondent. They executed apromissory note providing that the amount shall be payable within a periodof ten (10) years with a monthly amortization of P5,380.00 beginning March

11, 1982 and every 11th day of the month thereafter; that the interest rateshall be twenty-four percent (24%) per annum. From March 11, 1982 toJuly 10, 1991, petitioners paid respondent bank P412, 199.36. Thereafter,they failed to pay the remaining balance of the loan.

ISSUE Whether or not the interest of 24% p.a. imposed is legal?

RULING In the present case, the term of the subject loan is for a period of 10 years.Considering that its maturity is more than 730 days, the interest rate is notsubject to any ceiling following the above provision. Therefore, the 24%

Petitioners also cannot find refuge in Medel. In this case, what this Courtdeclared as unconscionable was the imposition of a 66% interest rate perannum. In the instant case, the interest rate is only 24% per annum ,agreed upon by both parties. By no means can it be consideredunconscionable or excessive.

b. In the absence of stipulationSEC. X305.1, MRB: Rate of interest in the absence ofstipulation. The rate of interest for the loan or forbearanceof any money, goods or credits and the rate allowed in

judgments, in the absence of expressed contract as to suchrate of interest, shall be twelve percent (12%) per annum.

c. Escalation Clause, when allowableART. 1308, NCC: The contract must bind both contractingparties; its validity or compliance cannot be left to the will ofone of them.

SEC. X305.2, MRB: Escalation clause; when allowable.Parties to an agreement pertaining to a loan or forbearanceof money, goods or credits may stipulate that the rate ofinterest agreed upon may be increased in the event that theapplicable maximum rate of interest is increased by theMonetary Board: Provided, That such stipulation shall bevalid only if there is also a stipulation in the agreement thatthe rate of interest agreed upon shall be reduced in theevent that the applicable maximum rate of interest isreduced by law or by the Monetary Board: Provided, further,That the adjustment in the rate of interest agreed upon shalltake effect on or after the effectivity of the increase or

decrease in the maximum rate of interest.CasesPNB v CA, 196 SCRA 536 (1991)FACTS Ambrosio Padilla applied for and was granted a by PNB a credit line ofP1.8M, secured by a real estate mortgage, for a term of two years with 18%interest per annum.

The Real Estate Mortgage Contract provided that:

(k) INCREASE OF INTEREST RATE




ISSUE W/N the floating rate of interest imposed by CBTC is valid.

RULING NO . The trust agreement provides:

I WE j i l d ll i d i h

ordered Equitable to pay moral/exemplary damages to respondents. The CAdismissed the appeal of Equitable

ISSUE W/N there was extraordinary deflation.




I, WE jointly and severally agree to any increase or decrease in theinterest rate which may occur after July 1, 1981, when the CentralBank floated the interest rate, and to pay additionally the penalty of1% per month until the amount/s or installment/s due and unpaidunder the trust receipt on the reverse side hereof is/are fully paid

The stipulation is invalid, having no reference rate set by either by it or bythe Central Bank, essentially leaving the determination thereof to the CBTC.

While it may be acceptable for banks to stipulate interest rates that aredepended upon prevailing market conditions, there should always be areference rate upon which to peg such variable interest. An example of suchis given in Polotan v. CA – “if there occurs any change in the prevailingmarket rates, the new interest rate shall be the guiding rate. In thisexample, the basis of any increase / decrease is the market rates. In thepresent case, there was no basis for any increase / decrease.

*The transaction is a simple loan. It is not a trust receipt as the goods wasreceived before the trust receipt was executed. (Vic is gay) Thus,respondents were required to comply with their loan obligation.

4. Extraordinary Inflation/DeflationART. 1250, NCC: In case an extraordinary inflation or deflation ofthe currency stipulated should supervene, the value of the currencyat the time of the establishment of the obligation shall be the basisof payment, unless there is an agreement to the contrary.

CasesEPCI Bank v Ng Sheung Ngor, 541 SCRA 223 (2007)FACTS

Ng Sheung Ngor, Ken Appliance Division and Benjamin Go (Respondents)filed an annulment/reformation case against Equitable PCI Bank and itsemployees. They claim that the Equitable induced them to avail of its Peso-Dollar credit facilities (evidenced by Promissory Notes) by offering lowinterest rates. However, there were not aware that escalation clauses werealso stipulated, thus allowing Equitable to increase interest rates w/o theirconsent.

RTC validated the transaction but invalidated the escalation clause.Nevertheless, it took judicial notice of extraordinary deflation during theintervening period and ordered to use 1996 Dollar Exchange Rate. It also

RULING NO . Extraordinary inflation exists when there is an unusual decrease in thepurchasing power of the currency and such decrease could not bereasonably foreseen or manifestly beyond the contemplation of the parties

at the time of the obligation. Extraordinary Deflation involves an inversesituation.

For Extraordinary inflation/deflation to affect an obligation, the followingmust be present. (1) official declaration by the BSP (2) obligation wascontractual in nature (3) parties expressly agreed to consider the effects ofextraordinary inflation/deflation.

In the present case, BSP never declared a situation of extraordinaryinflation. In addition, the parties did not agree to recognize the effects ofextraordinary inflation. Thus, the rate should be pegged at the simply onexchange rate fixed by the BSP on the date of maturity.

*the promissory notes are valid because despite being a contract ofadhesion, there was no situation where the dominant party took advantageof the weakness of the other party.

*Escalation clauses in this case are void as Equitable as unbridled discretionin determining the rate when the notes are extended, not based by law orby the Monetary Board. (Again, Vic is gay) Thus, the petitioners wererequired to comply with their obligation with 12% legal interest .

5. RestructuringSEC. X322, MRB: Restructured Loans; General Policy. Banks shallhave full discretion in the restructuring of loans in order to provide

flexibility in arranging the repayment of such loans withoutimpairing or endangering the lending bank’s financial interest,except in special cases approved by the Monetary Board such asloans funded by foreign currency obligations. However, therestructuring of loans granted to DOSRI should be upon terms notless favorable to the bank than those offered to others. Whileagreements on loan restructuring should be considered asmanagement tools to maintain or improve the soundness of thebank’s lending operations, these should be drawn mainly to assistborrowers towards the settlement of their obligations, taking intoaccount their capacity to pay.


C. Single Borrowers Limit

1. CeilingsSEC. 35.1, GBL : Except as the Monetary Board may otherwiseprescribe for reasons of national interest, the total amount of loans,

di d i d b d fi d b h

2. What is Included in CeilingSEC. 35.3, GBL: The above prescribed ceilings shall include:

(a) the direct liability of the maker or acceptor of paperdiscounted with or sold to such bank and the liability of ag l d d g t h bt i l




credit accommodations and guarantees as may be defined by theMonetary Board that may be extended by a bank to any person,partnership, association, corporation or other entity shall at no timeexceed twenty percent (20%) of the net worth of such bank. Thebasis for determining compliance with single borrower limit is thetotal credit commitment of the bank to the borrower.

SEC. 35.2, GBL: Unless the Monetary Board prescribes otherwise,the total amount of loans, credit accommodations and guaranteesprescribed in the preceding paragraph may be increased by anadditional ten percent (10%) of the net worth of such bank providedthe additional liabilities of any borrower are adequately secured bytrust receipts, shipping documents, warehouse receipts or othersimilar documents transferring or securing title covering readilymarketable, non-perishable goods which must be fully covered byinsurance.

SEC. 24, GBL: Equity Investments of a Universal Bank . – Auniversal bank may, subject to the conditions stated in thesucceeding paragraph, invest in the equities of allied and non-alliedenterprises as may be determined by the Monetary Board. Alliedenterprises may either be financial or non-financial.

Except as the Monetary Board may otherwise prescribe:

24.1. The total investment in equities of allied and non-alliedenterprises shall not exceed fifty percent (50%) of the networth of the bank; and

24.2. The equity investment in any one enterprise, whetherallied or non-allied, shall not exceed twenty-five percent(25%) of the net worth of the bank.

As used in this Act, “net worth” shall mean the total of theunimpaired paid-in capital including paid-in surplus, retainedearnings and undivided profit, net of valuation reserves and otheradjustments as may be required by the Bangko Sentral. Theacquisition of such equity or equities is subject to the prior approvalof the Monetary Board which shall promulgate appropriateguidelines to govern such investments. .

general endorser, drawer or guarantor who obtains a loan orother credit accommodation from or discounts paper with orsells papers to such bank;

(b) in the case of an individual who owns or controls a majority

interest in a corporation, partnership, association or anyother entity, the liabilities of said entities to such bank;

(c) in the case of a corporation, all liabilities to such bank of allsubsidiaries in which such corporation owns or controls amajority interest; and

(d) in the case of a partnership, association or other entity, theliabilities of the members thereof to such bank.

SEC. 35.4, GBL: Even if a parent corporation, partnership,association, entity or an individual who owns or controls a majorityinterest in such entities has no liability to the bank, the MonetaryBoard may prescribe the combination of the liabilities of subsidiarycorporations or members of the partnership, association, entity orsuch individual under certain circumstances, including but notlimited to, any of the following situations: .

(e) the parent corporation, partnership, association, entity orindividual guarantees the repayment of the liabilities;

(f) the liabilities were incurred for the accommodation of theparent corporation or another subsidiary or of the partnershipor association or entity or such individual; or

(g) the subsidiaries though separate entities operate merely asdepartments or divisions of a single entity.

SEC. 35.6, GBL: Loans and other credit accommodations, depositsmaintained with, and usual guarantees by a bank to any other bankor non-bank entity, whether locally or abroad, shall be subject tothe limits as herein prescribed.

SEC. 35.7, GBL: Certain types of contingent accounts of borrowersmay be included among those subject to these prescribed limits asmay be determined by the Monetary Board.


3. ExceptionsSEC. 35.1, GBL: Except as the Monetary Board may otherwiseprescribe for reasons of national interest, the total amount of loans,credit accommodations and guarantees as may be defined by theMonetary Board that may be extended by a bank to any person,partnership association corporation or other entity shall at no time

Transitory provision. Outstanding credit commitments of a bank asof 2 May 2004 which are within the ceiling prescribed under theregulations existing prior to said date but will exceed the limitationsprescribed in this Section shall not be subject to penalty for a periodof one (1) year or until said credit commitments become past due orare extended renewed or restructured whichever comes later: Said




partnership, association, corporation or other entity shall at no timeexceed twenty percent (20%) of the net worth of such bank. Thebasis for determining compliance with single borrower limit is thetotal credit commitment of the bank to the borrower.

SEC. 17, RURAL BANKS ACT: Deposits of rural banks withgovernment-owned or controlled financial institutions like the LandBank of the Philippines, the Development Bank of the Philippines,and the Philippine National Bank are exempted from the SingleBorrower's Limit imposed by the General Banking Act.

In areas where there are no government banks, rural banks maydeposit in private banks more than the amount prescribed by theSingle Borrower's Limit, subject to Monetary Board regulations.

4. SanctionsSUBSEC. 303.5, MRB: Sanctions. Violations of the provisions of thisSection shall be subject to the following:

a. Monetary penalties - Fines of one- tenth of one percent (1/10 of1%) of the excess over the ceiling but not to exceed P30,000.00 aday for each SBL violation shall be assessed on the bank to bereckoned from the date the excess started up to the date when suchexcess was eliminated: Provided, That a maximum fine of P500.00 aday for each violation shall be imposed against banks with totalresources of less than P50 million at the time of granting ofloan/credit accommodation.

b. Other sanctionsFirst Offense – Reprimand for the directors/officers who approved

the credit availment which resulted in the excess with a warningthat subsequent violations will be subject to more severe sanctions.

Subsequent offenses –(1) Fine of P1,000.00 for directors/ officers who approved the creditavailment which resulted in the excess.

(2) Suspension of the bank’s branching privileges and access to BSPrediscounting facilities until the excess is eliminated.

(3) Other penalties as the Monetary Board may impose dependingon the gravity of the offense.

are extended, renewed or restructured whichever comes later: Saidcredit commitments shall, however, be reported to the BangkoSentral within fifteen (15) banking days from 2 May 2004.

D. DOSRI AccountsSEC. 36, GBL: Restriction on Bank Exposure to Directors, Officers,Stockholders and Their Related Interests . - No director or officer of anybank shall, directly or indirectly, for himself or as the representative oragent of others, borrow from such bank nor shall he become aguarantor, endorser or surety for loans from such bank to others, or inany manner be an obligor or incur any contractual liability to the bankexcept with the written approval of the majority of all the directors ofthe bank, excluding the director concerned: Provided , That such writtenapproval shall not be required for loans, other credit accommodationsand advances granted to officers under a fringe benefit plan approvedby the Bangko Sentral. The required approval shall be entered upon therecords of the bank and a copy of such entry shall be transmittedforthwith to the appropriate supervising and examining department ofthe Bangko Sentral.

Dealings of a bank with any of its directors, officers or stockholders andtheir related interests shall be upon terms not less favorable to the bankthan those offered to others.

After due notice to the board of directors of the bank, the office of anybank director or officer who violates the provisions of this Section maybe declared vacant and the director or officer shall be subject to thepenal provisions of the New Central Bank Act.

The Monetary Board may regulate the amount of loans, credit

accommodations and guarantees that may be extended, directly orindirectly, by a bank to its directors, officers, stockholders and theirrelated interests, as well as investments of such bank in enterprisesowned or controlled by said directors, officers, stockholders and theirrelated interests. However, the outstanding loans, creditaccommodations and guarantees which a bank may extend to each ofits stockholders, directors, or officers and their related interests, shall belimited to an amount equivalent to their respective unencumbereddeposits and book value of their paid-in capital contribution in the bank:Provided , however, That loans, credit accommodations and guaranteessecured by assets considered as non-risk by the Monetary Board shallbe excluded from such limit: Provided, further , That loans, credit


accommodations and advances to officers in the form of fringe benefitsgranted in accordance with rules as may be prescribed by the MonetaryBoard shall not be subject to the individual limit.

The Monetary Board shall define the term “related interests.”

board of directors of a bank or who is directly or indirectly theregistered or beneficial owner of more than ten percent (10%) ofany class of its equity security.

e. Related interest shall refer to any of the following:(1) Spouse or relative within the first degree of




The limit on loans, credit accommodations and guarantees prescribedherein shall not apply to loans, credit accommodations and guaranteesextended by a cooperative bank to its cooperative shareholders.

SEC. 26, NCBA: Any director, officer or stockholder who, together withhis related interest, contracts a loan or any form of financialaccommodation from: (1) his bank; or (2) from a bank (a) which is asubsidiary of a bank holding company of which both his bank and thelending bank are subsidiaries or (b) in which a controlling proportion ofthe shares is owned by the same interest that owns a controllingproportion of the shares of his bank, in excess of five percent (5%) ofthe capital and surplus of the bank, or in the maximum amountpermitted by law, whichever is lower, shall be required by the lendingbank to waive the secrecy of his deposits of whatever nature in all banksin the Philippines. Any information obtained from an examination of hisdeposits shall be held strictly confidential and may be used by theexaminers only in connection with their supervisory and examinationresponsibility or by the Bangko Sentral in an appropriate legal action ithas initiated involving the deposit account.

1. Coverage: Persons and Transactions CoveredSEC. X326, MRB: General Policy. Dealings of a bank with any of itsDOSRI should be in the regular course of business and upon termsnot less favorable to the bank than those offered to others.

Definitions. For purposes of these regulations, the followingdefinitions shall apply:

a. Directors shall refer to bank directors as defined in Subsec.X141.1.

b. Officers shall refer to bank officers as defined in Subsec. X142.1.

c. Stockholder shall refer to any stockholder of record in the booksof the bank, acting personally, or through an attorney-in-fact, orany other person duly authorized by him. Stockholder shall alsorefer to a juridical person such as corporation, association or firm.

d. Substantial stockholder shall mean a person, or group of personswhether natural or juridical, owning such number of shares that willallow such person or group to elect at least one (1) member of the

(1) Spouse or relative within the first degree ofconsanguinity or affinity, or relative by legal adoption, of adirector, officer or stockholder of the bank;

(2) Partnership of which a director, officer, or stockholder of

a bank or his spouse or relative within the first degree ofconsanguinity or affinity, or relative by legal adoption, is ageneral partner;

(3) Co-owner with the director, officer, stockholder or hisspouse or relative within the first degree of consanguinity oraffinity, or relative by legal adoption, of the property orinterest or right mortgaged, pledged or assigned to securethe loans or other credit accommodations, except when themortgage, pledge or assignment covers only said co-owner’sundivided interest;

(4) Corporation, association, or firm of which a director orofficer of the bank, or his spouse is also a director or officerof such corporation, association or firm, except (a) wherethe securities of such corporation, association or firm arelisted and traded in the big board or commercial andindustrial board of domestic stock exchanges and less thanfifty percent (50%) of the voting stock thereof is owned byany one (1) person or by persons related to each otherwithin the first degree of consanguinity or affinity; or (b)where the director, officer or stockholder of the bank sits asa representative of the bank in the board of directors of suchcorporation: Provided, That the bank representative shallnot have any equity interest in the borrower corporationexcept for the minimum shares required by law, rules andregulations, or by the by-laws of the corporation: Provided,further, That the borrowing corporation is not among thosementioned in Items “e(5)”, “e(6)”, “e(7)” and “e(8)” of thisSection;

(5) Corporation, association or firm of which any or a groupof directors, officers, stockholders of the lending bankand/or their spouses or relatives within the first degree ofconsanguinity or affinity, or relative by legal adoption, holdor own at least twenty percent (20%) of the subscribed


capital of such corporation, or of the equity of suchassociation or firm;

(6) Corporation, association or firm wholly or majority-owned or controlled by any related entity or a group ofrelated entities mentioned in Items “e(2)” “e(4)” and “e(5)”

j. Total loan portfolio shall refer to the sum of all loan accountsoutstanding, gross of valuation reserves, as reflected in the bank’sconsolidated statement of condition, excluding outstanding loansfinanced by special/specific funds from the government financialinstitutions




related entities mentioned in Items e(2) , e(4) and e(5)of this Section.

(7) Corporation, association or firm which owns or controlsdirectly or indirectly whether singly or as part of a group of

related interest at least twenty percent (20%) of thesubscribed capital of a substantial stockholder of the lendingbank or which controls majority interest of the bankpursuant to Subsec. X303.1.

(8) Corporation, association or firm in which the lendingbank and/or its parent/ subsidiary holds or owns at leasttwenty percent (20%) of the subscribed capital of suchcorporation, or in the equity of such association or firm, orhas an existing management contract or any similararrangement with the lending bank or its parent/subsidiary.

f. Subsidiary shall refer to a corporation or firm more than fiftypercent (50%) of the outstanding voting stock of which is directly orindirectly owned, controlled or held with power to vote by its parentcorporation.

g. Unencumbered deposits shall refer to savings, time and demanddeposits, which are not subject to an assignment or hold-outagreement or any other encumbrance.

h. Book value of the paid-in capital contribution shall mean theproportional amount of the bank’s total capital accounts (net of suchunbooked valuation reserves and other capital adjustments as maybe required by the BSP) as the corresponding paid-in capitalcontribution of each of the bank’s directors, officers, stockholdersand their related interests bear to the total paid-in capital of thebank: Provided, That as a basis for determining the individual ceilingreferred to in Sec. X330, the corresponding book value of the sharesof stock of said directors, officers, stockholders and their relatedinterests which are the subject of pledge, assignment or any otherencumbrance shall be deducted therefrom.

i. Net worth shall mean the total of the unimpaired paid-in capitalincluding paid- in surplus, retained earnings and undivided profit,net of valuation reserves and other adjustments as may be requiredby the BSP.

institutions.

k. Secured loan, borrowing or other credit accommodation shallrefer to any loan, or credit accommodation or portion thereofreferred to in Sec. X327 which is secured by:

(1) Real estate mortgage, chattel mortgage on tangibleassets, and pledge of jewelry, precious stones and othervaluable articles;

(2) Assignment of intangible assets such as patents,trademarks, trade names and copyrights;

(3) Unconditional payment guarantees such as standbyletters of credit and letter of indemnity issued bybanks/multilateral financial institutions;

(4) Assignment of, or hold-out on, deposits or depositsubstitutes maintained in the lending bank;

(5) Cash margin deposits; or assignment or pledge ofgovernment securities or readily marketable bonds andother high-grade debt securities and “blue-chip” stocks,except those issued by the lending entity, or by its parentcompany which owns more than fifty percent (50%) of itsoutstanding shares of stocks, subject to the additionalprovision that the issuer corporation has a net worth of atleast P1 billion and with annual net earnings during theimmediately preceding five (5) years;

(6) Customer’s liability under import bills outstanding for notmore than thirty (30) days from date of original entry;

(7) Sales contract receivables arising from sale of realproperty on credit where title to the property is retained bythe bank; and

(8) Customer’s liability-import bills under trust receiptsoutstanding for not more than thirty (30) days from date ofbooking: Provided, That the booking under trust receiptsshall have been made not later than the thirty-first day fromthe date of original entry referred to in Item “(6)” above.


l. Unsecured loan, borrowing or other credit accommodation shallrefer to any loan, or other credit accommodation or portion thereofreferred in Sec. X327 which is not secured in accordance with Item

“k” above.

SEC X327 MRB: Transactions Covered The terms loans other

SEC. X328, MRB: Transactions Not Covered. The terms loans, othercredit accommodations and guarantees as used herein shall notrefer to the following:

a. Advances against accrued compensation, or for the purpose ofproviding payment of authorized travel legitimate expenses or other




SEC. X327, MRB: Transactions Covered. The terms loans, othercredit accommodations and guarantees as used herein shall refer totransactions of the bank which involve the grant of any loan,advance or other credit accommodation in any form whatsoever,whether renewal, extension or increase, and shall include:

a. Any advance by means of an incidental or temporary overdraft,cash item, “vale”, etc.;

b. Any advance of unearned salary or other unearned compensationfor periods in excess of thirty (30) days;

c. Any advance by means of DAUDs;

d. Outstanding availments under an established credit line;

e. Drawings against an existing letter of credit;

f. The acquisition of any note, draft, bill of exchange or otherevidence of indebtedness upon which the bank’s directors, officers,stockholders, and their related interests may be liable as makers,drawers, acceptors, endorsers, guarantors or sureties;

g. Indirect lending such as loans or other credit accommodationsgranted by another financial intermediary to said directors, officers,stockholders, and their related interests from funds of the bankinvested in the other institution’s trust or other department whenthere is a clear relationship between the transactions;

h. The increase of an existing indebtedness, as well as additionalavailments under a credit line or additional drawings against a letterof credit;

i. The sale of assets, such as shares of stock, on credit; and

j. Any other transactions as a result of which the bank’s directors,officers, stockholders and their related interests become obligated ormay become obligated to the lending bank, by any meanswhatsoever to pay money or its equivalent.

providing payment of authorized travel, legitimate expenses or othertransactions for the account of the bank or for utilization ofmaternity and other leave credits;

b. The increase in the amount of outstanding credit accommodations

as a result of additional charges or advances made by the bank toprotect its interest such as taxes, insurance, etc.;

c. The discount of bills of exchange drawn in good faith againstactually existing values, and the discount of commercial or businesspaper actually owned by the person negotiating the same, including,but not limited to, the acquisition by a domestic bank of export billsfrom any of its DOSRI which are drawn in accordance with the termsand conditions of the covering letters of credit: Provided, That thetransaction shall automatically be subject to the ceilings as hereinprovided once the DOSRI who is a party to the transaction becomesdirectly liable to the bank;

d. Transactions with a foreign bank which has stockholdings in thelocal bank where the foreign bank acts as guarantor through theissuance of letters of credit or assignment of a deposit in a currencyeligible as part of the international reserves and held in a bank inthe Philippines to secure other credit accommodations granted toanother person or entity: Provided, That the foreign bankstockholder shall automatically be subject to the ceilings as hereinprovided in the event that its contingent liability as guarantorbecomes a real liability; and

e. Interbank call loan transactions.

SEC. X329, MRB: Direct or Indirect BorrowingsLoans, other credit accommodations and guarantees to DOSRI shallbe considered direct or indirect borrowings in accordance with thefollowing criteria:

a. Direct borrowing. If the director, officer or stockholder of thelending bank is a party to any of the transactions enumerated inSec. X327 for himself, or as the representative or agent of others,or if he acts as a guarantor, endorser or surety for loans from thebank, or if the loan or other credit accommodation to another partyis secured by a property interest or right of the director, officer orstockholder.


b. Indirect Borrowing. If in any of the transactions in Sec. X327 theborrower, guarantor, endorser or surety is a related interest asdefined in Item “e”, Subsec. X326.1.

Other cases of direct/indirect borrowing shall be resolved on a case-

(6) Such other assets considered as non- risk by the MonetaryBoard.

b. Loans, other credit accommodations and advances to officers inthe form of fringe benefits granted in accordance with existingregulations; and




Other cases of direct/indirect borrowing shall be resolved on a caseto-case basis.

It shall be the responsibility of the bank concerned to ascertainwhether the borrower, guarantor, endorser or surety is related or

connected with the bank or with any of the directors, officers orstockholders of the bank in any of the capacities mentioned in Item

“e” of Subsec. X326.1.

In determining indirect borrowings, as enumerated above, onlythose cases involving living relatives shall be considered.

2. Ceilings: Individual and Aggregate Ceilings and ExclusionsSEC. X330, MRB: Individual Ceilings. The total outstanding loans,other credit accommodations and guarantees to each of the bank’sDOSRI shall be limited to an amount equivalent to their respectiveunencumbered deposits and book value of their paid-in capitalcontribution in the bank: Provided, however, That unsecured loans,other credit accommodations and guarantees to each of the bank’sDOSRI shall not exceed thirty percent (30%) of their respective totalloans, other credit accommodations and guarantees.

Exclusions from individual ceiling. The following loans, other creditaccommodations and guarantees shall be excluded in determiningcompliance with the individual ceiling.

a. Loans, other credit accommodations and guarantees secured byassets considered as non-risk by the Monetary Board;

Assets considered as non-risk shall refer to the following:(1) Cash;(2) Debt securities issued by the BSP or the Philippine

government;(3) Deposits maintained in the lending bank and held in the

Philippines;(4) Debt securities issued by the U.S. government;(5) Debt securities issued by central governments, central

banks of foreign countries and multilateral financialinstitutions such as International Finance Corporation, AsianDevelopment Bank and World Bank, with the highest creditquality given by any two (2) internationally accepted ratingagencies; and

c. Loans, other credit accommodations and guarantees extended bya Coop Bank to its cooperative shareholders.

SEC. X331, MRB: Aggregate Ceiling; Ceiling on Unsecured Loans,

Other Credit Accommodations and Guarantees. Except with the priorapproval of the Monetary Board, the total outstanding loans, othercredit accommodations and guarantees to DOSRI shall not exceedfifteen percent (15%) of the total loan portfolio of the bank or 100%of net worth whichever is lower: Provided, That in no case shall thetotal unsecured loans, other credit accommodations and guaranteesto said DOSRI exceed thirty percent (30%) of the aggregate ceilingor the outstanding loans, other credit accommodations andguarantees, whichever is lower. For the purpose of determiningcompliance with the ceiling on unsecured loans, other creditaccommodations and guarantees, banks shall be allowed to averagetheir ceiling on unsecured loans, other credit accommodations andguarantees every quarter.

In evaluating requests for extension of loans in excess of theaggregate ceiling, the BSP shall consider the credit standing of theborrower, viability of the projects financed by such other creditaccommodations in relation to national objectives, collateral orsecurity and other pertinent considerations.

SEC. X332. MRB: Exclusions from Aggregate Ceiling. The followingloans, other credit accommodations and guarantees shall beexcluded in determining compliance with the aggregate ceiling:

a. Credit accommodations or portions thereof to the extent securedby assets considered as non-risk by the Monetary Board;

b. Credit accommodations to a corporate stockholder which meetsall the following conditions:(1) The corporation is a non-financial institution;(2) Its shares are listed and traded in the domestic stock

exchanges; and(3) No person or group of persons related within the first degree of

consanguinity or affinity holds/owns more than twenty percent(20%) of the subscribed capital of the corporation.




d. For the duration of each violation, imposition of a fine of one-tenth of one percent (1/10 of 1%) of the excess over the ceilingsper day but not to exceed P30,000 a day on the following:(1) The lending bank;(2) The director, officer or stockholder whose borrowing exceeds his

borrower and in the case of unsecured loans and other creditaccommodations to an individual borrower, at least one (1) co-maker, except when the principal borrower has the financial capacityand a good track record of paying his obligations.

2. Joint and Solidary Signature (JSS)




( ) , gindividual ceiling; and

(3) Each of the directors voting for the approval of the loan or othercredit accommodation in excess of any of the ceilings prescribedin Secs. X330 and X331.

The penalty for exceeding the individual ceiling, aggregate ceilingand ceiling on unsecured loans shall be computed on the averageamount of loans in excess of said ceilings during the same week.

E. Collateral/Security1. Unsecured Loans

SEC. X319, MRB: General guidelines. Before granting a loan or othercredit accommodation, a bank must ascertain that the borrowers,co-makers, endorsers, sureties and/or guarantors are financiallycapable of fulfilling their commitments to the bank. For this purpose,banks shall obtain adequate information on their credit standingsand financial capacities.

Proof of financial capacity of borrower. In addition to the usualinformation sheet about the borrower, banks may requiresubmission of a statement of the borrower’s assets and liabilities.

Banks shall, however, require the following:a. A copy of the latest Income Tax Return (ITR) of the borrower andhis co-maker, if applicable, duly stamped as received by the Bureauof Internal Revenue (BIR); and

b. Except as otherwise provided in other regulations, if the borroweris engaged in business, a copy of the borrower’s latest financial

statements as submitted for taxation purposes to the BIR.Should the document(s) submitted prove to be spurious or incorrectin any material detail, the bank may terminate any loan or othercredit accommodation granted on the basis of said document(s) andshall have the right to demand immediate repayment or liquidationof the obligation. Moreover, the bank may seek redress from thecourt for any harm done by the borrower’s submission of spuriousdocuments.

Signatories. Banks shall require that loans and other creditaccommodations be made under the signature of the principal

y g ( )ART. 2047, NCC: By guaranty a person, called the guarantor, bindshimself to the creditor to fulfill the obligation of the principal debtorin case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, theprovisions of Section 4, Chapter 3, Title I of this Book shall beobserved. In such case the contract is called a suretyship.

CasesPNB v CA, 198 SCRA 767 (1991)PNB v. CAFACTS EE Depusoy Construction entered into a building contract with the Bureau ofPublic Works for the construction of the GSIS Building. Requiring money forsuch construction, Depusoy applied credit accommodation by PNB. Assecurity, Depusoy executed a Deed of Assignment in favor of PNB, assigningall money to be received from GSIS. As additional security, Luzon Suretyexecuted 2 surety bonds.

2 years later, Depusoy defaulted in the building contract. As a result, GSISstopped payment. PNB now demands payment for the credit accommodationit extended to Depusoy. It filed a complaint in the courts. RTC grantedPNB’s recourse against Depusoy but not with Luzon Surety. CA affirmed thedecision. Initially, SC dismissed the appeal of PNB due to lack of merit andpertaining to factual issues. This is the MR.

ISSUE W/N Luzon Surety should be held solidarily liable with Depusoy.

RULING NO . As based on the findings of both RTC and CA, Depusoy and LuzonSurety bound themselves jointly and severally to PNB on the ground of theDeed of Assignment only. Luzon Surety executed the bonds to guaranteethe faithful performance of Depusoy in his obligation under the Deed ofAssignment, NOT to guarantee the payment of loans of Depusoy to PNB.Even Delfin Santiago, Manager of PNB, admitted that what was guaranteedwas the Deed of Assignment and not the loan.

As the language of the bonds is clear and explicit, there is no doubt torequire an interpretation. Even if there is doubt, the issue should beresolved in favor of the surety based on Art 2055 – “guaranty is not


presumed, it must be expressed and cannot extend to more than what isstipulated therein”. Thus, the liability of the surety is measured by the termsof the contract and strictly limited by its terms.

Security Bank v Cuenca, 341 SCRA 781 (2000)FACTS

longer connected with the corporation. They should have introduced a newsurety for the new loan.

3. Loans Secured by Chattels or Intangible Propertya. Limits

SEC. 38, GBL: Loans And Other Credit Accommodations on




Sta Ines is a corporation engaged in logging operations. They were able toobtain a credit line from Security Bank expiring on November 1 1981 for anamount not exceeding P8.8M. Sta Ines executed a chattel mortgage over itsmachineries and equipments, while having Rodolfo Cuenca execute an

indemnity agreement, being solidary liable with Sta Ines. They availed ofthe credit line only on one instance, worth P6.1M. Four years after theexpiration, Cuenca resigned as President, and his shares of stock was soldto Adolfo Angala through public auction. Sta Ines was able to obtainadditional loan, and restructured its previous credit line with the bank toaccommodate the extra loan obtained, without informing Cuenca of suchdeal. Sta Ines defaulted and the bank demanded from both the corporationand Cuenca.

ISSUE Whether Cuenca is still liable to the bank

RULING NO . When additional loan was given to Sta Ines that paved way for therestructuring of the credit line, there had been a novation of agreementsbetween the bank and the corporation, which removed the accessoryobligation of Cuenca as surety. There were also several inconsistenciesbetween both agreements that the two cannot coexist. Art 1296 states that,"when principal obligation is extinguished in consequence of a novation,accessory obligation (in this case a surety agreement) may subsist onlyinsofar as they may benefit third persons who did not give their consent."Also, Art 2079 which the CA relied on states that, "an extension granted tothe debtor by the creditor without the consent of the guarantor extinguishesthe guaranty."

***A "joint and solidary signature" is a common practice of a bank wherethey require a major stockholder or corporate officer as an additionalsecurity for loans granted to the corporation for two reasons: the bank cango beyond the veil of separate corporate entity and go after the surety;second, it assures the bank that the loan will be used for the purposeagreed upon.

As Cuenca was not related to the bank at the time of the restructuring ofthe credit line for which he was previously a surety, there is no reason toinclude him again. There had been negligence on the part of the bank whenhe was still considered as a surety, as it failed to realize that Cuenca was no

,Security of Chattels and Intangible Properties . - Except asthe Monetary Board may otherwise prescribe, loans andother credit accommodations on security of chattels andintangible properties such as, but not limited to, patents,

trademarks, trade names, and copyrights shall not exceedseventy-five percent (75%) of the appraised value of thesecurity, an such loans and other credit accommodation maybe made to the title-holder of the chattels and intangibleproperties or his assignees.

b. Types of Securityi. Chattel Mortgage

ii. Pledgeiii. Hold-Out and/or Assignment

4. Loans Secured by Real Estate Mortgages (REMs)a. Limits

SEC. 37, GBL: Loans and Other Credit Accommodations Against Real Estate . – Except as the Monetary Board mayotherwise prescribe, loans and other credit accommodationsagainst real estate shall not exceed seventy-five percent(75%) of the appraised value of the respective real estatesecurity, plus sixty percent (60%) of the appraised value ofthe insured improvements, and such loans may be made tothe owner of the real estate or to his assignees.

b. Mortgagee in Good Faith v Mortgagee in Bad FaithCasesPhil. National Coop Bank v Carandang-Villalon, 139 SCRA 570(1985)FACTS Faustino Galvan was the owner of the parcel of land, being litigated in thiscase, when it was donated to his daughter, Aida Galvan. He was a lessee ofSpouses Dionisio Galvan and Carmen Cabrera when he failed to pay rentals.The spouses sued him for the unpaid rentals where he lost the case. Duringexecution, the spouses died, and the administrators Bengzon and Jimenezcontinued the execution. A year after the finality of the case against herfather, Aida mortgaged the property to the bank. The administrators failedto execute the judgement, thus they tried to rescind the donation, allegingthat it was done in fraud of creditors. The bank was not impleaded in thiscase. The administrators won in the CA level, which became final and


executory. The property was sold at public auction to the administrators.The bank then foreclosed the property upon failure of Aida to pay the bank,where the bank was the highest bidder. However, it failed to register theproperty in its name, since the mortgagor was no longer the owner of theproperty.

harmonious system. It simply confirms a title already created and alreadyvested, rendering it forever indefeasible. If one happened to obtain acertificate of title by mistake, to the prejudice of another, with or withoutbad faith, the certificate of title should be cancelled.

2. YES . Cajes can still claim the property since constructive trust that




ISSUE Whether or not the bank is entitled to the protection accorded to "innocentpurchasers for value"

RULING YES . Where the Torrens Title of the land was in the name of the mortgagorand later given as security for a bank loan, the subsequent declaration ofsaid title as null and void is not a ground for nullifying the mortgage rightsof the bank, which acted in good faith. The claim cannot be justified that thebank, before accepting the mortgage, should have made an investigation ofthe title, as such claim would be unreasonable.

DBP v CA, 331 SCRA 267 (2000)FACTS Ulpiano Mumar was the original owner of the disputed land when it was soldto Carlos Cajes. Cajes was issued a tax declaration for the property hebought. Unknown to them, Jose Alvarez was able to register a parcel ofland, which included the property sold to Cajes. Alvarez sold the land toSpouses Beduya, which they were issued a TCT. The spouses mortgaged theproperty to DBP, for a loan which they were not able to pay. DBP foreclosedthe property, and consolidated its ownership over the property.

Prior to the foreclosure, Cajes also applied for a loan with DBP, using theproperty sold to him. The property was inspected, and the loan was granted.However, it was discovered the property was really part of the landmortgaged by the spouses for which they cancelled the loan.

A year after the foreclosure, they tried to re-appraise the property, andfound out that the property was occupied by the Cajes. DBP filed a suit forrecovery of property.

ISSUES : (non-banking)1. Whether DBP has a right over the property2. Whether Cajes can still claim the property3. Whether DBP was in good faith when the property was bought (bankingissue)

RULING :1. NO . Registration has never been a mode of acquiring ownership overimmovable property. The sole purpose of the creation of Land Registrationwas to bring land titles of the Philippines under one comprehensive and

prescribes in ten years does not run on property held by in possession bythe plaintiff. When a person claiming to be the owner has actual possessionof the property, an action to seek reconveyance does prescribe.

3. NO . DBP was not in good faith when it became a mortgagee on twogrounds. First, the bank was told by the spouses that the property was inpossession of Cajes. Second, the bank's representative conducted aninvestigation of the property when Cajes mortgaged the property with thebank. DBP was fully aware that a person, other than the registered ownerwas in possession of the property. They disregarded such fact, and now theycannot feign ignorance of Cajes's claim.

Canlas v CA, 326 SCRA 425 (2000)FACTS Osmundo Canlas and Vicente Mañosca decided to venture into business andto raise the capital needed. The former executed an SPA authorizing thelatter to mortgage two parcels of land in the name of himself and his wifeAngelina.

Subsequently, Canlas agreed to sell the said lands to Manosca for P850K,P500K of which was payable within one week, and the balance of P350K toserve as his investment. Canlas delivered the TCTs and Mañosca issued twopostdated checks in the amounts of P40K and P460K respectively, but itturned out that the latter check was not sufficiently funded. Later on,Mañosca was able to mortgage the same parcels of land for P100k to acertain Atty Magno, with the help of impostors who misrepresentedthemselves as the spouses Canlas. After that, Mañosca was granted a loanby the respondent Asian Savings Bank (ASB) in the amount of P500,000.00,with the lands as security, and with the same impostors who againintroduced themselves as the Canlas spouses. When the loan it extendedwas not paid, respondent bank extrajudicially foreclosed the mortgaged.

Before the auction could be held, (the real) Osmundo Canlas wrote a letterinforming the respondent bank that the execution of subject mortgage overthe two parcels of land in question was without their authority, andrequested that steps be taken to annul the questioned mortgage. But AsianSavings Bank refused and proceeded with the scheduled auction sale.Consequently, Canlas instituted the present case for annulment of deed ofreal estate mortgage; the trial court issued an Order restraining the sherifffrom issuing the corresponding Certificate of Sheriff’s Sale. Mañosca wasdeclared in default.


The lower court annulled the mortgage. CA reversed, reinstating themortgage.

ISSUE Whether the bank was a mortgagee in good faith

d. “Dragnet Clause” or “Blanket Mortgage Clause”CasesUnion Bank v CA, 471 SCRA 751 (2005)FACTS DRossa Incorporated (DRI) mortgaged parcels of land in favor of UnionBank as security for the credit facility of Josephine Marine Trading




HELD NO . Reversed. Not even a single identification card was exhibited by thesaid impostors to show their true identity; and yet, the bank acted on theirrepresentations simply on the basis of the residence certificates bearing

signatures which tended to match the signatures affixed on a previous deedof mortgage to a certain Atty. Magno, covering the same parcels of land inquestion. But the previous deed of mortgage did not bear the tax accountnumber of the spouses, nor the Community Tax Certificate of AngelinaCanlas. But such fact notwithstanding, the bank did not require theimpostors to submit additional proof of their true identity. Under thedoctrine of last clear chance, which is applicable here, the respondent bankmust suffer the resulting loss. Settled is the rule that a contract of mortgagemust be constituted only by the absolute owner on the property mortgaged;a mortgage constituted by an impostor is void.

c. Acquisition of Property By Way of Satisfaction of ClaimsSEC. 52, GBL: Acquisition of Real Estate by Way ofSatisfaction of Claims . – Notwithstanding the limitations ofthe preceding Section, a bank may acquire, hold or conveyreal property under the following circumstances:

52.1. Such as shall be mortgaged to it in good faith by wayof security for debts;

52.2. Such as shall be conveyed to it in satisfaction of debtspreviously contracted in the course of its dealings; or

52.3. Such as it shall purchase at sales under judgments,decrees, mortgages, or trust deeds held by it and such as itshall purchase to secure debts due it.

Any real property acquired or held under the circumstancesenumerated in the above paragraph shall be disposed of bythe bank within a period of five (5) years or as may beprescribed by the Monetary Board: Provided, however, Thatthe bank may, after said period, continue to hold theproperty for its own use, subject to the limitations of thepreceding Section.

Corporation (JMTC). JMTC availed P3m from the credit line. It was increasedto 8.61m. Subsequently, Union Bank unilaterally increased the credit facilityof JMTC to P27 million, from which JMTC availed P18.3M. Upon JMTC'sfailure to pay its obligation, Union Bank instituted foreclosure proceedings

on DRI's properties. Union bank was the highest bidder.

DRI filed a complaint seeking to declare the public sale as null. It claimedthat its liability is only P8.61 million which was the liability incurred by JMTCunder its first agreement with Union Bank. However, Union Bank allegedthat DRI was liable to JMTC's total outstanding obligations, regardless ofwhether it was incurred during or subsequent to the first agreement. TheTrial Court dismissed the complaint, the CA reversed. The CA said that themortgage was pegged at 8.61M and thus DRI could not be made liable formore than this.

ISSUE What is the liability of DRI?

HELD DRI is liable to the full extent of JMTC's obligations, because the mortgagecontained a dragnet clause. The pertinent provisions of the Real EstateMortgage provide: "The obligations secured by this Mortgage (the SecuredObligations') are the following:...any and all instruments or documentsissued upon the renewal, extension, amendment or novation of the Notes,the Agreement and this Mortgage, irrespective of whether such obligationsas renewed, extended, amended or novated are in the nature of new,separate or additional obligations"

"A blanket mortgage clause, also known as a 'dragnet clause in American jurisprudence, is one which is specifically phrased to subsume all debts ofpast or future origins. Such clauses are 'carefully scrutinized and strictlyconstrued. Mortgages of this character enable the parties to providecontinuous dealings, the nature or extent of which may not be known oranticipated at the time, and they avoid the expense and inconvenience ofexecuting a new security on each new transaction. A 'dragnet clauseoperates as a convenience and accommodation to the borrowers as it makesavailable additional funds without their having to execute additional securitydocuments, thereby saving time, travel, loan closing costs, costs of extralegal services, recording fees, et cetera. Indeed, it has been settled in a longline of decisions that mortgages given to secure future advancements arevalid and legal contracts, and the amounts named as consideration in said


contracts do not limit the amount for which the mortgage may stand assecurity if from the four corners of the instrument the intent to securefuture and other indebtedness can be gathered."

5. Foreclosure of REMsa. Types of Foreclosure

sale shall not affect the rights of persons holdingprior encumbrances upon the property or a partthereof, and when confirmed by an order of thecourt, also upon motion, it shall operate to divestthe rights in the property of all the parties to theaction and to vest their rights in the purchaser,




i. JudicialRULE 68, ROC Section 1. Complaint in action for foreclosure.In an action for the foreclosure of a mortgage or

other encumbrance upon real estate, the complaintshall set forth the date and due execution of themortgage; its assignments, if any; the names andresidences of the mortgagor and the mortgagee; adescription of the mortgaged property; a statementof the date of the note or other documentaryevidence of the obligation secured by the mortgage,the amount claimed to be unpaid thereon; and thenames and residences of all persons having orclaiming an interest in the property subordinate inright to that of the holder of the mortgage, all ofwhom shall be made defendants in the action.

Sec. 2. Judgment on foreclosure for payment orsale.If upon the trial in such action the court shall findthe facts set forth in the complaint to be true, itshall ascertain the amount due to the plaintiff uponthe mortgage debt or obligation, including interestand other charges as approved by the court, andcosts, and shall render judgment for the sum sofound due and order that the same be paid to thecourt or to the judgment obligee within a period ofnot less than ninety (90) days nor more than onehundred twenty (120) days from the entry of

judgment, and that in default of such payment theproperty shall be sold at public auction to satisfy the

judgment.

Sec. 3. Sale of mortgaged property; effect.When the defendant, after being directed to do so asprovided in the next preceding section, fails to paythe amount of the judgment within the periodspecified therein, the court, upon motion, shall orderthe property to be sold in the manner and under theprovisions of Rule 39 and other regulationsgoverning sales of real estate under execution. Such

subject to such rights of redemption as may beallowed by law.

Upon the finality of the order of confirmation or

upon the expiration of the period of redemptionwhen allowed by law, the purchaser at the auctionsale or last redemptioner, if any, shall be entitled tothe possession of the property unless a third party isactually holding the same adversely to the judgmentobligor. The said purchaser or last redemptionermay secure a writ of possession, upon motion, fromthe court which ordered the foreclosure.

Sec. 4. Disposition of proceeds of sale.The amount realized from the foreclosure sale of themortgaged property shall, after deducting the costsof the sale, be paid to the person foreclosing themortgage, and when there shall be any balance orresidue, after paying off the mortgage debt due, thesame shall be paid to junior encumbrancers in theorder of their priority, to be ascertained by thecourt, or if there be no such encumbrancers or therebe a balance or residue after payment to them, thento the mortgagor or his duly authorized agent, or tothe person entitled to it.

Sec. 5. How sale to proceed in case the debt is notall due.If the debt for which the mortgage or encumbrancewas held is not all due as provided in the judgment,as soon as a sufficient portion of the property hasbeen sold to pay the total amount and the costs due,the sale shall terminate; and afterwards, as often asmore becomes due for principal or interest and othervalid charges, the court may, on motion, order moreto be sold. But if the property cannot be sold inportions without prejudice to the parties, the wholeshall be ordered to be sold in the first instance, andthe entire debt and costs shall be paid, if theproceeds of the sale be sufficient therefor, there


being a rebate of interest where such rebate isproper.

Sec. 6. Deficiency judgment.If upon the sale of any real property as provided inthe next preceding section there be a balance due toh l ff f l h d f h l

estate mortgages under this Rule insofar as theformer are not inconsistent with or may serve tosupplement the provisions of the latter.

ii. Extra-JudicialACT NO. 3135, as amended




the plaintiff after applying the proceeds of the sale,the court, upon motion, shall render judgmentagainst the defendant for any such balance forwhich, by the record of the case, he may be

personally liable to the plaintiff, upon whichexecution may issue immediately if the balance is alldue at the time of the rendition of the judgment;otherwise, the plaintiff shall be entitled to executionat such time as the balance remaining becomes dueunder the terms of the original contract, which timeshall be stated in the judgment.

Sec. 7. Registration.A certified copy of the final order of the courtconfirming the sale shall be registered in the registryof deeds. If no right of redemption exists, thecertificate of title in the name of the mortgagor shallbe cancelled, and a new one issued in the name ofthe purchaser.

Where a right of redemption exists, the certificate oftitle in the name of the mortgagor shall not becancelled, but the certificate of sale and the orderconfirming the sale shall be registered and a briefmemorandum thereof made by the registrar ofdeeds upon the certificate of title. In the event theproperty is redeemed, the deed of redemption shallbe registered with the registry of deeds, and a briefmemorandum thereof shall be made by the registrarof deeds on said certificate of title.

If the property is not redeemed, the final deed ofsale executed by the sheriff in favor of the purchaserat the foreclosure sale shall be registered with theregistry of deeds; whereupon the certificate of titlein the name of the mortgagor shall be cancelled anda new one issued in the name of the purchaser.

Sec. 8. Applicability of other provisions.The provisions of sections 31, 32 and 34 of Rule 39shall be applicable to the judicial foreclosure of real

iii. Specific Rules for TB/RB/Coop BanksSEC. 6, RURAL BANKS ACT: Loans or advancesextended by rural banks organized and operated

under this Act shall be primarily for the purpose ofmeeting the normal credit needs of farmers,fishermen or farm families owning or cultivating landdedicated to agricultural production as well as thenormal credit needs of cooperatives and merchants.In the granting of loans, the rural bank shall givepreference to the application of farmers andmerchants whose cash requirements are small.

Loans may be granted by rural banks on the securityof lands without Torrens Title where the owner ofprivate property can show five (5) years or more ofpeaceful, continuous and uninterrupted possessionin concept of owner; or of portions of friar landestates or other lands administered by the Bureau ofLands that are covered by sales contracts and thepurchasers have paid at least five (5) yearsinstallment thereon, without the necessity of priorapproval and consent by the Director of Lands, or ofportions of other estates under the administration ofthe Department of Agrarian Reform or othergovernmental agency which are likewise covered bysales contracts and the purchasers have paid atleast five (5) years installment thereon, without thenecessity of prior approval and consent of theDepartment of Agrarian Reform or correspondinggovernmental agency; or of homesteads or freepatent lands pending the issuance of titles butalready approved, the provisions of any law orregulations to the contrary notwithstanding:Provided, That when the corresponding titles areissued, the same shall be delivered to the Registerof Deeds of the province where such lands aresituated for the annotation of the encumbrance:Provided, further, That in the case of lands pendinghomestead or free patent titles, copies of the noticesfor the presentation of the final proof shall also be


furnished the creditor rural bank and, if theborrower applicants fail to present the final proofwithin thirty (30) days from date of notice, thecreditor rural bank may do so for then at theirexpense: Provided, furthermore, That the applicantfor homestead or free patent has already madei h l d d h l li d f i

secure their loans with the procedure correspondingto their share.

A rural bank shall be allowed to foreclosure landsmortgaged to it; Provided, That said lands shall becovered under Republic Act No. 6657.




improvements on the land and the loan applied for isto be used for further development of the same orfor other productive economic activities: Provided,finally, That the appraisal and verification of the

status of a land is a full responsibility of the ruralbank and any loan granted on any land which shallbe found later to be within the forest zone shall befor the sole account of the rural bank.

The foreclosure of mortgages covering loans grantedby rural banks and executions of judgment thereoninvolving real properties levied upon by sheriff shallbe exempt from the publications in newspapers nowrequired by law where the total amount of loan,excluding interests due and unpaid, does not exceedOne Hundred thousand Pesos (P100,000) or suchamount as the Monetary Board may prescribe asmay be warranted by prevailing economicconditions. It shall be sufficient publication in suchcases if the notices of foreclosure and execution of

judgment are posted in the most conspicuous areaof the municipal building, the municipal publicmarket, the rural bank, the barangay hall, and thebarangay public market, if any, where the landmortgaged is situated during the period of sixty (60)days immediately preceding the public auction orexecution of judgment. Proof of publication asrequired herein shall be accomplished by an affidavitof the sheriff or officer conducting the foreclosuresale or execution of judgment and shall be attachedwith the records of the case: Provided, That when ahomestead or free patent is foreclosed, thehomesteader or free patent holder, as well as hisheirs shall have the right to redeem the same withinone (1) year from the date of foreclosure in the caseof land not covered by a Torrens Title or one (1)year from the date of the registration of theforeclosure in the case of land covered by a TorrensTitle: Provided, finally, That in any case, borrowers,especially those who are mere tenants, need only to

b. Right and Period of RedemptionSEC. 47 (1), GBL: Foreclosure of Real Estate Mortgage . - Inthe event of foreclosure, whether judicially or extra-

judicially, of any mortgage on real estate which is securityfor any loan or other credit accommodation granted, themortgagor or debtor whose real property has been sold forthe full or partial payment of his obligation shall have theright within one year after the sale of the real estate, toredeem the property by paying the amount due under themortgage deed, with interest thereon at rate specified in themortgage, and all the costs and expenses incurred by thebank or institution from the sale and custody of saidproperty less the income derived therefrom. However, thepurchaser at the auction sale concerned whether in a judicialor extra-judicial foreclosure shall have the right to enterupon and take possession of such property immediatelyafter the date of the confirmation of the auction sale andadminister the same in accordance with law. Any petition incourt to enjoin or restrain the conduct of foreclosureproceedings instituted pursuant to this provision shall begiven due course only upon the filing by the petitioner of abond in an amount fixed by the court conditioned that hewill pay all the damages which the bank may suffer by theenjoining or the restraint of the foreclosure proceeding.

(i) ExceptionSEC. 47 (2), GBL: Notwithstanding Act 3135, juridicalpersons whose property is being sold pursuant to anextrajudicial foreclosure, shall have the right to redeemthe property in accordance with this provision until, butnot after, the registration of the certificate of foreclosuresale with the applicable Register of Deeds which in nocase shall be more than three (3) months afterforeclosure, whichever is earlier. Owners of propertythat has been sold in a foreclosure sale prior to theeffectivity of this Act shall retain their redemption rightsuntil their expiration.


(ii) Exercise of Right of RedemptionCasesMetrobank v Tan, 569 SCRA 814 (2009)FACTS Lamb Construction Consortium Corporation obtained a P5.5M loan fromMetropolitan Bank & Trust Co. To secure the loan, respondent executed aR l E t t M t i l i i l f l d L b f il d t th

third parties. Hence, it was ruled therein that under the circumstances, theobligation of a court to issue a writ of possession in favor of the purchaser ina foreclosure of mortgage case ceases to be ministerial, because under Act3135, the possession of the mortgaged property may be awarded to apurchaser in the extrajudicial foreclosure "unless a third party is actuallyholding the property adversely to the judgment debtor."




Real Estate Mortgage involving six parcels of land. Lamb failed to pay theloan upon maturity hence petitioner filed a petition for the extra-judicialforeclosure of the said properties. During the auction sale MBTC emerged asthe highest bidder with the bid amount of P6.7M.

During the period of redemption, MBTC filed a verified petition for issuanceof a writ of possession. It alleged that notwithstanding its demands, Lambrefused and failed to turn over actual possession of the foreclosedproperties. The RTC denied the issuance of the writ on the ground thatbecause MBTC had not yet deposited the surplus (1.4M) from theforeclosure sale. The CA reversed and allowed the issuance of the writ, butstill ordered MBTC to pay the surplus.

MBTC appealed to the SC, arguing that in a petition for the issuance of awrit of possession, it is improper to rule upon the surplus or excess of thepurchase price because the only issue that must be resolved is thepurchaser’s entitlement to the writ. If there is any surplus or excess, theremedy of the respondent is to file an independent action for collection ofsurplus.

ISSUE Whether or not the above statement is correct, and whether the writ ofpossession should be issued.

HELD YES , the only issue to be resolved is the purchaser's entitlement to the writ.But for peculiar reasons, the writ of possession should NOT be a matter ofright, but a matter of discretion. However, since the period to redeem hasalready lapsed, this point has become moot and the writ must now beissued. As a general rule, the issuance of a writ of possession is ministerial.However, there are exceptions.

In Sulit v. Court of Appeals we withheld the issuance of a writ of possessionbecause the mortgagee failed to deliver the surplus from the proceeds ofthe foreclosure sale which is equivalent to approximately 40% of the totalmortgage debt.

In Barican v. IAC, long before the mortgagee bank had sold the disputedproperty to the respondent therein, it was no longer the judgment debtorwho was in possession but the petitioner spouses who had assumed themortgage, and that there was a pending civil case involving the rights of

In Cometa v. IAC, where the properties in question were found to have beensold at an unusually lower price than their true value, that is, propertiesworth at least P500K were sold for only P57K, the court decided to withhold

the issuance of the writ of possession on the ground that it could workinjustice because the petitioner might not be entitled to the same.

The general rule that mere inadequacy of price is not sufficient to set asidea foreclosure sale is based on the theory that the lesser the price the easierit will be for the owner to effect the redemption. The same thing cannot besaid where the amount of the bid is in excess of the total mortgage debt.The reason is that in case the mortgagor decides to exercise his right ofredemption. The redemption price should be equivalent to the amount of thepurchase price, plus 1% monthly interest up to the time of the redemption,plus assessments or taxes which the purchaser may have paid, and interest.

Applying this to the present case would be highly iniquitous because thatwould mean exacting payment at a price unjustifiably higher than the realamount of the mortgage obligation. Simply put, such a construction willundeniably be prejudicial to the substantive rights of private respondent andit could even effectively prevent it from exercising the right of redemption.

HOWEVER, since the period to redeem has already lapsed, as in this case,the writ must be granted.

The failure of the mortgagee to deliver the surplus proceeds does not affectthe validity of the foreclosure sale. It gives rise to a cause of action for themortgagee to file an action to collect the surplus proceeds. An action tocollect the surplus proceeds is improper where there is a pending action forthe nullification of the foreclosure proceedings.

(iii) Extension of Redemption PeriodCasesLazo v Republic Surety and Insurance Co, 31 SCRA 329 (1970)FACTS Jose Robles obtained a loan (12k) from Philippine Bank of Commerce.Republic Surety & Insurance Co (Respondent) acted as the surety/co-debtorfor Robles with respect the loan obtained from the bank. On the other hand,lazo spouses (petitioners) are the guarantors of Robles for the suretycontract and, in connection therewith, petitioner spouses executed a RealEstate Mortgage over their property in favor of Respondent.




such other rightfully relies and acts on such belief, so that he will beprejudiced if the former is permitted to deny the existence of such facts.

The CA in affirming decision of the TC relied on Lazo vs Republic surety,which stated that the one year period of redemption provided in act no.3135 is only directory and can be extended by agreement of the parties.This is not so in the instant case There was no voluntary agreement The

Defendants plead res judicata and prescription and set a counterclaim forrentals plus attorney’s fees. Court dismissed the case and demandedplaintiffs to vacate the property and to pay 100 a month to the bank frommarch 30 1060 until property is vacated. Plaintiffs appealed to the CA,which the CA then certified to the SC on questions of law.

ISSUE




This is not so in the instant case. There was no voluntary agreement. Thesheriff unilaterally and arbitrarily extended the period of redemption to twoyears in the certificate of sale. The parties were not privy to the extensionmade by the sheriff. Nonetheless, as above discussed, the bank can not

after the lapse of two years insist that the redemption period was one yearonly. The rule on redemption is liberally interpreted in favor of the originalowner of the property.

Such interpretation will be as loose as the morals of Alex as proven by hismany homosexual advances on men.

(iv) Tolling of Redemption PeriodCasesSumerariz v DBP, 21 SCRA 1374 (1967)FACTS Plaintiffs Spouses Sumerariz constituted in favour of Rehabilitation FinanceCorporation, now Development Bank of the Philippines, an REM on twoparcels of land in San Andres Subdivision, Manila with TCTs in the couple’sname to guarantee a loan for 15K. Plaintiffs did not pay for the loan so DBPforeclosed. After several postponements of the public auction on plaintiff’srequest, sale was set for march 29, 1955. Upon the behest of Juansumerariz, made the day before, the bank agreed to postpone the sale ifthere was a token payment of at least 100 before 9am the next day. Nosuch payment was made so the bank bought the property on march 29 for8k as the highest bidder.

Bank notified plaintiffs they had one year to redeem the property or notelater than march 29, 1956 upon down payment of P2806, the balancepayable in ten years at the rate of 166 per month. Instead of exercisingredemption, on march 26, 1956 plaintiffs filed a case against the bank andsheriff of manila to set aside the foreclosure sale on the ground that thebank failed to comply with its agreement to postpone the auction salescheduled to be held on march 29, 1956.

In July 1956 the bank sold the property to Philippine Surety and InsuranceCo. In 1958 the case of the Sumerariz was dismissed because the plaintiffshad not redeemed the property within the period prescribed by lawtherefore the bank has thereby become its absolute owner. The couple lostall the way to the SC hence the present case against the bank and theSurety Co to annul the sale made to the latter by the bank and to beallowed to redeem the property in question.

ISSUE Whether or not the plaintiffs had a right to redeem the property still?(whether or not the filing of a case to annul foreclosure suspends the periodfor redemption?

HELD NO , it does not suspend the period. There is no statue or decision thatsupports the plaintiff’s contention that the period of one year to redeem landsold at a sheriff’s sale was suspended by the institution of an action to annulthe foreclosure sale. Moreover, up to now, plaintiffs have not exercised theright to redemption. Indeed, although they have intimated their wish toredeem the property in question, they have not deposited the amountnecessary therefore.

As to res judicata, although not a party in the first case, the inclusion of thesurety co as a defendant in the case at bar does not detract from the legalidentity of both cases because by buying the property subject matter of bothcases from the bank, the sure co became merely the bank’s successor ininterest. Neither does the absence of the sheriff in the first case negate theidentiy inasmuch as the sheriff was but a formal party in said previous caseand is virtually a party in the present case although not mentioned explicitlyas such therein.

People’s Financing Corp v CA, 192 SCRA 34 (1990)FACTS Kalmar Construction and Muning Exploration Co. purchased several pieces ofheavy equipment from J.P. Enterprises for the total amount of P787,000.The buyer paid 30% (P237,000) of the price and 18 paid monthlyinstalments for the rest (P550,000). Additional charges were stated thereinin cases where there is overdue instalments/amount. A promissory note anda chattel mortgage were signed by the officers, including the respondentsherein, of Kalmar to secure the amount unpaid by the latter. On the samedate, the seller assigned the promissory note and the chattel to People’sFinancing Corporation. Respondent Manliguez and his wife executed a realestate mortgage on one of the parcel of land owned by them as additionalsecurity for the existing obligation (re: promissory note).

Thereafter, the petitioners caused the foreclosure of this mortgage for non-payment of the promissory note. Petitioner PFC was the highest bidder andwas registered accordingly.


The private respondents moved to annul the foreclosure and sure fordamages. The lower court issued an injunction of the registration of FinalDeed of Sale and ruled in favor of the complainants granting them 1)P191,906.00 worth of additional charges to be returned by the petitionersfor not properly informing the private respondents of such charges, 2) rightto redeem the mortgaged property.

including the buildings and improvements. Two transactions occurredthereafter: (1) UCPB sold all of its rights, interests and participation overthe properties to a certain Manuel Go (2) Manuel Go sold all the rights heacquired from the UCPB over the same lots on that very same day to privaterespondent GOLDEN STAR. Barely a month later, respondent NICOSsuddenly executed a document entitled “Waiver of Right of Redemption” infavor of respondent GOLDEN STAR which then filed a petition for the




On the matter of right of redemption. The lower court ruled that the one-year period of redemption has never commenced because the issuance ofthe Final Deed of Sale set for by the Sheriff was stopped by the trial court.

On registered lands, the one-year period of redemption starts not from thedate of the sale but from the date when the certificate of sale issued by thesheriff is registered in the office of the register of deeds.

ISSUE (Relevant to topic) Whether the right to redemption was properly granted?

RULING NO . The certificate of sale was duly registered by the petitioners in theOffice of the Register of Deeds of Mandaue City. From thereon, the one-yearredemption began. Since the private respondents did not exercise their rightof redemption from the said time, the consequence is that ownership waslegally consolidated in PFC, which had a right to the issuance of a new

certificate of title in its name.

The one-year period to redeem a mortgage of land covered byTorrens Title is not stopped or suspended by any TRO issued by thecourts.

An experienced businessman cannot claim that he and his wife did not knowof the “total finance charges” for he was one of the signatories to thepromissory note.

Consolidated Bank v IAC, 150 SCRA 591 (1987)FACTS Originally, petitioned Solidbank loaned private respondent NICOS sums ofmoney. NICOS failed to pay back the loan prompting Solidbank to file acollection case. Pursuant to the writ of attachment issued by the Court andupon petitioner’s posting of sufficient bond, the Sheriff of Manila levied andattached the two real properties described by the foregoing order ofattachment. Pursuant to the foregoing inscription and annotations, guardswere deputized by the Manila Sheriff to secure the premises of the twoattached realties.

A year later, however, the attached properties which had been mortgagedby NICOS to the UCPB were extra-judicially foreclosed by the latter. As thehighest bidder, a certificate of sale was issued to it over the subject realties

favor of respondent GOLDEN STAR, which then filed a petition for theissuance of a writ of possession over the subject realties before the RTC. Itwas granted.

Petitioner Solidbank filed an omnibus motion to annul the writ of possessionissued to GOLDEN STAR and to punish for contempt of court the personswho implemented the writ of possession with the use of force andintimidation. Petitioner interposed an appeal before the IntermediateAppellate Court arguing inter alia that the properties were under custodialegis, hence the extra-judicial foreclosure and the writ of possession werenull and void, and that the right of NICOS to redeem the auctionedproperties had been acquired by Solidbank. The Intermediate AppellateCourt found no merit to this appeal. Hence the petition for review, on thegrounds that appellate court decided the case contrary to law and applicabledecisions of the SC.

ISSUE

Whether the subject properties were under custodia legis by virtue of theprior annotation of a writ of attachment in petitioner’s favor at the time theproperties were extrajudicially foreclosed?

RULING YES . The disputed real properties were under custodia legis by virtue of avalid attachment at the time the same were extrajudicially foreclosed by athird party mortgagee. The rule is well settled that when a writ ofattachment has been levied on real property or any interest thereinbelonging to the judgment debtor, the levy thus effected creates a lienwhich nothing can destroy but its dissolution. (1) It follows that the writ ofpossession issued by the Malolos court in favour of respondent GOLDENSTAR is null and void because it interfered with the jurisdiction of a co-ordinate and co-equal court. (2) The transactions on which respondentGOLDEN STAR’s right to a writ of possession are based are highly irregularand questionable. The attempts to bring the disputed properties out of thepetitioner’s reach inspite of the attachment, are plain and apparent. Theyconspired to defeat petitioner’s lien on the attached properties and to denythe latter its right of redemption.

In issuing the writ of possession, the Malolos court relied on copies ofdocuments submitted to it by GOLDEN STAR. It was thus led into the errorof ruling that the petitioner’s attachment was not properly annotated. It


likewise follows that the petitioner (the attaching creditor) has acquired byoperation of law the right of redemption over the foreclosed properties.

It has been held that “an attaching creditor may succeed to the incidentalrights to which the debtor was entitled by reason of his ownership of theproperty, as for example, a right to redeem from a prior mortgage. The factthat respondent NICOS executed a waiver of right of redemption in favour of

Petitioner filed a "Motion to require Sheriff to Execute Certificate ofRedemption". Respondent Judge issued the challenged order denyingpetitioner's motion requiring the Sheriff to execute a certificate ofredemption. A motion for reconsideration was denied by respondent Judge.

ISSUE




that respondent NICOS executed a waiver of right of redemption in favour ofrespondent GOLDEN STAR is of no moment as by that time it had no moreright which it may waive in favor of another.

(Relevant to topic starts here)GOLDEN STAR argues that even if the attachment in issue was dulyregistered and the petitioner has a right of redemption, the certificate ofsale of the lands in question was registered on September 6, 1983. It claimsthat the period to redeem therefore lapsed on September 6, 1984 withoutthe petitioner bank ever exercising any right to redemption. Well settled isthe rule that the pendency of an action tolls the term of the right ofredemption. In the case at bar, the petitioner commenced the instanctaction by way of an omnibus motion before the Bulacan Court on November21, 2983 or barely two months after the certificate of sale was registered onSeptember 6, 1983, well within the one year period.

CMS Stock Brokerage v CA, 275 SCRA 790 (1997)

FACTSPetitioner, as judgment debtor, seeks to redeem two parcels of land sold onexecution none years earlier upon the contention that the pendency of anaction involving the ownership thereof suspended the 12-month period ofredemption provided by the present Rules.

The deputy sheriff refused to execute a deed of redemption. Petitioner wentto the RTC. Respondent Judge Buenaventura thereafter ruled againstpetitioner on the ground that the right of redemption had long expired.

Dissatisfied with this ruling which sustained the deputy sheriff's action,petitioner filed a petition for certiorari and mandamus , with a prayer for awrit of preliminary injunction with respondent CA. The appellate courtdismissed the petition hence the instant petition for review on certiorari .

The SC declared petitioner as the real owner of the subject parcel of landand not Rosario S. Sandejas who initiated the proceedings for "quieting ofownership of real property, injunction and damages". Petitioner filed anotice to redeem and tendered the redemption money. Petitioner also paidan additional sum as Sheriff's Commission. Respondents Sheriffs informedpetitioner that they cannot execute and issue the certificate of redemptionbecause of the absence a court order directing them to do so, and theyinformed the latter that they accepted the tendered amounts forsafekeeping.

ISSUE 1) Whether petitioner could have effected the redemption of the subjectproperty within the 12-month period provided under the Rules; and(Relevant topic)

2) Whether petitioner's period to redeem is tolled by an action to quiet titlefiled by a third-party claimant questioning the ownership of the propertysold on execution?

RULING (1) It is petitioner's contention that it could not have exercised the right ofredemption before the lapse of the 12-month redemption period because itstitle at the time was clouded by the claim of a third party, Rosario Sandejas.The CA rejected this contention principally because under the establishedfactual circumstances, petitioner considered itself to be the owner of thesubject property despite the alleged pending case for quieting of title. Thepetitioner's reliance on the supposed cloud or uncertainty in its ownership

for not effecting redemption within the 12-month redemption period ismisplaced.

The real property sold on execution may be redeemed by the judgmentdebtor (CMS Stock Brokerage, Inc.) or his successors in interest, in thewhole or any part of the property. The exercise of this right of redemptionby the judgment debtor is not conditioned upon ownership of the propertysold on execution but by virtue of a writ of execution directed against such

judgment debtor. In instances when a piece of property is claimed by a thirdperson, as in the case at hand When, however, property is levied upon andsold, despite a claim by a third person who must vindicate then his claim ina proper action, Section 29 determines who shall have a right ofredemption. Clearly, the right of redemption is given to the judgment debtorand not to any third-party claimant.

The judgment debt or obligation and not ownership is the mainconsideration in granting the judgment debtor the right to redeem.Petitioner's supposition that unquestioned ownership of the subject propertyis a requisite for its exercise of the right of redemption in this case has nolegal basis. Petitioner could have effected its right of redemption had itwanted to within the 12-month redemption period provided under the Rules.This is the law and ignorance thereof is no excuse for petitioner's failure toexercise such right.


(2) NO . As already pointed out, the issue of ownership insofar aspetitioner’s right of redemption as judgement debtor is concerned, has nobearing whatsoever, so as have the effect of tolling or interrupting therunning o running of the 12-month redemption period. If at all, as pointedout by respondent CA, the condition imposed after the execution salerelating to the pending action for quieting of title, may only benefit thethird-party claimant, Rosario Sandejas, that is should her claim prosper,

provisions of sections four hundred and sixty-four to fourhundred and sixty-six, inclusive, of the Code of CivilProcedure, in so far as these are not inconsistent with theprovisions of this Act.

SEC. 28, RULE 39 (ROC): Time and manner of, andamounts payable on, successive redemptions; notice to be




third party claimant, Rosario Sandejas, that is should her claim prosper,only then may the execution sale be declared null and void. But with respectto petitioner's right of redemption as judgment debtor this condition is of nomoment.

(v) Payment of CGT and DST

c. Redemption PriceSEC. 47 (1), GBL: Foreclosure of Real Estate Mortgage . - Inthe event of foreclosure, whether judicially or extra-

judicially, of any mortgage on real estate which is securityfor any loan or other credit accommodation granted, themortgagor or debtor whose real property has been sold forthe full or partial payment of his obligation shall have theright within one year after the sale of the real estate, toredeem the property by paying the amount due under themortgage deed, with interest thereon at rate specified in the

mortgage, and all the costs and expenses incurred by thebank or institution from the sale and custody of saidproperty less the income derived therefrom. However, thepurchaser at the auction sale concerned whether in a judicialor extra-judicial foreclosure shall have the right to enterupon and take possession of such property immediatelyafter the date of the confirmation of the auction sale andadminister the same in accordance with law. Any petition incourt to enjoin or restrain the conduct of foreclosureproceedings instituted pursuant to this provision shall begiven due course only upon the filing by the petitioner of abond in an amount fixed by the court conditioned that hewill pay all the damages which the bank may suffer by theenjoining or the restraint of the foreclosure proceeding.

SEC. 6, ACT NO. 3135: In all cases in which anextrajudicial sale is made under the special powerhereinbefore referred to, the debtor, his successors ininterest or any judicial creditor or judgment creditor of saiddebtor, or any person having a lien on the propertysubsequent to the mortgage or deed of trust under whichthe property is sold, may redeem the same at any timewithin the term of one year from and after the date of thesale; and such redemption shall be governed by the

amounts payable on, successive redemptions; notice to begiven and filed.

The judgment obligor, or redemptioner, may redeem the

property from the purchaser, at any time within one (1)year from the date of the registration of the certificate ofsale, by paying the purchaser the amount of his purchase,with one per centum per month interest thereon in addition,up to the time of redemption, together with the amount ofany assessments or taxes which the purchaser may havepaid thereon after purchase, and interest on such lastnamed amount at the same rate; and if the purchaser bealso a creditor having a prior lien to that of theredemptioner, other than the judgment under which suchpurchase was made, the amount of such other lien, withinterest. Property so redeemed may again be redeemedwithin sixty (60) days after the last redemption upon

payment of the sum paid on the last redemption, with twoper centum thereon in addition, and the amount of anyassessments or taxes which the last redemptioner may havepaid thereon after redemption by him, with interest on suchlast-named amount, and in addition, the amount of any liensheld by said last redemptioner prior to his own, withinterest. The property may be again, and as often as aredemptioner is so disposed, redeemed from any previousredemptioner within sixty (60) days after the lastredemption, on paying the sum paid on the last previousredemption, with two per centum thereon in addition, andthe amounts of any assessments or taxes which the lastprevious redemptioner paid after the redemption thereon,with interest thereon, and the amount of any liens held bythe last redemptioner prior to his own, with interest.Written notice of any redemption must be given to the

officer who made the sale and a duplicate filed with theregistry of deeds of the place, and if any assessments ortaxes are paid by the redemptioner or if he has or acquiresany lien other than that upon which the redemption wasmade, notice thereof must in like manner be given to theofficer and filed with the registry of deeds; if such notice benot filed, the property may be redeemed without payingsuch assessments, taxes, or liens.


CasesUnion Bank v CA, 359 SCRA 480 (2001)FACTS Spouses Vincoy obtained a loan from Union Bank in the amount of P2M,which they secured with a mortgage over their residence. For failure to payon its maturity date, Union Bank extrajudicially foreclosed the mortgage andit became the highest bidder in the scheduled auction for P3.29K.

During the process of paying the 20% installment agreed upon, BMCexecuted a Deed of Assignment to West Negros College, assigning to thelatter the interests of BMC in the properties foreclosed, as well as the rightto redeem them. West Negros demanded that the redemption price bereduced for excessive interest charges.

Thereafter, DBP Head Office REJECTED the compromise amount of P21.5M




it became the highest bidder in the scheduled auction for P3.29K.

Before the expiration of the redemption period, Spouses Vincoy, togetherwith Gregorio sisters, filed a complaint for annulment of mortgage, alleging

that the property had been constituted as a family home as early as 1989and that the Gregorio sisters did not consent to the mortgage.

RTC declared that the constitution of the family home is void because itsactual value exceeded P300K and that the mortgage in favor of Union Bankvalid. It also ordered Spouses Vincoy to pay their O/S balance to Union bankin the amount of P4.8M. CA sustained the finding of RTC as to the issue ofthe family home, but found that the proper redemption price should beP3.29M, which is the purchase price at the foreclosure sale plus 1% monthlyinterest pursuant to Rule 39 of the RoC.

ISSUE Whether the redemption price set by the Court of Appeals is proper

RULING NO . Section 78 of GBL governs the determination of the redemption price ofthe subject property. The Court has settled that the amount at which theforeclosed property is redeemable is the amount due under the mortgagedeed, or the O/S obligation of the mortgagor plus interests and expenses inaccordance with Sec. 78, GBL. It was therefore erroneous for the CA toapply Rule 39 of the RoC in determining the redemption price in this case.

DBP v West Negros College, 391 SCRA 330 (2002)FACTS Bacolod Medical Center (BMC) obtained a loan worth P2.4M from DBP,secured by a mortgage on 2 parcels of land, hospital building and medicalequipment.

For failure to pay, DBP extrajudicially foreclosed the mortgage under Act No3135. At the public auction, DBP emerged as the highest bidder for P4.09M.The O/S balance of BMC with DBP as of the date of public auction amountedto P32.5M.

Before the expiration of the redemption period, BMC and DBP Bacolodagreed to peg the redemption price at P21.5M, as a compromise settlementof the O/S account--subject to approval of DBP Head Office.

Thereafter, DBP Head Office REJECTED the compromise amount of P21.5Msaying that the re-appraised value of the properties is P28.9M as of May1991.

West Negros College requested the issuance of the certificate of redemptionafter it had paid DBP P4.3M as 1% monthly interest. Its computation wasbased on Rule 39 of the RoC and Act 3135, while that of DBP's was basedon its charter requiring payment of the amount owed as of the date of theforeclosure sale. Pursuant to this, DBP refused to hand over the TCTs of theforeclosed properties. However, West Negros was vested with possession ofthe properties.

West Negros filed a petition with the RTC for the surrender of the TCTs (orthe issuance of new ones) alleging full payment of the redemption priceunder Rule 39 of RoC and Act No 3135--the amount of purchase with 1%monthly interest + expenses at the sale. DBP, on the other hand, contendsthat the proper redemption price is based on the total outstanding loan as of

the date of the foreclosure sale, plus interests and expenses.

RTC ruled in favor of West Negros, which the CA sustained.

ISSUE What is the proper redemption price?

RULING TOTAL OUTSTANDING BALANCE AS OF THE DATE OF FORECLOSURESALE. It has long been settled that where real property is mortgaged toand foreclosed judicially or extrajudicially by DBP, the right of redemptionmay only be exercised by paying all the amount owed on the date of thesale, with interest on the total indebtedness at the rate agreed upon, unlessthe bidder has taken material possession of the property or unless it hasbeen delivered to him, in which case, the proceeds of the property shallcompensate the interest. This is applied whether the foreclosed property issold to DBP or to another person at the public auction, provided that theproperty was mortgaged to DBP. Where property is sold to persons otherthan the mortgagee, the procedure is for DBP to return to the bidder theamount it received from him as a result of the auction sale with interest.

This rule is embodied in the charters of DBP and its predecessor agencies.CA 459 (Agricultural and Industrial Bank) set the redemption price at thetotal indebtedness plus interest as of the date of the auction sale.


Several cases had settled that CA 459, NOT Rule 39 of RoC, is applicable incase of redemption of real estate mortgaged to DBP to secure a loan. Assuch, the redemption price to be paid by the mortgagor to DBP is all amounthe owes on the date of the sale, with interest on the total indebtedness, andNOT merely the amount paid for by the purchaser in the public auction.

d. Possession

Pending the Petition, Spouses Samson filed an action for Annulment of EJForeclosure and/or Nullification of the Sale against Lenjul Realty, FEBTC,BPI, the clerk of court and the RD of Antipolo City.

Judge Rivera gave due course to the Petition for Issuance of Writ ofPossession and denied the opposition. Pursuant to this, a Writ of Possessionwas issued directing the sheriff to place Lenjul Realty in physical possession




SEC. 47 (1), GBL: Foreclosure of Real Estate Mortgage . - Inthe event of foreclosure, whether judicially or extra-

judicially, of any mortgage on real estate which is security

for any loan or other credit accommodation granted, themortgagor or debtor whose real property has been sold forthe full or partial payment of his obligation shall have theright within one year after the sale of the real estate, toredeem the property by paying the amount due under themortgage deed, with interest thereon at rate specified in themortgage, and all the costs and expenses incurred by thebank or institution from the sale and custody of saidproperty less the income derived therefrom. However, thepurchaser at the auction sale concerned whether in a judicialor extra-judicial foreclosure shall have the right to enterupon and take possession of such property immediatelyafter the date of the confirmation of the auction sale and

administer the same in accordance with law. Any petition incourt to enjoin or restrain the conduct of foreclosureproceedings instituted pursuant to this provision shall begiven due course only upon the filing by the petitioner of abond in an amount fixed by the court conditioned that hewill pay all the damages which the bank may suffer by theenjoining or the restraint of the foreclosure proceeding.

CasesSamson v RiveraFACTS Spouses Samson obtained a loan amounting to P55M from Far East Bank,which they secured with 2 REMs covering 5 parcels of commercial propertyin Antipolo, Rizal.

Due to their failure to pay, FEBTC filed an Application for Extra-JudicialForeclosure of REM. FEBTC and Lenjul Realty were the 2 bidders in the 2ndauction (1st auction was postponed because there was only 1 bidder then),with the latter declared as the highest bidder in the amount of P80M.

Thereafter, Lenjul Realty filed a Petition for the Issuance of a Writ ofPossession, which the Spouses Samson opposed.

g p j y p y pof the foreclosed properties. On the same date, the sheriff issued a Notice toVacate to Rempson Corp (owned by Samson spouses).

Spouses Samson then filed with the CA a SCA for Certiorari withProhibition/Mandamus under Rule 65 to annul orders of Judge Rivera.

CA ruled that certiorari was improper and premature and that there was anadequate remedy available--to file a petition to set aside the foreclosuresale and to cancel the writ of possession.

ISSUE 1. Whether RTC committed GADLEJ in granting Petition for Issuance of

Writ of Possession2. Whether Petition for Certiorari was the proper remedy

HELD

1. NO . The issuance of the Writ is explicitly authorized by Act No. 3135,which regulates the methods of effecting an EJ Foreclosure of Mortgage.Under Sec. 7 of Act No. 3135, the purchaser in a foreclosure sale may applyfor a writ of possession during the redemption period by filing for thatpurpose an ex parte motion under oath. Upon the filing of such motion andthe approval of the corresponding bond, the court is expressly directed toissue the writ.

The duty of the RTC to grant a writ of possession is ministerial. Such writissues as a matter of course upon the filing of the proper motion and theapproval of the corresponding bond.

2. NO . SCA for Certitorari could be availed of only if RTC acted with GADLEJand if there is no appeal or any other plain, speedy and adequate remedy inthe ordinary course of law.

There is grave abuse when the court acts in a capricious, whimsical,arbitrary or despotic manner equivalent to acting with lack of jurisdiction.

In this case, there was no GADLEJ since the RTC only issued the Writ incompliance with Act No. 3135.

Since there was no GADLEJ, Spouses Samson should have filed an ordinaryappeal instead of a petition for certiorari.


e. Injunction and BondSEC. 47 (1), GBL: Foreclosure of Real Estate Mortgage . - Inthe event of foreclosure, whether judicially or extra-

judicially, of any mortgage on real estate which is securityfor any loan or other credit accommodation granted, themortgagor or debtor whose real property has been sold forthe full or partial payment of his obligation shall have the

Sec. 24.1, GBL : Except as the Monetary Board may otherwiseprescribe, the total investment in equities of allied and non-allied enterprises shall not exceed fifty percent (50%) of the networth of the bank.

(iii) Investment in equity of any one enterprise

Sec. 24.2, GBL : Except as the Monetary Board may otherwise




p p y gright within one year after the sale of the real estate, toredeem the property by paying the amount due under themortgage deed, with interest thereon at rate specified in the

mortgage, and all the costs and expenses incurred by thebank or institution from the sale and custody of saidproperty less the income derived therefrom. However, thepurchaser at the auction sale concerned whether in a judicialor extra-judicial foreclosure shall have the right to enterupon and take possession of such property immediatelyafter the date of the confirmation of the auction sale andadminister the same in accordance with law. Any petition incourt to enjoin or restrain the conduct of foreclosureproceedings instituted pursuant to this provision shall begiven due course only upon the filing by the petitioner of abond in an amount fixed by the court conditioned that hewill pay all the damages which the bank may suffer by the

enjoining or the restraint of the foreclosure proceeding.

V. INVESTMENTS AND OTHER FUNCTIONS OFBANKS A. E QUITY I NVESTMENTS

1. Limits on Equity Investments of UB

a. In general

Sec. 24, par. 1, GBL : A universal bank may, subject to theconditions stated in the succeeding paragraph, invest in theequities of allied and non-allied enterprises as may bedetermined by the Monetary Board. Allied enterprises mayeither be financial or non-financial.

(i) Prior approval of MB

Sec. 24, par. 4, GBL: The acquisition of such equity or equitiesis subject to the prior approval of the Monetary Board whichshall promulgate appropriate guidelines to govern suchinvestments.

(ii) Total investment in equities of allied and non-alliedenterprises

, p y yprescribe, the equity investment in any one enterprise,whether allied or non-allied, shall not exceed twenty-fivepercent (25%) of the net worth of the bank.

(iv) Definition of net worth

Sec. 24, par. 3, GBL : As used in this Act, “net worth” shallmean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net ofvaluation reserves and other adjustments as may be required bythe Bangko Sentral.

(v) Do the foregoing limits apply to debt-to-equityconversions?

xSubsec. X116.3(i)., MRB: Equity investments. This refers toinvestments in capital stock of companies, firms or enterprises,made for purposes of control, affiliation or other continuingbusiness advantage.

xSec. 52, GBL: Acquisition of Real Estate by Way of Satisfactionof Claims . – Notwithstanding the limitations of the precedingSection, a bank may acquire, hold or convey real property underthe following circumstances:

52.1. Such as shall be mortgaged to it in good faith by wayof security for debts;


52.3. Such as it shall purchase at sales under judgments,

decrees, mortgages, or trust deeds held by it and such as itshall purchase to secure debts due it.

Any real property acquired or held under the circumstancesenumerated in the above paragraph shall be disposed of by thebank within a period of five (5) years or as may be prescribedby the Monetary Board: Provided, however, That the bank may,after said period, continue to hold the property for its own use,subject to the limitations of the preceding Section.

(vi) Sanctions if without prior MB approval

xSec. 385, MRB: Sanctions. The following sanctions shall be


imposed for equity investments made without prior MonetaryBoard approval:

a. First Offense - If the investment is not allowable underexisting regulations, divestment of the investment andreprimand on officer/director who recommended/ approvedthe investment.

primary purpose of which is to develop, promote and assist, thrudebt or equity financing or any other means, any small andmedium-scale enterprise in the country.

X379.2 Equity investments of venture capital corporations.Equity investment of a VCC in small and medium- scaleenterprises shall be subject to the following conditions:




b. Subsequent OffenseOn the Bank. If the investment is not allowable underexisting regulations, divestment of the investment.

On the Director/Officer. Fine of P20,000 for each investment tobe imposed on the members of the board and the executiveofficers who recommended/approved the investment perinvestment and to be shouldered personally by theofficer/director: Provided, That if the subsequent offense is aninvestment in a non-allied enterprise, the fine shall be P40,000.

b. In specific areas

(i) In financial allied enterprises

Sec. 25, GBL : Equity Investments of a Universal Bank in

Financial Allied Enterprises . - A universal bank can own up toone hundred percent (100%) of the equity in a thrift bank, arural bank or a financial allied enterprise.

A publicly-listed universal or commercial bank may own up toone hundred percent (100%) of the voting stock of only oneother universal or commercial bank.

(ii) In Venture Capital Corporations (VCCs)

xSec. X379, MRB: Investments in Venture Capital Corporations.The following rules and regulations shall implement Presidential

Decree No. 1688 entitled “Authorizing Banks to Invest in theEquity of Venture Capital Corporations to Assist Small andMedium- Scale Enterprises”.

For purposes of this Section, a venture capital corporation (VCC)shall refer to an entity organized jointly by private banks, theNational Development Corporation and the TechnologyLivelihood and Resource Center and/or such other governmentagency as may be authorized by the appropriate authority, the

a. Equity financing by a VCC may be extended to a small andmedium-scale enterprise engaged in an industry certified asdesirable by the Department of Trade and Industry; and

b. The total assets of the enterprises shall not exceed P4million, including the VCC's equity investment. Should thetotal assets of the small and medium-scale enterprisesubsequently exceed the prescribed P4 million maximum,the VCC equity investment therein made before the totalassets of the enterprise exceeded P4 million, may bemaintained but shall not be increased.

(iii) In non-financial allied enterprises

Sec. 26, GBL : Equity Investments of a Universal Bank in Non-Financial Allied Enterprises . – A universal bank may own up toone hundred percent (100%) of the equity in a non-financial

allied enterprise. xSec. X380, MRB: Non-Financial Allied Under- takings. A bankmay acquire up to 100% of the equity of a non-financial alliedundertaking: Provided, That the equity investment of a TB/RB inany single enterprise shall remain less than fifty percent (50%)of the voting shares in that enterprise: Provided, further, Thatprior Monetary Board approval is required if the investment is inexcess of forty percent (40%) of the total voting stock of suchallied undertaking.

(iv) In non-allied enterprises

Sec. 27, GBL : Equity Investments of a Universal Bank in Non-

Allied Enterprises . - The equity investment of a universal bank,or of its wholly or majority-owned subsidiaries, in a single non-allied enterprise shall not exceed thirty-five percent (35%) ofthe total equity in that enterprise nor shall it exceed thirty-fivepercent (35%) of the voting stock in that enterprise.

xSec. 1381, MRB : Investments in Non-Allied or Non-RelatedUndertakings. Only UBs may invest in the equity of anenterprise engaged in non-allied or non-related activities.

1381.2 Limits on investments in non- allied enterprises

a. The equity investment of a UB, or of its wholly or majority-


owned subsidiaries, in a single non-allied enterprise shall notexceed thirty-five percent (35%) of the total equity in thatenterprise nor shall it exceed thirty-five percent (35%) ofthe voting stock in that enterprise.

For the purpose of determining compliance with the ceilingprescribed in the preceding paragraph, (i) theequityinvestment of the bank; and (ii) the equity investment

profitable; otherwise, the feasibility study on the proposedsubsidiary should show profits in the first two (2) years ofoperations.

2. Limits on Equity Investments of KB

a. In general

S 30 1 GBL A commercial bank may subject to the




equityinvestment of the bank; and (ii) the equity investmentof the bank’s subsidiaries, shall be combined.

b. In no case shall the total equity investments in a single non-

allied enterprise of UBs, NBFIs performing QB functions andtheir subsidiaries, whether or not the parent financialintermediaries have equity investments in the enterprise,amount to fifty percent (50%) or more of the voting stock ofthat enterprise: Provided, however, That equity investmentsin excess of the ceilings prescribed herein as of April 1, 1980may be maintained but may not be increased and ifreduced, shall not be increased thereafter beyond the ceilingprescribed herein.

(v) In quasi-banks

Sec. 28, GBL: Equity Investments in Quasi-Banks . – Topromote competitive conditions in financial markets, theMonetary Board may further limit to forty percent (40%) equityinvestments of universal banks in quasi-banks. This rule shallalso apply in the case of commercial banks.

(vi) In subsidiaries and affiliates abroad

xSec. X382, MRB : Investments in Subsidiaries and AffiliatesAbroad. The establishment or acquisition of subsidiaries oraffiliates abroad shall require prior approval of the BSP.

X382.8 Investment of a bank subsidiary in a foreign subsidiary.The following guidelines shall govern the investment in a foreignsubsidiary by a bank subsidiary:

a. The investment of a bank subsidiary in the equity of asubsidiary located abroad shall be subject to prior BSP approval;

b. The bank subsidiary may invest in a subsidiary if it meets thefollowing pre- qualification requirements:

(1) It has complied with the minimum capital requirement ofthe host country;

(2) It has booked the required valuation reserves and othercapital adjustments, if any; and

(3) Its operations in the preceding three (3) years were

Sec. 30, par. 1, GBL: A commercial bank may, subject to theconditions stated in the succeeding paragraphs, invest only inthe equities of allied enterprises as may be determined by theMonetary Board. Allied enterprises may either be financial ornon-financial.

(i) Prior approval of MB

Sec. 30, par. 3, GBL : The acquisition of such equity or equitiesis subject to the prior approval of the Monetary Board whichshall promulgate appropriate guidelines to govern suchinvestment.

(ii) Total investment in equities of allied (financial or non-financial) enterprises

Sec. 30.1, GBL : The total investment in equities of alliedenterprises shall not exceed thirty-five percent (35%) of the net

worth of the bank.(iii) Investment in equity of any one enterprise

Sec. 30.2, GBL: The equity investment in any one enterpriseshall not exceed twenty-five percent (25%) of tile net worth ofthe bank.

(iv) Definition of net worth

Sec. 24, par. 3, GBL: As used in this Act, “net worth” shallmean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net ofvaluation reserves and other adjustments as may be required bythe Bangko Sentral.

(v) Sanctions if without prior MB approval

xSec. 385, MRB : Sanctions. The following sanctions shall beimposed for equity investments made without prior MonetaryBoard approval:

a. First Offense - If the investment is not allowable underexisting regulations, divestment of the investment andreprimand on officer/director who recommended/ approvedthe investment.




the thrift bank; (b) the equity investment in any single enterprise shallbe limited to fifteen percent (15%) of the net worth of the thrift bank;(c) the equity investment in any single enterprise shall remain aminority holding in that enterprise; and (d) the equity investment inother banks shall be subject to the same provisions governing similarinvestments of commercial banks and shall be deducted from theinvesting bank's net worth for the purpose of computing of the

f

(c) Fertilizer and agricultural chemical and pesticidesdistribution;

(d) Farm equipment distribution;

(e) Trucking and transportation of agricultural products;

(f) Marketing of agricultural products;




prescribed ratio as provided in Section 9 hereof: Provided, further , Thatequity investments shall not be permitted in non-relatedactivities.Where the allied activity is a wholly- or majority-owned

subsidiary of the thrift bank, the Bangko Sentral may subject it toexamination.

Investment in allied undertaking shall include institutions engaged in thefollowing activities:

(a) Banking and financing;

(b) Warehousing and other post-harvesting activities;

(c) Fertilizer and agricultural chemical and pesticidesdistribution;

(d) Farm equipment distribution;

(e) Trucking and transportation of agricultural products;

(f) Marketing of agricultural products;

(g) Leasing; and

(h) Other undertakings as may be determined by theMonetary Board.

4. Limits on Equity Investments of RB

Sec. 13, Rural Banks Act : Subject to such guidelines as may beestablished by the Monetary Board, rural banks may invest in equities ofallied undertakings as hereinafter enumerated: Provided, That: (a) thetotal investment to equities shall not exceed twenty-five percent (25%)of the net worth of the rural bank; (b) the equity investment in anysingle enterprise shall be limited to fifteen percent (15%) of the networth of the rural bank; and (c) the equity investment of the rural bankin any single enterprise shall remain a minority holding in thatenterprise: Provided, further, That equity investment shall not bepermitted in non-related activities;

Allied undertakings shall include;

(a) Banks, financial institutions and non-bank financialintermediaries;

(b) Warehousing and other post-harvest facilities;

(g) Leasing; and

(h) Other undertakings as may be determined by the MonetaryBoard.

5. Limits on Equity Investments of Islamic Bank

Sec. 6(11), Islamic Bank Charter: Islamic Bank's Powers . - TheAl-Amanah Islamic Investment Bank of the Philippines, upon itsorganization, shall be a body corporate and shall have the power:

To invest in equities of the following allied undertakings:

(a) Warehousing companies;

(b) Leasing companies;

(c) Storage companies;

(d) Safe deposit box companies;

(e) Companies engaged in the management of mutual funds butnot in the mutual funds themselves; and

(f) Such other similar activities as the Monetary Board of theCentral Bank of the Philippines has declared or may declare asappropriate from time to time, subject to existing limitationsimposed by law;

B. O THER KB F UNCTIONS

Sec. 29, GBL : Powers of a Commercial Bank . - A commercial bank shallhave, in addition to the general powers incident to corporations, all suchpowers as may be necessary to carry on the business of commercial banking

such as accepting drafts and issuing letters of credit; discounting andnegotiating promissory notes, drafts, bills of exchange, and other evidencesof debt; accepting or creating demand deposits; receiving other types ofdeposits and deposit substitutes; buying and selling foreign exchange andgold or silver bullion; acquiring marketable bonds and other debt securities;and extending credit, subject to such rules as the Monetary Board maypromulgate. These rules may include the determination of bonds and otherdebt securities eligible for investment, the maturities and aggregate amountof such investment.

1. Non-Core/Quasi-Banking Functions


Sec. 4, GBL: The Bangko Sentral shall also have supervision over theoperations of and exercise regulatory powers over quasi-banks, trustentities and other financial institutions which under special laws aresubject to Bangko Sentral supervision. .

For the purposes of this Act, “quasi-banks” shall refer to entitiesengaged in the borrowing of funds through the issuance, endorsementor assignment with recourse or acceptance of deposit substitutes as

another availment under the same letter of credit. However, the Bank ofAyudhua informed the Bank of America that the letter of credit wasfraudulent. After investigation of the NBI, the officers of Inter-resin wascharged with estafa but their cases were dismissed due to lack of primafacie evidence.

Now, Bank of America files a case against Inter-Resin for the recovery of10M it issued under the fraudulent letter of credit. The TC ruled in favor of




or assignment with recourse or acceptance of deposit substitutes asdefined in Section 95 of Republic Act No. 7653 (hereafter the “NewCentral Bank Act” ) for purposes of re-lending or purchasing ofreceivables and other obligations.

Sec. 95, NCBA : The term "deposit substitutes" is defined as analternative form of obtaining funds from the public, other than deposits,through the issuance, endorsement, or acceptance of debt instrumentsfor the borrower's own account, for the purpose ofrelending orpurchasing of receivables and other obligations. These instruments mayinclude, but need not be limited to, bankers acceptances, promissorynotes, participations, certificates of assignment and similar instrumentswith recourse, and repurchase agreements. The Monetary Board shalldetermine what specific instruments shall be considered as depositsubstitutes for the purposes of Section 94 of this Act: Provided,however, That deposit substitutes of commercial, industrial and othernon-financial companies for the limited purpose of financing their own

needs or the needs of their agents or dealers shall not be covered by theprovisions of Section 94 of this Act.

2. Issuing L/Cs

Sec. 105, NCBA: Margin Requirements Against Letters of Credit.— The Monetary Board may at any time prescribe minimum cashmargins for the opening of letters of credit, and may relate the size ofthe required margin to the nature of the transaction to be financed.

CasesBank of America, NT & SA v. Court of Appeals , 228 SCRA 357 (1993)FACTS

Bank of America received an irrevocable letter of credit purportedly issuedby Bank of Ayudhua to cover the sale of plastic ropes and agricultural filesbetween General Chemicals Ltd of Thailand (Buyer) and Inter-ResinIndustrial Corporation of Philippines (Seller). Inter-Resin tried to have theletter of credit confirmed. However, the Bank of America said that there wasno need for confirmation, as the letter of credit would not have beentransmitted if it were not genuine.

Afterwards, Inter-Resin sought to make partial availment under the letter ofcredit from Bank of America, its advising bank. Assured by the

“genuineness” of letter of credit, Bank of America, issued a Cashier’s checkamounting to 10M in favor of Inter-Resin. Again, Inter-Resin sought for

10M it issued under the fraudulent letter of credit. The TC ruled in favor ofInter-Resin, stating that the Bank of America lead Inter-Resin to believe theletter of credit was genuine. The CA affirmed the decision.

ISSUE W/N the Bank of America is a mere advising/notifying bank or a confirmingbank.

RULING

The Bank is only an advising bank, based on the provisions of the letter ofcredit, the bank’s letter of advice and request for payment of advising fee.The fact that the Bank asked Inter-Resin to submit documents and paid theproceeds did not make it a confirming bank. the Bank’s letter clearly limitedits obligation only to being an advising bank.

As an advising/notifying bank, it did not incur any obligation other than just

notifying Inter-Resin of the issuance of the letter of credit. The statement ofone of the bank employees regarding the genuineness of the letter of creditdid not have an effect of novating the position of the bank as an advisingbank. in addition, the Bank is bound only to check the “apparentauthenticity” of the letter of credit, which it did.

Thus, the Bank of America can recover what it has paid to Inter-Resin,under the discounting agreement with the bank being a negotiating bank.With this agreement, the bank independently assumed the obligation underthe letter of credit, with right of recourse against the bank of Ayudha,saving Inter-Resin the trouble of traveling to Thailand.

Definition

A letter of credit is a financial device developed by merchants as aconvenient and relatively safe mode of dealing with sales of goods to satisfythe seemingly irreconcilable interests of a seller, who refuses to part withhis goods before he is paid, and a buyer, who wants to have control of thegoods before paying. To break the impasse, the buyer may be required tocontract a bank to issue a letter of credit in favor of the seller so that, byvirtue of the latter of credit, the issuing bank can authorize the seller todraw drafts and engage to pay them upon their presentment simultaneouslywith the tender of documents required by the letter of credit. The buyer andthe seller agree on what documents are to be presented for payment, butordinarily they are documents of title evidencing or attesting to the


shipment of the goods to the buyer.

Once the credit is established, the seller ships the goods to the buyer and inthe process secures the required shipping documents or documents of title.To get paid, the seller executes a draft and presents it together with therequired documents to the issuing bank. The issuing bank redeems the draftand pays cash to the seller if it finds that the documents submitted by theseller conform with what the letter of credit requires. The bank then obtains

are other principles, which, although part of lex mercatoria , are not dealtwith the U.C.P.

Transfield Philippines, Inc. v. Luzon Hydro Corporation , 443 SCRA 307(2004)FACTS

On 26 March 1997, petitioner and respondent Luzon Hydro Corporation




q .possession of the documents upon paying the seller. The transaction iscompleted when the buyer reimburses the issuing bank and acquires thedocuments entitling him to the goods. Under this arrangement, the sellergets paid only if he delivers the documents of title over the goods, while thebuyer acquires said documents and control over the goods only afterreimbursing the bank.

Parties

There would at least be three (3) parties: (a) the buyer , who procures theletter of credit and obliges himself to reimburse the issuing bank uponreceipts of the documents of title; (b) the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and properdocument of titles and to surrender the documents to the buyer uponreimbursement; and, (c) the seller , who in compliance with the contract ofsale ships the goods to the buyer and delivers the documents of title anddraft to the issuing bank to recover payment.

The number of the parties, not infrequently and almost invariably ininternational trade practice, may be increased. Thus, the services of anadvising (notifying) bank may be utilized to convey to the seller theexistence of the credit; or, of a confirming bank which will lend credence tothe letter of credit issued by a lesser known issuing bank; or, of a payingbank , which undertakes to encash the drafts drawn by the exporter.Further, instead of going to the place of the issuing bank to claim payment,the buyer may approach another bank, termed the negotiating bank , tohave the draft discounted.

Governing Law

Being a product of international commerce, the impact of this commercialinstrument transcends national boundaries, and it is thus not uncommon tofind a dearth of national law that can adequately provide for its governance.This country is no exception. Our own Code of Commerce basicallyintroduces only its concept under Articles 567-572, inclusive, thereof. It isno wonder then why great reliance has been placed on commercial usageand practice, which, in any case, can be justified by the universalacceptance of the autonomy of contract rules. The rules were laterdeveloped into what is now known as the Uniform Customs and Practice forDocumentary Credits ("U.C.P.") issued by the International Chamber ofCommerce. It is by no means a complete text by itself, for, to be sure, there

, p p y p(hereinafter, LHC) entered into a Turnkey Contract whereby petitioner, asTurnkey Contractor, undertook to construct, on a turnkey basis, a seventy(70)-Megawatt hydro-electric power station at the Bakun River in the

provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitionerwas given the sole responsibility for the design, construction,commissioning, testing and completion of the Project.

To secure performance of petitioner’s obligation on or before the targetcompletion date, or such time for completion as may be determined by theparties’ agreement, pe titioner opened in favor of LHC two (2) standbyletters of credit.

In the course of the construction of the project, petitioner sought variousEOT to complete the Project. The extensions were requested allegedly dueto several factors which prevented the completion of the Project on targetdate, such as force majeure occasioned by typhoon Zeb , barricades anddemonstrations. LHC denied the requests, however. This gave rise to aseries of legal actions between the parties which culminated in the instantpetition.

ISSUE

Whether or not the beneficiary of an LOC can invoke the IndependencePrinciple?

RULING

YES. To say that the independence principle may only be invoked by theissuing banks would render nugatory the purpose for which the letters ofcredit are used in commercial transactions. As it is, the independence

doctrine works to the benefit of both the issuing bank and the beneficiary.

Vintola v. Insular Bank of Asia and America , 150 SCRA 578 (1987)FACTS

The Vintola spouses were engaged in manufacturing finished products fromraw seashells. They applied for a Letter of Credit with IBAA, whichauthorized IBAA to negotiate for the Vintolas account drafts drawn by acertain Stalin Tan who was their supplier of seashells. Stalin Tan deliveredshells worth forty thousand. The Vintolas executed a Trust ReceiptAgreement with IBAA Cebu agreeing to hold the goods in trust for IBAA and


to turn over the proceeds in case of a sale. The Vintolas defaulted, hence,IBAA demands from the Vintolas but they were not able to dispose of theshells and offered them to IBAA. IBAA refused and charged them withestafa. TC acquitted the Vintolas because the element of misappropriationwas not present and that under the Trust Receipt, the remedy of IBAA iscivil in nature not criminal. IBAA then filed a civil case but the TC dismissedit again, but later reconsidered, ordering the Vintolas to pay twenty-seventhousand and attorney’s fees

banks to sell to the Bangko Sentral or to other banks all or part of theirsurplus holdings of foreign exchange. Such transfers may be requiredfor all foreign currencies or for only certain of such currencies, accordingto the decision of the Monetary Board. The transfers shall be made atthe rates established under the provisions of Section 74 of this Act.

The Monetary Board may, whenever warranted, determine the netassets and net liabilities of banks and shall, in making such a




thousand and attorney’s fees.

ISSUE

(1) Does the delivery of the seashells first to IBAA, and upon IBAA’srefusal, to the trial court extinguish the Vintolas’ liability?

(2) Does the previous acquittal bar the filing of the civil action since IBAAdid not reserve the right to enforce civil liability?

HELD

Both NO . Delivery of the seashells did not extinguish Vintola’s liability andthe previous acquittal did not bar the filing of a civil action.

A letter of credit-trust receipt arrangement is endowed with its owndistinctive features and characteristics. Under the agreed set up, the bankextends a loan covered by the letter of credit, with the trust receipt assecurity for the loan.

According to Samo. V. People: “a trust receipt is considered as a securitytransaction intended to aid in financing importers and retail dealers who donot have sufficient funds or resources to finance the importation or purchaseof merchandise, and who may not be able to acquire credit except throughutilization, as collateral of the merchandise imported or purchased.”

So IBAA never became the real owner of the goods, and was merely theholder of a security title for the advances made under the LC. The Vintolasown the shells and hold it at their own risk, the trust agreement did notmake the IBAA an investor. IBAA remained a creditor and a lender.Depositing of the goods with IBAA did not convert them to investors andextinguish the liability of the Vintolas. Even if they did not misappropriate or

misapply or convert the seashells, they are still liable ex contractu under theterms of the LC/Trust Receipt separately from the estafa, hence they wereproperly sued despite the acquittal in the criminal case.

3. Foreign Exchange Operations

Sec. 76, NCBA: Foreign Exchange Holdings of the Banks. — Inorder that the Bangko Sentral may at all times have foreign exchangeresources sufficient to enable it to maintain the international stabilityand convertibility of the peso, or in order to promote the domesticinvestment of bank resources, the Monetary Board may require the

, gdetermination, take into account the bank's networth, outstandingliabilities, actual and contingent, or such other financial or performanceratios as may be appropriate under the circumstances. Any suchdetermination of net assets and net liabilities shall be applied in allbanks uniformly and without discrimination.

Sec. 77, NCBA: Requirement of Balanced Currency Position . —The Monetary Board may require the banks to maintain a balancedposition between their assets and liabilities in Philippine pesos or in anyother currency or currencies in which they operate. The banks shall begranted a reasonable period of time in which to adjust their currencypositions to any such requirement.

The powers granted under this section shall be exercised only whenspecial circumstances make such action necessary, in the opinion of theMonetary Board, and shall be applied to all banks alike and withoutdiscrimination.

Sec. 78, NCBA: Regulation of Non-spot Exchange Transactions . —In order to restrain the banks from taking speculative positions withrespect to future fluctuations in foreign exchange rates, the MonetaryBoard may issue such regulations governing bank purchases and salesof non-spot exchange as it may consider necessary for said purpose.

Sec. 79, NCBA: Other Exchange Profits and Losses. — The banksshall bear the risks of non- compliance with the terms of the foreignexchange documents and instruments which they buy and sell, and shallalso bear any other typically commercial or banking risks, includingexchange risks not assumed by the Bangko Sentral under the provisionsof the preceding section.

Sec. 80, NCBA: Information on Exchange Operations. — The banksshall report to the Bangko Sentral the volume and composition of theirpurchases and sales of gold and foreign exchange each day, and mustfurnish such additional information as the Bangko Sentral may requestwith reference to the movements in their accounts in foreigncurrencies.The Monetary Board may also require other persons andentities to report to it currently all transactions or operations in gold, inany shape or form, and in foreign exchange whether entered into orundertaken by them directly or through agents, or to submit such dataas may be required on operations or activities giving rise to or inconnection with or relating to a gold or foreign exchange transaction.


The Monetary Board shall prescribe the forms on which suchdeclarations must be made. The accuracy of the declarations may beverified by the Bangko Sentral by whatever inspection it may deemnecessary.

C. O THER S ERVICES

1. Custodian of Funds, Documents, Valuable Objects

4. Financial Adviser

Sec. 53.4, GBL: Other Banking Services . – In addition to the operationsspecifically authorized in this Act, a bank may perform the followingservices, upon prior approval of the Monetary Board, act as managingagent, adviser, consultant or administrator of investmentmanagement/advisory/consultancy accounts.




Sec. 53.1, GBL: Other Banking Services . – In addition to the operationsspecifically authorized in this Act, a bank may perform the followingservices, receive in custody funds, documents and valuable objects.

2. Financial Agent

Sec. 53.2, GBL: Other Banking Services . – In addition to the operationsspecifically authorized in this Act, a bank may perform the followingservices, act as financial agent and buy and sell, by order of and for theaccount of their customers, shares, evidences of indebtedness and alltypes of securities

Cases

Panlilio v. Citibank, N.A. , 539 SCRA 69 (2007)

The Central Bank, through the Monetary Board, is empowered to conduct

investigations and examine the records of savings and loan associations. Ifany irregularity is discovered in the process, the Monetary Board mayimpose appropriate sanctions, such as suspending the offender from holdingoffice or from being employed with the Central Bank, or placing the namesof the offenders in a watchlist.

The requirement of prior notice is also relaxed under Section 28 (c) of RA3779 as investigations or examinations may be conducted with or withoutprior notice "but always with fairness and reasonable opportunity for theassociation or any of its officials to give their side." As may be gatheredfrom the records, the said requirement was properly complied with by therespondent Monetary Board.

3. Collection/Payment Agent

Sec. 53.3, GBL: Other Banking Services . – In addition to the operationsspecifically authorized in this Act, a bank may perform the followingservices, make collections and payments for the account of others andperform such other services for their customers as are not incompatiblewith banking business

5. Renting Out Safety Deposit Boxes

Sec. 53.5, GBL : Other Banking Services . – In addition to the operationsspecifically authorized in this Act, a bank may perform the followingservices, rent out safety deposit boxes.

Cases

CA Agro-Industrial Development Corporation v. Court of Appeals ,219 SCRA (1993)

FACTS

CA-Agro (through its President, Aguirre) and the spouses Pugao entered intoan agreement whereby the former bought two parcels of land for P350Kwith a P75k downpayment. Among the terms were that the titles will betransferred to CA-Agro upon full payment and that the owner's copies of thetitles will be deposited in a safety deposit box in a bank. The same could bewithdrawn upon the joint signatures of a representative of CA-Agro and thePugaos upon full payment of the purchase price. They then rented SafetyDeposit Box No. 1448 of private respondent Security Bank and TrustCompany. For this purpose, both signed a contract of lease which containsthese provisos:

"13. The bank is not a depositary of the contents of the safe and ithas neither the possession nor control of the same.

14. The bank has no interest whatsoever in said contents, exceptherein expressly provided, and it assumes absolutely no liability in

connection therewith."Renters keys were given to Aguirre, and the Pugaos. A guard key remainedwith the bank. Thereafter, a certain Margarita Ramos offered to buy the landfrom Ca-Agro at a price P280k higher than market, but demandedimmediate execution of deeds of sale and transfer of OCTs. Aguirre and thePugaos went to SBTC to open the safety deposit box, but when they openedit...the titles were GONE (dun dun dun). Ca-Agro attempted to have theTitles reconstituted, but because of the delay Ms. Ramos withdrew her offerto purchase. CA-Agro then filed this damage suit against the bank, losing atthe RTC and CA level.


ISSUES

What is the contractual relation between the bank and a third party in acontract of safety deposit? (If lease, then bank not liable because of SDBbeing in total control of depositor, as held by RTC and CA). Is SBTC Liable?

HELD

that either of them could ask the Bank for access to the safety deposit boxand, with the use of such key and the Bank's own guard key, could open thesaid box, without the other renter being present."

Sia v. Court of Appeals , 222 SCRA 24 (1993)

FACTS




SBTC is liable because the contract is not one of lease. The contract ofsafety deposit is a special kind of deposit.

Note that clauses 13 and 14 in the contract do not exempt the bank fromliability. Any stipulation exempting the depositary from any liability arisingfrom the loss of the thing deposited on account of fraud, negligence or delaywould be void for being contrary to law and public policy, and areinconsistent with the respondent Bank's responsibility as a depositary underSection 72(a) of the General Banking Act.

It cannot be characterized as an ordinary contract of lease under Article1643 because the full and absolute possession and control of the safetydeposit box was not given to the joint renters — the petitioner and thePugaos. The guard key of the box remained with the respondent Bank;without this key, neither of the renters could open the box.

Our provisions on safety deposit boxes are governed by Section 72(a) of theGeneral Banking Act, and this primary function is still found within theparameters of a contract of deposit like the receiving in custody of funds,documents and other valuable objects for safekeeping. The renting out ofthe safety deposit boxes is not independent from, but related to or inconjunction with, this principal function. Thus, a depositary's liability isgoverned by our Civil Code rules on oblicon, and thus the SBTC would beliable if, in performing its obligation, it is found guilty of fraud, negligence,delay or contravention of the tenor of the agreement.

"Thus, we reach the same conclusion which the Court of Appeals arrived at,that is, that the petition should be dismissed, but on grounds quite differentfrom those relied upon by the Court of Appeals. In the instant case, therespondent Bank's exoneration cannot, contrary to the holding of the Courtof Appeals, be based on or proceed from a characterization of the impugnedcontract as a contract of lease, but rather on the fact that no competentproof was presented to show that respondent Bank was aware of theagreement between the petitioner and the Pugaos to the effect that thecertificates of title were withdrawable from the safety deposit box only uponboth parties' joint signatures, and that no evidence was submitted to revealthat the loss of the certificates of title was due to the fraud or negligence ofthe respondent Bank. This in turn flows from this Court's determination thatthe contract involved was one of deposit. Since both the petitioner and thePugaos agreed that each should have one (1) renter's key, it was obvious

FACTS

Luzan Sia rented a safety deposit box with the Security Bank and TrustCompany to put his collection of stamps. An agreement was enteredbetween the parties that the liability of the bank will be limited only toprevent the opening of the box by any person other than the renter, andthat the bank will not be considered a depositary. There had been a floodthat entered into the bank’s premises, which seeped through the box, anddestroyed the stamps. Sia filed a complaint with the RTC, which ruled in hisfavor. The CA reversed.

ISSUE

Whether or not renting of a deposit box is lease or deposit agreement

RULING

It is a deposit agreement. Both stipulations (stated above) are contrary tolaw and public policy, and must be considered void. The primary functions ofthe bank are within the scope of an agreement of deposit, and not of a leaseagreement. Under the General Banking Act, a bank shall perform the act ofrenting out a safety deposit box as depositaries.

*The bank was also considered negligent when it did not report the effectsof the flooding with Sia. It failed to apply the diligence of a good father inprotecting the stamps deposited with them. It also aggravated the status ofthe stamps in its failure to tell Sia that flood entered its premises.

D. O THER F UNCTIONS /O PERATIONS

1. Issue Guarantees

Sec. 74, General Banking Act: No bank or banking institution shallenter, directly or indirectly, into any contract of guaranty or suretyship,or shall guarantee the interest or principal of any obligation of anyperson, co-partnership, association, corporation or other entity. Theprovisions of this section shall, however, not be held to apply to theborrowing of money by any such bank or institution through therediscounting of its receivables, or otherwise, as may be permitted bylaw, nor to the granting or guaranteeing of acceptance credits in theordinary course of its business. Nor shall the provisions of this section

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 174apply to the certification of checks or to transactions involving therelease of documents attached to items received for collection, nor toany other transaction which may properly be regarded as commonusage and accepted banking practice.

2. Act as Correspondent Bank

Cases

that the condition was void since it depended on the sole will of the debtor,the defendant Christiansen. The trial court ordered the immediate executionof its judgment upon the private respondent's filing of a bond.

ISSUE

Whether or not a correspondent bank is to be held liable under the letter ofcredit despite non-compliance by the beneficiary with the terms thereof?




Feati Bank & Trust Company v. Court of Appeals , 196 SCRA 576 (1991)

FACTS

Villaluz agreed to sell to the then defendant Christiansen 2,000 cubic metersof lauan logs. The Security Pacific National Bank of Los Angeles, Californiaissued Irrevocable Letter of Credit available at sight in favor of Villaluz forthe sum of the total purchase price. The letter of credit was mailed to theFeati Bank and Trust Company (now Citytrust) with the instruction to thelatter that it "forward the enclosed letter of credit to the beneficiary." Theletter of credit provided that the draft to be drawn is on Security PacificNational Bank and that it be accompanied by some specified documents,including a Certification from Christiansen stating that logs have beenapproved prior to shipment. However, Christiansen refused to issue thecertification as required, despite several requests made by the private

respondent. Because of the absence of the certification by Christiansen, theFeati Bank and Trust Company refused to advance the payment on theletter of credit. Since the demands by the private respondent forChristiansen to execute the certification proved futile, Villaluz, instituted anaction for mandamus and specific performance against Christiansen and theFeati Bank and Trust Company before the Court.

The Court agreed with the plaintiff that the defendant bank may be heldliable under the principles and laws on both trust and estoppels, arguingthat when the defendant bank accepted its role as the notifying andnegotiating bank for and in behalf of the issuing bank, it in effect accepted atrust reposed on it, and became a trustee in relation to plaintiff as thebeneficiary of the letter of credit. As trustee, it was then duty bound toprotect the interests of the plaintiff under the terms of the letter of credit.When the defendant bank assumed the role of a notifying and negotiatingbank, it in effect represented to the plaintiff that, if the plaintiff compliedwith the terms and conditions of the letter of credit and presents the sameto the bank together with the documents mentioned therein the said bankwill pay the plaintiff the amount of the letter of credit.

The defendant bank, in insisting upon the certification of defendantChristiansen as a condition precedent to negotiating the letter of credit, inthe Court's opinion acted in bad faith, not only because of the cleardeclaration of the Central Bank that such a requirement was illegal, butbecause the bank, with all the legal counsel available to it must have known

RULING

It is a settled rule in commercial transactions involving letters of credit thatthe documents tendered must strictly conform to the terms of the letter ofcredit. The tender of documents by the beneficiary (seller) must include alldocuments required by the letter. A correspondent bank which departs fromwhat has been stipulated under the letter of credit, as when it accepts faultytender, acts on its own risks and it may not thereafter be able to recoverfrom the buyer or the issuing bank.

The bank may only negotiate, accept or pay, if the documents tendered to itare on their face in accordance with the terms and conditions of thedocumentary credit. And since a correspondent bank, like the petitioner,principally deals only with documents, the absence of any documentrequired in the documentary credit justifies the refusal by the correspondentbank to negotiate, accept or pay the beneficiary, as it is not its obligation tolook beyond the documents. It merely has to rely on the completeness ofthe documents tendered by the beneficiary.

In regard to the ruling of the lower court and affirmed by the Court ofAppeals that the petitioner is not a notifying bank but a confirming bank, itwas found to be erroneous. The trial court wrongly mixed up the meaning ofan irrevocable credit with that of a confirmed credit. In its decision, the trialcourt ruled that the petitioner, in accepting the obligation to notify therespondent that the irrevocable credit has been transmitted to the petitioneron behalf of the private respondent, has confirmed the letter. The trial courtoverlooked the fact that an irrevocable credit is not synonymous with aconfirmed credit. These types of letters have different meanings and thelegal relations’ arising from there varies. A credit may be an irrevocable credit and at the same time a confirmed credit or vice-versa.Hence, the mere fact that a letter of credit is irrevocable does notnecessarily imply that the correspondent bank in accepting the instructionsof the issuing bank has also confirmed the letter of credit. Another errorwhich the lower court and the CA made was to confuse the obligationassumed by the petitioner.

In commercial transactions involving letters of credit, the functionsassumed by a correspondent bank are classified according to theobligations taken up by it. The correspondent bank may be called anotifying bank, a negotiating bank, or a confirming bank. In case of

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 175a notifying bank, the correspondent bank assumes no liabilityexcept to notify and/or transmit to the beneficiary the existence ofthe letter of credit. A negotiating bank, on the other hand, is acorrespondent bank which buys or discounts a draft under the letterof credit. Its liability is dependent upon the stage of the negotiation.If before negotiation, it has no liability with respect to the seller butafter negotiation, a contractual relationship will then prevailbetween the negotiating bank and the seller In the case of a

To be able to recover the amounts credited, PNB applied/appropriated theamounts of $2,600 and P34,000 from the remittances of Lapez's principalsabroad.

ISSUE

Whether PNB was justified in making the set-off against the 2 remittancescoursed though it in favor of Lapez to recover on the double credits, based

l i i d bi i




between the negotiating bank and the seller. In the case of aconfirming bank, the correspondent bank assumes a directobligation to the seller and its liability is a primary one as if thecorrespondent bank itself had issued the letter of credit.

In this case, the letter merely provided that the petitioner "forward theenclosed original credit to the beneficiary." Considering the aforesaidinstruction to the petitioner by the issuing bank, it is indubitable that thepetitioner is only a notifying bank and not a confirming bank as ruled by thecourts below. Since the petitioner was only a notifying bank, itsresponsibility was solely to notify and/or transmit the documentary of creditto the private respondent and its obligation ends there. A notifying bank isnot a privy to the contract of sale between the buyer and the seller, itsrelationship is only with that of the issuing bank and not with the beneficiaryto whom he assumes no liability. It follows therefore that when thepetitioner refused to negotiate with the private respondent, the latter has nocause of action against the petitioner for the enforcement of his rights underthe letter.

In order that the petitioner may be held liable under the letter, there shouldbe proof that the petitioner confirmed the letter of credit. No proof wasfound. Whether therefore the petitioner is a notifying bank or a negotiatingbank, it cannot be held liable. Absent any definitive proof that it hasconfirmed the letter of credit or has actually negotiated with the privaterespondent, the refusal by the petitioner to accept the tender of the privaterespondent is justified.

Philippine National Bank v. Court of Appeals , 259 SCRA 174 (1996)

FACTS

Lapez had remittances from Jeddah and Libya to be credited to his Citibankand PNB accounts, respectively.

Prior to this, in 1980 and 1981, Lapez's PNB account was doubly creditedwith $5,600 and $5,800 (total of P87,000). PNB made a demand upon Lapezfor the refund of the double credits erroneously made on his account.

Thereafter, a reduction of P34,000 was made by PNB not without theknowledge and consent of Lapez, who was in fact issued a receipt.

on solutio indebiti

RULING

NO . Not all requisites for legal compensation are existing in this case.

The telegraphic money transfer was sent by the IBN, Lapez’s principal inJeddah, Saudi Arabia, thru the National Commercial Bank of Jeddah, SaudiArabia (NCB, for short), for his account with Citibank, coursed thru thePNB's head office, the NCB's correspondent bank in the Philippines.

The credit account, or simply account means that the amount stated in thetelegraphic money transfer is to be credited in the account of plaintiff withthe Citibank, and, in that sense, presupposes a creditor-debtor relationshipbetween the PNB, as creditor and the Citibank, as debtor . Withal thetelegraphic money transfer, no such creditor-debtor relationship could havebeen created between them.

The telegraphic money transfer, or simply telegraphic transfer, waspurchased by the IBN from the NCB in Saudi Arabia, and since the PNB isthe NCB's corresponden) bank in the Philippines, there is created betweenthe two banks a sort of communication exchange for the correspondentbank to transmit and/or remit and/or pay the value of the telegraphictransfer in accordance with the dictate of the correspondence exchange.Some such responsibility of the correspondent bank is akin to section 7 ofthe Rules and Regulations Implementing E.O. 857, as amended by E.O. 925,". . . to take charge of the prompt payment" of the telegraphic transfer, thatis, by transmitting the telegraphic money transfer to the Citibank so that theamount can be promptly credited to the account of the plaintiff with the saidbank . That is all that t he PNB can do under the remittance arrangement that

it has with the NCB . With its responsibility as defined as well as by thenature of its banking business and the responsibility attached to it, andthrough which the industry, trade and commerce of all countries andcommunities are carried on, the PNB's liability as correspondent bankcontinues until it has completely performed and discharged its obligationthereunder."

Even if the beneficiary (Lapez) is indebted to PNB, the bank cannot do ashortcut and simply intercept the funds being coursed through it, fortransmittal to another bank (Citi) and eventually to be deposited to theaccount of the beneficiary. The bank cannot invoke legal compensation insuch case.

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 1763. Credit Card Operations –

xSec. X320, MRB: Credit Card Operations; General Policy. The BSP shallfoster the development of consumer credit through innovative productssuch as credit cards under conditions of fair and sound consumer creditpractices. The BSP likewise encourages competition and transparency toensure more efficient delivery of services and fair dealings withcustomers.

general powers incident to corporations, shall have the power to:

83.1. Act as trustee on any mortgage or bond issued by anymunicipality, corporation, or any body politic and to accept and executeany trust consistent with law;

83.2. Act under the order or appointment of any court as guardian,receiver, trustee, or depositary of the estate of any minor or otherincompetent person and as receiver and depositary of any moneys paid




Towards this end, the following rules and regulations shall govern thecredit card operations of banks and subsidiary/affiliate credit cardcompanies, aligned with global best practices.

E. T RUST O PERATIONS

Sec. 79, GBL: Authority to Engage in Trust Business . – Only a stockcorporation or a person duly authorized by the Monetary Board to engage intrust business shall act as a trustee or administer any trust or hold propertyin trust or on deposit for the use, benefit, or behoof of others. For purposesof this Act, such a corporation shall be referred to as a trust entity.

Sec. 80, GBL: Conduct of Trust Business . – A trust entity shall administerthe funds or property under its custody with the diligence that a prudentman would exercise in the conduct of an enterprise of a like character andwith similar aims.

No trust entity shall, for the account of the trustor or the beneficiary of thetrust, purchase or acquire property from, or sell, transfer, assign, or lendmoney or property to, or purchase debt instruments of, any of thedepartments, directors, officers, stockholders, or employees of the trustentity, relatives within the first degree of consanguinity or affinity, or therelated interests, of such directors, officers and stockholders, unless thetransaction is specifically authorized by the trustor and the relationship ofthe trustee and the other party involved in the transaction is fully disclosedto the trustor of beneficiary of the trust prior to the transaction.

The Monetary Board shall promulgate such rules and regulations as may benecessary to prevent circumvention of this prohibition or the evasion of theresponsibility herein imposed on a trust entity.

Sec. 81, GBL: Registration of Articles of Incorporation and By-Laws of aTrust Entity . – The Securities and Exchange Commission shall not registerthe articles of incorporation and by-laws or any amendment thereto, of anytrust entity, unless accompanied by a certificate of authority issued by theBangko Sentral.

Sec. 82, GBL: Minimum Capitali zation. – A trust entity, before it canengage in trust or other fiduciary business, shall comply with the minimumpaid-in capital requirement which will be determined by the Monetary Board.

Sec. 83, GBL: Powers of a Trust Entity . – A trust entity, in addition to the

incompetent person, and as receiver and depositary of any moneys paidinto court by parties to any legal proceedings and of property of anykind which may be brought under the jurisdiction of the court;

83.3. Act as the executor of any will when it is named the executorthereof;

83.4. Act as administrator of the estate of any deceased person, withthe will annexed, or as administrator of the estate of any deceasedperson when there is no will;

83.5. Accept and execute any trust for the holding, management, andadministration of any estate, real or personal, and the rents, issues andprofits thereof; and

83.6. Establish and manage common trust funds, subject to such rulesand regulations as may be prescribed by the Monetary Board.

Sec. 84, GBL: Deposit for the Faithful Performance of Trust Duties . – Beforetransacting trust business, every trust entity shall deposit with the BangkoSentral, as security for the faithful performance of its trust duties, cash orsecurities approved by the Monetary Board in an amount equal to or not lessthan Five hundred thousand pesos (P500,000.00) or such higher amount asmay fixed by the Monetary Board: Provided, however, That the MonetaryBoard shall require every trust entity to increase the amount of its cash orsecurities on deposit with the Bangko Sentral in accordance with theprovisions of this paragraph. Should the capital and surplus fall below saidamount, the Monetary Board shall have the same authority as that grantedto it under the provisions of the fifth paragraph of Section 34 of this Act.

A trust entity so long as it shall continue to be solvent and comply with lawsor regulations shall have the right to collect the interest earned on suchsecurities deposited with the Bangko Sentral and, from time to time, withthe approval of the Bangko Sentral, to exchange the securities for others. Ifthe trust entity fails to comply with any law or regulation, the BangkoSentral shall retain such interest on the securities deposited with it for thebenefit of rightful claimants. Al claims rising out of the trust business of atrust entity shall have priority over all other claims as regards the cash orsecurities deposited as above provided. The Monetary Board may notpermit the cash or securities deposited in accordance with the provisions ofthis Section to be reduced below the prescribed minimum amount until thedepositing entity shall discontinue its trust business and shall satisfy the

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 177Monetary Board that it has complied with all its obligations in connectionwith such business.

Sec. 85, GBL: Bond of Certain Persons for the Faithful Performance ofDuties . – Before an executor, administrator, guardian, trustee, receiver ordepositary appointed by the court enters upon the execution of his duties,he shall, upon order of the court, file a bond in such sum as the court maydirect.

Sec. 89, GBL: Real Estate Acquired by a Trust Entity . – Unless otherwisespecifically directed by the trustor or the nature of the trust, real estateacquired by a trust entity in whatever manner and for whatever purposes,shall likewise be governed by the relevant provisions of Section 52 of thisAct.

Sec. 90, GBL: Investment of Non-Trust Funds . – The investment of fundsother than trust funds of a trust entity which is a bank, financing company

i h h ll b d b h l i i f hi




Upon the application of any executor, administrator, guardian, trustee,receiver, depositary or any other person in interest, the court may, afternotice and hearing, order that the subject matter of the trust or any part,thereof be deposited with a trust entity. Upon presentation of proof to thecourt that the subject matter of the trust has been deposited with a trustentity. Upon presentation of proof to the court that the subject matter ofthe trust has been deposited with a trust entity, the court may order thatthe bond given by such persons for the faithful performance of their dutiesbe reduced to such sums as it may deem proper: Provided, however, Thatthe reduced bond shall be sufficient to secure adequately the properadministration and care of any property remaining under the control of suchpersons and the proper accounting for such property.

Property deposited with any trust entity in conformity with this Section shallbe held by such entity under the orders and direction of the court.

Sec. 86, GBL: Exemption of Trust Entity from Bond Requirement . – Nobond or other security shall be required by the court from a trust entry forthe faithful performance of its duties as court-appointed trustee, executor,administrator, guardian, receiver, or depositary. However, the court may,upon proper application with it showing special cause therefore, require thetrust entity to post a bond or other security for the protection of funds orproperty confided to such entity.

Sec. 87, GBL: Separation of Trust Business from General Business . – Thetrust business and all funds, properties or securities received by any trustentity as executor, administrator, guardian, trustee, receiver, or depositaryshall be kept separate and distinct from the general business including allother funds, properties, and assets of such trust entity. The accounts of all

such funds, properties, or securities shall likewise be kept separate anddistinct from the accounts of the general business of the trust entity.

Sec. 88, GBL: Investment Limitations of a Trust Entity . – Unless otherwisedirected by the instrument creating the trust, the lending and investment offunds and other assets acquired by a trust entity as executor, administrator,guardian, trustee, receiver or depositary of the estate of any minor or otherincompetent person shall be limited to loans or investments as may beprescribed by law, the Monetary Board or any court of competent

jurisdiction.

or an investment house shall be governed by the relevant provisions of thisAct and other applicable laws.

Sec. 91, GBL: Sanctions and Penalties . - A trust entity or any of its officersand directors found to have willfully violated any pertinent provisions of thisAct, shall be subject to the sanctions and penalties provided tinder Section66 of this Act as well as Sections 36 and 37 of the New Central Bank Act.

Sec. 92, GBL: Exemption of Trust Assets from Claims . - No assets held bya trust entity in its capacity as trustee shall be subject to any claims otherthan those of the parties interested in the specific trusts.

Sec. 93, GBL: Establishment of Branches of a Trust Entity . – The ordinarybusiness of a trust entity shall be transacted at the place of businessspecified in its articles of incorporation. Such trust entity may, with priorapproval of the Monetary Board, establish branches in the Philippines andthe said entity shall be responsible for all business conducted in such

branches to the same extent and in the same manner as though suchbusiness had all been conducted in the head office.

For the purpose of this Act, the trust entity and its branches shall be treatedas one unit.

F. P ROHIBITED ACTS

1. Insurance business

Sec. 54, GBL: Prohibition to Act as Insurer . - A bank shall not directlyengage in insurance business as the insurer.

Sec. 2, Insurance Code : Whenever used in this Code, the followingterms shall have the respective meanings hereinafter set forth orindicated, unless the context otherwise requires:

(1) A "contract of insurance" is an agreement whereby one undertakesfor a consideration to indemnify another against loss, damage or liabilityarising from an unknown or contingent event.

A contract of suretyship shall be deemed to be an insurance contract,within the meaning of this Code, only if made by a surety who or which,as such, is doing an insurance business as hereinafter provided.

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 178(2) The term "doing an insurance business" or "transacting an insurancebusiness" , within the meaning of this Code, shall include:

(a) making or proposing to make, as insurer, any insurancecontract;

(b) making or proposing to make, as surety, any contract ofsuretyship as a vocation and not as merely incidental to any otherlegitimate business or activity of the surety;

in terms of their financial resources and technical expertise andintegrity. The bank licensing process shall incorporate an assessment ofthe bank’s ownership structure, directors and senior management, itsoperating plan and internal controls as well as its projected financialcondition and capital base.

a. Stock corporation (Sec. 8.1, GBL) See supra

(i) Issuance of stocks




g y y;

(c) doing any kind of business, including a reinsurance business,specifically recognized as constituting the doing of an insurancebusiness within the meaning of this Code;(d) doing or proposing to do any business in substance equivalent toany of the foregoing in a manner designed to evade the provisionsof this Code.

In the application of the provisions of this Code the fact that no profit isderived from the making of insurance contracts, agreements ortransactions or that no separate or direct consideration is receivedtherefor, shall not be deemed conclusive to show that the makingthereof does not constitute the doing or transacting of an insurancebusiness.

(3) As used in this code, the term "Commissioner" means the

"Insurance Commissioner" .2. Outsourcing of inherent bank functions

Sec. 55(1)(e), GBL: No director, officer, employee, or agent of anybank shall outsource inherent banking functions.

VI. BANK REGULATIONS A. O WNERSHIP /C APITALIZATION OF B ANKS

1. Organization

Sec. 8, GBL : Organization . – The Monetary Board may authorize theorganization of a bank or quasi-bank subject to the following conditions:

8.1 That the entity is a stock corporation;8.2 That its funds are obtained from the public, which shall mean

twenty (20) or more persons; and8.3 That the minimum capital requirements prescribed by the

Monetary Board for each category of banks are satisfied.

No new commercial bank shall be established within three (3) yearsfrom the effectivity of this Act. In the exercise of the authority grantedherein, the Monetary Board shall take into consideration their capability

( )

Sec. 9, GBL: Issuance of Stocks . – The Monetary Board mayprescribe rules and regulations on the types of stock a bank mayissue, including the terms thereof and rights appurtenantthereto to determine compliance with laws and regulationsgoverning capital and equity structure of banks; Provided , Thatbanks shall issue par value stocks only. (ii) Treasury stocks

Sec. 10, GBL: Treasury Stocks . – No bank shall purchase oracquire shares of its own capital stock or accept its own sharesas a security for a loan, except when authorized by theMonetary Board: Provided , That in every case the stock sopurchased or acquired shall, within six (6) months from the timeof its purchase or acquisition, be sold or disposed of at a publicor private sale.

CasesFua Cun v. Summers , 44 Phil. 705 (1923)FACTS Chua Soco subscribed 500 shares of stock with China Bank. He alreadymade payment of P25,000 representing 250 shares of stock, with thebalance forthcoming.

On a different transaction, Chua executed a promissory note in favor of FueCun for P25,000 payable within 90 days. The note was secured by a chattelmortgage on the shares of stock subscribed.

Meanwhile, Chua became indebted to China Bank for dishonored

acceptances of commercial papers. China bank brought an action againstChua, resulting in the attachment of the whole 500 shares of stock. It wasafter the attachment that Fue brought an action against Chua due to defaultin payment. In addition, Fue allege that he is the owner of 250 shares ofstock by virtue of the chattel mortgage. The TC ruled in favor of Fue.

ISSUE W/N Fue owns the 250 shares of stock.

RULING YES . Fue owns the 250 shares. China Bank has no right over the shares ofstock of Chua on account of non-payment of drafts. The Corporation Act (old

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 179law) provides that a corporation has no lien upon the shares of stockholdersfor any indebtedness to the corporation. The rationale being that if thecorporations were given a lien on their own stocks for indebtedness of thestockholders, the prohibition against granting loans or discounts upon thesecurity of the stock would become largely ineffective.It is decided that shares of stock are classified as equity not permitted to bea subject of a chattel mortgage. Having a character of intangibility, it wouldbe difficult to place it under a chattel mortgage. Though that being the case,

d. Capability and other requirements

Sec. 8, par. 2, GBL: No new commercial bank shall be establishedwithin three (3) years from the effectivity of this Act. In theexercise of the authority granted herein, the Monetary Board shalltake into consideration their capability in terms of their financialresources and technical expertise and integrity. The bank licensingprocess shall incorporate an assessment of the bank’s ownershipstructure directors and senior management its operating plan and




the shares of stock can still be validly assigned. The endorsement presentedexplicitly mentions the assignment of rights in the shares from Chua to Fue.

The TC erred in holding Chua, as the owner of the shares upon the paymentof P25,000, had the right to dispose it to Fue. It should have been held thatChua, having interest in the shares of stock, validly assigned said stocks toFue.

Filipinas Mils, Inc. v. Dayrit , 192 SCRA 177 (1990)FACTS

FMI obtained a loan of P70,000 from CBT . Despite repeated demands, theloan remained unpaid. CBT filed a complaint before the RTC where it wasable to obtain a Decision, and a writ of execution was issue pursuant to theDecision. A Notice of garnishment was issued on the goods, effects,interests, credits, moneys, stocks, shares and any other personal propertyin the possession of FMI. A Notice of Sale was issued but the shares of stock(issued by CBT, and owned by FMI) were not included in the items for sale.

ISSUE

Whether or not the sale of CBT’s capital stock (owned by FMI) in a publicauction initiated by CBT itself, is a violation of Sec. 24 of the GBL.

RULING

NO. The sale in a public auction is not a violation. CBT must have misreadthe provision. There is a specific exception (“unless such security orpurchase be necessary to prevent loss upon a debt previously contracted ingood faith”) and a general exception (“or purchased or acquired for anyother reason in the course of its operations”) mentioned therein. Thus, ifand when, CBT decides to purchase those shares of stock in the publicauction sale will not be a violation of Sec. 24 as it will come under thegeneral exception.

b. Funds obtained from the public ( Sec. 8.2, GBL) See supra

c. Minimum capital requirements ( Sec. 8.3, GBL) See supra

structure, directors and senior management, its operating plan andinternal controls as well as its projected financial condition andcapital base.

2. Stockholdings

a. Foreign stockholdings

CasesNunga, Jr. v. Nunga III , 574 SCRA 760 (2008)FACTS

Gonzalez decided to sell his shares of stock in the Rural Bank of Apalit.Petitioners (father and son tandem) Francisco Nunga Jr and Victor Nungathen negotiated a contract to sell with Gonzalez for the shares of stock for200k. Initial payment of 50k the rest after. Gonzalez wrote a letter to theCorp. Sec Isabel Firme to transfer to Victor the remaining shares of stock

but they could no longer be found. The contract to sell was notarized onlyon February 28 1996.

Before Petitioners could pay the balance they found out that on Feb 27Gonzalez executed a Deed of Assignment of his RBA shares in favor ofFrancisco III (respondent) for 300k paid in full. On the 28 th Francisco Jr.arrives from the USA and proceeded with his son to the residence ofGonzalez and convinced him to accept the balance despite having been toldthe shares were sold the day before. Gonzales signed his name at the dorsalportion of the stock certificates to endorse the same to Francisco Jr. andalso executed the absolute deed of sale in favor of Junior.

On the same day, the 28 th of Feb, Franciso III demanded that Juniorsurrender the shares to him, while Junior demanded corp sec. Firme toregister the sale to Junior but she denied because Franciso III had alreadybought them the day before. They sued each other with Francisco IIIcontending that Junior was not allowed to own shares of stock of a RuralBank because he was a US citizen. Junior said that RA 8179, an act toliberalize foreign investments granted Junior, who was a former natural borncitizen equal investment rights in rural banks of the Philippines because ithad retroactive effect (the act came after the sale of the shares of stock).

CA sided with Franciso III, hence the SC case.

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 180ISSUE

Whether or not a former natural born citizen who is now a foreigner mayinvest in Rural Banks by virtue of RA 8179 “The act to further liberalizeforeign investments”?

HELD

NO Petition without merit

subsequent law.

Nonetheless, it would not matter that Gonzalez executed the contractto sell in favor of Junior prior to the Deed of Assignment to FrancisoIII because the Contract to Sell between Gonzalez and Franciscowas void and without effect for being contrary to law.

(i) Indi id als and non bank corporations




NO . Petition without merit.

Francisco Jr. was disqualified from acquiring Gonzalez’s shares of stock inRBA. The argument of junior and victor that there was no specific provisionin RA 7353 that prohibited the transfer of rural bank shares to individualswho were not Philippine citizens or declared such transfer void is botherroneous and unfounded.

Section 4 of RA 3353 states:

“With exception of shareholdings of corporations organized primarily to holdequities in rural banks as provided for under section 12-C of RA 337, asamended, and of Filipino-controlled domestic banks, the capital stock ofany rural bank shall be fully owned and held directly or indirectly bycitizens of the Philippines or corporations, associations or cooperativesqualified under Philippine laws to own and hold such capital stock: xxx.”

IN SUMMARY

The court held that the afore-quoted provision categorically provides thatonly citizens of the Philippines can own and hold, directly or indirectly, thecapital stock of a rural bank, subject only to the exception of corporations,associations, associations or cooperatives qualified under Philippine laws toown and hold such capital stock. This was the very interpretation of Section4 of RA 7353 made by this court in Bulos, Jr. v. Yasuma, on the basis ofwhich the Court disqualified Yasuma, a foreigner from owning capital stockin the Rural Bank of Paranaque.

In the instant case, it is undisputed that when Gonzalez executed thecontract to sell and the deed of absolute sale covering his RBAshares of stock in favor of Franciso Jr, the latter was already a

naturalized citizen of the Untied States of America. Consequently,the acquisition by Franciso Jr. of the disputed RBA shares by virtueof the foregoing contracts is a violation of the clear and mandatorydictum of RA 7353 which the Court cannot countenance. Even withthe subsequent enactment of RA 8179 (Foreign InvenstmentLiberalization Act), such cannot benefit Franciso Junior. It is true thatunder the Civil Code, laws shall have no retroactive effect, unless thecontrary is provided or when the statute is curative or remedial, or when itcreates new rights PROVIDED such rights do not prejudice or impair anyvested right. Francisco III clearly already had a vested right when such actwas enacted hence junior’s qualification could not have been cured by the

(i) Individuals and non-bank corporations

Sec. 11, GBL : Foreign Stockholdings – Foreign individuals and

non-bank corporations may own or control up to forty percent(40%) of the voting stock of a domestic bank. This rule shallapply to Filipinos and domestic non-bank corporations.

The percentage of foreign-owned voting stocks in a bank shallbe determined by the citizenship of the individual stockholdersin that bank. The citizenship of the corporation which is astockholder in a bank shall follow the citizenship of thecontrolling stockholders of the corporation, irrespective of theplace of incorporation.

(ii) Foreign banks

Sec. 11, GBL: See supra

Sec. 73, GBL : Acquisition of Voting Stock in a Domestic Bank . –Within seven (7) years from the effectivity of this act andsubject to guidelines issued pursuant to the Foreign BanksLiberalization Act, the Monetary Board may authorize a foreignbank to acquire up to one hundred percent (100%) of the votingstock of only one (1) bank organized under the laws of theRepublic of the Philippines.

Within the same period, the Monetary Board may authorize anyforeign bank, which prior to the effectivity of this Act availeditself of the privilege to acquire up to sixty percent (60%) of thevoting stock of a bank under the Foreign Banks Liberalization

Act and the Thrift Banks Act, to further acquire voting sharessuch bank to the extent necessary for it to own one hundredpercent (100%) of the voting stock thereof.

In the exercise of the authority, the Monetary Board shall adoptmeasures as may be necessary to ensure that at all times thecontrol of seventy percent (70%) of the resources or assets ofthe entire banking system is held by banks which are at leastmajority-owned by Filipinos.

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 181Any right, privilege or incentive granted to a foreign bank underthis Section shall be equally enjoyed by and extended under thesame conditions to banks organized under the laws of theRepublic of the Philippines.

b. Filipino stockholdings

(i) Individuals and non-bank corporations

Sec 11 par 1 GBL : Foreign Stockholdings Foreign

xSec. 2.2, BSP Circular No. 271 (Series of 2001) Public offering of bank shares. A domestic bank applying for aUB authority shall, as a condition to the approval of itsapplication, make a public offering of at least ten percent (10%)of the required minimum capital and this condition must becomplied with before it can be granted the license for authorityto operate as a UB.

The term public offering shall mean the offer to sell equity




Sec. 11, par. 1, GBL : Foreign Stockholdings – Foreignindividuals and non-bank corporations may own or control up toforty percent (40%) of the voting stock of a domestic bank.

This rule shall apply to Filipinos and domestic non-bankcorporations.

(iii) Domestic banks

Sec. 25, GBL: Equity Investments of a Universal Bank inFinancial Allied Enterprises . - A universal bank can own up toone hundred percent (100%) of the equity in a thrift bank, arural bank or a financial allied enterprise.

A publicly-listed universal or commercial bank may own up toone hundred percent (100%) of the voting stock of only oneother universal or commercial bank.

Sec. 31, GBL : Equity Investments of a Commercial Bank inFinancial Allied Enterprises . - A commercial bank may own up toone hundred percent (100%) of the equity of a thrift bank or arural bank.

Where the equity investment of a commercial bank is in otherfinancial allied enterprises, including another commercial bank,such investment shall remain a minority holding in thatenterprise.

c. Stockholdings of family groups or related interests

Sec. 12, GBL: Stockholdings of Family Groups of RelatedInterests . – Stockholdings of individuals related to each otherwithin the fourth degree of consanguinity or affinity, legitimateor common-law, shall be considered family groups or relatedinterests and must be fully disclosed in all transactions by suchcorporations or related groups of persons with the bank.

Sec. 13, GBL : Corporate Stockholdings. - Two or morecorporations owned or controlled by the same family group orsame group of persons shall be considered related interests andmust be fully disclosed in all transactions by such corporationsor related group of persons with the bank.

d. Required public offering –

The term public offering shall mean the offer to sell equityshares to the public stockholders.

Public stockholders shall refer to all stockholders, excluding thebank’s directors, shareholders owning twenty percent (20%) ormore of the bank’s subscribed capital stock together with thoseof their relatives within the fourth degree of consanguinity oraffinity, and corporations controlled or affiliated with them.

A bank whose shares of stock are already listed in the PhilippineStock Exchange (PSE) at the time of filing of its application forUB authority shall be deemed to have complied with the publicoffering requirement. Likewise, an applicant bank may opt tohave its shares listed in the PSE directly instead of passingthrough the process of public offering. In either case, at leastten percent (10%) of the applicant bank’s capital stock shouldbe held by public stockholders before it can be granted thelicense for authority to operate as a UB.

B. D IRECTORS AND O FFICERS

1. Composition of Board

Sec. 15, GBL: Board of Directors . - The provisions of the CorporationCode to the contrary notwithstanding, there shall be at least five (5),and a maximum of fifteen (15) members of the board or directors of abank, two (2) of whom shall be independent directors. An "independentdirector" shall mean a person other than an officer or employee of thebank, its subsidiaries or affiliates or related interests. .

Non-Filipino citizens may become members of the board of directors of abank to the extent of the foreign participation in the equity of said bank.

The meetings of the board of directors may be conducted throughmodern technologies such as, but not limited to, teleconferencing andvideo-conferencing.

Sec. 17, GBL : Directors of Merged or Consolidated Banks . - In the caseof a bank merger or consolidation, the number of directors shall notexceed twenty-one (21).

Sec. 7, Foreign Banks Liberalization Act: Board of Directors. - Non-Filipino citizens may become members of the Board of Directors of

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 182a bank to the extent of the foreign participation in the equity of saidbank.

Sec. 23, Corporation Code: The board of directors or trustees. -Unless otherwise provided in this Code, the corporate powers of allcorporations formed under this Code shall be exercised, all businessconducted and all property of such corporations controlled and held bythe board of directors or trustees to be elected from among the holdersof stocks or where there is no stock from among the members of the

Association (PESALA). CB sent letters to the Board of Directors of PESALAinviting them to a conference to discuss the findings. Petitioners did notattend.

The Monetary Board adopted and issued MB Resolution No. 805, whichnoted, among others, the findings in the 16 th regular examination. It alsocontained a provision which states:

5. To include the names of Mr. Catalino Banez, Mr. Romeo Busuego




of stocks, or where there is no stock, from among the members of thecorporation, who shall hold office for one (1) year until their successorsare elected and qualified.

Every director must own at least one (1) share of the capital stock ofthe corporation of which he is a director, which share shall stand in hisname on the books of the corporation. Any director who ceases to bethe owner of at least one (1) share of the capital stock of thecorporation of which he is a director shall thereby cease to be a director.Trustees of non-stock corporations must be members thereof. amajority of the directors or trustees of all corporations organized underthis Code must be residents of the Philippines.

2. Qualifications

a. Own at least one share

Sec. 23, Corporation Code: See supra

b. Fit and proper rule

Sec. 16, GBL : Fit and Proper Rule . - To maintain the quality ofbank management and afford better protection to depositors andthe public in general the Monetary Board shall prescribe, pass uponand review the qualifications and disqualifications of individualselected or appointed bank directors or officers and disqualify thosefound unfit.

After due notice to the board of directors of the bank, the MonetaryBoard may disqualify, suspend or remove any bank director orofficer who commits or omits an act which render him unfit for theposition.

In determining whether an individual is fit and proper to hold theposition of a director or officer of a bank, regard shall be given to hisintegrity, experience, education, training, and competence.

Cases

Busuego v. Court of Appeals , 304 SCRA 473 (1999)FACTSOn the 16 th regular examination, Central Bank examiners discovered severalanomalies and irregularities committed by PAL Employees Savings and Loan

and Mr. Renato Lim in the Sector's watchlist to prevent them fromholding responsible positions in any institution under Central Banksupervision;

Petitioners then filed an injunction suit to enjoin the Monetary Board fromimplementing the resolution putting them under a watch list. According tothem their right to due process was violated since they were not grantedopportunity to be heard.

ISSUE

(1) W/N petitioners’ right to due process was violated?(2) W/N the MB Resolution is valid insofar as it deprives petitioner of the

opportunity to seek employments in the field which they can excel andare best fitted?

HELD

1. NO . Petitioners were duly afforded their right to due process by theMonetary Board but they did not appear. Petitioners therefore cannotcomplain of deprivation of their right to due process, as they were givenample opportunity by the Monetary Board to air their submission anddefenses as to the findings of irregularity during the said 16th regularexamination. The essence of due process is to be afforded a reasonableopportunity to be heard and to submit any evidence one may have insupport of his defense. What is offensive to due process is the denial of theopportunity to be heard. Petitioner having availed of their opportunity topresent their position to the Monetary Board by their letters-explanation,they were not denied due process.

2. NO . The resolution is valid. t must be remembered that the Central Bankof the Philippines (now Bangko Sentral ng Pilipinas), through the MonetaryBoard, is the government agency charged with the responsibility ofadministering the monetary, banking and credit system of the country andis granted the power of supervision and examination over banks and non-bank financial institutions performing quasi-banking functions of whichsavings and loan associations, such as PESALA, from part of.

The special law governing savings and loan associations is Republic Act No.3779, as amended, otherwise known as the "Savings and Loan AssociationAct." Said law authorizes the Monetary Board to conduct regular yearlyexaminations of the books and records of savings and loans associations, to

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 183suspend a savings and loan association for violation of law, to decide anycontroversy over the obligations and duties of directors and officers, and totake remedial measures, among others.

c. Other minimum qualifications –

xSubsec. X141.2, MRB : Qualifications of a director

obligations guaranteed as to principal and interest by the Republic ofthe Philippines. (As amended by R.A. 6037, 04 August 1969;renumbered from Sec. 12 by R.A. 9302, 12 August 2004)

b. The banking or checking accounts of the Corporation shall be keptwith the Bangko Sentral ng Pilipinas, with the Philippine NationalBank, or with any other bank designated as depository or fiscalagent of the Philippine government. (As amended by R.A. 9302, 12August 2004)




A director shall have the following minimum qualifications:

a. He shall be at least twenty-five (25) years of age at the timeof his election or appointment;

b. He shall be at least a college graduate or have at least five(5) years experience in business;

c. He must have attended a special seminar on corporategovernance for board of directors conducted or accreditedby the BSP: Provided, That incumbent directors as well asthose elected after September 17, 2001 must attend saidseminar on or before June 30, 2003 or within a period of six(6) months from date of election for those elected after June30, 2003, as the case may be; and

d. He must be fit and proper for the position of a director of the

bank. In determining whether a person is fit and proper forthe position of a director, the following matters must beconsidered: integrity/probity, competence, education,diligence and experience/training.

The foregoing qualifications for directors shall be in addition to thoserequired or prescribed under R.A. No. 8791 and other existingapplicable laws and regulations.

3. Disqualifications –

xSubsec. X141.2, MRB : See supra

a. Criminal conviction

Sec. 27, Corporation Code: Disqualification of directors,trustees or officers. - No person convicted by final judgment of anoffense punishable by imprisonment for a period exceeding six (6)years, or a violation of this Code committed within five (5) yearsprior to the date of his election or appointment, shall qualify as adirector, trustee or officer of any corporation.

Sec. 17, PDIC Charter

a. Money of the Corporation not otherwise employed shall beinvested in obligations of the Republic of the Philippines or in

August 2004)

c. It is hereby declared to be the policy of the State that the DepositInsurance Fund of the Corporation shall be preserved andmaintained at all times. Accordingly, all tax obligations of theCorporation for a period of five (5) years reckoned from the date ofeffectivity of this Act shall be chargeable to the Tax ExpenditureFund (TEF) in the annual General Appropriations Act pursuant to theprovisions of Executive Order No. 93, series of 1986; Provided,That, on the 6th year and thereafter, the Corporation shall beexempt from income tax, final withholding tax, value-added tax onassessments collected from member banks, and local taxes. (Asadded by R.A 9576, 29 April 2009)

d. When the Corporation has determined that an insured bank is indanger of closing, in order to prevent such closing, the Corporation,in the discretion of its Board of Directors, is authorized to makeloans to, or purchase the assets of, or assume liabilities of, or makedeposits in, such insured bank, upon such terms and condition asthe Board of Directors may prescribe, when in the opinion of theBoard of Directors, the continued operation of such bank is essentialto provide adequate banking service in the community or maintainfinancial stability in the economy. (Renumbered from Sec. 17 (c) byR.A. 9576, 29 April 2009)

The authority of the Corporation under the foregoing paragraph toextend financial assistance to, assume liabilities of, purchase theassets of an insured bank may also be exercised in the case of aclosed insured bank if the Corporation finds that the resumption ofoperations of such bank is vital to the interests of the community, ora severe financial climate exists which threatens the stability of anumber of banks possessing significant resources: Provided, Thatthe reopening and resumption of operations of the closed bank shallbe subject to the prior approval of the Monetary Board. (Asamended by R.A. 7400, 13 April 1992)

The Corporation may provide any corporation acquiring control of,merging or consolidating with or acquiring the assets of an insuredbank in danger of closing in order to prevent such closing or of aclosed insured bank in order to restore to normal operations, withsuch financial assistance as it could provide an insured bank under

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 184this subsection: Provided, That, within sixty (60) days from date ofassistance the Corporation shall submit a report thereof to theMonetary Board. (As amended by R.A. 7400, 13 April 1992)

The Corporation, prior to the exercise of the powers under thisSection, shall determine that actual payoff and liquidation thereofwill be more expensive than the exercise of this power: Provided,That when the Monetary Board has determined that there aresystemic consequences of a probable failure or closure of an insured

No director or officer of any rural bank shall, either directly orindirectly, for himself or as the representative or agent of another,borrow any of the deposits or funds of such banks, nor shall hebecome a guarantor, indorser, or surety for loans from such bank toothers, or in any manner be an obligor for money borrowed from thebank or loaned by it except with the written approval of the majorityof the directors of the bank, excluding the director concerned. Anysuch approval shall be entered upon the records of the corporation

d f h t h ll b t itt d f th ith t th




syste c co seque ces o a p obab e a u e o c osu e o a su edbank, the Corporation may grant financial assistance to such insuredbank in such amount as may be necessary to prevent its failure or

closure and/or restore the insured bank to viable operations, undersuch terms and conditions as may be deemed necessary by theBoard of Directors, subject to concurrence by the Monetary Boardand without additional cost to the Deposit Insurance Fund. (Asamended by R.A. 9302, 12 August 2004)

A systemic risk refers to the possibility that failure of one bank tosettle net transactions with other banks will trigger a chain reaction,depriving other banks of funds leading to a general shutdown ofnormal clearing and settlement activity. Systemic risk also meansthe likelihood of a sudden, unexpected collapse of confidence in asignificant portion of the banking or financial system with potentiallylarge real economic effects. Finally, the Corporation may not use its

authority under this subsection to purchase the voting or commonstock of an insured bank but it can enter into and enforceagreements that it determines to be necessary to protect itsfinancial interests: Provided, That the financial assistance may takethe form of equity or quasiequity of the insured bank as may bedeemed necessary by the Board of Directors with concurrence bythe Monetary Board: Provided, further, That the Corporation shalldispose of such equity as soon as practicable. (As amended by R.A.9302, 12 August 2004)

b. Public officials

Sec. 19, GBL : Prohibition on Public Officials . - Except as otherwiseprovided in the Rural Banks Act, no appointive or elective publicofficial whether full-time or part-time shall at the same time serveas officer of any private bank, save in cases where such service isincident to financial assistance provided by the government or agovernment owned or controlled corporation to the bank or unlessotherwise provided under existing laws.

Sec. 5, Rural Banks Act : All members of the Board of Directors ofthe rural bank shall be citizens of the Philippines at the time of theirassumption to office: Provided, however, That nothing in this Actshall be construed as prohibiting any appointive or in any capacity inthe bank.

and a copy of such entry shall be transmitted forthwith to theappropriate supervising department. The director/officer of the bankwho violates the provisions of this section shall be immediatelydismissed from his office and shall be penalized in accordance withSection 26 of this Act.

The Monetary Board may regulate the amount of creditaccommodations that may be extended directly to the directors,officers or stockholders of rural banks of banking institutions.However, the outstanding credit accommodations which a rural bankmay extend to each of its stockholders owning two percent (2%) ormore of the subscribed capital stock, its directors, or officers shallbe limited to an amount equivalent to the respective outstandingdeposits and book value of the paid-in capital contributions in thebank.

c. MB member/BSP personnelSec. 9, NCBA: Disqualifications. — In addition to thedisqualifications imposed by Republic Act No. 6713, a member of theMonetary Board is disqualified from being a director, officer,employee, consultant, lawyer, agent or stockholder of any bank,quasi-bank or any other institution which is subject to supervision orexamination by the Bangko Sentral, in which case such membershall resign from, and divest himself of any and all interests in suchinstitution before assumption of office as member of the MonetaryBoard.

The members of the Monetary Board coming from the private sectorshall not hold any other public office or public employment duringtheir tenure.No person shall be a member of the Monetary Board if he has beenconnected directly with any multilateral banking or financialinstitution or has a substantial interest in any private bank in thePhilippines, within one (1) year prior to his appointment; likewise,no member of the Monetary Board shall be employed in any suchinstitution within two (2) years after the expiration of his termexcept when he serves as an official representative of the PhilippineGovernment to such institution.

Sec. 27, NCBA: Prohibitions. — In addition to the prohibitions

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 185found in Republic Act Nos. 3019 and 6713, personnel of the BangkoSentral are hereby prohibited from:

a. Being an officer, director, lawyer or agent, employee, consultantor stockholder, directly or indirectly, of any institution subject tosupervision or examination by the Bangko Sentral, except non-stock savings and loan associations and provident fundsorganized exclusively for employees of the Bangko Sentral, andexcept as otherwise provided in this Act;

for reasonable pre diems: Provided, however, That any suchcompensation other than per diems may be granted to directors by thevote of the stockholders representing at least a majority of theoutstanding capital stock at a regular or special stockholders' meeting.In no case shall the total yearly compensation of directors, as suchdirectors, exceed ten (10%) percent of the net income before incometax of the corporation during the preceding year.

5. Meetings




p p ;b. Directly or indirectly requesting or receiving any gift, present or

pecuniary or material benefit for himself or another, from any

institution subject to supervision or examination by the BangkoSentral;c. Revealing in any manner, except under orders of the court, the

Congress or any government office or agency authorized by law,or under such conditions as may be prescribed by the MonetaryBoard, information relating to the condition or business of anyinstitution. This prohibition shall not be held to apply to thegiving of information to the Monetary Board or the Governor ofthe Bangko Sentral, or to any person authorized by either ofthem, in writing, to receive such information; and

d. Borrowing from any institution subject to supervision orexamination by the Bangko Sentral shall be prohibited unlesssaid borrowings are adequately secured, fully disclosed to theMonetary Board, and shall be subject to such further rules andregulations as the Monetary Board may prescribe: Provided,however, That personnel of the supervising and examiningdepartments are prohibited from borrowing from a bank undertheir supervision or examination.

4. Compensation and Other Benefits

Sec. 18, GBL : Compensation and Other Benefits of Directors andOfficers . To protect the finds of depositors and creditors the MonetaryBoard may regulate the payment by the bark to its directors and officersof compensation, allowance, fees, bonuses, stock options, profit sharingand fringe benefits only in exceptional cases and when thecircumstances warrant, such as but not limited to the following:

18.1. When a bank is under comptrollership or conservatorship; or

18.2. When a bank is found by the Monetary Board to beconducting business in an unsafe or unsound manner; or

18.3. When a bank is found by the Monetary Board to be in anunsatisfactory financial condition.

Sec. 30, Corporation Code: Compensation of directors. - In theabsence of any provision in the by-laws fixing their compensation, thedirectors shall not receive any compensation, as such directors, except

g

Sec. 15, par. 3, GBL : The meetings of the board of directors may beconducted through modern technologies such as, but not limited to,teleconferencing and video-conferencing.

Sec. 25, Corporation Code : Corporate officers, quorum. -Immediately after their election, the directors of a corporation mustformally organize by the election of a president, who shall be a director,a treasurer who may or may not be a director, a secretary who shall bea resident and citizen of the Philippines, and such other officers as maybe provided for in the by-laws. Any two (2) or more positions may beheld concurrently by the same person, except that no one shall act aspresident and secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform theduties enjoined on them by law and the by-laws of the corporation.

Unless the articles of incorporation or the by-laws provide for a greatermajority, a majority of the number of directors or trustees as fixed inthe articles of incorporation shall constitute a quorum for the transactionof corporate business, and every decision of at least a majority of thedirectors or trustees present at a meeting at which there is a quorumshall be valid as a corporate act, except for the election of officers whichshall require the vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings.

6. Powers of Directors

a. General Powers

Sec. 23, Corporation Code : The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of allcorporations formed under this Code shall be exercised, all businessconducted and all property of such corporations controlled and heldby the board of directors or trustees to be elected from among theholders of stocks, or where there is no stock, from among themembers of the corporation, who shall hold office for one (1) yearuntil their successors are elected and qualified.

Every director must own at least one (1) share of the capital stockof the corporation of which he is a director, which share shall standin his name on the books of the corporation. Any director who

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 186ceases to be the owner of at least one (1) share of the capital stockof the corporation of which he is a director shall thereby cease to bea director. Trustees of non-stock corporations must be membersthereof. a majority of the directors or trustees of all corporationsorganized under this Code must be residents of the Philippines.

xSubsec. X141.3, MRB : General responsibility of the board ofdirectors. The position of a bank director is a position of trust. Adirector assumes certain responsibilities to different constituencies

(10) To meet regularly(11) To keep the individual members of the board and the

shareholders informed.(12) To ensure that the bank has beneficial influence on the

economy.(13) To assess at least annually its performance and

effectiveness as a body, as well as its various committees, thechief executive officer and the bank itself.

(14) To keep their authority within the powers of the institution




por stakeholders, i.e., the bank itself, its stockholders, its depositorsand other creditors, its management and employees, and the public

at large. These constituencies or stakeholders have the right toexpect that the institution is being run in a prudent and soundmanner.

The board of directors is primarily responsible for the corporategovernance of the bank. To ensure good governance of the bank,the board of directors should establish strategic objectives, policiesand procedures that will guide and direct the activities of the bankand the means to attain the same as well as the mechanism formonitoring management’s performance. While the management ofthe day-to-day affairs of the institution is the responsibility of themanagement team, the board of directors is, however, responsiblefor monitoring and overseeing management action.

b. Specific Duties/ Responsibilities

xSubsec. X141.5, MRB: Specific duties and responsibilities of theboard of directors

(1) To select and appoint officers who are qualified to administerthe bank’s affairs effectively and soundly and to establishadequate selection process for all personnel.

(2) To establish objectives and draw up a business strategy forachieving them.

(3) To conduct the affairs of the institution with high degree ofintegrity.

(4) To establish and ensure compliance with sound written

policies.(5) To prescribe a clear assignment of responsibilities anddecision-making authorities, incorporating a hierarchy ofrequired approvals from individuals to the board of directors.

(6) To effectively supervise the bank’s affairs.(7) To monitor, assess and control the performance of

management.(8) To adopt and maintain adequate risk management policy.(9) To constitute the following committees (optional for banks

with net worth of less than P20 million but mandatory if asubsidiary of other banks)

(14) To keep their authority within the powers of the institutionas prescribed in the articles of incorporation, charter, by-lawsand in existing laws, rules and regulations.

c. Certification of Directors

xBSP Circular No. 283 (Series of 2001) : The directors concernedshall each be required to acknowledge receipt of the copies of suchspecific duties and responsibilities and shall certify that they fullyunderstand the same.

Copies of the acknowledgement and certification herein requiredshall be submitted to the appropriate supervisory and examiningdepartment of SES within fifteen (15) days from date thereof. Itshall be considered a major report (category a-2) and delay in itssubmission shall be subject to penalty in accordance with existingregulations.

7. Doctrine of Apparent Authority

Cases

Prudential Bank v. Court of Appeals , 223 SCRA 350 (1993)FACTS Aurora Cruz invested P200k in Central Bank bills with Prudential Bank. Theplacement was for 63 days at 13.75% annual interest. For this purpose, theamount of P196,122.88 was withdrawn from her account and applied to theinvestment. The difference of P3,877.07 represented the pre-paid interest.Susan Quimbo was the employee of the bank to whom Cruz was referredand who was apparently in charge of such transactions. The transaction wasevidenced by a Confirmation of Sale delivered to Cruz , together with aDebit Memo in the amount withdrawn and applied to the confirmed sale.

Upon maturity of the placement, Cruz returned to the bank to "roll-over" orrenew her investment. Quimbo, who again attended to her, prepared aCredit Memo crediting the amount of P200k in Cruz's savings accountpassbook. She also prepared a Debit Memo for the amount of P196,122.88to cover the re-investment of P200,000.00 minus the prepaid interest ofP3,877.02.This time, Cruz was asked to sign a Withdrawal Slip forP196,122.98, representing the amount to be re-invested after deduction ofthe prepaid interest. Quimbo explained this was a new requirement of thebank. Several days later, Cruz received another Confirmation of Sale and a



BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 189Prior to the expiration of the 90-day period within which to make the escrowdeposit (as stipulated in the Letter-Agreement setting forth the terms andconditions of the sale), Spouses Pronstroller requested that the balance ofthe purchase price be made payable only upon service on them of a finaldecision of the SC affirming the bank's right to possess the property. Atty.Soluta, acting for the bank, allowed the Spouses' request.

In 1994, the bank reorganized its management. Atty. Dayday replaced Atty.Soluta as Asst. VP and Head of Documentation Section. Atty. Dayday

certain acts for and on his behalf, the board may validly delegate some ofits functions and powers to officers, committees and agents. The authorityof such individuals to bind the corporation is generally derived from law,corporate bylaws or authorization from the board, either expressly orimpliedly, by habit, custom, or acquiescence, in the general course ofbusiness.

The authority of a corporate officer or agent in dealing with third personsmay be actual or apparent The doctrine of "apparent authority " with




Soluta as Asst. VP and Head of Documentation Section. Atty. Daydaydiscovered that Spouses Pronstroller failed to pay the balance of thepurchase price and that they requested extension of time to pay. Uponreferral to ARRMC (Asset Recovery and Remedial Management Committee),it was disapproved. Consequently, this was referred to the bank's LegalDepartment for rescission of the contract.

Spouses Pronstroller proposed to pay the balance of the purchase price(P3M upon approval and the balance after 6 months). But this wasdisapproved by the bank's president and will only be allowed if they wouldpay interest at 24.5% p.a. on the unpaid balance.

For failure to arrive to an agreement, Spouses Pronstroller reiterated thatthey would enforce their agreement with Atty. Soluta. However, Atty.Soluta's authority to enter into that agreement was denied by the bank.

In 1994, Spouses Pronstroller instituted this suit against the bank. The bankcountered saying that their contract had already been rescinded because ofthe Spouses' failure to deposit in escrow the balance of the purchase price.

During the pendency of this case, the bank sold the property to SpousesVaca, who registered the sale.

RTC ruled in favor of Spouses Pronstroller on the ground of the rule of"Apparent Authority" vested upon Atty. Soluta. CA affirmed ruling furtherthat the bank had no right to unilaterally rescind the contract and that thebank were estopped from questioning the efficacy of the Soluta-Pronstrolleragreement because of its failure to repudiate the same for 1 year.

ISSUE Whether the bank is bound by the agreement signed by Atty. Soluta underthe doctrine of apparent authority

RULING YES . The general rule is that, in the absence of authority from the board ofdirectors, no person, not even its officers, can validly bind a corporation.The power and responsibility to decide whether the corporation should enterinto a contract that will bind the corporation is lodged in the board ofdirectors. However, just as a natural person may authorize another to do

may be actual or apparent. The doctrine of apparent authority, withspecial reference to banks, had long been recognized in this jurisdiction.Apparent authority is derived not merely from practice. Its existence may beascertained through 1) the general manner in which the corporation holdsout an officer or agent as having the power to act, or in other words, theapparent authority to act in general, with which it clothes him; or 2) theacquiescence in his acts of a particular nature, with actual or constructiveknowledge thereof, within or beyond the scope of his ordinary powers.

Accordingly, the authority to act for and to bind a corporation may bepresumed from acts of recognition in other instances, wherein the powerwas exercised without any objection from its board or shareholders.Undoubtedly, petitioner had previously allowed Atty. Soluta to enter into thefirst agreement without a board resolution expressly authorizing him; thus,it had clothed him with apparent authority to modify the same via thesecond letter-agreement. It is not the quantity of similar acts whichestablishes apparent authority, but the vesting of a corporate officer withthe power to bind the corporation.

Naturally, the third person has little or no information as to what occurs incorporate meetings; and he must necessarily rely upon the externalmanifestations of corporate consent. The integrity of commercialtransactions can only be maintained by holding the corporation strictly tothe liability fixed upon it by its agents in accordance with law. Whattranspires in the corporate board room is entirely an internal matter. Hence,petitioner may not impute negligence on the part of the respondents infailing to find out the scope of Atty. Soluta's authority. Indeed, the publichas the right to rely on the trustworthiness of bank officers and their acts.

If a corporation knowingly permits its officer, or any other agent, to performacts within the scope of an apparent authority, holding him out to the publicas possessing power to do those acts, the corporation will, as against anyperson who has dealt in good faith with the corporation through such agent,be estopped from denying such authority.

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 1908. Prohibited Acts

Sec. 55.1, GBL: No director, officer, employee, or agent of any bankshall –

(a) Make false entries in any bank report or statement orparticipate in any fraudulent transaction, thereby affecting thefinancial interest of, or causing damage to, the bank or any person;

(b) Without order of a court of competent jurisdiction, disclose to

Philippine branches of a foreign bank, the head office of such branchesshall fully guarantee the prompt payment of all liabilities of its Philippinebranch.

Residents and citizens of the Philippines who are creditors of a branch inthe Philippines of a foreign bank shall have preferential rights to theassets of such branch in accordance with the existing laws.

2. Banking Days and Hours




any unauthorized person any information relative to the funds orproperties in the custody of the bank belonging to private

individuals, corporations, or any other entity: Provided, That withrespect to bank deposits, the provisions of existing laws shallprevail; (c) Accept gifts, fees, or commissions or any other form ofremuneration in connection with the approval of a loan or othercredit accommodation from said bank; (d) Overvalue or aid inovervaluing any security for the purpose of influencing in any waythe actions of the bank or any bank; or (e) Outsource inherentbanking functions.

C. B ANK O PERATIONS

1. Branches

Sec. 20, GBL: Bank Branches . - Universal or commercial banks mayopen branches or other offices within or outside the Philippines uponprior approval of the Bangko Sentral. Branching by all other banks shallbe governed by pertinent laws.

A bank may, subject to prior approval of the Monetary Board, use any orall of its branches as outlets for the presentation and/or sale of thefinancial products of its allied undertaking or of its investment houseunits.

A bank authorized to establish branches or other offices shall beresponsible for all business conducted in such branches and offices to

the same extent and in the same manner as though such business hadall been conducted in the head office. A bank and its branches andoffices shall be treated as one unit.

Sec. 74, GBL: Local Branches of Foreign Banks . – In the case of aforeign bank which has more than one (1) branch in the Philippines, allsuch branches shall be treated as one (1) unit for the purpose of thisAct, and all references to the Philippine branches of foreign banks shallbe held to refer to such units.

Sec. 75, GBL: Head Office Guarantee . – In order to provide effectiveprotection of the interests of the depositors and other creditors of

g y

Sec. 21, GBL : Banking Days and Hours . – Unless otherwise authorized

by the Bangko Sentral in the interest of the banking public, all banksincluding their branches and offices shall transact business on allworking days for at least six (6) hours a day. In addition, banks or anyof their branches or offices may open for business on Saturdays,Sundays or holidays for at least three (3) hours a day: Provided , Thatbanks which opt to open on days other than working days shall report tothe Bangko Sentral the additional days during which they or theirbranches or offices shall transact business.

For purposes of this Section, working days shall mean Mondays toFridays, except if such days are holidays.

3. Independent Auditor

Sec. 58, GBL: Independent Auditor . - The Monetary Board may requirea bank, quasi-bank or trust entity to engage the services of anindependent auditor to be chosen by the bank, quasi-bank or trustentity concerned from a list of certified public accountants acceptable tothe Monetary Board. The term of the engagement shall be as prescribedby the Monetary Board which may either be on a continuing basis wherethe auditor shall act as resident examiner, or on the basis of specialengagements; but in any case, the independent auditor shall beresponsible to the bank’s, quasi-bank’s or trust entity’s board ofdirectors. A copy of the report shall be furnished to the MonetaryBoard. The Monetary Board may also direct the board of directors of abank, quasi-bank, trusty entity and/or the individual members thereof;to conduct, either personally or by a committee created by the board,

an annual balance sheet audit of the bank, quasi-bank or trust entity toreview the internal audit and control system of the bank, quasi-bank ortrust entity and to submit a report of such audit.

4. Financial Statements

Sec. 60, GBL: Financial Statements . – Every bank, quasi-bank or trustentity shall submit to the appropriate supervising and examiningdepartment of the Bangko Sentral financial statements in such form andfrequency as may be prescribed by the Bangko Sentral. Suchstatements, which shall be as of a specific date designated by theBangko Sentral, shall show thee actual financial condition of the

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 191institution submitting the statement, and of its branches, offices,subsidiaries and affiliates, including the results of its operations, andshall contain such information as may be required in Bangko Sentralregulations.

Sec. 61, GBL: Publication of Financial Statements . - Every bank, quasi-bank or trust entity, shall publish a statement of its financial condition,including those of its subsidiaries and affiliates, in such termsunderstandable to the layman and in such frequency as may be

ib d B k S l i E li h Fili i l

5. Electronic Transactions

Sec. 59, GBL: Authority to Regulate Electronic Transactions . - TheBangko Sentral shall have full authority to regulate the use of electronicdevices, such as computers, and processes for recording, storing andtransmitting information or data in connection with the operations of abank; quasi-bank or trust entity, including the delivery of services andproducts to customers by such entity.

6. Unsound Banking Practice




prescribed Bangko Sentral, in English or Filipino, at least once everyquarter in a newspaper of general circulation in the city or province

where the principal office, in the case of a domestic institution or theprincipal branch or office in the case of a foreign bank, is located, but ifno newspaper is published in the same province, then in a newspaperpublished in Metro Manila or in the nearest city or province.

The Bangko Sentral may by regulation prescribe the newspaper wherethe statements prescribed herein shall be published. .

The Monetary Board may allow the posting of the financial statements ofa bank, quasi-bank or trust entity in public places it may determine, lieuof the publication required in the preceding paragraph, when warrantedby the circumstances.

Additionally, banks shall make available to the public in such form and

manner as the Bangko Sentral may prescribe the complete set of itsaudited financial statements as well as such other relevant informationincluding those on enterprises majority-owned or controlled by thebank, that will inform the public of the true financial condition of a bankas of any given time. .

In periods of national and/or local emergency or of imminent panicwhich directly threaten monetary and banking stability, the MonetaryBoard, by a vote of at least five (5) of its members, in special cases andupon application of the bank, quasi-bank or trust entity, may allow suchbank, quasi-bank or trust entity to defer for a stated period of time thepublication of the statement of financial condition required herein.

Sec. 62, GBL: Publication of Capital Stock . – A bank, quasi-bank ortrust entity incorporated under the laws of the Philippines shall notpublish the amount of its authorized or subscribed capital stock withoutindicating at the same time and with equal prominence, the amount ofits capital actually paid up.

No branch of any foreign bank doing business in the Philippines shall inany way announce the amount of the capital and surplus of its headoffice, or of the bank in its entirety without indicating at the same timeand with equal prominence the amount of the capital, if any, definitelyassigned to such branch, such fact shall be stated in, and shall form partof the publication.

6. Unsound Banking Practice

Sec. 56, GBL : Conducting Business in an Unsafe or Unsound Manner -

In determining whether a particular act or omission, which is nototherwise prohibited by any law, rule or regulation affecting banks,quasi-banks or trust entities, may be deemed as conducting business inan unsafe or unsound manner for purposes of this Section, the MonetaryBoard shall consider any of the following circumstances:

56.1. The act or omission has resulted or may result in materialloss or damage, or abnormal risk or danger to the safety, stability,liquidity or solvency of the institution;

56.2. The act or omission has resulted or may result in materialloss or damage or abnormal risk to the institution's depositors,creditors, investors, stockholders or to the Bangko Sentral or to thepublic in general;

56.3. The act or omission has caused any undue injury, or hasgiven any unwarranted benefits, advantage or preference to thebank or any party in the discharge by the director or officer of hisduties and responsibilities through manifest partiality, evident badfaith or gross inexcusable negligence; or

56.4. The act or omission involves entering into any contract ortransaction manifestly and grossly disadvantageous to the bank,quasi-bank or trust entity, whether or not the director or officerprofited or will profit thereby.

Whenever a bank, quasi-bank or trust entity persists in conducting itsbusiness in an unsafe or unsound manner, the Monetary Board may,without prejudice to the administrative sanctions provided in Section 37of the New Central Bank Act, take action under Section 30 of the sameAct and/or immediately exclude the erring bank from clearing, theprovisions of law to the contrary notwithstanding.

a. Factors to be considered by MB

b. Effect of persistence in conducting business in unsafe andunsound manner

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 1927. Settlement of Disputes

Sec. 63, GBL: Settlement of Disputes . – The provisions of any law tothe contrary notwithstanding, the Bangko Sentral shall be consulted byother government agencies or instrumentalities in actions orproceedings initiated by or brought before them involving controversiesin banks, quasi-banks or trust entities arising out of and involvingrelations between and among their directors, officers or stockholders, aswell as disputes between any or all of them and the bank, quasi-bank ort t tit f hi h th di t ffi t kh ld

the relevancy of the testimony and the materiality thereof has beendemonstrated to the arbitrators. Arbitrators may also require theretirement of any witness during the testimony of any other witness. Allof the arbitrators appointed in any controversy must attend all thehearings in that matter and hear all the allegations and proofs of theparties; but an award by the majority of them is valid unless theconcurrence of all of them is expressly required in the submission orcontract to arbitrate. The arbitrator or arbitrators shall have thepower at any time, before rendering the award, without prejudice




trust entity of which they are directors, officers or stockholders.

Cases

Home Bankers Savings and Trust Co. v. Court of Appeals , 318 SCRA558 (1999)FACTS Victor Tancuan issued a check amounting to P25,250,000 while EugeneArriesgado issued 3 checks, all amounting to P25,200,000. Both exchangedeach other’s check and deposited them with their respective banks forcollection. When Far East Bank and Trust Company (FEBTC) presentedVictor’s check to Home Bankers Savings and Trust Company (HBSTC),HBSTC dishonored the check for insufficiency of funds. on the other hand,when HBSTC presented Eugene’s checks to FEBTC, it was also dishonoredfor insufficiency. HBSTC returned the checks to FEBTC through the PhilippineClearing House Corporation for the reason “Beyond Reglementary Period”,implying that HBSTC already treasted Eugene’s checks as cleared andallowed to be withdrawn.

Now, FEBTC demands reimbursements for the returned checks. The issuewas subjected for arbitration. However, during the pendency of thearbitration, FEBTC filed a case in court with prayer for attachment. HBSTCcountered with a motion to dismiss, arguing the case cannot be filed whilethe arbitration is still on going. The LC ruled dismissed the motion ofFEBTC.

ISSUE

W/N FEBTC can file a separate case in court over the same subject matter of

an arbitration, while the arbitration is still ongoing.RULING

YES . Section 14 of of RA 876 “Arbitration Law allows any party to thearbitration proceeding to petition the court to take measures to safeguardand/or conserve any matter which is the subject of the dispute inarbitration

Section 14. Subpoena and subpoena duces tecum . - Arbitrators shallhave the power to require any person to attend a hearing as a witness.They shall have the power to subpoena witnesses and documents when

p y , g , p jto the rights of any party to petition the court to take measures tosafeguard and/or conserve any matter which is the subject of thedispute in arbitration.

Participants in the regional clearing operations of the Philippine ClearingHouse Corporation cannot bypass the arbitration process laid out bythe body and seek relief directly from the courts . In the case at bar,undeniably, private respondent has initiated arbitration proceedings asrequired by the PCHC rules and regulations, and pending arbitration hassought relief from the trial court for measures to safeguard and/or conservethe subject of the dispute under arbitration, as sanctioned by section 14 ofthe Arbitration Law, and otherwise not shown to be contrary to the PCHCrules and regulations.

Basically, the case filed by FEBTC is allowed on the ground of primarily

taking measures to safeguard the subject matter of the dispute(attachment), notwithstanding the arbitration proceedings.

Allied Banking Corporation v. Court of Appeals , 294 SCRA 803 (1998)FACTS Hyatt Terraces Baguio issued two crossed checks drawn against AlliedBanking Corp. (hereinafter, ALLIED) in favor of appellee MeszellenCommodities Services, Inc. (hereinafter, MESZELLEN). Said checks weredeposited on August 5, 1980 and August 18, 1980, respectively, with thenow defunct Commercial Bank and Trust Company (hereinafter,COMTRUST). Upon receipt of the above checks, COMTRUST stamped at theback thereof the warranty "All prior endorsements and/or lack of

endorsements guaranteed." After the checks were cleared through thePhilippine Clearing House Corporation (hereinafter, PCHC), ALLIED BANKpaid the proceeds of said checks to COMTRUST as the collecting bank.

On March 17, 1981, the payee, MESZELLEN, sued the drawee, ALLIEDBANK, for damages which it allegedly suffered when the value[s] of thechecks were paid not to it but to some other person.

Before defendant ALLIED BANK could finish presenting its evidence, it filed athird party complaint against Bank of the Philippine Islands (hereinafter,BPI, appellee herein) as successor-in-interest of COMTRUST, forreimbursement in the event that it would be adjudged liable in the main

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 193case to pay plaintiff, MESZELLEN.

A Motion to Dismiss was filed by BPI on the ground that the trial court hadno jurisdiction over the case as they are subject to mandatory arbitrationunder the PCHC Rules.

ISSUE

Whether or not the trial court has jurisdiction over the Third Party Complaintof ALLIED against BPI.

petition for review in the earlier case filed by respondent at the RTC Makati.Respondent filed a Motion to Dismiss Petition for Review for Lack of

jurisdiction. RTC upheld and stated that pe titioner should have been filed asa separate case.

ISSUE

Whether or not RTC erred in dismissing the Petition of Petitioner for lack of jurisdiction on the ground it should have been docketed as a separa te case?




g

RULING

NO. The parties are subject to mandatory arbitration.

Sec. 38 — Arbitration

Any dispute or controversy between two or more clearingparticipants involving any check/item cleared thru PCHC shall besubmitted to the Arbitration Committee, upon written complaint ofany involved participant by filing the same with the PCHC servingthe same upon the other party or parties, who shall within fifteen(15) days after receipt thereof file with the Arbitration Committee itswritten answer to such written complaint and also within the sameperiod serve the same upon the complaining participant, . . . .

We defer to the primary authority of PCHC over the present dispute,because its technical expertise in this field enables it to better resolvequestions of this nature. This is not prejudicial to the interest of any party,since primary recourse to the PCHC does not preclude an appeal to theregional trial courts on questions of law.

Insular Savings Bank v. Far East Bank and Trust Company , 492 SCRA145 (2006)FACTS Far East filed a complaint against Home Banks Trust and Company (HBTC)with the Philippine Clearing House Corporation’s (PCHC) arbitrationcommittee for 25.2M. for the total amount of three checks drawn and

debited against its clearing account. HBTC sent these checks to respondentfor to respondent for clearing through the PCHC clearing system.Respondent dishonour the checks for insuffiency of funds and returned toHBTC however, the latter refused to accept them since the checks werereturned by respondent after the reglementary regional clearing period.Pending arbitration respondent filed another complaint but this time with theRTC in Makati. The RTC then suspended the case pending the outcome ofarbitration.

Arbitration was in favour of respondent and petitioners were told to pay the25.2M. MR was denied at the arbitration committee so petitioner filed a

HELD

Petition Lacks merit. RTC ruling upheld except for ruling on requirement tofile a separate case.

PCHC has its own rules of procedure for arbitration. However, this isgoverned by the arbitration law and supplemented by the rules of court. Asprovided in the PCHC rules, the findings of facts of the decision or awaredrendered by the Arbitration Committee shall be final and conclusive upon allthe parties in said arbitration dispute. Under Article 2055 of the Civil Code,the validy of any stipulation on the finality of arbitratior’s award or decisionis recognized however, where the conditions desrbied in articles 2038-2040applicable to both compromises and arbitration obtaining, the arbitratorsawards may be annulled or resciended. Consequently, the decision of thearbi committee is subject to judicial review.

Furthermore , petitioner had several judicial remedies available at itsdisposal after the Arbitration Committee denied its Motion forReconsideration . It may petition the proper RTC to issue an ordervacating the award on the grounds provided for under Section 24 of theArbitration Law. Petitioner likewise has the option to file a petition forreview under Rule 43 of the Rules of Court with the Court of Appeals onquestions of fact, of law, or mixed questions of fact and law. Lastly ,petitioner may file a petition for certiorari under Rule 65 of the Rules ofCourt on the ground that the Arbitrator Committee acted without or inexcess of its jurisdiction or with grave abuse of discretion amounting to lackor excess of jurisdiction. Since this case involves acts or omissions of aquasi-judicial agency, the petition should be filed in and cognizable only by

the Court of Appeals.In this instance, petitioner did not avail of any of theabovementioned remedies available to it. Instead it filed a petitionfor review with the RTC where Civil Case No. 92-145 is pendingpursuant to Section 13 of the PCHC Rules to sustain its action.Clearly, it erred in the procedure it chose for judicial review of thearbitral award.

In the instant case, petitioner and respondent have agreed that the PCHCRules would govern in case of controversy. However, since the PCHCRules came about only as a result of an agreement between and

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 194among member banks of PCHC and not by law, it cannot confer

jurisdiction to the RTC. Thus, the portion of the PCHC Rules granting jurisdiction to the RTC to review arbitral awards, only on questionsof law, cannot be given effect.

Consequently, the proper recourse of petitioner from the denial of its motionfor reconsideration by the Arbitration Committee is to file either a motion tovacate the arbitral award with the RTC, a petition for review with the Courtof Appeals under Rule 43 of the Rules of Court or a petition for certiorariunder Rule 65 of the Rules of Court

such bank and may require that part or all of the net profits be used toincrease the capital accounts of the bank until the minimum requirementhas been met The Monetary Board may, furthermore, restrict or prohibitthe acquisition of major assets and the making of new investments bythe bank, with the exception of purchases of readily marketableevidences of indebtedness of the Republic of the Philippines and of theBangko Sentral and any other evidences of indebtedness or obligationsthe servicing and repayment of which are fully guaranteed by theRepublic of the Philippines, until the minimum required capital ratio has




under Rule 65 of the Rules of Court.

In the case at bar, petitioner filed a petition for review with the RTCwhen the same should have been filed with the Court of Appealsunder Rule 43 of the Rules of Court. Thus, the RTC of Makati did noterr in dismissing the petition for review for lack of jurisdiction butnot on the ground that petitioner should have filed a separate case but on the necessity of filing the correct petition in the proper court . It isimmaterial whether petitioner filed the petition for review in CivilCase No. 92-145 as an appeal of the arbitral award or whether itfiled a separate case in the RTC, considering that the RTC will onlyhave jurisdiction over an arbitral award in cases of motions tovacate the same . Otherwise, as elucidated herein, the Court of Appealsretains jurisdiction in petitions for review or in petitions forcertiorari.

D. O THER R EGULATIONS

1. Risk Based Capital

Sec. 34, GBL : Risk-Based Capital . - The Monetary Board shall prescribethe minimum ratio which the net worth of a bank must bear to its totalrisk assets which may include contingent accounts.

For purposes of this Section, the Monetary Board may require such ratiobe determined on the basis of the net worth and risk assets of a bankand its subsidiaries, financial or otherwise, as well as prescribe thecomposition and the manner of determining the net worth and total risk

assets of banks and their subsidiaries: Provided , That in the exercise ofthis authority, the Monetary Board shall, to the extent feasible conformto internationally accepted standards, including those of the Bank forInternational Settlements (BIS), relating to risk-based capitalrequirements: Provided further, That it may alter or suspend compliancewith such ratio whenever necessary for a maximum period of one (1)year: Provided, finally, That such ratio shall be applied uniformly tobanks of the same category. .

In case a bank does not comply with the prescribed minimum ratio, theMonetary Board may limit or prohibit the distribution of net profits by

been restored. .

In case of a bank merger or consolidation, or when a bank is underrehabilitation under a program approved by the Bangko Sentral,Monetary Board may temporarily relieve the surviving bank,consolidated bank, or constituent bank or corporations underrehabilitation from full compliance with the required capital ratio undersuch conditions as it may prescribe.

Before the effectivity of rules which the Monetary Board is authorized toprescribe under this provision, Section 22 of the General Banking Act, asamended, Section 9 of the Thrift Banks Act, and all pertinent rulesissued pursuant thereto, shall continue to be in force.

a. MB Authority

b. Effect of Non-Compliance2. Major Investments/Ownership of Real Property

Sec. 50, GBL: Major Investments . - For the purpose or enhancing banksupervision, the Monetary Board shall establish criteria for reviewingmajor acquisitions of investments by a bank including corporateaffiliations or structures that may expose the bank to undue risks or inany way hinder effective supervision.

Sec. 51, GBL: Ceiling on Investments in Certain Assets . – Any bankmay acquire real estate as shall be necessary for its own use in theconduct of its business: Provided, however, That the total investment insuch real estate and improvements thereof including bank equipment,

shall not exceed fifty percent (50%) of combined capital accounts:Provided, further, That the equity investment of a bank in anothercorporation engaged primarily in real estate shall be considered as partof the bank’s total investment in real estate, unless otherwise providedby the Monetary Board.

Sec. 52, GBL: Acquisition of Real Estate by Way of Satisfaction oClaims . – Notwithstanding the limitations of the preceding Section, abank may acquire, hold or convey real property under the followingcircumstances:

52.1. Such as shall be mortgaged to it in good faith by way of

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 195security for debts;


52.3. Such as it shall purchase at sales under judgments, decrees,mortgages, or trust deeds held by it and such as it shall purchaseto secure debts due it.

A l t i d h ld d th i t t d

thousand pesos (P100,000) or by imprisonment of not less than one (1)year nor more than five (5) years, or both, in the discretion of the court.

Sec. 35, NCBA: False Statement. — The willful making of a false ormisleading statement on a material fact to the Monetary Board or to theexaminers of the Bangko Sentral shall be punished by a fine of not less thanOne hundred thousand pesos (P100,000) nor more than Two hundredthousand pesos (P200,000), or by imprisonment of not more than (5) years,or both, at the discretion of the court.




Any real property acquired or held under the circumstances enumeratedin the above paragraph shall be disposed of by the bank within a period

of five (5) years or as may be prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue tohold the property for its own use, subject to the limitations of thepreceding Section.

3. Declaration of Dividends

Sec. 57, GBL: Prohibition on Dividend Declaration . – No bank or quasi-bank shall declare dividends, if at the time of declaration:

57.1. Its clearing account with the Bangko Sentral is overdrawn; or

57.2. It is deficient in the required liquidity floor for governmentdeposits for five (5) or more consecutive days, or

57.3. It does not comply with the liquidity standards/ratiosprescribed by the Bangko Sentral for purposes of determining fundsavailable for dividend declaration; or 57.4. It has committed amajor violation as may be determined by the Bangko Sentral.

E. P ENALTY FOR VIOLATIONS

Sec. 66, GBL : Penalty for Violation of this Act . – Unless otherwise hereinprovided, the violation of any of the provisions of this Act shall be subject toSections 34, 35, 36 and 37 of the New Central Bank Act. If the offender is adirector or officer of a bank, quasi-bank or trust entity, the Monetary Boardmay also suspend or remove such director or officer. If the violation iscommitted by a corporation, such corporation may be dissolved by quowarranto proceedings instituted by the Solicitor General.

Sec. 34, NCBA: Refusal to Make Reports or Permit Examination. —Any officer, owner, agent, manager, director or officer-in-charge of anyinstitution subject to the supervision or examination by theBangko Sentralwithin the purview of this Act who, being required in writing by theMonetary Board or by the head of the supervising and examiningdepartment willfully refuses to file the required report or permit any lawfulexamination into the affairs of such institution shall be punished by a fine ofnot less than Fifty thousand pesos (P50,000) nor more than One hundred

Sec. 36, NCBA: Proceedings Upon Violation of This Act and OtherBanking Laws, Rules, Regulations, Orders or Instructions. —Whenever a bank or quasi-bank, or whenever any person or entity willfullyviolates this Act or other pertinent banking laws being enforced orimplemented by the Bangko Sentral or any order, instruction, rule orregulation issued by the Monetary Board, the person or persons responsiblefor such violation shall unless otherwise provided in this Act be punished bya fine of not less than Fifty thousand pesos (P50,000) nor more than Twohundred thousand pesos (P200,000) or by imprisonment of not less thantwo (2) years nor more than ten (10) years, or both, at the discretion of thecourt.

Whenever a bank or quasi-bank persists in carrying on its business in anunlawful or unsafe manner, the Board may, without prejudice to thepenalties provided in the preceding paragraph of this section and theadministrative sanctions provided in Section 37 of this Act, take actionunder Section 30 of this Act.

Sec. 37, NCBA: Administrative Sanctions on Banks and Quasi-banks.— Without prejudice to the criminal sanctions against the culpable personsprovided in Sections 34, 35, and 36 of this Act, the Monetary Board may, atits discretion, impose upon any bank or quasi-bank, their directors and/orofficers, for any willful violation of its charter or by-laws, willful delay in thesubmission of reports or publications thereof as required by law, rules andregulations; any refusal to permit examination into the affairs of theinstitution; any willful making of a false or misleading statement to theBoard or the appropriate supervising and examining department or itsexaminers; any willful failure or refusal to comply with, or violation of, any

banking law or any order, instruction or regulation issued by the MonetaryBoard, or any order, instruction or ruling by the Governor; or anycommission of irregularities, and/or conducting business in an unsafe orunsound manner as may be determined by the Monetary Board, thefollowing administrative sanctions, whenever applicable:

(a) fines in amounts as may be determined by the Monetary Board to beappropriate, but in no case to exceed Thirty thousand pesos (P30,000) aday for each violation, taking into consideration the attendantcircumstances, such as the nature and gravity of the violation orirregularity and the size of the bank or quasi-bank;

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 196(b) suspension of rediscounting privileges or access to Bangko Sentralcredit facilities;

(c) suspension of lending or foreign exchange operations or authority toaccept new deposits or make new investments;

(d) suspension of interbank clearing privileges; and/or (e) revocation ofquasi-banking license.

Resignation or termination from office shall not exempt such director orofficer from administrative or criminal sanctions The Monetary Board may

Cases

Perez v. Monetary Board , 20 SCRA 592 (1967)FACTS Perez instituted mandamus proceedings against the Monetary Board, theSuperintendent of Banks, the Central Bank and the Secretary of Justice. Hisobject was to compel respondents to prosecute, Pablo Roman and severalother Republic Bank officials for violations of the General Banking Act(specifically secs. 76-78 and 83 thereof) and the Central Bank Act, and forf l ifi i f bli i l d i i i h i




officer from administrative or criminal sanctions.The Monetary Board may,whenever warranted by circumstances, preventively suspend any director or

officer of a bank or quasi-bank pending an investigation: Provided, Thatshould the case be not finally decided by the Bangko Sentral within a periodof one hundred twenty (120) days after the date of suspension, said directoror officer shall be reinstated in his position: Provided, further, That when thedelay in the disposition of the case is due to the fault, negligence or petitionof the director or officer, the period of delay shall not be counted incomputing the period of suspension herein provided.

The above administrative sanctions need not be applied in the order of theirseverity.

Whether or not there is an administrative proceeding, if the institutionand/or the directors and/or officers concerned continue with or otherwisepersist in the commission of the indicated practice or violation, the MonetaryBoard may issue an order requiring the institution and/or the directorsand/or officers concerned to cease and desist from the indicated practice orviolation, and may further order that immediate action be taken to correctthe conditions resulting from such practice or violation. The cease and desistorder shall be immediately effective upon service on the respondents.

The respondents shall be afforded an opportunity to defend their action in ahearing before the Monetary Board or any committee chaired by anyMonetary Board member created for the purpose, upon request made by therespondents within five (5) days from their receipt of the order. If no suchhearing is requested within said period, the order shall be final. If a hearingis conducted, all issues shall be determined on the basis of records, afterwhich the Monetary Board may either reconsider or make final its order.

The Governor is hereby authorized, at his discretion, to impose uponbanking institutions, for any failure to comply with the requirements of law,Monetary Board regulations and policies, and/or instructions issued by theMonetary Board or by the Governor, fines not in excess of Ten thousandpesos (P10,000) a day for each violation, the imposition of which shall befinal and executory until reversed, modified or lifted by the Monetary Boardon appeal.

falsification of public or commercial documents in connection with certainalleged anomalous loans authorized by Roman and the other bank officials.

Respondents assailed the propriety of mandamus. The Secretary of Justiceclaimed that it was not their specific duty to prosecute the personsdenounced by Perez. The Central Bank and its respondent officials, on theother hand, averred that they had already done their duty under the law byreferring to the special prosecutors of the Department of Justice for criminalinvestigation and prosecution those cases involving the alleged anomalousloans.

ISSUE

W/N mandamus would lie against respondents? (specifically the CentralBank)

HELD

NO . The Central Bank and its respondent officials may have the duty underthe Central Bank Act and the General Banking Act to cause the prosecutionof those alleged violators, yet We find nothing in said laws that imposes aclear, specific duty on the former to do the actual prosecution of the latter.The Central Bank is a government corporation created principally toadminister the monetary and banking system of the Republic, not aprosecution agency like the fiscal's office. Being an artificial person, TheCentral Bank is limited to its statutory powers and the nearest power towhich prosecution of violators of banking laws may be attributed is its powerto sue and be sued. But this corporate power of litigation evidently refers tocivil cases only.

The Central Bank and its respondent officials have already done all theycould, within the confines of their powers, to cause the prosecution of thosepersons denounced by Perez.

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 197VII. BANKS IN DISTRESS;CESSATION OF BANKING BUSINESS

A. LOANS TO B ANKS

1. Loans without collateral Sec. 83, NCBA : Loans for Liquidity Purposes. — The BangkoSentral may extend loans and advances to banking institutions for aperiod of not more than seven (7) days without any collateral for the

may exceed twenty-five percent (25%) of the bank's total depositand deposit substitutes if the same is adequately secured byapplicable loan values of government securities and unencumberedfirst class collaterals approved by the Monetary Board, and theprincipal stockholders of the institution furnish an acceptableundertaking to indemnify and hold harmless from suit a conservatorwhose appointment the Monetary Board may find necessary at anytime.

P i h l f h fi h h b ki i i i h ll




period of not more than seven (7) days without any collateral for thepurpose of providing liquidity to the banking system in times of

need.

2. Emergency loans Sec. 84, NCBA: Emergency Loans and Advances. — In periodsof national and/or local emergency or of imminent financial panicwhich directly threaten monetary and banking stability, theMonetary Board may, by a vote of at least five (5) of its members,authorize the Bangko Sentral to grant extraordinary loans oradvances to banking institutions secured by assets as definedhereunder: Provided, That while such loans or advances areoutstanding, the debtor institution shall not, except upon priorauthorization by the Monetary Board, expand the total volume of itsloans or investments.

The Monetary Board may, at its discretion, likewise authorize theBangko Sentral to grant emergency loans or advances to bankinginstitutions, even during normal periods, for the purpose of assistinga bank in a precarious financial condition or under serious financialpressures brought by unforeseen events, or events which, thoughforeseeable, could not be prevented by the bankconcerned:Provided, however, That the Monetary Board has ascertained thatthe bank is not insolvent and has the assets defined hereunder tosecure the advances: Provided, further, That a concurrent vote of atleast five (5) members of the Monetary Board is obtained.

The amount of any emergency loan or advance shall not exceed thesum of fifty percent (50%) of total deposits and deposit substitutesof the banking institution and shall be disbursed in two (2) or moretranches. The amount of the first tranche shall be limited to twenty-five percent (25%) of the total deposit and deposit substitutes of theinstitution and shall be secured by government securities to theextent of their applicable loan values and other unencumbered firstclass collaterals which the Monetary Board may approve: Provided,That if as determined by the Monetary Board, the circumstancessurrounding the emergency warrant a loan or advance greater thanthe amount provided hereinabove, the amount of the first tranche

Prior to the release of the first tranche, the banking institution shallsubmit to the Bangko Sentral a resolution of its board of directorsauthorizing the Bangko Sentral to evaluate other assets of thebanking institution certified by its external auditor to be good andavailable for collateral purposes should the release of thesubsequent tranche be thereafter applied for.

The Monetary Board may, by a vote of at least five (5) of itsmembers, authorize the release of a subsequent tranche oncondition that the principal stockholders of the institution:

(a) furnish an acceptable undertaking to indemnify and holdharmless from suit a conservator whose appointment theMonetary Board may find necessary at any time; and

(b) provide acceptable security which, in the judgment of theMonetary Board, would be adequate to supplement, wherenecessary, the assets tendered by the banking institution tocollateralize the subsequent tranche.

In connection with the exercise of these powers, the prohibitions inSection 128 of this Act shall not apply insofar as it refers toacceptance as collateral of shares and their acquisition as a result offoreclosure proceedings, including the exercise of voting rightspertaining to said shares: Provided, however, That should theBangko Sentral acquire any of the shares it has accepted ascollateral as a result of foreclosure proceedings, the Bangko Sentralshall dispose of said shares by public bidding within one (1) year

from the date of consolidation of title by the Bangko Sentral.Whenever a financial institution incurs an overdraft in its accountwith the Bangko Sentral, the same shall be eliminated within theperiod prescribed in Section 102 of this Act.

B. CONSERVATORSHIP Sec. 67, GBL : Conservatorship . – The grounds and procedures forplacing a bank under conservatorship, as well as, the powers and dutiesof the conservator appointed for the bank shall be governed by theprovisions of Section 29 and the last two paragraphs of Section 30 of

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 198the New Central Bank Act: Provided, That this Section shall also applyto conservatorship proceedings of quasi-banks.

Sec. 29, NCBA: Appointment of Conservator. — Whenever, on thebasis of a report submitted by the appropriate supervising or examiningdepartment, the Monetary Board finds that a bank or a quasi-bank is ina state of continuing inability or unwillingness to maintain a condition ofliquidity deemed adequate to protect the interest of depositors andcreditors, the Monetary Board may appoint a conservator with such

th M t B d h ll d t t k h f

Sec. 30, NCBA: Proceedings in Receivership and Liquidation. —Whenever, upon report of the head of the supervising or examiningdepartment, the Monetary Board finds that a bank or quasi- bank:

(a) Is unable to pay its liabilities as they become due in the ordinarycourse of business: Provided, That this shall not include inability to paycaused by extraordinary demands induced by financial panic in thebanking community;

(b) B th B k S t l t t it li biliti




powers as the Monetary Board shall deem necessary to take charge ofthe assets, liabilities, and the management thereof, reorganize themanagement, collect all monies and debts due said institution, andexercise all powers necessary to restore its viability. Theconservatorshall report and be responsible to the Monetary Board andshall have the power to overrule or revoke the actions of the previousmanagement and board of directors of the bank or quasi-bank.

The conservator should be competent and knowledgeable in bankoperations and management. The conservatorship shall not exceed one(1) year.

The conservator shall receive remuneration to be fixed by the MonetaryBoard in an amount not to exceed two-thirds (2/3) of the salary of thepresident of the institution in one (1) year, payable in twelve (12) equalmonthly payments: Provided, That, if at any time within one-yearperiod, the conservatorship is terminated on the ground that theinstitution can operate on its own, the conservator shall receive thebalance of the remuneration which he would have received up to theend of the year; but if the conservatorship is terminated on othergrounds, the conservator shall not be entitled to such remainingbalance. The Monetary Board may appoint a conservator connected withthe Bangko Sentral, in which case he shall not be entitled to receive anyremuneration or emolument from the Bangko Sentral during theconservatorship. The expenses attendant to the conservatorship shall beborne by the bank or quasi-bank concerned.

The Monetary Board shall terminate the conservatorship when it issatisfied that the institution can continue to operate on its own and theconservatorship is no longer necessary. The conservatorship shalllikewise be terminated should the Monetary Board, on the basis of thereport of the conservator or of its own findings, determine that thecontinuance in business of the institution would involve probable loss toits depositors or creditors, in which case the provisions of Section 30shall apply.

(b) By the Bangko Sentral, to meet its liabilities; or

(c) Cannot continue in business without involving probable losses to itsdepositors or creditors; or

(d) Has willfully violated a cease and desist order under Section 37 thathas become final, involving acts or transactions which amount to fraudor a dissipation of the assets of the institution; in which cases, theMonetary Board may summarily and without need for prior hearingforbid the institution from doing business in the Philippines anddesignate the Philippine Deposit Insurance Corporation as receiver ofthe banking institution.

For a quasi-bank, any person of recognized competence in banking orfinance may be designed as receiver.

The receiver shall immediately gather and take charge of all the assetsand liabilities of the institution, administer the same for the benefit of itscreditors, and exercise the general powers of a receiver under theRevised Rules of Court but shall not, with the exception ofadministrative expenditures, pay or commit any act that will involve thetransfer or disposition of any asset of the institution: Provided, That thereceiver may deposit or place the funds of the institution in non-speculative investments. The receiver shall determine as soon aspossible, but not later than ninety (90) days from take over, whetherthe institution may be rehabilitated or otherwise placed in such acondition so that it may be permitted to resume business with safety to

its depositors and creditors and the general public: Provided, That anydetermination for the resumption of business of the institution shall besubject to prior approval of the Monetary Board.If the receiverdetermines that the institution cannot be rehabilitated or permitted toresume business in accordance with the next preceding paragraph, theMonetary Board shall notify in writing the board of directors of itsfindings and direct the receiver to proceed with the liquidation of theinstitution. The receiver shall:

1. File ex parte with the proper regional trial court, and withoutrequirement of prior notice or any other action, a petition for assistance

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES199

in the liquidation of the institution pursuant to a liquidation plan adoptedby the Philippine Deposit Insurance Corporation for general applicationto all closed banks. In case of quasi-banks, the liquidation plan shall beadopted by the Monetary Board. Upon acquiring jurisdiction, the courtshall, upon motion by the receiver after due notice, adjudicate disputedclaims against the institution, assist the enforcement of individualliabilities of the stockholders, directors and officers, and decide on otherissues as may be material to implement the liquidation plan adopted.The receiver shall pay the cost of the proceedings from the assets of theinstitution

liquidation proceedings under the New Central Bank Act (Republic ActNo. 7653) or successor legislation;

(b) Insurance company shall refer to those companies that arepotentially or actually subject to insolvency proceedings under theInsurance Code (Presidential Decree No. 1460) or successor legislation;and

(c) Pre-need company shall refer to any corporation authorized/licensedto sell or offer to sell pre need plans




institution.

2. Convert the assets of the institutions to money, dispose of the sameto creditors and other parties, for the purpose of paying the debts ofsuch institution in accordance with the rules on concurrence andpreference of credit under the Civil Code of the Philippines and he may,in the name of the institution, and with the assistance of counsel as hemay retain, institute such actions as may be necessary to collect andrecover accounts and assets of, or defend any action against, theinstitution. The assets of an institution under receivership or liquidationshall be deemed in custodia legis in the hands of the receiver and shall,from the moment the institution was placed under such receivership orliquidation, be exempt from any order of garnishment, levy, attachment,or execution.

The actions of the Monetary Board taken under this section or underSection 29 of this Act shall be final and executory, and may not berestrained or set aside by the court except on petition for certiorari onthe ground that the action taken was in excess of jurisdiction or withsuch grave abuse of discretion as to amount to lack or excess of

jurisdiction. The petition for certiorari may only be filed by thestockholders of record representing the majority of the capital stockwithin ten (10) days from receipt by the board of directors of theinstitution of the order directing receivership, liquidation orconservatorship. The designation of a conservator under Section 29 ofthis Act or the appointment of a receiver under this section shall bevested exclusively with the Monetary Board. Furthermore, the

designation of a conservator is not a precondition to the designation of areceiver.

Sec. 5, FRIA: Exclusions. - The term debtor does not include banks,insurance companies, pre-need companies, and national and localgovernment agencies or units.For purposes of this section:

(a) Bank shall refer to any duly licensed bank or quasi-bank that ispotentially or actually subject to conservatorship, receivership or

to sell or offer to sell pre-need plans.Provided, That government financial institutions other than banks andgovernment-owned or controlled corporations shall be covered by thisAct, unless their specific charter provides otherwise.

1. Grounds Sec. 29, par. 1, NCBA : Whenever, on the basis of a reportsubmitted by the appropriate supervising or examining department,the Monetary Board finds that a bank or a quasi-bank is in a state ofcontinuing inability or unwillingness to maintain a condition ofliquidity deemed adequate to protect the interest of depositors andcreditors, the Monetary Board may appoint a conservator with suchpowers as the Monetary Board shall deem necessary to take chargeof the assets, liabilities, and the management thereof, reorganizethe management, collect all monies and debts due said institution,and exercise all powers necessary to restore its viability. Theconservator shall report and be responsible to the Monetary Boardand shall have the power to overrule or revoke the actions of theprevious management and board of directors of the bank or quasi-bank.

2. Appointment of Conservator Sec. 29, par. 1, NCBA: see supra

Sec. 30, last par. NCBA : The actions of the Monetary Board takenunder this section or under Section 29 of this Act shall be final andexecutory, and may not be restrained or set aside by the court

except on petition for certiorari on the ground that the action takenwas in excess of jurisdiction or with such grave abuse of discretionas to amount to lack or excess of jurisdiction. The petition forcertiorari may only be filed by the stockholders of recordrepresenting the majority of the capital stock within ten (10) daysfrom receipt by the board of directors of the institution of the orderdirecting receivership, liquidation or conservatorship. Thedesignation of a conservator under Section 29 of this Act or theappointment of a receiver under this section shall be vestedexclusively with the Monetary Board. Furthermore, the designation


of a conservator is not a precondition to the designation of areceiver.

3. Powers of Conservator Sec. 29, par. 1, NCBA : see supra

CasesFirst Philippine International Bank v. Court of Appeals , 252 SCRA 259(1996)FACTS

Third, the power under the Central Bank Law regarding conservatorship inpreservation of the bank’s assets CANNOT EXTEND to the post-factorepudiation of perfected transaction; otherwise, it would infringe the non-Impairment clause of the Constitution. Thus, the authority under Section28-A only pertains the power to revoke defective contracts – void, voidable,unenforceable or rescissible. The conservator cannot repudiate a contractvalidly made under the doctrine of implied authority. Its only authority insuch case is to assail such contract in court.

NOTE: The Bank is guilty of Forum Shopping There is a Perfected Contract




FACTS First Phil International Bank (formerly Producers Bank of the Phil) acquired 6parcels of land from BYME Investment and Development Corporationthrough mortgage and foreclosure. Now, Demetrio Demetria and JoseJanolo desire to buy the said property from the Bank.

The potential buyers coursed his offer to Mecurio Rivera, the manager ofproperty management department of the bank. initially, both offered 3.5M.Rivera counter-offered with 5.5M. Both again offered 4.2M but later agreedto the 5.5M purchase price. However, the Conservator of the bank wasreplaced by an Acting Conservator, thus, the offer by Demetria and Janolowas subjected to further review. Demetria and Janolo insisted that therewas a perfected contract of sale already. They tendered the price of 5.5Mbut the Bank refused to acknowledge the “perfected contact”.

RTC ruled in favor of Demetria and Janolo. CA affirmed.

Note that the bank was placed under conservatorship during the time ofnegotiation and perfection of the contact.

ISSUE W/N the Conservator of the Bank can unilaterally repudiate the authority ofBank Officers.

RULING NO . The Conservator has no power to repudiate the contract.First, the issue of Conservator’s authority to repudiate a contract was raised

for the first time on appeal. Issues not raised in the trial court cannot beraised for the first time on appeal, as it is offensive to basic rules of fairplay.

Second, there was no evidence that the Conservator actually repudiated thecontract at the time it was perfected. The Acting Conservator never objectedto the contact, it only informed that the transaction was subject to review.What the Acting Conservator did was he repudiated the authority of Riverato make a binding offer, NOT repudiate the contract itself.

NOTE: The Bank is guilty of Forum-Shopping. There is a Perfected Contractof Sale. Such Contract is Enforceable. There is no Reversible Error of Facts.

4. Qualifications and Remuneration Sec. 29, pars. 2 and 3, NCBA: The conservator should becompetent and knowledgeable in bank operations and management.The conservatorship shall not exceed one (1) year.

The conservator shall receive remuneration to be fixed by theMonetary Board in an amount not to exceed two-thirds (2/3) of thesalary of the president of the institution in one (1) year, payable intwelve (12) equal monthly payments: Provided, That, if at any timewithin one-year period, the conservatorship is terminated on theground that the institution can operate on its own, the conservatorshall receive the balance of the remuneration which he would havereceived up to the end of the year; but if the conservatorship isterminated on other grounds, the conservator shall not be entitledto such remaining balance. The Monetary Board may appoint aconservator connected with the Bangko Sentral, in which case heshall not be entitled to receive any remuneration or emolument fromthe Bangko Sentral during the conservatorship. The expensesattendant to the conservatorship shall be borne by the bank orquasi-bank concerned.

5. Period—NOT EXCEED 1 YEARSec. 29, par. 2, NCBA: see supra

6. Termination of Conservatorship Sec. 29, par. 2 and last par., NCBA : The conservator should becompetent and knowledgeable in bank operations and management.The conservatorship shall not exceed one (1) year.

x x x

The Monetary Board shall terminate the conservatorship when it issatisfied that the institution can continue to operate on its own andthe conservatorship is no longer necessary. The conservatorship





(d) Has willfully violated a cease and desist order under Section 37 thathas become final, involving acts or transactions which amount to fraudor a dissipation of the assets of the institution; in which cases, theMonetary Board may summarily and without need for prior hearingforbid the institution from doing business in the Philippines anddesignate the Philippine Deposit Insurance Corporation as receiver ofthe banking institution

2. Convert the assets of the institutions to money, dispose of the sameto creditors and other parties, for the purpose of paying the debts ofsuch institution in accordance with the rules on concurrence andpreference of credit under the Civil Code of the Philippines and he may,in the name of the institution, and with the assistance of counsel as hemay retain, institute such actions as may be necessary to collect andrecover accounts and assets of, or defend any action against, theinstitution. The assets of an institution under receivership or liquidationshall be deemed in custodia legis in the hands of the receiver and shall,from the moment the institution was placed under such receivership or




the banking institution.

For a quasi-bank, any person of recognized competence in banking orfinance may be designed as receiver.

The receiver shall immediately gather and take charge of all the assetsand liabilities of the institution, administer the same for the benefit of itscreditors, and exercise the general powers of a receiver under theRevised Rules of Court but shall not, with the exception ofadministrative expenditures, pay or commit any act that will involve thetransfer or disposition of any asset of the institution: Provided, That thereceiver may deposit or place the funds of the institution in non-speculative investments. The receiver shall determine as soon aspossible, but not later than ninety (90) days from take over, whetherthe institution may be rehabilitated or otherwise placed in such acondition so that it may be permitted to resume business with safety toits depositors and creditors and the general public: Provided, That anydetermination for the resumption of business of the institution shall besubject to prior approval of the Monetary Board.If the receiverdetermines that the institution cannot be rehabilitated or permitted toresume business in accordance with the next preceding paragraph, theMonetary Board shall notify in writing the board of directors of itsfindings and direct the receiver to proceed with the liquidation of theinstitution. The receiver shall:

1. File ex parte with the proper regional trial court, and withoutrequirement of prior notice or any other action, a petition for assistance

in the liquidation of the institution pursuant to a liquidation plan adoptedby the Philippine Deposit Insurance Corporation for general applicationto all closed banks. In case of quasi-banks, the liquidation plan shall beadopted by the Monetary Board. Upon acquiring jurisdiction, the courtshall, upon motion by the receiver after due notice, adjudicate disputedclaims against the institution, assist the enforcement of individualliabilities of the stockholders, directors and officers, and decide on otherissues as may be material to implement the liquidation plan adopted.The receiver shall pay the cost of the proceedings from the assets of theinstitution.

from the moment the institution was placed under such receivership orliquidation, be exempt from any order of garnishment, levy, attachment,or execution.

The actions of the Monetary Board taken under this section or underSection 29 of this Act shall be final and executory, and may not berestrained or set aside by the court except on petition for certiorari onthe ground that the action taken was in excess of jurisdiction or withsuch grave abuse of discretion as to amount to lack or excess of

jurisdiction. The petition for certiorari may only be filed by thestockholders of record representing the majority of the capital stockwithin ten (10) days from receipt by the board of directors of theinstitution of the order directing receivership, liquidation orconservatorship. The designation of a conservator under Section 29 ofthis Act or the appointment of a receiver under this section shall bevested exclusively with the Monetary Board. Furthermore, thedesignation of a conservator is not a precondition to the designation of areceiver.

Sec. 31, NCBA: Distribution of Assets. — In case of liquidation of abank or quasi-bank, after payment of the cost of proceedings, includingreasonable expenses and fees of the receiver to be allowed by the court,the receiver shall pay the debts of such institution, under order of thecourt, in accordance with the rules on concurrence and preference ofcredit as provided in the Civil Code.

Sec. 32, NCBA: Disposition of Revenues and Earnings. — All

revenues and earnings realized by the receiver in winding up the affairsand administering the assets of any bank or quasi-bank within thepurview of this Act shall be used to pay the costs, fees and expensesmentioned in the preceding section, salaries of such personnel whoseemployment is rendered necessary in the discharge of the liquidationtogether with other additional expenses caused thereby. The balance ofrevenues and earnings, after the payment of all said expenses, shallform part of the assets available for payment to creditors.

Sec. 33, NCBA : Disposition of Banking Franchise. — The BangkoSentral may, if public interest so requires, award to an institution, upon


such terms and conditions as the Monetary Board may approve, thebanking franchise of a bank under liquidation to operate in the areawhere said bank or its branches were previously operating: Provided,That whatever proceeds may be realized from such award shall besubject to the appropriate exclusive disposition of the Monetary Board.

Sec. 5, FRIA : Exclusions. - The term debtor does not include banks,insurance companies, pre-need companies, and national and localgovernment agencies or units.For purposes of this section:

Whether a bank placed under receivership by the BSP is required to securea tax clearance certificate before the court approves the project distributionof the assets of the bank

RULING NO . Section 52(c) of the NIRC only refers to dissolutions falling under theSEC, and not with the BSP. All liquidation of banks falls under Section 30 ofthe New Central Bank Act. Between a general law (NIRC) and a special law(NCBA), the latter will prevail. The court cannot apply by analogy the taxclearance requirement because dissolution of corporation and the




For purposes of this section:

(a) Bank shall refer to any duly licensed bank or quasi-bank that ispotentially or actually subject to conservatorship, receivership orliquidation proceedings under the New Central Bank Act (Republic ActNo. 7653) or successor legislation;

(b) Insurance company shall refer to those companies that arepotentially or actually subject to insolvency proceedings under theInsurance Code (Presidential Decree No. 1460) or successor legislation;and

(c) Pre-need company shall refer to any corporation authorized/licensedto sell or offer to sell pre-need plans.Provided, That government financial institutions other than banks andgovernment-owned or controlled corporations shall be covered by thisAct, unless their specific charter provides otherwise.

1. Governing LawCases

In Re: Petition for Assistance in the Liquidation of the Rural Bank ofBokod (Benguet), Inc., PDIC v. Bureau of Internal Revenue , 511SCRA 123 (2006)FACTS A special examination of the Rural Bank of Bokod, Inc (RBBI) was conductedby the Bangko Sentral ng Pilipinas (BSP). The latter required RBBI to infuse

fresh capital, which the bank failed to do. The BSP warned the RBBI andrecommended closure, but the bank still failed to comply. An order wasreleased, putting the bank under receivership and transferred the liquidationproceedings with the Philippine Deposit Insurance Corporation (PDIC). Acase was filed with the RTC, for the liquidation of the bank. PDIC then filed aMotion for Approval of Project of Distribution in accordance with sec 30 and31 of the New Central Bank Act. The BIR required PDIC to comply withsection 52(c) of the NIRC, which PDIC to secure a tax clearance certificate.The RTC released an order, requiring the PDIC to comply.

ISSUE

clearance requirement because dissolution of corporation and thereceivership and liquidation of banks have a totally different proceeding.

The Monetary Board may summarily and without need for prior hearing,forbid the bank from conducting business, appoint PDIC as receiver, and filean ex parte with the RTC for liquidation of the bank. What the BIR shouldhave required was to submit the final return of the RBBI, and there assessthe tax liabilities of the bank.

***It must be noted that the liquidation proceedings in the RTC is NOTsummarily in nature, and the concurrence and preference in credit found inArt 2241 and 2242 of the Civil Code may be applied, and the partiesconcerned may question such project distribution of the PDIC.

Koruga v. Arcenas , 590 SCRA 49 (2009)FACTS Koruga’s Complaint charged defendants with violation of Sections 31 to 34of the Corporation Code, prohibiting self-dealing and conflict of interest ofdirectors and officers; invoked her right to inspect the corporation’s recordsunder Sections 74 and 75 of the Corporation Code; and prayed forReceivership and Creation of a Management Committee, pursuant to Rule59 of the Rules of Civil Procedure, the Securities Regulation Code, theInterim Rules of Procedure Governing Intra-Corporate Controversies, theGeneral Banking Law of 2000, and the New Central Bank Act. She accusedthe directors and officers of Banco Filipino of engaging in unsafe, unsound,and fraudulent banking practices, more particularly, acts that violate theprohibition on self-dealing.

Koruga invoked Secs. 31, 32, 33 and 34 of the Corporation Code to supporthis claims.

ISSUE Which law governs in the appointment of conservator or liquidator in banks?

RULING NEW CENTRAL BANK ACT governs in this case. Koruga’s invocation of theprovisions of the Corporation Code is misplaced. In an earlier case withsimilar antecedents, the Court ruled that, the Corporation Code is a generallaw applying to all types of corporations, while the New Central Bank Act


regulates specifically banks and other financial institutions, including thedissolution and liquidation thereof. As between a general and special law,the latter shall prevail – generalia specialibus non derogant.

Consequently, it is not the Interim Rules of Procedure on Intra-CorporateControversies, or Rule 59 of the Rules of Civil Procedure on Receivership,that would apply to this case. Instead, Sections 29 and 30 of the NewCentral Bank Act should be followed.

2. Grounds

53.2. Act as financial agent and buy and sell, by order of and for theaccount of their customers, shares, evidences of indebtedness andall types of securities;

53.3. Make collections and payments for the account of others andperform such other services for their customers as are notincompatible with banking business; 53.4 Upon prior approval ofthe Monetary Board, act as managing agent, adviser, consultant oradministrator of investment management/advisory/consultancyaccounts; and 53.5. Rent out safety deposit boxes.




2. Grounds Sec. 30, NCBA : Whenever, upon report of the head of the supervising

or examining department, the Monetary Board finds that a bank orquasi- bank:

(a) Is unable to pay its liabilities as they become due in the ordinarycourse of business: Provided, That this shall not include inability to paycaused by extraordinary demands induced by financial panic in thebanking community;



(d) Has willfully violated a cease and desist order under Section 37 thathas become final, involving acts or transactions which amount to fraudor a dissipation of the assets of the institution; in which cases, theMonetary Board may summarily and without need for prior hearingforbid the institution from doing business in the Philippines anddesignate the Philippine Deposit Insurance Corporation as receiver ofthe banking institution.

x x x

Sec. 36, 2 nd par., NCBA : Whenever a bank or quasi-bank persistsin carrying on its business in an unlawful or unsafe manner, the

Board may, without prejudice to the penalties provided in thepreceding paragraph of this section and the administrative sanctionsprovided in Section 37 of this Act, take action under Section 30 ofthis Act.

Sec. 53, last par., GBL : Other Banking Services . – In addition tothe operations specifically authorized in this Act, a bank mayperform the following services:

53.1. Receive in custody funds, documents and valuable objects;

accounts; and 53.5. Rent out safety deposit boxes.

The bank shall perform the services permitted under Subsections53.1., 53.2., 53.3. and 53.4. as depositary or as an agent.Accordingly, it shall keep the funds, securities and other effectswhich it receives duly separate from the bank's own assets andliabilities:

The Monetary Board may regulate the operations authorized by thisSection in order to ensure that such operations do not endanger theinterests of the depositors and other creditors of the bank.

In case a bank or quasi-bank notifies the Bangko Sentral or publiclyannounces a bank holiday, or in any manner suspends the paymentof its deposit liabilities continuously for more than thirty (30) days,the Monetary Board may summarily and without need for priorhearing close such banking institution and place it underreceivership of the Philippine Deposit Insurance Corporation.

CasesBanco Filipino Savings and Mortgage Bank v. Monetary Board , 204SCRA 767 (1991)FACTS This refers to nine consolidated cases concerning the legality of the closureand receivership of Banco Filipino Savings and Mortgage Bank pursuant tothe order of the Monetary Board. Six cases involve the common issue ofwhether or not the liquidator appointed by the Central Bank has the

authority to prosecute as well as to defend suits, and to foreclose mortgageand in behalf of the bank while the issue on the validity of the receivershipand liquidation of the bank is pending resolution. Corollary to this issue iswhether the CB can be sued to fulfill financial commitments of a closed bankpursuant to Section 29 of the Central Bank Act. On the other hand the otherthree cases all seek to annul and set aside the M.B. Resolution No. 75issued by the Monetary Board.

ISSUE What are the grounds for placing a bank under receivership?


HELD Based on the afore-quoted provision the Monetary Board may order thecessation of operation of a bank in the Philippines and place it underreceivership upon a finding of insolvency or when its continuance inbusiness would involve probable loss to its depositors or creditors. If theMonetary Board shall determine and confirm within 60 days that the bank isinsolvent or can no longer resume business with safety to its depositors,creditors, and the general public, it shall, if public interest will be served,order its liquidation.

and free from ambiguity, it must be given its literal meaning and appliedwithout attempted interpretation.

Whenever, upon examination by the head of the appropriate supervising orexamining department or his examiners or agents into the condition of anybank , it shall be disclosed that the condition of the same is one ofinsolvency, or that its continuance in business would involveprobable loss to its depositors or creditors, it shall be the duty of thedepartment head concerned forthwith, in writing, to inform the MonetaryBoard of the facts. The Board may, upon finding the statements of the




Rural Bank of San Miguel, Inc. v. Monetary Board, Bangko Sentral ng

Pilipinas , 516 SCRA 154 (2007)FACTSRespondent Monetary Board (MB), prohibited RBSM from doing business inthe Philippines, placing it under receivership and designating respondentPhilippine Deposit Insurance Corporation (PDIC) as receiver. Petitioners fileda petition for certiorari and prohibition in the RTC to nullify and set aside theresolution. But on February 2000, they filed a notice of withdrawal in theRTC and a special civil action for certiorari and prohibition in the CA. TheRTC dismissed the case.

RBSM was unable to pay its liabilities as they became due in the ordinarycourse of business; it was also found that they cannot continue in businesswithout involving probable losses to its depositors and creditors. The MB,after evaluating and deliberating on the findings, issued closure order andtook over the management of RBSMs assets and affairs.

In their petition before the CA, petitioners claimed that respondents MB andBSP committed grave abuse of discretion in issuing the said order and the itwas bereft of any basis considering that no complete examination had beenconducted before it was issued.

Thereafter, MB passed a resolution directing PDIC to proceed the liquidationof RBSM.

ISSUE

Whether or not Section 30 of RA 7653 (also known as the New Central BankAct) and applicable jurisprudence require a current and completeexamination of the bank before it can be closed and placed underreceivership?

RULINGNO . Examination connotes in-depth analysis, evaluation, inquiry orinvestigation while report connotes a simple disclosure or narration of factsfor informative purposes. In RA 7653, only a report of the head of thesupervising or examining department is necessary. It is an established rulein statutory construction that where the words of a statute are clear, plain

y, p gdepartment head to be true, forbid the institution to do business in the

Philippines and designate an official of the Central Bank or a person ofrecognized competence in banking or finance, as receiver to immediatelytake charge of its assets and liabilities, as expeditiously as possible collectand gather all the assets and administer the same for the benefits of itscreditors, and represent the bank personally or through counsel as he mayretain in all actions or proceedings for or against the institution, exercisingall the powers necessary for these purposes including, but not limited to,bringing and foreclosing mortgages in the name of the bank.

The absence of an examination before the closure of RBSM did not meanthat there was no basis for the closure order. Needless to say, the decisionof the MB and BSP, like any other administrative body, must havesomething to support itself and its findings of fact must be supported bysubstantial evidence. But it is clear under RA 7653 that the basis need notarise from an examination as required in the old law. The Court thus ruledthat the MB had sufficient basis to arrive at a sound conclusion that therewere grounds that would justify RBSMs closure. In short, MB and BSPcomplied with all the requirements of RA 7653. By relying on a report beforeplacing a bank under receivership, the MB and BSP did not only follow theletter of the law, they were also faithful to its spirit, which was to actexpeditiously. Accordingly, the issuance of Resolution was untainted witharbitrariness.

3. Who May Be Receiver

Sec. 30, 1st

and 2nd

pars., NCBA: Whenever, upon report of thehead of the supervising or examining department, the MonetaryBoard finds that a bank or quasi- bank:

(a) Is unable to pay its liabilities as they become due in the ordinarycourse of business: Provided, That this shall not include inability topay caused by extraordinary demands induced by financial panic inthe banking community;



(c) Cannot continue in business without involving probable losses toits depositors or creditors; or

(d) Has willfully violated a cease and desist order under Section 37that has become final, involving acts or transactions which amountto fraud or a dissipation of the assets of the institution; in whichcases, the Monetary Board may summarily and without need forprior hearing forbid the institution from doing business in thePhilippines and designate the Philippine Deposit InsuranceCorporation as receiver of the banking institution.

"The Central Bank Act," as amended, insofar as it authorizes the CentralBank to take over a banking institution even if it is not charged withviolation of any law or regulation, much less found guilty thereof. The RTCgranted a TRO against the CB resolution.

Central Bank filed a motion to dismiss the complaint before the RTC forfailure to state a cause of action, i.e., it did not allege ultimate facts showingthat the action was plainly arbitrary and made in bad faith, which are theonly grounds for the annulment of Monetary Board resolutions placing abank under conservatorship, and that TSB was without legal capacity to sue




p g

For a quasi-bank, any person of recognized competence in bankingor finance may be designed as receiver.

4. Duties of Receiver Sec. 30, par. 3, NCBA: The receiver shall immediately gather andtake charge of all the assets and liabilities of the institution,administer the same for the benefit of its creditors, and exercise thegeneral powers of a receiver under the Revised Rules of Court butshall not, with the exception of administrative expenditures, pay orcommit any act that will involve the transfer or disposition of anyasset of the institution: Provided, That the receiver may deposit orplace the funds of the institution in non- speculative investments.The receiver shall determine as soon as possible, but not later thanninety (90) days from take over, whether the institution may berehabilitated or otherwise placed in such a condition so that it maybe permitted to resume business with safety to its depositors andcreditors and the general public: Provided, That any determinationfor the resumption of business of the institution shall be subject toprior approval of the Monetary Board.

5. “Close Now-Hear Later Doctrine”

Cases Central Bank of the Philippines v. Court of Appeals , 220 SCRA 536(1993)FACTS Based on examination reports submitted by the Supervision andExamination Sector of the Central Bank "that the financial condition of TSBis one of insolvency and its continuance in business would involve probableloss to its depositors and creditors," the Monetary Board issued aRESOLUTION ordering the closure of Triumph Savings Bank, forbidding itfrom doing business in the Philippines, placing it under receivership, andappointing Ramon V. Tiaoqui as receiver. One week later, TSB filed acomplaint against Central Bank and Ramon V. Tiaoqui challenging in theprocess the constitutionality of Sec. 29 of R.A. 269, otherwise known as

p, g p yexcept through its receiver. These were denied. The denial was elevated to

the CA, which upheld the orders of the RTC. Thus, this petition for (Rule 45)certiorari.

Central BAnk claims that it is the essence of Sec. 29 of R.A. 265 that priornotice and hearing in cases involving bank closures should not be requiredsince in all probability a hearing would not only cause unnecessary delay butalso provide bank "insiders" and stockholders the opportunity to furtherdissipate the bank's resources, create liabilities for the bank and evendestroy evidence of fraud or irregularity in the bank's operations to theprejudice of its depositors and creditors.

ISSUES 1) Is absence of prior notice and hearing constitutive of acts of

arbitrariness and bad faith, as to annul the MB resolution?2) Is it only the receiver who has a right of action to question the

resolution of the CB, and not the stockholders of the corporation?

HELD NO . Contrary to the notion of private respondent, Sec. 29 does notcontemplate prior notice and hearing before a bank may be directed to stopoperations and placed under receivership. When par. 4 provides for thefiling of a case within ten (10) days after the receiver takes charge of theassets of the bank, it is unmistakable that the assailed actions shouldprecede the filing of the case. Plainly, the legislature could not haveintended to authorize "no prior notice and hearing" in the closure of thebank and at the same time allow a suit to annul it on the basis of absencethereof. A previous hearing is NOT required. It is enough that a subsequent

judicial review be prov ided.

This "close now and hear later" scheme is grounded on practical and legalconsiderations to prevent unwarranted dissipation of the bank's assets andas a valid exercise of police power to protect the depositors, creditors,stockholders and the general public. The mere filing of a case forreceivership by the Central Bank can trigger a bank run and drain its assetsin days or even hours leading to insolvency even if the bank be actuallysolvent. The procedure prescribed in Sec. 29 is truly designed to protect the


interest of all concerned, i.e., the depositors, creditors and stockholders, thebank itself, and the general public.

The absence of notice and hearing is not a valid ground to annul a MonetaryBoard resolution placing a bank under receivership. The absence of priornotice and hearing cannot be deemed acts of arbitrariness and bad faith.

2) As regards the second ground, to rule that only the receiver may bringsuit in behalf of the bank is, to echo the respondent appellate court, "askingfor the impossible, for it cannot be expected that the master, the CB, will

HELD NO. A liquidation court may not continue with the liquidation proceedings ofPhilippine Veterans Bank after congress has mandated its rehabilitation andreopening. RA 7169 entitled an act to rehabilitate the PVB which waspublished in the official gazette provides in part for the reopening of PVBtogether with all its branches within the period of three years from the dateof the reopening of the head office. The law likewise provides for thecreation of a rehabilitation committee in order to facilitate theimplementation of the provisions of the same. The rehab committeesubmitted the proposed rehab plan of PVB to the monetary board for its




allow the receiver it has appointed to question that very appointment."

Consequently, only stockholders of a bank could file an action for annulmentof a Monetary Board resolution placing the bank under receivership andprohibiting it from continuing operations.

6. Liquidationa. As opposed to rehabilitation

Cases Philippine Veterans Bank Employees Union-N.U.B.E. v. Hon.Benjamin Vega , 360 SCRA 33 (2001)FACTS Sometime in 1985 the Central Bank filed with the RTC of Manila a petitionfor assitance in the liquidation of Philippine Veterans Bank (PVB) Thereafter,the petitioner, the PVB Employees Union, filed claims for accrued and unpaidemployee wages and benefits with the said court.

After lengthy proceedings, partial payment of the sums due to theemployees were made. However, many remain unpaid. On March 8, 1991,petitioners moved to disqualify the respondent judge from hearing theabove case on grounds of bias and hostility towards petitioners. January 2,1992 Congress enacted RA 7169 providing for the rehabilitation of thePhilippine Veterans Bank. Thereafter, petitioners filed with the labortribunals their residual claims for benefits and for reinstatement uponreopening of the bank. Sometime after in May 1992 the PVB reopened uponauthority issued by the Central Bank

Despite the legislative mandate for rehabilitation and reopening of PVB,respondent judge continued with the liquidation proceedings of the bank.Moreover, petitioners learned that the respondents (The judge, Central bankand the liquidators of PVB) were set to order the payment and release ofemployee benefits for another set of employees but not for the petitioner(their claims were frozen).

ISSUE May a liquidation court continue with liquidation proceedings of the PVBwhen congress had mandated its rehabilitation and reopening?

approval. Meanwhile, ALX PRZ fag, PVB filed a motion to terminate the

liquidation of PVB with the respondent judge praying the proceedings beimmediately terminated in view of the passage of RA 7169. The MB issuedMB resolution, which approved the rehab plan of PVB that led to themissuing a certificate of authority allowing PVB to reopen. Liquidator thenfiled a motion with the respondent judge to terminate the proceedings. TheCourt then issued a TRO restraining respondent judge from furtherproceeding with the liquidation of PVB. Clearly RA7169 as well assubsequent developments has rendered the liquidation court functus offico,consequently, respondent judge has been stripped of the authority to issueorders involving acts of liquidation for PVB. RA7169, by express provisiontook effect immediately without need of the usual 15-day wait afterpublication.

(Definition is part of the case)Liquidation : In corporation law, connotes a winding up or settling withcreditors and debtors. Assets are distributed to those entitled to receivethem. It is the process of reducing assets to cash, discharging liabilities anddividing surplus or loss.

Rehabilitation : contemplates a continuance of corporate life and activitiesin an effort to restore and reinstate the corporation to its former position ofsuccessful operation and solvency. It is contrary to the concept ofliquidation; to allow liquidation proceedings to continue would seriouslyhinder the rehabilitation of the bank.

b. Actions to takeSec. 30, NCBA: 1. File ex parte with the proper regional trialcourt, and without requirement of prior notice or any otheraction, a petition for assistance in the liquidation of theinstitution pursuant to a liquidation plan adopted by thePhilippine Deposit Insurance Corporation for general applicationto all closed banks. In case of quasi-banks, the liquidation planshall be adopted by the Monetary Board. Upon acquiring

jurisdiction, the court shall, upon motion by the receiver afterdue notice, adjudicate disputed claims against the institution,assist the enforcement of individual liabilities of the


stockholders, directors and officers, and decide on other issuesas may be material to implement the liquidation plan adopted.The receiver shall pay the cost of the proceedings from theassets of the institution.

2. Convert the assets of the institutions to money, dispose ofthe same to creditors and other parties, for the purpose ofpaying the debts of such institution in accordance with the ruleson concurrence and preference of credit under the Civil Code ofthe Philippines and he may, in the name of the institution, and

bank within the purview of this Act shall be used to pay thecosts, fees and expenses mentioned in the preceding section,salaries of such personnel whose employment is renderednecessary in the discharge of the liquidation together with otheradditional expenses caused thereby. The balance of revenuesand earnings, after the payment of all said expenses, shall formpart of the assets available for payment to creditors.

d. All claims filed in liquidation courtCases




with the assistance of counsel as he may retain, institute such

actions as may be necessary to collect and recover accounts andassets of, or defend any action against, the institution. Theassets of an institution under receivership or liquidation shall bedeemed in custodia legis in the hands of the receiver and shall,from the moment the institution was placed under suchreceivership or liquidation, be exempt from any order ofgarnishment, levy, attachment, or execution.

The actions of the Monetary Board taken under this section orunder Section 29 of this Act shall be final and executory, andmay not be restrained or set aside by the court except onpetition for certiorari on the ground that the action taken was inexcess of jurisdiction or with such grave abuse of discretion as toamount to lack or excess of jurisdiction. The petition forcertiorari may only be filed by the stockholders of recordrepresenting the majority of the capital stock within ten (10)days from receipt by the board of directors of the institution ofthe order directing receivership, liquidation or conservatorship.The designation of a conservator under Section 29 of this Act orthe appointment of a receiver under this section shall be vestedexclusively with the Monetary Board. Furthermore, thedesignation of a conservator is not a precondition to thedesignation of a receiver.

c. How assets are distributedSec. 31, NCBA: Distribution of Assets. — In case ofliquidation of a bank or quasi-bank, after payment of the cost ofproceedings, including reasonable expenses and fees of thereceiver to be allowed by the court, the receiver shall pay thedebts of such institution, under order of the court, in accordancewith the rules on concurrence and preference of credit asprovided in the Civil Code.

Sec. 32, NCBA: Disposition of Revenues and Earnings. —All revenues and earnings realized by the receiver in winding upthe affairs and administering the assets of any bank or quasi-

Ong v. Court of Appeals , 253 SCRA 105 (1996)

FACTSThe Rural Bank of Olongapo (RBO) owned 2 parcels of land in Tagaytay,which it mortgaged in favor of Jerry Ong to guarantee the payment ofOmnibus Finance, Inc., which is undergoing liquidation proceedings of itsmoney market obligations to Ong.

Omnibus Finance failed to seasonably settle its obligations to Ong, whichprompted him to extrajudicially foreclose on the mortgages.

Ong was not able to effect the registration of the lands, after the public sale,because RBO refused to surrender its copies of the TCT of the lands. For itspart, RBO contended that it was undergoing liquidation and, pursuant to

jurisprudence, it is the liquidation court which has jurisdiction to takecognizance of the case.

RTC ruled in favor of Ong, which the CA reversed.

ISSUE Whether the liquidation court has jurisdiction to take cognizance of this case

RULING YES . Section 29, par. 3, of R.A. 265 as amended by P. D. 1827 provides

If the Monetary Board shall determine and confirm within (sixtydays) that the bank . . . is insolvent or cannot resume business withsafety to its depositors, creditors and the general public, it shall, ifthe public interest requires, order its liquidation, indicate themanner of its liquidation and approve a liquidation plan. The CentralBank shall, by the Solicitor General, file a petition in the Court ofFirst Instance 7 reciting the proceedings which have been taken andpraying the assistance of the court in the liquidation of suchinstitution. The court shall have jurisdiction in the same proceedingsto adjudicate disputed claims against the bank . . . . and enforceindividual liabilities of the stockholders and do all that is necessaryto preserve the assets of such institution and to implement theliquidation plan approved by the Monetary Board.


In Hernandez v Rural Bank of Lucena, the SC held that "The fact that theinsolvent bank is forbidden to do business, that its assets are turned over tothe Superintendent of Banks, as a receiver, for conversion into cash, andthat its liquidation is undertaken with judicial intervention means that, as faras lawful and practicable, all claims against the insolvent bank should befiled in the liquidation proceeding ."

The rationale behind the provision, i.e., the judicial liquidation is intended to prevent multiplicity of actions against the insolvent bank. It is a pragmaticarrangement designed to establish due process and orderliness in the

RULING NO . The case falls within the jurisdiction of regular courts.Section 29 of the Central Bank Act regarding the Liquidation Court onlyapplies were there are claims against an insolvent bank. The Exclusive

jurisdiction of the liquidation court pertains only to the adjudication ofclaims against the bank. It does not cover the reverse situation where it isthe bank which files a claim against another person or legal entity. Theintended purpose is to prevent multiplicity of actions against an insolventbank and designed to establish due process and orderliness in theliquidation of the bank. being the situation where it is an action instituted by




liquidation of the bank, to obviate the proliferation of litigations and to avoid

injustice and arbitrariness . The lawmaking body contemplated that forconvenience only one court, if possible, should pass upon the claims againstthe insolvent bank and that the liquidation court should assist theSuperintendent of Banks and regulate his operations.

Manalo v. Court of Appeals , 366 SCRA 752 (2001)FACTS S. Villanueva Enterprises, through its president Therese Vargas, obtained a3M loan and 1M from PAIC Savings and Mortgage Bank. To secure the loan,they mortgaged 2 parcels of land. However, Villanueva Enterprise defaultedin their payment and the properties were foreclosed in favor of the bank.The redemption period lapsed and the title was consolidated in the Bank’sname.

The Central Bank decided the Bank to be liquidated and put underliquidation proceedings.

Meanwhile, Vargas petitioned to annul the foreclosure but was denied. Inturn, the Bank filed a case for issuance of writ of possession over thesubject property.

Notwithstanding the judgment and pending case, Vargas sold the foreclosedproperties to Armando Angsico and leased the property to Domingo Manalofor 10 years. Angsico then sold his rights to Manalo. Manalo now sought tointervene in the case for possession and insists his right of ownership overthe foreclosed properties.

The RTC ruled in favor of the Bank and granted a writ of possession. The CAaffirmed.

Note: Manalo entered into a new lease agreement with the Bank.

ISSUE W/N the case is under the jurisdiction of the Liquidation Court.

the Bank, the liquidation court does not have jurisdiction over the case.

There is no forum shopping as only one case was filed by the bank for writof possession. Though the bank was already closed, it still has juridicalpersonality, which can sue and be sued. The bank, through its liquidator,can still act on its claims.

NOTE: There is no prejudicial question regarding the redemption price as itonly applies to pending civil and criminal actions. Manalo has no right tointervene as he acquired no right from Vargas, who possessed no right ofownership. The new lease agreement is a different issue to be decided inanother case.

e. Disposition of banking franchiseSec. 33, NCBA: Disposition of Banking Franchise. — TheBangko Sentral may, if public interest so requires, award to aninstitution, upon such terms and conditions as the MonetaryBoard may approve, the banking franchise of a bank underliquidation to operate in the area where said bank or itsbranches were previously operating: Provided, That whateverproceeds may be realized from such award shall be subject tothe appropriate exclusive disposition of the Monetary Board.

7. Effects of Receivership and Liquidationa. Restriction on capacity to act

CasesVillanueva v. Court of Appeals , 244 SCRA 395 (1995)FACTS The lots in litigation were originally owned by spouses Celestino Villanuevaand Miguela Villanueva. Miguela tried to obtain a loan from PhilippineVeterans Bank (PVB), through Jose Viudez and Andres Sebastian. Viudezand Sebastian was able to obtain the title of the land, but without signatureof Celestino. Miguela never got the loan. She then tried to repurchase thelots, now in the name of PVB. This was stalled by the liquidation proceedingsfiled against PVB.


Ildefonso Ong, on the other hand, offered to purchase the property, whichPVB accepted. He only knew of the acceptance when PVB was already underreceivership by the Central Bank (CB). He tried to purchase from CB butwas unheeded, which opted him to file a case against the CB that gotreferred to the liquidation court. The Trial Court ruled in favor of MiguelaVillanueva, but was reversed by the CA.

ISSUE Whether there was a valid contract between PVB and Ong

building for One Hundred Fifty Million Pesos (P150,000,000.00). OnSeptember 16, 1994, Abacus sent a letter to Manila Bank informing thelatter of its desire to exercise its “ exclusive option to purchase ”. However,Manila Bank refused to honor the same.

ISSUE Whether or not Laureano may exercise the Option to Purchase.

RULING NO. There can be no quibbling that respondent Manila Bank was under




RULING

NO . At the time Ong offered to purchase the property from PVB, the bankwas still functioning normally. When he learned of the acceptance of thebank, which should have created the contract, PVB was already under thecontrol of the CB. Under Art 1323 of the Civil Code, an offer becomesineffective upon insolvency of either party before acceptance is conveyed.Therefore, the offer of Ong became ineffective due to the subsequentinsolvency of PVB, and the contract did not reach the perfection stage.

Abacus Real Estate Development Center, Inc. v. The Manila BankingCorporation , 455 SCRA 97 (2005)FACTSPrior to 1984, the Manila Bank began constructing on said land a 14-storeybuilding. Not long after, however, the bank encountered financial difficultiesthat rendered it unable to finish construction of the building.

On May 22, 1987, the Central Bank of the Philippines, now Bangko Sentralng Pilipinas , ordered the closure of Manila Bank and placed it underreceivership, with Feliciano Miranda, Jr. being initially appointed asReceiver. On November 11, 1988, the Central Bank, by virtue of MonetaryBoard (MB) Resolution No. 505, ordered the liquidation of Manila Bank anddesignated Atty. Renan V. Santos as Liquidator.

In the interim, Manila Bank’s then acting president, the late Vicente G.Puyat, in a bid to save the bank’s investment, started scouting for possibleinvestors who could finance the completion of the building earliermentioned. On August 18, 1989, a group of investors, represented byCalixto Y. Laureano (hereafter referred to as Laureano group ), wroteVicente G. Puyat offering to lease the building for ten (10) years and toadvance the cost to complete the same, with the advanced cost to beamortized and offset against rental payments during the term of the lease.Likewise, the letter-offer stated that in consideration of advancing theconstruction cost, the group wanted to be given the “ exclusive option to

purchase ” the building and the lot on which it was constructed.

In a letter dated August 30, 1989, Vicente G. Puyat accepted the Laureanogroup’s offer and granted it an “ exclusive option to purchase ” the lot and

receivership, pursuant to Central Bank’s MB Resolution No. 505 dated May

22, 1987, at the time the late Vicente G. Puyat granted the “ exclusiveoption to purchase ” to the Laureano group of investors. Owing to thisdefining reality, the appellate court was correct in declaring that Vicente G.Puyat was without authority to grant the exclusive option to purchase the lotand building in question. With respondent bank having been already placedunder receivership, its officers, inclusive of its acting president, Vicente G.Puyat, were no longer authorized to transact business in connection with thebank’s assets and property. Clearly then, the “ exclusive option to purchase ”granted by Vicente G. Puyat was and still is unenforceable against ManilaBank.

Clearly, the receiver appointed by the Central Bank to take charge of theproperties of Manila Bank only had authority to administer the same forthe benefit of its creditors . Granting or approving an “ exclusive option to

purchase ” is not an act of administration, but an act of strict ownership,involving, as it does, the disposition of property of the bank. Not being anact of administration, the so-called “approval” by Atty. Renan Santosamounts to no approval at all, a bank receiver not being authorized to do soon his own.

b. Penalties for transaction after Bank becomes insolventSec. 70, GBL: Penalty for Transactions After a Bank BecomesInsolvent . – Any director or officer of any bank declaredinsolvent or placed under receivership by the Monetary Boardwho refuses to turn over the bank’s records and assets to thedesignated receivers, or who tampers with banks records, orwho appropriates for himself for another party or destroys orcauses the misappropriation and destruction of the bank’sassets, or who receives or permits or causes to be received insaid bank any deposit, collection of loans and/or receivables, orwho pays out or permits or causes to be transferred anysecurities or property of said bank shall be subject to the penalprovisions of the New Central Bank Act.


c. Effect on garnishment, levy on attachment or executionSec. 30, NCBA : The actions of the Monetary Board takenunder this section or under Section 29 of this Act shall be finaland executory, and may not be restrained or set aside by thecourt except on petition for certiorari on the ground that theaction taken was in excess of jurisdiction or with such graveabuse of discretion as to amount to lack or excess of jurisdiction.The petition for certiorari may only be filed by the stockholdersof record representing the majority of the capital stock withinten (10) days from receipt by the board of directors of thei i i f h d di i i hi li id i

assets of the insolvent bank are held in trust for the equal benefit of allcreditors, and after its insolvency, one cannot obtain an advantage or apreference over another by attachment, execution, or otherwise.

d. Stoppage of businessCasesProvident Savings Bank v. Court of Appeals , 222 SCRA 125 (1993)FACTS On 16 February 1967, the spouses Lorenzo K. Guarin and Liwayway J.G i (G i ) b i d l f id b k i h f




institution of the order directing receivership, liquidation or

conservatorship. The designation of a conservator under Section29 of this Act or the appointment of a receiver under this sectionshall be vested exclusively with the Monetary Board.Furthermore, the designation of a conservator is not aprecondition to the designation of a receiver.

CasesLipana v. Development Bank of Rizal , 154 SCRA 257 (1987)FACTS From 1982 to 1984, Spouses Lipana opened and maintained both time andsavings deposits with the Development Bank of Rizal. When some of thetime deposit certificates matured, Lipana were not able to cash them butinstead were issued a manager’s check which was dishonored uponpresentment. Lipana later on filed a complaint with prayer for issuance ofpreliminary attachment for collection of a sum of money with damages.

Meanwhile, the Monetary Board, in its Resolution No. 1009, finding thecondition of Development Bank was one of insolvency and that itscontinuance in business would result in probable loss to its depositors andcreditors, decided to place it under receivership.

Respondent judge ordered the issuance of a writ of execution. Later on,upon motion, the same respondent judge stayed the execution.

ISSUE Whether or not respondent judge could legally stay excecution of judgmentthat has already become final and executory?

HELD YES . The stay of execution of a judgment is warranted by the fact thatDevelopment Bank was placed under receivership. To execute the judgmentwould unduly deplete the assets of the respondent bank to the obviousprejudice of other depositors and creditors, as stated in Central Bank v.Morfe, after the Monetary Board has declared that a bank is insolvent andhas ordered it to c ease operation, the Board becomes the trustee of itsassets for the equal benefit of all the creditors, including depositors. The

Guarin (Guarins) obtained a loan from provident bank in the amount of

P62,500.00 payable on or before 20 June 1967. As security for the loan,they executed a real estate mortgage in favor of provident bank over aparcel of land.

In September, 1972, provident bank was placed under receivership by theCentral Bank of the Philippines until 27 July 1981 when the receivership wasset aside by the Honorable Supreme Court.

On 10 July 1986, the Guarins and respondent Wilson Chua executed a Deedof Absolute Sale With Assumption of Mortgaged whereby the Guarins soldthe mortgaged property to Guarins sold the appellant for the sum ofP250,000.00 and plaintiff-appellant undertook to assume the mortgagedobligation of the Guarins with defendant-appellant which as of 15 February1985 amounted to P591,088.80

Wilson Chua wrote to Provident bank that the former had purchased themortgaged property from the Guarin's and requesting that the owner's copyof TCT in the possession of defendant-appellant be released to him so thathe can register the sale and have the title to the property transferred in hisname. He likewise, informed defendant-appellant that it had lost whateverright or action had against the Guarins because of prescription. (Defendant-appellant replied on 10 August 1987 stating the reasons why they could notcomply with plaintiff-appellant's demands

Provident bank argues that the prescriptive period was suspended due tothe prohibition “to do business” issued by the Monetary Board.

ISSUE Whether a foreclose proceeding falls within the purview of the phrase "doingbusiness"? Whether the prescriptive period for the mortage wassuspended?

RULING YES to both.Doing business means “a continuity of commercial dealings andarrangements, and contemplates to that extent, the exercise of some of the


words or the normally incident to, and in progressive prosecution of, the purpose ands object of its organizations .” With banks it also involves thecollection of debts and foreclosure of mortgages.

Generally, an appointment of a receiver does not dissolve the corporationnor does it interfere with the exercise of its corporate rights. But thisprinciples is, of course, applicable to a situation where there is no restraintimposed on the corporation, unlike in the case at bar where petitionerProvident Savings Bank was specifically forbidden and immobilized fromdoing business in the Philippines on September 15, 1972 1981 when thed i i i C l B k C f A l d d

ISSUES 1) Can an insolvent bank be adjudged to pay interest even after its closure?2) Can they be asked to pay damages?

HELD 1) NO. It is settled jurisprudence that a banking institution which has beendeclared insolvent and subsequently ordered closed by the Central Bank ofthe Philippines cannot be held liable to pay interest on bank deposits whichaccrued during the period when the bank is actually closed and non-operational.




decision in Central Bank vs. Court of Appeals was rendered.

Having arrived at the conclusion that the foreclosure is part of bank'sbusiness activity which could not have been pursued by the receiver thenbecause of the circumstances discussed in the Central Bank case, we arethus convinced that the prescriptive period was legally interrupted by fuerzamayor in 1972 on account on the prohibition imposed by the MonetaryBoard against petitioner from transacting business, until the directive of theboard was nullified in 1981. Indeed, the period during which the obligee wasprevented by a caso fortuito from enforcing his right is not reckoned againsthim ( Article 1154 , New Civil Code). When prescription is interrupted, all thebenefits acquired so far from the possession cease and when prescriptionstarts anew, it will be entirely a new one

Also when respondent wrote to the Guarins requesting that the former beallowed to pay off the loan of the mortgage, he in turn acknowledged theexisting debt thereby suspending the prescriptive period for the secondtime.

e. Interest on depositsCasesFidelity Savings and Mortgage Bank v. Cenzon , 184 SCRA 141 (1990)FACTS The spouses Santiago had P100k Time Deposit in Fidelity Bank. On February18, 1969, the Monetary Board, after finding that the condition of thedefendant Fidelity Savings and Mortgage Bank is one of insolvency issued aresolution deciding, to forbid the Fidelity Savings Bank to do business in thePhilippines and to instruct the Acting Superintendent of Banks to takecharge, in the name of the Monetary Board, of the Bank's assets.

The PDIC paid 10k of the Santiago's deposit. THe Bank subsequentlyunderwent liquidation (pending). The Santiagos then demanded the balancefrom Fidelity in a collection case. The RTC awarded a) P90k accrued interest,b) P30k exemplary damages, and c) P10k attorney's fees. Thus this petitionfor certiorari.

"What enables a bank to pay stipulated interest on money deposited with itis that thru the other aspects of its operation it is able to generate funds tocover the payment of such interest. Unless a bank can lend money, engagein international transactions, acquire foreclosed mortgaged properties ortheir proceeds and generally engage in other banking and financingactivities from which it can derive income, it is inconceivable how it cancarry on as a depository obligated to pay stipulated interest. Conventionalwisdom dictates this inexorable fair and just conclusion. And it can be saidthat all who deposit money in banks are aware of such a simple economicproposition. Consequently, it should be deemed read into every contract ofdeposit with a bank that the obligation to pay interest on the deposit ceasesthe moment the operation of the bank is completely suspended by the dulyconstituted authority, the Central Bank."

2) NO. There is no valid basis for the award of exemplary damages which issupposed to serve as a warning to other banks from dissipating their assetsin anomalous transactions. It was not proven by private respondents, andneither was there a categorical finding made by the trial court, thatpetitioner bank actually engaged in anomalous real estate transactions. Inthe absence of fraud, bad faith, malice or wanton attitude, petitioner bankmay, therefore, not be held responsible for damages which may bereasonably attributed to the non-performance of the obligation. thus itcannot even be held liable for Attorney's fees.

The award of damages and attorney's fees was deleted, while the bank wasadjudged liable for the P90k. with accrued interest only until the day thebank was put under receivership via the MB resolution.

But See Rural Bank of Sta. Catalina, Inc. v. Land Bank of thePhilippines , 435 SCRA 183 (2004)FACTSRespondent Land Bank filed a complaint against the petitioner at the RTC forthe collection of the sun of 2.8m capitalized, accrued interests, penaltiesand surcharges. On motion of the respondent, the petitioner was held indefault for failing to file an answer. The Rural Bank of Sta. Catalina (RBC)was placed under receivership. And the Philippine Deposit Insurance


Corporation (PDIC) was designated as receiver (conservator) of thepetitioner as the latter was prohibited from doing business in the Philippines.Unaware of the action of the Central Bank putting petitioner underreceivership, RTC rendered judgment against RBC to pay Land Bank withinterest. Petitioner, through PDIC appealed to the CA which affirmed RTC.

ISSUE Whether or not the court erred in holding that Petitioner bank (RBC) is stillliable to pay interest and penalty on its loan obligation after it has beenplaced under receivership/liquidation?

The petitioner is, thus, barred from relying on the orders of the MonetaryBoard of the Central Bank of the Philippines placing its assets and affairsunder receivership and ordering its liquidation.

It bears stressing that a defending party declared in default loses hisstanding in court and his right to adduce evidence and to present hisdefense. He, however, has the right to appeal from the judgment by defaultand assail said judgment on the ground, inter alia , that the amount of the

judgment is excessive or is different in kind from that prayed for, or thatthe plaintiff failed to prove the material allegations of his complaint, or thatth d i i i t t l S h t d l d i d f lt i ib d




HELD Petition has no merit,.

The petitioner asserts that, based on the ruling of this Court in OverseasBank of Manila vs. Court of Appeals , its liability to the respondent under itsavailments must be limited only to P5,814,712.40, the aggregate amount ofits outstanding liability as of the date of its closure, inclusive of accruedinterests and penalties. The petitioner avers that the PDIC, as the liquidatorof the petitioner, should not be faulted for failing to file its Answer to thecomplaint and to move for a reconsideration of the default order in the trialcourt and in the CA, because it had no knowledge of the case filed againstthe petitioner. The petitioner avers that it was only when the PDIC wasserved with a copy of the decision of the trial court that it learned, for thefirst time, of the pendency of the case in the RTC.

The records show that the petitioner was served with a copy of summonsand the complaint, but failed to file its answer thereto. It also failed to file averified motion to set aside the Order of default despite its receipt of a copythereof. We note that the trial court rendered judgment only on April 7,1998 or more than a year after the issuance of the default order; yet, thepetitioner failed to file any verified motion to set aside the said order beforethe rendition of the judgment of default. The PDIC was designated by theCentral Bank of the Philippines as receiver (conservator) as early as January14, 1998, and in the course of its management of the petitioner bank’saffairs, it should have known of the pendency of the case against the latterin the trial court.

Moreover, the petitioner, through the PDIC, received a copy of the decisionof the trial court on June 2, 1998, but did not bother filing a motion forpartial reconsideration, under Rule 37 of the Rules of Court, appendingthereto the orders of the Monetary Board or a motion to set aside the orderof default. Instead, the petitioner appealed the decision, and even failed toassign as an error the default order of the trial court.

the decision is contrary to law. Such party declared in default is proscribed

from seeking a modification or reversal of the assailed decision on the basisof the evidence submitted by him in the Court of Appeals, for if it wereotherwise, he would thereby be allowed to regain his right to adduceevidence, a right which he lost in the trial court when he was declared indefault, and which he failed to have vacated. In this case, the petitionersought the modification of the decision of the trial court based on theevidence submitted by it only in the Court of Appeals.

The petitioner cannot, likewise, rely on the ruling of the Court in OverseasBank of Manila vs. Court of Appeals , because in the said case, the issue ofwhether a party who had been declared in default is entitled to relief fromthe judgment by default based on evidence presented only in the appellatecourt, when such order of default was not vacated by the trial court prior tothe appeal from the judgment of default was not raised therein, much lessresolved by the Court .

8. Judicial Reviewa. Availability of remedy

Sec. 30, NCBA: The actions of the Monetary Board taken underthis section or under Section 29 of this Act shall be final andexecutory, and may not be restrained or set aside by the courtexcept on petition for certiorari on the ground that the actiontaken was in excess of jurisdiction or with such grave abuse ofdiscretion as to amount to lack or excess of jurisdiction. Thepetition for certiorari may only be filed by the stockholders ofrecord representing the majority of the capital stock within ten(10) days from receipt by the board of directors of theinstitution of the order directing receivership, liquidation orconservatorship. The designation of a conservator underSection 29 of this Act or the appointment of a receiver underthis section shall be vested exclusively with the Monetary Board.Furthermore, the designation of a conservator is not aprecondition to the designation of a receiver.


b. Ground: grave abuse of discretionCasesCentral Bank v. Court of Appeals , 106 SCRA 143 (1981)FACTSIn 1985, the Monetary Board ordered the closure of Triumph Savings Bank(TSB) after it found that its financial condition is one of insolvency and itscontinuance in business would involve probable loss to its depositors andcreditors.

TSB filed a complaint against Central Bank to annul its closure andchallenging the constitutionality of the Central Bank Act insofar as it

complaint with the RTC of Quezon City on the 8th day following the takeoverby the receiver of the bank's assets on 3 June 1985.

This "close now and hear later" scheme is grounded on practical and legalconsiderations to prevent unwarranted dissipation of the bank's assets andas a valid exercise of police power to protect the depositors, creditors,stockholders and the general public.

Admittedly, the mere filing of a case for receivership by the Central Bankcan trigger a bank run and drain its assets in days or even hours leading toinsolvency even if the bank be actually solvent The procedure prescribed in




challenging the constitutionality of the Central Bank Act insofar as it

authorizes the Central Bank to take over a banking institution even if it isnot charged with violation of any law or regulation.

It further alleged that the Central Bank violated the rule on administrativedue process, which requires that prior notice and hearing be afforded to allparties in administrative proceedings. Since MB Resolution No. 596 wasadopted without TSB being previously notified and heard, according torespondents, the same is void for want of due process; consequently, thebank's management should be restored to its board of directors and officers.

ISSUE May a Monetary Board resolution placing a private bank under receivershipbe annulled on the ground of lack of prior notice and hearing?

RULING NO . Under Sec. 29 of R.A. 265, the Central Bank, through the MonetaryBoard, is vested with exclusive authority to assess, evaluate and determinethe condition of any bank, and finding such condition to be one ofinsolvency, or that its continuance in business would involve probable lossto its depositors or creditors, forbid the bank or non-bank financialinstitution to do business in the Philippines; and shall designate an official ofthe CB or other competent person as receiver to immediately take charge ofits assets and liabilities. The fourth paragraph, which was then in effect atthe time the action was commenced, allows the filing of a case to set asidethe actions of the Monetary Board, which are tainted with arbitrariness andbad faith.

Sec. 29 does not contemplate prior notice and hearing before a bank maybe directed to stop operations and placed under receivership. It may beemphasized that Sec. 29 does not altogether divest a bank or a non-bankfinancial institution placed under receivership of the opportunity to be heardand present evidence on arbitrariness and bad faith because within ten (10)days from the date the receiver takes charge of the assets of the bank,resort to judicial review may be had by filing an appropriate pleading withthe court. Respondent TSB did in fact avail of this remedy by filing a

insolvency even if the bank be actually solvent. The procedure prescribed in

Sec. 29 is truly designed to protect the interest of all concerned, i.e ., thedepositors, creditors and stockholders, the bank itself, and the generalpublic, and the summary closure pales in comparison to the protectionafforded public interest. At any rate, the bank is given full opportunity toprove arbitrariness and bad faith in placing the bank under receivership, inwhich event, the resolution may be properly nullified and the receivershiplifted as the trial court may determine.

The Court ruled in Banco Filipino (as relied upon by TSB) that the closure ofthe bank was arbitrary and attendant with grave abuse of discretion, notbecause of the absence of prior notice and hearing, but that the MonetaryBoard had no sufficient basis to arrive at a sound conclusion of insolvency to

justify the closure. In other words, the arbitrariness, bad faith and abuse ofdiscretion were determined only after the bank was placed underconservatorship and evidence thereon was received by the trial court.

We rule that Sec. 29 of R.A. 265 is a sound legislation promulgated inaccordance with the Constitution in the exercise of police power of the state.Consequently, the absence of notice and hearing is not a valid ground toannul a Monetary Board resolution placing a bank under receivership. Theabsence of prior notice and hearing cannot be deemed acts of arbitrarinessand bad faith. Thus, an MB resolution placing a bank under receivership, orconservatorship for that matter, may only be annulled after a determinationhas been made by the trial court that its issuance was tainted witharbitrariness and bad faith. Until such determination is made, the status quoshall be maintained, i.e ., the bank shall continue to be under receivership.

Banco Filipino Savings and Mortgage Bank v. Monetary Board , 204SCRA 767 (1991)FACTS This refers to nine consolidated cases concerning the legality of the closureand receivership of Banco Filipino Savings and Mortgage Bank pursuant tothe order of the Monetary Board. Six cases involve the common issue ofwhether or not the liquidator appointed by the Central Bank has theauthority to prosecute as well as to defend suits, and to foreclose mortgageand in behalf of the bank while the issue on the validity of the receivership


and liquidation of the bank is pending resolution. Corollary to this issue iswhether the CB can be sued to fulfill financial commitments of a closed bankpursuant to Section 29 of the Central Bank Act. On the other hand the otherthree cases all seek to annul and set aside the M.B. Resolution No. 75issued by the Monetary Board.

ISSUE What are the grounds for placing a bank under receivership?

HELD Based on the afore quoted provision the Monetary Board may order the

This prohibition shall apply in all cases, disputes or controversiesinstituted by a private party, the insured bank, or anyshareholder of the insured bank. (As added by R.A. 9302, 12August 2004)

The Supreme Court may issue a restraining order or injunctionwhen the matter is of extreme urgency involving a constitutionalissue, such that unless a temporary restraining order is issued,grave injustice and irreparable injury will arise. The partyapplying for the issuance of a restraining order or injunction




Based on the afore-quoted provision the Monetary Board may order the

cessation of operation of a bank in the Philippines and place it underreceivership upon a finding of insolvency or when its continuance inbusiness would involve probable loss to its depositors or creditors. If theMonetary Board shall determine and confirm within 60 days that the bank isinsolvent or can no longer resume business with safety to its depositors,creditors, and the general public, it shall, if public interest will be served,order its liquidation.

c. JurisdictionSec. 4, Rule 65, Rules of Court : The petition may be filed notlater than sixty (60) days from notice of the judgment, order orresolution sought to be assailed in the Supreme Court or, if itrelates to the acts or omissions of a lower court or of acorporation, board, officer or person, in the Regional Trial Courtexercising jurisdiction over the territorial area as defined by theSupreme Court. It may also be filed in the Court of Appealswhether or not the same is in aid of its appellate jurisdiction, orin the Sandiganbayan if it is in aid of its jurisdiction. If itinvolves the acts or omissions of a quasi-judicial agency, andunless otherwise provided by law or these Rules, the petitionshall be filed in and cognizable only by the Court of Appeals.

d. Who may questionCasesCentral Bank of the Philippines v. Court of Appeals , 220 SCRA 537(1993);FACTS

e. Actions of the MB final and executory; InjunctionSec. 22, PDIC Charter: No court, except the Court of Appeals,shall issue any temporary restraining order, preliminaryinjunction or preliminary mandatory injunction against theCorporation for any action under this Act. (As added by R.A.9302, 12 August 2004)

applying for the issuance of a restraining order or injunction

shall file a bond in an amount to be fixed by the Supreme Court,which bond shall accrue in favor of the Corporation if the courtshould finally decide that the applicant was not entitled to therelief sought. (As added by R.A. 9302, 12 August 2004)

Any restraining order or injunction issued in violation of thisSection is void and of no force and effect and any judge who hasissued the same shall suffer the penalty of suspension of at leastsixty (60) days without pay. (As added by R.A. 9302, 12 August2004)

CasesCentral Bank of the Philippines v. Dela Cruz , 191 SCRA 346 (1990);FACTS The Rural Bank of Libmanan started operations in 1965. In 1979, theDepartment of Rural Banks and Savings and Loans Associations (DRBSLA) ofthe Central Bank conducted an examination on the conditions of theLibmanan Bank. It discovered serious irregularities; false entries and falsestatement giving the appearance of solidity and soundness of the bankwhich it did not have. The DRBSLA recommended the bank to be prohibitedfrom doing business and place it under receivership. The bank was thenplaced under receivership. After that, the Central Bank decided to liquidatethe bank due to failure to submit rehabilitation plans.

The Libmanan Bank filed a complaint to restrain the Central Bank fromenforcing the liquidation in the RTC. Judge Rafael De la Cruz granted therestraining order and ordered the Central Bank to desist from liquidating theLibmanan Bank. it also allowed Libmanan Bank to withdraw money from itsbank deposits. Central Bank now challenges the orders of Judge De la Cruzunder a petition for certiorari.

ISSUE W/N the judge acted with grave abuse of discretion in issuing thequestioned orders.


RULING YES . Section 29 of the Central Bank Act provides that the actions of theMonetary Board in proceedings on insolvency are explicitly declared by lawto be final and executory. They may not be set aside or restrained by thecourts except upon convincing proof that the action is plainly arbitrary andmade in bad faith. Judge De la Cruz disregarded the law by ordering torestrain the Monetary Board without receiving any convincing proof that theactions of the Monetary Board was plainly arbitrary and made in bad faith.Such act constitutes a grave abuse of discretion tantamount to excess orlack of jurisdiction.

ISSUE Whether or not the submission of the ROE with the MB for the closure of thebanks may be prevented by an injunction

RULING NO . The issuance by the RTC of an injunction is an unwarrantedinterference with the powers of the MB. The actions of the MB under theNew Central Bank Act may not be restrained or set aside by the courtexcept on petition for certiorari on the ground that the action was takenwith grave abuse of discretion as to amount to lack or excess of jurisdiction.This “close now hear later” scheme is grounded on practical and legal




In addition, a preliminary injunction should never be used to transfer thepossession or control of a thing to a party who did not have such possessionor control at the inception of the case. Its proper function is simply tomaintain the status quo. At the filing of the case by Libmanan Bank, it wasalready under control of DRBSLA. Thus, the order should not have removedthe Bank from the control of DRBSLA.

The judge also erred in denying the Central Bank’s motion to dismiss thecomplaint by Libmanan Bank. The complaint of Libmanan Bank should befiled in the proceedings for assistance in liquidation. It should have been acounterclaim and not a separate action to avoid multiplicity of suits. Failureto assert arbitrariness and bad faith in the liquidation proceedingsconstitutes a waiver of that defense.

The judge also was wrong in allowing the Libmanan Bank to withdraw fundsfrom its deposit. Such act would result in the further diminution anddissipation of its assets to the prejudice of its depositors and creditors in theliquidation proceedings.

Bangko Sentral ng Pilipinas Monetary Board v. Antonio-Valenzuela ,602 SCRA 698 (2009)FACTSThe BSP conducted examinations of the books of a lot of rural banks. Theyrequired these banks to infuse fresh capital. Though the banks claimed thatthey did, the BSP informed them that they failed to comply with theremedial requirements imposed by the BSP. The banks asked for moretime, and told BSP that they have not received the Report of Examination(ROE), which finalizes the audit findings. The Rural Bank of Paranaque fileda complaint for nullification of the BSP ROE, with application for TRO andpreliminary Injunction, which was raffled with Judge Nina Antonio-Valenzuela. Other banks followed suit with their respective RTC branches.The TRO application of RBPI was granted, and the other banks filed forconsolidation, where both the consolidation, and their TRO application weregranted. BSP filed a petition for certiorari, annulling the grant of injunctionagainst them. The CA dismissed the petition.

This close now, hear later scheme is grounded on practical and legal

considerations to prevent unwarranted dissipation of the bank’s assets andas a valid exercise of police power to protect the depositors, creditors,stockholders, and the general public. Such power of the MB to close banksmay be considered as an exercise of police power.

f. Effect of Filing Petition for ReviewCasesBanco Filipino Savings and Mortgage Bank v. Ybañez , 445 SCRA 482(2004)FACTS On March 7, 1978, respondents obtained a loan secured by a Deed of RealEstate Mortgage over Transfer Certificate of Title (TCT) No. 69836 frompetitioner bank. The loan was used for the construction of a commercialbuilding in Cebu City. On October 25, 1978, respondents obtained anadditional loan from the petitioner thus increasing their obligation to onemillion pesos.

From 1989 onwards, respondents did not pay a single centavo. They averthat Banco Filipino had ceased operations and/or was not allowed tocontinue business, having been placed under liquidation by the CentralBank.

On January 15, 1990, respondents’ lawyer wrote Special Acting Liquidator,Renan Santos, and requested that plaintiff return the mortgaged property ofthe respondents since it had sufficiently profited from the loan and that theinterest and penalty charges were excessive. Petitioner bank denied therequest.

Banco Filipino was closed on January 1, 1985 and re-opened for business onJuly 1, 1994. From its closure to its re-opening, petitioner bank did nottransact any business with its customers.

On August 24, 1994, respondents were served a Notice of Extra JudicialSale of their property covered by TCT No. 69836 to satisfy theirindebtedness allegedly of P6,174,337.46 which includes the principal,


interest, surcharges and 10% attorney’s fees. The public auction wasscheduled on September 22, 1994 at 2:00 in the afternoon.

On September 19, 1994, respondents filed a suit for Injunction,Accounting and Damages , alleging that there was no legal and factualbasis for the foreclosure proceedings since the loan had already been fullypaid. A restraining order was issued the following day by the lower courtenjoining petitioner to cease and desist from selling the property at a publicauction.

ISSUE

HELD NO . It is only Prime Savings Bank that is liable for the two cashier’s checks.Solidary liability cannot attach to the BSP, in its capacity as governmentregulator of banks, and the PDIC as statutory receiver under RA 7653,because they are the principal government agencies mandated by law todetermine the financial viability of banks and quasi-banks, and facilitatereceivership and liquidation of closed financial institutions, upon factualdetermination f the latter’s insolvency.

E PDIC F INANCIAL ASSISTANCE




ISSUE

What is the effect of the temporary closure of Banco Filipino from January 1,1985 to July 1, 1994 on the loan?

RULING NONE. In Banco Filipino Savings and Mortgage Bank v. Monetary Board, thevalidity of the closure and receivership of Banco Filipino was put in issue.But the pendency of the case did not diminish the authority of thedesignated liquidator to administer and continue the bank’s transactions.The Court allowed the bank’s liquidator to continue receiving collectibles andreceivables or paying off creditor’s claims and other transactions pertainingto normal operations of a bank . Among these transactions were theprosecution of suits against debtors for collection and for foreclosure ofmortgages. The bank was allowed to collect interests on its loans whileunder liquidation, provided that the interests were legal.

g. Liability of the MB and PDICCasesMiranda v. Philippine Deposit Insurance Corporation , 501 SCRA 288(2006)FACTSLeticia Miranda was a depositor of Prime Savings Bank. She withdrew asubstantial amount from her account but instead of cash she opted to beissued a crossed cashier’s check. She deposited the the two checks in heraccount in another bank on the same day, however, Bangko Sentral ngPilipinas (BSP) suspended the clearing privileges of Prime Savings Bank. Thetwo checks were returned unpaid.

Later on Prime Savings bank declared a bank holiday. Subsequently BSPplaced Prime Savings Bank under receivership of the PDIC. Miranda filed acollection suit and impleaded Prime Savings Bank, BSP, and PDIC. RTC heldall three solidarily liable. CA reversed and absolved BSP and PDIC.

ISSUE Whether or not BSP and PDIC can be held liable?

E. PDIC F INANCIAL ASSISTANCE

Sec. 12(c), PDIC Charter: When the Corporation has determined thatan insured bank is in danger of closing, in order to prevent such closing,the Corporation, in the discretion of its Board of Directors, is authorizedto make loans to, or purchase the assets of, or assume liabilities of, ormake deposits in, such insured bank, upon such terms and condition asthe Board of Directors may prescribe, when in the opinion of the Boardof Directors, the continued operation of such bank is essential to provideadequate banking service in the community or maintain financialstability in the economy.

VIII. THE BANGKO SENTRAL NG PILIPINAS AND

THE SUPERVISION OF BANKSA. T HE BSP

1. NatureSec. 1, NCBA : Declaration of Policy. — The State shall maintaina central monetary authority that shall function and operate as anindependent and accountable body corporate in the discharge of itsmandated responsibilities concerning money, banking and credit. Inline with this policy, and considering its unique functions andresponsibilities, the central monetary authority established underthis Act, while being a government-owned corporation, shall enjoyfiscal and administrative autonomy.

2. Responsibility and Primary Objective Sec. 3, NCBA : Responsibility and Primary Objective. — TheBangko Sentral shall provide policy directions in the areas of money,banking, and credit. It shall have supervision over the operations ofbanks and exercise such regulatory powers as provided in this Actand other pertinent laws over the operations of finance companiesand non-bank financial institutions performing quasi- bankingfunctions, hereafter referred to as quasi-banks, and institutionsperforming similar functions.


The primary objective of the Bangko Sentral is to maintain pricestability conducive to a balanced and sustainable growth of theeconomy. It shall also promote and maintain monetary stability andthe convertibility of the peso.

3. Corporate PowersSec. 5, NCBA: Corporate Powers. — The Bangko Sentral ishereby authorized to adopt, alter, and use a corporate seal whichshall be judicially noticed; to enter into contracts; to lease or ownreal and personal property, and to sell or otherwise dispose of thesame; to sue and be sued; and otherwise to do and perform any

RULINGYES to both. Even in the absence of contract, the record plainly shows thatthe CB made express representations to petitioners herein that it wouldsupport the OBM, and avoid its liquidation if the petitioners would execute(a) the Voting Trust Agreement turning over the management of OBM to theCB or its nominees, and (b) mortgage or assign their properties to theCentral Bank to cover the overdraft balance of OBM. The petitioners havingcomplied with these conditions and parted with value to the profit of the CB(which thus acquired additional security for its own advances), the CB maynot now renege on its representations and liquidate the OBM, to thedetriment of its stockholders, depositors and other creditors, under the rule




same; to sue and be sued; and otherwise to do and perform any

and all things that may be necessary or proper to carry out thepurposes of this Act.

The Bangko Sentral may acquire and hold such assets and incursuch liabilities in connection with its operations authorized by theprovisions of this Act, or as are essential to the proper conduct ofsuch operations. The Bangko Sentral may compromise, condone orrelease, in whole or in part, any claim of or settled liability to theBangko Sentral, regardless of the amount involved, under suchterms and conditions as may be prescribed by the Monetary Boardto protect the interests of the Bangko Sentral.

CasesEmerito Ramos v. Central Bank of the Philippines, October 4, 1971FACTS OBM was in dire financial distress. To aid them, CB prompted the former toenter into a trust agreement with PNB which the CB eventually took over.

In lieu of the Trust agreement, CB made OBM mortgage all its properties infavour of CB and in return, the latter promised to support, normalize andrehabilitate OBM (to do what it can to prevent OBM from being liquidated.)

Upon effectivity of the Trust agreement, CB elected its own directors andofficers. OBM, with its new officers and directors, requested substantialloans from to help rehabilitate OBM. CB extended an initial 10M loanhowever this measly sum proved to be inadequate as CB eventually wasforce to liquidate OBM less than a year after the effectivity of the trustagreement.

OBM is now questioning the resolutions of CB ordering the former’s clearing,suspension of operations and liquidation.

ISSUES W/N CB agreed to rehabilitate OBM?W/N the questioned resolutions were issued by CB in abuse of itsdiscretion?

detriment of its stockholders, depositors and other creditors, under the rule

of promissory estoppel

We are constrained to agree with petitioners that the conduct of the CBfrom and after January, 1968, reveals a calculated attempt to evaderehabilitating OBM despite its promises. What is more aggravating is that bythe ordered liquidation, depositors and other creditors would have to sharein the assets of the OBM, while the CB's own credits for advances weresecured by the new mortgages it had obtained from the petitioners, therebygaining for it what amounts to an illegal preference. To cap it all, the CBdisregarded its representations and promises to rehabilitate and normalizethe financial condition of OBM, as it had previously done with the RepublicBank, without even offering to discharge the mortgages, given bypetitioners in consideration for its promises, or notifying petitioners that itdesired to rescind its contract, or bringing action in court for the purpose.And all the while CB knew that the situation of the OBM was deterioratingdaily, with penalties at 3% per month continually accumulating, while itscreditors, depositors and stockholders awaited the promised aid that nevercame, and which apparently CB never intended to give.

We conclude that having induced the petitioners to part with additionalsecurity in reliance upon its (CB's) promises and commitments to avertliquidation and to support, normalize and rehabilitate the OBM, therespondent CB is duty bound to comply in good faith with such promises.Consequently, being contrary thereto, CB Resolutions should be annulledand set aside for having been adopted in abuse of discretion, equivalent toexcess of jurisdiction. And never having attempted to comply, nor even tobegin compliance, with its commitments and promises, the respondent CB isprecluded to invoke the expiration of the period specified for the duration ofits obligations under the Voting Trust Agreement. Such period should, in

justice and equity, be deemed to s tart running from and after the CB beginsdue performance of its commitments, promises and representations in goodfaith.


Central Bank of the Philippines v. Intermediate Appellate Court,December 4, 1989FACTSThe Central Bank, in 1954, in order to improve the textile industry, enteredinto an agreement with various textile mills for the latter to purchasespinning mills to manufacture yarn from raw cotton. This was called aTextile Mills Integration Program". Pursuant to this, these mills incurredcontractual obligations, payable in foreign currency, in the purchase ofcapital machineries needed for the improvement of their textile mills. Tocover the importation of their textile mill machineries, equipment,accessories and spare parts under the plan, the mills filed applications for

This case is distinguished from Batchelder v Central Bank. In that case theSC ruled that the Monetary Board Resolutions merely laid down a generalpolicy on the utilization of the dollar earnings of Filipino and residentAmerican contracts undertaking projects in U.S. military bases. They "arenot contracts that give rise to obligations which must be fulfilled by theCentral Bank in favor of affected parties."

Unlike the Batchelder case, however, the mills were required to integrateand thereafter authorized to import capital machinery only upon CBapproval of the foreign currency costs of the project, as well as thecorresponding peso payments, aside from being directed to undertake




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the corresponding foreign exchange allocations, approved by the CentralBank under several Resolutions of its Monetary Board. These resolutions ineffect allowed the mills to purchase the needed machines at the exchangerate of P2 = $1.

Then in 1961, Central Bank issued CB Circular No. 121 which eliminatedexisting contractual obligations previously approved by the Monetary Boardfrom among the enumerated foreign exchange transactions within thecoverage of the P2 to $1 preferred exchange rate. Thus, plaintiffs weredenied access to the P2 to $1 exchange rate with which to service theiraforesaid foreign exchange obligations.

The mills filed a complaint for declaratory relief, praying that they beallowed to complete all existing contractual obligations at the preferredexchange rate, and that the Central Bank be ordered to pay back allamounts that the mills had been forced to shell out so that they would notbe in default in the performance of existing contracts. The RTC and the IACfound for the mills.

ISSUE Whether CB made an enforceable promise to sell foreign exchange toprivate respondents at the preferred rate of P2 to $1 to service the paymentof imported machinery and equipment? At what point does promissoryestoppel apply?

HELD YES . Under the doctrine of promissory estoppel, an estoppel may arise fromthe making of a promise, even though without consideration, if it wasintended that the promise should be relied upon and in fact it was reliedupon, and if a refusal to enforce it would be virtually to sanction theperpetration of fraud or would result in other injustice. It applies in thiscase. It was established that the mills would not have entered into longterm deferred payment contracts with foreign companies if they had notbeen promissed the purchase of dollars at the preferred rate.

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importation only on a deferred payment basis. In short, private respondentsmerely complied with rules and regulations of the CB, as participants of thetextile mills integration program. As a result, they should not now bedeprived of rights acquired by reason thereof.

4. Organizationa. Monetary Board

Sec. 6, NCBA : Composition of the Monetary Board. — Thepowers and functions of the Bangko Sentral shall be exercisedby the Bangko Sentral Monetary Board, hereafter referred to asthe Monetary Board, composed of seven (7) members appointedby the President of the Philippines for a term of six (6) years.

The seven (7) members are:(a) The Governor of the Bangko Sentral, who shall be the

Chairman of the Monetary Board. The Governor of theBangko Sentral shall be head of a department and hisappointment shall be subject to confirmation by theCommission on Appointments. Whenever the Governor isunable to attend a meeting of the Board, he shalldesignate a Deputy Governor to act as his alternate:Provided, That in such event, the Monetary Board shalldesignate one of its members as acting Chairman;

(b) A member of the Cabinet to be designated by thePresident of the Philippines. Whenever the designatedCabinet Member is unable to attend a meeting of theBoard, he shall designate an Undersecretary in hisDepartment to attend as his alternate; and

(c) Five (5) members who shall come from the privatesector, all of whom shall serve full-time: Provided,however, That of the members first appointed under theprovisions of this subsection, three (3) shall have a termof six (6) years, and the other two (2), three (3) years.


No member of the Monetary Board may be reappointed morethan once.

Sec. 7, NCBA : Vacancies. — Any vacancy in the MonetaryBoard created by the death, resignation, or removal of anymember shall be filled by the appointment of a new member tocomplete the unexpired period of the term of the memberconcerned.

Sec. 8, NCBA: Qualifications . — The members of theMonetary Board must be natural-born citizens of the Philippines,

(b) If he is physically or mentally incapacitated that he cannotproperly discharge his duties and responsibilities and suchincapacity has lasted for more than six (6) months; or

(c) If the member is guilty of acts or operations which are offraudulent or illegal character or which are manifestlyopposed to the aims and interests of the Bangko Sentral; or

(d) If the member no longer possesses the qualificationsspecified in Section 8 of this

Sec. 11, NCBA: Meetings. — The Monetary Board shall meetat least once a week. The Board may be called to a meeting by




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at least thirty-five (35) years of age, with the exception of theGovernor who should at least be forty (40) years of age, of goodmoral character, of unquestionable integrity, of known probityand patriotism, and with recognized competence in social andeconomic disciplines.

Sec. 9, NCBA : Disqualifications. — In addition to thedisqualifications imposed by Republic Act No. 6713, a memberof the Monetary Board is disqualified from being a director,officer, employee, consultant, lawyer, agent or stockholder ofany bank, quasi-bank or any other institution which is subject tosupervision or examination by the Bangko Sentral, in which casesuch member shall resign from, and divest himself of any and allinterests in such institution before assumption of office asmember of the Monetary Board.

The members of the Monetary Board coming from the privatesector shall not hold any other public office or publicemployment during their tenure.

No person shall be a member of the Monetary Board if he hasbeen connected directly with any multilateral banking orfinancial institution or has a substantial interest in any privatebank in the Philippines, within one (1) year prior to hisappointment; likewise, no member of the Monetary Board shallbe employed in any such institution within two (2) years afterthe expiration of his term except when he serves as an officialrepresentative of the Philippine Government to such institution.

Sec. 10, NCBA : Removal. — The President may remove anymember of the Monetary Board for any of the following reasons:

(a) If the member is subsequently disqualified under theprovisions of Section 8 of this Act; or

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the Governor of the Bangko Sentral or by two (2) othermembers of the Board.

The presence of four (4) members shall constitute a quorum:Provided, That in all cases the Governor or his duly designatedalternate shall be among the four (4).

Unless otherwise provided in this Act, all decisions of theMonetary Board shall require the concurrence of at least four (4)members.

The Bangko Sentral shall maintain and preserve a completerecord of the proceedings and deliberations of the MonetaryBoard, including the tapes and transcripts of the stenographicnotes, either in their original form or in microfilm.

Sec. 12, NCBA: Attendance of the Deputy Governors. —The Deputy Governors may attend the meetings of the MonetaryBoard with the right to be heard.

Sec. 13, NCBA: Salary . — The salary of the Governor and themembers of the Monetary Board from the private sector shall befixed by the President of the Philippines at a sum commensurateto the importance and responsibility attached to the position.

Sec. 14, NCBA: Withdrawal of Persons Having a PersonalInterest. — In addition to the requirements of Republic Act No.6713, any member of the Monetary Board with personal orpecuniary interest in any matter in the agenda of the MonetaryBoard shall disclose his interest to the Board and shall retirefrom the meeting when the matter is taken up. The decisiontaken on the matter shall be made public. The minutes shallreflect the disclosure made and the retirement of the memberconcerned from the meeting.


Sec. 15, NCBA: Exercise of Authority. — In the exercise ofits authority, the Monetary Board shall:

(a) Issue rules and regulations it considers necessary for theeffective discharge of the responsibilities and exercise of thepowers vested upon the Monetary Board and the BangkoSentral. The rules and regulations issued shall be reported tothe President and the Congress within fifteen (15) days from thedate of their issuance;

(b) Direct the management, operations, and administration of

(d) Adopt an annual budget for and authorize such expendituresby the Bangko Sentral as are in the interest of the effectiveadministration and operations of

(e) The Bangko Sentral in accordance with applicable laws andregulations; and

(f) Indemnify its members and other officials of the BangkoSentral, including personnel of the departments performingsupervision and examination functions against all costs andexpenses reasonably incurred by such persons in connection




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the Bangko Sentral, reorganize its personnel, and issue suchrules and regulations as it may deem necessary or convenientfor this purpose. The legal units of the Bangko Sentral shall beunder the exclusive supervision and control of the MonetaryBoard;

(c) Establish a human resource management system which shallgovern the selection, hiring, appointment, transfer, promotion,or dismissal of all personnel. Such system shall aim to establishprofessionalism and excellence at all levels of the BangkoSentral in accordance with sound principles of management.

A compensation structure, based on job evaluation studies and

wage surveys and subject to the Board's approval, shall beinstituted as an integral component of the Bangko Sentral'shuman resource development program: Provided, That theMonetary Board shall make its own system conform as closelyas possible with the principles provided for under Republic ActNo. 6758: Provided, however, That compensation and wagestructure of employees whose positions fall under salary grade19 and below shall be in accordance with the rates prescribedunder Republic Act No. 6758.

On the recommendation of the Governor, appoint, fix theremunerations and other emoluments, and remove personnel ofthe Bangko Sentral, subject to pertinent civil service laws:Provided, That the Monetary Board shall have exclusive and finalauthority to promote, transfer, assign, or reassign personnel ofthe Bangko Sentral and these personnel actions are deemedmade in the interest of the service and not disciplinary:Provided, further, That the Monetary Board may delegate suchauthority to the Governor under such guidelines as it maydetermine.

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with any civil or criminal action, suit or proceedings to which hemay be, or is, made a party by reason of the performance of hisfunctions or duties, unless he is finally adjudged in such actionor proceeding to be liable for negligence or misconduct.

In the event of a settlement or compromise, indemnificationshall be provided only in connection with such matters coveredby the settlement as to which the Bangko Sentral is advised byexternal counsel that the person to be indemnified did notcommit any negligence or misconduct.

The costs and expenses incurred in defending theaforementioned action, suit or proceeding may be paid by the

Bangko Sentral in advance of the final disposition of such action,suit or proceeding upon receipt of an undertaking by or onbehalf of the member, officer, or employee to repay the amountadvanced should it ultimately be determined by the MonetaryBoard that he is not entitled to be indemnified as provided inthis subsection.

Sec. 16, NCBA: Responsibility. — Members of the MonetaryBoard, officials, examiners, and employees of the BangkoSentral who willfully violate this Act or who are guilty ofnegligence, abuses or acts of malfeasance or misfeasance or failto exercise extraordinary diligence in the performance of hisduties shall be held liable for any loss or injury suffered by theBangko Sentral or other banking institutions as a result of suchviolation, negligence, abuse, malfeasance, misfeasance orfailure to exercise extraordinary diligence.

Similar responsibility shall apply to members, officers, andemployees of the Bangko Sentral for: (1) the disclosure of anyinformation of a confidential nature, or any information on thediscussions or resolutions of the Monetary Board, or about theconfidential operations of the Bangko Sentral, unless thedisclosure is in connection with the performance of official


functions with the Bangko Sentral, or is with prior authorizationof the Monetary Board or the Governor; or (2) the use of suchinformation for personal gain or to the detriment of theGovernment, the Bangko Sentral or third parties: Provided,however, That any data or information required to be submittedto the President and/or the Congress, or to be published underthe provisions of this Act shall not be considered confidential.

b. Governor and Deputy GovernorsSec. 17, NCBA: Powers and Duties of the Governor. — TheGovernor shall be the chief executive officer of the Bangko

(f) Exercise such other powers as may be vested in him by theMonetary Board.

Sec. 18, NCBA: Representation of the Monetary Board andthe Bangko Sentral. — The Governor of the Bangko Sentralshall be the principal representative of the Monetary Board andof the Bangko Sentral and, in such capacity and in accordancewith the instructions of the Monetary Board, he shall beempowered to:

(a) Represent the Monetary Board and the Bangko Sentral in all




Sentral. His powers and duties shall be to:

(a) Prepare the agenda for the meetings of the Monetary Boardand to submit for the consideration of the Board the policies andmeasures which he believes to be necessary to carry out thepurposes and provisions of this Act;

(b) Execute and administer the policies and measures approvedby the Monetary Board;

(c) Direct and supervise the operations and internaladministration of the Bangko Sentral. The Governor maydelegate certain of his administrative responsibilities to other

officers or may assign specific tasks or responsibilities to anyfull-time member of the Monetary Board without additionalremuneration or allowance whenever he may deem fit or subjectto such rules and regulations as the Monetary Board mayprescribe;

(d) Appoint and fix the remunerations and other emoluments ofpersonnel below the rank of a department head in accordancewith the position and compensation plans approved by theMonetary Board, as well as to impose disciplinary measuresupon personnel of the Bangko Sentral, subject to the provisionsof Section 15(c) of this Act: Provided, That removal of personnelshall be with the approval of the Monetary Board;

(e) Render opinions, decisions, or rulings, which shall be finaland executory until reversed or modified by the Monetary Board,on matters regarding application or enforcement of lawspertaining to institutions supervised by the Bangko Sentral andlaws pertaining to quasi- banks, as well as regulations, policiesor instructions issued by the Monetary Board, and theimplementation thereof; and

dealings with other offices, agencies and instrumentalities of theGovernment and all other persons or entities, public or private,whether domestic, foreign or international;

(b) Sign contracts entered into by the Bangko Sentral, notesand securities issued by the Bangko Sentral, all reports, balancesheets, profit and loss statements, correspondence and otherdocuments of the Bangko Sentral.

The signature of the Governor may be in facsimile wheneverappropriate;

(c) Represent the Bangko Sentral, either personally or through

counsel, including private counsel, as may be authorized by theMonetary Board, in any legal proceedings, action or specializedlegal studies; and

(d) Delegate his power to represent the Bangko Sentra l, asprovided in subsections (a), (b) and (c) of this section, to otherofficers upon his own responsibility: Provided, however, That inorder to preserve the integrity and the prestige of his office, theGovernor of the Bangko Sentral may choose not to participate inpreliminary discussions with any multilateral banking or financialinstitution on any negotiations for the Government within oroutside the Philippines. During the negotiations, he may insteadbe represented by a permanent negotiator.

Sec. 19, NCBA: Authority of the Governor in Emergencies.— In case of emergencies where time is sufficient to call ameeting of the Monetary Board, the Governor of the BangkoSentral, with the concurrence of two (2) other members of theMonetary Board, may decide any matter or take any actionwithin the authority of the Board.


The Governor shall submit a report to the President andCongress within seventy-two (72) hours after the action hasbeen taken.

At the soonest possible time, the Governor shall call a meetingof the Monetary Board to submit his action for ratification.

Sec. 20, NCBA: Outside Interests of the Governor and theFull-time Members of the Board — The Governor of theBangko Sentral and the full-time members of the Board shalllimit their professional activities to those pertaining directly to

of the operations of institutions and the substantive similarities ofspecific functions to which such rules, modes or standards are to beapplied;

4.2.The conduct of examination to determine compliance with lawsand regulations if the circumstances so warrant as determined bythe Monetary Board;

4.3. Overseeing to ascertain that laws and regulations are compliedwith;




their positions with the Bangko Sentral. Accordingly, they maynot accept any other employment, whether public or private,remunerated or ad honorem, with the exception of positions ineleemosynary, civic, cultural or religious organizations orwhenever, by designation of the President, the Governor or thefull-time member is tasked to represent the interest of theGovernment or other government agencies in matters connectedwith or affecting the economy or the financial system of thecountry.

Sec. 21, NCBA: Deputy Governors. — The Governor of theBangko Sentral, with the approval of the Monetary Board, shallappoint not more than three (3) Deputy Governors who shall

perform duties as may be assigned to them by the Governor andthe Board.

In the absence of the Governor, a Deputy Governor designatedby the Governor shall act as chief executive of the BangkoSentral and shall exercise the powers and perform the duties ofthe Governor. Whenever the Government is unable to attendmeetings of government boards or councils in which he is an exofficio member pursuant to provisions of special laws, a DeputyGovernor as may be designated by the Governor shall be vestedwith authority to participate and exercise the right to vote insuch meetings.

B. S UPERVISION OF B ANKS

1. Scope and Extent Sec. 4, GBL: Supervisory Powers . The operations and activities ofbanks shall be subject to supervision of the Bangko Sentral.“Supervision” shall include the following:

4.1. The issuance of rules of, conduct or the establishmentstandards of operation for uniform application to all institutions orfunctions covered, taking into consideration the distinctive character

4.4. Regular investigation which shall not be oftener than once ayear from the last date of examination to determine whether aninstitution is conducting its business on a safe or sound basis:Provided , That the deficiencies/irregularities found by or discoveredby an audit shall be immediately addressed;

4.5. Inquiring into the solvency and liquidity of the institution; or

4.6. Enforcing prompt corrective action.

The Bangko Sentral shall also have supervision over the operationsof and exercise regulatory powers over quasi-banks, trust entitiesand other financial institutions which under special laws are subject

to Bangko Sentral supervision. .

For the purposes of this Act, “quasi-banks” shall refer to entitiesengaged in the borrowing of funds through the issuance,endorsement or assignment with recourse or acceptance of depositsubstitutes as defined in Section 95 of Republic Act No. 7653(hereafter the “New Central Bank Act” ) for purposes of re-lending orpurchasing of receivables and other obligations.

CasesBusuego v. Court of Appeals , 304 SCRA 473 (1999)FACTS CB examiners conducted a regular examination of the books and records ofthe PAL Employees Savings and Loan Association, Inc. (PESALA), afterwhich, several irregularities committed by Banez, Busuego and Lim(petitioners), PESALA's directors and officers, were uncovered, among whichare:1. Questionable investment in a multi-million peso real estate project(Pesalaville).

2. Conflict of interest in the conduct of business.

3. Unwarranted declaration and payment of dividends.


4. Commission of unsound and unsafe business practices.

MB Resolution No. 805 was issued providing, among others:2. To require the PESALA board of directors to immediately inform itsmembers of the results of the CB examination and their effects on itsfinancial condition;

5. To include the names of petitioners in the CB’s watchlist to prevent themfrom holding responsible positions in any institution under CB supervision;

SC rejected petitioners’ claims that the MB is not vested with "the authorityto disqualify persons from occupying positions in institutions under CBsupervision without proper notice and hearing" nor is it vested withauthority "to file civil and criminal cases against its officers/directors forsuspected fraudulent acts."

The CB, through the MB, is the government agency charged with theresponsibility of administering the monetary, banking and credit system ofthe country and is granted the power of supervision and examination overbanks and non-bank financial institutions performing quasi-banking




6. To require PESALA to enforce collection of the overpayment to the VistaGrande Management and Development Corp. and to require the accountingof P12.28 million unaccounted and unremitted bank loan proceeds and P3.9million other unsupported cash disbursements from the responsible directorsand officers;

7. To require the PESALA board to file civil and criminal cases againstpetitioners.

Petitioners secured a TRO and the declaration of nullity of the MB Resolutionfrom the RTC, but the CA dismissed the same. Petitioners filed this petition,claiming that they were denied due process. They also alleged that the MBResolution virtually deprived them of their gainful employment, and at the

same time marked them for judicial prosecution.

ISSUEWhether or not Petitioners were depriVed of theIr right to due process , whoWINS?

HELD Petitioners were duly afforded their right to due process by the MB, itappearing that:1. They were invited to a conference to discuss the findings made in theregular examination, but they did not attend said conference;2. Petitioner Lim's letter to PESALA's Board, explaining his side of thecontroversy, was forwarded to the MB which the latter considered inadopting MB Resolution No. 805; and3. PESALA's Board’s letter to the MB, explaining the Board's side of thecontroversy, was properly considered in the adoption of MB Resolution No.805.

The essence of due process is to be afforded a reasonable opportunity to beheard and to submit any evidence one may have in support of his defense.What is offensive to due process is the denial of the opportunity to be heard.Petitioners having availed of their opportunity to present their position tothe MB by their letters-explanation, they were not denied due process.

functions of which savings and loan associations, such as PESALA, form partof The Savings and Loan Association Act (RA 3779) authorizes the MB toconduct regular yearly examinations of the books and records of savingsand loan associations, to suspend a savings and loan association forviolation of law, to decide any controversy over the obligations and duties ofdirectors and officers, and to take remedial measures, among others. Also,if any irregularity is discovered in the process, the MB may imposeappropriate sanctions, such as suspending the offender from holding officeor from being employed with the CB, or placing the names of the offendersin a watchlist.

The requirement of prior notice is also relaxed under RA 3779, asinvestigations or examinations may be conducted with or without prior

notice "but always with fairness and reasonable opportunity for theassociation or any of its officials to give their side." Here, the saidrequirement was properly complied with by the MB.

At any rate, petitioners' suspension was only preventive in nature andtherefore, no notice or hearing was necessary. Until such time that thepetitioners have proved their innocence, they may be preventivelysuspended from holding office so as not to influence the conduct ofinvestigation, and to prevent the commission of further irregularities.

Neither were petitioners deprived of their lawful calling as they are free tolook for another employment so long as the company involved is not subjectto CB control and supervision. They can still practice their profession orengage in business as long as these are not within the ambit of MBResolution No. 805.

Union Bank of the Philippines v. Securities and ExchangeCommission , 358 SCRA 479 (2001)FACTSIn 1997, Union Bank sought the opinion of SEC Chairman Yasay as to theapplicability and coverage of Full Material Disclosure Rule on banks,contending that these, in effect, amend Revised Securites Act, exempting


securities issued or guaranteed by banking institutions from the registrationrequirement provided therein.

Yasay informed petitioner that while the requirements of registration do notapply to securities of banks which are exempt under the Revised SecuritiesAct, however, banks with a class of securities listed for trading on thePhilippine Stock Exchange, Inc. are covered by certain Revised SecuritiesAct Rules governing the filing of various reports with respondentCommission.

Unsatisfied, Union Bank referred the matter to the PSE, which reiterated

partnerships or associations which are grantees of government-issuedprimary franchises and/or licenses or permits to operate in the Philippines.

That petitioner is under the supervision of the Bangko Sentral ng Pilipinas(BSP) and the Philippine Stock Exchange (PSE) does not exempt it fromcomplying with the continuing disclosure requirements embodied in theassailed Rules. Petitioner, as a bank, is primarily subject to the control ofthe BSP; and as a corporation trading its securities in the stock market, it isunder the supervision of the SEC. It must be pointed out that even the PSEis under the control and supervision of respondent. 14 There is no over-supervision here. Each regulating authority operates within the sphere of its




that Union Bank is NOT exempt from the filing of certain reports.Two months after, SEC wrote Union Bank enjoining the latter to show causewhy it should not be penalized for failure to submit certain records asrequired under the Rules.

Union Bank failed to respond, prompting SEC to send another "Show Cause"letter to it and assessing it a fine of P50,000 + P500 for every report notfiled (total of P91,000). Union Bank disputed the assessment through anappeal, which the SEC denied. CA affirmed SEC's orders.

ISSUE Whether Union Bank is required to comply with SEC's full disclosure rules

RULING YES . Section 5(a) (3) of the said Act reads:

"Sec. 5. Exempt Securities. (a) Except expressly provided, therequirement of registration under subsection (a) of Section four ofthis Act shall not apply to any of the following classes of securities:

xxx xxx xxx

(3) Any security issued or guaranteed by any banking institutionauthorized to do business in the Philippines, the business of which issubstantially confined to banking, or a financial institution licensedto engage in quasi-banking, and is supervised by the Central Bank."

This provision exempts from registration the securities issued by banking orfinancial institutions mentioned in the law. Nowhere does it state or evenimply that petitioner, as a listed corporation, is exempt from complying withthe reports required by the assailed RSA Implementing Rules.

It must be emphasized that petitioner is a commercial banking corporation

listed in a stock exchange. Thus, it must adhere not only to banking andother allied special laws, but also to the rules promulgated by RespondentSEC, the government entity tasked not only with the enforcement of theRevised Securities Act, but also the supervision of all corporations,

powers. That stringent requirements are imposed is understandable,considering the paramount importance given to the interests of theinvesting public.

Otherwise stated, the mere fact that in regard to its banking functions,petitioner is already subject to the supervision of the BSP does not exemptthe former reasonable disclosure regulations issued by the SEC. Theseregulations are meant to assure full, fair and accurate disclosure ofinformation for the protection of investors in the stock market. Imposingsuch regulations is a function within the jurisdiction of the SEC. Sincepetitioner opted to trade its shares in the exchange, then it must abide bythe reasonable rules imposed by the SEC.

2. Issuance of RegulationsSec. 4.1, GBL: 4.1. The issuance of rules of, conduct or theestablishment standards of operation for uniform application to allinstitutions or functions covered, taking into consideration thedistinctive character of the operations of institutions and thesubstantive similarities of specific functions to which such rules,modes or standards are to be applied;

CasesShell Philippines, Inc. v. Central Bank of the Philippines , 162 SCRA629 (1988) FACTS Congress approved RA 6125 imposing a stabilization tax on consignmentsabroad.

Subsequenlty , the Central Bank, through it Circular No. 309 (basicallysetting the parameters for imposing stabilization tax on certain exports).Shell made exports of seria residues. Later on, Monetary Board issuedResolution No. 47 subjecting “petroleum pitch and other petroleumresidues” to the stabilization tax. Shell paid the tax under protest.


Shell filed a case to declare Resolution No. 47 null and void and prayed for arefund.

ISSUE Whether or not Resolution No. 47 is null and void?

HELD YES . While it is true that under RA 6125 the Central Bank was given theauthority to promulgate rules and regulations to implement the statutoryprovision in question, we reiterate the principle that this authority is limitedonly to carrying out into effect what the law being implemented provides.

2) What is more, it is presumed that the Monetary Board has exercised itspower to fix maximum rates of interest conformably to law, and courts willnot interfere with the policy of the Board thereon — unless it acted withoutor in excess of its jurisdiction or in a manifestly arbitrary or undulyoppressive manner — upon the theory that the Board is, for obviousreasons, in a better position to determine such question.

3) Furthermore, they do not impair vested rights because these circularsapplied only prospectively. Besides, it is understood that ALL contractualobligations are subject — as an implied reservation therein — to the policypower of the state, of which the regulatory authority of the Central Bank




Administrative regulations adopted under legislative authority by a particulardepartment must be in harmony with the provisions of the law, and shouldbe for the sole purpose of carrying into effect its general provisions. By suchregulations, the law itself cannot be extended.

Central Bank v. Cloribel , 44 SCRA 307 (1972)FACTSIn 1964, the Monetary board issued two circulars pegging the maximumrate of interest on certain types of deposits and how they are imposed,including allowing interest on savings deposits to accrue not more oftenthan quarterly, and providing that interest on time deposits should only be

paid on maturity, not in advance. Banco Filipino, in 1966, changed is policyallowing interest on savings deposits to accrue monthly, and paying intereston time deposits in advance of their maturity date. THe MB issued aresolution directing BP to comply with their circulars. BP replied by applyingfor prohibition in the CFI of Manila, against the implementation of the MBcirculars. Judge Cloribel granted the TRO, and then issued an injunction. CBthus filed the present petition for certiorari with the SC.

ISSUE What is the nature of the CB's regulatory power (specifically, to imposeinterest hard caps)?

HELD 1) It is legislative in nature. The CB has no legal obligation to notify andhear anybody, before exercising its power to fix the maximum rates ofinterest that banks may pay on deposits or any other obligations. It is asettled rule that if the nature of the administrative agency is essentiallylegislative, the requirements of notice and hearing are not necessary. Thevalidity of a rule of future action which affects a group, if vested rights ofliberty or property are not involved, is not determined according to thesame rules which apply in the case of the direct application of a policy to aspecific individual.

may be regarded as a mere extension.It is significant that the law does not merely authorize the Board to "fix themaximum rates of interest which banks may pay on deposits and on anyother obligations." It, also, expressly empowers the Board — "(i)n order toavoid possible evasion of maximum interest rates set by the ... Board" — tofix also "the maximum rates that banks may pay to or collect from theircustomers in the form of ... payments of any sort." Indeed, the authority toestablish maximum rates of interest carries with it, NECESSARILY, thepower to determine the maximum rates payable as interest for givenperiods of time. In other words, it connotes the right to specify the length oftime for which the rates thus fixed shall be computed. The determination ofthe rate must include a determinatino of how often that rate can be paid

out.

4) Neverthefurthermoreless, otherwise stated, the objective of the power tofix maximum rates of interest payable by banks is to establish a uniformceiling applicable to all banks, in order to AVOID competition among thesame. Banking is exposed to the danger of cutthroat competition. Thereexists a powerful temptation to try to attract added deposits by offeringhigher interest rates. This practice tends to reduce banking profits andencourages the banker to seek increased earnings by making lessconservative and more remunerative loans and investments. Not all bankerscan be trusted to watch competition cut into profits without taking someunwise action to prevent it, and this is what interest hard caps seek toprevent.

The purpose of the resolutions and circulars fixing maximum rates ofinterest payable by banks on savings deposits and prohibiting the paymentin advance of interest on time deposits, is to protect the stability of bankinginstitutions — as vital factors in the national economy — from the dangerthat may result from cut-throat competition among said institutions.


3. Bank Examination Sec. 25, NCBA: Supervision and Examination. — The BangkoSentral shall have supervision over, and conduct periodic or specialexaminations of, banking institutions and quasi-banks, includingtheir subsidiaries and affiliates engaged in allied activities.

For purposes of this section, a subsidiary means a corporation morethan fifty percent (50%) of the voting stock of which is owned by abank or quasi-bank and an affiliate means a corporation the votingstock of which, to the extent of fifty percent (50%) or less, is ownedby a bank or quasi-bank or which is related or linked to such

stock savings and loan associations and provident fundsorganized exclusively for employees of the Bangko Sentral, andexcept as otherwise provided in this Act;

(b) Directly or indirectly requesting or receiving any gift, present orpecuniary or material benefit for himself or another, from anyinstitution subject to supervision or examination by the BangkoSentral;

(c) Revealing in any manner, except under orders of the court, theCongress or any government office or agency authorized by law,or under such conditions as may be prescribed by the MonetaryBoard, information relating to the condition or business of any




institution or intermediary through common stockholders or suchother factors as may be determined by the Monetary Board.

The department heads and the examiners of the supervising and/orexamining departments are hereby authorized to administer oathsto any director, officer, or employee of any institution under theirrespective supervision or subject to their examination and to compelthe presentation of all books, documents, papers or recordsnecessary in their judgment to ascertain the facts relative to thetrue condition of any institution as well as the books and records ofpersons and entities relative to or in connection with the operations,activities or transactions of the institution under examination,subject to the provision of existing laws protecting or safeguarding

the secrecy or confidentiality of bank deposits as well asinvestments of private persons, natural or juridical, in debtinstruments issued by the Government.

No restraining order or injunction shall be issued by the courtenjoining the Bangko Sentral from examining any institution subjectto supervision or examination by the Bangko Sentral, unless there isconvincing proof that the action of the Bangko Sentral is plainlyarbitrary and made in bad faith and the petitioner or plaintiff fileswith the clerk or judge of the court in which the action is pending abond executed in favor of the Bangko Sentral, in an amount to befixed by the court. The provisions of Rule 58 of the New Rules ofCourt insofar as they are applicable and not inconsistent with theprovisions of this section shall govern the issuance and dissolutionof the restraining order or injunction contemplated in this section.

Sec. 27, NCBA: Prohibitions. — In addition to the prohibitionsfound in Republic Act Nos. 3019 and 6713, personnel of the BangkoSentral are hereby prohibited from:

(a) Being an officer, director, lawyer or agent, employee, consultantor stockholder, directly or indirectly, of any institution subject tosupervision or examination by the Bangko Sentral, except non-

institution. This prohibition shall not be held to apply to thegiving of information to the Monetary Board or the Governor ofthe Bangko Sentral, or to any person authorized by either ofthem, in writing, to receive such information; and

(d) Borrowing from any institution subject to supervision orexamination by the Bangko Sentral shall be prohibited unlesssaid borrowings are adequately secured, fully disclosed to theMonetary Board, and shall be subject to such further rules andregulations as the Monetary Board may prescribe: Provided,however, That personnel of the supervising and examiningdepartments are prohibited from borrowing from a bank undertheir supervision or examination.

Sec. 28, NCBA: Examination and Fees. — The supervising andexamining department head, personally or by deputy, shall examinethe books of every banking institution once in every twelve (12)months, and at such other times as the Monetary Board by anaffirmative vote of five (5) members, may deem expedient and tomake a report on the same to the Monetary Board: Provided, Thatthere shall be an interval of at least twelve (12) months betweenannual examinations.

The bank concerned shall afford to the head of the appropriatesupervising and examining departments and to his authorizeddeputies full opportunity to examine its books, cash and availableassets and general condition at any time during banking hours whenrequested to do so by the Bangko Sentral: Provided, however, Thatnone of the reports and other papers relative to such examinationsshall be open to inspection by the public except insofar as suchpublicity is incidental to the proceedings hereinafter authorized or isnecessary for the prosecution of violations in connection with thebusiness of such institutions.

Banking and quasi-banking institutions which are subject toexamination by the Bangko Sentral shall pay to the Bangko Sentral,within the first thirty (30) days of each year, an annual fee in an


amount equal to a percentage as may be prescribed by theMonetary Board of its average total assets during the preceding yearas shown on its end-of-month balance sheets, after deducting cashon hand and amounts due from banks, including the Bangko Sentraland banks abroad.

Sec. 4, GBL: 4.2.The conduct of examination to determinecompliance with laws and regulations if the circumstances sowarrant as determined by the Monetary Board;

Sec. 7, GBL: Examination by the Bangko Sentral . – The Bangko

pesos (P100,000) or by imprisonment of not less than one (1) yearnor more than five (5) years, or both, in the discretion of the court.

Sec. 35, NCBA: False Statement. — The willful making of a falseor misleading statement on a material fact to the Monetary Board orto the examiners of the Bangko Sentral shall be punished by a fineof not less than One hundred thousand pesos (P100,000) nor morethan Two hundred thousand pesos (P200,000), or by imprisonmentof not more than (5) years, or both, at the discretion of the court.Sec. 36, NCBA: Proceedings Upon Violation of This Act andOther Banking Laws, Rules, Regulations, Orders or




Sentral shall, when examining a bank, have the authority toexamine an enterprise which is wholly or majority-owned orcontrolled by the bank.

4. Overseeing Compliance Sec. 4, GBL: 4.3. Overseeing to ascertain that laws and regulationsare complied with;

Sec. 58, GBL: Independent Auditor . - The Monetary Board mayrequire a bank, quasi-bank or trust entity to engage the services ofan independent auditor to be chosen by the bank, quasi-bank ortrust entity concerned from a list of certified public accountantsacceptable to the Monetary Board. The term of the engagement

shall be as prescribed by the Monetary Board which may either beon a continuing basis where the auditor shall act as residentexaminer, or on the basis of special engagements; but in any case,the independent auditor shall be responsible to the bank’s, quasi-bank’s or trust entity’s board of directors. A copy of the report shallbe furnished to the Monetary Board. The Monetary Board may alsodirect the board of directors of a bank, quasi-bank, trusty entityand/or the individual members thereof; to conduct, either personallyor by a committee created by the board, an annual balance sheetaudit of the bank, quasi-bank or trust entity to review the internalaudit and control system of the bank, quasi-bank or trust entity andto submit a report of such audit.

5. Enforcement Sec. 34, NCBA: Refusal to Make Reports or PermitExamination. — Any officer, owner, agent, manager, director orofficer-in-charge of any institution subject to the supervision orexamination by theBangko Sentral within the purview of this Actwho, being required in writing by the Monetary Board or by the headof the supervising and examining department willfully refuses to filethe required report or permit any lawful examination into the affairsof such institution shall be punished by a fine of not less than Fiftythousand pesos (P50,000) nor more than One hundred thousand

Instructions. — Whenever a bank or quasi-bank, or whenever anyperson or entity willfully violates this Act or other pertinent bankinglaws being enforced or implemented by the Bangko Sentral or anyorder, instruction, rule or regulation issued by the Monetary Board,the person or persons responsible for such violation shall unlessotherwise provided in this Act be punished by a fine of not less thanFifty thousand pesos (P50,000) nor more than Two hundredthousand pesos (P200,000) or by imprisonment of not less than two(2) years nor more than ten (10) years, or both, at the discretion ofthe court.Whenever a bank or quasi-bank persists in carrying on its businessin an unlawful or unsafe manner, the Board may, without prejudiceto the penalties provided in the preceding paragraph of this section

and the administrative sanctions provided in Section 37 of this Act,take action under Section 30 of this Act.Sec. 37, NCBA: Administrative Sanctions on Banks and Quasi-banks. — Without prejudice to the criminal sanctions against theculpable persons provided in Sections 34, 35, and 36 of this Act, theMonetary Board may, at its discretion, impose upon any bank orquasi-bank, their directors and/or officers, for any willful violation ofits charter or by-laws, willful delay in the submission of reports orpublications thereof as required by law, rules and regulations; anyrefusal to permit examination into the affairs of the institution; anywillful making of a false or misleading statement to the Board or theappropriate supervising and examining department or its examiners;any willful failure or refusal to comply with, or violation of, anybanking law or any order, instruction or regulation issued by theMonetary Board, or any order, instruction or ruling by the Governor;or any commission of irregularities, and/or conducting business inan unsafe or unsound manner as may be determined by theMonetary Board, the following administrative sanctions, wheneverapplicable:(a) Fines in amounts as may be determined by the Monetary Boardto be appropriate, but in no case to exceed Thirty thousand pesos(P30,000) a day for each violation, taking into consideration the


attendant circumstances, such as the nature and gravity of theviolation or irregularity and the size of the bank or quasi-bank;(b) Suspension of rediscounting privileges or access to BangkoSentral credit facilities;(c) Suspension of lending or foreign exchange operations orauthority to accept new deposits or make new investments;(d) Suspension of interbank clearing privileges; and/or (e)revocation of quasi-banking license.Resignation or termination from office shall not exempt such directoror officer from administrative or criminal sanctions.The Monetary Board may, whenever warranted by circumstances,

CasesUnited Coconut Planters Bank v. E. Ganzon, Inc. , 591 SCRA 321 (2009) FACTS E. Ganzon Inc. (EGI) obtained a loan from UCPB, and was able to pay itsperiodic amortization payments, until the economic crisis caught up withthem. A memorandum of agreement was entered into between EGI andUCPB for the settlement of the remaining loan. The MOA reflected theremaining amount due, valued at P915,838,822.50. When portion of theproperties of EGI was sold through auction, it only amounted toP723,592,000.00, where there was still an unpaid balance ofP192,246,822.50. Some other properties valued at P166,127,369.50 was




preventively suspend any director or officer of a bank or quasi-bankpending an investigation: Provided, That should the case be notfinally decided by the Bangko Sentral within a period of one hundredtwenty (120) days after the date of suspension, said director orofficer shall be reinstated in his position: Provided, further, Thatwhen the delay in the disposition of the case is due to the fault,negligence or petition of the director or officer, the period of delayshall not be counted in computing the period of suspension hereinprovided.The above administrative sanctions need not be applied in the orderof their severity.Whether or not there is an administrative proceeding, if theinstitution and/or the directors and/or officers concerned continue

with or otherwise persist in the commission of the indicated practiceor violation, the Monetary Board may issue an order requiring theinstitution and/or the directors and/or officers concerned to ceaseand desist from the indicated practice or violation, and may furtherorder that immediate action be taken to correct the conditionsresulting from such practice or violation. The cease and desist ordershall be immediately effective upon service on the respondents.The respondents shall be afforded an opportunity to defend theiraction in a hearing before the Monetary Board or any committeechaired by any Monetary Board member created for the purpose,upon request made by the respondents within five (5) days fromtheir receipt of the order. If no such hearing is requested within saidperiod, the order shall be final. If a hearing is conducted, all issuesshall be determined on the basis of records, after which theMonetary Board may either reconsider or make final its order.The Governor is hereby authorized, at his discretion, to impose uponbanking institutions, for any failure to comply with the requirementsof law, Monetary Board regulations and policies, and/or instructionsissued by the Monetary Board or by the Governor, fines not inexcess of Ten thousand pesos (P10,000) a day for each violation,the imposition of which shall be final and executory until reversed,modified or lifted by the Monetary Board on appeal.

transferred to UCPB by way of dacion en pago. However, EGI noticed thatthe value they owe changed to P226,963,905.50. This prompted them torecheck their files, and saw that there are actually two values that points tohow much they owe: loan with a heading “ACTUAL” amounting toP146,849,412.58, and another with the heading “DISCLOSED TO EGI”amounting to P226,967,194.80. EGI demanded an explanation from UCPB,which the latter ignored. EGI then filed a case of unfair and unsound bankpractices against UCPB with the BSP, which dismissed the complaint. EGIappealed with the CA via Rule 43 of the Rules of Court which ruled that BSPsummarily dismissed the complaint, and remanded the case with the BSP.

ISSUE Whether the CA had jurisdiction over the case

Whether CA was correct in remanding the case with BSP

RULING YES and YES . Under sec 9 of BP 129 which amended Rule 43 of the Rules ofCourt, the list of quasi-judicial agency listed is not an exclusive list. SinceBSP is a quasi-judicial agency, BSP is included under Rule 43 where the CAmay review the decisions made by the BSP.CA was also correct in remanding the case with the BSP. BSP summarilydismissed the case filed by EGI against UCPB, where it had not made anyconclusive findings, and since BSP is the proper quasi-judicial agency todetermine such allegations, it must be remanded back to the BSP. The CAalso failed to fined enough evidence on the record to resolve the complaint,which is the main reason that the CA remanded the case with the BSP.

C. M ONEY F UNCTION Section 49. Definition of Currency. — The word "currency" is herebydefined, for purposes of this Act, as meaning all Philippine notes andcoins issued or circulating in accordance with the provisions of this Act.

Section 50. Exclusive Issue Power . — The Bangko Sentral shall havethe sole power and authority to issue currency, within the territory ofthe Philippines. No other person or entity, public or private, may put


into circulation notes, coins or any other object or document which, inthe opinion of the Monetary Board, might circulate as currency, norreproduce or imitate the facsimiles of Bangko Sentral notes withoutprior authority from the Bangko Sentral.

The Monetary Board may issue such regulations as it may deemadvisable in order to prevent the circulation of foreign currency or ofcurrency substitutes as well as to prevent the reproduction of facsimilesof Bangko Sentral notes.

The Bangko Sentral shall have the authority to investigate, make

facsimile, of the President of the Philippines and of the Governor of theBangko Sentral.

Similarly, the Monetary Board, with the approval of the President of thePhilippines, shall prescribe the weight, fineness, designs, denominationsand other characteristics of the coins issued by the Bangko Sentral. Inthe minting of coins, the Monetary Board shall give full consideration tothe availability of suitable metals and to their relative prices and cost ofminting.

Section 54. Printing of Notes and Mining of Coins. — The Monetary




arrests, conduct searches and seizures in accordance with law, for thepurpose of maintaining the integrity of the currency.

Violation of this provision or any regulation issued by the BangkoSentral pursuant thereto shall constitute an offense punishable byimprisonment of not less than five (5) years but not more than ten (10)years. In case the Revised Penal Code provides for a greater penalty,then that penalty shall be imposed.

Section 51. Liability for Notes and Coins. — Notes and coins issuedby the Bangko Sentral shall be liabilities of the Bangko Sentral and maybe issued only against, and in amounts not exceeding, the assets of theBangko Sentral. Said notes and coins shall be a first and paramount lien

on all assets of the Bangko Sentral.

The Bangko Sentral's holdings of its own notes and coins shall not beconsidered as part of its currency issue and, accordingly, shall not formpart of the assets or liabilities of the Bangko Sentral.

Section 52. Legal Tender Power. — All notes and coins issued by theBangko Sentral shall be fully guaranteed by the Government of theRepublic of the Philippines and shall be legal tender in the Philippines forall debts, both public and private: Provided, however, That, unlessotherwise fixed by the Monetary Board, coins shall be legal tender inamounts not exceeding Fifty pesos (P50.00) for denominations ofTwenty-five centavos and above, and in amounts not exceeding Twentypesos (P20.00) for denominations of Ten centavos or less.

Section 53. Characteristics of the Currency. — The Monetary Board,with the approval of the President of the Philippines, shall prescribe thedenominations, dimensions, designs, inscriptions and othercharacteristics of notes issued by the Bangko Sentral: Provided,however, That said notes shall state that they are liabilities of theBangko Sentral and are fully guaranteed by the Government of theRepublic of the Philippines. Said notes shall bear the signatures, in

Board shall prescribe the amounts of notes and coins to be printed andminted, respectively, and the conditions to which the printing of notesand the minting of coins shall be subject. The Monetary Board shall havethe authority to contract institutions, mints or firms for such operations.All expenses incurred in the printing of notes and the minting of coinsshall be for the account of the Bangko Sentral.

Section 55. Interconvertibility of Currency. — The Bangko Sentralshall exchange, on demand and without charge, Philippine currency ofany denomination for Philippine notes and coins of any otherdenomination requested. If for any reason the Bangko Sentral istemporarily unable to provide notes or coins of the denominationsrequested, it shall meet its obligations by delivering notes and coins of

the denominations which most nearly approximate those requested.

Section 56. Replacement of Currency Unfit for Circulation. — TheBangko Sentral shall withdraw from circulation and shall demonetize allnotes and coins which for any reason whatsoever are unfit for circulationand shall replace them by adequate notes and coins: Provided, however,That the Bangko Sentral shall not replace notes and coins theidentification of which is impossible, coins which show signs of filing,clipping or perforation, and notes which have lost more than two-fifths(2/5) of their surface or all of the signatures inscribed thereon. Notesand coins in such mutilated conditions shall be withdrawn fromcirculation and demonetized without compensation to the bearer.

Section 57. Retirement of Old Notes and Coins. — The BangkoSentral may call in for replacement notes of any series or denominationwhich are more than five (5) years old and coins which are more than(10) years old.

Notes and coins called in for replacement in accordance with thisprovision shall remain legal tender for a period of one (1) year from thedate of call. After this period, they shall cease to be legal tender butduring the following year, or for such longer period as the MonetaryBoard may determine, they may be exchanged at par and without


charge in the Bangko Sentral and by agents duly authorized by theBangko Sentral for this purpose. After the expiration of this latterperiod, the notes and coins which have not been exchanged shall ceaseto be a liability of the Bangko Sentral and shall be demonetized. TheBangko Sentral shall also demonetize all notes and coins which havebeen called in and replaced.

B. DEMAND DEPOSITSSection 58. Definition. — For purposes of this Act, the term "demanddeposits" means all those liabilities of the Bangko Sentral and of otherbanks which are denominated in Philippine currency and are subject to

(b) Submit to the President of the Philippines and the Congress, andmake public, a detailed report which shall include, as a minimum, adescription and analysis of:

(1) The causes of the rise or fall of the monetary aggregates, ofcredit or of prices;

(2) The extent to which the changes in the monetary aggregates, incredit, or in prices have been reflected in changes in the level ofdomestic output, employment, wages and economic activity in




payment in legal tender upon demand by the presentation of checks.Section 59. Issue of Demand Deposits. — Only banks dulyauthorized to do so may accept funds or create liabilities payable inpesos upon demand by the presentation of checks, and such operationsshall be subject to the control of the Monetary Board in accordance withthe powers granted it with respect thereto under this Act.

Section 60. Legal Character. — Checks representing demand depositsdo not have legal tender power and their acceptance in the payment ofdebts, both public and private, is at the option of the creditor: Provided,however, That a check which has been cleared and credited to theaccount of the creditor shall be equivalent to a delivery to the creditor of

cash in an amount equal to the amount credited to his account.

D. M ONETARY P OLICY

1. Domestic Monetary StabilizationSection 61. Guiding Principle. — The Monetary Board shall endeavorto control any expansion or contraction in monetary aggregates which isprejudicial to the attainment or maintenance of price stability.

Section 62. Power to Define Terms. — For purposes of this articleand of this Act, the Monetary Board shall formulate definitions ofmonetary aggregates, credit and prices and shall make public suchdefinitions and any changes thereof.

Section 63. Action When Abnormal Movements Occur in theMonetary Aggregates, Credit, or Price Level. — Whenever abnormalmovements in the monetary aggregates, in credit, or in prices endangerthe stability of the Philippine economy or important sectors thereof, theMonetary Board shall:

(a) Take such remedial measures as are appropriate and within thepowers granted to the Monetary Board and the Bangko Sentral underthe provisions of this Act; and

general, and the nature and significance of any such changes; and(3) The measures which the Monetary Board has taken and theother monetary, fiscal or administrative measures which itrecommends to be adopted.

Whenever the monetary aggregates, or the level of credit, increases ordecreases by more than fifteen percent (15%), or the cost of livingindex increases by more than ten percent (10%), in relation to the levelexisting at the end of the corresponding month of the preceding year, oreven though any of these quantitative guidelines have not been reachedwhen in its judgment the circumstances so warrant, the Monetary Boardshall submit the reports mentioned in this section, and shall state

thereinwhether, in the opinion of the Board, said changes in themonetary aggregates, credit or cost of living represent a threat to thestability of the Philippine economy or of important sectors thereof.

The Monetary Board shall continue to submit periodic reports to thePresident of the Philippines and to Congress until it considers that themonetary, credit or price disturbances have disappeared or have beenadequately controlled.

2. International Monetary Stabilization Section 64. International Monetary Stabilization. — TheBangko Sentral shall exercise its powers under this Act to preservethe international value of the peso and to maintain its convertibilityinto other freely convertible currencies primarily for, although notnecessarily limited to, current payments for foreign trade andinvisibles.

Section 65. International Reserves. — In order to maintain theinternational stability and convertibility of the Philippine peso, theBangko Sentral shall maintain international reserves adequate tomeet any foreseeable net demands on the Bangko Sentral forforeign currencies.


In judging the adequacy of the international reserves, the MonetaryBoard shall be guided by the prospective receipts and payments offoreign exchange by the Philippines. The Board shall give specialattention to the volume and maturity of the Bangko Sentral's ownliabilities in foreign currencies, to the volume and maturity of theforeign exchange assets and liabilities of other banks operating inthe Philippines and, insofar as they are known or can be estimated,the volume and maturity of the foreign exchange assets andliabilities of all other persons and entities in the Philippines.

Section 66. Composition of the International Reserves. — The

(a) Take such remedial measures as are appropriate and within thepowers granted to the Monetary Board and the Bangko Sentralunder the provisions of this Act; and

(b) Submit to the President of the Philippines and to Congress adetailed report which shall include, as a minimum, a description andanalysis of:

(1) The nature and causes of the existing or imminent decline;(2) The remedial measures already taken or to be taken by theMonetary Board;




international reserves of the Bangko Sentral may include but shallnot be limited to the following assets:

(a) Gold; and

(b) Assets in foreign currencies in the form of: documentsand instruments customarily employed for the internationaltransfer of funds; demand and time deposits in centralbanks, treasuries and commercial banks abroad; foreigngovernment securities; and foreign notes and coins.

The Monetary Board shall endeavor to hold the foreign exchangeresources of the Bangko Sentral in freely convertible currencies;

moreover, the Board shall give particular consideration to theprospects of continued strength and convertibility of the currenciesin which the reserve is maintained, as well as to the anticipateddemands for such currencies. The Monetary Board shall issueregulations determining the other qualifications which foreignexchange assets must meet in order to be included in theinternational reserves of the Bangko Sentral.

The Bangko Sentral shall be free to convert any of the assets in itsinternational reserves into other assets as described in subsections(a) and (b) of this section.

Section 67. Action When the International Stability of thePeso Is Threatened. — Whenever the international reserve of theBangko Sentral falls to a level which the Monetary Board considersinadequate to meet prospective net demands on the Bangko Sentralfor foreign currencies, or whenever the international reserveappears to be in imminent danger of falling to such a level, orwhenever the international reserve is falling as a result of paymentsor remittances abroad which, in the opinion of the Monetary Board,are contrary to the national welfare, the Monetary Board shall:

(3) The monetary, fiscal or administrative measures furtherproposed; and(4) The character and extent of the cooperation required fromother government agencies for the successful execution of thepolicies of the Monetary Board.

If the resultant actions fail to check the deterioration of the reserveposition of the Bangko Sentral, or if the deterioration cannot bechecked except by chronic restrictions on exchange and tradetransactions or by sacrifice of the domestic objectives of a balancedand sustainable growth of the economy, the Monetary Board shallpropose to the President, with appropriate notice of the Congress,such additional action as it deems necessary to restore equilibrium

in the international balance of payments of the Philippines.

The Monetary Board shall submit periodic reports to the Presidentand to Congress until the threat to the international monetarystability of the Philippines has disappeared.

3. Basic Tools of Monetary Policy

a. Operations in Gold and Foreign ExchangeSection 69. Purchases and Sales of Gold. — The Bangko Sentralmay buy and sell gold in any form, subject to such regulations asthe Monetary Board may issue.

The purchases and sales of gold authorized by this section shall bemade in the national currency at the prevailing international marketprice as determined by the Monetary Board.

Section 70. Purchases and Sales of Foreign Exchange. — TheBangko Sentral may buy and sell foreign notes and coins, anddocuments and instruments of types customarily employed for theinternational transfer of funds. The Bangko Sentral may engage infuture exchange operations.




Upon authority of the Monetary Board, the Bangko Sentral maypledge any gold or other assets which it possesses as securityagainst loans which it receives from foreign or international entities.

b. Regulation of Foreign Exchange Operations of BanksSection 76. Foreign Exchange Holdings of the Banks. — Inorder that the Bangko Sentral may at all times have foreignexchange resources sufficient to enable it to maintain theinternational stability and convertibility of the peso, or in order topromote the domestic investment of bank resources, the MonetaryBoard may require the banks to sell to the Bangko Sentral or toother banks all or part of their surplus holdings of foreign exchange.

shall also bear any other typically commercial or banking risks,including exchange risks not assumed by the Bangko Sentral underthe provisions of the preceding section.

Section 80. Information on Exchange Operations. — The banksshall report to the Bangko Sentral the volume and composition oftheir purchases and sales of gold and foreign exchange each day,and must furnish such additional information as the Bangko Sentralmay request with reference to the movements in their accounts inforeign currencies.The Monetary Board may also require otherpersons and entities to report to it currently all transactions oroperations in gold, in any shape or form, and in foreign exchange




p p g g gSuch transfers may be required for all foreign currencies or for onlycertain of such currencies, according to the decision of the MonetaryBoard. The transfers shall be made at the rates established underthe provisions of Section 74 of this Act.

The Monetary Board may, whenever warranted, determine the netassets and net liabilities of banks and shall, in making such adetermination, take into account the bank's networth, outstandingliabilities, actual and contingent, or such other financial orperformance ratios as may be appropriate under the circumstances.Any such determination of net assets and net liabilities shall beapplied in all banks uniformly and without discrimination.

Section 77. Requirement of Balanced Currency Position. —The Monetary Board may require the banks to maintain a balancedposition between their assets and liabilities in Philippine pesos or inany other currency or currencies in which they operate. The banksshall be granted a reasonable period of time in which to adjust theircurrency positions to any such requirement.

The powers granted under this section shall be exercised only whenspecial circumstances make such action necessary, in the opinion ofthe Monetary Board, and shall be applied to all banks alike andwithout discrimination.

Section 78. Regulation of Non-spot Exchange Transactions. —In order to restrain the banks from taking speculative positions withrespect to future fluctuations in foreign exchange rates, theMonetary Board may issue such regulations governing bankpurchases and sales of non-spot exchange as it may considernecessary for said purpose.

Section 79. Other Exchange Profits and Losses. — The banksshall bear the risks of non- compliance with the terms of the foreignexchange documents and instruments which they buy and sell, and

p g , y p , g gwhether entered into or undertaken by them directly or throughagents, or to submit such data as may be required on operations oractivities giving rise to or in connection with or relating to a gold orforeign exchange transaction. The Monetary Board shall prescribethe forms on which such declarations must be made. The accuracyof the declarations may be verified by the Bangko Sentral bywhatever inspection it may deem necessary.

c. Loans to Banks and Financial Institutions

A. CREDIT POLICYSection 81. Guiding Principles. — The rediscounts, discounts,

loans and advances which the Bangko Sentral is authorized toextend to banking institutions under the provisions of the presentarticle of this Act shall be used to influence the volume of creditconsistent with the objective of price stability.

B. NORMAL CREDIT OPERATIONSSection 82. Authorized Types of Operations. — Subject to theprinciple stated in the preceding section of this Act, the BangkoSentral may normally and regularly carry on the following creditoperations with banking institutions operating in the Philippines:

(a) Commercial credits. — The Bangko Sentral may rediscount,discount, buy and sell bills, acceptances, promissory notes andother credit instruments with maturities of not more than onehundred eighty (180) days from the date of their rediscount,discount or acquisition by the Bangko Sentral and resulting fromtransactions related to:

(1) the importation, exportation, purchase or sale of readily saleablegoods and products, or their transportation within thePhilippines; or

(2) the storing of non-perishable goods and products which are dulyinsured and deposited, under conditions assuring their


preservation, in authorized bonded warehouses or in otherplaces approved by the Monetary Board.

(b) Production credits. — The Bangko Sentral may rediscount,discount, buy and sell bills, acceptances, promissory notes andother credit instruments having maturities of not more thanthree hundred sixty (360) days from the date of theirrediscount, discount or acquisition by the Bangko Sentral andresulting from transactions related to the production orprocessing of agricultural, animal, mineral, or industrialproducts. Documents or instruments acquired in accordancewith this subsection shall be secured by a pledge of the

Government maturing within three (3) years from thedate of the advance; and

(7) negotiable bonds issued by the Government of thePhilippines, by Philippine provincial, city or municipalgovernments, or by any Philippine Governmentinstrumentality, and having maturities of not more thanten (10) years from the date of advance.

The rediscounts, discounts, loans and advances made in accordancewith the provisions of this section may not be renewed or extendedunless extraordinary circumstances fully justify such renewal orextension.




y p grespective crops or products: Provided, however, That the cropsor products need not be pledged to secure the documents if theoriginal loan granted by the Bangko Sentral is secured by a lienor mortgage on real estate property seventy percent (70%) ofthe appraised value of which equals or exceeds the amount ofthe loan granted.

(c) Other credits. — Special credit instruments not otherwiserediscountable under the immediately preceding subsections (a)and (b) may be eligible for rediscounting in accordance withrules and regulations which the Bangko Sentral shall prescribe.Whenever necessary, the Bangko Sentral shall provide funds

from non-inflationary sources: Provided, however, That theMonetary Board shall prescribe additional safeguards fordisbursing these funds.(d) Advances. — The Bangko Sentralmay grant advances against the following kinds of collaterals forfixed periods which, with the exception of advances againstcollateral named in clause (4) of the present subsection, shallnot exceed one hundred eighty (180) days:

(1) gold coins or bullion;(2) securities representing obligations of the Bangko Sentral

or of other domestic institutions of recognized solvency;(3) the credit instruments to which reference is made in

subsection (a) of this section;(4) the credit instruments to which reference is made in

subsection (b) of this section, for periods which shall notexceed three hundred sixty (360) days;

(5) utilized portions of advances in current amount coveredby regular overdraft agreements related to operationsincluded under subsections (a) and (b) of this section,and certified as to amount and liquidity by the institutionsoliciting the advance;

(6) negotiable treasury bills, certificates of indebtedness,notes and other negotiable obligations of the

Advances made against the collateral named in clauses (6) and (7)of subsection (d) of this section may not exceed eighty percent(80%) of the current market value of the collateral.

C. SPECIAL CREDIT OPERATIONSection 83. Loans for Liquidity Purposes. — The BangkoSentral may extend loans and advances to banking institutions for aperiod of not more than seven (7) days without any collateral for thepurpose of providing liquidity to the banking system in times ofneed.

D. EMERGENCY CREDIT OPERATIONSection 84. Emergency Loans and Advances. — In periods ofnational and/or local emergency or of imminent financial panic whichdirectly threaten monetary and banking stability, the MonetaryBoard may, by a vote of at least five (5) of its members, authorizethe Bangko Sentral to grant extraordinary loans or advances tobanking institutions secured by assets as defined hereunder:Provided, That while such loans or advances are outstanding, thedebtor institution shall not, except upon prior authorization by theMonetary Board, expand the total volume of its loans orinvestments.

The Monetary Board may, at its discretion, likewise authorize theBangko Sentral to grant emergency loans or advances to bankinginstitutions, even during normal periods, for the purpose of assistinga bank in a precarious financial condition or under serious financialpressures brought by unforeseen events, or events which, thoughforeseeable, could not be prevented by the bank concerned:Provided, however, That the Monetary Board has ascertained thatthe bank is not insolvent and has the assets defined hereunder tosecure the advances: Provided, further, That a concurrent vote of atleast five (5) members of the Monetary Board is obtained.




Section 89. Provisional Advances to the NationalGovernment. — The Bangko Sentral may make direct provisionaladvances with or without interest to the National Government tofinance expenditures authorized in its annual appropriation:Provided, That said advances shall be repaid before the end of three(3) months extendible by another three (3) months as the MonetaryBoard may allow following the date the National Governmentreceived such provisional advances and shall not, in their aggregate,exceed twenty percent (20%) of the average annual income of theborrower for the last three (3) preceding fiscal years.

d. Open Market Operations

be issued directly against the international reserve of theBangko Sentral or against the securities which it has acquiredunder the provisions of Section 91 of this Act, or may be issuedwithout relation to specific types of assets of the BangkoSentral.

The Monetary Board shall determine the interest rates,maturities and other characteristics of said obligations of theBangko Sentral, and may, if it deems it advisable, denominatethe obligations in gold or foreign currencies.

Subject to the principles stated in Section 90 of this Act, the




Sec. 90, NCBA: Principles of Open Market Operations. —The open market purchases and sales of securities by theBangko Sentral shall be made exclusively in accordance with itsprimary objective of achieving price stability.

Sec. 91, NCBA: Purchases and Sales of GovernmentSecurities. — In order to achieve the objectives of the nationalmonetary policy, the Bangko Sentral may, in accordance withthe principle stated in Section 90 of this Act and with such rulesand regulations as may be prescribed by the Monetary Board,buy and sell in the open market for its own account:

(a) evidences of indebtedness issued directly by theGovernment of the Philippines or by its politicalsubdivisions; and

(b) evidences of indebtedness issued by governmentinstrumentalities and fully guaranteed by theGovernment.

The evidences of indebtedness acquired under the provisions ofthis section must be freely negotiable and regularly serviced andmust be available to the general public through bankinginstitutions and local government treasuries in denominations ofa thousand pesos or more.

Sec. 92, NCBA : Issue and Negotiation of Bangko SentralObligations. — In order to provide the Bangko Sentral witheffective instruments for open market operations, the BangkoSentral may, subject to such rules and regulations as theMonetary Board may prescribe and in accordance with theprinciples stated in Section 90 of this Act, issue, place, buy andsell freely negotiable evidences of indebtedness of the BangkoSentral: Provided, That issuance of such certificates ofindebtedness shall be made only in cases of extraordinarymovement in price levels. Said evidences of indebtedness may

evidences of indebtedness of the Bangko Sentral to which thissection refers may be acquired by the Bangko Sentral beforetheir maturity, either through purchases in the open market orthrough redemptions at par and by lot if the Bangko Sentral hasreserved the right to make such redemptions. The evidences ofindebtedness acquired or redeemed by the Bangko Sentral shallnot be included among its assets, and shall be immediatelyretired and cancelled.

e. Reserve RequirementsSection 94. Reserve Requirements. — In order to control thevolume of money created by the credit operations of the banking

system, all banks operating in the Philippines shall be required tomaintain reserves against their deposit liabilities: Provided, That theMonetary Board may, at its discretion, also require all banks and/orquasi-banks to maintain reserves against funds held in trust andliabilities for deposit substitutes as defined in this Act. The requiredreserves of each bank shall be proportional to the volume of itsdeposit liabilities and shall ordinarily take the form of a deposit inthe Bangko Sentral. Reserve requirements shall be applied to allbanks of the same category uniformly and without discrimination.

Reserves against deposit substitutes, if imposed, shall bedetermined in the same manner as provided for reserverequirements against regular bank deposits, with respect to theimposition, increase, and computation of reserves.

The Monetary Board may exempt from reserve requirementsdeposits and deposit substitutes with remaining maturities of two(2) years or more, as well as interbank borrowings.

Since the requirement to maintain bank reserves is imposedprimarily to control the volume of money, the Bangko Sentral shallnot pay interest on the reserves maintained with it unless theMonetary Board decides otherwise as warranted by circumstances.


Section 95. Definition of Deposit Substitutes. — The term"deposit substitutes" is defined as an alternative form of obtainingfunds from the public, other than deposits, through the issuance,endorsement, or acceptance of debt instruments for the borrower'sown account, for the purpose ofrelending or purchasing ofreceivables and other obligations. These instruments may include,but need not be limited to, bankers acceptances, promissory notes,participations, certificates of assignment and similar instrumentswith recourse, and repurchase agreements. The Monetary Boardshall determine what specific instruments shall be considered asdeposit substitutes for the purposes of Section 94 of this Act:Provided, however, That deposit substitutes of commercial,

Section 100. Computation on Reserves. — The reserve positionof each bank or quasi- bank shall be calculated daily on the basis ofthe amount, at the close of business for the day, of the institution'sreserves and the amount of its liability accounts against whichreserves are required to be maintained: Provided, That withreference to holidays or non-banking days, the reserve position ascalculated at the close of the business day immediately precedingsuch holidays and non-banking days shall apply on such days.

For the purpose of computing the reserve position of each bank orquasi-bank, its principal office in the Philippines and all its branchesand agencies located therein shall be considered as a single unit.




industrial and other non-financial companies for the limited purposeof financing their own needs or the needs of their agents or dealersshall not be covered by the provisions of Section 94 of this Act.

Section 96. Required Reserves Against Peso Deposits. — TheMonetary Board may fix and, when it deems necessary, alter theminimum reserve ratios to peso deposits, as well as to depositsubstitutes, which each bank and/or quasi-bank may maintain, andsuch ratio shall be applied uniformly to all banks of the samecategory as well as to quasi-banks.

Section 97. Required Reserves Against Foreign Currency

Deposits. — The Monetary Board is similarly authorized to prescribeand modify the minimum reserve ratios applicable to depositsdenominated in foreign currencies.

Section 98. Reserves Against Unused Balances of OverdraftLines. — In order to facilitate Bangko Sentral control over thevolume of bank credit, the Monetary Board may establish minimumreserve requirements for unused balances of overdraft lines.

The powers of the Monetary Board to prescribe and modify reserverequirements against unused balances of overdraft lines shall be thesame as its powers with respect to reserve requirements againstdemand deposits.

Section 99. Increase in Reserve Requirements. — Whenever inthe opinion of the Monetary Board it becomes necessary to increasereserve requirements against existing liabilities, the increase shallbe made in a gradual manner and shall not exceed four percentagepoints in any thirty- day period. Banks and other affected financialinstitutions shall be notified reasonably in advance of the date onwhich such increase is to become effective.

Section 101. Reserve Deficiencies. — Whenever the reserveposition of any bank or quasi- bank, computed in the mannerspecified in the preceding section of this Act, is below the requiredminimum, the bank or quasi-bank shall pay the Bangko Sentral one-tenth of one percent (1/10 of 1%) per day on the amount of thedeficiency or the prevailing ninety-one-day treasury bill rate plusthree percentage points, whichever is higher: Provided, however,That banks and quasi-banks shall ordinarily be permitted to offsetany reserve deficiency occurring on one or more days of the weekwith any excess reserves which they may hold on other days of thesame week and shall be required to pay the penalty only on the

average daily deficiency during the week. In cases of abuse, theMonetary Board may deny any bank or quasi-bank the privilege ofoffsetting reserve deficiencies in the aforesaid manner.

If a bank or quasi-bank chronically has a reserve deficiency, theMonetary Board may limit or prohibit the making of new loans orinvestments by the institution and may require that part or all of thenet profits of the institution be assigned to surplus.

The Monetary Board may modify or set aside the reserve deficiencypenalties provided in this section, for part or the entire period of astrike or lockout affecting a bank or a quasi-bank as defined in theLabor Code, or of a national emergency affecting operations of

banks or quasi-banks. The Monetary Board may also modify or setaside reserved deficiency penalties for rehabilitation program of abank.

Section 102. Interbank Settlement. — The Bangko Sentral shallestablish facilities for interbank clearing under such rules andregulations as the Monetary Board may prescribe: Provided, Thatthe Bangko Sentral may charge administrative and other fees forthe maintenance of such facilities.


The deposit reserves maintained by the banks in the Bangko Sentralin accordance with the provisions of Section 94 of this Act shallserve as basis for the clearing of checks and the settlement ofinterbank balances, subject to such rules and regulations as theMonetary Board may issue with respect to such operations:Provided, That any bank which incurs on overdrawing in its depositaccount with the Bangko Sentral shall fully cover said overdraft,including interest thereon at a rate equivalent to one- tenth of onepercent (1/10 of 1%) per day or the prevailing ninety-one-daytreasury bill rate plus three percentage points, whichever is higher,not later than the next clearing day: Provided, further, Thatsettlement of clearing balances shall not be effected for any account

hi h i b d f fi (5) i b ki

SECTION 112. Representation with Other Financial Institutions. —The Bangko Sentral may be authorized by the Government to represent it indealings, negotiations or transactions with the International Bank forReconstruction and Development and with other foreign or internationalfinancial institutions or agencies. The President may, however, designateany of his other financial advisors to jointly represent the Government insuch dealings, negotiations or transactions.

SECTION 113. Official Deposits. — The Bangko Sentral shall be theofficial depository of the Government, its political subdivisions andinstrumentalities as well as of government-owned or controlled corporationsand, as a general policy, their cash balances should be deposited with theB k S l i h l i i ki b l b h ld b




which continues to be overdrawn for five (5) consecutive bankingdays until such time as the overdrawing is fully covered or otherwiseconverted into an emergency loan or advance pursuant to theprovisions of Section 84 of this Act: Provided, finally, That theappropriate clearing office shall be officially notified of banks withoverdrawn balances. Banks with existing overdrafts with the BangkoSentral as of the effectivity of this Act shall, within such period asmay be prescribed by the Monetary Board, either convert theoverdraft into an emergency loan or advance with a plan ofpayment, or settle such overdrafts, and that, upon failure to socomply herewith, the Bangko Sentral shall take such action againstthe bank as may be warranted under this Act.

Section 103. Exemption from Attachment and OtherPurposes. — Deposits maintained by banks with the BangkoSentral as part of their reserve requirements shall be exempt fromattachment, garnishments, or any other order or process of anycourt, government agency or any other administrative body issuedto satisfy the claim of a party other than the Government, or itspolitical subdivisions or instrumentalities.

F. B ANKER AND F INANCIAL ADVISER OF G OVERNMENT

ARTICLE I. FUNCTIONS AS BANKER OF THE GOVERNMENT

SECTION 110. Designation of Bangko Sentral as Banker of theGovernment. — The Bangko Sentral shall act as a banker of theGovernment, its political subdivisions and instrumentalities.

SECTION 111. Representation with the International Monetary Fund.— The Bangko Sentral shall represent the Government in all dealings,negotiations and transactions with the International Monetary Fund andshall carry such accounts as may result from Philippine membership in, oroperations with, said Fund.

Bangko Sentral, with only minimum working balances to be held bygovernment-owned banks and such other banks incorporated in thePhilippines as the Monetary Board may designate, subject to such rules andregulations as the Board may prescribe: Provided, That such banks mayhold deposits of thepolitical subdivisions and instrumentalities of theGovernment beyond their minimum working balances whenever suchsubdivisions or instrumentalities have outstanding loans with said banks.

The Bangko Sentral may pay interest on deposits of the Government or ofits political subdivisions and instrumentalities, as well as on deposits ofbanks with the Bangko Sentral.

SECTION 114. Fiscal Operations. — The Bangko Sentral shall open ageneral cash account for the Treasurer of the Philippines, in which the liquidfunds of the Government shall be deposited.

Transfers of funds from this account to other accounts shall be made onlyupon order of the Treasurer of the Philippines.

SECTION 115. Other Banks as Agents of the Bangko Sentral. — In theperformance of its functions as fiscal agent, the Bangko Sentral may engagethe services of other government-owned and controlled banks and of otherdomestic banks for operations in localities at home or abroad in which theBangko Sentral does not have offices or agencies adequately equipped toperform said operations: Provided, however, That for fiscal operations in

foreign countries, the Bangko Sentral may engage the services offoreign banking and financial institutions.

SECTION 116. Remuneration for Services. — The Bangko Sentral maycharge equitable rates, commissions or fees for services which it renders tothe Government, its political subdivisions and instrumentalities.


ARTICLE II. THE MARKETING AND STABILIZATION OF SECURITIESFOR THE ACCOUNT OF THE GOVERNMENT

A. THE ISSUE AND PLACING OF GOVERNMENT SECURITIES

SECTION 117. Issue of Government Obligations. — The issue ofsecurities representing obligations of the Government, its politicalsubdivisions or instrumentalities, may be made through the Bangko Sentral,which may act as agent of, and for the account of, the Government or itsrespective subdivisions or instrumentality, as the case may be: Provided,however, That the Bangko Sentral shall not guarantee the placement of saidsecurities, and shall not subscribe to their issue except to replace its

i h ldi f i i i h h h i

obligations, but shall not endeavor to alter movements of the marketresulting from basic changes in the pattern or level of interest rates.

The Monetary Board shall issue such regulations as may be necessary toimplement the provisions of this section.

SECTION 121. Resources of the Securities Stabilization Fund. —Subject to Section 132 of this Act, the resources of the SecuritiesStabilization Fund shall come from the balance of the fund as held by theCentral Bank under Republic Act No. 265 as of the effective date of this Act.

SECTION 122. Profits and Losses of the Fund. — The SecuritiesS bili i F d h ll i fi hi h i k i



maturing holdings of securities with the same type as the maturingsecurities.

SECTION 118. Methods of Placing Government Securities. — TheBangko Sentral may place the securities to which the preceding sectionrefers through direct sale to financial institutions and the public.

The Bangko Sentral shall not be a member of any stock exchange orsyndicate, but may intervene therein for the sole purpose of regulating theiroperations in the placing of government securities.

The Government, or its political subdivisions or instrumentalities, shall

reimburse the Bangko Sentral for the expenses incurred in the placing of theaforesaid securities.

SECTION 119. Servicing and Redemption of the Public Debt. — Theservicing and redemption of the public debt shall also be effected throughthe Bangko Sentral.

B. BANGKO SENTRAL SUPPORT OF THE GOVERNMENTSECURITIES MARKET

SECTION 120 The Securities Stabilization Fund There shall be

Stabilization Fund shall retain net profits which it may make on itsoperations, regardless of whether said profits arise from capital gains orfrom interest earnings. The Fund shall correspondingly bear any net losseswhich it may incur.

ARTICLE III. FUNCTIONS AS FINANCIAL ADVISOR OF THEGOVERNMENT

SECTION 123. Financial Advice on Official Credit Operations. — Beforeundertaking any credit operation abroad, the Government, through theSecretary of Finance, shall request the opinion, in writing, of the MonetaryBoard on the monetary implications of the contemplated action. Such

opinions must similarly be requested by all political subdivisions andinstrumentalities of the Government before any credit operation abroad isundertaken by them.

The opinion of the Monetary Board shall be based on the gold and foreignexchange resources and obligations of the nation and on the effects of theproposed operation on the balance of payments and on monetaryaggregates.

Whenever the Government, or any of its political subdivisions orinstrumentalities contemplates borrowing within the Philippines the prior