2013 and 2014

Supreme Court Decisions on Mercantile Law

By: JACINTO D. JIMENEZ

ANY FORM OF REPRODUCTION WITHOUT THE WRITTEN CONSENT OF THE AUTHOR IS PROHIBITED AND A VIOLATION OF THE INTELLECTUAL PROPERTY CODE

I. NEGOTIABLE INSTRUMENTS LAWS

On October 10, 2002, a check in the amount of P1,000,000.00 postdated October 9, 2003 and drawn against the account of Marciano Lilia was deposited with the Allied Banking Corporation. It sent the check for clearing to the Bank of the Philippine Islands through the Philippine Clearing House. The Bank of the Philippine Islands cleared the check. The payee of the check cleared the account and withdrew all the funds. When Marciano Lilia discovered that P1,000,000.00 was debited from his account, he complained. The Bank of the Philippine Islands credited his account with the amount. Allied Banking Corporation contended that the Bank of the Philippine Islands should bear the loss on the ground that it was negligent because of its failure to return the check within twenty-four hours as provided in the Clearing House Rules and Regulations. HELD: Both parties were negligent in the encashment of the check postdated one year from its presentment. The proximate cause of the encashment of the check was the negligence of the Bank of the Philippine Islands, who cleared the postdated check sent to it through the clearing facility without observing its own verification process. If it had only exercised ordinary care in the clearing process, it could have easily noticed the glaring defect upon seeing the date written on its face. Notwithstanding the antecedent negligence of Allied Banking Corporation in accepting the postdated check for deposit, it can seek reimbursement from the Bank of the Philippine Islands. The demands of substantial justice are satisfied by allocating 60% of the damage to Allied Banking Corporation and 40% to Bank of the Philippine Islands. (Allied Banking Corporation vs. Bank of the Philippine Islands, 692 SCRA 186)

II. TRUST RECEIPTS LAW

1. Loan Contract

The Spouses Quirino dela Cruz and Gloria dela Cruz were engaged in the sale of fertilizers and agricultural chemical products. Gloria dela Cruz applied for and was granted by Planters Products, Inc. a credit line with trust receipts as collateral. Later on, she signed the two trust receipts. She then obtained fertilizers and agricultural chemical products by submitting customer order forms. Planters Products, Inc. filed a case for a sum of money against the Spouses Quirino dela Cruz and Gloria dela Cruz for their failure to pay for the products they ordered. HELD: The contract did not involve a trust receipt transaction, such that its breach would render Gloria dela Cruz criminally liable for estafa. Under Section 4 of the Trust Receipts Law, the sale of goods by a person in the business of selling goods for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, or who sells the goods to the buyer on credit, retaining title or other interest, as security for the payment of the purchase price, does not constitute a trust receipt transaction.

When both parties enter into an agreement knowing that the return of the goods subject of the trust receipt is not possible and without any fault on the part of the trustee, it is not a trust receipt

transaction. The only obligation would be the delivery of the proceeds of the sale. The transaction becomes a mere loan, where the borrower is obliged to pay the credit and the amount spent for the purchase of the goods. Nevertheless, this does not erase the liabilities of the Spouses Quirino dela Cruz and Gloria dela Cruz. (Dela Cruz vs. Planters Products, Inc., 691 SCRA 28)

A trust receipt signed for the purchase of materials which will not be resold but will be used in the construction business is a simple contract of loan. (Hur Tin Yang vs. People, 703 SCRA 606)

2. Loss of Goods

The loss of the crops covered by a trust receipt due to a typhoon does not extinguish the obligations of the entrustee. (De la Cruz vs. Planters Products, Inc., 691 SCRA 28)

III. INSURANCE CODE

1. Fire Insurance

On May 13, 1996, Malayan Insurance Company, Inc. issued a fire insurance policy for the machineries and equipment of PAP Company, Ltd. located at the Sanyo Building at Rosario, Cavite. The policy was renewed for one year on an “as is” basis. On October 12, 1997, the machineries and equipment were totally lost because of a fire. PAP Company, Ltd. filed a claim against the fire insurance policy. Malayan Insurance Company, Inc. denied the claim because in September 1996, it transferred the machineries and equipment to the Pace Factory at Rosario, Cavite. This was a material fact that was concealed from it. HELD: The renewal policy provides that the removal of the insured properties to any building or place without the consent of Malayan Insurance Company, Inc. would free it from any liability. The change of location increased the hazard to which the properties were exposed. The old location was occupied by a factory of automotive and computer parts of PAP Company, Ltd. and a factory of zinc and aluminum die cast, plastic glass for copying machine with a rate of 0.449%. The Pace Factory repacked silicone sealant to plastic cylinder with a rate of 0.65%. The rate was increased from 0.449% to 0.637%. An insurer can rescind an insurance policy if the following conditions are present:

1) The policy limits the use or conditions of the thing insured;

2) There is an alteration in the use or condition;

3) The alteration is without the consent of the insurer;

4) The alteration is made by means within the control of the insured; and

5) The alteration increases the risk of loss. (Malayan Insurance Company, Inc. vs. PAP Company, Ltd., 703 SCRA 314)

2. Life Insurance

If a life insurance policy has been in force for at least two years from its date of issuance, the insurance company can no longer deny a claim on the ground of concealment or misrepresentation by the insured. (Manila Bankers Life Insurance Corporation vs. Aban, 702 SCRA 417)

3. Motor Vehicle Insurance

Arsenia Sonia Castor insured her car with Alpha Insurance and Surety Company against loss or damage. When she instructed her driver to bring the car to the auto shop for a tune-up, the driver no longer returned with the car. She filed a claim against the insurance policy for the loss of the car. Alpha Insurance and Surety Company denied it on the ground that one of the exceptions under the policy was any malicious damage caused by a person in the service of the insured. Arsenia Sonia Castor argued that the exception referred to damage to the car. HELD: The insurance policy insured for loss due to theft. The theft perpetrated by the driver is not an exception to the coverage of the policy. The exception refers only to malicious damage, or injury to the car. It does not contemplate loss. (Alpha Insurance and Surety Company vs. Castor, 704 SCRA 550)

4. Health Insurance

Mitsubishi Motors Philippines Corporation and Mitsubishi Motors Philippines Salaried Employees Union entered with a collective bargaining agreement. The collective bargaining agreement provided that the company would pay the hospitalization expenses of dependents of the employees subject to certain limitations. The company would obtain group hospitalization insurance coverage or assume the liability as self-insurer and payment would be made directly to the hospital and the doctors.

The dependents of three employees were hospitalized. The dependents were covered by personal health insurance. The personal health insurance companies paid a portion of the medical expenses. The company deducted from its payments the amounts paid by the personal health insurance companies. HELD: The condition that payment by the employees should be made directly to the hospital and doctor implies that the company is only liable to pay medical expenses actually shouldered by the dependents of the employees. It does not include amounts paid by the health insurance providers. (Mitsubishi Motors Philippines Salaried Employees Union vs. Mitsubishi Motors Philippines Corporation, 698 SCRA 599)

5. Subrogation

Vector Shipping Corporation was the operator of the tanker M/T Vector, while Francisco Soriano was its registered owner. Caltex Philippines, Inc. chartered M/T Vector to transport petroleum. The cargo was insured with American Home Assurance Company. On December 20, 1987, M/T Vector collided with another vessel. Both vessels were sank. The entire cargo of petroleum was lost. On July 12, 1988, American Home Assurance Company indemnified Caltex Philippines, Inc. for the loss of the petroleum. On March 5, 1992, it sued Vector Shipping Corporation and Francisco Soriano for reimbursement. The Regional Trial Court dismissed the case on the ground of prescription, because it was based on a quasi-delict which occurred on December 20, 1987 and the action was filed after four (4) years. HELD: The cause of action was based upon an obligation created by law, because it is based on the right of subrogation of the insurer by virtue of Article 2207 of the Civil Code. It comes under Article 1194(2) of the Civil Code and prescribes in ten years. (Vector Shipping Corporation vs. American Home Assurance Company, 700 SCRA 389)

IV. INTELLECTUAL PROPERTY CODE

1. False Designation of Origin

The trademarks “Hipolito & Sea Horse & Triangular Device” and “Fauna” for kerosene burners were owned by Casa Hipolito S.A. Portugal. They were assigned by the owner to Vicente Lo in all countries

except those in Europe and America. He filed a case against Chester Uy, Winston Uychiyong and Cherry Uyco-Ong for violation of Section 169 in relation to Section 170 of the Intellectual Property Code. He claimed that Wintrade, which was owned by them, used the trademark without his authorization for kerosene burners manufactured in the Philippines. The trademark and the phrases “Made in Portugal” and “Original Portugal” appeared in the wrappers of the kerosene burners. HELD: The owners of Wintrade placed the words “Made in Portugal” and “Original Portugal” with the trademarks in products produced in the Philippines with no authority from Casa Hipolito S.A. Portugal. The law prohibits a person from profiting from the business reputation owned by another and from deceiving the public as to the origins of the products. (Uyco vs. Lo, 689 SCRA 378)

2. Dissimilarity of Trademarks

Levi Strauss and Company registered as trademarks for jeans a leather patch showing two horses pulling a pair of pants and an arcuate pattern with the inscription “LEVI STRAUSS & CO.” Victorio Diaz owned tailoring shops. He produced jeans with the label “LS Jeans Tailoring” and a leather patch with two buffaloes. He was charged with infringement of the trademarks of Levi Strauss and Company. HELD: The trademark of Victorio Diaz is visually and aurally different from those of Levi Strauss and Company. The letters “LS” cannot be mistaken as a derivative of “LEVI STRAUSS”, because it is connected to the word “TAILORING”. Likewise, a horse and a buffalo are different animals which an ordinary customer can easily distinguish. (Diaz vs. People, 691 SCRA 139)

3. Ownership of Trademark

Renaud Cointreau & Cie, a French partnership, applied to register “Le Cordon Bleu & Device” as a trademark of a culinary school. Ecole de Cuisine Manille, Inc. opposed on the ground that it had been using it as a trademark in the Philippines since 1948. Renaud Cointreau & Cie argued that it is the true and lawful owner of the trademark, as Le Cordon Bleu is a culinary school of worldwide acclaim established in France in 1895. HELD: Foreign trademarks which are not yet registered in the Philippines are accorded protection against infringement and unfair competition under Articles 16bis and 8 of the Paris Convention, to which the Philippines and France are both signatories. Renaud Cointreau & Cie has been using the trademark in France since 1893. In fact, the foundress and the directress of Ecole de Cuisine Manille, Inc. both trained in Le Cordon Bleu. (Ecole de Cuisine Manille, Inc. vs. Renaud Cointreau & Cie, 697 SCRA 345)

Birkenstock Orthopaedie GMBH and Co. KG applied for the registration of various Birkenstock trademarks for footwear. Action on its application was suspended because of the registration of the trademark Birkenstock and device in the name of Shoe Town International and Industrial Corporation, the predecessor-in-interest of Philippine Expo Marketing Corporation. However, because of the failure of Philippine Expo Marketing Corporation and its predecessor-in-interest to file a tenth year declaration of the actual use, the registration was cancelled. Philippine Expo Marketing Corporation opposed the application of Birkenstock Orthopaedie GMBH and Co. KG on the ground it and its predecessor-in-interest had been using the trademark for more than sixteen years. HELD: The failure to file a declaration of actual use within the requisite period resulted in the automatic cancellation of the registration of a trademark. Such failure is tantamount to abandonment of any right of the registrant over his trademark.

Besides, Birkenstock Orthopaedie GMBH and Co. KG is the true and lawful owner of the trademark Birkenstock. Birkenstock was first adopted in Europe in 1774 by Johann Birkenstock, a shoemaker, for footwear and thereafter by numerous generations of his kins until it became the entity known as Birkenstock Orthopaedie GMBH and Co. KG. (Birkenstock Orthopaedie GMBH and Co. KG vs. Philippine Shoe Expo Marketing Corporation, 710 SCRA 474)

4. Infringement of Trademark

Petron Corporation produces liquefied petroleum gas. It is the registered owner of the trademark “GASUL” and GASUL cylinders used for its products. Pilipinas Shell Petroleum Corporation is the authorized user in the Philippines of the trademark “SHELLANE” used in the production and sale of SHELLANE liquefied petroleum gas.

Operatives of the National Bureau of Investigation brought empty liquefied petroleum gas cylinders bearing the trademarks SHELLANE and GASUL to Republic Gas Corporation, which refilled them. Money was then given for the refilling of the empty cylinders.

A senior agent of the National Bureau of Investigation applied for search warrants. The Regional Trial Court of Manila issued two search warrants. Operatives of the National Bureau of Investigation searched the premises of Republic Gas Corporation and seized empty and filled SHELLANE and GASUL cylinders. The officers and the employees of the Republic Gas Corporation were charged with infringement of trademark and unfair competition.

HELD: The officers and employees of Republic Gas Corporation committed infringement of trademark when they refilled, without the consent of Pilipinas Shell Petroleum Corporation and Petron Corporation, the liquefied petroleum gas containers bearing their registered trademarks. The acts will confuse the public, since they have no way of knowing that the gas contained in the liquefied petroleum gas tanks bearing their trademarks had been illegally refilled.

By refilling and selling the liquefied petroleum gas cylinders bearing the registered trademarks of Pilipinas Shell Petroleum Corporation and Petron Corporation, the officers and employees of Republic Gas Corporation were selling goods by giving them the general appearance of goods of other manufacturers. (Republic Gas Corporation vs. Petron Corporation, 698 SCRA 666)

V. CORPORATION

1. Juridical Personality

The stockholders of a corporation cannot claim damages for themselves for the wrongful attachment of its assets. (Stronghold Insurance Company, Inc. vs. Cuenca, 692 SCRA 473)

The mere fact that a corporate officer signed a contract in behalf of a corporation is not sufficient basis for piercing the veil of corporate fiction. (Saverio vs. Puyat, G.R. No. 186433, November 27, 2013)

Because of the foreclosure of the mortgages on the properties of Marinduque Mining and Industrial Corporation, the Development Bank of the Philippines and the Philippine National Bank acquired substantially all its assets. They organized the Nonoc Mining and Industrial Corporation to operate the business. Development Bank of the Philippines and the Philippine National Bank owned 57% and 43%, respectively, of the shares of stock of the corporation.

Later on, Nonoc Mining and Industrial Corporation hired Hercon, Inc. for its mine stripping and road construction programs. Claiming that it was not fully paid, Hercon, Inc. sued Nonoc Mining and Industrial Corporation, Development Bank of the Philippines and Philippine National Bank for the unpaid balance, and asked that they be held liable solidarily. The two banks claimed that they could not be held liable, because of their separate juridical personalities.

The Regional Trial Court and the Court of Appeals ruled that the separate juridical personalities of the banks should be disregarded, because the Nonoc Mining and Industrial Corporation was merely their alter ego. HELD: To determine application of the alter ego theory, a three-pronged test is laid down:

1. Control, not by mere stock control but complete domination of finances, policy and business practice in respect to the transaction assailed, so that the corporation had no separate mind;

2. Use of such control to commit fraud or wrong in contradiction of the right of the plaintiff;

3. Injury proximately caused by the control and breach of duty.

In the absence of control and fraud through the corporate cover of Nonoc Mining and Industrial Corporation, no harm can be said to have been proximately caused by the banks on Hercon, Inc. for which Hercon, Inc. can hold them solidarily liable with Nonoc Mining and Industrial Corporation. (Philippine National Bank vs. Hydro Resources Contractors Corporation, 693 SCRA 294)

Hammer Garments Corporation obtained loans from International Exchange Bank. The payment was secured by a real estate mortgage on the properties of Goldkey Development Corporation. As the loans were not paid, International Exchange Bank foreclosed the real estate mortgage. Since the foreclosure sale resulted in a deficiency, International Exchange Bank sued Hammer Garments Corporation and Goldkey Development Corporation for the deficiency. The Regional Trial Court held Goldkey Development Corporation liable on the ground that the separate juridical personalities of the two corporations should be disregarded. HELD: The separate juridical personalities of the two corporations should be disregarded. First, the stockholders of both corporations are the Spouses Manuel Chua and Fe Tan Uy and their families. Second, they share the same office. Third, Manuel Chua is the president of both corporations. Manuel Chua signed the promissory notes of Hammer Garments Corporation and the real estate mortgages of Goldkey Development Corporation. Fourth, the assets of the two corporations were co-mingled. The proceeds of the loans were used to buy a manager’s check payable to Goldkey Development Corporation. When Manuel Chua disappeared, Goldkey Development Corporation ceased to operate. (Heirs of Fe Tan Uy vs. International Exchange Bank, 690 SCRA 919)

Francisco Co, Jr. sued Abante Tonite, a tabloid, for publishing an article which was allegedly libelous. Abante Tonite argued that it could not be sued since it was not a juridical person. HELD: Abante Tonite is a corporation by estoppel as a result of its having represented itself to the reading public as a corporation in its editorial box despite its not being incorporated. (Macasaet vs. Co., Jr., 697 SCRA 187)

2. Board of Directors

The power of a corporation to sue is vested in the board of directors. (Swedish Match Philippines, Inc. vs. Treasurer of the City of Manila, 700 SCRA 428; Esguerra vs. Holcim Philippines, Inc., 704 SCRA 490)

Alfredo Tan and Uy Keng See Willy, the president and the treasurer, respectively, of Arma Traders Corporation, purchased paper products on credit and obtained loans from Advance Paper Corporation in

behalf of Arma Traders Corporation. The checks issued to pay for the purchases and the loans were dishonored. Advance Paper Corporation sued Arma Traders Corporation for payment. Arma Traders Corporation alleged that the board of directors never passed a resolution authorizing the transaction. HELD: The management of Arma Traders Corporation was left to Alfredo Uy and Uy Keng See Willy. Since 1984 up to the filing of the case, the stockholders and the board of directors never had any meeting. HELD: The doctrine of apparent authority provides that a corporation will be estopped from denying the authority of an agent if it knowingly permits an officer to act within the scope of an authority and holds him out to the public as possessing the power to do those acts. Its existence may be ascertained through a general manner in which the corporation holds out an officer as having the power to act or the acquiscience in his acts of a particular nature, with actual or constructive knowledge of them. (Advance Paper Corporation vs. Arma Traders Corporation, G.R. No. 176897, December 11, 2013)

Hammer Garments Corporation obtained loans from International Exchange Bank. The payment of the loans were secured by a real estate mortgage. As Hammer Garments Corporation defaulted in the payment of the loans, International Exchange Bank foreclosed the mortgage extrajudicially. The foreclosure sale resulted in a deficiency. International Exchange Bank sued the treasurer of Hammer Garments Corporation for the deficiency. The Court of Appeals held her liable on the ground that she was an officer of the board. The financial report submitted for the application for the loans incorrectly declared the assets and cash flow. HELD: At most, Fe Tan Uy could be charged with negligence in the performance of her duties. Nonetheless, this is not sufficient. The negligence of the officer must be so gross as to amount to bad faith. (Heirs of Fe Tan Uy vs. International Exchange Bank, 690 SCRA 919)

In the absence of bad faith and malice, corporate officers cannot be held liable for breach of contract entered into by a corporation. (Gotesco Properties, Inc. vs. Fajardo, 692 SCRA 319)

The general manager of a corporation cannot be held personally liable for the obligations of a corporation in the absence of proof that it was merely his alter ego. (Roxas vs. Our Lady’s Foundation, 692 SCRA 578)

An internal audit of the accounts of Marina International Marketing Corporation led to the discovery that Virginia Dy, an assistant vice president of Philippine Banking Corporation, approved the purchase of shipping documents which were fictitious. The Philippine Banking Corporation sued her for damages. HELD: She is liable for the amounts paid. (Dy vs. Philippine Banking Corporation, 689 SCRA 507)

3. Shares of Stock

Fil-Estate Golf and Development, Inc. sold a common share in Forest Hills Golf and Country Club to Asuncion Construction Corporation. The purchase price for the common share had not yet been fully paid. Asuncion Construction Corporation sold the common share to Vertex Sales and Trading, Inc. Vertex Sales and Trading, Inc paid the purchase price in full to Forest Hills Golf and Country Club, as well as the transfer fee. For failure of Forest Hills Golf and Country Club to deliver the stock certificate, Vertex Sales and Trading, Inc. sued for rescission of the sale. HELD: The purchase price was paid in full on February 11, 1999, but the stock certificate was delivered only on February 23, 2002. The failure to deliver the stock certificate within a reasonable time is a substantial breach of contract that entitles Vertex Sales and Trading, Inc. to rescind the sale. (Fil-Estate Golf and Development, Inc. vs. Vertex Sales and Trading, Inc., 648 SCRA 2720)

4. Derivative Suit

Juanito Ang and Roberto Ang were brothers and stockholders of Sunrise Marketing (Bacolod), Inc. Their wives, Aniceta Ang and Rachel Ang, were also stockholders of the corporation. Nancy Ang was the sister of Juanito Ang and Roberto Ang. Nancy Ang and her husband, Theodore Ang, granted a loan of one million dollars to Juanito Ang, Roberto Ang, Aniceta Ang and Rachel Ang to be used to settle the obligations of Sunrise Marketing (Bacolod), Inc. and other corporations owned by the Ang family. No written agreement was signed because of the close relationship among the parties.

Nancy Ang and Theodore Ang sent a letter of demand, because they were not being paid. Roberto Ang and Rachel Ang answered that they were not paying, because they had not contracted any loan from Nancy Ang and Theodore Ang. Juanito Ang and Aniceta Ang entered into a settlement with Nancy Ang and Theodore Ang.

Juanito Ang filed a derivative suit in behalf of Sunrise Marketing (Bacolod), Inc. against Roberto Ang and Rachel Ang. He claimed that their intentional and malicious refusal to pay their 50% share in the loan would affect the financial viability of the corporation. HELD: The action is not a derivative suit. The loan was not a corporate obligation but a personal debt of the Ang brothers and their spouses. The proceeds of the loan were used to pay the loans of other corporations owned by the Ang family and the purchase of real properties for the Ang brothers. (Ang vs. Ang, 699 SCRA 272)

5. Dissolution

Changing the name of a corporation does not result in its dissolution. (Zuellig Transport and Cargo System vs. National Labor Relations Office, 701 SCRA 561)

The directors of a corporation which has been dissolved may continue acting as trustees even beyond the three-year period for liquidation for the purpose of liquidating the corporation. (Aguirre II vs. FQB+7, Inc., 688 SCRA 242)

Claiming to be a stockholder of FQB+7, Inc., Vitaliano Aguirre II filed a complaint questioning the validity of the change in the composition of the directors and stockholders of the corporation in the general information sheet on the basis of an alleged meeting of the stockholders. Meanwhile, the Securities and Exchange Commission dissolved FQB+7, Inc. for failure to comply with reportorial requirements. HELD: The case can continue. The corporation does not seek to continue the business of the corporation. Its aim is to vindicate the right of a stockholder to the return of his stockholdings and to remove usurpers and strangers from its affairs. The determination of which group is the rightful board of directors will provide practical relief to the parties involved. The stockholdings of a party is a property right which he may vindicate. The dissolution of the corporation does not extinguish it. (Aguirre II vs. FQB+7, Inc., 688 SCRA 242)

The Metropolitan Building Services, Inc. supplied janitorial employees to the Philippine College of Criminology, Inc. In 2008, the Philippine College of Criminology, Inc. discovered that the certificate of incorporation of the Metropolitan Building Services, Inc. had been revoked and terminated the contract with it. As a result, the janitorial employees were terminated. The employees filed a case for illegal dismissal. The Metropolitan Building Services, Inc. argued that it could not be held liable, because its certificate of registration had been revoked. HELD: Under Section 245 of the Corporation Code, any

liability incurred by a corporation is not impaired by its dissolution. (Vigilla vs. Philippine College of Criminology, Inc., 698 SCRA 247)

VI. SECURITIES REGULATION CODE

Ester Tanco-Gabaldon, Arsenio Tanco, and the Heirs of Ku Tiong Lau filed criminal complaints against the Officers of Citibank, N.A. and the Citigroup Private Bank for violation of the Securities Regulation Code, because they were sold income notes which were not duly registered, and the sellers were not registered security issuers, brokers, dealers or agents, and their investments were wiped out.

The officers claimed that the cases had prescribed, because under Sections 57 and 62.1 of the Securities Regulation Code, violations of Sections 56, 57, 57.1(a) and 57.1(b) prescribe within two years or five years. HELD: Section 62.1 merely addressed the prescriptive period for civil liability. Because of the absence of a prescriptive period for criminal liability in the Securities Regulation Code, Act No. 3326 applies. Section 1 of Act No. 3326 provides that for offenses punished by imprisonment for six years or more prescribe after 12 years. (Citibank, N.A. vs. Tanco-Gabaldon, 703 SCRA 172)

VII. CORPORATE REHABILITATION

Steel Corporation of the Philippines filed a petition for corporate rehabilitation. It obtained an industrial all risks insurance policy against material damage and business interruption. When a fire broke out in its plant, it filed a motion with the court where its petition was pending asking the court to order the insurance companies to pay the insurance proceeds. HELD: The rehabilitation court has no jurisdiction over the insurance claim. Steel Corporation of the Philippines must file a separate action for collection where the insurance companies can properly raise their defenses. (Steel Corporation of the Philippines vs. Mapfre Insular Insurance Corporation, 707 SCRA 601)

VIII. TRANSPORTATION AND PUBLIC UTILITIES

1. Common Carrier

A customs broker who delivers the goods of its customers as part of its service is a common carrier (Westwind Shipping Corporation vs. UCPB General Insurance Company, Inc. 710 SCRA 544)

2. Extent of Liability

A shipment of soybean meal consigned to Simon Enterprises, Inc. was transferred to the receiving barges of Asian Terminals, Inc., the arrastre operator. A second shipment of soybean meal was also transferred to the receiving barges of Asian Terminals, Inc. Simon Enterprises, Inc. claimed that there was a shortage of 18.556 metric tons in the first shipment and a shortage of 199.863 metric tons in the second shipment. It filed a claim for damages. As Asian Terminals, Inc. denied the claim, Simon Enterprises, Inc. filed a case against it. HELD: Simon Enterprises, Inc. failed to prove that the shipments suffered actual shortage, as there was no competent evidence of its neglect at the port of origin. The bills of lading carried the qualification “shipper’s right, quantity and quality unknown”. Besides, any shortage being claimed may have been due to the inherent nature of the soybean meal or the packaging as it was shipped in bulk and had moisture content of 12.5%. Soybean meal tends to settle or consolidate over time. (Asian Terminals, Inc. vs. Simon Enterprises, Inc., 692 SCRA 87)

Nichimen Corporation shipped on board a vessel owned by Westwind Shipping Corporation packages containing trucks and consigned to Universal Motors Corporation. The shipment was insured with Philam Insurance Company, Inc. A steel case was partly torn and crumpled on one side while it was being unloaded from the vessel. Its contents were damaged. Philam Insurance Corporation, Inc. paid the claim of Universal Motors Corporation against its policy. It sued Westwind Shipping Corporation for indemnity. HELD: The responsibility of a common carrier lasts from the time the goods are unconditionally placed in its possession until they are delivered actually or constructively by the common carrier to the consignee. (Asian Terminals, Inc. vs. Philam Insurance Company, Inc., 702 SCRA 88)

Kinsho-Mataichi Corporation shipped skids of tin-free steel for delivery to San Miguel Corporation on board a vessel owned by Westward Shipping Corporation. San Miguel Corporation insured the cargoes with UCPB General Insurance Company, Inc. During the unloading, some skids were dented and punctured from the forklift used by the stevedores. San Miguel Corporation filed a claim against the insurance policy. UCPB General Insurance Company, Inc. paid the claim and sued Westwind Shipping Corporation. It argued that it had no more custody of the skids when they were damaged. HELD: Section 3(2) of the COGSA provides that among the responsibilities of carriers is to properly and carefully discharge the goods carried. The duty of care is non-delegable. The carrier is liable for the acts of the stevedores. (Westwind Shipping Corporation vs. UCPB General Insurance Company, Inc., 710 SCRA 544)

On August 29, 2003, September 13, 2003, and September 29, 2003, Sumitomo Corporation shipped to Calamba Steel steel sheets in coil on board vessels of Eastern Shipping Lines, Inc. The shipments were insured. Upon unloading upon arrival in Manila, some of the coils in the shipments were found to be in bad condition. Calamba Steel filed claims against the insurance policies, and BPI/MS Insurance Corporation paid the claims and sued Eastern Shipping Lines, Inc. as a subrogee. HELD: It is settled in maritime law jurisprudence that cargoes remain under the custody of the carrier while they are being unloaded. The cargoes were damaged even before they were turned over to the stevedore. The damages were compounded by negligent acts of Eastern Shipping Lines, Inc. and the stevedore, who mishandled the cargoes during the discharging operations. (Eastern Shipping Lines, Inc. vs. BPI/MS Insurance Corporation, G.R. No. 193986, January 15, 2014)

3. Air Transportation

Wilfredo Reyes, Juanito Reyes, and Michael Roy Reyes purchased round-trip airplane tickets from Cathay Pacific Airways for Manila-Hong Kong-Adelaide-Hong Kong-Manila through Sampaguita Travel Corporation. On the return trip, they were not allowed to board in Hong Kong on the scheduled date, because they did not have confirmed reservations. It turned out that Sampaguita Travel Corporation inputted a ticket number for the airplane ticket of Wilfredo Reyes but cancelled it the next day, as no ticket numbers existed for Juanito Reyes and Michael Roy Reyes. They sued for damages for breach of contract. HELD: Cathay Pacific Airways breached the contract of carriage with the Reyes Family when it disallowed them to board the plane in Hong Kong going to Manila on the date reflected in their tickets. (Cathay Pacific Airways vs. Reyes, 699 SCRA 725)

4. Public Service Act

Republic Act No, 7252, which was enacted on March 20, 1992, gave GMA Network, Inc., which was formerly known as Republic Broadcasting System, Inc., a legislative franchise to operate radio and television broadcasting stations for 23 years. Upon its application, the National Telecommunications Commission granted it provisional authority to operate a radio station for 18 months from January 14, 1997.

Despite the expiration of the provisional authority, GMA Network, Inc. continued broadcasting on the basis of a temporary permit for the period April 21, 1998 to April 1, 2002 and April 2, 2001 to April 1, 2004. On September 13, 2002, GMA Network, Inc. applied for a certificate of public convenience. The National Telecommunications Commission renewed its provisional authority for three (3) years until July 14, 2004, but fined it under Section 21 of the Public Service Act for operating with an expired provisional authority from July 14, 1998 to September 13, 2002.

GMA Network, Inc. argued that the imposition of the fine was barred by the 60-day prescriptive period in Section 28 of the Public Service Act, the fine of P76,050.00 was unconscionable, and the imposition of the fine was unfounded because of the issuance of the temporary permit. HELD: The National Telecommunications Commission is authorized to impose fines upon a public service utility under Section 21 of the Public Service Act for failure to comply with the terms and conditions of its certificate. The imposition of the fine is imposed in an administrative proceeding. The 60-day prescriptive period in Section 28 of the Public Service Act can be availed of as defense only in criminal proceedings. Section 21 of the Public Service Act provides for a fine not exceeding P200.00 per day for every day of violation. The fine of P76,500.00 is equivalent to P50.00 per day and is consistent with the limitation. A temporary permit is not a substitute for a provisional authority. (GMA Network, Inc. vs. National Telecommunications Commission, G,R. No. 19612, February 26, 2014)

5. Anti-Electricity and Electric Transmission Lines/Materials Pilferage Act

For the discovery of a tampered meter to constitute evidence of illegal use of electricity, it must be witnessed and attested by an officer of the law or a representative of the Energy Regulatory Commission. (Manila Electric Company vs. Castillo, 688 SCRA 455)

Before service of electricity may be disconnected, a forty-eight hour written notice must be given to the consumer. (Manila Electric Company vs. Castillo, 688 SCRA 455).

6. Carriage of Goods by Sea Act

The failure to file a claim against a carrying vessel does not affect the right to sue it for damages, (Asian Terminals, Inc. vs. Philam Insurance Company, Inc., 702 SCRA 88)

IX. USURY LAW

The Monetary Board has the power to suspend the ceiling on interest rates. (Advocates for Truth in Lending, Inc. vs. Bangko Sentral Monetary Board, 688 SCRA 530)

X. NEW CENTRAL BANK ACT

1. Receivership of Bank

The Monetary Board may place a bank under receivership without the need for a prior hearing. (Vivas vs. Monetary Board of the Bangko Sentral ng Pilipinas, 703 SCRA 290)

2. Liquidation of Bank

The Monetary Board directed the Philippine Deposit Insurance Corporation to proceed with the liquidation of the Rural Bank of Tuba (Benguet), Inc. because of its insolvency. The Bureau of Internal Revenue asked the court to suspend the liquidation proceedings until the Philippine Deposit Insurance Corporation has obtained a tax clearance in accordance with Section 52(c) of the National Internal Revenue Code. HELD: The provision pertains only to a regulation of the relationship between the Securities and Exchange Commission and the Bureau of Internal Revenue with respect to corporations contemplating dissolution or reorganization. The liquidation of banks is governed by Section 3 of the New Central Bank Act, which does not require a tax clearance. (Philippine Deposit Insurance Corporation vs. Bureau of Internal Revenue, 698 SCRA 311)

XI. GENERAL BANKING LAW

1. Deposits

Rowena de Leon Cruz was assistant branch manager of a bank. Geoffrey Uymatiao deposited United States currency under a certificate of deposit. The certificate of deposit was pre-terminated. The signature of Geoffrey Uymatiao in the instruction sheet was forged. It was Rowena de Leon Cruz who approved the pretermination without the presentation of the certificate of deposit.

Geoffrey Uymatiao also had a dollar savings account which was dormant. It was reactivated, and its funds were withdrawn. His signature in the instruction sheet was forged. It was Rowena de Leon Cruz who approved the reactivation and the withdrawal of money from the account.

Maybel Caluag deposited United States currency under a certificate of deposit. The certificate of deposit was pre-terminated and the proceeds were subsequently withdrawn. Rowena de Leon Cruz approved the pretermination without the presentation of the certificate of deposit.

Evelyn Avila had a dollar savings account. The balance of her account was withdrawn. At that time, she was in Australia. It was Rowena de Leon Cruz who approved the withdrawal.

Rowena de Leon Cruz was dismissed for gross negligence and breach of trust. She filed a case for illegal dismissal. She claimed that she compared the signatures in the documents with the signatures in the signature specimen cards. HELD: Rowena de Leon Cruz did not call the depositors to appear before her. She did not require that the original certificates of deposit be surrendered. If she took these precautions, the fraud could have been averted. (Cruz vs. Bank of the Philippine Islands, 690 SCRA 546)

Robert Mar Chante maintained a current account with Far East Bank and Trust Company. The bank issued to him a card to handle ATM transactions. The bank alleged that on May 4, 1992, Robert Mar Chante used his card to withdraw an amount of P967,000.00 from his account. At that time, the branch where the account of Robert Mar Chante was kept was offline. The balance of the account was P198,511.70; the maximum withdrawal limit was P50,000.00 per day; and the withdrawals were not deducted from his current account. There was a system bug at the time which allowed the withdrawals. Robert Mar Chante denied making the withdrawals.

Far East Bank and Trust Company debited the current account of Robert Mar Chante and sued him for the balance of P770,488.30. HELD: Far East Bank and Trust Company had the burden of proof to show that the ATM card of Robert Mar Chante was used to make the withdrawals and that he used the ATM

card and PIN by himself or by another person. The fact that the current account of Robert Mar Chante and ATM card number were the ones used for the withdrawals is not sufficient to support the conclusion that he made the withdrawals. The possibility that a replacement card or some other equivalent scheme was used cannot be discounted, most notably, since the withdrawals took advantage of the system bug. The most damaging lapse was that the Bank failed to establish that the ATM facility actually dispensed cash in the very large amount during the series of questioned withdrawals. (Far East Bank and Trust Company vs. Chante, 707 SCRA 149)

Ana Grace Rosales and her mother, Yo Yuk To, opened a joint peso account with Metropolitan Bank and Trust Company. Later on, Ana Grace Rosales accompanied her client, Lui Chiu Tang, a Taiwanese applying for a retiree’s business, to open a dollar savings account, as required by the Philippine Leisure and Retirement Agency, since he could speak Mandarin only.

Later on, the dollar account of Lui Chiu Tang was closed and the entire deposit of US$75,000.00 was withdrawn by an impostor. A month later, Ana Grace Rosales and her mother opened a joint dollar account with an initial deposit of US$14,000.00. Metropolitan Bank and Trust Company alleged that the serial numbers of the dollar notes in the amount of US$1,800.00 deposited in their joint account were the same as those of dollar notes withdrawn from the account of Lui Chiu Tang.

Metropolitan Bank and Trust Company alleged that Ana Grace Rosales accompanied the impostor of Lui Chiu Tang who was able to withdraw US$75,000.00. Ana Grace Rosales denied taking part in the fraudulent withdrawal.

Metropolitan Bank and Trust Company returned the money of Lui Chiu Tang. It issued a hold-out order against all the accounts of Ana Grace Rosales and her mother. Metropolitan Bank and Trust Company filed a complaint for estafa against Ana Grace Rosales with the Office of the City Prosecutor of Manila.

Ana Grace Rosales and her mother sued Metropolitan Bank and Trust Company for breach of contract, because they were not allowed to withdraw from their account. Metropolitan Bank and Trust Company argued that it had a valid reason for issuing the hold-out order due to the fraudulent scheme of Ana Grace Rosales. HELD: The stipulation authorized the bank to withhold as security for any obligation of the depositor all monies in the possession of the Bank, and the Bank may assert a lien on any balance of the account and apply it against any indebtedness of the bank. The hold-out clause applies only if there is a valid and existing obligation arising from any of the sources of obligation in Article 1157 of the Civil Code. Although a criminal case was filed against Ana Grace Rosales, this is not enough reason to issue a hold-out order. The case is still pending and no final judgment of conviction has been rendered against her. (Metropolitan Bank and Trust Company vs. Rosales, G.R. No. 183204, January 13, 2014)

2. Loans

The Spouses Dio Dato and Sonia Sia obtained a credit line facility for P5,700,000.00 from the Bank of the Philippine Islands. They mortgaged five parcels of land. They obtained a loan for P800,000.00. The Spouses Dio Dato and Sonia Sia failed to pay. They filed a case against the Bank of the Philippine Islands.

The Bank of the Philippine Islands foreclosed extrajudicially the mortgage on one of the parcels of land. The parcel of land was sold to it as the sole bidder.

The Spouses Dio Dato and Sonia Sia argued that there was no credit line facility for P5,700,000.00, because they did not obtain P5,700,000.00. HELD: A credit line is the amount of money which a banker agrees to supply a person on credit and is generally agreed to in advance. It is the fixed limit of credit granted by a bank to a customer and is usually intended to cover a series of transactions. The Bank of the Philippine Islands did not have to require the execution of a promissory note for the entire amount of P5,700,000.00. (Dato vs. Bank of the Philippine Islands, 710 SCRA 716)

Milo Ramos and Raul Obispo were best friends. The Spouses Milo Ramos and Eleanor Ramos signed a deed of real estate mortgage in favor of Far East Bank and Trust Company and gave it to Raul Obispo. Later on, they wrote Far East Bank and Trust Company that they entrusted the title to the real property of Raul Obispo to be used as collateral for a loan of P250,000.00 in their behalf and they had paid in full to Raul Obispo. As Far East Bank and Trust Company took no action, the Ramos Spouses filed an action for annulment of the real estate mortgage. They claimed that upon verification with the Registry of Deeds, they were surprised to learn that their property was mortgaged for P1,159,096.00 as collateral for a loan of Raul Obispo. HELD: It is unbelievable that the Ramos Spouses surprisingly accepted the P250,000.00 as loan proceeds without seeing any document containing the details of the transaction. It is difficult to believe their explanation that they requested for the documents as Raul Obispo did not give them any. Such failure should have alerted them that something was amiss in the loan transaction. They accepted the proceeds of the loan in the form of personal checks issued by Raul Obispo instead of checks issued by the bank itself. It is also disturbing that they did not go directly to the bank to pay their loan. The Ramos Spouses claimed that they settled their loan by paying P250,000.00 to Raul Obispo. Does this mean the bank granted the loan free of interest? These give rise to the inference that Raul Obispo was the borrower, and the Ramos Spouses were accommodating mortgagors. (Ramos vs. Obispo, 692 SCRA 240)

Carlos Lim, Consolacion Lim and Carlito Lim obtained a loan from Development Bank of the Philippines in 1969. They obtained a second loan in 1970. They made a partial payment in 1978. In 1989, Development Bank of the Philippines agreed to restructure the loan and gave them several extensions from 1989 to 1994. Because of their failure to settle their loans, Development Bank of the Philippines cancelled the restructuring agreement. Carlos Lim, Consolacion Lim, and Carlito Lim argued that their loan should be deemed extinguished under Article 1186 of the Civil Code because of the cancellation of the restructuring agreement. HELD: Carlos Lim, Consolacion Lim, and Carlito Lim failed to make payments. Development Bank of the Philippines had reason to cancel the restructuring agreement. (Lim vs. Development Bank of the Philippines, 700 SCRA 210)

The mere loss of the motor vehicle mortgaged to secure the payment of a promissory note does not extinguish the obligation of the maker. (De Leon vs. Bank of the Philippine Islands, 710 SCRA 443).

The Spouses Deo Agner and Maricon Agner bought a motor vehicle from Citimotors, Inc. They executed a promissory note secured by a chattel mortgage in favor of Citimotors, Inc. Citimotors, Inc. assigned the promissory note with the chattel mortgage to ABN AMRO Savings Bank, Inc., which in turn assigned it to BPI Family Savings Bank, Inc.

As the Agner Spouses failed to pay, BPI Family Savings Bank, Inc. filed an action for replevin. The complaint prayed for the delivery of the motor vehicle or the payment of the loan in case the delivery of the motor vehicle could not be effected. The motor vehicle was not recovered. The court ordered the Agner Spouses to pay their loan. The Agner Spouses argued that the resort by the BPI Family Savings

Bank, Inc. both to replevin and collection of sum of money violated Article 1484 of the Civil Code. HELD: There is no violation of Article 1484 of the Civil Code, as the motor vehicle was not recovered. The trial court rightfully granted the alternative prayer for a sum of money. (Agner vs. BPI Family Savings Bank, Inc. 697 SCRA 89)

Even if the ceiling on interest rates has been lifted, if the stipulated rate is unconscionable, it should be struck down. (Advocates of Truth in Lending, Inc. vs. Bangko Sentral Monetary Board, 688 SCRA 530)

The Spouses Florentino and Aurea Mallari obtained a loan from Prudential Bank. It was stipulated that the loan would bear 23% interest per annum. The Mallari Spouses executed a deed of real estate mortgage to secure the payment of the loan. As the loan was not paid, Prudential Bank filed a petition for the extrajudicial foreclosure of the real estate mortgage. The Mallari Spouses filed an action for annulment of the real estate mortgage on the ground that the interest was unconscionable. HELD: The interest rate of 23% per annum was not unconscionable. (Mallari vs. Prudential Bank, 697 SCRA 555, 565)

The imposition by a bank of additional interest and penalty without the consent of the debtor is void. (Lim vs. Development Bank of the Philippines, 700 SCRA 210)

Sarabia Manor Hotel Corporation obtained two bank loans to expand its hotel business. The payment of the loans was secured by a real estate mortgage over several parcels of land and by a suretyship agreement signed by its stockholders. The completion of the building was delayed by two years because the contractor abandoned the construction and its take-over resulted in a cost overrun.

Sarabia Manor Hotel Corporation filed a petition for corporate rehabilitation. The Regional Trial Court approved the rehabilitation. It reduced the interest on the bank loans at 6.75 percent per annum instead of the escalating interest rate of 8 percent for 2002 to 2003, 8 percent from 2006 to 2010, 10 percent from 2011 to 2013, 12 percent from 2014 to 2015, and 14 percent up to 2018. Bank of the Philippine Islands questioned the rehabilitation plan because of the imposition of the fixed interest rate of 6.79 percent a year and the extended repayment period. HELD: The interest rate of 6.75 a year is reasonable. The proposed escalating interest rates are based on the assumption of future fluctuations despite the fact that its interests as a secured creditor remain well preserved. (Bank of the Philippine Islands vs. Sarabia Manor Hotel Corporation, 702 SCRA 432)

The Spouses Ignacio Juico and Alice Juico obtained two loans from China Banking Corporation. They executed a real estate mortgage to secure the payment of the loans. As they failed to pay the monthly installments, the mortgage was foreclosed extrajudicially. As the proceeds of the foreclosure sale resulted in a deficiency, China Banking Corporation filed a collection case against the Spouses Ignacio Juico and Alice Juico. In their answer, they questioned the amount being claimed in the complaint, because every month the interest rate was being charged based on the prevailing interest rate. HELD: The two promissory notes authorized China Banking Corporation to increase or decrease the interest rate without any advance notice in case a law or Central Bank regulation is passed or promulgated increasing or decreasing the interest rate. The claim is void, because it granted China Banking Corporation the power to impose an increased rate of interest without a written notice to the Juico Spouses and their written consent.

A detailed billing based on the new imposed interest with corresponding computation of the total debt should have been provided to enable them to make an informed decision. An appropriate form must also be signed by them to indicate their conformity to the new rates. (Juico vs. China Banking Corporation, 695 SCRA 520)

The Spouses Bayan Andal and Gracia Andal obtained a loan of P21,805,000 from the Philippine National Bank. It was stipulated that the rate of interest could be increased or decreased for the subsequent interest period in the event of changes in interest rates prescribed by law or the Monetary Board or increase in the overall cost of funds by the bank. The payment of the loan was secured by a real estate mortgage on five parcels of land.

As the Andal Spouses failed to pay for their loan in full, the Philippine National Bank extrajudicially foreclosed the mortgage on three parcels of land. The Philippine National Bank emerged as the winning bidder.

The Andal Spouses filed a complaint for the amount of the mortgage and the foreclosure sale. They argued that the unilateral increase of interest rate charges was void and no interest should be imposed on their loan. HELD: Only the rate of interest increased. The stipulations requiring the Andal Spouses to pay interest on their loan remained valid and binding. The legal rate of interest should be applied to their unpaid obligation. (Andal vs. Philippine National Bank, G.R. No. 194201, November 27, 2013)

Anchor Savings Bank filed an action for a sum of money against Ciudad Transport Services, Inc., its president, Henry Furugay, and his wife, Glenda Furugay. While this case was pending, the spouses donated their real properties in favor of their minor children.

Claiming that the donation was in fraud of creditors, Anchor Savings Bank filed a case for its rescission. HELD: Because of the subsidiary nature of the remedy of rescission, the complaint must allege (1) the creditor exhausted the properties of the debtor through levy and execution; (2) the creditor exercised all the rights and actions of the debtor, save those personal to him; and (3) the contract was executed in fraud of creditors. The complaint failed to allege the first two requisites. The donation cannot be annulled. (Anchor Savings Bank vs. Furigay, 693 SCRA 384)

3. Investments

A bank which registered in the name of a trustee real estate in which it invested because its total interest in real estate exceeded 50% of the combined capital accounts cannot sue the trustee to recover the property, because the agreement is contrary to law. (Banco Filipino Savings and Mortgage Bank vs. Tala Realty Services Corporation, 705 SCRA 208)

4. Trusts

The late Joseph Goyanko, Sr. invested funds with the Philippine Asia Lending Investors, Inc. As a result of the conflicting claims to the investment by his family and his illegitimate family, Philippine Asia Lending Investors, Inc. deposited the proceeds of the investment in the amount of P1,509,318.76 with United Coconut Planters Bank under the name “Phil. Asia: ITF (In Trust For) The Heirs of Joseph Goyanko, Sr.” Later on, the Bank allowed Philippine Asia Lending Investors, Inc. to withdraw P1,500,000.00 from the account.

The administrator of the estate of Joseph Goyanko, Sr. sued United Coconut Planters Bank. He argued since the opening of the account involved a trust with the bank as trustee and the heirs as beneficiaries, the withdrawal should not have been allowed. HELD: The creation of an express trust cannot be assumed from vague declarations or circumstances capable of other interpretations. There were no trustor and trustee. The bank was never under any equitable duty to deal with or given any power of administration over the account. It was Philippine Asia Lending Investors, Inc. who undertook the duty to hold title to the account for the benefit of the heirs. The bank was a mere depositary of the proceeds of the interest. (Goyanko, Jr. vs. United Coconut Planters Bank, 690 SCRA 79)

XII. ANTI-MONEY LAUNDERING LAW

On June 27, 2005, the Anti-Money Laundering Council applied with the Court of Appeals for the issuance of a freeze order against monetary instruments and properties of Lieutenant General Jacinto Ligot and his family pursuant to Section 10 of Anti-Money Laundering Act. On July 5, 2005, the Court of Appeals granted the application for a period of twenty days.

On July 26, 2005, a motion to extend the freeze order was filed. On September 28, 2005, the Court of Appeals extended the freeze order until after all the appropriate proceedings and investigations had been terminated. On November 25, 2005, the Rules of Procedure in Cases of Civil Forfeiture took effect. It allowed extension of a freeze order for a maximum period of six months. On January 31, 2006, the Ligot Family filed a motion to lift the freeze order on the ground that it expired six months after it was issued on July 5, 2005. HELD: A freeze order is meant to prevent the owner from disposing of his properties and thwarting the effort of the State in prosecuting the owner. The law is silent on the maximum period of time that the freeze order can be extended. Section 55 of the Rule in Civil Forfeiture Cases limits the extensions for a period of six months. The silence of the laws does not affect the power of the Supreme Court under the Constitution to promulgate rules concerning the protection of constitutional rights and procedure in all courts. Pursuant to this power, the Supreme Court issued the Rule on Civil Forfeiture Cases. The right to due process requires a limitation for the governmental action. The freeze order bars the Ligot Family from using any of the property covered by it until after a civil forfeiture proceeding is concluded in their favor and after they have been adjudged as not guilty of the crimes they are suspected of committing. This is beyond the purpose of a freeze order, which is intended solely as an interim relief. (Ligot vs. Republic, 692 SCRA 509)

XIII. EXTRAJUDICIAL FORECLOSURE OF MORTGAGE

1. Scope of Mortgage

Paper City Corporation of the Philippines obtained loans from Rizal Commercial Banking Corporation, Metropolitan Bank and Trust Corporation, and Union Bank of the Philippines. The payment of the loans was secured by a mortgage trust indenture and real estate mortgage on various parcels of land, machineries, and equipment. As Paper City Corporation of the Philippines failed to pay, the real estate mortgage was foreclosed extrajudicially, and the properties were sold to the three banks. Paper City Corporation of the Philippines filed an action for annulment of the foreclosure sale. Paper City Corporation of the Philippines filed a motion to remove the machineries on the ground that they were not included in the foreclosure sale. HELD: The mortgage and the foreclosure sale included the machineries. Under Article 2127 of the Civil Code, a real estate mortgage extends to the improvements. (Star Two (SPV-AMC) Inc. vs. Paper City Corporation of the Philippines, 692 SCRA 439)

The Spouses Rodolfo and Emilie Montealegre obtained a loan from Philippine National Bank. To secure its payment, they mortgaged a parcel of land, together with the building erected on it, which was registered in the name of Emilie Montealegre. As the Montealegre Spouses failed to pay, the Philippine National Bank foreclosed the mortgage extrajudicially and emerged as the highest bidder.

The Spouses Bernard and Cresencia Moranon filed an action to annul the title of Philippine National Bank on the ground that they were the true owners of the property of Emilie Montealegre, who forged their signatures in the deed of sale in her favor. Because of the pendency of the case, a tenant of the building deposited the rental payments in court. The Regional Trial Court rendered a decision declaring the title of Emilie Montealegre void subject to the mortgage lien in favor of Philippine National Bank. It also declared the Moranon Spouses as the ones entitled to the rentals which were deposited. HELD: The foreclosure sale could not have included the building, because the Montealegre Spouses were not its owner. Accordingly, the principle that the improvement shall follow the principal does not apply. The building remained the property of the Montealegre Spouses. The claim of Philippine National Bank for the rentals deposited has no basis. (Philippine National Bank vs. Moranon, 700 SCRA 297)

2. Mortgagee in Bad Faith

Barbara Poblete obtained a loan from a cooperative and mortgaged a lot as collateral to secure its payment. The cooperative in turn obtained a loan from the Land Bank of the Philippines and used the same lot as collateral for the loan. Barbara Poblete decided to sell the lot and asked her son-in-law, Domingo Balen, to look for a buyer. Domingo Balen referred Angelito Maniego to her. She signed a deed of absolute sale dated November 9, 1998 and referred to herself as a widow. Domingo Balen delivered the deed of absolute sale to Angelito Maniego, but he promised to pay the price upon his return from the United States.

Angelito Maniego paid the Land Bank of the Philippines for the loan of the cooperative. He then applied for a loan in the amount of one million pesos and offered the lot of Barbara Poblete as collateral. He succeeded in having the lot transferred in his name on August 14, 2000 by presenting a deed of absolute sale from Barbara Poblete dated August 14, 2000. He then obtained a loan from the Land Bank of the Philippines for one million pesos the next day and mortgaged the lot. As he failed to pay, the Land Bank of the Philippines applied to foreclose the real estate mortgage exgtrajudicially.

Barbara Poblete filed an action to nullify the deed of absolute sale and to enjoin the foreclosure sale. She alleged that her signature and the signature of her husband in the deed of absolute sale were forgeries, as her husband died on April 27, 1996. The Land Bank of the Philippines claimed that it was a mortgagee in good faith. HELD: The Land Bank of the Philippines is not a mortgagee in good faith. It processed the application of the loan of Angelito Maniego although the title was still in the name of Barbara Poblete. It ignored the fact that the cooperative used it as a collateral for the loan. When the person applying for a loan is not the registered owner of the real property being mortgaged, such fact should have induced the bank to make inquiries and confirm his authority to mortgage it. (Land Bank of the Philippines vs. Poblete, 691 SCRA 613)

Fermina Guia sold a portion of the lot she owned to the Spouses Petronio and Macaria Arguelles. Although the Arguelles Spouses immediately took possession of the lot, the deed of sale was not registered with the Register of Deeds or annotated on the certificate of title. Later on, Fermina Guia ordered her son Eddie Guia and his wife to have the lot subdivided into three lots. The third lot, which

corresponded to the portion sold to the Arguelles Spouses, was in the name of Fermina Guia and was not delivered to them.

The Guia Spouses obtained a loan from Malarayat Rural Bank and mortgaged the third lot as security for the loan pursuant to the special power of attorney executed by Fermina Guia. When the Arguelles Spouses discovered the annotation of the real estate mortgage and the special power of attorney on the title to the third lot, they registered an adverse claim and filed an action for annulment of the mortgage. Malarayat Rural Bank foreclosed the real estate mortgage, acquired the third lot, and registered it in its name. HELD: Where the mortgagor is not the registered owner but is merely an attorney-in-fact, it is incumbent upon the mortgagee to exercise greater care in dealing with the mortgagor. Where the mortgagee is a bank, it cannot merely rely on the certificate of title. It should conduct an ocular inspection to determine the real owner. Malarayat Rural Ban is not a mortgagee in good faith. The unregistered sale in favor of the Arguelles Spouses must prevail over its mortgage lien. (Arguelles vs. Malarayat Rural Bank, G.R. No. 200648, March 19, 2014)

3. Personal Notice of Foreclosure Sale

The extrajudicial foreclosure of a real estate mortgage is void if it was stipulated that the mortgagor must be given personal notice of it and no notice was given. (Lim vs. Development Bank of the Philippines, 700 SCRA 210 and Ramirez vs. Manila Banking Corporation, G.R. No. 198800, December 11, 2013)

4. Place of Sale

A stipulation in a deed of real estate mortgage fixing the place of the foreclosure sale does not preclude holding it at the location of the property if the stipulation does not provide for exclusivity. (Heirs of the Late Spouses Flaviano Maglasang and Salud Adaza-Maglasang vs. Manila Banking Corporation, 706 SCRA 235)

5. Selling Price

Sycamore Ventures Corporation and the Spouses Simon Paz and Leng Leng Paz obtained loans from Metropolitan Bank and Trust Company. The payment of the loans was secured by a real estate mortgage on the parcels of land of Sycamore Ventures Corporation, together with their improvements. As Sycamore Ventures Corporation and the Spouses Simon Paz and Leng Leng Paz failed to pay their loans, Metropolitan Bank and Trust Corporation filed a petition to foreclose the real estate mortgage extrajudicially.

Sycamore Ventures Corporation and the Spouses Simon Paz and Leng Leng Paz filed an action for annulment of the real estate mortgage. They disputed the appraisal of the value of the mortgaged properties. They asked that commissioners be appointed to determine the true appraised value of the properties and that the foreclosure of the real estate mortgage be enjoined. The Regional Trial Court granted their prayer. HELD: The law does not provide that the appraised value of the mortgaged property be determined and that the appraised value shall be the basis for the bid price. (Sycamore Ventures Corporation vs. Metropolitan Bank and Trust Company, 709 SCRA 559)

6. Issuance of Writ of Preliminary Injunction

Solid Builders, Inc. obtained several loans from China Banking Corporation. Medina Foods Industries, Inc. mortgaged several parcels of land to secure their payment. China Banking Corporation sent a letter of demand to Solid Builders, Inc. for payment of its outstanding loans. Claiming that the interests, penalties, and charges imposed on the loans were unconscionable, Solid Builders, Inc. and Medina Foods Industries, Inc. filed an action to enjoin the foreclosure of the real estate mortgage. HELD: Administrative Resolution No. 99-10-05 provides that no temporary restraining order or writ of preliminary shall be issued against the extrajudicial foreclosure of the real estate mortgage unless the debtor pays the mortgagee at least 12 percent per annum interest on the principal obligation, which shall be updated monthly while the case is pending. (Solid Builders, Inc. vs. China Banking Corporation, 695 SCRA 101)

7. Deficiency

The Spouses Flaviano and Salud Maglasang obtained loans from Manila Banking Corporation. They mortgaged seven properties to secure the payment of their loans. After Flaviano Maglasang died intestate, his widow and the children filed a petition for the settlement of his estate. The heirs executed an extrajudicial partition of the estate of Flaviano Maglasang. With its execution, the court terminated the proceedings. As the loans owed by Flaviano Maglasang had not been paid, Manila Banking Corporation extrajudicially foreclosed the mortgage on the properties of the estate. As the foreclosure sale resulted in a deficiency, Manila Banking Corporation sued the heirs of Flaviano Maglasang for it. HELD: Under Section 7, Rule 86 of the Rules of Court, a secured creditor has three options: (a) waive the mortgage and claim the entire debt from the estate as an ordinary claim; (b) foreclose the mortgage judicially and prove the deficiency as an ordinary claim; or (c) rely on the mortgage exclusively. The third option includes extrajudicial foreclosure. The result of adopting the third option is to waive any deficiency. (Heirs of the Late Spouses Flaviano Maglasang and Salud Adaza-Maglasang vs. Manila Banking Corporation, 706 SCRA 235)

8. Void Foreclosure Sale

Guariňa Corporation obtained a loan of P3,387,000.00 from the Development Bank of the Philippines to finance the development of its resort, and executed a promissory note that would be due on November 3, 1988. It executed a real estate mortgage over several properties as security for the repayment of the loan. The loan was released in installments, and the proceeds were used to defray the cost of additional improvements.

Guariňa Corporation demanded the release of the balance of the loan. The Development Bank of the Philippines refused. Instead, it directly paid some suppliers despite the objection of Guariňa Corporation. When the Development Bank of the Philippines found upon investigation that the construction had not been completed, it demanded that the completion of the project be expedited.

Unsatisfied with the inaction of Guariňa Corporation, the Development Bank of the Philippines foreclosed the mortgage extrajudicially and acquired the properties mortgaged. It then obtained a writ of possession.

Guariňa Corporation sued for the annulment of the foreclosure and the cancellation of the certificate of sale. HELD: A loan is a reciprocal obligation. This means that the creditor should release the full amount, and the debtor repays it when it becomes due and demandable. Because of its failure to

release the proceeds of the loan entirely, the Development Bank of the Philippines had no right yet to exact from Guariňa Corporation compliance with its obligations. The foreclosure of the mortgage was premature and void. The restoration of possession and the payment of reasonable rentals to Guariňa Corporation in accordance with Article 561 of the Civil Code are in order. (Development Bank of the Philippines vs. Guariňa Agricultural and Realty Development Corporation, G.R. No. 160758, January 19, 2014)

Predisons Realty Corporation mortgaged a parcel of land to the Philippine Bank of Communications to secure the payment of a loan. It then transferred the land to its sister company, Ivory Crest Realty and Development Corporation. Ivory Crest Realty and Development Corporation obtained permits and licenses to construct and sell condominium units on the land from the Housing and Land Use Regulatory Board.

When the loan was not paid, the Philippine Bank of Communications filed a petition to foreclose the mortgage extrajudicially. Buyers of condominium units filed actions with the Housing and Land Use Regulatory Board to enjoin the auctions. They also asked for the delivery of their titles to the condominium units free from the mortgage. The Philippine Bank of Communications assailed the jurisdiction of the Housing and Land Use Regulatory Board over it. HELD: Section 1(a) of Presidential Decree No. 957 includes in the jurisdiction of the Housing and Land Use Regulatory Board cases involving unsound real estate practices. It is broad enough to include third parties to sales contracts. The complaints filed were for unsound real estate business practices of Predisons Realty Corporation and Ivory Crest Realty and Development Corporation. The Philippine Bank of Communications was impleaded on the basis of the allegation that the mortgage failed to meet the requirement of Section 18 of Presidential Decree No. 957 that the proceeds of the loan shall be used for the development of the condominium. The Housing and Land Use Regulatory Board has jurisdiction over an action for annulment of the mortgage. (Philippine Bank of Communications vs. Pridisons Realty Corporation, 688 SCRA 200)

9. Right of Possession of Mortgagor

Juanita Ermitano leased her house and lot to Lailanie Paglas for one year. Juanita Ermitano mortgaged the property in favor of Charlie Yap. Later on, the mortgage was foreclosed extrajudicially. Charlie Yap purchased it during the foreclosure sale. Charlie Yap sold the property to Lailanie Paglas subject to the right of redemption of Juanita Ermitano. Meanwhile, Juanita Ermitano sent a letter of demand to Lailanie Paglas to pay the rentals and to vacate the property. As she refused, Juanita Ermitano filed an ejectment case against her. HELD: The subsequent acquisition of ownership of the property is not a sufficient excuse for refusing to pay the rentals. The right of a purchaser at a foreclosure sale is merely inchoate until after the expiration of the period of redemption without the right being exercised. When the period of redemption expired without Juanita Ermitano having redeemed the property, she lost her possessory right over it. (Ermitano vs. Paglas, 689 SCRA 158)

10. Writ of Possession

The buyer at the extrajudicial foreclosure of a real estate mortgage may obtain possession of the property even before the expiration of the redemption period by posting the requisite bond. (LZK Holdings and Development Corporation vs. Planters Development Bank, G.R. No. 187973, January 20, 2014)

The Spouses Edgardo Cristobal and Maria Teresita Cristobal obtained a loan from Metropolitan Bank and Trust Company. The payment of the loan was secured by a real estate mortgage. As the loan was not paid, Metropolitan Bank and Trust Company foreclosed the mortgage extrajudicially and emerged as the highest bidder. It registered the certificate of sale. It then filed a petition for a writ of possession. HELD: After consolidation of the title in the name of the buyer, the writ of possession becomes a matter of right. Hence, Metropolitan Bank and Trust Company must first show that it has consolidated ownership in its name. (Metropolitan Bank and Trust Company vs. Cristobal, G.R. No. 175768, December 11, 2013)

The Spouses Jose Ingles and Josefina Ingles obtained a loan from Charles Esteban. They mortgaged a parcel of land as collateral for the loan. As the loan was not paid, Charles Esteban foreclosed the mortgage extrajudicially. He was declared the highest bidder. He then filed a petition for a writ of possession. The petition was granted. A petition for annulment of order was filed in the Court of Appeals. HELD: The assailed orders are not the final orders in civil actions that may be the subject of annulment. They were issued in connection with a proceeding for the extrajudicial foreclosure of a mortgage. (Ingles vs. Estrada, 695 SCRA 289)

A petition for a writ of possession cannot be consolidated with an action for annulment of the real estate mortgage and the foreclosure sale. (Ingles vs. Estrada, 695 SCRA 285)

11. Pendency of Action for Annulment of Real Estate Mortgage or Foreclosure Sale

The issuance of a writ of possession to the buyer at the foreclosure sale is ministerial despite the pendency of an action for annulment of the real estate mortgage or the foreclosure sale. (Tolosa vs. United Coconut Planters Bank, 695 SCRA 138; Darcen vs. V.R. Gonzales Credit Enterprises, Inc., 695 SCRA 207; Nagtatan vs. United Coconut Planters Bank, 702 SCRA 615; United Coconut Planters Bank vs. Lumba, G.R. No. 162757, December 11, 2013)

The issuance of a writ of possession cannot be enjoined if the right of redemption of the mortgagor has expired. (Philippine Bank of Communications vs. Yeung, G.R. No. 179691, December 4, 2013)

12. Enforcement of Writ of Possession against Third Parties

The writ of possession can be enforced against a third party who is a buyer or transferee of the mortgagor. (Rural Bank of Santa Barbara (Iloilo), Inc. vs. Centeno, 693 SCRA 110; Darcen vs. V.R. Gonzales Credit Enterprises, Inc., 695 SCRA 207; Marquez vs. Alindog, G.R. No. 189045, January 22, 2014)

The writ of possession cannot be enforced against a third party who is claiming rights adverse to the mortgagor. (Royal Savings Bank vs. Asia, 695 SCRA 511; Aldover vs. Court of Appeals, 706 SCRA 188)

13. Redemption

An expression of a desire to redeem the property whose mortgage was foreclosed does not constitute exercise of the right of redemption unless it is accompanied by a tender of payment. (Hoyas vs. Philippine Amanah Bank, 697 SCRA 505)

Goldenway Merchandising Corporation obtained a loan of P2,000,000.00 from Equitable PCI Bank. It executed a real estate mortgage to secure its payment. As it failed to pay, the real estate mortgage was

foreclosed extrajudicially. The properties were sold to Equitable PCI Bank during the foreclosure sale. The certificate of sale was registered on February 16, 2001. On March 8, 2001, Goldenway Merchandising Corporation offered to redeem the properties. Equitable PCI Bank rejected the offer on the ground that the certificate of sale had already been registered. Goldenway Merchandising Corporation filed a case, alleging the redemption period was one year. HELD: Under Section 47 of the General Banking Law, juridical persons are allowed to exercise a right of redemption only until but not after the registration of the certificate of sale and in no case more than three months after the sale, whichever comes first. (Goldenway Merchandising Corporation vs. Equitable PCI Bank, 693 SCRA 439)