hizon notes - special commercial laws

8/12/2019 Hizon Notes - Special Commercial Laws

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NOTES ON SPECIAL COMMERCIAL LAWSKenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________

Facultad de Derecho ivil 1UNIVERSITY OF SANTO TOM

UNIVERSITY OF SANTO TOMAS

Faculty of Civil Law

A.Y. 2012-2013

First Semester

SPECIAL COMMERCIAL LAWS

LETTERS OF CREDIT

Definition

Q: What are letters of credit?

A: Any arrangement however named of described, whereby a

bank acting upon the request of its client or in its own behalf,

agrees to pay another, against a stipulated documentsprovided that the terms of the credit are complied with.

Q: What is the duration of LC?

A:

1. Upon the period fixed by the parties; or2. If none is fixed:

a. 6 months from its date if used in the Philippines;b. 12 months if used abroad

Governing law

Q: What laws govern commercial transactions?

A: In the absence of any particular provision in the Code of

Commerce, commercial transaction shall be governed by

usage and customs genereally observed.

Letter of credit as an independent contract

Q: Is a letter of credit an accessory contract?

A: Letters of credit are in effect an absolute undertaking to

pay the money advanced or the amount for which credit isgiven on the faith of the instrument. They are primary

obligations and not accessory contracts.

NOTE: A letter of credit by itself does not come into

operation without a contract supporting it. It is not a contract

that can stand on its own, it needs a supporting contract. In a

commercial letter of credit it is a sale; in standby letter of

credit, it is a non-sale transaction.

Q: Describe the liability of the bank which issued the letter

of credit.

A: It is neither a surety nor a guarantor. The liability of the

issuing bank is primary and solidary. It is also not entitled to

the benefit of excussion.

Q: What is the purpose of the letters of credit?

A: To ensure certainty of payment. The seller is assured of

payment because the bank intervenes and makes the

commitment to pay. This addresses problems arising from thesellers refusal to part with his goods before being paid and

the buyers refusal to part with his money before acquiring

the goods, thus, facilitating commercial transactions.

NOTE: The issuing bank should pay the beneficiary upon the

latters submission of the stipulated documents and

compliance with the terms of the credit even though there is

a pending issue on whether or not the main contract

underlying the letter of credit has been paid or fulfilled o

not.

Q: What are the 2 kinds of letters of credit?

A:

COMMERCIAL STANDBY

Involves contracts of sale Involves non-sale

transactions

Payable only upon

presentation by the seller-

beneficiary of documents

that show he has performed

his contract

Payable upon certification by

the beneficiary of the

applicants non-performance

of the agreement.

Q: What are the other kinds of letters of credit?

A:

1. Irrevocable letter of credit A letter of crediwherein the terms and the undertakings of the

issuing bank cannot be amended or altered or

revoked without the consent of the beneficiary

2. Revocable letter of credit can be amendedaltered or revoked even without the consent of the

beneficiary


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3. Confirmed letter of credit - the liability of theconfirming bank is primary

4. Non-confirmed letter of creditIrrevocable letter of credit

Q: Is irrevocable letter of credit and confirmed letter of

credit synonymous?

A: An irrevocable letter of credit is not synonymous with a

confirmed letter of credit. In an irrevocable letter of credit,

the issuing bank may not, without the consent of the

beneficiary and the applicant, revoke its undertaking under

the letter, whereas, in a confirmed letter of credit, the

correspondent bank gives an absolute assurance to the

beneficiary that it will undertake the issuing banks obligation

as its own according to the terms and condition of the credit.

IRREVOCABLE LETTER OF

CREDIT

CONFIRMED LETTER OF

CREDIT

The issuing bank may not,

without the consent of thebeneficiary and the

applicant, revoke its

undertaking under the letter

The correspondent bank

gives an absolute assuranceto the beneficiary that it will

undertake the issuing banks

obligation as its own

according to the terms and

conditions of the credit

Q: Can the irrevocable nature of letter of credit be changed?

A: The terms of an irrevocable letter of credit cannot be

changed without the consent of the parties, particularly the

beneficiary thereof (Philippine Virginia Tobacco

Administration v. De Los Angeles, 164 SCRA 543, 1988).

Q: Can a court order the release to the applicant the

proceeds of an irrevocable letter of credit without the

consent of the beneficiary?

A: No, such order violates the irrevocable nature of the letter

of credit. The terms of an irrevocable letter of credit cannot

be changed without the consent of the parties, particularly

the beneficiary thereof.

Parties to a letter of credit

Q: Who are the parties to the letter of credit?

A:

1. Applicant2. Beneficiary3. Issuing bank

Q: Who is the applicant?

A: He may be a buyer, importer or obligor. The person who

procures the opening of letter of credit and who agrees to

reimburse the issuing bank any and all amount should be paid

under the letter of credit once the issuing bank is compelled

to pay because the beneficiary is able to submit the

document stipulated.

He agrees to pay the bank that issued the letter of credit. The

applicant has no obligation to reimburse the issuing bank if

the latter pays without the stipulated amounts duly paid

under the letter of credit.

Q: Who is the beneficiary?

A: The one entitled to payment from the issuing bank upon

his submission of the document stipulated and compliance

with the terms of the credit.

Q: What is the effect of the failure of the beneficiary to

fulfill his obligation under the main contract?

A: It does not negate his right to payment from the issuing

bank as long as he is able to submit the required documents

and comply with the terms of the credit, without prejudice tohis liability against the account party under the law on

contract and damages

Q: Who is the issuing bank?

A: The one that undertakes to pay the beneficiary upon

submission of the beneficiary of these stipulated documents

and compliance with the terms of the credit.

Q: Enumerate the other parties.

A:

Advising or

Notifying bank

Not liable to pay the beneficiary; it does no

have any contractual relations with the

beneficiary. Its only obligation is to determine

the apparent authenticity of the letter of credit

to check if at first glance that the same is

genuine or valid:

a. If valid, the advising/notifying banknotifies the beneficiary of the letter o

credit; transmit the letter of credit in

favor of the beneficiary so that the

beneficiary can cause shipment of the

equipment

Paying bank An agent of the issuing bank for the purpose ofmaking payment to the beneficiary.

He can also be the advising bank

Confirming bank It lends credence to a letter of credit issued by a

lesser known bank as if it is the one who issued

the letter of credit.

Its obligation is similar to an issuing bank. Thus

beneficiary may tender documents to the

confirming bank and collect payment

Negotiating

bank

The bank in the city of the beneficiary which

buys or discounts the drafts contemplated by

the LC, if such draft is to be drawn on the

opening bank not in the city of the beneficiary


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Correspondent

bank of issuing

bank

If the account party is in the Philippines and the

beneficiary is abroad, the beneficiary will be

notified and consequently will be paid through

the correspondent bank

Q: Describe the duty of the advising bank?

A: It determines the apparent authenticity of the letter of

credit and notifies the beneficiary of the letter of credit.

He does not guarantee the genuineness or due execution of

the letter of credit. It is not liable for damages even if it turns

out to be spurious provided the spurious character is not

apparent on the face of the instrument.

Q: Does the advising bank have the obligation to pay the

beneficiary?

A:

GR: No

XPN: When the advising bank is also the confirming orpaying bank

Three distinct relationships arising from a letter of credit

Q: Explain the three (3) distinct but intertwined contract

relationships that are indispensable in a letter of credit

transaction.

1. Between the applicant/buyer/importer and thebeneficiary/seller/exporterThe applicant/ buyer/

importer is the one who procures the letter of credit

while the beneficiary/seller/exporter is the one who incompliance with the contract of sale ships the goods to

the buyer and delivers the documents of title and draft

to the issuing bank to recover payment for the goods.

Their relationship is governed by the contract of sale.

2. Between the issuing bank and thebeneficiary/seller/exporterThe issuing bank is the one

that issues the letter of credit and undertakes to pay the

seller upon receipt of the draft and proper documents of

title. On the other hand, the beneficiary/seller/exporter

surrenders document of title to the bank in compliance

with the terms of the LC. Their relationship is governed

by the terms of the LC.

3. Between the issuing bank and theapplicant/buyer/importer The applicant/buyer/

importer obliges himself to reimburse the issuing bank

upon receipt of the documents of title. Their relationship

is governed by the terms of the application for the

issuance of the letter of credit by the bank.

NOTE: These relationships while interrelated are distinct and

separate from each other.

Q: When is the bank entitled to reimbursement?

A: Once the issuing bank shall have paid the beneficiary afte

the latters compliance with the terms of the LC. Presentment

for acceptance to the customer/applicant is not a condition

sine qua non for reimbursement.

Q: Is presentment a condition prior to reimbursement?

A: Presentment for acceptance to the customer or applicant

of the drafts drawn by the beneficiary is not a condition sine

qua non for reimbursement (Prudential Bank & Trust Co. v

IAC, 216 SCRA 257, 1992)

Q: What is the consequence of payment upon an expired

LC?

A: An issuing bank which paid the beneficiary of an expired

letter of credit can recover the payment from the applicant

which obtained the goods from the beneficiary to prevent

unjust enrichment.

Q: Should the marginal deposit made by the customer, inpossession of the bank be first deducted from the principal

indebtedness before computing the interest?

A: Yes, since it is supposed to be returned upon compliance

with his obligation. Indeed, it would be onerous to compute

interest and other charges on the face value of the letter o

credit which the issuing bank issued, without first crediting o

setting off the marginal deposit which the importer paid to it

Requiring the importer to pay the interest on the entire letter

of credit without deducting first his marginal deposit would

be a clear case of unjust enrichment by the bank.

NOTE: The applicant has the right to have the margina

deposit deducted from the principal obligation under the

letter of credit and to have the interest computed only on the

balance and not on the face value thereof.

Doctrine of Independence

Q: What is the doctrine of independence?

A: Under this doctrine, the obligation of the issuing bank to

pay the beneficiary does not depend on the fulfillment or

non-fulfillment of the contract supporting the letter of credit

If it is a commercial letter of credit, the obligation if theissuing bank to pay the beneficiary is not affected by any

breach of contract by the seller to the buyer because the

contract between the issuing bank and beneficiary is separate

and distinct from the contract between the seller and the

buyer.

Q: Does the issuing bank have the obligation to determine

whether or not the main contract has been fulfilled or not?


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A: No. The issuing bank is liable to pay the beneficiary upon

the latters submission of the stipulated documents and

compliance with the terms of the credit regardless of any

breach of contract by the beneficiary to the applicant of the

letter of credit.

The SC held that banks deals with documents, they dont deal

with goods. The issuing bank has no obligation to check the

object, the quantity or quality of the goods. The bank needs

not to verify or go beyond the four corners of the document.

The issuing bank will determine the documents to be

submitted, where the stipulated documents tendered

faithfully. If the documents were submitted, the issuing pays

the seller.

Q: What is the exception to the doctrine of independence?

A: Fraud exception principle

Fraud exception Principle

Q: What is the Fraud exception principle?

A: The beneficiary may be enjoined from collecting on the

letter of credit if the following elements are present:

a. There is fraud on the part of the beneficiaryb. Fraud must be in relation to the independent

purpose or character of the credit

c. Unless the beneficiary is restrained, the applicantshall suffer grave and irreparable injury.

NOTE: To be an exception, the fraud must NOT be in relation

to the performance of the main contract but in relation to the

independent purpose or character of the credit.

Q: What is the remedy for a fraudulent abuse?

A:Injunction.

Doctrine of Strict Compliance

Q: How should commercial transaction involving letter of

credit be complied?

A: Commercial transaction involving letters of credit are

governed by the rule on strict compliance.

Q: What is the so-called doctrine of strict compliance?

A: The documents that the beneficiary should submit to the

issuing bank or confirming bank must strictly conform to the

documents stipulated. If there is discrepancy, the issuing

bank is not liable to pay. If it pays, it pays at its own risk and

cannot obtain reimbursement from the applicant.

It matters not that the submission of the documents are

unfair, unjust or inequitable, the point is, it requires that the

document stipulated must be the document to be submitted

otherwise, the issuing bank is not liable or the beneficiary is

not entitled to payment.

TRUST RECEIPT

Definition

Q: What is a trust receipt transaction?

A: It is any transaction between the entruster and entrustee

whereby the entruster who owns or holds absolute title or

security interests over certain specified goods, documents or

instrument, releases the same to the possession of entrustee

upon the latters execution of a TR agreement.

It is a transaction wherein the entrustee binds himself to hold

the designated goods in trust for the entruster and, in case of

default, to sell such goods, documents or instrument with the

obligation to turn over to the entruster the proceeds to theextent of the amount owing to it or to turn over the goods

documents or instrument itself if not sold.

NOTE: To be in the nature of a trust receipt, the entruster

should have financed the acquisition or importation of the

goods. The funds should have been delivered before or

simultaneously with delivery of the goods.

Q: What is a trust receipt (TR)?

A: It is the written or printed document signed by the

entrustee in favor of the entruster containing terms and

conditions substantially complying with the provisions of PD

115.

Q: What is the consequence where the execution of the

trust receipt agreement was made only after the goods

covered by it had been purchased by and delivered to the

entrustee and the latter as a consequence acquired

ownership over the goods?

A: In such case, the transaction does not involve a trust

receipt but a simple loan even though the parties

denominated the transaction as one of trust receipt

(Colinares v. CA, 339 SCRA 609, 2000; Consolidated Bank andTrust Corp., v. CA, 356 SCRA 671, 2001.)

Parties to a trust receipt agreement

Q: Who are the parties to a trust receipt agreement?

A:

1. Entruster2. Entrustee


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Q: Who is an entruster?

A: A lender, financer or creditor. Person holding title over the

goods documents or instruments (GDI) subject of a trust

receipt transaction; releases possession of the goods upon

execution of trust receipt.

Q: Who is an entrustee?

A: A borrower, buyer, importer or debtor. Person to whom

the goods are delivered for sale or processing in trust, with

the obligation to return the proceeds of sale of the goods or

the goods themselves to the entruster

LCs and TRs, not negotiable instruments

Q: Are letters of credit and trust receipt considered as

negotiable instruments?

A: No, but drafts in connection with the former are

negotiable instruments (Lee v. CA 375 SCRA 579, 2002).

2 features of a trust receipt agreement

a. Loan featureb. Security feature

Q: Discuss the dual features of a trust receipt agreement.

A: A trust receipt has a loan and security features. The

entruster (bank) extends loan to the entrustee (importer and

retail dealers) to finance the importation of goods or

instruments in favor of the entrustee who may not be able to

obtain credit except thru utilization of the merchandise

imported or purchased.

The security feature is in the covering trust receipt which

secures the indebtedness.

Effect of failure on the part of entrustee to comply with its

obligations

Q: What is the effect of payment of the loan or delivery of

the sale proceeds equivalent to the full amount?

A: It extinguishes both criminal and civil liabilities of the

entrustee.

Section 13.Penalty clause.The failure of an entrustee to turn over the

proceeds of the sale of the goods, documents or instruments covered by a

trust receipt to the extent of the amount owing to the entruster or as

appears in the trust receipt or to return said goods, documents or

instruments if they were not sold or disposed of in accordance with the

terms of the trust receipt shall constitute the crime of estafa, punishable

under the provisions of Article Three hundred and fifteen, paragraph one (b)

of Act Numbered Three thousand eight hundred and fifteen, as amended,

otherwise known as the Revised Penal Code. If the violation or offense is

committed by a corporation, partnership, association or other juridical

entities, the penalty provided for in this Decree shall be imposed upon the

directors, officers, employees or other officials or persons therein

responsible for the offense, without prejudice to the civil liabilities arising

from the criminal offense.

P.D 115 is not violative of the constitutional provision

against imprisonment for the non-payment of debt

Q: Is PD 115 violative of the constitutional provision against

imprisonment for the non-payment of debt?

A: No because what is sought to be penalized is not the non-payment of debt but the dishonesty and abuse of confidence

in the handling of money or goods to the prejudice of

another. It punishes the act not as an offense against

property but against public order (People v. Nitafan, 207

SCRA 726, 1992).

NOTE: The penal sanction covers:

1. Criminal liability2. Civil liability

Estafa

Q: What is the effect of the failure of the entrustee to

deliver the proceeds of the sale of the goods or instruments

subject to the trust receipt or return the goods?

A: It will constitute estafa.

Q: May the civil action for the collection of the loan be

instituted independently of the criminal action?

A: Yes.

Q: What is the effect of the acquittal of the entrustee in the

criminal case as a result of the surrender or consignation ofthe goods?

A: The acquittal of the entrustee in the criminal case as a

result of the surrender or consignation of the goods is not a

bar to the filing of a separate civil action to enforce payment

of the loan(Vintola v. Insular Bank of Asia and America, 150

SCRA 140, 1987).

Q: What is the effect of compromise of estafa case arising

from trust receipt transaction, after the case has been filed

in court?

A: Compromise of estafa case arising from trust receipt

transaction, after the case has been filed in court does not

amount to novation and does not erase the criminal liability

of the accused (Ong v. CA, 124 SCRA 578, 1983).

Penalty in case of corporation

Q: What if the entrustee is a corporation?

A: In such case, the law makes the officers or employees o

other persons responsible for the offense liable to suffer the


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penalty of imprisonment. The criminal liability falls on the

human agent responsible for the violation of the Trust

Receipt Law.

A person who admits being the agent of the entrustee

corporation is a person responsible for the offense if he is the

signatory of the trust receipts and if he cannot explain why he

is not responsible for the failure to turn over the proceeds of

the sale or account for the goods covered by the trust receipt.

Q: Why are the officers, employees, etc. of a corporation

responsible for the offense?

A: It is because they are vested with the authority and

responsibility to devise means necessary to ensure

compliance with the law, and if they fail to do so, are held

criminally accountable. Yet, a corporation may be charged

and prosecuted for a crime if the imposable penalty is fine

(Ching v. Sec. of Justice, 481 SCRA 609, 2006)

Q: Is the person signing the trust receipt for the corporation

solidarily liable with the entrustee-corporation for the civilliability arising from the criminal offense?

A: No. He may however be personally liable if he bound

himself to pay the debt of the corporation under a separate

contract of surety or guarantee (Ong v. CA, 401 SCRA 649,

2003).

Q: Can we file a criminal case against the corporation?

A: It depends, if the penalty is imprisonment, we cannot file a

criminal case, but if the penalty is a fine or forfeiture or

revocation of the corporationsfranchise, then we can.

Civil obligation remains as long as loan is not paid

Q: What is the effect of non-payment of the loan?

A: The civil obligation still remains.

Q: What is the effect of the loss of the goods subject of the

trust receipt?

A: Loss of the goods subject of the trust receipt, regardless of

the cause does not extinguish the civil liability of the

entrustee.

Q: What is the effect of return of goods?

A: If the loan is not yet paid, the return of the goods may

extinguish the criminal liability but not the civil liability of the

entrustee unless the goods are sold and the proceeds thereof

applied in full payment of the loan.

Penal sanction applies to goods intended for sale only

Q: When does the penal sanction under the trust receipts

law apply?

A: Jurisprudence provides that the penal sanction does not

apply in case the goods are not intended for sale or resale as

when they are for actual use.

Cases where no criminal liability despite execution of

TR agreement

1. Compliance with the terms of the trust receipt eitherby:

a. payment,b. return of the proceeds orc. return of the goods.

2. The transaction is not a trust receipt within thecontemplation of the trust receipts law

3. Surrender of the goods to the entruster4. Non-delivery of the goods to entrustee5. Compromise agreement before the filing of the

criminal information for violation of the TR law6. Cancellation of the trust and taking possession by

the entruster

NOTE: Mere repossession of the goods wil

extinguish criminal liability.

7. Loss of the goods due to force majeure8. Consignment

Entrustee, owner of the articles subject of the TR

Q: Who is the owner of the articles subject of the TR?

A: The entrustee. A trust receipt has two features, the loan

and security features. The loan is brought about by the fact

that the entruster financed the importation or purchase of

the goods under TR. Until and unless this loan is paid, the

obligation to pay subsists. If the entrustee is made to appea

as the owner, it was but an artificial expedient, more of lega

fiction than fact, for if it were really so, it could dispose of the

goods in any manner that it wants, which it cannot do. To

consider the entrustee as the true owner from the inception

of the transaction would be to disregard the loan feature

thereof. (Rosario Textile Mills Corp. v. Home Bankers Savings

and Trust Company, 2005)

Q: Can the entrustee mortgage or pledge the articles in

trust?

A: The articles covered by the trust receipts are owned by the

entruster and they were only held by the entrustee in trust

While it was allowed to sell the items, the entrustee had no

opportunity to dispose of them or any part thereof or their

proceeds through conditional sale, pledge or any other

means. Accordingly, the entrustee has neither ownership


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free disposal nor the authority to freely dispose of the

articles. Hence, the entrustee could not have subjected them

to a chattel mortgage (DBP v. Prudential Bank, 475 SCRA 623,

2005).

NOTE: The entrustee cannot mortgage the goods because

one of the requisites of a valid mortgage is that the

mortgagor must be the absolute owner of the property

mortgaged or must have free disposal thereof. Entrustee is

not the absolute owner of the goods nor has the free disposal

thereof.

Receipt of bank of sum of money without reference to trust

receipt obligation

Q: What is the effect of the receipt of the bank of a sum of

money without reference to the trust receipt obligation to

which the same pertains?

A: It does not obligate the bank to apply the money received

against the trust receipt obligation.

Q: Does it have the effect of compensation?

A: No since compensation is not proper when one of the

debts consist in civil liability when one of the debts consists in

civil liability arising from a criminal offense (Metropolitan

Bank and Trust Company v. Tonda, 338 SCRA 254, 2000).

Rights of the entruster

Q: What are the right of an entuster?

A:

1. To be entitled to the proceeds of the sale of thegoods under trust receipt to the extent of the

amount owing to him or to return the goods in case

of non-sale

2. To cancel the trust and take possession of the goodsor of the proceeds realized therefrom at any time

upon default by the entrustee

3. To sell the goods with at least 5-day notice to theentrustee and apply the proceeds in payment of the

obligation. Entrustee is liable to pay deficiency, if

any.

Validity of the security interest as against creditors of theentrustee/innocent purchasers for value

Q: As between the entruster and the creditors of the

entrustee, who has a better right over the goods?

A: The entruster. His security interest in goods, documents,

or instruments pursuant to the written terms of a trust

receipt shall be valid as against all creditors of the entrustee

for the duration of the trust receipt agreement.

Q: Who can defeat the rights of the entruster over the

goods?

A: A purchaser in good faith. He acquires goods, documents

or instruments free from the entruster's security interest.

Goods covered by TR not subject to levy

Q: Are the goods covered by a trust receipt subject to levy?

A:

GR: No, the law warrants the validity of entrusters security

interest as against creditors of the trust receipt agreement

during the duration of the trust receipt agreement.

XPN: When the properties are in the hands of an innocent

purchaser for value and in good faith (Prudential Bank v

NLRC, 251 SCRA 421, 1995).

Obligations or liability of the entrustee

Q: What are the obligations and liabilitites of the entrustee?A:

1. To hold good, documents and instruments (GDI) intrust for the entruster and to dispose of them strictly

in accordance with the terms of TR;

2. To receive the proceeds of the sale for the entrusterand to turn over the same to the entruster to the

extent of amount owing to the entruster;

3. To insure GDI against loss from fire, theft, pilferageor other casualties.

4. To keep GDI or the proceeds thereof, whether inmoney or whatever form, separate and capable of

identification as property of the entruster;

5. To return GDI to the entruster in case they could notbe sold or upon demand of the entruster; and

6. To observe all other conditions of the trust receipts(Sec. 9, P.D. 115)

Order for application of proceeds

Q: What is the order in the application of proceeds of

the TR transactions?

A:

1. Expenses of the sale2. Expenses derived from storing the goods3. Principal obligation

Q: Is the entrustee liable for the deficiency?

A: Yes, but any excess shall likewise belong to him.


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Liability for loss of goods, documents or instruments

Q: Who shall bear the loss of goods which are the subject of

TR?

A: The entrustee. Loss of goods, documents or instruments

which are the subject of a TR, pending their disposition,

irrespective of whether or not it was due to the fault or

negligence of the entrustee, shall not extinguish his obligation

to the entruster for the value thereof. (Sec. 10, P.D. 115)

NOTE: The principle of res perit dominowill not apply against

the entruster

Remedies

Q: What are the remedies available to the entruster?

A:

1. File a criminal action for estafa in case of failure ofthe entrustee to deliver the proceeds of the sale of

the goods under the trust receipt up to the extent ofhis obligation to the entruster.

NOTE: The civil action may be instituted:

a. In the criminal actionb. Separately filed independently of the criminal actionCRIMINAL ACTION CIVIL ACTION

Based on ex-delicto Based on ex-contracto

2. Cancel the trust and take possession of the goods atany time upon default of the entrustee

3. After the repossession, the entruster may sell thegoods upon at least 5-day notice to the entrustee

and apply the proceeds in payment of the obligation.

The entrustee is liable for deficiency or entitled to

excess, if any.

4. If a surety secures the obligation of the entrustee inaddition to the trust receipt, the law does not

obligate the entruster to cancel the trust or take

possession of the goods. He can proceed against the

surety. The options belong to the entruster.

Q: In the event of default, is it mandatory or compulsory for

the entruster to cancel the trust and take possession of thegoods to be able to enforce his rights?

A: No, the law uses the word may in granting to the

entruster the right to cancel the trust and take possession of

the goods. Thus, he has the discretion to avail itself of such

right to sue or seek alternative actions, such as third party

claim or a separate civil action which it deems bets to protect

its right, at any time upon default or failure of the entrustee

to comply with any of the terms and conditions of the

agreement (South City Homes, Inc. v. BA Finance Corporation,

371 SCRA 603, 2001).

CHATTEL MORTGAGE

Q: What is a chattel mortgage?

A: An accessory contract whereby a personal property is

recorded in the Chattel Mortgage Register to secure the

performance of a principal obligation.

NOTE: The concept of a chattel mortgage as a conditional sale

under the old chattel mortgage law has been supplanted by

the definition of chattel mortgage under Art 2140 of the Civi

Code. It is now an accessory contract, no longer a conditiona

sale.

CHARACTERISTICS OF CHATTEL MORTGAGE

1. An accessory contract because it is for the purpose ofsecuring the performance of a principal obligation;

2. A formal contract because of its enforceabilityregistration in the Chattel Mortgage Register is

indispensable;

3. A unilateral contract because it produces onlyobligations on the part of the creditor to free the thing

from encumbrance on the fulfillment of the obligation.

NOTE: The extinguishment of the accessory contract does not

extinguish the principal contract; the extinguishment of the

principal contract extinguishes the accessory contract.

ESSENTIAL REQUISITES

Q: What are the essential requisites for a valid chatte

mortgage?

A:

1. Constituted to secure fulfillment of the principaobligation

2. Mortgagor is the absolute owner of the property3. Mortgagor has free disposal of the property, in the

absence thereof, that he be legally authorized for

such purpose4. That it involves a personal property. (Sec. 2085,NCC)

FORMAL REQUISITES

Q: What are the formal requisites for a valid chatte

mortgage?

A:

1. Affidavit of good faith


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2. Registration with the Chattel Mortgage Registry3. If necessary, additional registration with the proper

government agency

Affidavit of Good Faith

Q: What is an affidavit of good faith?

A: A certificate included in the chattel mortgage contract

executed by both mortgagor and mortgagee stating that:

1. The obligation is valid, just and subsisting; and2. It is not one entered into for purposes of fraud.

Q: What is the effect of absence of affidavit of good faith?

A: It does not affect the validity of the chattel mortgage but

the same will be unenforceable against third persons.

Q: What is the status of an unrecorded CM?

A: The mortgage is valid and binding between the parties.Registration is necessary only for the purpose of binding third

person.

NOTE: In an action for collection, the non-registration of the

chattel mortgage which ordinarily does not bind third persons

is not critical. The rule is different when the remedy resorted

to is foreclosure.

Q: What is the effect if the mortgage is not registered?

A:It is nevertheless binding between the parties.

Q: What is the period within which the registration should

be made?

A: The law does not provide any specific time. Yet, the law is

substantially and sufficiently complied with:

a. where the registration is made by the mortgageebefore the mortgagor has complied with his principal

obligation and;

b. no right of innocent third persons Is prejudiced.Q: What is the effect of registration?

A: It creates real rightit is an effective and binding notice tothe other creditors of its existence and creates a real right or

lien which follows the chattel wherever it goes.

The registration gives the mortgagee symbolical possession.

The efficacy of the act of recording a chattel mortgage

consists in the fact that it operates as a constructive notice of

the existence of the contract.

Dual Registration rule

Q: Explain the Dual registration rule?

A: The property must be registered:

a. Place where the mortgagor residesb. In the place where the property is situated

XPN:

a. If the mortgagor resides in the same place where theproperty is located; or

b. If the amount of the loan is more than P500,000.00,registration should be made in the city or

municipality where the property is situated (P.D

1159, Sec. 113 & 114)

RULES:

Private motor

vehicle

Land Transportation Office (LTO)

Public motor

vehicle

Land Transportation Franchise &

Regulatory Board (LTFRB)Vessels Maritime Industry Authority (MARINA)

Aircrafts Civil Aviation Authority of the

Philippines (CAAP)

Chattel mortgage vs. Pledge

Q: Distinguish chattel mortgage from pledge.

A:

CHATTEL MORTGAGE PLEDGE

DeliveryDelivery is not necessary Delivery is necessary

Registration

Registration in the Chattel

Mortgage register is

necessary for its

enforceability

Registration in the Registry

Property is not necessary.

Security

Cannot secure future

obligations

Can secure future obligations

Law governing the sale

Procedure for the sale of the

thing given as security is

governed by Sec. 14, Act No.

1508

Art. 2112, NCC

Excess

If the property is foreclosed,

the excess goes to the debtor

If the property is sold, the

debtor is not entitled to the

excess unless otherwise

agreed.

Recovery of deficiency

The creditor is entitled to

recover the deficiency from

the debtor except if the

The creditor is not entitled to

recover the deficiency

notwithstanding any


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chattel mortgage is a security

for the purchase of property

in installments

stipulation to the contrary.

Possession

Possession remains with the

debtor

Possession is vested in the

creditor

Contract

Formal contract Real contract

Recording in a public instrument

Must be recorded in a public

instrument to bind third

persons

Must be in a public

instrument containing

description of the thing

pledged and the date thereof

to bind third persons

SUBJECT MATTER OF CHATTEL MORTGAGE

Q: What is the subject matter of chattel mortgage?

A: It must always be personal or movable property.

Q: What are the properties mortgageable under the law?

A:

1. Shares of stock in a corporation- If the owner of theshares is not domiciled in the same province where the

corporation is domiciled, the registration must be made

in both provinces.

2. An interest in business, for its personal proper capable ofappropriation;

3. Machinery treated by the parties as personal propertysubsequently installed on leased land;4. Vessels but it is essential that the mortgage is recordedin the office of the MARINA (Maritime Industry

Authority) to be effective as to third persons. It is not

necessary that it be recorded in the office of the register

of deeds;

5. Motor vehicles-which must be registered with the LandTransportation Commission (LTO) and with respect to

vehicles used for public services, it must also be

approved by the Public Service Commission (LTFRB);

6. House of mixed materials;7. House intended to be demolished for what are really

mortgaged in this case are the materials thereof;

8. House built on rented land since it did not form part ofthe land;

It is settled that an object placed on land by one who had

only a temporary right to it does not become

immobilized by attachment;

9. A house of strong materials- as long as the parties to thecontract so agree and no innocent third party will be

prejudiced thereby.

Q: What is the effect if a chattel mortgage is constituted on

machinery permanently attached on the ground?

A: It is to be considered as personal property and the chatte

mortgage constituted thereon is null and void, regardless of

who owns the land. However, the chattel mortgage is binding

on the contracting parties but cannot prejudice innocent

third parties (Makati Leasing and Finance Corp. v. Wearever

Textile Mills, Inc. 122 SCRA 296, 1983).

In accordance with Art. 2125 of the Civil Code, an

unregistered chattel mortgage is valid and binding between

the parties because registration is necessary only for the

purpose of binding third persons (Filipinas Marble Corp. v

IAC, 142 SCRA 180, 1986).

Q: What is the appropriate remedy to unbolt the machinery

preparatory to the extra-judicial foreclosure?

A:

1. Action for replevin preparatory to extra-judiciaforeclosure

2. Simply, judicially forecloseMortgagee vs. Innocent purchaser for value

In one case, the court held that chattel mortgage over a

house is valid between the contracting parties even

though it is a real property. Since it is a valid mortgage

the mortgagee can foreclose in case of default.

But, even if he has foreclosed the chattel mortgage, i

does not bind the judgment creditor of D because it

does not affect innocent 3rd parties. That conclusion

will not change even if the mortgagee sold the house to

a 3rd party, an innocent purchaser for value.

That innocent purchaser for value has a right inferio

compared to the rights of the judgment creditors of D

for the simple reason that the innocent purchaser fo

value simply steps into the shoes of the origina

mortgagee and acquires only whatever rights, title, o

interest that the mortgagee originally had over the

house and subject to the same limitations.

If the right of the right of the original mortgagee is

enforceable only against the mortgagor, the right of theinnocent purchaser for value, the assignee of the

original mortgagee is also valid and enforceable only

against the mortgagor. But, that does not prejudice o

affect innocent 3rd parties, like judgment creditors o

the mortgagor.

After-Acquired Property

Q: Can the CM cover afteracquired properties?


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A:

GR: No, because Section 7 of Act 1508 provides: A chattel

mortgage shall be deemed to cover only the property

described therein and not like or substituted property

thereafter acquired by the mortgagor and placed in the same

depository as the property originally mortgage.

XPN: Where the afteracquired property is in renewal of, or in

substitution for, goods on hand when the mortgage was

executed, or is purchased with the proceeds of the sale of

such goods.

NOTE: While pledge, real estate mortgage, or anti-chresis

may secure after-incurred obligations so long as these future

debts are accurately described, a chattel mortgage can only

cover obligations existing at the time the mortgage is

constituted.

Although the promise expressed in the chattel mortgage to

include debts that are yet to be contracted can be a bindingcommitment that can be compelled upon, the security itself,

however, does not come into existence or arise until after a

chattel mortgage agreement covering the newly contracted

debt is executed either by:

a. concluding a fresh chattel mortgage orb. by amending the old contract conformably with the

form prescribed by the Chattel Mortgage Law

Q: Does the law require a minute and specific description of

every chattel mortgage in the deed of mortgage?

A:No, it only requires that the description of the mortgaged

property be such as to enable the parties to the mortgage orany other person to identify the same after a reasonable

investigation and inquiry.

After-Incurred Obligation

Q: Can the CM cover afterincurred obligations?

A: No, the affidavit of good faith in a CM makes it obvious

that the debt referred to in the law is current, not an

obligation that is yet merely contemplated. (Acme Shoe v. CA,

G.R. No. 103576, Aug. 22, 1996)

Q: What then is the consequence of a CM covering

afterincurred obligations?

A: A promise expressed in a CM to include debts that are yet

to be contracted can be a binding commitment that can be

compelled upon. The security itself, however, does not come

into existence or arise until after a CM agreement covering

newly contracted debt is executed either by concluding a

fresh CM or by amending the old contract conformably with

the form prescribed by the CM law. The remedy of

foreclosure can only cover the debts extant at the time o

constitution and during the life of the CM sought to be

foreclosed.

Dragnet clause

Q: What is a dragnet clause?

A: It is a clause which operates as a convenience and

accommodation to the barrowers as it makes available

additional funds without their having to execute additiona

security documents, thereby saving time, travel, loan closing

costs, costs of extra legal services, recording fees etc.

It subsumes all debts of past or future origin.

Q: How do you construe such clause?

A: It must be carefully scrutinized and strictly construed

particularly where the mortgage contract is one of adhesion.

NOTE: A mortgage given to secure future advancements is acontinuing security and is not discharged by the repayment o

the amount named in the mortgage, until the full amount of

the advancements is paid. It permitted the mortgagor to take

the money as it is needed and thus avoid the necessity o

paying interest until the necessity for its use actually arises.

Remedies available in case of simple loan

Q: What does the word default cover?

A:

1. non-payment2. violation of the terms of the agreement

Q: What is the effect of stipulation prohibiting the

mortgagor from exercising acts of ownership?

A: Such agreement is void. Since the mortgagor remains the

owner of the chattel, he can sell it even if the chatte

mortgage agreement prohibits the mortgagor from selling the

chattel without the consent of the mortgagee.

The sale, however, is without prejudice to:

a. his criminal prosecution under the permanentprovisions of the RPC

b. the sale can be considered as violation of the termsof the chattel mortgage

Q: What are the remedies in case of default?

A:

1. action for collection2. foreclosure

NOTE: There is no rescission in case of simple loan.


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Q: What is the nature of these remedies?

A: They are alternative remedies. The election of one bars the

other remedies.

NOTE: The mere filing of the collection case bars the

foreclosure, regardless of the venue (whether here or

abroad).

Foreclosure

Q: What is foreclosure?

A: It is the remedy available to the mortgagee by which he

subjects the mortgaged property to the satisfaction of the

obligation to secure which the mortgage was given through

the sale of the property at public auction and the application

of the proceeds thereof to the payment of his claim.

Q: State the essence of a contract of mortgage?

A: The essence of a contract of mortgage indebtedness is that

a property has been identified or set apart from the mass of

the property of the debtor-mortgagor as security for the

payment of money or the fulfillment of an obligation to

answer the amount of indebtedness in case of default of

payment.

Q: What are the kinds of foreclosure?

A:

1. judicial foreclosure2. extra-judicial foreclosure

Judicial foreclosure

Q: What is judicial foreclosure?

A: By bringing an action for that purpose in the RTC of the

province or city where the real property or any part therof

lies.

The proceeds of the sale shall be applied to the payment of

the:

a. Costs of the sale;b. Amount due to the mortgagee;c. Claims of persons holding subsequent

mortgages in the order of their priority; and

d. Balance if any shall be paid to the mortgagor.Extra-judicial foreclosure

Q: What is Extra-judicial foreclosure?

A: A mortgage may be foreclosed extra judicially where there

is inserted in the contract, a clause giving the mortgagee the

power, upon default of the debtor, to foreclose the mortgage

by an extrajudicial sale of the mortgaged property.

Q: What is the remedy if the mortgagee cannot obtain

possession of mortgaged property?

A: If a mortgagee cannot obtain possession of a mortgaged

property for its sale on foreclosure, the mortgagee cannot

take the property by force but must institute the appropriate

action in the court.

a. He must bring a civil action for replevin either torecover such possession as preliminary step on the

extra-judicial foreclosure of the chattel mortgage or

b. judicial foreclosure.NOTE: Foreclosure can be:

1. public sale2. private sale, if stipulated by the parties

Two-bidder Rule

Q: What is the so-called Two-bidder rule?

A: There must be at least 2 participating bidders for the

auction sale to be valid.

Q: Does the two-bidder rule apply to chattel mortgage?

A: No, it only applies to pledge.

Twin Periods Rule

Q: What is the twin periods rule?

A:In case of the equity of redemption, the mortgagor has the

right to prevent the sale by paying the debt within 30 days

from default. So it is a grace period that the law affords in

favor of the mortgagor. Within the 30 days grace period there

must be a Notice of salegiven to the mortgagor.

Also, there must be a 10-day notice to the mortgagor prior to

the sale.

Claim of deficiency

Q: Can the mortgagee claim in case of deficiency?

A:

GR: Yes, mortgagee is entitled to recover deficiency.

XPNS:

1. Contrary stipulation2. Transactions covered by Recto Law (Art. 1484, NCC)


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3. In accommodation mortgages, the accommodationmortgagor is liable only to the extent of the value of

the mortgaged property;

4. Due to death of mortgagor.Q: In case of pledge, is a stipulation to recover deficiency

valid?

A: No, it is void.

Q: Does the claim for deficiency prescribe?

A: A mortgage action prescribes in 10 years from the time the

right of action accrues, that is, from the time the mortgagor

defaults in the payment of his obligation to the mortgagee

and not from the date of the execution of the mortgage

contract.

Accommodation mortgagor

Q: Who is an accommodation party?

A: He is a person who has signed the instrument as maker,

drawer, acceptor, or indoser without receiving value therefor,

and for the purpose of lending his name to some other

persons. He is liable on the instrument notwithstanding that

such holder at the time of taking the instrument knew such

person to be only an accommodation party. The

accommodation party has right, after paying the holder, to

obtain reimbursement from the party accommodated since

the relation between them is in effect that of principal and

surety, the accommodation party being the surety.

NOTE: Ordinarily, the debtor is also the mortgagor, but it is

also possible that a 3rd party may constitute a mortgage in

favor of the mortgagor. This arrangement is valid even if the

accommodating party does not receive anything.

Q: What is the extent of the liability of the accommodation

mortgagor?

A: His liability is limited only to the value of the property he

secured for another.

Death of mortgagor

Q: What is the remedy in case of death of the mortgagor?

A:

1. File a money claim against the estate (whether realproperty or personal property). If the mortgagee

chose this remedy, he is deemed to have abandoned

the mortgage and he lost priority.

2. To foreclose the mortgage by ordinary action incourt and recover any deficiency against the estate

in administration; and,

3. To foreclose without action at any time within theperiod allowed by the statute of limitations

Transactions covered by Recto Law

(Articles 1484 & 1485 of the civil code Civil Code)

ART. 1484. In a contract of sale of personal property the price of which is

payable in installments, the vendor may exercise any of the following

remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to

pay;

(2) Cancel the sale, should the vendee's failure to pay cover two

or more installments;

(3) Foreclose the chattel mortgage on the thing sold if one has

been constituted, should the vendee's failure to pay cover two or

more installments. In this case, he shall have no further action

against the purchaser to recover any unpaid balance of the price

Any agreement to the contrary shall be void.

Q: When does the Recto Law apply?

A:

1. Sale of personal property, the price of which ispayable in two or more installments

2. Contracts purporting to be leases of personaproperty with option to buy (Art. 1485, NCC)

Q: What are the requisites for the sale to be covered under

the Recto Law?

A:

1. Sale of personal property2. Payable in installments3. CM constituted over the same property

Q: Under the Recto Law, what are the remedies of theunpaid seller?

A:

1. Exact fulfillment of the obligation, should the vendeefail to pay (action for specific performance)

2. Cancel the sale, should the vendees failure to paycover two or more installments (rescission); or

3. Foreclose the chattel mortgage on the thing soldshould the vendees failure to pay cover 2 or more

installments.

Q: Can the unpaid seller avail of all remedies?

A:No, the remedies are alternative.

The three remedies under this article, available to the vendo

who has sold personal property on the installment plan, are

alternative, not cumulative. In other words, if the vendor has

elected to avail himself of any of the remedies, he is deemed

to have renounced the others (Tolentino, Vol.V).

Q: What is the reason for this rule?


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A: According to Sen. Tolentino, in case the vendor

elects to foreclose the mortgage, if one has been given

on the property, he is not obliged to return to the

purchaser the amount of the installment already paid

should there be an agreement to that effect, and it is

not unconscionable.

NOTE: In all proceedings for the foreclosure of chattelmortgages, executed on the chattels, which have been

sold on the installment plan, the mortgagee is limited to

the property only in the mortgage.

Thus, the principal object of Article 1484 was to remedy

the abuses committed in connection with the

foreclosure of chattel mortgages. This prevents

mortgagees from seizing the engaged property, buying

it at foreclosure for a low price and then bringing suit

against the mortgagor for the deficiency judgment. The

almost invariable result of this procedure was that themortgagor found himself minus the property and still

owing practically the full amount of the original

indebtedness.

NOTE: According to Dean Divina, the reason for this rule is to

encourage the mortgagee/creditor to make a reasonable

bid. If he bids at a low price, the company will record on its

book of accounts the deficiency as a loss. To prevent this

situation, the mortgagee will bid at a reasonable amount.

Art. 1484 not applicable in case mortgagee is not the vendor

Q: Does Article 1484 apply as against a mortgagee who is

not the venodor of the chattel mortgaged?

A: Art. 1484 of the NCC does not apply as against a

mortgagee who is not the vendor of the chattel mortgaged.

Thus, a suit for replevin is not equivalent to an exercise of the

remedy of foreclosure under Art. 1484 of the NCC. Hence, a

vendor-mortgagee is not barred from making a claim for

specific performance against the buyer-mortgagor, by the

mere fact that the former was already able to secure a writ of

replevin.

Rescission

NOTE: In rescission, there should be mutual restitution

except in case of stipulation of forfeiture of prior payments.

Replevin

Q: What is replevin?

A: It is the appropriate action to recover possession

preliminary to the extra-judicial foreclosure of a chatte

mortgage.

Q: Who can institute replevin suit?

A: It is not only the owner but also a person entitled to the

possession of the property can institute a replevin suit.

Q: In case of recovery of property through replevinpreparatory to foreclosure, is it a bar to avail of other

remedies?

A: Recovery of property through a replevin case preparatory

to foreclosure will not bar the other remedies if there was no

actual foreclosure. If sellermortgagee opts to file an action

for specific performance, he shall be deemed to have waived

his right as a mortgagee but may still levy on the mortgaged

property (on execution).

REPLEVIN

VOUNTARY INVOLUNTARYNot akin to foreclosure

Ex: surrender of the property

Not a bar to avail of other

remedies

XPN: if possession is in view

of dacion en pago

Akin to foreclosure; a bar to

other remedies which are

alternative

Q: Is the mortgagees letter informing the mortgagor of his

intent to foreclose is already considered a foreclosure of the

chattel?

A: No. A mere offer by the mortgagor to surrender the

chattel, not accepted by the mortgagee, does not preclude

the mortgagee from bringing suit to recover the balance o

the purchase price.

Q: Is mere demand sufficient to foreclose the object?

A: A mere demad to surrender the object which is not heeded

by the mortgagor will not amount to foreclosure, but the

repossession thereof by the vendor-mortgagee would have

the effect of foreclosure (Borbon II v. Servicewide Specialist,258 SCRA 634, 1996).

Q: Is a mortgagee of a personal property sold on

installments, after taking possession of the property, legally

obligated to foreclose the chattel mortgage and sell it at

public auction?

A: Having opted to foreclose the chattel mortgage, GAMI can

no longer cancel the sale. The three remedies of the vendor

in case the vendee defaults, in a contract of sale of persona


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property the price of which is payable in installment under

Article 1484 of the Civil Code, are alternative and cannot be

exercised simultaneously or cumulatively by the vendor-

creditor (Esguerra v. CA, 1989).

Q: What are included in the term debt which are

extinguished under the Recto Law?

A:

1. Principal2. Interest3. Cost of collection

Q: Who bears the necessary expenses incurred in the

prosecution by the mortgagee of the action for replevin to

regain possession of the chattel?

A:It is the mortgagor who bears such expenses.

Q: What does recoverable expense include?

A: It includes expenses properly incurred in affecting seizureof the chattel and reasonable attorneys fees in prosecuting

the action for replevin (Agustin v. CA, 271 SCRA 463, 1997).

NOTE: The cost of repossession which is brought by the

unjustified refusal of the mortgagor can still be recovered and

is not deemed extinguished.

Additional security

Q: What is the effect of the foreclosure as regards the

personal property which are not subject of the sale but are

given as additional security?

A: Under Art. 1484 of the NCC, the vendor of personal

property sold on installment who chooses the remedy of

foreclosure of the chattel mortgage is limited to the

foreclosure of the items sold only and not to the other items

not subject of the sale although also given as additional

securitty. The foreclosure of the latter is null and void (Ridad

v. Filipinas Investment and Finance Corporation, 120 SCRA

246, 1983).

All other additional securities are barred once the mortgagee

chose to foreclose. This also bars him from going against the

surety or guarantor.

Ridad v. Filipinas Investment and Finance Corporation

Having chosen to foreclose the chattel mortgage, and

bought the purchased vehicles at the public auction as

the highest bidder, it submitted itself to the

consequences of the law as specifically mentioned, by

which it is deemed to have renounced any and all rights

which it might otherwise have under the promissory

note and the chattel mortgage as well as the payment

of the unpaid balance.

Under the law, should the vendor choose to foreclose

the mortgage, he has to content himself with the

proceeds of the sale at the public auction of the chattel

which were sold on installment and mortgaged to him

and having chosen the remedy of foreclosure, he

cannot nor should he be allowed to insist on the sale ofthe house and lot of the vendees, for to do so would be

equivalent to obtaining a writ of execution against them

concerning other properties which are separate and

distinct from those which were sold on installment. This

would indeed be contrary to public policy and the very

spirit and purpose of the law, limiting the vendor's right

to foreclose the chattel mortgage only on the thing

sold.

IMPORTANT: SIMPLE LOAN v. RECTO LAW

SIMPLE LOAN RECTO LAW

Taking of property through replevin

The taking of possession by

replevin is not equivalent to

foreclosure

The taking of possession by

replevin is tantamount to

foreclosure which bars the

action for specific

performance

Remedies

1. Foreclosure2. Action for specific

performance

1. Action for specificperformance;

2. Cancellation orescission; or

3. Foreclose thechattel mortgage on

the thing sold

Suggested remedy

Foreclose! Dont even think

about it because you have a

lien in such case

Weigh the options

Recovery of deficiency

You can recover for

deficiency. And the right to

recover deficiency may be

enforced against any one of

the solidary co-debtors, ifany, and is not limited to the

mortgagor for the reason

that the chattel mortgage is

just a security, not a mode of

payment.

Precludes the mortgagee to

recover the deficiency

Effect of election of action for collection

Election of action for

collection is a bar to the

other remedy

If it is a transaction falling

under the Recto Law, its only

when the mortgagee actually

forecloses or elects the


16/62



remedy of foreclosure that

he is subject to the rule that

he cannot recover any

unpaid claims.

So if he files an action for

collection and obtained

judgment then he can levy

any and all properties of the

mortgagor until the debt is

paid or satisfied.

NOTE: In case of transactions under the Recto Law, it is only

when there has been a foreclosure of the chattel mortgage

that the vendee-mortgagor would be permitted to escape

from deficiency liability. Hence, if the case is one for specific

performance, even when this action is selected after the

vendee has refused to surrender the mortgaged property to

permit n extra-judicial foreclosure, the property may still be

levied on execution.

Equity of redemption

Q: Is there a right of redemption in case of personal

properties?

A: None.

Q: When is equity of redemption may be exercised?

A: Equity of redemption may be exercised by the mortgagor

after his default in the performance of his obligation but

before the sale of the mortgaged property or confirmation of

sale.

Q: When is the right of redemption available?

A: The SC said that there are only 3 cases where there is a

right of redemption. And they do not involve personal

property. They only pertain to real property. There are only 3:

1. Extrajudicial foreclosure of Real Estate Mortgageunder Act 3135

2. Execution sale of a real property under the Rule 39of Rules of Court

3. Judicial foreclosure of a real estate mortgage, if themortgagee is a bank or a credit institution

NOTE: So the mortgagee cannot foreclose right away after

default. He has to give the mortgagor 30 days grace period.

That is what you call equity of redemption. The right of the

mortgagor to prevent the sale by paying the debt within 30

days from default. It is only when he failed the debt that

there can be actual foreclosure of chattel mortgage.

BANKING LAWS:

GENERAL BANKING ACT

BANK

Q: What are banks?

A:Entities engaged in the lending of funds obtained through

deposits from public.

Elements

Q: What are the elements determinative of a bank?

A:

1. Must be authorized by law;2. Accepts fund, in the form of a deposit, from the

public; and (there are at least 20 despositors)

3. Lends money to the public.NOTE: The fourth element under the old code, habituality

has been deleted.

Q: Is a transaction involving purchase of receivables

considered as banking transaction?

A: If it is a transaction not involving a loan but purchase

of receivables at a discount, it is well within the purview

of "investing, reinvesting or trading in securities" which an

investment company is authorized to perform and does not

constitute a violation of the General Banking Act.

This transaction is known as a deposit substitute.

NOTE: What is prohibited by law is for investment companies

to lend funds obtained from the public through receipts of

deposit, which is a function of banking institutions. But here

the funds supposedly "lent" to petitioners have not been

shown to have been obtained from the public by way of

deposits, hence, the inapplicability of banking laws (Baas v

Asia Pacific Finance Corp., 2000).

Paluwagan

Q: Describe the concept ofpaluwagan?

A: Even if there are more than 20 members, such is not

considered as banks: the funds are not obtained in the form

of deposits. It is for savings among its members.

Deposit-taking activity

Q: What is a deposit-taking activity?


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A: The funds given to the bank gives rise to a creditor-debtor

relationship. The ownership of the funds is thus transferred

to the banks and the latter are free to use the funds as it

pleases.

Deposit substitutes

Q: What are deposit substitutes?

A: It is an alternative form of obtaining funds from the public,

other than deposits, through the issuance, endorsement, or

acceptance of debt instruments, for the borrower's own

account, for the purpose of relending or purchasing of

receivables and other obligations. These instruments may

include, but need not be limited to, bankers acceptances,

promissory notes, participations, certificates of assignment

and similar instruments with recourse, and repurchase

agreements.

Quasi-banks

Q: What are quasi-banks?

A: These are entities engaged in the borrowing of funds

through the issuance, endorsement or assignment with

recourse or acceptance of deposit substitutes for purposes of

re-lending or purchasing of receivables and other obligations.

NOTE: Quasi-banks are also under BSP. They have to secure a

license from the BSP.

Banks vs. Quasi-Banks

BANKS QUASI-BANKS

Obtains funds from the

public in the form of deposit

Refer to entities engaged in

the borrowing of funds

through the issuance,

endorsement or assignment

with recourse or acceptance

of deposit substitutes for

purposes of relending or

purchasing of receivables and

other obligations

Deposits are insured with

PDIC

Not insured with PDIC

There is creditor-debtor

relationship

No creditor-debtor

relationshipMust secure from the Bangko Sentral ng Pilipinas (BSP)

Quo Warranto proceedings

Q: What is the appropriate proceeding to question a

corporation who performs functions of a bank without the

license from BSP?

A: Any corporation who does these functions and activities

without a corresponding license or approval from the SEC can

be ousted by way of quo warranto proceedings (Republic of

the Philippines v. Security Credit and Acceptance Corp, et al.

1967).

Classification of Banks

1. Universal banks can exercise the powers of aninvestment house and invest in nonallied enterprises

and have the highest capitalization requirement.

Capital: 4.950 billion

2. Commercial banks Ordinary banks governed by the GBLwhich have a lower capitalization requirement than

universal banks and can neither exercise the powers of

an investment house nor invest in nonallied enterprises.

Capital: 2.4 billion

3. Thrift banksThese are:a) Savings and mortgage banks;

b) Stock savings and loan associations;c) Private development banks, which are primarily

governed by the Thrift Banks Act (R.A. 7906).

4. Rural banks5. Cooperative banks6. Islamic banks7. Other classification of banks as determined by the

Monetary Board of the Bangko Sentral ng Pilipinas.

Bank power and liabilities

Universalbank a.

Powers of a commercial bankb. Power of an investment housec. Power to invest in the equities o

allied enterprises

d. Power to invest in the equities onon-allied enterprises

Commercial

bank

a. General power incident to acorporation

b. All such powers as may benecessary to carry on the business

of commercial banking such as

(ADD EBC):

1. Accepting drafts and issuing LCs2. Discounting and negotiating

promissory notes, drafts, bills

of exchange, and othe

evidence of indebtedness

3. Accepting or creating demanddeposits

4. Receiving other types odeposit and deposit substitute

5. Buying and selling foreignexchange and gold or silve

bullion


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6. Acquiring marketable bondsand other debt securities and

extending credit

c. Power to invest in the equities ofallied enterprises

NOTE: Whatever a commercial bank can do, a universal bank

can also perform

Allied and non-allied transactions

Q: What do you mean by to invest in equity?

A: It means to be a stockholder of another corporation

Q: What are allied or related undertakings?

A: Any undertaking which is about money such as:

a. Foreign exchangeb. Leasingc. Investment companyd. Insurance companye. Warehousing

NOTE: An example of non-allied undertaking is cargo

operations.

Q: What are the kinds of underwriting agreements?

A:

FIRM COMMITMENT BEST EFFORTS

Those which are considered

as sold

underwriter does not

guarantee that it will sell the

entire

The underwriter purchases

outright the securities and

then resells the same

The underwriter merely sells

for commission

Banking and incidental powers

Q: What are the other services that a bank may offer?

A:

1. receive in custody funds, documents, and othervaluable objects

2. act as financial agent and buy and sell for theaccount securities

3. make collections and payments for the account ofothers

4. perform such other services not incompatible withbanking business and;

5. upon prior approval of the BSP, act as manageradviser of investment management accounts

6. rent out safety deposit boxRenting out of deposit box

Q: Is a safety deposit box a form of deposit or lease?

A: The contract for the use of a safe deposit box should be

governed by the law on lease.

Under the old banking law, a safety deposit box is a specia

deposit. However, the new General Banking Law, while

retaining the renting of safe deposit box as one of the

services that the bank may render, deleted reference to

depository function.

Sia v. Court of appeals

Justice Edgardo Paras was of the opinion that the contract fo

the use of safety deposit box is governed by the law on lease

The Supreme Court did not agree with him and said that

contract for the use of safety deposit box is a special kind o

deposit. In other words the bank must exercise the due

diligence required of depository in safekeeping or preserving

of the object inside the safety deposit box.

The basis for this is that under the Old General Banking Act, it

provided that in renting out safety deposit boxes the bank

shall act as a depositary. Because the law itself provides for

this SC concluded that the contract for the use of safety

deposit box is governed by deposits.

New Law retains the authority of the Bank to rent out safety

deposit box but silent on being a depositary.

Power to acquire real properties

Q: Can the bank acquire real property in settlement of a civi

liability arising from a crime?

A: Generally, no.

XPNS: It can only acquire real property when:

a. it is needed for business (Business)b. as shall be conveyed to it in satisfaction of debts

previously contracted in the course of its

dealings (Dacion en pago)

c. as shall be mortgaged to it in good faith by wayof security of debts (foreclosure)

d. as it shall purchase at sales under judgments,decrees, mortgages, or trust deeds (executionsale to satisfy judgment)

NOTE: Any property acquired under b-d should be disposed

of within 5 years from the acquisition because the bank is not

a realty company.

Q: Can banks acquire ownership of real property by virtue of

the deed of transfer executed by its former employee in

satisfaction of a civil liability arising from the crimina

offense?


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A: Abank cannot acquire ownership of real property by virtue

of the deed of transfer executed by its former employee in

satisfaction of a civil liability arising from the criminal offense

since debts referred to in the law are only those resulting

from previous loans and similar transactions made or entered

into by a bank in the ordinary course of its business.

Diligence required of banks

Q: What is the degree of diligence required of banks in

handling deposits?

A: Extraordinary diligence. The appropriate standard of

diligence must be very high, if not the highest, degree of

diligence; highest degree of care (PCI Bank vs. CA, 350 SCRA

446, PBCom vs. CA, 2001)

Q: Does the bank need to exercise extraordinary diligence

in all commercial transactions?

A: No, the degree of diligence required of banks, is more thanthat of a good father of the family where the fiduciary nature

of their relationship with their depositors is concerned, that

is, depositary of deposits. But the same higher degree of

diligence is not expected to be exerted by banks in

commercial transactions that do not involve their fiduciary

relationship with their depositors, such as sale and issuance

of foreign exchange demand draft. (Reyes v. CA, 2001)

Q: In what transactions this highest degree of care or

diligence is applied?

A: This applies only to cases where banks are acting in their

fiduciary capacity, that is, as depository of the deposits of

their depositors. (Reyes v. CA, G.R. No. 118492, 2001)

NOTE: The General Banking Law of 2000 requires banks the

highest degree of standards of integrity and performance.

Hence, a bank is under obligation to treat the accounts of its

depositors with meticulous care (Philippine Savings Bank v.

Chowking Food Corporation, 2008).

Q: What is the effect when the teller gave the passbook to a

wrong person?

A: If the teller gives the passbook to the wrong person, theywould be clothing that person presumptive ownership of the

passbook, facilitating unauthorized withdrawals by that

person. For failing to return the passbook to authorized

representative of the depositor, the bank presumptively

failed to observe such high degree of diligence in

safeguarding the passbook and insuring its return to the party

authorized to receive the same. The banks liability, however,

is mitigated by the depositors contributory negligence in

allowing a withdrawal slip signed by authorized signatories to

fall into the hands of an impostor. (Consolidated Bank and

Trust Corporation vs. CA, 2003).

Q: Did a bank exercise the diligence required when the

pretermination of the account is allowed despite

discrepancies in the signature and photograph of the person

claiming to be the depositor and failure to surrender the

original certificate of time deposit?

A: No. The bank is negligent because the depositor did not

present the certificate of deposit

Q: Is the bank liable when an employee encashed a check

without the requisite of endorsement?

A: Yes. The fiduciary nature of the relationship between the

bank and the depositors must always be of paramount

concern. (Philippine Savings Bank vs. Chowking, 2008).

NOTE: In a checking transaction, the drawee bank has the

duty to verify the genuineness of the signature of the drawer

and to pay the checks strictly in accordance with the drawersinstructionsto the named payee in the check. Otherwise

the drawee will be violating the instructions of the drawer

and it shall be liable for the amount charged to the drawers

account. The drawee bank had the responsibility to ascertain

the regularity of the endorsements, and the genuineness of

the signatures on the checks before accepting them fo

deposit. Thus, banks are minded to treat their customers

accounts with utmost care, confidence, and dishonesty (PNB

v. Rodriguez, et al., 566 SCRA 513, 2008).

Nature of bank funds and bank deposits

Q: What law governs bank deposits?

A: The law on loans. Creditor and debtor relationship is

created between the Bank and the depositors.

Q: What is the nature of a bank deposit?

A:All kinds of bank deposits are loan. The bank can make use

as its own the money deposited. Said amount is not being

held in trust for the depositor nor is it being kept for

safekeeping.

Bank not a trustee

Q: Is a bank a trustee?

A: No, the fiduciary nature of a bank-depositor relationship

does not convert the contract between the bank and its

depositors from a simple loan to trust agreement. Failure by

the bank to pay the depositor is failure to pay a simple loan

and not a breach of trust.


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Mandamus will not lie

Q: In the enforcement of obligations concerning deposit, will

the remedy of mandamus lie?

A: No, because all kinds of deposit are loans. Thus, the

relationship being contractual in nature, mandamus cannot

be availed of because mandamus will not lie to enforce the

performance of contractual obligations.

Q: After procuring a checking account, the depositor issued

several checks. He was surprised to learn later that they had

been dishonored for insufficient funds. Investigation

disclosed that deposits made by the depositor were not

credited to its account. Is the bank liable for damages?

A: Yes, the depositor expects the bank to treat his account

with utmost fidelity, whether such account consist only of a

few hundred pesos or of millions. The bank must record every

single transaction accurately, down to the last centavo, and

as promptly as possible. This has to be done if the account isto reflect at any given time the amount of money the

depositor can dispose of as he sees fit, confident that the

bank will deliver it as and to whomever he directs. A blunder

on the part of the bank, such as the dishonor of the check

without good reason, can cause the depositor not a little

embarrassment if not also financial loss and perhaps even

civil and criminal litigation.

Stipulation of interest

NOTE: Circular 905 suspended the Usury Law, but it has

not been repealed.

Circular 905 lifted the ceiling on the interest rate. The

bank and its depositors are therefore free to stipulate

on the rate of interest for loans. Nev

hizon notes - special commercial laws

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