Banking Laws

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Chapter 1 Banks and the Business of Banking

I. Declared Policy Of The State Section 2 of Republic Act 8791 (General Banking Law of 2000 or GBL) provides: The State recognizes the vital role of banks in providing an environment conducive to the sustained development of the national economy and the duciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efcient banking and nancial system that is globally competitive, dynamic and responsive to the demands of a developing economy. II. Denition Of Banks Banks are dened under the GBL as entities engaged in the lending of funds obtained in the form of deposits.1 Note however that banks may engage in other activities allowed by law which will be discussed in the succeeding chapters of this book. Other Denitions: A bank is (i) A moneyed institute2 founded to facilitate the borrowing, lending and safe-keeping of money3 and to deal, in notes, bills of exchange, and credits.4
Section 3.2, Republic Act No. 8791. Talmage vs. Pell 7 N.Y. (3 Seld.) 328, 347, 348. 3 Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243, 255 U.S. 180, 210, 65 L. Ed. 577. 4 State vs. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa 338; Banks & Banking, by Zellmann, Vol. 1, p. 46.
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BANKING LAWS & JURISPRUDENCE
(ii)
An investment company which loans out the money of its customers, collects the interest and charges a commission to both lender and borrower, is a bank.5
(iii) Any person engaged in the business carried on by banks of deposit, of discount, or of circulation is doing a banking business, although but one of these functions is exercised.6 (iv) A nancial institution with power to issue its promissory notes intended to circulate as money (known as bank notes); or to receive the money of others on general deposit, to form a joint fund that shall be used by the institution for its own benet, for one or more of the purposes of making temporary loans and discounts, of dealing in notes, foreign and domestic bills of exchange, coin bullion, credits, and the remission of money; or with both these powers, and with the privileges, in addition to these basic powers, of receiving special deposits, and making collection for the holders of negotiable paper, if the institution sees t to engage in such business.7 In funding these businesses, the bank invests the money that it holds in trust of its depositors. III. Nature Of Banking Business A. Debtor-Creditor Relationship
The relation existing between a depositor and a bank is that of creditor and debtor8 and not that of a depositor and a depositary under the Civil Code. Article 1980 of the Civil Code of the Philippines provides: Art. 1980. Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning loan.
Western Investment Banking Co. vs. Murray, 56 P. 728, 730, 731; 6 Ariz 215. MacLaren vs. State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas. 826; 9 C.J.S. 30. 7 United Coconut Planters Bank vs. Ramos, G.R. No. 147800, November 11, 2003. 8 Gullas vs. The Philippine National Bank, G.R. No. L-43191, November 13, 1935; Fulton Iron Works Co. vs. China Banking Corporation, 59 Phil. 59 (1933).
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CHAPTER 1 BANKS AND THE BUSINESS OF BANKING
In Consolidated Bank and Trust Corporation vs. Court of Appeals, the Supreme Court held: The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan, x x x. There is a debtorcreditor relationship between the bank and its depositor. The bank is the debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The savings deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of the parties. Similarly, in Serrano vs. Central Bank of the Philippines, the Supreme Court held that bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. x x x. The petitioner here in making time deposits that earn interests with respondent Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The respondent Bank was in turn a debtor of petitioner. Failure of the respondent Bank to honor the time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from a depositarys failure to return the subject matter of the deposit. B. Fiduciary Duty i. Section 2 of the GBL expressly imposes duciary duty on banks when it declares that the State recognizes the duciary nature of banking that requires high standards of integrity and performance. This statutory declaration merely echoes the earlier pronouncement of the Supreme Court9 requiring banks to treat the accounts of its depositors with meticulous care, always having in mind the duciary nature of their relationship.10 Jurisprudence had already imposed on banks the same high standard of diligence long before the enactment of the GBL. This duciary relationship means that the banks obligation to observe high standards of integrity
ii.
9 Simex International (Manila) Inc. vs. Court of Appeals, G.R. No. 88013, March 19, 1990, 183 SCRA 360. 10 Ibid.
and performance is deemed written into every deposit agreement between a bank and its depositor. iii. The duciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Thus, the banks duciary duty imposes upon it a higher level of accountability than that expected of depositor.11
C.
Not a Trust Agreement i. However, the duciary nature of a bank-depositor relationship does not convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether express or implied. Failure by the bank to pay the depositor is failure to pay a simple loan, and not a breach of trust.12 The law simply imposes on the bank a higher standard of integrity and performance in complying with its obligations under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple loan. The duciary nature of banking does not convert a simple loan into a trust agreement because banks do not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the lowest possible interest rate to depositors while charging the highest possible interest rate on their own borrowers. The interest spread or differential belongs to the bank and not to the depositors who are not cestui que trust of banks. If depositors are cestui que trust of banks, then the interest spread or income belongs to the depositors, a situation that Congress certainly did not intend in enacting Section 2 of R.A. 8791.
ii.
D.
Indispensable Institution
The Supreme Court never fails to stress the remarkable signicance of a banking institution to commercial transactions, in
11 Philippine Banking Corporation vs. Court of Appeals, G.R. No. 127469, January 15, 2004. 12 Serrano vs. Central Bank, G.R. No. L-30511, February 14, 1980, 96 SCRA 96.
particular, and to the countrys economy in general.13 The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude, and most of all, condence. i. Thus, even the humble wage-earner has not hesitated to entrust his lifes savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith, usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business entities, the bank is a trusted and active associate that can help in the running of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks.14
ii.
iii.
E.
Impressed with Public Interest i. The business of banking is imbued with public interest. The stability of banks largely depends on the condence of the people in the honesty and efciency of banks. The depositors reasonable expectations from a bank and the banks corresponding duty to its depositor, were pointed out by the Supreme Court as follows: In every case, the depositor expects the bank to treat his account with the utmost delity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reect at any given time the amount of money the depositor can dispose of as he
13 Metropolitan Bank and Trust Company vs. Cabilzo, G.R. No. 154469, December 6, 2006. 14 Simex International (Manila) Inc. vs. Court of Appeals, 183 SCRA 360, March 19, 1990.
sees t, condent that the bank will deliver it as and to whomever he directs.15 ii. Since the banking business is impressed with public interest, of paramount importance thereto is the trust and condence of the public in general. Consequently, the highest degree of diligence16 is expected,17 and high standards of integrity and performance are even required, of it. By the nature of its functions, a bank is under obligation to treat the accounts of its depositors with meticulous care,18 always having in mind the duciary nature of their relationship.19
F.
Degree of Diligence i. The law imposes on banks high standards in view of the duciary nature of banking.20 As stated earlier, the new provision in the general banking law is a statutory afrmation of Supreme Court decisions, starting with the 1990 case of Simex International vs. Court of Appeals,21 holding that the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the duciary nature of their relationship.22
Ibid. The diligence required of banks is more than that of a pater familias or good father of a family. Bank of the Philippine Islands vs. Court of Appeals, 383 Phil. 538, 554, February 29, 2000. See Philippine Bank of Commerce vs. Court of Appeals, 336 Phil. 667, 681, March 14, 1997. 17 Philippine Commercial International Bank vs. Court of Appeals, 350 SCRA 446, 472, January 29, 2001. 18 Westmont Bank vs. Ong, 375 SCRA 212, 221, January 30, 2002; Citing Citytrust Banking Corp. vs. IAC, 232 SCRA 559, 564, May 27, 1994. 19 Simex International (Manila) Inc. vs. Court of Appeals, 183 SCRA 360, 367, March 19, 1990, Per Cruz, J. 20 In the United States, the prevailing rule, as enunciated by the U.S. Supreme Court in Bank of Marin vs. England, 385 U.S. 99 (1966), is that the bank-depositor relationship is governed by contract, and the bankruptcy of the depositor does not alter the relationship unless the bank receives notice of the bankruptcy. However, the Supreme Court of some states, like Arizona, have held that banks have more than a contractual duty to depositors, and that a special relationship may create a duciary obligation on banks outside of their contract with depositors. See Stewart vs. Phoenix National Bank, 49 Ariz. 34, 64 P. 2d 101 (1937); Klein vs. First Edina National Bank, 293 Minn. 418, 196 N.W. 2d 619 (1972). 21 G.R. No. 88013, March 19, 1990, 183 SCRA 360. 22 The ruling in Simex International was followed in the following cases: Bank of the Philippine Islands vs. Intermediate Appellate Court, G.R. No. 69162, February
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ii.
The duciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Article 1173 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family.23 Section 2 of the GBL prescribes the statutory diligence required from banks that banks must observe high standards of integrity and performance24 in servicing their depositors. In Philippine Bank of Commerce vs. Court of Appeals25 upholding a long standing doctrine, the Supreme Court ruled that the degree of diligence required of banks, is more than that of a good father of a family where the duciary nature of their relationship with their depositors is concerned. In other words banks are duty bound to treat the deposit accounts of their depositors with the highest degree of care. But the said ruling applies only to cases where banks act under their duciary capacity, that is, as depositary of the deposits of their depositors. But the same higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their duciary relationship with their depositors. Considering the foregoing, a bank is not required to exert more than the diligence of a good father of a family in regard to the sale and issuance of foreign exchange demand draft. It does not involve the handling of deposit, if any, with the bank. Instead, the relationship involved was that of a buyer and seller, that is, between the bank as the seller of the foreign exchange demand draft, and the buyer of the same.26
iii.
iv.
21, 1992, 206 SCRA 408; Citytrust Banking Corporation vs. Intermediate Appellate Court, G.R. No. 84281, May 27, 1994, 232 SCRA 559; Tan vs. Court of Appeals, G.R. No. 108555, December 20, 1994, 239 SCRA 310; Metropolitan Bank & Trust Co. vs. Court of Appeals, G.R. No. 112576, October 26, 1994, 237 SCRA 761; Philippine Bank of Commerce vs. Court of Appeals, 336 Phil. 667 (1997); Firestone vs. Court of Appeals, G.R. No. 113236, March 5, 2001, 353 SCRA 601. 23 The second paragraph of Article 1173 of the Civil Code provides: If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. 24 Bank of Commerce vs. Spouses San Pablo, G.R. No. 167848, April 27, 2007. 25 Reyes vs. Court of Appeals, G.R. No. 118492, August 15, 2001. 26 Ibid.
* Note: Diligence Extends to Financial Institutions: 1. A government nancial institution (e.g., GSIS), like banks, is expected to exercise greater care and prudence in its dealings, including those involving registered lands.27 Due diligence required of banks extend even to persons, or institutions, regularly engaged in the business of lending money secured by real estate mortgages.28
2.
G.
Treatment of Accounts with Meticulous Care i. ii. A bank is under obligation to treat the accounts of its depositors with meticulous care.29 In every case, the depositor expects the bank to treat his account with the utmost delity, whether such account consists only of a few hundred pesos or of millions. A blunder on the part of the bank, such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also nancial loss and perhaps even civil and criminal litigation.30 But there is no law mandating banks to call up their clients whenever their representatives withdraw signicant amounts from their accounts.
iii.
H.
Duty to Keep Records
A bank has a duciary duty to keep efciently a record of its transactions with its depositors.31 Banks shall have a true and accurate account, record or statement of their daily transactions, particularly those referring to their deposit liabilities. The making of any false entry or the willful omission of entries relevant to any transaction, is a ground for the imposition of administrative sanctions and the disqualication from ofce of any director or
27 Government Service Insurance System vs. Santiago, G.R. No. 155206, October 28, 2003; Cruz vs. Bancom Finance Corporation, 379 SCRA 490 (2002). 28 Adriano vs. Pangilinan, 373 SCRA 544 (2002). 29 Firestone Tire & Rubber Company of the Philippines vs. Court of Appeals, G.R. No. 113236, March 5, 2001, 353 SCRA 601, 609, citing Philippine Bank of Commerce vs. Court of Appeals, 269 SCRA 695, 699 (1997). 30 Simex International (Manila) Incorporated vs. Court of Appeals, G.R. No. 88013, March 19, 1990. 31 Philippine Banking Corporation vs. Court of Appeals, G.R. No. 127469, January 15, 2004.
ofcer responsible therefor. This is without prejudice to their criminal liability under the New Central Bank Act (NCBA) and/or the applicable provisions of the Revised Penal Code. I. Banks are not Gratuitous Bailees
Banks are not gratuitous bailees of the funds deposited with them by their customers. Banks are run for gain, and they solicit deposits in order that they can use the money for that very purpose.32 J. Banks not Expected to be Infallible
A bank is not expected to be infallible.33 However, it must bear the blame for not discovering mistakes if there are established procedures and the same have not been followed. Problem: Spouses A and V opened a joint current account in C Bank with an initial deposit of P2,250. Prior thereto, A had an existing separate personal checking account in the same branch. When the spouses opened their joint current account, the new accounts teller of the bank pulled out from the banks les the old and existing signature card of A for use as ID and reference. By mistake, she placed the old personal account number of A on the deposit slip for the new joint checking account of the spouses so that the initial deposit of P2,250 for the joint checking account was miscredited to As personal account. The spouses subsequently deposited other amounts in their joint account. However, when V issued a check for P1,639.89 and another check for P1,160.00, one of the checks was dishonored by the bank for insufcient funds and a penalty of P20 was deducted from the account in both instances. In view of the overdrawings, the bank tried to call up the spouses at the telephone number which they had given in their application form, but the bank could not contact them because they actually reside in Porac, Pampanga. The city address and telephone number which they gave to the bank belonged to Vs parents. Is the bank liable for damages?
32 San Carlos Milling Co., Ltd. vs. Bank of the Philippines Islands, G.R. No. 37467, December 11, 1933. 33 Bank of the Philippine Islands vs. The Intermediate Appellate Court, G.R. No. 69162, February 21, 1992.
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Yes. The bank is not expected to be infallible but, in this instance, it must bear the blame for not discovering the mistake of its teller despite the established procedure requiring the papers and bank books to pass through a battery of bank personnel whose duty it is to check and countercheck them for possible errors. Apparently, the ofcials and employees tasked to do that did not perform their duties with due care.34 While the banks negligence may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation to the depositors for which they are entitled to recover reasonable moral damages.35 The award of reasonable attorneys fees is proper for the depositors were compelled to litigate to protect their interest.36 However, the absence of malice and bad faith renders an award of exemplary damages improper.37 K. i. Dealing with Registered Lands Banks should exercise more care and prudence in dealing even with registered lands, than private individuals, for their business is one affected with public interest.38 Banks keep in trust money belonging to their depositors, which they should guard against loss by not committing any act of negligence that amounts to lack of good faith. Absent good faith, banks would be denied the protective mantle of the land registration statute, Act 496 (Land Registration Law), which extends only to purchasers for value and good faith, as well as to mortgagees of the same character and description. The rule that persons dealing with registered lands can rely solely on the certicate of title does not apply to banks.39 A mortgagee can rely on what appears on the certicate of title presented by the mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagors title. This rule is strictly applied to banking institutions. A mortgageebank must exercise due diligence before entering into said
ii.
Ibid. American Express International, Inc. vs. IAC, 167 SCRA 209. 36 Art. 2208, Civil Code. 37 Globe Mackay Cable and Radio Corp. vs. Court of Appeals, 176 SCRA 778. 38 Id. at 88. 39 Manlapat vs. Court of Appeals, G.R. No. 125585, June 8, 2005.
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contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives to the premises of the land offered as collateral and to investigate who the real owners thereof are. iii. In Cavite Development Bank vs. Spouses Lim,40 the Court explained the doctrine of mortgagee in good faith, thus: There is, however, a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of public policy. This is the doctrine of the mortgagee in good faith based on the rule that all persons dealing with property covered by the Torrens Certicates of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title. The public interest in upholding the indefeasibility of a certicate of title, as evidence of lawful ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face of the certicate of title. iv. Indeed, a mortgagee has a right to rely in good faith on the certicate of title of the mortgagor of the property given as security, and in the absence of any sign that might arouse suspicion, the mortgagee has no obligation to undertake further investigation. This doctrine presupposes, however, that the mortgagor, who is not the rightful owner of the property, has already succeeded in obtaining Torrens title over the property in his name and that, after obtaining the said title, he succeeds in mortgaging the property to another who relies on what appears on the title. This does not apply in a situation where the mortgagor was not the registered owner and merely represented himself to be the attorney-in-fact.41 In cases where the mortgagee does not directly deal with the registered owner of real property, the law requires that a higher degree of prudence be exercised by the mortgagee.
v.
40 381 Phil. 355, 368 (2000) as cited in Erea vs. Querrer-Kauffman, G.R. No. 165853, June 22, 2006, 492 SCRA 298, 319. 41 Bank of Commerce vs. Sps. San Pablo, G.R. No. 167848, April 27, 2007.
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As enunciated in the case of Abad vs. Guimba:42 x x x While one who buys from the registered owner does not need to look behind the certicate of title, one who buys from one who is not a registered owner is expected to examine not only the certicate of title but all the factual circumstances necessary for [one] to determine if there are any aws in the title of the transferor, or in [the] capacity to transfer the land. Although the instant case does not involve a sale but only a mortgage, the same rule applies inasmuch as the law itself includes a mortgagee in the term purchaser.43 vi. This principle is applied more strenuously when the mortgagee is a bank or a banking institution. In the case of Cruz vs. Bancom Finance Corporation, the Supreme Court ruled: Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is expected to exercise greater care and prudence in its dealings, including those involving registered lands. A banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations.44 vii. That the person applying for the loan is other than the registered owner of the real property being mortgaged should already raise a red ag and which should induce a bank to make inquiries into and conrm the authority to mortgage anothers property. A person who deliberately ignores a signicant fact that could create suspicion in an otherwise reasonable person is not an innocent purchaser for value.45
* Note: Any investigation previously conducted on the property offered as collateral does not preclude a bank from considering new information on the same property as security for a subsequent
G.R. No. 157002, July 29, 2005, 465 SCRA 356, 369. Bank of Commerce vs. Sps. San Pablo, G.R. No. 167848, April 27, 2007. 44 Ibid., 429 Phil. 225, 239 (2002). 45 Ibid.
42 43
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loan. In Sps. Omengan vs. Philippine National Bank, G.R. No. 161319, January 23, 2007, it was held that: [T]he business of a bank is one affected with public interest, for which reason the bank should guard against loss due to negligence or bad faith. In approving the loan of an applicant, the bank concerns itself with proper [information] regarding its debtors.46 Any investigation previously conducted on the property offered by petitioners as collateral did not preclude PNB from considering new information on the same property as security for a subsequent loan. The credit and property investigation for the original loan of P3 million did not oblige PNB to grant and release any additional loan. At the time the original P3 million credit line was approved, the title to the property appeared to pertain exclusively to petitioners. By the time the application for an increase was considered, however, PNB already had reason to suspect petitioners claim of exclusive ownership.
viii. Banks have access to more facilities in conrming the identity of their judgment debtors. It should act more cautiously, especially if some uncertainty had been reported by the appraiser tasked to make verications. The uncertainty should not be treated as a imsy matter. In one case, a bank was held negligent when it placed more importance on the information regarding the marketability and market value of the property, utterly disregarding the identity of the registered owner thereof. ix. Unlike private individuals, it behooves banks to exercise greater care and prudence in their dealings, including those involving registered lands. A banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as a security must be standard and indispensable part of its operations. A bank that failed to observe due diligence cannot be accorded the status of a bona de mortgagee.
46 United Coconut Planters Bank vs. Ramos, G.R. No. 147800, November 11, 2003, 415 SCRA 596, 609.
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Problems: 1. A owns an unregistered parcel of land. A sold a portion of said land to B. Subsequently, an Original Certicate of Title (OCT) was issued by the Register of Deeds. A then surrendered to X Bank the owners duplicate of the OCT as a consequence of a mortgage. B died without knowing that an OCT was already issued. Later, C, Bs heir, upon learning of his right over the land confronted A. Having failed to obtain possession of the OCT from A, C went to X Bank. C sought to borrow the owners duplicate certicate for the purpose of photocopying the same and thereafter showing a copy thereof to the Register of Deeds. X Bank allowed C to bring the owners duplicate certicate outside the bank premises when the latter showed the Deed of Sale between A and B. C returned the owners duplicate certicate on the same day after having copied the same. C then brought the copy of the OCT to the Register of Deeds which upon being presented with the Deed of Sale cancelled the OCT and issued a Transfer Certicate of Title. Is X Bank liable for damages to A? Yes. The act of X Bank of entrusting to C the owners duplicate certicate entrusted to it by A without even notifying A and absent any prior investigation on the veracity of Cs claim and character is a patent failure to foresee the risk created by the act. This act runs afoul of every banks mandate to observe the highest degree of diligence in dealing with its clients. Moreover, A has also the right to be afforded due process before deprivation or diminution of his property is effected as the OCT was still in the name of A. Notice and hearing are indispensable elements of this right which the bank miserably ignored.47 2. A bank accepted a property as mortgage despite existence of structures and occupants other than the mortgagor. Is the bank negligent? Yes. Banks, being in the business of extending loans secured by real estate mortgage, are familiar with rules on land registration. As such, they are expected to exercise more care and prudence than private individuals in their dealing with registered lands. Thus, the suspicion provoking presence of occupants other than the owner on a land to be mortgaged, it behooved banks to conduct a more exhaustive investigation on the history of the mortgagors title. The
47
Manlapat vs. Court of Appeals, G.R. No. 125585, June 8, 2005.
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banks acceptance in mortgage of the property notwithstanding the existence of structures on the property and which were in actual, visible and public possession of a person other than the mortgagor, constitutes gross negligence amounting to bad faith.48 Mercado vs. Allied Banking Corporation G.R. No. 171460, July 24, 2007 On 28 May 1992, Perla executed a Special Power of Attorney (SPA) in favor of her husband, Julian D. Mercado (Julian) over several pieces of real property registered under her name, authorizing the latter to perform several acts. On the strength of the aforesaid SPA, Julian, on 12 December 1996, obtained a loan from Allied Banking Corporation (ABC) in the amount of P3,000,000.00, secured by real estate mortgage constituted on TCT No. RT-18206 (106338) which covers a parcel of land with an area of 805 square meters, registered with the Registry of Deeds of Quezon City (Subject Property). Still using the Subject Property as security, Julian obtained an additional loan from ABC in the sum of P5,000,000.00, evidenced by a Promissory Note he executed on 5 February 1997 as another real estate mortgage (REM). It appears, however, that there was no property identied in the SPA as TCT No. RT-18206 (106338) and registered with the Registry of Deeds of Quezon City. What was identied in the SPA instead was the property covered by TCT No. RT106338 registered with the Registry of Deeds of Pasig. Subsequently, Julian defaulted on the payment of his loan obligations. Thus, ABC initiated extra-judicial foreclosure proceedings over the Subject Property which was subsequently sold at public auction wherein the it was declared as the highest bidder as shown in the Sheriffs Certicate of Sale dated 15 January 1998. ABC explained that the discrepancy in the designation of the Registry of Deeds in the SPA was merely an error that must not prevail over the clear intention of Perla to include the subject property in the said SPA. In sum, the property referred
48
Garaygay vs. Court of Appeals, G.R. No. 128229, March 18, 2005.
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to in the SPA Perla executed in favor of Julian as covered by TCT No. 106338 of the Registry of Deeds of Pasig (now Makati) and the subject property in the case at bar, covered by RT18206 (106338) of the Registry of Deeds of Quezon City, are one and the same. Elaborating, ABC claims to have carefully veried Julians authority over the subject property which was validly contained in the SPA. It stresses that the SPA was annotated at the back of the TCT of the subject property. Finally, after conducting an investigation, it found that the property covered by TCT No. 106338, registered with the Registry of Deeds of Pasig (now Makati) referred to in the SPA, and the subject property, covered by TCT No. 18206 (106338) registered with the Registry of Deeds of Quezon City, are one and the same property. From the foregoing, ABC concluded that Julian was indeed authorized to constitute a mortgage over the subject property. Is ABC a mortgagee in good faith? No. The property listed in the real estate mortgages Julian executed in favor of ABC is the one covered by TCT#RT18206(106338). On the other hand, the Special Power of Attorney referred to TCT No. RT-106338-805 Square Meters of the Registry of Deeds of Pasig now Makati. The palpable difference between the TCT numbers referred to in the real estate mortgages and Julians SPA, coupled with the fact that the said TCTs are registered in the Registries of Deeds of different cities, should have put ABC on guard. ABCs claim of prudence is debunked by the fact that it had conveniently or otherwise overlooked the inconsistent details appearing on the face of the documents, which it was relying on for its rights as mortgagee, and which signicantly affected the identication of the property being mortgaged. In Arrofo vs. Quio,49 it was elucidated that: [Settled is the rule that] a person dealing with registered lands [is not required] to inquire further than what the Torrens title on its face indicates. This rule, however, is not absolute but admits of exceptions. Thus, while its is true, x x x that a person dealing with registered lands need
49
G.R. No. 145794, January 26, 2005, 449 SCRA 284.
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not go beyond the certicate of title, it is likewise a well-settled rule that a purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man on his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor. His mere refusal to face up the fact that such defect exists, or his willful closing of his eyes to the possibility of the existence of a defect in the vendors or mortgagors title, will not make him an innocent purchaser for value, if it afterwards develops that the title was in fact defective, and it appears that he had such notice of the defect as would have led to its discovery had he acted with the measure of precaution which may be required of a prudent man in a like situation. By putting blinders on its eyes, and by refusing to see the patent defect in the scope of Julians authority, easily discernable from the plain terms of the SPA, ABC cannot now claim to be an innocent mortgagee. Further, in the case of Abad vs. Guimba,50 the Supreme Court laid down the principle that where the mortgagee does not directly deal with the registered owner of real property, the law requires that a higher degree of prudence be exercised by the mortgagee, thus: While [the] one who buys from the registered owner does not need to look behind the certicate of title, one who buys from [the] one who is not [the] registered owner is expected to examine not only the certicate of title but all factual circumstances necessary for [one] to determine if there are any aws in the title of the transferor, or in [the] capacity to transfer the land. Although the instant case does not involve a sale but only a mortgage, the same rule applies inasmuch as the law itself includes a mortgagee in the term purchaser.51
50 51
G.R. No. 157002, July 29, 2005, 465 SCRA 356. Id. at 368-369.
18
This principle is applied more strenuously when the mortgagee is a bank or a banking institution. Thus, in the case of Cruz vs. Bancom Finance Corporation,52 the Supreme Court ruled: Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is expected to exercise greater care and prudence in its dealings, including those involving registered lands. A banking institution is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations.53 Hence, considering that the property being mortgaged by Julian was not his, and there are additional doubts or suspicions as to the real identity of the same, ABC should have proceeded with its transactions with Julian only with utmost caution. As a bank, ABC must subject all its transactions to the most rigid scrutiny, since its business is impressed with public interest and its duciary character requires high standards of integrity and performance.54 Where ABC acted in undue haste in granting the mortgage loans in favor of Julian and disregarding the apparent defects in the latters authority as agent, it failed to discharge the degree of diligence required of it as a banking corporation. Thus, even granting for the sake of argument that the subject property and the one identied in the SPA are one and the same, it would not elevate ABCs status to that of an innocent mortgagee. As a banking institution, jurisprudence stringently requires that ABC should take more precautions than an ordinary prudent man should, to ascertain the status and condition of the properties offered as collateral and to verify the scope of the authority of the agents dealing with these. The failure of ABC to investigate into the circumstances surrounding the mortgage of the subject property belies its contention of good faith.
429 Phil. 225 (2002). Id. at 239. 54 The General Banking Law of 2000, Section 2.
52 53
19
L.
Banks may Exclude Persons in their Premises
Banks are mandated to exercise a higher degree of diligence in the handling of its affairs than that expected of an ordinary business enterprise. Banks handle transactions involving millions of pesos and properties worth considerable sums of money. The banking business will thrive only as long as it maintains the trust and condence of its customers/clients. Indeed, the very nature of their work, the degree of responsibility, care and trustworthiness expected of ofcials and employees of the bank is far greater than those of ordinary ofcers and employees in the other business rms. Hence, no effort must be spared by banks and their ofcers and employees to ensure and preserve the trust and condence of the general public and its customers/clients, as well as the integrity of its records and the safety and well-being of its customers/clients while in its premises. For the said purpose, banks may impose reasonable conditions or limitations to access by non-employees to its premises and records, such as the exclusion of non-employees from the working areas for employees, even absent any imminent or actual unlawful aggression on or an invasion of its properties or usurpation thereof, provided that such limitations are not contrary to the law.55 M. Charging of Interest for Loans
The charging of interest for loans forms a very essential and fundamental element of the banking business. In fact, it may be considered to be the very core of the bankings existence or being.56 IV. Liability For Acts Of Ofcers And Employees A banks liability as obligor is not merely vicarious but primary, wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no moment. Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of responsibility, care and trustworthiness expected of their employees and ofcials is far greater than those of ordinary clerks and employees. Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.
55 56
UCPB vs. Basco, G.R. No. 142668, August 31, 2004. Spouses Anastacio-Calina vs. DBP, G.R. No. 159748, July 31, 2007.
20
i.
The bank must not only exercise high standards of integrity and performance, it must also insure that its employees do likewise because this is the only way to insure that the bank will comply with its duciary duty. A bank is liable for the wrongful acts of its ofcers done in the interest of the bank or in their dealings as bank representatives but not for acts outside the scope of their authority.57 A bank holding out its ofcers and agents as worthy of condence will not be permitted to prot by the frauds they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be permitted to shirk its responsibility for such frauds, even though no benet may accrue to the bank therefrom.58 Accordingly, a banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting within the general scope of his authority even though the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person, for his own ultimate benet.59
ii.
A.
Negligence of Manager
The bank, as employer, is liable for the negligence or the misdeed of its branch manager.60 Obviously, condence in the banking system, which necessarily includes reliance on bank managers, is vital in the economic life of our society.61 B. Negligence of Ofcers (i) As a general rule, a banking corporation is liable for the wrongful or tortious acts and declarations of its ofcers or agents within the course and scope of their employment.
Prudential Bank vs. Court of Appeals, G.R. No. 108957, June 14, 1993, 223 SCRA 350. 58 10 Am Jur 2d, p. 114. 59 Ibid. 60 The Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No. 138569, September 11, 2003; Prudential Bank vs. Court of Appeals, G.R. No. 125536, March 16, 2000, 328 SCRA 264. 61 BPI Family Savings Bank, Inc. vs. First Metro Investment Corporation, G.R. No. 132390, May 21, 2004.
57
21
A bank will be held liable for the negligence of its ofcers or agents when acting within the course and scope of their employment. It may be liable for the tortious acts of its ofcers even as regards that species of tort of which malice is an essential element. A bank is liable for the fraudulent acts or representations of an ofcer or agent acting within the course and apparent scope of his employment or authority. And if an ofcer or employee of a bank, in his ofcial capacity, receives money to satisfy an evidence of indebtedness lodged with his bank for collection, the bank is liable for his misappropriation of such sum. (ii) If a corporation knowingly permits its ofcer, or any other agent, to perform acts within the scope of an apparent authority, holding him out to the public as possessing power to do those acts, the corporation will, as against any person who has dealt in good faith with the corporation through such agent, be estopped from denying such authority.62
C.
Negligence of Tellers
Likewise, banks tellers must exercise a high degree of diligence in insuring that they return the passbook only to the depositor or his authorized representative. The tellers know, or should know, that the rules on savings account provide that any person in possession of the passbook is presumptively its owner. If the tellers give the passbook to the wrong person, they would be clothing that person presumptive ownership of the passbook, facilitating unauthorized withdrawals by that person.
* Note: Appropriation of money by a teller is not estafa. What is involved is the possession of money in the capacity of a bank teller. The Supreme Court considered deposits received by a teller in behalf of a bank as being only in the material possession of the teller. This interpretation applies with equal force to money received by a bank teller at the beginning of a business day for the purpose of servicing withdrawals. Such is only material possession. Juridical possession remains with the bank. If the teller appropriates the money for personal gain then the felony committed is theft and not estafa. Further, since the teller occupies a position of condence,
62
Ibid.
22
and the bank places money in the tellers possession due to the condence reposed on the teller, the felony of qualied theft would be committed.63
D.
Right to Recover from Employees
However, banks may recover from its employees for any payments made in view of the latters negligent or criminal acts.64 The Supreme Court in one case applied the Civil Code provision that [W]hoever pays for the damages caused by his dependents or employees may recover from the latter what he has paid or delivered in satisfaction of the claim. E. Liability for Damages
It is settled that in order that a plaintiff may maintain an action for the injuries of which he complains, he must establish that such injuries resulted from a breach of duty which the defendant owed to the plaintiff a concurrence of injury to the plaintiff and legal responsibility by the person causing it. The underlying basis for the award of tort damages is the premise that an individual was injured in contemplation of law; thus there must rst be a breach before damages may be awarded and the breach of such duty should be the proximate cause of the injury.65 1. Actual and Compensatory Damages
A deposit being a contract of loan or an obligation consisting in the payment of money, the damages to be awarded should be similar to those stated in Rizal Commercial Banking Corporation vs. Alfa RTW Manufacturing Corporation, citing Eastern Shipping Lines, Inc. vs. Court of Appeals, to wit: II. With regard particularly to an award of interest, in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows: 1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of
Roque vs. People, G.R. No. 138954, November 25, 2004. Pacic Banking Corporation vs. Court of Appeals, G.R. No. L-45656, May 5, 1989, citing Art. 2181, Civil Code. 65 Aznar vs. Citibank, N.A., (Philippines), G.R. No. 164273, March 28, 2007; BPI Express Card Corporation vs. Court of Appeals, 357 Phil. 262, 276 (1998).
63 64
23
money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is reached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantication of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount nally adjudged. When the judgment of the court awarding a sum of money becomes nal and executory, the rate of legal interest whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such nality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. Exemplary Damages
3.
2.
The law allows the grant of exemplary damages by way of example for the public good.66 The public relies on the banks duciary duty to observe the highest degree of diligence. The banking sector is expected to maintain at all times this high level of meticulousness.67
66 67
Prudential Bank vs. Court of Appeals, supra, Note 59. Ibid.
24
3.
Moral Damages
The nancial credit of a businessman is a prized and valuable asset, it being a signicant part of the foundation of his business. Any adverse reection thereon constitutes some material loss to him.68 As a general rule, a corporation being an articial person without feelings, emotions and senses, and having existence only in legal contemplation is not entitled to moral damages,69 because it cannot experience physical suffering and mental anguish.70 However, for breach of the duciary duty required of a bank, a corporate client may claim such damages when its good reputation is besmirched by such breach, and social humiliation results therefrom.71 It is not enough that one merely suffered sleepless nights, mental anguish or serious anxiety as a result of the actuations of the other party. It is also required that a culpable act or omission was factually established, that proof that the wrongful act or omission of the defendant is shown as the proximate cause of the damage sustained by the claimant and that the case is predicated on any of the instances expressed or envisioned by Arts. 221972 and
Araneta vs. Bank of America, G.R. No. L-25414, July 30, 1971. LBC Express, Inc. vs. Court of Appeals, 236 SCRA 602, 607, September 21, 1994; See Layda vs. Court of Appeals, 90 Phil. 724, 730, January 29, 1952. 70 Article 2217 of the Civil Code. 71 Bank of the Philippine Islands vs. Casa Montessori Internationale, G.R. No. 149454, May 28, 2004; Morales, THE PHILIPPINE GENERAL BANKING LAW (Annotated 2002), pp. 3-4; Citing Simex International (Manila) Inc. vs. Court of Appeals, supra, and Mambulao Lumber Co. vs. Philippine National Bank, 130 Phil. 366, 391, January 30, 1968; Simex International (Manila) Incorporated vs. Court of Appeals, G.R. No. 88013, March 19, 1990. 72 Art. 2219. Moral damages may be recovered in the following and analogous cases: (1) A criminal offense resulting in physical injuries; (2) Quasi-delicts causing physical injuries; (3) Seduction, abduction, rape, or other lascivious acts; (4) Adultery or concubinage; (5) Illegal or arbitrary detention or arrest; (6) Illegal search; (7) Libel, slander or any other form of defamation; (8) Malicious prosecution; (9) Acts mentioned in Article 309; (10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35. xxx
68 69
25
222073 of the Civil Code.74 In culpa contractual or breach of contract, moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is found guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligations. The breach must be wanton, reckless, malicious or in bad faith, oppressive or abusive.75
* Notes: (i) Although there is a duciary relationship between a bank and its depositors and the extent of diligence expected of it in handling the accounts entrusted to its care is more than ordinary, the bank may not be held responsible for such damages in the absence of fraud, bad faith, malice, or wanton attitude.76 The Supreme Court pronounced in BPI Express Card Corporation vs. Court of Appeals:77 We do not dispute the ndings of the lower court that private respondent suffered damages as a result of the cancellation of his credit card. However, there is a material distinction between damages and injury. Injury is the illegal invasion of a legal right; damage is the loss, hurt, or harm which results from the injury; and damages are the recompense or compensation awarded for the damage suffered. Thus, there can be damage without injury to those instances in which the loss or harm was not the result of a violation of a legal duty. In such cases, the consequences must be borne by the injured person alone, the law affords no remedy for damages resulting from an act which does not amount to a legal injury or wrong. These situations are often called damnum absque injuria.78 (ii) A depositor has the right to recover reasonable moral damages even if the banks negligence may not have
73 Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should nd that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. 74 Equitable Banking Corp. vs. Calderon, G.R. No. 156168, December 14, 2004, 446 SCRA 271, 276. 75 Id. at 277. 76 Moran vs. Court of Appeals, G.R. No. 105836, March 7, 1994. 77 Supra note 57. 78 Id. at 275-276.
26
been attended with malice and bad faith, if the former suffered mental anguish, serious anxiety, embarrassment and humiliation.79 Moral damages are not meant to enrich a complainant at the expense of defendant. It is only intended to alleviate the moral suffering she has undergone. The award of exemplary damages is justied, on the other hand, when the acts of the bank are attended by malice, bad faith or gross negligence. The award of reasonable attorneys fees is proper where exemplary damages are awarded. It is proper where depositors are compelled to litigate to protect their interest.80
F.
Respondeat Superior, Diligence in the Selection and Supervision of Employees
A bank is bound by the negligence of its employees under the principle of respondeat superior or command responsibility. The defense of exercising the required diligence in the selection and supervision of employees is not a complete defense in culpa contractual, unlike in culpa aquiliana.81 V. Classication Of Banks Banks are classied into: (CUT-RICO) (a) (b) (c) Universal banks; Commercial banks; Thrift banks, composed of: (i) (ii) Savings and mortgage banks, Stock savings and loan associations, and
(iii) Private development banks, as dened in the Thrift Banks Act (Republic Act No. 7906). (d) Rural banks, as dened in the Rural Banks Act (Republic Act No. 7353);
Civil Code, Article 2217. Bank of The Philippine Islands vs. Court of Appeals, G.R. No. 136202, January 25, 2007; Prudential Bank vs. Court of Appeals, supra note 26. 81 Cangco vs. Manila Railroad Co., 38 Phil. 769 (1918); De Guia vs. Meralco, 40 Phil. 706 (1920).
79 80
27
(e) (f)
Cooperative banks, as dened in the Cooperative Code (Republic Act No. 6938); Islamic banks as dened in the Charter of Al Amanah Islamic Investment Bank of the Philippines (Republic Act No. 6848); and Other classications of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas. (Section 3, GBL) Only a bank that is granted universal/commercial banking authority may represent itself to the public as such in connection with its business name. Thrift Banks may be allowed to adopt and use any name: Provided, That the words A Thrift Bank, Savings Bank, A Private Development Bank or A Stock Savings and Loan Association, as the case may be, are afxed after its business name.
(g)
A.
Business Name (i)
(ii)
(iii) Rural Banks/Cooperative Banks may adopt a corporate name or use a business name/style with the word Rural or Coop, as the case may be. Said banks may also adopt a name without such words: Provided, That the identifying phrase, A Cooperative Bank or A Rural Bank, as the case may be, is afxed after its business name: Provided, further, That where the name of the bank is shown on letterheads, billboards and other advertising materials, the size of the letters of such phrase shall be at least onehalf (1/2) the size of the business name. Any bank not organized under the Rural Banks Act and any person, association, or corporation doing the business of banking, not authorized under the Rural Banks Act which shall use the words Rural Bank as part of the name or title of such bank or of such person, association, or corporations, shall be punished by a ne of not less than Fifty pesos (P50) for each day during which said words are so used.82
82 Section 28, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks, and for Other Purposes).
28
B.
Universal Banks
Universal banks are large commercial banks licensed by the Bangko Sentral ng Pilipinas (BSP) to do both commercial and investment banking.83 A universal bank shall have the authority to exercise: a. b. c. the powers authorized for a commercial bank, the powers of an investment house as provided in existing laws, and the power to invest in non-allied enterprises. (Section 23, GBL)
The operations of universal banks are discussed in Chapter 4. C. Commercial Banks A commercial bank shall have: a. b. the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking, such as: (i) (ii) accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt;
(iii) accepting or creating demand deposits; (iv) receiving other types of deposits and deposit substitutes; (v) buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and
(vi) extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment. (Section 29, GBL)
83
Asian Bonds Glossary (asianbondsonline.adb.org).
29
The operations of commercial banks are discussed in Chapter 4. D. Rural Banks
The State recognizes the need to promote comprehensive rural development with the end in view of attaining acquitable distribution of opportunities, income and wealth; a sustained increase in the amount of goods and services produced by the nation for the benet of the people; and in expanding productivity as a key raising the quality of life for all, especially the underprivileged.84 Towards these ends, the State encourages and assists in the establishment of rural banking system designed to make needed credit available and readily accessible in the rural areas on reasonable terms.85 Loans or advances extended by rural banks shall be primarily for the purpose of meeting the normal credit needs of farmers, shermen or farm families owning or cultivating land dedicated to agricultural production as well as the normal credit needs of cooperatives and merchants. In granting of loans, the rural bank shall give preference to the application of farmers and merchant whose cash requirements are small.86 In areas where there are no government banks, rural banks may deposit in private banks more than the amount prescribed by the Single Borrowers Limit subject to Monetary Board regulations.87
* Note: Single Borrowers limit is discussed in Chapter 4.
E.
Thrift Banks i. It is the policy of the State to: (a) Recognize the indispensable role of the private sector, to encourage private enterprise, and to provide incentives to needed investments;
84 Section 1, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks, and for Other Purposes). 85 Ibid. 86 Section 6, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks, and for Other Purposes). 87 Section 17, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks, and for Other Purposes).
30
(b)
Promote economic development pursuant to the socio-economic program of the government, to expand industrial and agricultural growth, to encourage the establishment of more private thrift banks in order to meet the needs for capital, personal and investment credit or medium- and long-term loans for Filipino entrepreneurs; Encourage and assist the establishment of thrift bank system which will promote agriculture and industry and at the same time place within easy reach of the people the medium- and long-term credit facilities at reasonable cost; Encourage industry, frugality and the accumulation of savings among the public, and the members and stockholders of thrift banks; and Regulate and supervise the activities of thrift banks in order to place their operations on a sound, stable and efcient basis and to curtail or prevent acts or practices which are prejudicial to the public interest.88
(c)
(d)
(e)
ii.
Thrift banks include savings and mortgage banks, private development banks, and stock savings and loans associations organized under existing laws, and any banking corporation that may be organized for the following purposes: (1) Accumulating the savings of depositors and investing them, together with capital loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds and other forms of security or in loans for personal or household nance, whether secured or unsecured, or in nancing for home building and home development; in readily marketable and debt securities; in commercial papers and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; and in such other investments and loans which the Monetary Board may de-
88 Section 2, Republic Act No. 7906 (An Act Providing for the Regulation of the Organization and Operations of Thrift Banks, and for Other Purposes).
31
termine as necessary in the furtherance of national economic objectives; (2) Providing short-term working capital, mediumand long-term nancing, to businesses engaged in agriculture, services, industry and housing; and Providing diversied nancial and allied services for its chosen market and constituencies specially for small and medium enterprises and individuals.89 Accept savings and time deposits; Open current or checking accounts: Provided, That the thrift bank has net assets of at least Twenty million pesos (P20,000,000) subject to such guidelines as may be established by the Monetary Board; and shall be allowed to directly clear its demand deposit operations with the Bangko Sentral and the Philippine Clearing House Corporation; Act as correspondent for other nancial institutions; Act as collection agent for government entities, including but not limited to, the Bureau of Internal Revenue, Social Security System, and the Bureau of Customs; Act as ofcial depository of national agencies and of municipal, city or provincial funds in the municipality, city or province where the thrift bank is located, subject to such guidelines as may be established by the Monetary Board; Rediscount paper with the Philippine National Bank, the Land Bank of the Philippines, the Development Bank of the Philippines, and other governmentowned or -controlled corporations. Said institutions shall specify the nature of paper deemed acceptable for rediscount, as well as rediscounting rate to be charged by any of these institutions; and
(3)
iii.
The following are the powers of thrift banks: (a) (b)
(c) (d)
(e)
(f)
89
Section 3, supra.
32
(g)
Issue mortgage and chattel mortgage certicates, buy and sell them for its own account or for the account of others, or accept and receive them in payment or as amortization of its loan. Such mortgage and chattel mortgage certicates shall be issued exclusively in national currency and exclusively for the nancing of equipment loans, mortgage loans for the acquisition of machinery and other xed installations, conservation, enlargement or improvement of productive properties and real estate mortgage loans for: (1) the construction, acquisition, expansion or improvement of rural and urban properties; the renancing of similar loans and mortgages; and such other purposes as may be authorized by the Monetary Board.
(2) (3)
A thrift bank shall coordinate the amounts and maturities of its certicates with those of its loans, so as to ensure adequate cash receipts for the payment of principal and interest at the time they become due. The bank shall accept its own certicates at least at the actual price of issue, in any prepayment of loans which mortgage or chattel mortgage debtors may wish to make: Provided, That the date of maturity of the certicates is not later than the date on which the payment would otherwise become due, in the absence of the aforesaid prepayment.
(h)
Purchase, hold and convey real estate under the same conditions as those governing commercial banks; Engage in quasi-banking and money market operations; Open domestic letters of credit;
(i) (j)
33
(k)
Extend credit facilities to private and government employees: Provided, That in the case of a borrower who is a permanent employee or wage earner, the treasurer, cashier or paymaster of the ofce employing him is authorized, notwithstanding the provisions of any existing law, rules and regulations to the contrary, to make deductions from his salary, wage or income pursuant to the terms of his loan, to remit deductions to the thrift bank concerned, and collect such reasonable fee for his services; Extend credit against the security of jewelry, precious stones and articles of similar nature, subject to such rules and regulations as the Monetary Board may prescribe; and
(l)
(m) Offer other banking services. Thrift banks may perform the services under (b), (d), (e), (g) and (i) only upon prior approval of the Monetary Board. It may also perform commercial banking services, operate under an expanded banking authority, or exercise such other powers incident to a corporation with prior approval of the Monetary Board.90 F. Cooperative Banks i. A cooperative bank is one organized by, the majority shares of which is owned and controlled by, cooperatives primarily to provide nancial and credit services to cooperatives. The term cooperative bank shall include cooperative rural banks.91 A cooperative bank may perform the following functions: (1) (2) To carry on banking and credit services for the cooperatives; To receive nancial aid or loans from the Government and the Central Bank of the Philippines for and in behalf of the cooperative banks and primary cooperatives and their federations engaged in
ii.
Section 10, supra. Section 100, Republic Act No. 6938 (An Act to Ordain a Cooperative Code of the Philippines).
90 91
34
business and to supervise the lending and collection of loans; (3) (4) (5) (6) (7) To mobilize savings of its members for the benet of the cooperative movement; To act as a balancing medium for the surplus funds of cooperatives and their federations; To discount bills and promissory notes issued and drawn by cooperatives; To issue negotiable instruments to facilitate the activities of cooperatives; To issue debentures subject to the approval of and under conditions and guarantees to be prescribed by the Government; To borrow money from banks and other nancial institutions within the limit to be prescribed by the Central Bank; and To carry out all other functions as may be prescribed by the Cooperative Development Authority: Provided, That the performance of any banking function shall be subject to prior approval by the Central Bank of the Philippines.
(8)
(9)
iii. G.
Membership of a cooperative bank shall include only cooperatives and federations of cooperatives.92
Islamic Banks i. R.A. 6848 created the Al-Amanah Islamic Investment Bank of the Philippines, or the Islamic Bank. Its principal domicile and place of business is in Zamboanga City. It may establish branches, agencies or other ofces at such places in the Philippines or abroad subject to the laws, rules and regulations of the Bangko Sentral ng Pilipinas.93
Section 102, supra. Section 2, Republic Act No. 6848 (An Act Providing for the 1989 Charter of the Al-Amanah Islamic Investment Bank of the Philippines, Authorizing its Conduct of Islamic Banking Business and Repealing for this Purpose Presidential Decree
92 93
35
ii.
The primary purpose of the Islamic Bank is to promote and accelerate the socio-economic development of the Autonomous Region by performing banking, nancing and investment operations and to establish and participate in agricultural, commercial and industrial ventures based on the Islamic concept of banking.94 All business dealings and activities of the Islamic Bank shall be subject to the basic principles and rulings of Islamic Sharia within the purview of the declared policy. Any zakat or tithe paid by the Islamic Bank on behalf of its shareholders and depositors shall be considered as part of compliance by the Islamic Bank with its obligation to appropriate said zakat fund and to disburse it in legitimate channels to be ascertained rst by the Sharia Advisory Council.95 Notwithstanding the provisions of any law to the contrary, the Islamic Bank is authorized to operate an Investment House pursuant to Presidential Decree No. 129, as amended, and as a Venture Capital Corporation pursuant to Presidential Decree No. 1688 and, by virtue thereof, carry on the following types of commercial operations: (1) The Islamic Bank may have a direct interest as a shareholder, partner, owner or any other capacity in any commercial, industrial, agricultural, real estate or development project under mudarabah form of partnership or musharaka joint venture agreement or by decreasing participation, or otherwise invest under any of the various contemporary Islamic nancing techniques or modes of investment for prot sharing; The Islamic Bank may carry on commercial operations for the purpose of realizing its investment banking objectives by establishing enterprises or nancing existing enterprises, or otherwise by participating in any way with other companies, institutions or banks
iii.
iv.
(2)
Numbered Two Hundred and Sixty-four as Amended by Presidential Decree Numbered Five Hundred and Forty-Two Creating The Philippine Amanah Bank). 94 Section 3, supra. 95 Ibid.
36
performing activities similar to its own or which may help accomplish its objectives in the Philippines or abroad, under any of the contemporary Islamic nancing techniques or modes of investment for prot sharing; and (3) The Islamic Bank may perform all business ventures and transactions as may be necessary to carry out the objectives of its charter within the framework of the Islamic Banks nancial capabilities and technical considerations prescribed by law and convention: Provided, That these shall not involve any riba or other activities prohibited by the Islamic Sharia principles.
H.
Other Banks The following are Government-Owned Banks: (i) Philippine Veterans Bank
On June 18, 1963, the Philippine Veterans Bank was created with the enactment of Republic Act No. 3518, which became its charter. Under the provisions of this law, the P100 million authorized capital of the Bank will be divided into 510,000 common shares and 490,000 preferred shares with a par value of P100.00. The common shares were fully subscribed by the Government for and on behalf of the veterans, their widows and orphans, and paid out of the Veterans Trust Fund. The preferred shares, which were to be sold to the veterans at the rate of one share each, were eventually distributed to them at no cost on their part. While PVB was conceived and created as a private commercial bank that is owned by the veterans, the law provided that it shall be a government depository as a gesture of appreciation by a grateful nation to the veterans for the sacrices that they offered on the altar of freedom.96 (ii) Land Bank of the Philippines
Republic Act No. 3844 (Agricultural Land Reform Code) created the Land Bank of the Philippines to nance the acquisition and distribution of agricultural estates for division and resale to
96
Website of Philippine Veterans Bank (www.veteransbank.com.ph).
37
small landholders as well as the purchase of the landholding by the agricultural lessee.97 (iii) Development Bank of the Philippines In 1947, the government created the Rehabilitation Finance Corporation (RFC) under R.A. 85 which absorbed the assets and took over the functions of the Agricultural Industrial Bank. The RFC provided credit facilities for the development of agriculture, commerce and industry and the reconstruction of properties damaged by the war. In 1958, the RFC was reorganized into the Development Bank of the Philippines. The change in corporate name marked the shift from rehabilitation to broader activities.98 I. Non-Stock Savings and Loan Associations
Non-stock savings and loan association is a non-stock, non-prot corporation engaged in the business of accumulating the savings of its members and using such accumulations for loans to members to service the needs of households by providing long-term nancing for home building and development and for personal nance.99 The Association connes its membership to a well-dened group of persons and cannot transact business with the general public.100 J. Quasi-Banks
Quasi-banks 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.101 In this connection, deposit substitutes is an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers 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,
97 98
Website of Land Bank of the Philippines (www.landbank.com). Website of Development Bank of the Philippines (www.devbankphil.com.
ph). Republic Act No. 8367. Ibid. 101 Section 4, GBL.

99 100
38
participations, certicates of assignment and similar instruments with recourse, and repurchase agreements.102 K. Offshore Banks i. P.D. 1034 (Authorizing The Establishment Of An Offshore Banking System In The Philippines) has the following whereas clauses: WHEREAS, conditions conducive to the establishment of an offshore banking system, such as political stability, a growing economy and adequate communication facilities, among others, exist in the Philippines; WHEREAS, it is in the interest of developing countries to have as wide access as possible to the sources of capital funds for economic development; WHEREAS, an offshore banking system based in the Philippines will be advantageous and benecial to the country by increasing our links with foreign lenders, facilitating the ow of desired investments into the Philippines, creating employment opportunities and expertise in international nance, and contributing to the national development effort. WHEREAS, the geographical location, physical and human resources, and other positive factors provide the Philippines with the clear potential to develop as another nancial center in Asia; ii. Offshore Banking refers to the conduct of banking transactions in foreign currencies involving the receipt of funds from external sources and the utilization of such funds. Offshore Banking Unit means a branch, subsidiary or afliate of a foreign banking corporation which is duly authorized by the Bangko Sentral ng Pilipinas (BSP) to transact offshore banking business in the Philippines. iii. Subject to such regulatory guidelines as the Monetary Board may prescribe, only banks which are organized under any law other than those of the Republic of the
102
Section 95, NCBA.
39
Philippines their branches, subsidiaries or afliates, shall be qualied to operate offshore banking units in the Philippines. However, local branches of foreign banks already authorized to accept foreign currency deposits under the provisions of R.A. 6426103 may opt to apply for authority to operate an offshore banking unit: Provided, that, upon their receipt of a corresponding certicate of authority to operate as an offshore banking unit, the license to transact business under the provisions of R.A. 6426 shall be deemed automatically withdrawn. iv. The Monetary Board of the BSP is authorized to issue certicates of authority to operate offshore banking units: Provided, however, that, in issuing such certicates, the Monetary Board shall take into consideration the applicants liquidity and solvency position, networth and resources, management, international banking expertise, contribution to the Philippine economy, and other relevant factors such as participation in equity of local commercial banks and appropriate geographic representation. The Central Bank of the Philippines is authorized to collect a fee of not less than US$ 20,000.00 upon issuing any certicate of authority to operate and annually thereafter on the anniversary date of such certicate. v. No application to operate as an offshore banking unit shall be considered unless the applicant shall have rst submitted to the BSP a sworn undertaking of its head ofce or parent or holding company, duly supported by an appropriate resolution of its board of directors, that, among other things: (a) it will, on demand, provide the necessary specied currencies to cover liquidity needs that may arise or other shortfall that is offshore banking unit may incur; (b) the operations of its offshore banking unit shall be managed soundly and with prudence; (c) it will train and continually educate a specic number of Filipinos in international banking and foreign exchange trading with a view to reducing the number of expatriates; (d) it will provide and maintain in its offshore banking unit net ofce funds in the minimum amount of US$ 1,000,000.00
103 An Act Instituting a Foreign Currency Deposit System in the Philippines And for other Purposes.
40
and (e) it will start operations of its offshore banking unit within 180 days from receipt of its certicate of authority to operate such unit. vi. Transactions of offshore banking units with nonresidents or with other offshore banking units shall be freely allowed: Provided, that the BSP may establish such safeguards as may be necessary to prevent circumvention of applicable foreign exchange regulations. Transactions of offshore banking units with resident of the Philippines, including those with local commercial banks and local branches of foreign banks authorized to receive foreign currency deposits under Republic Act No. 6426, shall be subject to applicable law and regulations. The Monetary Board of the Central Bank of the Philippines shall promulgate such rules and regulations as may be necessary to carry out and implement the provisions of this Decree. vii. Tax and Other Incentives: (a) The provisions of any law to the contrary notwithstanding, the transactions of offshore banking unit authorized hereunder with non-residents and other offshore banking units shall be subject to a ve per cent (5%) tax on the net, income from such transactions which shall be in lieu of all taxes on the said transactions: Provided, however, that transactions of offshore banking units with local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, shall likewise be subject to the same tax, except net income from such transactions as may be specied by the Secretary of Finance, upon recommendation of the Monetary Board, to be subject to the usual income tax payable by banks. Any income of non-residents from transactions with said offshore banking units shall be exempt from any tax. In the case of transaction with residents (other than other offshore banking units or local commercial banks including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units), interest income from
(b)
41
loans granted to such residents shall be subject only to a ten per cent (10%) withholding tax as nal tax. (c) Notwithstanding the provision of any law to the contrary, foreign personnel may be assigned by any foreign bank to work in its offshore banking unit in the Philippines. Such foreign personnel, their spouses and unmarried children under twenty-one years of age, shall be issued a multiple entry special visa, valid for a period of one year, to enter the Philippines: Provided, however, that a responsible ofcer of such foreign bank submits a certicate of the effect that the person who seeks entry in the Philippines is an employee of the said foreign bank and will work exclusively for its offshore banking unit in the Philippines and that he will be paid by the foreign bank in the Philippines compensation in foreign currencies: Provided, further, that in the case of the spouse and unmarried children mentioned herein the certicate shall be to the effect that they are dependents of the foreign personnel working in the offshore banking unit. The admission and stay of the foreign personnel and their dependents mentioned in the next preceding paragraph shall be co-terminous with the validity of the multiple entry special visa: Provided, however, that their stay may be extended yearly upon submission to the Commission on Immigration and Deportation of a sworn certication by a responsible ofcer of the offshore banking unit in the Philippines that such banks authority to operate as an offshore banking unit is valid and subsisting and that the personnel concerned has been paid in the Philippines, from the date of original admission, the compensation mentioned in the next preceding paragraph, for which that tax due thereon has been withheld and paid to the Bureau of Internal Revenue. The foreign personnel and their respective spouses and dependents shall be exempt from: the Payment of all fees due under the immigration and alien registration laws; securing alien certicates of registration; and obtaining emigration clearance
42
certicates, and all types of clearances required by any government department or agency, except that upon their nal departure from the Philippines, the employer of the said foreign personnel shall so advice in writing the Commission on Immigration and Deportation at least ve (5) working days prior to such departure, and the nally departing personnel shall be required to submit to the said ofce a tax clearance from the Bureau of Internal Revenue. (d) Aliens employed by offshore banking units. There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensations, remunerations and emoluments from such offshore banking units a tax equal to fteen per centum of such gross income. The alien executives of offshore banking units shall enjoy the privileges extended to foreigners coming to settle in the Philippines for the rst time as provided for under Section 105(h) of the Tariff and Customs Code, as amended. The offshore banking units shall be exempt from all forms of local licenses, fees, dues, imposts, or any other local taxes or burdens.
(e)
(f)
VI. Authority To Engage In Banking And Quasi-Banking Functions A. Authority from the Bangko Sentral
No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral. An entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions. Note that this is consistent with the following provisions of the Corporation Code: (i) No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking insti-
43
tutions, building and loan associations, trust companies and other nancial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favorable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law.104 (ii) The Securities and Exchange Commission shall not accept for ling the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certicate of the appropriate government agency to the effect that such bylaws or amendments are in accordance with law.105
B.
Determination by the Monetary Board
The determination of whether a person or entity is performing banking or quasi-banking functions without Bangko Sentral authority shall be decided by the Monetary Board. i. To resolve such issue, the Monetary Board may, through the appropriate supervising and examining department of the Bangko Sentral, examine, inspect or investigate the books and records of such person or entity. Upon issuance of this authority, such person or entity may commence to engage in banking operations or quasibanking functions and shall continue to do so unless such authority is sooner surrendered, revoked, suspended or annulled by the Bangko Sentral in accordance with the GBL or other special laws. Existence of a victim actually injured is not necessary in determining whether an entity is engaged in illegal banking. In Central Bank of The Philippines vs. Morfe, G.R. No. L-20119, June 30, 1967, it was held:
ii.
iii.
104 105
Section 17, Corporation Code (Batas Pambansa Blg. 68). Section 46, Corporation Code (Batas Pambansa Blg. 68).
44
Again, the aforementioned order would seem to assume that an illegal banking transaction, of the kind contemplated in the contested action of the ofcers of the Bank, must always connote the existence of a victim. If this term is used to denote a party whose interests have been actually injured, then the assumption is not necessarily justied. The law requiring compliance with certain requirements before anybody can engage in banking obviously seeks to protect the public against actual, as well as potential, injury. Similarly, we are not aware of any rule limiting the use of warrants to papers or effects which cannot be secured otherwise. The line of reasoning of respondent Judge might, perhaps, be justied if the acts imputed to the Organization consisted of isolated transactions, distinct and different from the type of business in which it is generally engaged. In such case, it may be necessary to specify or identify the parties involved in said isolated transactions, so that the search and seizure be limited to the records pertinent thereto. Such, however, is not the situation confronting us. The records suggest clearly that the transactions objected to by the Bank constitute the general pattern of the business of the Organization. Indeed, the main purpose thereof, according to its By-laws, is to extend nancial assistance, in the form of loans, to its members, with funds deposited by them. It is true, that such funds are referred to in the Articles of Incorporation and the By-laws as their savings. and that the depositors thereof are designated as members, but, even a cursory examination of said documents will readily show that anybody can be a depositor and thus be a participating member. In other words, the Organization is, in effect, open to the public for deposit accounts, and the funds so raised may be lent by the Organization. Moreover, the power to so dispose of said funds is placed under the exclusive authority of the founder members, and participating members are expressly denied the right to vote or be voted for, their
45
privileges and benets, if any, being limited to those which the board of trustees may, in its discretion, determine from time to time. As a consequence, the membership of the participating members is purely nominal in nature. This situation is fraught, precisely, with the very dangers or evils which Republic Act No. 337 seeks to forestall, by exacting compliance with the requirements of said Act, before the transactions in question could be undertaken. C. Authority of Supervising and Examining Department
The department head and the examiners of the appropriate supervising and examining department are authorized: a) b) to administer oaths to any such person, employee, ofcer, or director of any such entity; and to compel the presentation or production of such books, documents, papers or records that are reasonably necessary to ascertain the facts relative to the true functions and operations of such person or entity. Failure or refusal to comply with the required presentation or production of such books, documents, papers or records within a reasonable time shall subject the persons responsible therefor to penal sanctions provided under the New Central Bank Act. Persons or entities found to be performing banking or quasi-banking functions without authority from the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act and other applicable laws.106 D. Extension of Examining Powers
The Bangko Sentral shall, when examining a bank, have the authority to examine an enterprise which is wholly or majorityowned or controlled by the bank.107 However, note that this is available only when the Bangko Sentral is examining a bank.
106 107
Section 6, GBL. Section 7, GBL.
46
Interestingly, under the NCBA, the examining powers extend only to subsidiaries and afliates engaged in allied activities.108 E. Certicate of Authority to Register (i) The Securities and Exchange Commission shall not register the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certicate of authority issued by the Monetary Board, under its seal. Such certicate shall not be issued unless the Monetary Board is satised from the evidence submitted to it: (RPC) 1. That all requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with; (R) That the public interest and economic conditions, both general and local, justify the authorization; and (P) That the amount of capital, the nancing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest. (C)
2.
3.
(ii)
The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless accompanied by a certicate of authority from the Bangko Sentral.109
Problems: 1. A total of 59,463 savings account deposits have been made by the public with A corporation and its 74 branches. A Corporation has an aggregate deposit of P1,689,136.74, which has been lent out to such persons as the corporation deemed suitable therefor. Is the corporation engaged in banking business?
108 109
Sec. 25, New Central Bank Act. Section 14, GBL.
47
Yes. It is clear that these transactions partake of the nature of banking.110 Indeed, a bank has been dened as a moneyed institute111 founded to facilitate the borrowing, lending and safe-keeping of money112 and to deal, in notes, bills of exchange, and credits.113 An investment company which loans out the money of its customers, collects the interest and charges a commission to both lender and borrower, is a bank.114 Any person engaged in the business carried on by banks of deposit, of discount, or of circulation is doing a banking business, although but one of these functions is exercised.115 Thus, authority from the Bangko Sentral is necessary. 2. An investment company engaged in the purchase of receivables at a discount. Did it engage in banking business without authority from the Bangko Sentral? No. An investment company refers to any issuer which is or holds itself out as being engaged or proposes to engage primarily in the business of investing, reinvesting or trading in securities. Securities include commercial papers evidencing indebtedness of any person, nancial or non-nancial entity, irrespective of maturity, issued, endorsed, sold, transferred or in any manner conveyed to another with or without recourse, such as promissory notes. Purchase of receivables at a discount, 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 banking laws.116 Indubitably, 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.117
110 Republic of the Philippines vs. Security Credit and Acceptance Corporation, G.R. No. L-20583, January 23, 1967. 111 Talmage vs. Pell, 7 N.Y. (3 Seld. ) 328, 347, 348. 112 Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243, 255 U.S. 180, 210, 65 L. Ed. 577. 113 State vs. Cornings Sav. Bank, 115 N.W. 937, 139 Iowa 338; Banks & Banking, by Zellmann, vol. 1, p. 46. 114 Western Investment Banking Co. vs. Murray, 56 P. 728, 730, 731; 6 Ariz 215. 115 Maclaren vs. State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas. 826; 9 C.J.S. 30. 116 Baas vs. Asia Pacic Finance Corporation, G.R. No. 128703, October 18, 2000. 117 Ibid.
48
VII. Service of Summons Upon Banks A. Service under the Rules of Court i. Sec.11, Rule 14 of the Rules of Court provides: Service upon domestic private juridical entity. When the defendant is a corporation, partnership or association organized under the laws of the Philippines with a juridical personality, service may be made on the president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel. ii. Sec. 12, Rule 14 of the Rules of Court provides: Service upon foreign private juridical entity. When the defendant is a foreign private juridical entity which has transacted business in the Philippines, service may be made on its resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government ofcial designated by law to that effect, or on any of its ofcers or agents within the Philippines.
* Note: See related discussion on service to foreign banks in Chapter 6.
B.
Strict Compliance is Necessary i. Basic is the rule that a strict compliance with the mode of service is necessary to confer jurisdiction of the court over a corporation. The ofcer upon whom service is made must be one who is named in the statute; otherwise, the service is insufcient.118 The purpose is to render it reasonably certain that the corporation will receive prompt and proper notice in an action against it or to insure that the summons be served on a representative so integrated with the corporation that such person will know what to do with the legal papers served on him. In this connection, service of summons on a branch manager is invalid. Thus, it was held that:
ii.
118 Bank of the Philippine Islands vs. Sps. Santiago, G.R. No. 169116, March 28, 2007; Delta Motors Corp. vs. Pamintuan, G.R. No. L-41667, April 30, 1976, 70 SCRA 598.
49
Applying the aforestated principle in the case at bar, we rule that the service of summons on BPIs Branch Manager did not bind the corporation for the branch manager is not included in the enumeration of the statute of the persons upon whom service of summons can be validly made in behalf of the corporation. Such service is therefore void and ineffectual.119 iii. However, whatever defect that attended the service of an original summons would be promptly and accordingly cured upon the issuance and the proper service of new summons. In the case of The Philippine American Life and General Insurance Company vs. Brevea,120 the Supreme Court ruled: A case should not be dismissed simply because an original summons was wrongfully served. It should be difcult to conceive, for example, that when a defendant personally appears before a Court complaining that he had not been validly summoned, that the case against him should be dismissed. An alias summons can be actually served on said defendant. xxxx x x x It is not pertinent whether the summons is designated as an original or an alias summons as long as it has adequately served its purpose. What is essential is that the summons complies with the requirements under the Rules of Court and it has been duly served on the defendant together with the prevailing complaint. x x x Moreover, the second summons was technically not an alias summons but more of a new summons on the amended complaint. It was not a continuation of the rst summons considering that it particularly referred to the amended complaint and not to the original complaint. (Emphases supplied.)
119 Bank of the Philippine Islands vs. Sps. Santiago, G.R. No. 169116, March 28, 2007. 120 The Philippine American Life and General Insurance Company vs. Breva, G.R. No. 147937, November 11, 2004, 442 SCRA 217, 223-225.
50
Chapter 2 Organization, Management And Administration Of Banks, Quasi-Banks And Trust Entities
I. Organization Of Banks A. Conditions
The Monetary Board may authorize the organization of a bank or quasi-bank subject to the following conditions: (SPC) 1. That the entity is a stock corporation; (S) The Monetary Board may prescribe rules and regulations on the types of stock a bank may issue, including the terms thereof and rights appurtenant thereto to determine compliance with laws and regulations governing capital and equity structure of banks. Banks shall issue par value stocks only.1
2. 3.
That its funds are obtained from the public, which shall mean twenty (20) or more persons; and (P) That the minimum capital requirements prescribed by the Monetary Board for each category of banks are satised. (C)
B.
Capabilities
The Monetary Board shall take into consideration their capability in terms of their nancial resources and technical expertise and integrity. The bank licensing process shall incorporate an assessment of:
1
Section 9, GBL. 50
CHAPTER 2 ORGANIZATION, MANAGEMENT AND ADMINISTRATION OF BANKS, QUASI-BANKS AND TRUST ENTITIES
51
a) b) c) d) e) C.
the banks ownership structure, directors and senior management, its operating plan, and internal controls, as well as its projected nancial condition and capital base.2
Capital Requirements
1. Banks to be established shall comply with the required minimum capital enumerated below or as may be prescribed by the Monetary Board: Type of Bank a. Universal Banks b. Commercial Banks c. Thrift Banks With head ofce within Metro Manila With head ofce outside Metro Manila d. Rural Banks within Metro Manila Cities of Cebu and Davao In 1st, 2nd & 3rd class cities and 1st class municipalities In 4th, 5th & 6th class cities and in 2nd, 3rd & 4th class municipalities In 5th & 6th class municipalities 26.0 13.0 6.5 325.0 52.0 Amounts (In Million Pesos) 4,950.0 2,400.0
3.9 2.6
2. At least 25% of the total authorized capital stock shall be subscribed by the subscribers of the proposed bank, and at least
2
Section 8, GBL.
52
25% of such subscription shall be paid-up, provided that in no case shall the paid-up capital be less than the minimum required capital stated above. This is consistent with Section 13 of the Corporation Code to wit: Sec. 13. Amount of capital stock to be subscribed and paid for purposes of incorporation. At least twenty-ve percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-ve percent (25%) of the total subscription must be paid upon subscription, the balance to be payable on a date or dates xed in the contract of subscription without need of call, or in the absence of a xed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than ve thousand pesos (P5,000.00). D. Incorporators/Subscribers (i) The incorporators/subscribers and proposed directors and ofcers must be persons of integrity and of good credit standing in the business community. The subscribers must have adequate nancial strength to pay for their proposed subscriptions in the bank. The incorporators/subscribers and proposed directors and ofcers must not have been convicted of any crime involving moral turpitude, and unless otherwise allowed under the provisions of existing laws are not ofcers and employees of a government agency, instrumentality, department or ofce charged with the supervision of, or the granting of loans to banks.
(ii)
(iii) A bank may be organized with not less than ve (5) nor more than fteen (15) incorporators. In case there are more than fteen (15) persons initially interested in organizing and investing in the proposed bank, the excess may be listed among the original subscribers in the Articles of Incorporation.
* Note: Cooperatives may organize a rural bank. Upon consultation with the rural banks in the area, duly established cooperatives and corporations primarily organize to hold equities
53
in rural banks may organize a rural bank and/or subscribe to the shares of stock of any rural bank: Provided, That a cooperative or corporation owning or controlling the whole or majority of the voting stock of the rural bank shall be subject to special examination and to such rules and regulations as the Monetary Board may prescribe.3
E.
Bank Branches (i) Universal or commercial banks may open branches or other ofces within or outside the Philippines upon prior approval of the Bangko Sentral. Branching by all other banks shall be governed by pertinent laws. A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as outlets for the presentation and/or sale of the nancial products of its allied undertaking or of its investment house units. A bank authorized to establish branches or other ofces shall be responsible for all business conducted in such branches and ofces to the same extent and in the same manner as though such business had all been conducted in the head ofce. A bank and its branches and ofces shall be treated as one unit.4 II. Stockholdings
(ii)
A.
Treasury Stocks (i) The GBL provides that no bank shall: a) b) purchase or acquire shares of its own capital stock; or accept its own shares as a security for a loan. The exception is when otherwise authorized by the Monetary Board. In every case, the stock so purchased or acquired shall, within six (6) months from the time of its purchase or acquisition, be sold or disposed of at a public or private sale.5
3 Section 4, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks and for Other Purposes). 4 Section 20, GBL. 5 Section 10, GBL.
54
(ii)
At common law a corporation has no lien upon the shares of stockholders for any indebtedness to the corporation6 and there is no statute creating such lien. No bank shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith, and stock so purchased or acquired shall, within six months from the time of its purchase, be sold or disposed of at public or private sale, or, in default thereof, a receiver may be appointed to close up the business of the bank in accordance with law.7
(iii) Section 35 of the United States National Banking Act of 1864 contains a similar provision and it has been held in various decisions of the United States Supreme Court that a bank organized under that Act can have no lien on its own stock for the indebtedness of the stockholders even when the by-laws provide that the shares shall be transferable only on the books of the corporation and that no such transfer shall be made if the holder of the shares is indebted to the corporation.8 The reasons for this doctrine are obvious; if banking corporations were given a lien on their own stock for the indebtedness of the stockholders, the prohibition against granting loans or discounts upon the security of the stock would become largely ineffective.9 B. Foreign Stockholdings The GBL provides: (i) Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations.10
Jones on Liens, 3d Ed., Sec. 375. Fua Cun (alias Tua Cun) vs. Summers, G.R. No. L-19441, March 27, 1923. 8 Jones on Liens, 3d Ed., Sec. 384; First National Bank of South Bend vs. Lanier and Handy, 11 Wall., 369; Bullard vs. National Eagle Bank, 18 Wall., 589; First National Bank of Xenia vs. Stewart and Mcmillan, 107 U.S., 676. 9 Fua Cun (alias Tua Cun) vs. Summers, G.R. No. L-19441, March 27, 1923. 10 Section 11, GBL.
6 7
55
* Note: This provision is ambiguous. It appears that foreign individuals and non-bank corporations may only control up to forty percent (40%) of the voting stock. On the other hand, Filipinos and domestic non-bank corporations may also control only up to forty percent of the voting stock. What happens then to the remaining twenty percent (20%)? The same has been claried as follows: a) Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank: Provided, That the aggregate foreignvoting stocks owned by the foreign individuals and nonbank corporations in a domestic bank shall not exceed forty percent (40%) of the outstanding voting stock of the bank. The percentage of foreign-owned voting stock in a bank shall be determined by the citizenship of the individual stockholders in that bank. b) A Filipino individual and a domestic non-bank corporation may each own up to forty percent (40%) of the voting stock of a domestic bank. There shall be no aggregate ceiling on the ownership by such individuals and corporations in a domestic bank.
(ii)
The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation.11 Thus, the citizenship of the corporation which is a stockholder of a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation. The term controlling stockholders shall refer to individuals holding more than fty percent (50%) of the voting stock of the corporate stockholders of the bank.
(iii) At least 60% of voting stock of any commercial bank shall be owned by Filipino citizens. For any thrift bank, at least 40% of its voting stock shall be owned by Filipino citizens. Subject to Section 4 of Republic Act. No. 7353
11
Ibid.
56
(Rural Banks Act), all of the capital stock of any rural bank shall be fully owned and held, directly or indirectly, by Filipino citizens or corporations, associations or cooperatives qualied under Philippine laws to own and hold such capital stock.
* Note: In determining the nationality of banks, the control test is applied. The war-time test, investment test, place of incorporation test, and principal place of business test do not apply:
C.
Acquisition Of Voting Stock In A Domestic Bank The GBL provides for the following rules: (i) Within seven (7) years from the effectivity of the GBL and subject to guidelines issued pursuant to the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to one hundred percent (100%) of the voting stock of only one (1) bank organized under the laws of the Republic of the Philippines. Within the same period, the Monetary Board may authorize any foreign bank, which prior to the effectivity of the GBL availed itself of the privilege to acquire up to sixty percent (60%) of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks Act, to further acquire voting shares of such bank to the extent necessary for it to own one hundred percent (100%) of the voting stock thereof.
(ii)
(iii) In the exercise of this authority, the Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos. Any right, privilege or incentive granted to a foreign bank under this Section shall be equally enjoyed by and extended under the same conditions to banks organized under the laws of the Republic of the Philippines.12
* Note: See discussion on foreign banks in Chapter 6.
12
Section 73, GBL.
57
D.
Family Groups or Related Interests
Stockholdings of individuals related to each other within the fourth degree of consanguinity or afnity, legitimate or commonlaw, shall be considered family groups or related interests and must be fully disclosed in all transactions by such an individual with the bank.13 Two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank.14 III. Board Of Directors A. Number of Directors
The provisions of the Corporation Code to the contrary notwithstanding, there shall be at least ve (5), and a maximum of fteen (15) members of the board of directors of bank, two (2) of whom shall be independent directors. Except for the requirement of two independent directors, this requirement under the GBL is similar to Section 10 of the Corporation Code: Number and qualications of incorporators. Any number of natural persons not less than ve (5) but not more than fteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank. 15 An independent director means a person other than an ofcer or employee of the bank, its subsidiaries or afliates or related interests.
Section 12, GBL. Section 13, GBL. 15 Sec. 7, R.A. 7721.

13 14
58
Specically, an independent director shall mean a person who a. Is not or has not been an ofcer or employee of the bank/ quasibank/trust entity, its subsidiaries or afliates or related interests during the past three (3) years counted from the date of his election; Is not a director or ofcer of the related companies of the institutions majority stockholder; Is not a majority shareholder of the institution, any of its related companies, or of its majority shareholder; Is not a relative within the fourth degree of consanguinity or afnity, legitimate or common-law of any director, ofcer or majority shareholder of the bank/quasi-bank/ trust entity, or any of its related companies; Is not acting as a nominee or representative of any director or substantial shareholder of the bank/quasibank/trust entity, any of its related companies or any of its substantial shareholders; and Is free from any business or other relationship with the institution or any of its major stockholders which could materially interfere with the exercise of his judgment, i.e., has not engaged and does not engage in any transaction with the institution, any of its related companies or any of its substantial shareholders, whether by himself or with other persons or through a rm of which he is a partner or a company of which he is a director or substantial shareholder, other than transactions which are conducted at arms length and could not materially interfere or inuence with the exercise of his judgments.
b. c. d.
e.
f.
B.
Directors of Merged or Consolidated Banks
In the case of a bank merger or consolidation, the number of directors shall not exceed twenty-one.16 C. Meetings
The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and
16
Section 17, GBL.
59
video-conferencing.17 Banks shall include in their bylaws a provision that meetings of their board of directors shall be held only within the Philippines. In relation to this, Section 25 of the Corporation Code provides: Corporate ofcers, quorum. Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other ofcers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time. The directors or trustees and ofcers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the bylaws provide for a greater majority, a majority of the number of directors or trustees as xed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of ofcers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot attend or vote by proxy at board meetings. D. Compensation and other Benets of Directors and Ofcers
To protect the funds of depositors and creditors, the Monetary Board may regulate the payment by the bank to its directors and ofcers of compensation, allowance, fees, bonuses, stock options, prot sharing and fringe benets only in exceptional cases and when the circumstances warrant, such as but not limited to the following: (CUU) a. When a bank is under comptrollership or conservatorship; or (C)
17
Section 15, GBL.
60
b. c.
When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or (U) When a bank is found by the Monetary Board to be in an unsatisfactory nancial condition. (Section 18, GBL) (U)
* Note: This is somewhat absurd. The Monetary Board may only regulate the compensation and benets of directors and ofcers to protect the depositors and creditors only when the bank is in trouble. Sec. 30 of the Corporation Code provides the remedy: Compensation of directors. In the absence of any provision in the by-laws xing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders meeting. In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year.
IV. Fit And Proper Rule A. Powers of the Monetary Board The GBL provides the following rules: 1. To maintain the quality of bank management and afford better protection to depositors and the public in general, the Monetary Board shall prescribe, pass upon and review the qualications and disqualications of individuals elected or appointed bank directors or ofcers and disqualify those found unt. After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or ofcer who commits or omits an act which render him unt for the position. In determining whether an individual is t and proper to hold the position of a director or ofcer of a bank, regard shall be given to his integrity, experience, education, training, and competence. (CITEE)18
2.
3.
18
Section 16, GBL.
61
B.
Disqualications19 a. The following are permanently disqualied from being directors: 1. Persons who have been convicted by nal judgment of a court for offenses involving dishonesty or breach of trust such as, but not limited to, estafa, embezzlement, extortion, forgery, malversation, swindling, theft, robbery, falsication, bribery, violation of B.P. Blg. 22 (Bouncing Checks Law), violation of anti-graft and corrupt practices act (R.A. 3019) and prohibited acts and transactions under Section 7 of R.A. 6713 (Code of Conduct and Ethical Standards for Public Ofcials and Employees); Persons who have been convicted by nal judgment of a court sentencing them to serve a maximum term of imprisonment of more than six years; Persons who have been convicted by nal judgment of the court for violation of banking laws, rules and regulations; Persons who have been judicially declared insolvent, spendthrift or incapacitated to contract; or Directors, ofcers or employees of closed banks/ quasi-banks/trust entities who were found to be culpable for such institutions closure as determined by the monetary board; Directors and ofcers of banks, quasi-banks and trust entities found by the monetary board as administratively liable for violation of banking laws, rules and regulations where a penalty of removal from ofce is imposed, and which nding of the monetary board has become nal and executory; and Directors and ofcers of banks, quasi-banks and trust entities or any person found by the monetary board to be unt for the position of directors or ofcers because they were found administratively liable by another government agency for violation of banking
2.
3.
4. 5.
6.
7.
19
Circular No. 513, Series of 2006.
62
laws, rules and regulations or any offense/violation involving dishonesty or breach of trust, and which nding of said government agency has become nal and executory. b. The following are temporarily disqualied from being directors: 1. Persons who refuse to fully disclose the extent of their business interest or any material information to the appropriate supervising and examining department when required pursuant to a provision of law or of a circular, memorandum, rule or regulation of the BSP. This disqualication shall be in effect as long as the refusal persists; Directors who have been absent or who have not participated for whatever reasons in more than fty percent (50%) of all meetings, both regular and special, of the board of directors during their incumbency, and directors who failed to physically attend for whatever reasons in at least twenty-ve percent (25%) of all board meetings in any year, except that when a notarized certication executed by the corporate secretary has been submitted attesting that said directors were given the agenda materials prior to the meeting and that their comments/ decisions thereon were submitted for deliberation/ discussion and were taken up in the actual board meeting, said directors shall be considered present in the board meeting. This disqualication applies only for purposes of the immediately succeeding election; Persons who are delinquent in the payment of their obligations: a. Delinquency in the payment of obligations means that an obligation of a person with a bank/quasi-bank/trust entity where he/she is a director or ofcer, or at least two obligations with other banks/nancial institution, under different credit lines or loan contracts, are past due (pursuant to Secs. X306 and 4308Q of the Manual of Regulations for Banks).
2.
3.
63
b.
Obligations shall include all borrowings from a bank/quasi-bank obtained by: i. A director or ofcer for his own account or as the representative or agent of others or where he/she acts as a guarantor, indorser, or surety for loans from such nancial institutions; The spouse or child under the parental authority of the director or ofcer; Any person whose borrowings or loan proceeds were credited to the account of, or used for the benet of a director or ofcer; A partnership of which a director or ofcer, or his/her spouse is the managing partner or a general partner owning a controlling interest in the partnership; and A corporation, association or rm whollyowned or majority of the capital of which is owned by any or a group of persons mentioned in the foregoing items (i), (ii) and (iv);
ii. iii.
iv.
v.
This disqualication shall be in effect as long as the delinquency persists. 4. Persons who have been convicted by a court for offenses involving dishonesty or breach of trust such as, but not limited to, estafa, embezzlement, extortion, forgery, malversation, swindling, theft, robbery, falsication, bribery, violation of B.P. Blg. 22, violation of anti-graft and corrupt practices act (R.A. 3019), and prohibited acts and transactions under Section 7 of R.A. 6713 (Code Of Conduct And Ethical Standards For Public Ofcials And Employees), violation of banking laws, rules and regulations or those sentenced to serve a maximum term of imprisonment of more than six years but whose conviction has not yet become nal and executory;
64
5.
Directors and ofcers of closed banks/quasi-banks/ trust entities pending their clearance by the Monetary Board; Directors disqualied for failure to observe/discharge their duties and responsibilities prescribed under existing regulations. This disqualication applies until the lapse of the specic period of disqualication or upon approval by the Monetary Board on recommendation by the appropriate supervising and examining department of such directors election/reelection; Directors who failed to attend the special seminar for board of directors. This disqualication applies until the director concerned had attended such seminar; Persons dismissed/terminated from employment for cause. This disqualication shall be in effect until they have cleared themselves of involvement in the alleged irregularity or upon clearance, on their request, from the monetary board after showing good and justiable reasons; Those under preventive suspension; or Persons with derogatory records as certied by, or on the ofcial les of, the judiciary, National Bureau of Investigation, Philippine National Police, quasi-judicial bodies, other government agencies, international police, monetary authorities and similar agencies or authorities of foreign countries for irregularities or violations of any law, rules and regulations that would adversely affect the integrity of the director/ofcer or the ability to effectively discharge his duties. This disqualication applies until they have cleared themselves of the alleged irregularities/violations or after a lapse of ve (5) years from the time the complaint, which was the basis of the derogatory record, was initiated; Directors and ofcers of banks, quasi-banks and trust entities found by the Monetary Board as administratively liable for violation of banking laws, rules and regulations where a penalty of removal from ofce is imposed, and which nding of the Mon-
6.
7.
8.
9. 10.
11.
65
etary Board is pending appeal before the appellate court, unless execution or enforcement thereof is restrained by the court; 12. Directors and ofcers of banks, quasi-banks and trust entities or any person found by the Monetary Board to be unt for the position of directors or ofcers because they were found administratively liable by another government agency for violation of banking laws, rules and regulations or any offense/ violation involving dishonesty or breach of trust, and which nding of said government agency is pending appeal before the appellate court, unless execution or enforcement thereof is restrained by the court; Directors and ofcers of banks, quasi-banks and trust entities found by the Monetary Board as administratively liable for violation of banking laws, rules and regulations where a penalty of suspension from ofce or ne is imposed, regardless whether the nding of the Monetary Board is nal and executory or pending appeal before the appellate court, unless execution or enforcement thereof is restrained by the court. The disqualication shall be in effect during the period of suspension or so long as the ne is not fully paid.
13.
C.
Disqualications/Prohibitions under the Corporation Code The Corporation Code provides: Section 27. Disqualication of directors, trustees or ofcers. No person convicted by nal judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within ve (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or ofcer of any corporation.
D.
Disqualications/Prohibitions under the NCBA The NCBA provides for the following: Section 9. Disqualications. In addition to the disqualications imposed by Republic Act No. 6713, a member of the Monetary Board is disqualied from being a director, ofcer, employee, consultant, lawyer, agent or stockholder of
66
any bank, quasi-bank or any other institution which is subject to supervision or examination by the Bangko Sentral, in which case such member shall resign from, and divest himself of any and all interests in such institution before assumption of ofce as member of the Monetary Board. The members of the Monetary Board coming from the private sector shall not hold any other public ofce or public employment during their tenure. No person shall be a member of the Monetary Board if he has been connected directly with any multilateral banking or nancial institution or has a substantial interest in any private bank in the Philippines, within one (1) year prior to his appointment; likewise, no member of the Monetary Board shall be employed in any such institution within two (2) years after the expiration of his term except when he serves as an ofcial representative of the Philippine Government to such institution. (Emphasis supplied) Section 27. Prohibitions. In addition to the prohibitions found in Republic Act Nos. 3019 and 6713, personnel of the Bangko Sentral are hereby prohibited from: (a) being an ofcer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the Bangko Sentral, except non-stock savings and loan associations and provident funds organized exclusively for employees of the Bangko Sentral, and except as otherwise provided in this Act; directly or indirectly requesting or receiving any gift, present or pecuniary or material benet for himself or another, from any institution subject to supervision or examination by the Bangko Sentral; revealing in any manner, except under orders of the court, the Congress or any government ofce or agency authorized by law, or under such conditions as may be prescribed by the Monetary Board, information relating to the condition or business of any institution. This prohibition shall not be held to apply to the giving of information to the Monetary Board or the Governor of the Bangko Sentral, or to any person authorized by either of them, in writing, to receive such information; and
(b)
(c)
67
(d)
borrowing from any institution subject to supervision or examination by the Bangko Sentral shall be prohibited unless said borrowings are adequately secured, fully disclosed to the Monetary Board, and shall be subject to such further rules and regulations as the Monetary Board may prescribe: Provided, however, That personnel of the supervising and examining departments are prohibited from borrowing from a bank under their supervision or examination. (Emphasis supplied)
E.
Disqualication/Prohibition under the PDIC (Philippine Deposit Insurance Corporation) Law The PDIC law provides: SECTION 17. Except with the written consent of the Corporation (PDIC), no person shall serve as a director, ofcer, or employee of an insured bank who has been convicted, or who is hereafter convicted, of any criminal offense involving dishonesty or a breach of trust. For each willful violation of this prohibition, the bank involved shall be subject to a penalty of not more than P100 for each day this prohibition is violated, which the Corporation may recover for its use.
F.
Disqualication/Prohibition under Republic Act No. 7353 (An Act Providing For The Creation, Organization And Operation Of Rural Banks, And For Other Purposes) R.A. 7353 provides: Sec. 5. All members of the Board of Directors of the rural bank shall be citizens of the Philippines at the time of their assumption to ofce: Provided, however, That nothing in this Act shall be construed as prohibiting any appointive or elective public ofcial from serving as director, ofcer, consultant or in any capacity in the bank.
G.
Disqualication/Prohibition under Appendix 38, Manual of Regulations for Banks (Guidelines For The Organization Of Cooperative Banks) Appendix 38 of the MORB provides: Sec. 10. Limitation on ofcership/directorship. Any ofcer or employee of the CDA (Cooperative Development Authority) shall be disqualied to be elected or appointed to any position in a Coop Bank. Elective ofcials of the Government,
68
except barangay ofcials, shall also be ineligible to become ofcers and directors of Coop Banks. H. Prohibition on Public Ofcials
Except as otherwise provided in the Rural Banks Act, no appointive or elective public ofcial, whether full-time or part-time shall at the same time serve as ofcer of any private bank, save in cases where such service is incident to nancial assistance provided by the government or a government-owned or -controlled corporation to the bank or unless otherwise provided under existing laws.20 The pertinent provision of the Rural Banks Act states: All members of the Board of Directors of the rural bank shall be citizens of the Philippines at the time of their assumption to ofce: Provided, however, That nothing in this Act shall be construed as prohibiting any appointive or elective public ofcial from serving as director, ofcer, consultant or in any capacity in the bank.21 V. Banking Days And Hours A. Number of Days and Hours The GBL provides for the following guidelines: (i) Unless otherwise authorized by the Bangko Sentral in the interest of the banking public, all banks including their branches and ofces shall transact business on all working days for at least six (6) hours a day. In addition, banks or any of their branches or ofces may open for business on Saturdays, Sundays or holidays for at least three (3) hours a day. Banks which opt to open on days other than working days shall report to the Bangko Sentral the additional days during which they or their branches or ofces shall transact business.
(ii)
Section 19, GBL. Section 5, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks and for Other Purposes).
20 21
69
(iii) Working days mean Mondays to Fridays, except if such days are holidays.22 B. Rules and Regulations
In connection with banking days and hours, the following are the pertinent rules and regulations: i. All banks, including their branches and ofces, doing business in the Philippines, shall observe for the conduct of their business a regular banking week of ve (5) days, except when such days are holidays. The regular banking week should fall on Mondays to Fridays unless otherwise authorized by the BSP in the interest of the banking public. On these days, said institution shall transact business for at least six (6) hours each day. a. For purposes of servicing deposits and withdrawals, banks may, at their discretion, remain open beyond the minimum six (6) hours and for as long as they nd it necessary, even before 8:00 AM or after 8:00 PM. Banks may, after prior written notice, also remain open beyond the minimum six (6) hours for banking services other than the servicing of deposits and withdrawals but in no case shall such banking hours start earlier than 8:00 AM nor extend beyond 8:00 PM. Branches of banks at any international airport or major sh port are allowed to operate on exible banking hours within a twenty-four (24)-hour period, subject to the condition that the individual banks management will inform the BSP of the schedule of its banking hours which shall in no case be less than six (6) hours a day. The banking days and hours selected for each of the ofces of banks shall be reported in writing to the appropriate supervising and examining department of the BSP. Banks may change the banking days and hours previously reported to the BSP by giving prior
b.
c.
d.
22
Section 21, GBL.
70
written notice: Provided, That changes in banking days or hours shall not be made oftener than once every thirty (30) days, except during emergencies. e. Emergency shall mean (a) condition of an area or locality proclaimed by the President of the Philippines as in a state of emergency; or (b) an event or occasion or a combination of circumstances equivalent to a public calamity resulting from re, ood, or like disaster, or through some unusual occurrence or pressing necessity not reasonably subject to anticipation calling for immediate action or remedy. The prior written notice to the BSP on changes in banking days and hours shall be given through the fastest means of communication, at least seven (7) banking days before the intended effectivity of the change in banking hours or days. In case a bank, due to an emergency, has to open outside, or close during, the banking hours or days reported to the BSP, a written report submitted within twenty-four (24) hours from opening or closing, as the case may be, will sufce. The report shall state the specic nature of the emergency and the period the bank opened or closed or shall open or close by reason of emergency.
f.
g.
ii.
Subject to compliance with other relevant laws, banks, including their branches and ofces, may opt to observe a banking week in excess of the ve (5) days after reporting to the BSP the additional days during which such banks or their branches or ofces shall transact business for at least three (3) hours each day. Without the need for prior approval of the BSP, and even in the absence of an approved local holiday, banks and/ or their branches or other ofces are allowed to close on certain days in celebration of important historical and/or religious events in the locality where these banks operate: Provided, That said closure has the prior approval of the bankers association in the locality and in the case of bank branches, their respective head ofces: Provided, further,
iii.
71
That said closure will only be allowed in the municipality or city where the festivities are centered. iv. Banks and/or their branches or other ofces shall submit, either individually or through their head ofces, to the appropriate supervising and examining department of the BSP a prior notice of their intended closure on account of a specic local festivity, together with a copy of the resolution of the local bankers association approving said closure, at least two (2) days after the date of said resolution. The required notice shall be supported by a certication that: a. On the date of the temporary closure, the bank and/or branch will maintain a skeletal force to handle outof-town clearing items (in line with the provisions of Section X603 of the MORB); The notice of the banks closure and the reason thereof shall be posted conspicuously in the banks premises; and For branches of banks, the closure has the prior approval of their respective head ofces.23 VI. Automated Teller Machines A. Off-Site Automated Teller Machines (ATMs)
v.
b.
c.
Banks may establish off-site ATMs, subject to the following conditions: (1) (2) Banks shall submit a report to the appropriate department of the BSP on ATMs which they establish; The off-site ATMs shall be installed only in centers of activity like shopping centers, supermarkets, hospitals, university campuses: Provided, That adequate internal control and security measures shall be adopted and submitted to the BSP; and Only banks which have shown general compliance with
(3)
23
Section X156 of the MORB as amended by Circular No. 500, Series of 2005.
72
laws, rules and regulations shall be allowed to open offsite ATMs. B. Mobile ATMs
Banks may also establish mobile ATMs, subject to the following conditions: (1) The mobile ATMs should be allowed to visit only centers of activity as mentioned in Item A(2) above and should conne their itinerary to Metro Manila until further notice; The bank shall secure insurance coverage or adopt a self-insurance scheme to protect itself against losses of whatever nature in its mobile ATM operations; and The bank shall notify the supervising and examining department of the BSP of the actual date a mobile ATM becomes operational and when no longer in operation. VII. Independent Auditor The following are the rules with respect to nancial audit of banks: (i) The Monetary Board may require a bank, quasi-bank or trust entity to engage the services of an independent auditor to be chosen by the bank, quasi-bank or trust entity concerned from a list of certied public accountants acceptable to the Monetary Board. The term of the engagement shall be as prescribed by the Monetary Board which may either be on a continuing basis where the auditor shall act as resident examiner, or on the basis of special engagements, but in any case, the independent auditor shall be responsible to the banks, quasi-banks or trust entitys board of directors. A copy of the report shall be furnished to the Monetary Board.
(2)
(3)
(ii)
(iii) The Monetary Board may also direct the board of directors of a bank, quasi-bank, trust entity and/or the individual members thereof, to conduct, either personally or by a committee created by the board, an annual balance sheet audit of the bank, quasi-bank or trust entity to review the
73
internal audit and control system of the bank, quasi-bank or trust entity and to submit a report of such audit.24 VIII. Financial Statements Every bank, quasi-bank or trust entity shall submit to the appropriate supervising and examining department of the Bangko Sentral nancial statements in such form and frequency as may be prescribed by the Bangko Sentral. Such statements, which shall be as of a specic date designated by the Bangko Sentral, shall show the actual nancial condition of the institution submitting the statement, and of its branches, ofces, subsidiaries and afliates, including the results of its operations, and shall contain such information as may be required in Bangko Sentral regulations.25 A. Publication of Financial Statements
The following are rules regarding publication of nancial statements: (i) Every bank, quasi-bank or trust entity, shall publish a statement of its nancial condition, including those of its subsidiaries and afliates, in such terms understandable to the layman and in such frequency as may be prescribed by the Bangko Sentral, in English or Filipino, at least once every quarter in a newspaper of general circulation in the city or province where the principal ofce, in the case of a domestic institution, or the principal branch or ofce in the case of a foreign bank, is located, but if no newspaper is published in the same province, then in a newspaper published in Metro Manila or in the nearest city or province. The Bangko Sentral may by regulation prescribe the newspaper where the statements shall be published. The Monetary Board may allow the posting of the nancial statements of a bank, quasi-bank or trust entity in public places it may determine, in lieu of the publication required in the preceding paragraph, when warranted by the circumstances.
(ii)
24 25
Section 58, GBL. Section 60, GBL.
74
(iii) Additionally, banks shall make available to the public in such form and manner as the Bangko Sentral may prescribe the complete set of its audited nancial statements as well as such other relevant information including those on enterprises majority-owned or controlled by the bank, that will inform the public of the true nancial condition of a bank as of any given time. (iv) In periods of national and/or local emergency or of imminent panic which directly threaten monetary and banking stability, the Monetary Board, by a vote of at least ve (5) of its members, in special cases and upon application of the bank, quasi-bank or trust entity, may allow such bank, quasibank or trust entity to defer for a stated period of time the publication of the statement of nancial condition required herein. (Section 61, GBL)
* Notes: 1. Consolidated nancial statements refer to the combined statement of condition/balance sheet and statement of income and expenses of two (2) or more corporate entities as they would appear if they were one (1) organization, after eliminating the effects of intercompany transactions. Subsidiary refers to a corporation or rm more than fty percent (50%) of the outstanding voting stock of which is directly or indirectly owned, controlled or held with power to vote by a bank. A domestic subsidiary is any subsidiary domiciled in the Philippines and incorporated under the laws of the Philippines, while a foreign subsidiary is a subsidiary incorporated and organized under the laws of a foreign country. Afliate refers to an entity linked directly or indirectly to a bank by means of: (a) Ownership, control or power to vote, of ten percent (10%) or more of the outstanding voting stock of the entity, or vice-versa; (b) Interlocking directorship or ofcership, except in cases involving independent directors as dened under existing regulations; (c) Common stockholders owning ten percent (10%) or more of the outstanding voting stock of each nancial intermediary and the entity;
2.
3.
75
(d) Management contract or any arrangement granting power to the bank to direct or cause the direction of management and policies of the entity, or vice-versa; and (e) Permanent proxy or voting trusts in favor of the bank constituting ten percent. 4. The nancial statements of allied undertakings shall be consolidated with those of the investing bank only when the allied undertaking is a subsidiary and a nancial allied undertaking. In the case of non-nancial allied undertakings and afliates, consolidation may be required on a case-to-case basis as may be determined by the appropriate supervising and examining department of the BSP. Financial statements of all domestic and foreign subsidiaries shall be consolidated with those of the investing domestic parent bank, except: (a) Subsidiaries about to be disposed of; (b) Subsidiaries where control is being exercised on a temporary basis; (c) Subsidiaries whose nancial statements bear a closing date different from that of the investing banks nancial statements and/or: (i) (ii) The difference in closing days exceeds three (3) months or more; The closing date of all the statements are not expressly indicated;
5.
6.
(iii) The necessity of the difference to closing dates is not explained; and (iv) Changes in accounting periods of the afliate/ constituent companies are not disclosed, together with their nancial statements. (d) Subsidiaries whose business activities are dissimilar from those of the investing bank that the presentation of separate nancial statement would provide better information; and (e) Foreign subsidiaries located in places where: (i) (ii) There are foreign exchange restrictions; The rates of exchange uctuate widely;
(iii) There are unfavorable legislation in force; and
76
(iv) The foreign government concerned is undergoing a process of change.
IX. Publication Of Capital Stock A bank, quasi-bank or trust entity incorporated under the laws of the Philippines shall not publish the amount of its authorized or subscribed capital stock without indicating at the same time and with equal prominence, the amount of its capital actually paid-up. No branch of any foreign bank doing business in the Philippines shall in any way announce the amount of the capital and surplus of its head ofce, or of the bank in its entirety without indicating at the same time and with equal prominence the amount of the capital, if any, denitely assigned to such branch. In case no capital has been denitely assigned to such branch, such fact shall be stated in, and shall form part of the publication.26 X. Settlement Of Disputes The provisions of any law to the contrary notwithstanding, the Bangko Sentral shall be consulted by other government agencies or instrumentalities in actions or proceedings initiated by or brought before them involving controversies in banks, quasi-banks or trust entities arising out of and involving relations between and among their directors, ofcers or stockholders, as well as disputes between any or all of them and the bank, quasi-bank or trust entity of which they are directors, ofcers or stockholders.27 XI. Strikes And Lockouts A. Unsettled Labor Disputes
The banking industry is indispensable to the national interest and, notwithstanding the provisions of any law to the contrary, any strike or lockout involving banks, if unsettled after seven (7) calendar days shall be reported by the Bangko Sentral to the Secretary of Labor who may assume jurisdiction over the dispute and28 decide
Section 62, GBL. Section 63, GBL. 28 The GBL uses the word or instead of and. It is submitted that assumption of jurisdiction is futile if no decision will be made. The Labor Code has a similar provision, to wit: Art. 263(g) When, in his opinion, there exists a labor dispute caus26 27
77
it or certify the same to the National Labor Relations Commission for compulsory arbitration. However, the President of the Philippines may at any time intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same.29 B. Reports of Strikes and lockouts
Banks through their president or chief executive ofcer shall immediately apprise the Deputy Governor of the Supervision and Examination Sector of the BSP on the status of strikes/lockouts involving their banks, if unsettled after seven (7) calendar days. The bank shall disclose the following pertinent information on the strike/ lockout: a. b. Cause of the strike/lockout and bank managements position on its legality; and Bank operations affected. XII. Laws Governing Other Types Of Banks The organization, ownership and capital requirements, powers, supervision and general conduct of business of thrift banks, rural banks and cooperative banks shall be governed by the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code, respectively. The organization, ownership and capital requirements, powers, supervision and general conduct of business of Islamic banks shall be governed by special laws. The provisions of the GBL, however, insofar as they are not in conict with the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code shall likewise apply to thrift banks, rural banks, and cooperative banks, respectively. However, for purposes of prescribing the minimum ratio which the net worth of a thrift bank must bear to its total risk assets, the provisions of the GBL shall govern.30
ing or likely to cause a strike or lockout in an industry indispensable to the national interest, the Secretary of Labor and Employment may assume jurisdiction over the dispute and decide it or certify the same to the Commission for compulsory arbitration. x x x. 29 Section 22, GBL. 30 Section 71, GBL.
78
Chapter 3 Deposit Functions of Banks

I. Kinds Of Deposits A. Demand Deposits
Demand deposits are all those liabilities of the Bangko Sentral and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of (depositors) checks.1 Banks may accept or create demand deposits subject to withdrawal by check. A Universal Bank and Commercial Bank may accept or create demand deposits subject to withdrawal by check, without prior authority from the BSP. A Thrift Bank/Rural Bank/ Cooperative Bank may accept or create demand deposits upon prior authority of the BSP. The GBL and NCBA provide: A bank other than a universal or commercial bank cannot accept or create demand deposits except upon prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board. (Section 33, GBL) Only banks duly authorized to do so may accept funds or create liabilities payable in pesos upon demand by the presentation of checks, and such operations shall be subject to the control of the Monetary Board in accordance with the powers granted it with respect thereto under the NCBA. (Section 58, NCBA)
* Note: Manner of Making the Deposit In one case, the Supreme Court made the following observations:
See Section 58, Republic Act No. 7653 (The New Central Bank Act). 78
CHAPTER 3 DEPOSIT FUNCTIONS OF BANKS
79
In the ordinary and usual course of banking operations, current account deposits are accepted by the bank on the basis of deposit slips prepared and signed by the depositor, or the latters agent or representative, who indicates therein the current account number to which the deposit is to be credited, the name of the depositor or current account holder, the date of the deposit, and the amount of the deposit either in cash or checks. The deposit slip has an upper portion or stub, which is detached and given to the depositor or his agent; the lower portion is retained by the bank. In some instances, however, the deposit slips are prepared in duplicate by the depositor. The original of the deposit slip is retained by the bank, while the duplicate copy is returned or given to the depositor.2
1. Temporary Overdrawings; Drawings Against Uncollected Deposits The following regulations shall govern temporary overdrawings and drawings against uncollected deposits (DAUDs). a. Temporary overdrawings. Temporary overdrawings against current account shall not be allowed, unless caused by normal bank charges and other fees incidental to handling such accounts. Banks which violate these regulations shall be subject to a ne of one-tenth of one percent (1/10 of 1%) per day of violation, computed on the basis of the amount of overdrawing or nes in amounts as may be determined by the Monetary Board, but not to exceed P30,000 a day for each violation, whichever is lower. Technical overdrawings arising from force posting in-clearing checks shall be debited by banks under Returned Checks and Other Cash Items Not in Process of Collection which is part of Other Assets in the Statement of Condition. Items to be lodged under this account shall consist only of in-clearing checks which may result in technical overdrawn accounts and shall be immediately reversed the following day. The checks lodged under Returned Checks, etc. shall either be returned or honored the following day before clearing. The items to be used as cover for the honored checks should only consist of any of the following: (1) Cash;
2 Philippine Bank of Commerce vs. Court of Appeals, G.R. No. 97626, March 14, 1997.
80
(2) (3) (4) (5) (6) (7)
Cashiers, Managers or Certied Checks; Bank Drafts; Postal Money Orders; Treasury Warrants; Duly funded On us Checks; and Fund transfers/credit memos within the same bank representing proceeds of loans granted under existing regulations.
Peso demand deposit accounts maintained by foreign correspondent banks with commercial banks shall not be subject to the above-mentioned regulations: Provided, That: (a) The maintenance of non-resident correspondent banks peso checking accounts and overdrawings therefrom are covered by reciprocal arrangement; (b) Temporary overdrawings are covered within fteen (15) days from the date overdrawings are incurred; and (c) Such accounts are credited only through foreign exchange inward remittance. b. Drawings against uncollected deposits. DAUDs shall be prohibited except when the drawings are made against uncollected deposits representing managers/cashiers/ treasurers checks, treasury warrants, postal money orders and duly funded on us checks which may be permitted at the discretion of each bank. Current Accounts of Bank Ofcers and Employees
2.
The following ofcers and employees of banks are prohibited from maintaining demand deposits or current accounts with the banking ofce in which they are assigned: a. b. c. All ofcers; Employees of the banks cash department/cash units; and Other employees who have direct and immediate responsibility in the handling of transactions and/or records pertaining to demand deposits or current accounts.
The above-mentioned prohibition shall include the spouses and relatives within the second degree of consanguinity and afnity
81
of the ofcers and employees covered by the prohibition, and the business interests of such ofcers and employees, their spouses and relatives within the second degree of consanguinity and afnity, in single proprietorships, or partnerships or corporations in which such ofcers and employees, individually or as a group, own or control at least a majority of the capital of the partnership or the outstanding subscribed capital stock (voting and non-voting) of the corporation. 3. Checks
A check is a bill of exchange drawn on a bank payable on demand. Thus, a check is a written order addressed to a bank or persons carrying on the business of banking, by a party having money in their hands, requesting them to pay on presentment, to a person named therein or to bearer or order, a named sum of money.3 Fixed savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. In other words, the relationship between the bank and the depositor is that of a debtor and creditor. By virtue of the contract of deposit between the banker and its depositor, the banker agrees to pay checks drawn by the depositor provided that said depositor has money in the hands of the bank.4 4. (i) Duty of Banks to Honor Checks Where the bank possesses funds of a depositor, it is bound to honor his checks to the extent of the amount of his deposits. The failure of a bank to pay the check of a merchant or a trader, when the deposit is sufcient, entitles the drawer to substantial damages without any proof of actual damages. Conversely, a bank is not liable for its refusal to pay a check on account of insufcient funds, notwithstanding the fact that a deposit may be made later in the day. Before a bank depositor may maintain a suit to recover a specic amount from his bank, he must rst show that he had on deposit sufcient funds to meet his demand.5 A bank performs its full duty where, upon the receipt of a check drawn against an account in which there are
(ii)
Moran vs. Court of Appeals, G.R. No. 105836, March 7, 1994. Ibid. 5 Ibid.
3 4
82
insufcient funds to pay it in full, it endeavors to induce the drawer to make good his account so that the check can be paid, and failing in this, it protests the check on the following morning and noties its correspondent bank by the telegraph of the protest. It cannot, therefore, be held liable to the payee and holder of the check for not protesting it upon the day when it was received.6 (iii) Banks must ensure that the amount of the checks should be paid only to its designated payee. The fact that the drawee bank did not discover the irregularity seasonably constitutes negligence in carrying out the banks duty to its depositors. 5. Responsibilities of Drawer
A drawer must remember his responsibilities every time he issues a check. He must personally keep track of his available balance in the bank and not rely on the bank to notify him of the necessity to fund certain checks he previously issued. A check, as distinguished from an ordinary bill of exchange, is supposed to be drawn against a previous deposit of funds for it is ordinarily intended for immediate payment.7 6. Duty of Banks to Know Signatures
A bank is bound to know the signatures of its customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily charge the amount so paid to the account of the depositor whose name was forged.8 7. No Obligation to Make Partial Payment
A bank is under no obligation to make part payment on a check, up to only the amount of the drawers funds, where the check is drawn for an amount larger than what the drawer has on deposit. Such a practice of paying checks in part has never existed. Upon partial payment, the check holder could not be called upon to surrender the check, and the bank would be without a voucher affording a certain means of showing the payment. The rule is
Ibid. Ibid. 8 San Carlos Milling Co., Ltd. vs. Bank of the Philippine Islands, 59 Phil. 59, 66, December 11, 1933; 7 C. J., 683.
6 7
83
based on commercial convenience, and any rule that would work such manifest inconvenience should not be recognized. A check is intended not only to transfer a right to the amount named in it, but to serve the further purpose of affording evidence for the bank of the payment of such amount when the check is taken up.9 8. No Duty to Make Up the Deciency from Other Accounts Where a depositor has two accounts with a bank, an open account and a savings account, and draws a check upon the open account for more money than the account contains, the bank may rightfully refuse to pay the check, and is under no duty to make up the deciency from the savings account.10 9. Legal Character of Checks Representing Demand Deposits Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, That a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. (Section 60, NCBA) 10. Cross-Check In State Investment House vs. IAC,11 the Supreme Court enumerated the effects of crossing a check, thus: (1) that the check may not be encashed but only deposited in the bank; (2) that the check may be negotiated only once to one who has an account with a bank; and (3) that the act of crossing the check serves as a warning to the holder that the check has been issued for a denite purpose so that such holder must inquire if the check has been received pursuant to that purpose. 11. Cashiers Check A cashiers check is really the banks own check and may be treated as a promissory note with the bank as the maker. The check
Moran vs. Court of Appeals, G.R. No. 105836, March 7, 1994 Ibid. 11 G.R. No. 72764, July 13, 1989, 175 SCRA 310.
9 10
84
becomes the primary obligation of the bank which issues it and constitutes a written promise to pay upon demand. In New Pacic Timber & Supply Co. Inc. vs. Seeris, the Supreme Court took judicial notice of the well-known and accepted practice in the business sector that a cashiers check is deemed as cash. This is because the mere issuance of a cashiers check is considered acceptance thereof.12 12. Set-Off i. A bank may debit the personal account of a depositor for an amount erroneously credited to the depositors sole proprietorship account because the latter being a sole proprietorship has no separate and distinct personality from the depositor. In Bank of the Philippine Islands vs. Court of Appeals, G.R. No. 136202, January 25, 2007, the Supreme Court ruled: Consequently, petitioner, as the collecting bank, had the right to debit Salazars account for the value of the checks it previously credited in her favor. It is of no moment that the account debited by petitioner was different from the original account to which the proceeds of the check were credited because both admittedly belonged to Salazar, the former being the account of the sole proprietorship which had no separate and distinct personality from her, and the latter being her personal account. The right of set-off was explained in Associated Bank vs. Tan:13 A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals on the part of a depositor. The right of a collecting bank to debit a clients account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that [f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal
12 13
BPI vs. Roxas, G.R. No. 157833, October 15, 2007. G.R. No. 156940, December 14, 2004, 446 SCRA 282.
85
compensation under Article 1278 of the Civil Code may take place when all the requisites mentioned in Article 1279 are present xxx. ii. While, banks have the right of set-off, the issue of whether it acted judiciously is an entirely different matter.14 As businesses affected with public interest, and because of the nature of their functions, banks are under obligation to treat the accounts of their depositors with meticulous care, always having in mind the duciary nature of their relationship.15 It must be emphasized that the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as the expert on this eld, and the law thus holds it to a high standard of conduct.16 The taking and collection of a check without the proper indorsement amount to a conversion of the check by the bank.17 Crossing of the check with the phrase Payees Account Only, is a warning that the check should be deposited only in the account of the payee. Thus, it is the duty of the collecting bank to ascertain that the check be deposited in payees account only. Therefore, it is the collecting bank which is bound to scrutinize the check and to know its depositors before it could make the clearing indorsement all prior indorsements and/or lack of indorsement guaranteed.18
iii.
iv.
Id. Prudential Bank vs. Court of Appeals, G.R. No. 125536, March 16, 2000, 328 SCRA 264; Simex International [Manila], Inc. vs. Court of Appeals, G.R. No. 88013, March 19, 1990, 183 SCRA 360; BPI vs. IAC, G.R. No. 69162, February 21, 1992, 206 SCRA 408. 16 Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corp., G.R. No. L-74917, January 20,1988, 157 SCRA 188. 17 Bank of the Philippine Islands vs. Court of Appeals, G.R. No. 136202, January 25, 2007; Associated Bank vs. Court of Appeals, G.R. No. 89802, May 7, 1992, 208 SCRA 465; City Trust Banking Corp. vs. IAC, G.R. No. 84281, May 27, 1994, 232 SCRA 559. 18 Philippine Commercial International Bank vs. Court of Appeals, G.R. No. 121413, January 29, 2001.
14 15
86
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, it was ruled: Anent petitioners liability on said instruments, this court is in full accord with the ruling of the PCHCs Board of Directors that: In presenting the checks for clearing and for payment, the defendant made an express guarantee on the validity of all prior endorsements. Thus, stamped at the back of the checks are the defendants clear warranty: ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such warranty, plaintiff would not have paid on the checks. 13. Relationship of Payee or Holder and the Bank It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which it is sent for collection is, in the absence of an agreement to the contrary, that of principal and agent.19 A bank which receives such paper for collection is the agent of the payee or holder.20 Even if diversion of the amount of a check payable to the collecting bank in behalf of the designated payee may be allowed, still such diversion must be properly authorized by the payor. Otherwise stated, the diversion can be justied only by proof of authority from the drawer, or that the drawer has clothed his agent with apparent authority to receive the proceeds of such check.21 14. Encashment of Checks Banking business requires that the one who rst cashes and negotiates the check must take some precautions to learn whether or not it is genuine. And if the one cashing the check through indifference or other circumstance assists the forger in committing the fraud, he should not be permitted to retain the proceeds of the check from the drawee whose sole fault was that it did not discover the forgery or the defect in the title of the person negotiating the instrument before paying the check. For this reason, a bank which cashes a check drawn upon another bank, without requiring proof
Ibid. Ibid. 21 Ibid.
19 20
87
as to the identity of persons presenting it, or making inquiries with regard to them, cannot hold the proceeds against the drawee when the proceeds of the checks were afterwards diverted to the hands of a third party. In such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual proper investigation, satised itself of the authenticity of the negotiation of the checks. Thus, one who encashed a check which had been forged or diverted and in turn received payment thereon from the drawee, is guilty of negligence which proximately contributed to the success of the fraud practiced on the drawee bank. The latter may recover from the holder the money paid on the check. B. Savings Deposits 1. Servicing Deposits Outside Bank Premises
Banks may be authorized by the BSP to solicit and accept deposits outside their bank premises, subject to the following conditions: a. The nancial condition of the bank applying for authority to solicit and collect savings deposits outside its bank premises is sound and the operations and the quality of the management thereof could reasonably assure the safety of the funds which may be entrusted to its deposit collectors and/or solicitors; The proposed area where applicant bank intends to solicit shall be clearly dened; Solicitation of deposits shall only be conned within a locality where there are no other banks in operation, or where it can be clearly established that the deposit potentials of the said locality are still untapped; and Applicant bank shall institute and maintain the following minimum safeguards: (1) All deposit solicitors shall be initially bonded for at least P1,000 subject to the increase thereof to approximate their daily collections; Deposit solicitors shall be provided with proper identication cards with photograph and signature of each respective solicitor, certied to by the appropriate ofcer of the bank. Said identication
b. c.
d.
(2)
88
cards shall be worn by each solicitor at all times at the upper breast of his outer garment when soliciting deposits; (3) Adequate insurance coverage for funds in transit (representing deposits collected outside banking premises) shall be secured by applicant bank from insurance companies not included in the list of companies blacklisted by the Insurance Commissioner; Deposit slips shall be in booklet form, prenumbered, in triplicate copies and in three (3) colors the original to be issued to the depositor, the second copy to be used for posting reference, and the third copy to be retained in the booklet; All collections shall be turned over to the cashier at the end of each day accompanied by a Collection Summary Report to be accomplished in duplicate which shall contain the following minimum information: (a) (b) (c) (d) (e) (f) (6) Date of the report, Names and addresses of the depositors, Deposit slip numbers, Amounts of deposit, Savings account and passbook numbers, and Name and signature of solicitor rendering the report.
(4)
(5)
Depositors shall always be required to accomplish a Signature Card when opening an account, which card shall be used always as reference in checking the genuineness/authenticity of signatures afxed on withdrawal slips or authorizations for withdrawal; Deposits/withdrawals shall be recorded by the bookkeeper or any ledger clerk, except any bank solicitor, in the depositors ledger cards and passbooks on the same day that such deposits/withdrawals are accepted. Passbooks shall be returned to the depositors not later than the following business day;
(7)
89
(8)
At the end of each month, depositors shall be advised in writing of the balances of their deposits with the bank, the advise slips of which shall never be handcarried by the solicitors themselves; and Places of assignments of bank solicitors shall be rotated at least quarterly.
(9) 2.
Individual and Joint Accounts
A deposit may be either individual or joint account. A joint account may be an and account or an and/or account. In an and account, the signature of both co-depositors are required for withdrawals. On the other hand, in case of an and/or either one of the co-depositors may deposit and withdraw from the account without the knowledge, consent and signature of the other.22 3. Withdrawals
Banks are prohibited from issuing/accepting withdrawal slips or any other similar instruments designed to effect withdrawals of savings deposits without requiring the depositors concerned to present their passbooks and accomplishing the necessary withdrawal slips, except for banks authorized by the BSP to adopt the no passbook withdrawal system.
* Note: As previously stated, there is no law mandating banks to call up their clients whenever their representatives withdraw signicant amounts from their accounts.
C.
Negotiable Order of Withdrawal (NOW) Accounts 1. Authority to accept Negotiable Order of Withdrawal Accounts Negotiable Order of Withdrawal (NOW) accounts are interest-bearing deposit accounts that combine the payable on demand feature of checks and investment feature of savings accounts. A Universal Bank/Commercial Bank may offer NOW accounts without prior authority of the Monetary Board. A Thrift Bank/Rural Bank Cooperative Bank may accept NOW accounts upon prior approval of the Monetary Board.
22
Viray, Handbook on Bank Deposits, 1998 Edition.
90
2.
Rules on Servicing NOW Accounts The following rules shall be observed in servicing NOW accounts: a. Prior to or simultaneous with the opening of a NOW account, the bank shall inform the depositor of its terms and conditions. The bank shall be responsible for the proper identication of its depositors; it shall require, among other things, two (2) specimen signatures and such other pertinent information. Deposits shall be covered by deposit slips in duplicate duly validated and initialed by the teller receiving the deposit. A copy of the deposit slip shall be furnished the depositor. NOW accounts shall be kept and maintained separately from the regular savings deposits. Blank NOW forms shall be prenumbered and shall be controlled as in the case of unissued blank checks. A bank statement shall be sent to each depositor at the end of each month for conrmation of balances. Banks must use the form prescribed by present rules for NOW accounts.
b.
c.
d. e. f. g. D.
Time Deposits
Time deposit is dened as one the payment of which cannot legally be required within such a specied number of days.23 1. Term of Time Deposits
Time deposits shall be issued for a specic period of term. 2. Special Time Deposits
Authority shall be automatically granted to any accredited banking institution which may participate in the supervised credit program to accept special time deposits from the Agrarian Reform Fund Commission with interest lower than the rate allowed on time
23
10 Am Jur 2d Sec. 652, citing 12 Cfr Sec. 204.2 (C)(1).
91
deposits accepted from the general public. Such deposits shall be exempt from the legal reserve requirements, as an exception to the existing policies on the matter. 3. Certicates of Time Deposit (CTD)
The following are the rules regarding issuance of CTDs: a. Negotiable Certicates of Time Deposit (NCTDs) (i) (ii) b. Universal Banks/Commercial Banks may issue NCTDs without approval of the BSP. Thrift Banks/Rural Banks/Cooperative Banks may issue NCTDs upon the prior approval of the BSP.
Non-Negotiable Certicates of Time Deposit Banks may issue long-term non-negotiable taxexempt certicates of time deposit without approval of the BSP.
E.
Deposit Substitute Operations (Quasi-Banking Functions) The essential elements of quasi-banking are: a. b. c. Borrowing funds for the borrowers own account; Twenty (20) or more lenders at any one time; Methods of borrowing are issuance, endorsement, or acceptance of debt instruments of any kind, other than deposits, such as acceptances, promissory notes, participations, certicates of assignments or similar instruments with recourse, trust certicates, repurchase agreements, and such other instruments as the Monetary Board may determine; and The purpose of which is (1) relending, or (2) purchasing receivables or other obligations.
d.
* Notes: (i) Borrowing shall refer to all forms of obtaining or raising funds through any of the methods and for any of the purposes provided in (d) above whether the borrowers liability thereby is treated as real or contingent.
92
(ii)
For the borrowers own account shall refer to the assumption of liability in ones own capacity and not in representation, or as an agent or trustee, of another.
(iii) Purchasing of receivables or other obligations shall refer to the acquisition of claims collectible in money, including interbank borrowings or borrowings between nancial institutions, or of acquisition of securities, of any amount and maturity, from domestic or foreign sources. (iv) Relending shall refer to the extension of loans by an institution with antecedent borrowing transactions. Relending shall be presumed, in the absence of express stipulations, when the institution is regularly engaged in lending. (v) Regularly engaged in lending shall refer to the practice of extending loans, advances, discounts or rediscounts as a matter of business, as distinguished from isolated lending transactions.
F.
Foreign Currency Deposits 1. Authority to Deposit Foreign Currencies
Any person, natural or juridical, may deposit with such Philippine banks in good standing, as may, upon application, be designated by the Central Bank for the purpose, foreign currencies which are acceptable as part of the international reserve, except those which are required by the Central Bank to be surrendered.24 2. Authority of Banks to accept Foreign Currency Deposits The banks designated by the Central Bank shall have the authority: (1) To accept deposits and to accept foreign currencies in trust; Numbered accounts for recording and servicing of said deposits are allowed. (2) To issue certicates to evidence such deposits;
24
Section 2, Republic Act No. 6426 (Foreign Currency Deposit Act of the Philip-
pines).
93
(3) (4)
To discount said certicates; To accept said deposits as collateral for loans subject to such rules and regulations as may be promulgated by the Central Bank from time to time; and To pay interest in foreign currency on such deposits.25 Foreign Currency Cover Requirements
(5) 3.
Except as the Monetary Board may otherwise prescribe or allow, the depository banks shall: (i) (ii) maintain at all times a one hundred percent foreign currency cover for their liabilities, of which cover at least fteen percent shall be in the form of foreign currency deposit with the Central Bank,
(iii) and the balance in the form of foreign currency loans or securities, which loan or securities shall be of short-term maturities and readily marketable, (iv) Such foreign currency loans may include loans to domestic enterprises which are export-oriented or registered with the Board of Investments, subject to the limitations to be prescribed by the Monetary Board on such loans, (v) Except as the Monetary Board may otherwise prescribe or allow, the foreign currency cover shall be in the same currency as that of the corresponding foreign currency deposit liability,
(vi) The Central Bank may pay interest on the foreign currency deposit, and if requested shall exchange the foreign currency notes and coins into foreign currency instruments drawn on its depository banks. Depository banks which, on account of networth, resources, past performance, or other pertinent criteria, have been qualied by the Monetary Board to function under an expanded foreign currency deposit system shall be exempt from the requirement of maintaining fteen percent (15%) of the cover in the form of foreign currency deposit with the Central Bank. Subject to prior Central
25
pines).
94
Bank approval when required by Central Bank regulations, said depository banks may extend foreign currency loans to any domestic enterprise, without the limitations prescribed regarding maturity and marketability, and such loans shall be eligible for purposes of the 100% foreign currency cover prescribed.26 4. Withdrawability and Transferability of Foreign Currency Deposits There is no restriction on the withdrawal by the depositor of his deposit or on the transferability of the same abroad except those arising from the contract between the depositor and the bank.27 G. Anonymous and Numbered Accounts
Anonymous accounts or accounts under ctitious names should not be kept/allowed. In case where numbered accounts is allowed (i.e., foreign currency deposits), banks/non-bank nancial institutions should ensure that the client is identied in an ofcial or other identifying documents. The following are related laws: i. Revised Penal Code
Art. 178. Using ctitious name and concealing true name. The penalty of arresto mayor and a ne not to exceed 500 pesos shall be imposed upon any person who shall publicly use a ctitious name for the purpose of concealing a crime, evading the execution of a judgment or causing damage. Any person who conceals his true name and other personal circumstances shall be punished by arresto menor or a ne not to exceed 200 pesos.
ii.
Civil Code
Art. 379. The employment of pen names or stage names is permitted, provided it is done in good faith and there is no injury to third persons. Pen names and stage names cannot be usurped. Art. 380. Except as provided in the preceding article, no person shall use different names and surnames.
26
Section 4, Republic Act No. 6426 (Foreign Currency Deposit Act of the PhilipSection 5, Republic Act No. 6426 (Foreign Currency Deposit Act of the Philip-
pines).
27
pines).
95
iii.
Commonwealth Act No. 142 as amended by Republic Act No. 6085

Sec. 1. Except as a pseudonym solely for literary, cinema, television, radio or other entertainment purposes and in athletic events where the use of pseudonym is a normally accepted practice, no person shall use any name different from the one with which he was registered at birth in the ofce of the local civil registry, or with which he was baptized for the rst time, or, in case of an alien, with which he was registered in the Bureau of Immigration upon entry; or such substitute name as may have been authorized by a competent court: Provided, That persons, whose births have not been registered in any local civil registry and who have not been baptized, have one year from the approval of this act within which to register their names in the civil registry of their residence. The name shall comprise the patronymic name and one or two surnames. Sec. 2. Any person desiring to use an alias shall apply for authority therefor in proceedings like those legally provided to obtain judicial authority for a change of name, and no person shall be allowed to secure such judicial authority for more than one alias. The petition for an alias shall set forth the persons baptismal and family name and the name recorded in the civil registry, if different, his immigrants name, if an alien, and his pseudonym, if he has such names other than his original or real name, specifying the reason or reasons for the use of the desired alias. The judicial authority for the use of alias the Christian name and the alien immigrants name shall be recorded in the proper local civil registry, and no person shall use any name or names other, than his original or real name unless the same is or are duly recorded in the proper local civil registry. Sec. 3. No person having been baptized with a name different from that with which he was registered at birth in the local civil registry, or in case of an alien, registered in the Bureau of Immigration upon entry, or any person who obtained judicial authority to use an alias, or who uses a pseudonym, shall represent himself in any public or private transaction or shall sign or execute any public or private document without stating or afxing his real or original name and all names or aliases or pseudonym he is or may have been authorized to use. Sec. 4. Six months from the approval of this act and subject to the provisions of section 1 hereof, all persons who have used any name and/or names and alias or aliases different from those authorized in section one of this act and duly recorded in the local civil registry, shall be prohibited to use such other name or names and/or alias or aliases.
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II. Administration Of Deposits A. Specimen Signatures, ID Photos
All banking institutions are required to set a minimum of three (3) specimen signatures to be simultaneously required from each of their depositors and to update the specimen signatures of their depositors every ve (5) years or sooner, at the discretion of the bank. Banks may, at their option, require their depositors to submit ID photos together with the specimen signatures.28 BSP Circular No. 564, Series of 2007 provides for the list of valid identication cards, as follows: i. Clients who engage in a nancial transaction with the covered institutions for the rst time shall be required to present the original and submit a copy of at least two valid photo-bearing identication documents issued and signed by an ofcial authority. Valid IDs include the following: Passport Drivers license Professional Regulations Commission (PRC) ID National Bureau of Investigation (NBI) clearance Police clearance Postal ID Voters ID Barangay certication Government Service and Insurance System (GSIS) e-Card Social Security System (SSS) card Philhealth card Senior Citizen Card Overseas Workers Welfare Administration (OWWA) ID OFW ID Seamans Book
28
X262.1, Manual of Regulation for Banks.
97
Alien Certication of Registration/Immigrant Certicate of Registration Government ofce ID [e.g. Armed Forces of the Philippines (AFP), Home Development Mutual Fund (HDMF) IDs] Certication from the National Council for the Welfare of Disabled Persons (NCWDP) Department of Social Welfare and Development (DSWD) Certication Other valid IDs issued by the Government and its instrumentalities
ii.
Students who are beneciaries of an OFW and who are not yet of voting age shall also be required to present two IDs. For transactions involving remittance claims, a photo-bearing school ID signed by the principal or head of school is considered as one of the two acceptable IDs. Other IDs may include birth certicate, library ID, and membership IDs duly issued by any association or organization within the college or university and signed by the pertinent authority issuing the ID. Banks and non-bank nancial institutions shall require their clients to submit clear copies of the two valid IDs on a one-time basis only, or at the commencement of a business relationship. They shall require their clients to submit an updated photo and other relevant information whenever the need for it arises. Financial transactions may include remittances, among others, as falling under the denition of transaction. Under the Anti-Money Laundering Act of 2001, as amended, a nancial transaction is any act establishing any right or obligation or giving rise to any contractual or legal relationship between the parties thereto. It also includes any movement of funds by any means with a covered institution.
iii.
iv.
B.
Minors and Corporations As Depositors 1. Minors
Minors are vested with special capacity and power, in their own right and in their own names, to make savings or time deposits
98
with and withdraw the same as well as receive interests thereon from banking institutions, without the assistance of their parents or guardians, provided the following requisites are met: 1. 2. 3. 4. at least seven years of age, able to read and write, have sufcient discretion, and not otherwise disqualied by any other incapacity.
Parents may nevertheless deposit for their minor children and guardians for their wards. Deposits in Thrift Banks Minors in their own rights and in their own names may make deposits and withdraw the same, and may receive dividends and interest: Provided, however, That, if any guardian shall give notice in writing to any thrift bank not to make payments of deposits, dividends, or interest to the minor of whom he is the guardian, then such payment shall be made only to the guardian.29 2. Corporations
Corporations may open bank accounts as follows: (i) Incorporation Stage In case the payment of subscription is in cash, the Securities and Exchange Commission requires a Bank Certicate of deposit of paid-up capital notarized in place where signed. Post Incorporation In opening a bank account, the Board of Directors issues a resolution authorizing the signatories and specifying the depositary bank.
(ii)
C.
Time of Payment of Interest on Time Deposits/Deposit Substitutes
Interest or yield on time deposit/deposit substitute may be paid at maturity or upon withdrawal or in advance: Provided, however, That interest or yield paid in advance shall not exceed the interest for one (1) year.30
29 Section 22, Republic Act No. 7906 (An Act Providing for the Regulation of the Organization and Operations of Thrift Banks, and for Other Purposes). 30 X242.1, Manual of Regulations for Banks.
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* Notes: Interest Rates the cost of borrowing money or the amount paid for lending money expressed as a percentage of the principal. Interest Rate Differential the difference or margin between interest rates such as the difference between domestic and foreign interest rates.
D.
Treatment of Matured Time Deposits/Deposit Substitutes (i) A time deposit not withdrawn or renewed on its due date shall be treated as a savings deposit and shall earn interest from maturity to the date of actual withdrawal or renewal at a rate applicable to savings deposits. A deposit substitute instrument not withdrawn or renewed on its maturity date shall from said date become payable on demand and shall earn an interest or yield from maturity to actual withdrawal or renewal at a rate applicable to a deposit substitute with a maturity of fteen (15) days. Banks performing quasi-banking functions shall continue to consider matured and unwithdrawn deposit substitutes as such and subject to reserves.31
(ii)
E.
Clearing Cut-off Time
As a general rule, all deposits and withdrawals during regular banking hours shall be credited or debited to deposit liability accounts on the date of receipt or payment thereof: Provided, however, That a bank may set a clearing cut-off time for its head ofce not earlier than two (2) hours before the start of clearing at the BSP, and not earlier than three and one-half (3-1/2) hours before the start of clearing for all its branches, agencies and extension ofces doing business in the Philippines, after which time, deposits received shall be booked as hereinafter provided: Provided, further, That banks which are located in areas where there are no BSP regional/clearing arrangements may set a clearing cut-off time not earlier than two (2) hours before the start of their local clearing after which time, deposits received shall be booked likewise as hereinafter provided.32
31 32
X242.2, Manual of Regulations for Banks. X261.1, Manual of Regulations for Banks.
100
F.
Booking of Cash Deposits
Cash deposits received after the selected clearing cut-off time until the close of the regular banking hours shall be booked as deposits on the day of receipt.33 G. Booking of Non-cash Deposits
Deposits of checks including on us checks, managers/ cashiers/treasurers checks and demand drafts, which are drawn against the depository bank and all its ofces, as well as treasury warrants and postal money orders, received after the selected clearing cut-off time until the close of the regular banking hours, may, at the option of the bank, be booked as deposits on the day of receipt. Other non-cash deposits received after the selected clearing cut-off time shall be treated as contingent accounts on the day of receipt and shall be booked as deposits the following banking day.34 H. Booking of Deposits After Regular Banking Hours
Deposits, whether cash or non-cash, received after the close of the regular banking hours shall be treated as contingent accounts on the day of receipt and shall be booked as deposits the following banking day.35 I. Average Daily Balance i. Banks may impose and collect service charges and/or maintenance fees on savings and demand deposit accounts, whether active or dormant, that fall below the required minimum monthly average daily balance (ADB), subject to the following conditions: a) b) the imposition of such charges or fees is clearly stated among the terms and conditions of the deposit; the rate or amount of such charges or fees is properly disclosed among the terms and conditions of the deposit; the deposit account balances have fallen below the required minimum monthly ADB for dormant
c)
X261.3, Manual of Regulations for Banks. X261.4, Manual of Regulations for Banks. 35 X261.5, Manual of Regulations for Banks.
33 34
101
accounts and for at least two (2) consecutive months for active accounts; d) the required minimum monthly ADB of deposits are properly disclosed among the terms and conditions of the deposit; and in the case of charges and fees for dormant accounts or dormancy fee, the period of dormancy shall be properly disclosed among the terms and conditions of the deposit, and that the depositors shall be informed by registered mail with return card on his last known address at least sixty (60) days prior to the imposition of dormancy fee.
e)
ii.
Any change in the terms and conditions for the imposition of service charges and/or maintenance fees, e.g., increase in the amount of such charges and fees or increase in the required minimum monthly ADB of deposits, shall take effect only after due notice to the depositor: Provided, That information by regular mail, statement of account messages, electronic mail, courier delivery and/or other alternative modes of communication on the depositors last known address at least sixty (60) days prior to implementation shall be considered sufcient notice: Provided, further, That failure of the depositor to manifest or register his objection to the new service charges and maintenance fees or any change in their terms and conditions in writing within thirty (30) days from receipt of written notice of amendment shall be deemed to constitute acceptance of such changes. Banks shall likewise post said information on their respective websites, automated teller machine (ATM) onscreen messages, and in conspicuous places within the bank premises and other places near the banks own ATM at least sixty (60) days prior to implementation. III. Survivorship Agreement
iii.
A.
Denition
There is survivorship agreement when joint (and several) owners of a deposit agree that either of them could withdraw any
102
part or the whole of said account during the lifetime of both, and the balance, if any, upon the death of either, belonged to the survivor.36 It is an aleatory contract supported by law a lawful consideration the mutual agreement of the joint depositors permitting either of them to withdraw the whole deposit during their lifetime, and transferring the balance to the survivor upon the death of one of them.37 Article 1790 of the Civil Code provides: ART. 1790. By an aleatory contract one of the parties binds himself, or both reciprocally bind themselves, to give or to do something as an equivalent for that which the other party is to give or do in case of the occurrence of an event which is uncertain or will happen at an indeterminate time. Furthermore, it is well established that a bank account may be so created that two persons shall be joint owners thereof during their mutual lives, and the survivor take the whole on the death of the other. The right to make such joint deposits has generally been held not to be done with by statutes abolishing joint tenancy and survivorship generally as they existed at common law. (7 Am. Jur., 299.) B. Survivorship Agreement not Invalid Per Se but may be Violative of Law
Although the survivorship agreement is per se not contrary to law, its operation or effect may be violative of the law. For instance, if it be shown in a given case that such agreement is a mere cloak to hide an inofcious donation, to transfer property in fraud of creditors, or to defeat the legitime of a forced heir, it may be assailed and annulled upon such grounds.38 IV. Nature Of Bank Deposits A. Nature Based on existing jurisprudence, the following are the nature of bank deposits: (i) It should be noted that xed, savings, and current deposits of money in banks and similar institutions are that true
Vitug vs. Court of Appeals, G.R. No. 82027, March 29, 1990. Rivera vs. Peoples Bank and Trust Co., G.R. No. L-47757, April 7, 1942. 38 Vitug vs. Court of Appeals, G.R. No. 82027, March 29, 1990.
36 37
103
deposits are considered simple loans and, as such, are not preferred credits.39 (ii) Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest.40 All kinds of bank deposits, whether xed, savings, or current are to be treated as loans and are to be covered by the law on loans.41 Current and saving deposits, are loans to a bank because it can use the same. A depositor is in reality a creditor of the Bank and not a depositor. The Bank is in turn a debtor of depositor. Failure of the Bank to honor the time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from a depositarys failure to return the subject matter of the deposit.42
(iii) The relationship between the depositor and the Savings and Loan Association is that of creditor and debtor; consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals. While the Bank has the obligation to return the amount deposited, it has, however, no obligation to return or deliver the same money that was deposited. And, the failure of the Bank to return the amount deposited will not constitute estafa through misappropriation punishable under Article 315, par. 1(b) of the Revised Penal Code, but it will only give rise to civil liability.43 (iv) The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple
39 Guingona, Jr. vs. The City Fiscal of Manila, G.R. No. L-60033, April 4, 1984; Central Bank of the Philippines vs. Morfe, 63 SCRA 114, 119 (1975); Art. 1980, Civil Code; In Re Liquidation of Mercantile Batik of China Tan Tiong Tick vs. American Apothecaries, Co., 66 Phil. 414; Pacic Coast Biscuit Co. vs. Chinese Grocers Association, 65 Phil. 375; Fletcher American National Bank vs. Ang Chong Um, 66 Pwl 385; Pacic Commercial Co. vs. American Apothecaries Co., 65 Phil. 429; Gopoco Grocery vs. Pacic Coast Biscuit Co., 65 Phil. 443. 40 Bank of the Philippine Islands vs. Court of Appeals, G.R. No. 104612, May 10, 1994. 41 Serrano vs. Central Bank of the Philippine, 96 SCRA 102 (1980); Art. 1980, Civil Code; Gullas vs. Phil. National Bank, 62 Phil. 519. 42 Guingona, Jr. vs. The City Fiscal of Manila, G.R. No. L-60033, April 4, 1984. 43 Ibid.
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loan.44 Article 1980 of the Civil Code expressly provides that x x x savings x x x deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. There is a debtor-creditor relationship between the bank and its depositor. The bank is the debtor and the depositor is the creditor. The depositor lends the bank money and the bank agrees to pay the depositor on demand. The savings deposit agreement between the bank and the depositor is the contract that determines the rights and obligations of the parties.45 (v) A bank ultimately acquires ownership of the deposits, but such ownership is coupled with a corresponding obligation to pay the depositor an equal amount on demand. Although the bank owns the deposits, it cannot prevent the depositor from demanding payment of the banks obligation by drawing checks against his current account, or asking for the release of the funds in his savings account. Thus, when the depositor issues checks drawn against his current account, he has every right as creditor to expect that those checks will be honored by the bank as debtor. A bank does not have a unilateral right to freeze the accounts of a depositor based on its mere suspicion that the funds therein were proceeds of a scam the depositor was allegedly involved in. To grant any bank the right to take whatever action it pleases on deposits which it supposes are derived from shady transactions, would open the oodgates of public distrust in the banking industry.46
B.
Set-Off
It may be stated as a general rule that when a depositor is indebted to a bank, and the debts are mutual, that is, between the same parties and in the same right-the bank may apply the deposit, or such portion thereof as may be necessary, to the payment of the debt due it by the depositor, provided there is no express agreement
44 Article 1953 of the Civil Code provides: A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay the creditor an equal amount of the same kind and quality. 45 The Consolidated Bank and Trust Corporation vs. Court of Appeals, G.R. No. 138569, September 11, 2003. 46 BPI Family Bank vs. Franco G.R. No. 123498, November 23, 2007.
105
to the contrary and the deposit is not specically applicable to some other particular purpose.47 V. Duties Of Banks A. Meticulous Care
By the nature of its functions, a bank is required to take meticulous care of the deposits of its clients, who have the right to expect high standards of integrity and performance from it. Among its obligations in furtherance thereof is knowing the signatures of its clients. Depositors are not estopped from questioning wrongful withdrawals, even if they have failed to question those errors in the statements sent by the bank to them for verication.48 B. Payment to Proper Party
Where the ownership of the deposit remained undetermined, a bank, as the debtor with respect thereto, had no right to pay to persons other than those in whose favor the obligation was constituted or whose right or authority to receive payment is indisputable. The payment of the money deposited with the bank that will extinguish its obligation to the creditor-depositor is payment to the person of the creditor or to one authorized by him or by the law to receive it. Payment made by the debtor to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor, or through error induced by fraud of a third person. The payment, even if done in good faith, will not extinguish the obligation to the true depositor.49 C. In Case of Death of Depositor The National Internal Revenue Code provides: If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the
47
Tan Tiong Tick vs. American Apothecaries Co., G.R. No. 43682, March 31,
1938.
48 Bank of the Philippine Islands vs. Casa Montessori Internationale, G.R. No. 149454, May 28, 2004. 49 Bank of the Philippine Islands vs. Court of Appeals, G.R. No. 104612, May 10, 1994.
106
said deposit account, unless the Commissioner has certied that the taxes imposed thereon by this Title have been paid: Provided, however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certication. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors.50 VI. Secrecy Of Bank Deposits51 A. Purposes The Secrecy of Bank Deposits Act has the following purposes: (i) (ii) To give encouragement to the people to deposit their money in banking institutions; and To discourage private hoarding so that the same may be properly utilized by banks in authorized loans to assist in the economic development of the country.
B.
Privacy
Zones of privacy are recognized and protected in our laws. The Civil Code provides that [e]very person shall respect the dignity, personality, privacy and peace of mind of his neighbors and other persons and punishes as actionable torts several acts for meddling and prying into the privacy of another. It also holds public ofcer or employee or any private individual liable for damages for any violation of the rights and liberties of another person, and recognizes the privacy of letters and other private communications. The Revised Penal Code makes a crime of the violation of secrets by an ofcer, revelation of trade and industrial secrets, and trespass to dwelling. Invasion of privacy is an offense in special laws like the Anti-Wiretapping Law, the Secrecy of Bank Deposits Act, and the Intellectual Property Code.
50 51
Section 97, NIRC. Republic Act No. 1405.
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C.
Absolute Condentiality
All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are considered as of an absolutely condential nature and may not be examined, inquired or looked into by any person, government ofcial, bureau or ofce. It shall be unlawful for any ofcial or employee of a banking institution to disclose to any person any information concerning said deposits. 1. Prohibition against inquiry into or disclosure of deposits under Republic Act No. 8367 (An Act Providing For The Regulation Of The Organization And Operation Of Non-Stock Savings And Loan Associations): All deposits of whatever nature with an Association (Savings and Loan) in the Philippines are hereby considered as of an absolutely condential nature and may not be examined, inquired or looked into by any person, government ofcial, bureau or ofce, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public ofcials, or in cases where the money deposited or invested is the subject matter of litigation.52 It shall be unlawful for any ofcial or employee of an Association to disclose to any person any information concerning said deposits, except in the cases mentioned in the preceding paragraph of this section. Any ofcial or employee of an Association who violates this section shall be punished under Republic Act No. 1405, as amended.53 2. Foreign Currency Deposits:
All foreign currency deposits54 are of an absolutely condential nature and, except upon the written permission of the depositors, in no instance shall such foreign currency deposits be examined, inquired or looked into by any person, government ofcial, bureau or ofce whether judicial or administrative or private. Said foreign
Section 6, Republic Act No. 8367. Ibid. 54 Authorized under this Act, as amended by Presidential Decree No. 1035, as well as foreign currency deposits authorized under Presidential Decree No. 1034.
52 53
108
currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever.55 3. Condentiality of Deposits in Islamic Banks:
Banking transactions relating to all deposits of whatever nature are condential and may not be examined, inquired or looked into by any person, government ofcial, bureau or ofce except: 1. 2. 3. inspection by the banks auditor, or upon written permission by the depositor, or in cases where the money deposited or the transaction concerned is the subject of a court order.
It shall be unlawful for any ofcial or employee of the Islamic Bank or any person as may be designated by the Board of Directors to examine or audit the books of the Bank to disclose or reveal to any person any condential information except under the circumstances mentioned in the preceding paragraph.56 VII. Exceptions To Secrecy Of Deposits A. Exceptions under the Bank Secrecy Law: (i) (ii) Upon written permission of the depositor, or In cases of impeachment, or
(iii) Upon order of a competent court in cases of bribery or dereliction of duty of public ofcials, or (iv) In cases where the money deposited or invested is the subject matter of the litigation. Example: a. Where the bank inadvertently caused the transfer of the amount of US$1,000,000.00 instead of only US$1,000.00, the Court sanctioned the examination
55
pines). Section 17, Republic Act No. 6848 (An Act Providing for the 1989 Charter of the Al-Amanah Islamic Investment Bank of the Philippines, authorizing its conduct of Islamic Banking Business, and repealing for this purpose Presidential Decree Numbered Two Hundred and Sixty-Four as amended by Presidential Decree Numbered Five Hundred And Forty-Two, creating the Philippine Amanah Bank).
56
109
of the bank accounts where part of the money was subsequently caused to be deposited.57 b. If a case is aimed at recovering the amount converted by defendants therein for their own benet, necessarily, an inquiry into the whereabouts of the illegally acquired amount extends to whatever is concealed by being held or recorded in the name of persons other than the one responsible for the illegal acquisition.
B.
Garnishment The Rules of Court provides: Garnishment of debts and credits. The ofcer may levy on debts due the judgment obligor and other credits, including bank deposits, nancial interests, royalties, commissions and other personal property not capable of manual delivery in the possession or control of third parties. Levy shall be made by serving notice upon the person owing such debts or having in his possession or control such credits to which the judgment obligor is entitled. The garnishment shall cover only such amount as will satisfy the judgment and all lawful fees. The garnishee shall make a written report to the court within ve (5) days from service of the notice of garnishment stating whether or not the judgment obligor has sufcient funds or credits to satisfy the amount of the judgment. If not, the report shall state how much funds or credits the garnishee holds for the judgment obligor. The garnished amount in cash, or certied bank check issued in the name of the judgment obligee, shall be delivered directly to the judgment obligee within ten (10) working days from service of notice on said garnishing requiring such delivery, except the lawful fees which shall be paid directly to the court. In the event there are two or more garnishees holding deposits or credits sufcient to satisfy the judgment, the judgment obligor, if available, shall have the right to indicate the garnishee or garnishees who shall be required to deliver the amount due; otherwise, the choice shall be made by the judgment obligee.
57
Mellon Bank, N.A. vs. Magsino, G.R. No. L-61011, October 18, 1990.
110
The executing sheriff shall observe the same procedure under paragraph (a) with respect to delivery of payment to the judgment obligee.58 Note the properties exempt from execution under the Rules of Court: Property exempt from execution.59 Except as otherwise expressly provided by law, the following property, and no other, shall be exempt from execution: (a) The judgment obligors family home as provided by law, or the homestead in which he resides, and land necessarily used in connection therewith; Ordinary tools and implements personally used by him in his trade, employment, or livelihood; Three horses, or three cows, or three carabaos, or other beasts of burden such as the judgment obligor may select necessarily used by him in his ordinary occupation; His necessary clothing and articles for ordinary personal use, excluding jewelry; Household furniture and utensils necessary for housekeeping, and used for that purpose by the judgment obligor and his family, such as the judgment obligor may select, of a value not exceeding one hundred thousand pesos; Provisions for individual or family use sufcient for four months; The professional libraries and equipment of judges, lawyers, physicians, pharmacists, dentists, engineers, surveyors, clergymen, teachers, and other professionals, not exceeding three hundred thousand pesos in value; One shing boat and accessories not exceeding the total value of one hundred thousand pesos owned by a sherman and by the lawful use of which he earns his livelihood; So much of the salaries, wages, or earnings of the judgment obligor of his personal services within the four months
(b) (c)
(d) (e)
(f) (g)
(h)
(i)
58 59
Section 9(c), 1997 Revised Rules of Civil Procedure. Section 13, Rule 39, 1997 Revised Rules of Civil Procedure.
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preceding the levy as are necessary for the support of his family; (j) (k) (l) Lettered gravestones; Monies benets, privileges, or annuities accruing or in any manner growing out of any life insurance; The right to receive legal support, or money or property obtained as such support, or any pension or gratuity from the Government;
(m) Properties specially exempt by law. But no article or species of property mentioned in this section shall be exempt from execution issued upon a judgment recovered for its price or upon a judgment of foreclosure of a mortgage thereon. (Emphasis supplied) The prohibition against examination of or inquiry into a bank deposit does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and if the existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank. It was not the intention of the lawmakers to place bank deposits beyond the reach of execution to satisfy a nal judgment.60 C. Secrecy and Exemption from Attachment and Garnishment of Foreign Currency Deposits Cannot be Used as Device for Wrongdoing
The application of the law depends on the extent of its justice. Exemption from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever, is not applicable to a foreign transient, otherwise, injustice would result especially to a citizen aggrieved by a foreign guest.61 It cannot be used as a device for
60 61
China Banking Corporation vs. Ortega, G.R. No. L-34964, January 31, 1973. Salvacion vs. Central Bank of the Philippines, G.R. No. 94723, August 21,
1997.
112
wrongdoing, and in so doing, acquitting the guilty at the expense of the innocent. Foreign currency deposits of a foreigner who was convicted of the crime of rape committed against a Filipino child may be garnished and attached to satisfy the judgment.
* Note: Interestingly, the Supreme Court in one case62 did not interfere with the following resolution of the Ombudsman: In Salvacion vs. Central Bank and China Bank, 278 SCRA 27 (1997), the Highest Tribunal adopted the opinion of the Ofce of the Solicitor General (OSG) that only foreign currency deposits of foreign lenders and investors are given protection and incentives by the law, and further ruled that the Foreign Currency Deposits Act cannot be utilized to perpetuate injustice. Following such pronouncements, it is respectfully submitted that foreign currency deposits of Filipino depositors, including herein complainant, are not covered by the Foreign Currency Deposits Act, and are thus not exempt from the processes duly-issued by the BIR. Thus, the Supreme Court held: We do not perceive any grave abuse of discretion on the part of the public respondents when they issued the aforecited rulings. We, thus, defer to the policy of noninterference in the conduct of preliminary investigations. We have invariably stated that it is not sound practice to depart from the policy of non-interference in the Ombudsmans exercise of discretion to determine whether or not to le information against an accused. The rule is based not only upon respect for the investigatory and prosecutory powers granted by the Constitution to the Ofce of the Ombudsman but upon practicality as well. Otherwise, the functions of the courts will be grievously hampered by innumerable petitions assailing the dismissal of investigatory proceedings conducted by the Ofce of the Ombudsman with regard to complaints led before it, in much the same way that the courts would be absolutely swamped if they could be compelled to review the exercise of discretion on the part of the scals or prosecuting attorneys each time they decided to le an information in court or dismissed a complaint by a private complainant. Thus, in the absence of a clear case of abuse of discretion, this Court will not interfere with the discretion of the Ombudsman, who, depending on his
62
Estrada vs. Desierto, G.R. No. 156160, December 9, 2004.
113
own ndings and considered evaluation of the case, either dismisses a complaint or proceeds with it. The Supreme Court however was quick to add: A cautionary word. A declaration by this Court that the public respondents did not gravely abuse their discretion in issuing the resolutions dismissing petitioners complaint does not necessarily translate to a declaration of assent in the ndings of fact and conclusions of law contained therein. With respect specically to the resolution for violation of Section 8 of Rep. Act. No. 6426, public respondents relied on the whereas clause of P.D. No. 1246 which amended Rep. Act No. 6426 and on the Salvacion case to conclude that only non-residents who are not engaged in trade and business are under the mantle of protection of Section 8 of Rep. Act No. 6426. Assuming that such reliance is erroneous as contended by petitioner, this Court, on petition for certiorari, cannot correct the same as the error is not of a degree that would amount to a clear case of abuse of discretion of the grave and malevolent kind. It is axiomatic that not every erroneous conclusion of law or fact is abuse of discretion. As adverted to earlier, this Court will interfere in the Ombudsmans ndings of fact and conclusions of law only in clear cases of grave abuse of discretion.
D.
Graft and Corruption
While Republic Act No. 1405 provides that bank deposits are absolutely condential and therefore may not be examined, inquired or looked into, except in those cases enumerated therein, the AntiGraft Law directs in mandatory terms that bank deposits shall be taken into consideration in its enforcement, notwithstanding any provision of law to the contrary. The only conclusion possible is that the Anti-Graft Law is intended to amend Republic Act 1405 by providing an additional exception to the rule against the disclosure of bank deposits.63 Cases of unexplained wealth are similar to cases of bribery and dereliction of duty and no reason why these two classes of cases cannot be excepted from the rule making bank deposits condential. The policy as to one cannot be different from the policy as to the other. This policy expresses the notion that a public ofce is a public trust and any person who enters upon its discharge does so with full knowledge that his life, so far as relevant to his duty, is open
63
Philippine National Bank vs. Gancayco, 15 SCRA 91.
114
to pubic scrutiny. The inquiry into illegally acquired property or property not legitimately acquired extends to cases where such property is concealed by being held by or recorded in the name of other persons.64 E. Authority to Inquire into Bank Deposits under the AntiMoney Laundering Act
The AMLC may inquire into or examine any particular deposit or investment with any banking institution or non-bank nancial institution upon order of any competent court in cases of violation, when it has been established that: (i) (ii) there is probable cause that the deposits or investments are related to an unlawful activity; or a money laundering offense.
No court order shall be required in the following unlawful activities: (1) (2) Kidnapping for ransom (Article 267, Revised Penal Code, as amended); Violations of the Comprehensive Dangerous Drugs Act of 2002 (Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16, Republic Act No. 9165); Hijacking and other violations under Republic Act No. 6235 (An Act Prohibiting Certain Acts Inimical To Civil Aviation, And For Other Purposes); Destructive arson and murder including those perpetrated by terrorists against non-combatant persons and similar targets.
(3)
(4)
F.
Periodic or Special Examination
The Bangko Sentral ng Pilipinas (BSP) may inquire into or examine any deposit or investment with any banking institution or non-bank nancial institution when the examination is made in the course of a periodic or special examination, in accordance with the rules of examination of the BSP.65
64 Banco Filipino Savings and Mortgage Bank vs. Purisima, G.R. No. L-56429, May 28, 1988. 65 Republic Act No. 9160 (An Act Dening the Crime of Money Laundering,
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Disclosure is also allowed in an examination made in the course of a special or general examination of a bank that is specically authorized by the Monetary Board after being satised that there is reasonable ground to believe that a bank fraud or serious irregularity has been or is being committed and that it is necessary to look into the deposit to establish such fraud or irregularity. Another exception to the condentiality of deposits is the examination made by an independent auditor hired by the bank to conduct its regular audit provided that the examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank.66
* Note: Examination by auditor as an exception to the secrecy of bank deposits can no longer be found in the statute books. Nevertheless, it can nd basis in opinions of authors, banking experts and practitioners. Moreover, common sense would tell that disclosure is a natural consequence of examination.
G.
In Camera Inspection by the Ombudsman
Section 15(8) of Republic Act No. 6770 (The Ombudsman Act of 1989) provides as one of the powers of the Ombudsman: (8) Administer oaths, issue subpoena and subpoena duces tecum, and take testimony in any investigation or inquiry, including the power to examine and have access to bank accounts and records.
Before an in camera inspection may be allowed to the Ombudsman, there must be a pending case before a court of competent jurisdiction. Further, the account must be clearly identied, the inspection limited to the subject matter of the pending case before the court of competent jurisdiction. The bank personnel and the account holder must be notied to be present during the inspection, and such inspection may cover only the account identied in the pending case.67 Investigation by the Ofce of the Ombudsman is not considered pending litigation before any court of competent authority. The
Providing Penalties Therefor and for Other Purposes) as amended by Sec. 8, R.A. No. 9194, March 7, 2003. 66 Marquez vs. Desierto, G.R. No. 135882, June 27, 2001; Citing Union Bank of the Philippines vs. Court of Appeals. 67 Marquez vs. Desierto, G.R. No. 135882, June 27, 2001.
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investigation would not warrant the opening of the bank account for inspection.68 To allow the opening of a bank account is to allow the Ofce of the Ombudsman to sh for additional evidence. H. Preliminary Attachment Section 10, Rule 57 of the Rules of Court provides: Examination of party whose property is attached and persons indebted to him or controlling his property; delivery of property to sheriff. Any person owing debts to the party whose property is attached or having in his possession or under his control any credit or other personal property belonging to such party, may be required to attend before the court in which the action is pending, or before a commissioner appointed by the court, and be examined on oath respecting the same. The party whose property is attached may also be required to attend for the purpose of giving information respecting his property, and may be examined on oath. The court may, after such examination, order personal property capable of manual delivery belonging to him, in the possession of the person so required to attend before the court, to be delivered to the clerk of the court or sheriff on such terms as may be just, having reference to any lien thereon or claim against the same, to await the judgment in the action. Section 10, Rule 57 is not incompatible with the law on secrecy of bank deposits because it provides an exception in cases where the money deposited or invested is the subject matter of the litigation. I. Disclosure of Dormant Accounts
Section 2 of Act No. 3936 (An Act Requiring Banks, Trust Companies, Savings And Mortgage Banks, Mutual Building And Loan Associations, And Banking Institutions Of Every Kind To Transfer Unclaimed Balances Held By Them To The Insular Treasury, And For Other Purposes) provides: Immediately after the taking effect of this Act and within the month of January of every odd year, all banks shall forward to the Insular Treasurer a statement, under oath of their respective managing ofcers, of all credits and deposits held by them in favor of persons known to be dead, or who have not
68
Ibid.
117
made further deposits or withdrawals during the preceding ten years or more, arranged in alphabetical order according to the names of depositors, and showing: (a) The names and last known place of residence or postofce addresses of the persons in whose favor such credit or deposits stand; The amount and date of the outstanding credit or deposit and whether the same is in money or in security, and if the latter, the nature of the same; The date when the person in whose favor the credit or deposit stands died, if known, or the date when he made his last deposit or withdrawal; and The interest due on such credit or deposit, if any, and the amount thereof.
(b)
(c)
(d)
Immediately upon receipt of the above statement the Insular Treasurer shall publish the same once a week for three consecutive weeks in at least two newspapers of general circulation in the locality where the bank or banks are situated, if there be any, and if there is none, in the City of Manila, one in English and one in Spanish. The cost of such publication shall be paid by the Treasury Bureau and the latter shall be reimbursed out of the escheated fund. It shall be the duty of the Insular Treasurer to inform the Attorney-General from time to time of the existence of unclaimed balances held by banks. J. Authority of the Commissioner of Internal Revenue to Inquire into Deposits
Section 6 of the 1997 National Internal Revenue Code provides: (F) Authority of the Commissioner to inquire into Bank Deposit Accounts. Notwithstanding any contrary provision of Republic Act No. 1405 and other general or special laws, the Commissioner is hereby authorized to inquire into the bank deposits of: (1) (2) a decedent to determine his gross estate; and any taxpayer who has led an application for compromise of his tax liability under Sec. 204(A)(2) of this Code by reason of nancial incapacity to pay his tax liability.
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In case a taxpayer les an application to compromise the payment of his tax liabilities on his claim that his nancial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic Act No. 1405 or under other general or special laws, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer. K. Waiver by DOSRI The NCBA provides: Section 26. Bank Deposits and Investments. Any director, ofcer or stockholder who, together with his related interest, contracts a loan or any form of nancial accommodation from: (1) his bank; or (2) from a bank: (a) which is a subsidiary of a bank holding company of which both his bank and the lending bank are subsidiaries; or (b) in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank, in excess of ve percent (5%) of the capital and surplus of the bank, or in the maximum amount permitted by law, whichever is lower, shall be required by the lending bank to waive the secrecy of his deposits of whatever nature in all banks in the Philippines. Any information obtained from an examination of his deposits shall be held strictly condential and may be used by the examiners only in connection with their supervisory and examination responsibility or by the Bangko Sentral in an appropriate legal action it has initiated involving the deposit account. Problem: A and B opened a joint foreign currency savings account with Interbank to hold funds which belonged entirely and exclusively to A, to facilitate the funding of certain business undertakings of both of them and which funds were to be temporarily (held) in trust by B, who shall turnover the same to A upon demand. Withdrawals from the account were always made through their joint signatures. When their business relationship turned sour, B unilaterally closed their joint account, withdrew the remaining balance of Deutschmark (DM) 269,777.37 and placed the money in his own personal account with the same bank. A thus sought an injunctive writ to prevent B
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from withdrawing the money at any time. Is Bs deposit protected by the law on secrecy of bank deposits? No. By depositing those funds in a joint and/or account, A did not convey ownership thereof to B and B could not convert those funds to his personal and exclusive ownership and use. The privileges extended by the statute are actually enjoyed, and are invocable only, by A, because A is the owner of the foreign exchange fund subject of the case. B is still not entitled to the condentiality provisions of the law. For, as already noted, B is not the owner of such foreign currency funds.
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Chapter 4 Investments, Loans and Other Functions of Banks

I. Operations Of Universal Banks A. Powers of a Universal Bank
As earlier stated, universal bank shall have the authority to exercise: (i) (ii) the powers authorized for a commercial bank, the powers of an investment house,1 and
(iii) the power to invest in non-allied enterprises.2 B. Equity Investments of a Universal Bank
A universal bank may invest in the equities of allied and nonallied enterprises as may be determined by the Monetary Board. a. b. Allied enterprises may either be nancial or nonnancial. Except as the Monetary Board may otherwise prescribe: b.1) The total investment in equities of allied and nonallied enterprises shall not exceed fty percent (50%) of the net worth of the bank; and b.2) The equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-ve percent (25%) of the net worth of the bank.
1 2
As provided in existing laws. Section 23, GBL. 120
CHAPTER 4 INVESTMENTS, LOANS AND OTHER FUNCTIONS OF BANKS
121
c.
Net worth means the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided prot, net of valuation reserves and other adjustments as may be required by the Bangko Sentral.
The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investments.3 C. Equity Investments of a Universal Bank in Financial Allied Enterprises (i) A universal bank can own up to one hundred percent (100%) of the equity in a thrift bank, a rural bank or a nancial allied enterprise. A publicly-listed universal or commercial bank may own up to one hundred percent (100%) of the voting stock of only one other universal or commercial bank.4
(ii)
The following are Financial Allied Undertakings:5 a. Leasing companies including leasing of stalls and spaces in a commercial establishment: Provided, That bank investment in/acquisition of shares of such leasing company shall be limited/applicable only in cases of conversion of outstanding loan obligations into equity; Banks; Investment houses; Financing companies; Credit card companies; Financial institutions catering to small and medium scale industries including venture capital corporation (VCC); Companies engaged in stock brokerage/securities dealership; and Companies engaged in foreign exchange dealership/ brokerage.
b. c. d. e. f. g. h.
Section 24, GBL. Section 25, GBL. 5 Sec. X377, Manual of Regulations for Banks.
3 4
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In addition, Universal Banks may invest in the following as nancial allied undertakings: (1) (2) Insurance companies; and Holding company: Provided, That the investments of such holding company are conned to the equities of allied undertakings and/or non-allied undertakings of Universal Banks allowed under BSP regulations. The Monetary Board may declare such other activities as nancial allied undertakings of banks. The determination of whether the corporation is engaged in a nancial allied undertaking shall be based on its primary purpose as stated in its articles of incorporation and the volume of its principal business.
D.
Equity Investments of a Universal Bank in Non-Financial Allied Enterprises
A universal bank may own up to one hundred percent (100%) of the equity in a non-nancial allied enterprise.6 The following are Non-Financial Allied Undertakings:7 (1) (2) (3) (4) (5) (6) (7) (8) (9) Warehousing companies; Storage companies; Safe deposit box companies; Companies primarily engaged in the management of mutual funds but not in the mutual funds themselves; Management corporations engaged or to be engaged in an activity similar to the management of mutual funds; Companies engaged in providing computer services; Insurance agencies/brokerages; Companies engaged in home building and home development; Companies providing drying and/or milling facilities for agricultural crops such as rice and corn;
6 7
Section 26, GBL. Sec. X380, Manual of Regulations for Banks.
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(10)
Service bureaus, organized to perform for and in behalf of banks and non-bank nancial institutions the services allowed to be outsourced: Provided, That data processing companies may be allowed to invest up to forty percent (40%) in the equity of service bureaus; Philippine Clearing House Corporation (PCHC), Philippine Central Depository, Inc. and Fixed Income Exchange; and Such other similar activities as the Monetary Board may declare as non-nancial allied undertakings of banks. Universal Banks may further invest in health maintenance organizations (HMOs).
(11)
(12)
* Note: Incidentally, rural banks/cooperative banks may invest, as a non-nancial allied undertaking, in the equities of companies engaged in the following: (1) (2) (3) (4) (5) (6) (7) Warehousing and other post-harvest facilities; Fertilizer and agricultural chemical and pesticides distribution; Farm equipment distribution; Trucking and transportation of agricultural products; Marketing of agricultural products; Leasing; and Other undertakings as may be determined by the Monetary Board.
E.
Equity Investments of a Universal Bank in Non-Allied Enterprises
The equity investment of a universal bank, or of its wholly or majority-owned subsidiaries, in a single non-allied enterprise shall not exceed thirty-ve percent (35%) of the total equity in that enterprise nor shall it exceed thirty-ve percent (35%) of the voting stock in that enterprise.8
Section 27, GBL.
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F.
Investments in Non-Allied or Non-Related Undertakings9
Only Universal Banks may invest in the equity of an enterprise engaged in non-allied or non-related activities. The following are non-allied undertakings eligible for investment by universal banks: a. Enterprises engaged in physically productive activities in agriculture, mining and quarrying, manufacturing, public utilities, construction, wholesale trade and community and social services following the industrial groupings in the Philippine Standard Industrial Classication (PSIC); Industrial park projects and/or industrial estate developments; Financial and commercial complex projects (including land development and buildings constructed thereon) arising from or in connection with the Governments privatization program; and Such other broad categories as the Monetary Board may declare as appropriate.
b. c.
d. G.
Equity Investments in Quasi-Banks
To promote competitive conditions in nancial markets, the Monetary Board may further limit to forty percent (40%) equity investments of universal banks in quasi-banks. This rule shall also apply in the case of commercial banks.10 II. Operations Of Commercial Banks A. Powers of a Commercial Bank As stated earlier, commercial bank shall have: a. b. the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking, such as:
10
Sec. 1381, Manual of Regulations for Banks. Section 28, GBL.
125
(i) (ii)
accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt;
(iii) accepting or creating demand deposits; (iv) receiving other types of deposits and deposit substitutes; (v) buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other debt securities; and
(vi) extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include the determination of bonds and other debt securities eligible for investment, the maturities and aggregate amount of such investment.11
B.
Issuance of Letters Of Credit 1. Nature
A letter of credit is a nancial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. To break the impasse, the buyer may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the letter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously with the tender of documents required by the letter of credit. The buyer and the seller agree on what documents are to be presented for payment, but ordinarily they are documents of title evidencing or attesting to the shipment of the goods to the buyer.12 It is an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specied
Section 29, GBL. Reliance Commodities, Inc. vs. Daewoo Industrial Co., Ltd., G.R. No. 100831, December 17, 1993.
11 12
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in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon.13 Commercial letters of credit have come into general use in international sales transactions where much time necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which interval great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller is desirous of being paid as surely and as soon as possible, realizing that the vendee at a distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of credit meet this condition by affording celerity and certainty of payment. Their purpose is to insure to a seller payment of a denite amount upon presentation of documents. The bank deals only with documents. It has nothing to do with the quality of the merchandise. Disputes as to the merchandise shipped may arise and be litigated later between vendor and vendee, but they may not impede acceptance of drafts and payment by the issuing bank when the proper documents are presented.14 By this arrangement a banker advances money to an intending importer, and thereby lends the aid of capital, of credit, or of business facilities and agencies abroad, to the enterprise of foreign commerce. Much of this trade could hardly be carried on by any other means, and therefore it is of the rst importance that the fundamental factor in the transaction, the bankers advance of money and credit, should receive the amplest protection. Accordingly, in order to secure that the banker shall be repaid at the critical point that is, when the imported goods nally reach the hands of the intended vendee the banker takes the full title to the goods at the very beginning; he takes it as soon as the goods are bought and settled for by his payments or acceptances in the foreign country, and he continues to hold that title as his indispensable security until the goods are sold in the United States and the vendee is called upon to pay for them. This security is not an ordinary pledge by the importer to the banker, for the importer has never owned the goods, and moreover he is not able to deliver the possession; but the security is the complete title vested
13 Prudential Bank vs. Intermediate Appellate Court, G.R. No. 74886, December 8, 1992. 14 Hibernia Bank and Trust Co. vs. J. Aron & Co., Inc., 134 Misc. 18, 21-22, N.Y.S. 486, 490-491.
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originally in the bankers, and this characteristic of the transaction has again and again been recognized and protected by the courts. Of course, the title is at bottom a security title, as it has sometimes been called, and the banker is always under the obligation to reconvey; but only after his advances have been fully repaid and after the importer has fullled the other terms of the contract.15 Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or documents of title. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank. The issuing bank redeems the draft and pays cash to the seller if it nds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank and acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the said documents and control over the goods only after reimbursing the bank.16 2. Characteristics
What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and the required shipping documents are presented to it. In turn, this arrangement assures the seller of prompt payment, independent of any breach of the main sales contract. By this so-called independence principle, the bank determines compliance with the letter of credit only by examining the shipping documents presented; it is precluded from determining whether the main contract is actually accomplished or not.17 3. Intertwined Relationships
A letter of credit transaction may thus be seen to be a composite of at least three (3) distinct but intertwined relationships, each relationship being concretized in a contract:
In re Dunlap Carpet Co. Reliance Commodities, Inc. vs. Daewoo Industrial Co., Ltd., G.R. No. 100831, December 17, 1993. 17 Bank of America, NT & SA vs. Court of Appeals, G.R. No. 105395, December 10, 1993.
15 16
128
(a)
One contract relationship links the party applying for the L/C (the account party or buyer or importer) and the party for whose benet the L/C is issued (the beneciary or seller or exporter). A second contract relationship is between the account party and the issuing bank. Under this contract, (sometimes called the Application and Agreement or the Reimbursement Agreement), the account party, among other things, applies to the issuing bank for a specied L/C and agrees to reimburse the bank for amounts paid by that bank pursuant to the L/C. The third contract relationship is established between the issuing bank and the beneciary, in order to support the contract, under (a) above, of the account party and the beneciary to, inter alia, pay certain monies to the latter.18 Parties
(b)
(c)
4.
There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title; (b) the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper documents of titles and to surrender the documents to the buyer upon reimbursement; and (c) the seller, who in compliance 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. The number of the parties, not infrequently and almost invariably in international trade practice, may be increased. Thus, the services of an advising (notifying) bank may be utilized to convey to the seller the existence of the credit; or, of a conrming bank which will lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying bank which undertakes to encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, termed the negotiating bank, to have the draft discounted.19
18 Reliance Commodities, Inc. vs. Daewoo Industrial Co., Ltd., G.R. No. 100831, December 17, 1993. 19 Bank of America, NT & SA vs. Court of Appeals, G.R. No. 105395, December 10, 1993.
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* Note:
See discussion on Trust Receipts in Chapter 9.
C.
Equity Investments of a Commercial Bank
A commercial bank may invest only in the equities of allied enterprises as may be determined by the Monetary Board. Allied enterprises may either be nancial or non-nancial. Except as the Monetary Board may otherwise prescribe: 1. The total investment in equities of allied enterprises shall not exceed thirty-ve percent (35%) of the net worth of the bank; and The equity investment in any one enterprise shall not exceed twenty-ve percent (25%) of the net worth of the bank. The acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate guidelines to govern such investments.20
2.
D.
Equity Investments of a Commercial Bank in Financial Allied Enterprises (i) A commercial bank may own up to one hundred percent (100%) of the equity of a thrift bank or a rural bank. Unlike universal banks, commercial banks may not own one hundred percent (100%) of the equity of nancial allied enterprises other than a thrift bank or a rural bank.
(ii)
Where the equity investment of a commercial bank is in other nancial allied enterprises, including another commercial bank, such investment shall remain a minority holding in that enterprise.21
E.
Equity Investments of a Commercial Bank in NonFinancial Allied Enterprises
A commercial bank may own up to one hundred percent (100%) of the equity in a nonnancial allied enterprise.22
Section 30, GBL. Section 31, GBL. 22 Section 32, GBL.
20 21
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Table of Equity Investments*

ACTIVITIES
UB Publicly-listed Allied enterprises Financial Allied Undertakings Universal Banks Commercial Banks Thrift Banks Rural Bank Coop Bank Insurance companies Venture Capital Corporations Others 100% 100% 100% 100% NA 100% 60% 100% 49% 49% 100% 100% 100% 100% NA NA 60% 49% 49% 49% 49% 49% 49% 49% NA NA 60% 40% 49% 49% 49% 49% NA NA 49% 40% 49% 49% 49% 100% 30% NA 49% 40% Not listed INVESTOR KB Publicly-listed Not listed TB RB COOP
*Sec. X378, MORB, as amended by Circular No. 530, Series of 2006
III. Risk-Based Capital A. Minimum Ratio
The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts. (i) The Monetary Board may require that such ratio be determined on the basis of the net worth and risk assets of a bank and its subsidiaries, nancial or otherwise, as well as prescribe the composition and the manner of determining the net worth and total risk assets of banks and their subsidiaries. In the exercise of this authority, the Monetary Board shall, to the extent feasible, conform to internationally accepted standards, including those of the Bank for
(ii)
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International Settlements (BIS), relating to risk-based capital requirements. (iii) It may alter or suspend compliance with such ratio whenever necessary for a maximum period of one (1) year. (iv) Such ratio shall be applied uniformly to banks of the same category. B. Effect of Non-Compliance
In case a bank does not comply with the prescribed minimum ratio, the Monetary Board may: 1. limit or prohibit the distribution of net prots by such bank and may require that part or all of the net prots be used to increase the capital accounts of the bank until the minimum requirement has been met; restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the Republic of the Philippines and of the Bangko Sentral and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines, until the minimum required capital ratio has been restored.
2.
In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by the Bangko Sentral, the Monetary Board may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio under such conditions as it may prescribe.23 (Section 34, GBL) IV. Limit On Loans, Credit Accommodations And Guarantees A. Single Borrowers Limit (i) The total amount of loans, credit accommodations and guarantees as may be dened by the Monetary Board that
23 Before the effectivity of the rules which the Monetary Board is authorized to prescribe under this provision, Section 22 of the General Banking Act, as amended, Section 9 of the Thrift Banks Act, and all pertinent rules issued pursuant thereto, shall continue to be in force.
132
may be extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed twenty percent (20%) of the net worth of such bank. Exceptions: (i) (ii) As the Monetary Board may otherwise prescribe for reasons of national interest Deposits of rural banks with government-owned or -controlled nancial institutions like the Land Bank of the Philippines, the Development Bank of the Philippines, and the Philippine National Bank are exempted from the Single Borrowers Limit imposed by the General Banking Act.24
The basis for determining compliance with single-borrower limit is the total credit commitment of the bank to the borrower. Loans refer to all the accounts under the loan portfolio of a bank as enumerated in the manual of accounts for banks. Other credit accommodations refer to credit and specic market risk exposures of banks arising from accommodations other than loans such as receivables (sales contract receivables, accounts receivables and other receivables), and debt securities booked as investments. Total credit commitment shall include outstanding loans and other credit accommodations, deferred letters of credit less margin deposits, and guarantees. Except as specically provided, total credit commitment shall be reckoned on credit riskweighted basis consistent with existing regulations.
* Notes: a.
b.
c.
d.
(ii)
The total amount of loans, credit accommodations and guarantees prescribed in the preceding paragraph (i) may be increased by an additional ten percent (10%) of the net worth of such bank provided the additional liabilities of any borrower are adequately secured by trust receipts,
24 Section 17, Republic Act No. 7353 (An Act Providing for the Creation, Organization and Operation of Rural Banks, and for Other Purposes).
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shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance. Exception: Unless otherwise prescribed by the Monetary Board. Readily marketable goods mean articles of commerce, agriculture or industry of such uses as to make them the subject of constant dealings in ready markets with such frequent quotations as to make their prices easily and denitely ascertainable, or which lend themselves easily to disposal by sale at any time to pay the obligations secured by the said goods.
* Note: In connection with the foregoing, pertinent provisions of Circular No. 425 are reproduced hereunder: Circular No. 425, Series Of 2004 The Monetary Board, in its Resolution No. 299 dated March 11, 2004, approved the following amendments to Section X303, Subsections X303.1 to X303.5 and Subsection X347.2 of the Manual of Regulations for Banks (MOR) to implement Section 35 of Republic Act (R.A.) 8791, The General Banking Law (GBL) of 2000. SECTION 1. Section X303 of the MOR and its subsections are hereby amended to read as follows: SECTION X303. Credit Exposure Limits to a Single Borrower. A. Consistent with national interest, the total amount of loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed twenty ve percent (25%) of the net worth of such bank. The basis for determining compliance with the single borrowers limit (SBL) is the total credit commitment of the bank to or on behalf of the borrower. B. The total amount of loans, credit accommodations and guarantees prescribed in the rst paragraph may be increased by an additional ten percent (10%) of the net worth of such bank: Provided, That the additional liabilities are adequately secured by trust receipts, shipping documents,
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warehouse receipts or other similar documents transferring or securing title covering readily marketable, non-perishable goods which must be fully covered by insurance. C. The above prescribed ceilings shall include: (a) the direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general endorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such bank; (b) in the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; (c) in the case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and (d) in the case of a partnership, association or other entity, the liabilities of the members thereof to such bank. D. Even if a parent corporation, partnership, association, entity or an individual who owns or controls a majority interest in such entities has no liability to the bank, the liabilities of subsidiary corporations or members of the partnership, association, entity or such individual shall be combined under certain circumstances, including but not limited to any of the following situations: (a) the parent corporation, partnership, association, entity or individual guarantees the repayment of the liabilities; (b) the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership or association or entity or such individual; or (c) the subsidiaries though separate entities operate merely as departments or divisions of a single entity. E. For purposes of this section, loans, other credit accommodations and guarantees shall exclude: (a) loans and other credit accommodations secured by obligations of the Bangko Sentral or of the Philippine Government; (b) loans and other credit accommodations fully guaranteed by the government as to the payment of principal and interest; (c) loans and other credit accommodations secured by U.S. treasury notes and other securities issued by central governments and central banks of foreign countries with the highest credit quality given by any two internationally accepted rating agencies; (d) loans and other credit accommodations to the extent covered by the hold-out on or assignment of, deposits maintained in the lending bank and held in the Philippines; (e) loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits; and (f) other loans or credit accommodations which the Monetary Board may from time to time specify as non-risk items.
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F. The wholesale lending activities of government banks to participating nancial institutions for relending to end-user borrowers shall at no time exceed a separate limit of thirty-ve percent (35%) of net worth, subject to the following guidelines: (a) it shall apply only to loans granted to participating nancial institutions (PFIs) on a wholesale basis for on-lending to end-user borrowers; (b) it shall apply only to loan programs funded by multilateral, international or local development agencies, organizations or institutions especially designed for wholesale lending activities of government banks; (c) the end-user borrowers of the PFIs shall be subject to the 25% SBL, not the increased ceiling of 35%; and (d) government banks shall observe appropriate criteria for accrediting PFIs and for the grant/renewal of credit lines to accredited PFIs. G. Loans and other credit accommodations as well as deposits maintained with, and usual guarantees by a bank to any other bank or non-bank entity, whether locally or abroad, shall be subject to the limits as herein prescribed. Deposits of rural banks and cooperative banks (RBs/ Coop Banks) with government-owned or controlled nancial institutions like the Land Bank of the Philippines and the Development Bank of the Philippines shall not be covered by the SBL imposed under R. A. No. 8791. In municipalities and cities where there are no government banks, the deposits of RBs/Coop Banks in private banks in said areas shall not be subject to the SBL. Deposits in private banks located in other municipalities/cities shall be covered by the SBL. The outstanding balance of the deposit in a private depository bank being used by the Thrift Banks/RBs/Coop Banks with authority to accept/create demand or current deposits, to fund checks cleared through the said private depository bank shall also be exempt from the SBL even if there is a governmentowned or controlled nancial institution in the area. Subsection X303.1 Denition of Terms. For purposes of this Circular, the following denitions shall apply: a. Total Credit Commitment shall include outstanding loans and other credit accommodations, deferred letters of credit less margin deposits, and guarantees. Except as specically provided, total credit commitment shall be reckoned on credit risk-weighted basis consistent with existing regulations.
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b. Loans shall refer to all the accounts under the loan portfolio of a bank as enumerated in the manual of accounts for banks. c. Other Credit Accommodations shall refer to credit and specic market risk exposures of banks arising from accommodations other than loans such as receivables (sales contract receivables, accounts receivables and other receivables), and debt securities booked as investments. d. Bank Guarantee. A bank guarantee is an irrevocable commitment of a bank binding itself to pay a sum of money in the event of non-performance of a contract by a third party. The guarantee is a commitment separate and distinct from the principal debt or contract. e. Net Worth shall mean the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided prot, net of valuation reserves and other adjustments as may be required by the Bangko Sentral. f. Qualifying Capital shall mean capital as computed under Circular 280 dated March 29, 2001 or as dened by the Monetary Board. g. The term Control of Majority Interest shall be synonymous to controlling interest and exists when the parent owns directly or indirectly through subsidiaries more than one half of the voting power of an enterprise unless, in exceptional circumstance, it can be clearly demonstrated that such ownership does not constitute control. Control of majority interest may also exist even when the parent owns one half or less of the voting power of an enterprise when there is: 1. Power over more than one half of the voting rights by virtue of an agreement with other investors; or 2. Power to govern the nancial and operating policies of the enterprise under a statute or an agreement; or 3. Power to appoint or remove the majority members of the board of directors or equivalent governing body; or 4. Power to cast the majority votes at meetings of the board of directors or equivalent governing body; or 5. above. Any other arrangement similar to any of the
h. Subsidiary shall refer to a corporation or rm more than fty percent (50%) of the outstanding voting stock of which
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is directly or indirectly owned, controlled or held with power to vote by its parent corporation. i. Credit Risk Transfer shall refer to any arrangement that allows the bank to transfer the credit risk associated with its loan or other credit accommodation to a third party. j. Readily Marketable Goods shall mean articles of commerce, agriculture or industry of such uses as to make them the subject of constant dealings in ready markets with such frequent quotations as to make their prices easily and denitely ascertainable, or which lend themselves easily to disposal by sale at any time to pay the obligations secured by the said goods. k. Bill of exchange drawn in good faith against actually existing values shall mean one which is drawn by a seller on the purchaser for the purchase price of commodities sold. A bill of exchange, whether drawn against goods for exports or against goods to be sold locally, which is discounted or purchased by a bank is a bill drawn against existing values only when it is accompanied by shipping documents, warehouse receipts or other papers, securing title to the goods sold. However, bills of exchange drawn in good faith against actually existing values as dened in this paragraph, which are past due or the maturities of which have been extended, shall be considered as additional loans authorized under the second paragraph of this section and shall be subject to the ten percent (10%) limitation provided therein. l. Commercial or business paper actually owned by the person negotiating the same shall mean a paper arising from an actual business transaction. A trade acceptance or promissory note actually owned by the person negotiating the same is a commercial or a business paper. However, if a bill is drawn against an agent or ctitious drawee, or if a promissory note is executed by an agent or ctitious drawee, neither is a commercial or a business paper. Commercial or business papers actually owned and discounted by the person negotiating the same, which are past due or the maturity of which have been extended, shall be considered as money borrowed and shall be subject to the limitation of twenty-ve percent (25%) provided in the rst paragraph of this Section. Subsection X303.2 Rediscounted Papers Included in Loan Limit. The liabilities to the bank of borrowers whose papers were rediscounted by banks with the Bangko Sentral shall not be deemed as having been extinguished by the rediscount,
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but shall be considered as still existing and shall be included in determining the SBL until such papers are paid by the borrowers. Subsection X303.3 Credit Risk Transfer. Subject to prior approval of the Bangko Sentral, loans and other credit accommodations covered by a legally effective credit risk transfer arrangement such as guarantee, letter of indemnity, standby letter of credit or credit derivative, may be excluded from the total credit commitment of the bank to a borrower in reckoning compliance with the single borrowers limit. Subsection X303.4 Exclusions from Loan Limit. a. The discount of bills of exchange drawn in good faith against actually existing values, and the discount of commercial or business paper which are actually owned by the person, company, corporation or association negotiating the same; b. Credit accommodations to nance the importation of rice and corn to the extent of one hundred percent (100%) of the net worth of the bank concerned shall be excluded in determining the SBL prescribed herein, subject to the following conditions: 1. The importation shall be made in pursuance of a national policy duly enunciated by the National Government; 2. The importation shall have been approved by the National Economic Development Authority (NEDA); 3. The letter of credit shall specify that importation shall be made with certication from the National Food Authority (NFA), or the consular establishment of the Philippine government at the source of any such shipment to the effect that the commodity being imported is either rice or corn; and 4. The related bills of lading shall specify in addition to the name of the importer concerned, that the NFA shall be the consignee of the shipment. c. The portion of loans and other credit accommodations covered by the guarantee of Industrial Guarantee and Loan Fund; d. The total liabilities of a commercial paper issuer for commercial paper held by a Universal Bank (UB) as a rm underwriter shall not be counted in determining compliance
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with the SBL within a period of one hundred eighty (180) days from the acquisition of the commercial paper by the UB: Provided, That in no case shall such liabilities exceed ve percent (5%) of the net worth of the UB beyond the normal applicable SBL; e. The portion of loans and other credit accommodations covered by guarantees of international/regional institutions/ multi-lateral nancial institutions where the Philippine Government is a member/shareholder, such as the International Finance Corporation and the Asian Development Bank; f. Loans and other credit accommodations or portion thereof, specically provided for with valuation reserves; provided, that the bank has no unbooked valuation reserves; g. Loans and other credit accommodations as a result of an underwriting or sub-underwriting agreement of debt securities outstanding for a period not exceeding thirty (30) calendar days. Subsection X303.5 Sanctions. Violations of the provisions of the foregoing rules shall be subject to the following: a. Monetary Penalties Fines of one-tenth of one percent (1/10 of 1%) of the excess over the ceiling but not to exceed Thirty Thousand Pesos (P30,000.00) a day for each SBL violation shall be assessed on the bank to be reckoned from the date the excess started up to the date when such excess was eliminated: Provided, That a maximum ne of Five Hundred Pesos (P500.00) a day for each violation shall be imposed against banks with total resources of less than P50 million at the time of granting of loan/credit accommodation. b. Other Sanctions
First Offense Reprimand for the directors/ofcers who approved the credit availment which resulted in the excess with a warning that subsequent violations will be subject to more severe sanctions. Subsequent Offenses 1. Fine of One Thousand Pesos (P1,000.00) for directors/ ofcers who approved the credit availment which resulted in the excess. 2. Suspension of the banks branching privileges and access to Bangko Sentral rediscounting facilities until the excess is eliminated.
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3. Other penalties as the Monetary Board may impose depending on the gravity of the offense. SECTION 2. Subsection X347.2 of the MOR is hereby amended to read as follows: Subsection X347.2. Ceiling. The total guarantees or similar arrangements, the nature of which requires the guarantor to assume the liabilities/obligations of third parties in case of their inability to pay, that may be issued by a bank and outstanding at any given time, shall not exceed One Hundred Percent (100%) of the banks qualifying capital.
B.
Inclusions to the Limit (i) The prescribed ceilings shall include: a. the direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general indorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such bank; in the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; in the case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and in the case of a partnership, association or other entity, the liabilities of the members thereof to such bank.
b.
c.
d.
(ii)
The term control of majority interest is synonymous to controlling interest and exists when the parent owns directly or indirectly through subsidiaries more than one half of the voting power of an enterprise unless, in exceptional circumstance, it can be clearly demonstrated that such ownership does not constitute control. Control of majority interest may also exist even when the parent owns one-half or less of the voting power of an enterprise when there is:
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Power over more than one-half of the voting rights by virtue of an agreement with other investors; or Power to govern the nancial and operating policies of the enterprise under a statute or an agreement; or Power to appoint or remove the majority members of the board of directors or equivalent governing body; or Power to cast the majority votes at meetings of the board of directors or equivalent governing body; or Any other arrangement similar to any of the above.
(iii) Even if a parent corporation, partnership, association, entity or an individual who owns or controls a majority interest in such entities has no liability to the bank, the Monetary Board may prescribe the combination of the liabilities of subsidiary corporations or members of the partnership, association, entity or such individual under certain circumstances, including but not limited to any of the following situations: (a) the parent corporation, partnership, association, entity or individual guarantees the repayment of the liabilities; the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership or association or entity or such individual; or the subsidiaries though separate entities operate merely as departments or divisions of a single entity.
(b)
(c)
C.
Exclusions to the Limit
Loans, other credit accommodations and guarantees shall exclude: a. loans and other credit accommodations secured by obligations of the Bangko Sentral or of the Philippine Government;
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Reason: b. The State undoubtedly is always solvent.25
loans and other credit accommodations fully guaranteed by the government as to the payment of principal and interest; loans and other credit accommodations covered by assignment of deposits maintained in the lending bank and held in the Philippines; loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits; and other loans or credit accommodations which the Monetary Board may from time to time, specify as non-risk items.
c.
d.
e.
D.
Bank Guarantee
Loans and other credit accommodations, deposits maintained with, and usual guarantees by a bank to any other bank or non-bank entity, whether locally or abroad, shall be subject to the limits as herein prescribed. A bank guarantee is an irrevocable commitment of a bank binding itself to pay a sum of money in the event of non-performance of a contract by a third party. The guarantee is a commitment separate and distinct from the principal debt or contract. E. Contingent Accounts
Certain types of contingent accounts of borrowers may be included among those subject to these prescribed limits as may be determined by the Monetary Board.26 F. Assignment of Credits
Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the need
25 Tolentino vs. Carlos, 66 Phil. 140; Government of the P.I. vs. Judge of the Court of First Instance of Iloilo, 34 Phil. 167, cited in Joaquin Gutierrez, et al. vs. Camus, et al., G.R. No. L-6725, promulgated October 30, 1954. 26 Section 35, GBL.
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of the consent of the debtor, transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor ... It may be in the form of a sale, but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against a third person, or it may constitute a donation as when it is by gratuitous title; or it may even be merely by way of guaranty, as when the creditor gives as a collateral, to secure his own debt in favor of the assignee, without transmitting ownership. The character that it may assume determines its requisites and effects, its regulation, and the capacity of the parties to execute it; and in every case, the obligations between assignor and assignee will depend upon the judicial relation which is the basis of the assignment.27 As a consequence, the third party steps into the shoes of the original creditor as subrogee of the latter. Moreover, in assignment, the debtors consent is not essential for the validity of the assignment (Art. 1624 in relation to Art. 1475, Civil Code), his knowledge thereof affecting only the validity of the payment he might make (Article 1626, Civil Code). Article 1626 also shows that payment of an obligation which is already existing does not depend on the consent of the debtor. It, in effect, mandates that such payment of the existing obligation shall already be made to the new creditor from the time the debtor acquires knowledge of the assignment of the obligation. The law is clear that the debtor had the obligation to pay and should have paid from the date of notice whether or not he consented. In Sison & Sison vs. Yap Tico and Avancea, 37 Phil. 587 [1918] it was ruled that denitely, consent is not necessary in order that assignment may fully produce legal effects. Hence, the duty to pay does not depend on the consent of the debtor. Otherwise, all creditors would be prevented from assigning their credits because of the possibility of the debtors refusal to give consent. What the law requires in an assignment of credit is not the consent of the debtor but merely notice to him. A creditor may, therefore, validly assign his credit and its accessories without the debtors consent (National Investment and Development Co. vs. De
27 Manila Banking Corporation vs. Teodoro, citing Tolentino, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, Vol. 5, pp. 165-166, G.R. No. L53955, January 13, 1989.
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Los Angeles, 40 SCRA 489 [1971]. The purpose of the notice is only to inform that debtor from the date of the assignment, payment should be made to the assignee and not to the original creditor.28 G. No Pacto Commissorio in Assignment of Deposits
In general, the creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.29 The encashment of the deposit certicates is not a pacto commissorio which is prohibited under Art. 2088 of the Civil Code. A pacto commissorio is a provision for the automatic appropriation of the pledged or mortgaged property by the creditor in payment of the loan upon its maturity. The prohibition against a pacto commissorio is intended to protect the obligor, pledgor, or mortgagor against being overreached by his creditor who holds a pledge or mortgage over property whose value is much more than the debt. Where the security for the debt is also money deposited in a bank, the amount of which is even less than the debt, it was not illegal for the creditor to encash the time deposit certicates to pay the debtors overdue obligation, with the latters consent.30 V. Restriction On Bank Exposure To Directors, Ofcers, Stockholders And Their Related Interests A. Approval and Other Requirements (i) No director or ofcer of any bank shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor shall he become a guarantor, indorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned. Such written approval shall not be required for loans, other credit accommodations and advances granted to ofcers under a fringe benet plan approved by the Bangko Sentral.
28 South City Homes, Inc. vs. Insurance Corporation, G.R. No. 135462, December 7, 2001. 29 Art. 2088, Civil Code. 30 Chu vs. Court of Appeals, G.R. No. L-78519, September 26, 1989.
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(ii)
The required approval shall be entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko Sentral.
(iii) Dealings of a bank with any of its directors, ofcers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others. B. Directors Directors shall include: (1) (2) (3) C. directors who are named as such in the articles of incorporation; directors duly elected in subsequent meetings of the stockholders; and those elected to ll vacancies in the board of directors.
Ofcers i. Ofcers shall include the president, executive vice president, senior vice president, vice president, general manager, secretary, treasurer, trust ofcer and others mentioned as ofcers of the bank, or those whose duties as such are dened in the by-laws, or are generally known to be the ofcers of the bank (or any of its branches and ofces other than the head ofce) either through announcement, representation, publication or any kind of communication made by the bank. A person holding the position of chairman, vice-chairman or any other position of the board who also performs functions of management such as those ordinarily performed by regular ofcers shall also be considered an ofcer.
ii.
D.
Stockholder
Stockholder shall refer to any stockholder of record in the books of the bank/quasi-bank/trust entity, acting personally, or through an attorney-in-fact; or any other person duly authorized by him or through a trustee designated pursuant to a proxy or voting trust or other similar contracts, whose stockholdings in the lending bank/quasi-bank/trust entity, individual and/or collectively with the
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stockholdings of: (i) his spouse and/or relative within the rst degree by consanguinity or afnity or legal adoption; (ii) a partnership in which the stockholder and/or the spouse and/or any of the aforementioned relatives is a general partner; and (iii) corporation, association or rm of which the stockholder and/or his spouse and/or the aforementioned relatives own more than fty percent (50%) of the total subscribed capital stock of such corporation, association or rm, amount to ONE PERCENT (1%) or more of the total subscribed capital stock of the bank/quasi-bank/trust entity. E. Related Interests The following are considered related interests: (1) Spouse or relative within the rst degree of consanguinity or afnity, or relative by legal adoption, of a director, ofcer or stockholder of the bank; Partnership of which a director, ofcer, or stockholder of a bank or his spouse or relative within the rst degree of consanguinity or afnity, or relative by legal adoption, is a general partner; Co-owner with the director, ofcer, stockholder or his spouse or relative within the rst degree of consanguinity or afnity, or relative by legal adoption, of the property or interest or right mortgaged, pledged or assigned to secure the loans or other credit accommodations, except when the mortgage, pledge or assignment covers only said coowners undivided interest; Corporation, association, or rm of which a director or ofcer of the bank, or his spouse is also a director or ofcer of such corporation, association or rm, except (a) where the securities of such corporation, association or rm are listed and traded in the big board or commercial and industrial board of domestic stock exchanges and less than fty percent (50%) of the voting stock thereof is owned by any one (1) person or by persons related to each other within the rst degree of consanguinity or afnity; or (b) where the director, ofcer or stockholder of the bank sits as a representative of the bank in the board of directors of such corporation: Provided, That the bank representative shall not have any equity interest in the borrower corporation except for the minimum shares
(2)
(3)
(4)
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required by law, rules and regulations, or by the by-laws of the corporation: Provided, further, That the borrowing corporation is not among those mentioned in Items (5), (6), (7) and (8) below; (5) Corporation, association or rm of which any or a group of directors, ofcers, stockholders of the lending bank and/or their spouses or relatives within the rst degree of consanguinity or afnity, or relative by legal adoption, hold or own at least twenty percent (20%) of the subscribed capital of such corporation, or of the equity of such association or rm; Corporation, association or rm wholly or majority-owned or controlled by any related entity or a group of related entities mentioned in Items (2), (4) and (5) above; Corporation, association or rm which owns or controls directly or indirectly whether singly or as part of a group of related interest at least twenty percent (20%) of the subscribed capital of a substantial stockholder of the lending bank or which controls majority interest of the bank; and Corporation, association or rm in which the lending bank and/or its parent/subsidiary holds or owns at least twenty percent (20%) of the subscribed capital of such corporation, or in the equity of such association or rm, or has an existing management contract or any similar arrangement with the lending bank or its parent/ subsidiary.
(6)
(7)
(8)
F.
Effect of Violation
After due notice to the board of directors of the bank, the ofce of any bank director or ofcer who violates the foregoing may be declared vacant and the director or ofcer shall be subject to the penal provisions provided in the New Central Bank Act. G. Limits of Loans (i) The Monetary Board may regulate the amount of loans, credit accommodations and guarantees that may be extended, directly or indirectly, by a bank to its directors, ofcers, stockholders and their related interests, as well
148
as investments of such bank in enterprises owned or controlled by said directors, ofcers, stockholders and their related interests. (ii) The outstanding loans, credit accommodations and guarantees which a bank may extend to each of its stockholders, directors, or ofcers and their related interests, shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank.
H.
Exclusions to the Limit (i) Loans, credit accommodations and guarantees secured by assets considered as non-risk by the Monetary Board shall be excluded from such limit. Loans, credit accommodations and advances to ofcers in the form of fringe benets granted in accordance with rules as may be prescribed by the Monetary Board shall not be subject to the individual limit.
(ii)
(iii) The limit on loans, credit accommodations and guarantees shall not apply to loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders. (Section 36, GBL) I. Applicability of DOSRI Rules and Regulations to Government Borrowings
Circular No. 547, Series Of 2006, provides that the DOSRI Rules and Regulations shall also apply to loans, other credit accommodations, and/or guarantees granted to the National Government or Republic of the Philippines (ROP), its political subdivisions and instrumentalities as well as government-owned or -controlled corporations (GOCCs), subject to the following clarications: 1. Loans, other credit accommodations, and/or guarantees to the ROP and/or its agencies/departments/bureaus shall be considered: (a) non-risk; and (b) not subject to any ceiling; Loans, other credit accommodations, and/or guarantees to: (a) GOCCs; and (b) corporations where the ROP, its agencies/departments/bureaus, and/or GOCCs own at
2.
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least twenty percent (20%) of the subscribed capital stock shall be considered indirect borrowings of the ROP and shall form part of the individual ceiling as well as the aggregate ceiling: Provided, That the following loans, other credit accommodations, and/or guarantees to GOCCs and corporations where the ROP, its agencies/departments/ bureaus, and/or GOCCs own at least twenty percent (20%) of the subscribed capital stock, shall be excluded from the thirty percent (30%) ceiling on unsecured loans: a. Loans, other credit accommodations, and/or guarantees for the purpose of undertaking priority infrastructure projects consistent with the Medium-Term Development Plan/Medium Term Public Investment Program of the National Government, duly certied as such by the Secretary of Socio-Economic Planning; Loans, other credit accommodations, and/or guarantees granted to participating nancial institutions (PFIs) in the lending programs of the government wherein the funds borrowed are intended for relending to other PFIs or end-user borrowers; and Loans, other credit accommodations, and/or guarantees to provide rediscounting facilities and/or guarantee programs for loans granted to the agricultural sector, and micro, small and medium enterprises.
b.
c.
3.
In view of the scal autonomy granted under R.A. 7653 and the independence prescribed under the Constitution, the BSP shall be considered an independent entity, hence, not a related interest of the ROP and/or its agencies/ departments/bureaus. Loans, other credit accommodations and guarantees of the BSP shall be considered: (a) nonrisk; and (b) not subject to any ceiling; Local government units (LGUs) shall be considered separate from the ROP, other government entities, and from one another due to the full autonomy in the exercise of their proprietary functions and in the management of their economic enterprises granted to them under the Local Government Code of the Philippines, subject to certain limitations provided by law, hence, not a related
4.
150
interest of the ROP and/or its agencies/departments/ bureaus; 5. A director who acts as a government representative in the lending institution shall not be excluded in the deliberation as well as in the determination of majority of the directors in cases of loans, other credit accommodations, and guarantees to the ROP and/or its agencies/departments/ bureaus; and A director of the lending institution shall be excluded in the deliberation as well as in the determination of majority of the directors in cases of loans, other credit accommodations, and guarantees to the borrowing government entity other than the ROP, its agencies, departments or bureaus where said director is also a director, ofcer or stockholder under existing DOSRI regulations. VI. Securities On Loans And Other Credit Accommodations A. Loans and Other Credit Accommodations against Real Estate
6.
Loans and other credit accommodations against real estate shall not exceed seventy-ve percent (75%) of the appraised value of the respective real estate security, plus sixty percent (60%) of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees. (Section 37, GBL) Exception: If the Monetary Board prescribes otherwise. B. Loans and Other Credit Accommodations on Security of Chattels and Intangible Properties
Loans and other credit accommodations on security of chattels and intangible properties, such as, but not limited to, patents, trademarks, trade names, and copyrights shall not exceed seventyve percent (75%) of the appraised value of the security, and such loans and other credit accommodations may be made to the titleholder of the chattels and intangible properties or his assignees. (Section 38, GBL) Exception: If the Monetary Board prescribes otherwise.
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C.
Joint and Solidary Agreement
Joint and Solidary Agreement (JSA) is indubitably a surety, not a guaranty.31 It is an agreement where parties consent to be jointly and severally liable. But the solidary liability should be carefully studied, not sweepingly assumed to cover all liabilities. The JSA, as a contract of adhesion, should be taken contra proferentum against the party who may have caused any ambiguity therein. D. Effect of Surety Agreement
Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material alteration in the principal loan agreement, or at least to notify it thereof. Hence, a bank cannot hold a surety liable for loans obtained in excess of the amount or beyond the period stipulated in the original agreement, absent any clear stipulation showing that the latter waived his right to be notied thereof, or to give consent thereto. This is especially true where a surety is no longer the principal ofcer or major stockholder of the corporate debtor at the time the later obligations were incurred. He was thus no longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations.32 An essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latters obligation. As the Court held in National Bank vs. Veraguth, [i]t is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability. Indeed, it has been held that a contract of surety cannot extend to more than what is stipulated. It is strictly construed against the
31 Applying Article 2047 of the Civil Code, the surety is charged not as a collateral undertaking, but as an original promissor to the loan. See Rodriguez, supra, p. 71; Goldenrod, Inc. vs. Court of Appeals, 418 Phil. 492, 502, September 28, 2001; and Philippine National Bank vs. Luzon Surety Co., Inc., 68 SCRA 207, 214, November 29, 1975. 32 Security Bank and Trust Company, Inc. vs. Cuenca, G.R. No. 138544, October 3, 2000.
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creditor, every doubt being resolved against enlarging the liability of the surety. Likewise, the Court has ruled that it is a well-settled legal principle that if there is any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety x x x. Ambiguous contracts are construed against the party who caused the ambiguity. It is a common banking practice to require the JSS (joint and solidary signature) of a major stockholder or corporate ofcer, as an additional security for loans granted to corporations. There are at least two reasons for this. First, in case of default, the creditors recourse, which is normally limited to the corporate properties under the veil of separate corporate personality, would extend to the personal assets of the surety. Second, such surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation. In Security Bank and Trust Company, Inc. vs. Cuenca, G.R. No. 138544, October 3, 2000, it was held: Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no longer an ofcer or a stockholder of the debtor-corporation. Verily, he was not in a position then to ensure the payment of the obligation. Neither did he have any reason to bind himself further to a bigger and more onerous obligation. Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even informing him, smacks of negligence on the part of the bank and bad faith on that of the principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan having been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a surety for the new loan. In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a position to ensure the payment of the loan. Even a perfunctory attempt at credit investigation would have revealed that respondent was
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no longer connected with the corporation at the time. As it is, the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that could have been secured by a fairly obtained surety. For its defeat in this litigation, the bank has only itself to blame. Incidentally, in La Insular vs. Machuca Go Tanco, et al. it was held: It is undoubtedly true that the law looks upon the contract of suretyship with a jealous eye, and the rule is settled that the obligation of the surety cannot be extended by implication beyond specied limits. VII. Grant And Purpose Of Loans And Other Credit Accommodations A. Amount and Purpose of Loan (i) A bank shall grant loans and other credit accommodations only in amounts and for the periods of time essential for the effective completion of the operations to be nanced. Such grant of loans and other credit accommodations shall be consistent with safe and sound banking practices.
(ii)
The purpose of all loans and other credit accommodations shall be stated in the application and in the contract between the bank and the borrower.
(iii) If the bank nds that the proceeds of the loan or other credit accommodation have been employed, without its approval, for purposes other than those agreed upon with the bank, it shall have the right to terminate the loan or other credit accommodation and demand immediate repayment of the obligation. (Section 39, GBL) B. Requirement for Grant of Loans or Other Credit Accommodations
Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fullling his commitments to the bank. Toward this end, a bank may demand from its credit applicants: a. a statement of their assets and liabilities;
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b. c.
a statement of their income and expenditures; and such information as may be prescribed by law or by rules and regulations of Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding nancial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or other credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation.
* Note: Even in the absence of the above provision in the GBL, the bank may still demand immediate repayment because the borrower lost the benet of the period as provided under the Civil Code: The debtor shall lose every right to make use of the period: (1) When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt; When he does not furnish to the creditor the guaranties or securities which he has promised; When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory; When the debtor violates any undertaking, in consideration of which the creditor agreed to the period; When the debtor attempts to abscond.33
(2) (3)
(4) (5)
In formulating the rules and regulations, the Monetary Board shall recognize the peculiar characteristics of micronancing, such as cash ow-based lending to the basic sectors that are not covered by traditional collateral.34
33 34
Art. 1198, Civil Code. Section 40, GBL.
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* Note: Micronancing loans are small loans granted to the basic sectors, as dened in the Social Reform and Poverty Alleviation Act of 1997 (R.A. 8425), and other loans granted to the poor and low-income households for their microenterprises and small businesses so as to enable them to raise their income levels and improve their living standards. These loans are granted on the basis of the borrowers cash ow and are typically unsecured.
C.
Reason for Stringent Rules in Granting Loans
A banking corporation is a nancial institution with power to issue its promissory notes intended to circulate as money (known as bank notes); or to receive the money of others on general deposit, to form a joint fund that shall be used by the institution for its own benet, for one or more of the purposes of making temporary loans and discounts, of dealing in notes, foreign and domestic bills of exchange, coin bullion, credits, and the remission of money; or with both these powers, and with the privileges, in addition to these basic powers, of receiving special deposits, and making collection for the holders of negotiable paper, if the institution sees t to engage in such business.35 In funding these businesses, the bank invests the money that it holds in trust of its depositors.36 For this reason, the business of a bank is one affected with public interest, for which reason the bank should guard against loss due to negligence or bad faith.37 In approving the loan of an applicant, the bank concerns itself with proper informations regarding its debtors. A bank and a nancial institution engaged in the grant of loans is expected to ascertain and verify the identities of the persons it transacts business with.38 Under the General Banking Law of 2000, banks shall grant loans and other credit accommodations only in amounts and for periods of time essential to the effective completion of operations to be nanced, consistent with safe and sound banking practices. The Monetary Board then and now still prescribes, by regulation, the
35 Morse, Jr., John T.: A TREATISE ON THE LAW OF BANKS AND BANKING, Vol. I, 6th Edition, 1928, USA. 36 United Coconut Planters Bank vs. Ramos, G.R. No. 147800, November 11, 2003. 37 Rural Bank of Sta. Ignacia, Inc. vs. Dimatulac, G.R. No. 142015, April 29, 2003. 38 Adriano vs. Pangilinan, 373 SCRA 544 (2002).
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conditions and limitations under which banks may grant extensions or renewals of their loans and other credit accommodations.39 D. Unsecured Loans or Other Credit Accommodations
The Monetary Board is authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks.40 E. Other Security Requirements for Bank Credits
The Monetary Board may, by regulation, prescribe further security requirements to which the various types of bank credits shall be subject, and the Board may by regulation,41 reduce the maximum ratios in connection with loans,42 or, in special cases, increase the established maximum ratios.43 F. Authority to Prescribe Terms and Conditions of Loans and Other Credit Accommodations Section 43 of the GBL provides: The Monetary Board may, similarly, in accordance with the authority granted to it in Section 106 of the New Central Bank Act, and taking into account the requirements of the economy for the effective utilization of long-term funds, prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action. The Monetary Board shall regulate the interest imposed on micronance borrowers by lending investors and similar lenders, such as, but not limited to, the unconscionable rates of interest collected on salary loans and similar credit accommodations.
39 New Sampaguita Builders Construction vs. Philippine National Bank, G.R. No. 148753, July 30, 2004. 40 Section 41, GBL. 41 In accordance with the authority granted to it in Section 106 of the New Central Bank Act. 42 Established in Sections 36 and 37 of the GBL. 43 Section 42, GBL.
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In this connection, Section 106 of the NCBA provides: Section 106. Required Security Against Bank Loans. In order to promote liquidity and solvency of the banking system, the Monetary Board may issue such regulations as it may deem necessary with respect to the maximum permissible maturities of the loans and investments which the banks may make, and the kind and amount of security to be required against the various types of credit operations of the banks. G. Amortization on Loans and Other Credit Accommodations (i) The amortization schedule of bank loans and other credit accommodations shall be adapted to the nature of the operations to be nanced. In case of loans and other credit accommodations with maturities of more than ve (5) years, provisions must be made for periodic amortization payments, but such payments must be made at least annually.
(ii)
(iii) When the borrowed funds are to be used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the initial amortization payment to be deferred until such time as said revenues are sufcient for such purpose, but in no case shall the initial amortization date be later than ve (5) years from the date on which the loan or other credit accommodation is granted. (iv) In case of loans and other credit accommodations to micronance sectors, the schedule of loan amortization shall take into consideration the projected cash ow of the borrower and adopt this into the terms and conditions formulated by banks. (Section 44, GBL) H. Escalation Clause; When Allowable
Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced
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in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board: Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.44 In relation to this, the Usury Law provides: Sec. 7-a. Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board: Provided further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.45 Escalation clauses are not void per se. However, one which grants the creditor an unbridled right to adjust the interest independently and upwardly, completely depriving the debtor of the right to assent to an important modication in the agreement is void. Clauses of that nature violate the principle of mutuality of contracts. Article 1308 of the Civil Code holds that a contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.46 Accordingly, for a stipulation on an escalation clause to be valid, it should specically provide (1) that there can be an increase in interest if increased by law or by the Monetary Board, and (2) it must include a provision for reduction of the stipulated interest in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board. The purpose of the law in mandating the inclusion of a deescalation clause is to prevent one-sidedness in favor of the lender
X305.2, Manual of Regulations for Banks. Act No. 2655 (Usury Law) as amended by P.D. 1684. 46 Equitable PCI Bank vs. Ng Sheurig Ngor, G.R. No. 171545, December 19,
44 45
2007.
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which is considered repugnant to the principle of mutuality of contracts. Art. 1308, Civil Code. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulllment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void. The inescapable conclusion is that a de-escalation clause is an indispensable requisite to the validity and enforceability of an escalation clause in the contract. In other words, in the absence of a corresponding de-escalation clause, the escalation clause shall be considered null and void.47 Effect of Annulment of Escalation Clause In case the escalation clause is annulled, the principal amount of the loan is subject to the original or stipulated rate of interest. Upon maturity, the amount due is subject to legal interest at the rate of 12% per annum.48 Exception Even if there is no de-escalation clause, the escalation clause is still valid if the creditor unilaterally and actually decreased the interest charges whenever the rate of interest is reduced by law or the Monetary Board. Thus, it was held by the Supreme Court in one case: We are fully persuaded, however, to take particular exception from said ruling insofar as the case at bar is concerned, considering the peculiar circumstances obtaining herein. There is no dispute that the escalation clause in the promissory note involved in this case does not contain a correlative deescalation clause or a provision providing for the reduction of the stipulated interest in the event that the applicable maximum
47 48
Llorin vs. Court of Appeals, G.R. No. 103592, February 4, 1993. Equitable PCI Bank vs. Ng Sheurig Ngor, G.R. No. 171545, December 19,
2007.
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rate of interest is reduced by law or by the Monetary Board. Notwithstanding the absence of such stipulation, however, it is similarly not controverted but, as a matter of fact, specically admitted by petitioner that respondent APEX unilaterally and actually decreased the interest charges it imposed on herein petitioner on three occasions. Consequently, we hold that with this actuality, the escalation clause involved in this case remains valid and enforceable. The evil sought to be thwarted with the enactment and by the application of Presidential Decree No. 1684 is inexistent in the present case by reason of the actual grant of a concomitant decrease in the interest rates on petitioners loan. We do not nd here a situation where it can be said that the parties do not stand on equal footing, which is the evil proscribed by said decree. Ergo, cessante ratione legis cessat ipsa lex.49 I. Unilateral Increase of Rates
The unilateral determination and imposition of increased rates is violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. One-sided impositions do not have the force of law between the parties, because such impositions are not based on the parties essential equality. The binding effect of any agreement between the parties to a contract is premised on two settled principles: (1) that obligations arising from contracts have the force of law between the contracting parties; and (2) that there must be mutuality between the parties based on their essential equality to which is repugnant to have one party bound by the contract leaving the other free therefrom. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties is likewise invalid.50 A provision in a promissory note authorizing a bank to increase, decrease or otherwise change from time to time the rate of interest and/or bank charges without advance notice, in the event of change in the interest rate prescribed by law or the Monetary Board of the Central Bank of the Philippines, does not give the
49 50
Llorin vs. Court of Appeals, supra. Floirendo vs. Metropolitan Bank and Trust Co., G.R. No. 148325, September
3, 2007.
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bank unrestrained freedom to charge any rate other than that which was agreed upon. Where the monthly upward/downward adjustment of interest rate is left to the will of the bank alone, it violates the essence of mutuality of the contract.51 Although escalation clauses are valid in maintaining scal stability and retaining the value of money on long-term contracts, giving a party an unbridled right to adjust the interest independently and upwardly would completely take away from the other party the right to assent to an important modication in their agreement and would also negate the element of mutuality in their contracts. Also, the fulllment of the contract would be dependent exclusively upon the uncontrolled will52 of one party and therefore void. Moreover, a pro forma promissory note has the character of a contract dadhsion,53 where the parties do not bargain on equal footing, the weaker partys [the debtors] participation being reduced to the alternative to take it or leave it.54 While the Usury Law ceiling on interest rates was lifted by [Central Bank] Circular No. 905, nothing in the said Circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. Neither Circular No. 905 nor P.D. 1684, which further amended the Usury Law, authorized either party to unilaterally raise the interest rate without the others consent.55 Unilateral and lopsided policy defeats the purpose of stimulating the growth of the borrower. Thus, it was held Moreover, a similar case eight years ago pointed out to the same respondent (PNB) that borrowing signied a capital transfusion from lending institutions to businesses and industries and was done for the purpose of stimulating their growth; yet respondents continued unilateral and lopsided
Ibid. Garcia vs. Rita Legarda, Inc., 128 Phil. 590, 594-595, October 30, 1967, per Dizon, J. 53 Labeled since Raymond Baloilles contracts by adherence. Qua Chee Gan vs. Law Union & Rock Insurance Co. Ltd., 98 Phil. 85, 95, December 17, 1955, per Reyes, J.B.L., J. 54 Philippine National Bank vs. Court of Appeals, supra at note 108, per GrioAquino, J. See Qua Chee Gan vs. Law Union & Rock Insurance Co. Ltd., supra. 55 New Sampaguita Builders Construction vs. Philippine National Bank, G.R. No. 148753, July 30, 2004.
51 52
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policy56 of increasing interest rates without the prior assent57 of the borrower not only defeats this purpose, but also deviates from this pronouncement. Although such increases are not usurious, since the Usury Law is now legally inexistent58 the interest ranging from 26 percent to 35 percent in the statements of account59 must be equitably reduced for being iniquitous, unconscionable and exorbitant.60 Rates found to be iniquitous or unconscionable are void, as if it there were no express contract thereon.61 Above all, it is undoubtedly against public policy to charge excessively for the use of money.62 It cannot be argued that assent to the increases can be implied either from the June 18, 1991 request of petitioners for loan restructuring or from their lack of response to the statements of account sent by respondent. Such request does not indicate any agreement to an interest increase; there can be no implied waiver of a right when there is no clear, unequivocal and decisive act showing such purpose.63 Besides, the statements were not letters of information sent to secure their conformity; and even if we were to presume these as an offer, there was no acceptance. No one receiving a proposal to modify a loan contract, especially interest a vital component is obliged to answer the proposal.64 J. Iniquitous, Unconscionable and Exorbitant Interests
The Supreme Court has consistently held that for sometime now, usury has been legally non-inexistent and that interest can now
Spouses Almeda vs. Court of Appeals, supra, p. 319, per Kapunan, J. Id., p. 316. 58 Medel vs. Court of Appeals, 359 Phil. 820, 829, November 27, 1998, per Pardo, J. See also People vs. Dizon, 329 Phil. 685, 696, August 22, 1996; Liam Law vs. Olympic Sawmill Co., 214 Phil. 385, 388, May 28, 1984; Peoples Financing Corp. vs. Court of Appeals,, 192 SCRA 34, 40, December 4, 1990; and Javier vs. De Guzman Jr., 192 SCRA 434, 439, December 19, 1990. 59 These are billings sent by respondent to petitioner showing the details of its outstanding claim against the latter as of a given date. 60 Spouses Solangon vs. Salazar, supra, p. 822. 61 Imperial vs. Jaucian, supra, p. 10. 62 De Leon, supra, p. 50. 63 Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. I (1990), p. 29. 64 Philippine Bank of Communications vs. Diamond Seafoods Corporation, G.R. No. 142420, January 29, 2007.
56 57
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be charged as lender and borrower may agree upon.65 As a matter of fact, Section 1 of Central Bank Circular No. 905 states that:
SECTION 1. The rate of interest, including commissions, premiums, fees and other charges , on a loan or forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured, that may be charged or collected by any person, whether natural or judicial, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.66
In Trade & Investment Development Corporation of the Philippines vs. Roblett Industrial Construction Corporation,67 the Court has ruled that:
With the suspension of the Usury Law and the removal of interest ceiling, the parties are free to stipulate the interest to be imposed on monetary obligations. Absent any evidence of fraud, undue inuence, or any vice of consent exercised by one party against the other, the interest rate agreed upon is binding upon them.
However, the Supreme Court has held: i. Although interest ranging from 26 percent to 35 percent are not usurious, since the Usury Law is now legally inexistent the same must be equitably reduced for being iniquitous, unconscionable and exorbitant. Rates found to be iniquitous or unconscionable are void, as if it there were no express contract thereon. Above all, it is undoubtedly against public policy to charge excessively for the use of money.68 The interest at 5.5% per month, or 66% per annum is iniquitous or unconscionable, and, hence, contrary to morals (contra bonos mores), if not against the law. The stipulation is void. The courts shall reduce equitably
ii.
65 Liam Law vs. Olympic Sawmill Co., G.R. No. L-30771, May 28, 1984, 129 SCRA 439; Medel vs. Court of Appeals, G.R. No. 131622, November 27, 1998, 299 SCRA 481; People vs. Dizon, G.R. No. 120957, August 22, 1996, 260 SCRA 851; Peoples Financing Corp. vs. Court of Appeals, G.R. No. 80791, December 4, 1990, 192 SCRA 34; Verdejo vs. Court of Appeals, G.R. No. L-77735, January 29, 1988, 157 SCRA 743. 66 Central Bank Circular No. 905, Series of 1982, 78 Off. Gaz. 7336. 67 G.R. No. 139290, May 19, 2006, 490 SCRA 1. 68 New Sampaguita Builders Construction vs. Philippine National Bank, G.R. No. 148753, July 30, 2004.
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liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.69 iii. In Medel vs. Court of Appeals, the Supreme Court found the stipulated interest rate of 5.5 percent per month, or 66 percent per annum, unconscionable. In the present case, the rate is even more iniquitous and unconscionable, as it amounts to 192 percent per annum. When the agreed rate is iniquitous or unconscionable, it is considered contrary to morals, if not against the law. [Such] stipulation is void.70
Cases: Cuaton vs. Salud G.R. No. 158382, January 27, 2004 In Ruiz vs. Court of Appeals, we declared that the Usury Law was suspended by Central Bank Circular No. 905, s. 1982, effective on January 1, 1983, and that parties to a loan agreement have been given wide latitude to agree on any interest rate. However, nothing in the said Circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. The stipulated interest rates are illegal if they are unconscionable. Thus, in Medel vs. Court of Appeals, and Spouses Solangon vs. Salazar, the Court annulled a stipulated 5.5% per month or 66% per annum interest on a P500,000.00 loan and a 6% per month or 72% per annum interest on a P60,000.00 loan, respectively, for being excessive, iniquitous, unconscionable and exorbitant. In both cases, the interest rates were reduced to 12% per annum. In the present case, the 10% and 8% interest rates per month on the one-million-peso loan of petitioner are even higher than those previously invalidated by the Court in the above cases. Accordingly, the reduction of said rates to 12% per annum is fair and reasonable. Stipulations authorizing iniquitous or unconscionable interests are contrary to morals (contra bonus mores), if not
69 70
Medel vs. Court of Appeals, G.R. No. 131622, November 27, 1998. Imperial vs. Jaucian, G.R. No. 149004, April 14, 2004.
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against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratied nor the right to set up their illegality as a defense be waived. Dio vs. Virgilio G.R. No. 154129, July 8, 2005 In the instant case, the Court of Appeals found that the 5% interest rate per month and 5% penalty rate per month for every month of default or delay is in reality interest rate at 120% per annum. This Court has held that a stipulated interest rate of 5.5% per month or 66% per annum is void for being iniquitous or unconscionable. We have likewise ruled that an interest rate of 6% per month or 72% per annum is outrageous and inordinate. Conformably to these precedent cases, a combined interest and penalty rate at 10% per month or 120% per annum, should be deemed iniquitous, unconscionable, and inordinate. Hence, we sustain the appellate court when it found the interest and penalty rates in the Deed of Real Estate Mortgage in the present case excessive, hence legally impermissible. Reduction is legally called for now in rates of interest and penalty stated in the mortgage contract. Spouses Bacolor vs. Banco Filipino Savings And Mortgage Bank, G.R. No. 148491, February 8, 2007 Petitioners invoke this Courts rulings in Almeda vs. Court of Appeals71 and Medel vs. Court of Appeals72 to show that the interest rate in the subject promissory note is unconscionable. Their reliance on these cases is misplaced. In Almeda, what this Court struck down as being unconscionable and excessive was the unilateral increase in the interest rates from 18% to 68%. This Court ruled thus: It is plainly obvious, therefore, from the undisputed facts of the case that respondent bank unilaterally altered the terms of its contract by increasing the interest rates of
71 72
G.R. No. 113412, April 17, 1996, 256 SCRA 292. G.R. No. 131622, November 27, 1998, 299 SCRA 481.
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the loan without the prior assent of the latter. In fact, the manner of agreement is itself explicitly stipulated by the Civil Code when it provides, in Article 1956, that No interest shall be due unless it has been expressly stipulated in writing. What has been stipulated in writing from a perusal of the interest rate provision of the credit agreement signed between the parties is that petitioners were bound merely to pay 21% interest x x x. Petitioners also cannot nd refuge in Medel. In this case, what this Court declared as unconscionable was the imposition of a 66% interest rate per annum. In the instant case, the interest rate is only 24% per annum, agreed upon by both parties. By no means can it be considered unconscionable or excessive. Verily, petitioners cannot now renege on their obligation to comply with what is incumbent upon them under the loan agreement. A contract is the law between the parties and they are bound by its stipulations.73 K. Effect of Void Interest Rate
Since the stipulation on the interest rate is void, it is as if there were no express contract thereon. Hence, courts may reduce the interest rate as reason and equity demand.74 On the other hand, unless the stipulated amounts are exorbitant, the court will sustain the amounts agreed upon by the parties because, as stated in Pryce Corporation vs. Philippine Amusement and Gaming Corporation, obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. If the terms of the contract clearly express the intention of the contracting parties, the literal meaning of the stipulations would be controlling. The court has to enforce the contractual stipulations in the manner that they have been agreed upon for as long as they are not unconscionable or contrary to morals and public policy.75
73
Salvador vs. Court of Appeals, G.R. No. 124899, March 30, 2004, 426 SCRA Imperial vs. Jaucian, G.R. No. 149004, April 14, 2004. Ang Gobonseng vs. Unibancard Corp., G.R. No. 160026, December 10, 2007.
433.
74 75
167
L.
Reduction of Interest, Penalty and Attorneys Fees
In the case of Permanent Savings and Loan Bank vs. Velarde, G.R. No. 140608, February 5, 2007, the Supreme Court ruled:
Equity dictates that we review the amount of the award, considering the excessive interest rate and the too onerous penalty, and, consequently, the resulting excessive attorneys fees. Moreover, it would be inequitable to penalize respondent with such huge interests and penalties considering the following circumstances: First, the basis of the Courts decision that respondent did not specically deny in his Answer the genuineness and due execution of the promissory note is a procedural lapse on the part of respondents counsel for which respondent should not be made to suffer beyond the bounds of reason. Second, respondent cannot be faulted for not settling the loan at an earlier time because both the trial court and the CA ruled that petitioner failed to prove the existence of the loan. And lastly, the nal resolution of the case has dragged for several years because of the appeals interposed by herein petitioner, thus resulting in the escalation of the amount of the obligation to more than 15 times the amount of the principal loan. Such unreasonable consequence merits a second look as this Court dispenses not only law but also equity in appropriate cases.76
M.
Prepayment of Loans and Other Credit Accommodations
A borrower may at any time prior to the agreed maturity date prepay, in whole or in part, the unpaid balance of any bank loan and other credit accommodation, subject to such reasonable terms and conditions as may be agreed upon between the bank and its borrower.77 N. Legal Compensation i. Under Article 1278 of the New Civil Code, compensation shall take place when two persons, in their own right, are creditors and debtors of each other. In order that compensation may be proper, the following must be established:
76 See Development Bank of the Philippines vs. West Negros College, Inc., G.R. No. 152359, May 21, 2004, 429 SCRA 50, 61; Cuaton vs. Salud, G.R. No. 158382, January 27, 2004, 421 SCRA 278, 283. 77 Section 45, GBL.
168
(1)
That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; That the two debts be due; That they be liquidated and demandable; That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.78
(2)
(3) (4) (5)
ii.
Compensation takes effect by operation of law when all the requisites mentioned in Article 1279 of the New Civil Code are present and extinguishes both debts to the concurrent amount even though the creditors and debtors are not aware of the compensation. Legal compensation operates even against the will of the interested parties and even without their consent.79 Such compensation takes place ipso jure; its effects arise on the very day on which all requisites concur.80 As its minimum, compensation presupposes two persons who, in their own right and as principals, are mutually indebted to each other respecting equally demandable and liquidated obligations over any of which no retention or controversy commenced and communicated in due time to the debtor exists. Compensation, be it legal or conventional, requires conuence in the parties of the characters of mutual debtors and creditors, although their rights as such creditors or their obligations as such debtors need not spring from one and the same contract or transaction.81
iii.
78 79
Article 1279, New Civil Code. Bank of the Philippine Island vs. Court of Appeals, 325 Phil. 930, 938 Republic vs. Court of Appeals, G.R. No. 25012, July 22, 1975, 65 SCRA 186,
(1996).
80
190.
81 Mavest (U.S.A.) Inc. vs. Sampaguita Garment Corporation, G.R. No. 127454, September 21, 2005, 470 SCRA 440, 449.
169
iv.
Article 1980 of the New Civil Code provides that xed, savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loans. Under Article 1953, of the same Code, a person who secures a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay the creditor an equal amount of the same kind and quality. The relationship of the depositors and the Bank or similar institution is that of creditor-debtor. Such deposit may be setoff against the obligation of the depositor with the bank or similar institution. However, a subsidiary has an independent and separate juridical personality from that of its parent company; hence, any claim against the subsidiary is not a claim against the parent company and vice versa. Thus, in Spouses Nisce vs. Equitable PCI Bank, Inc., G.R. No. 167434, February 19, 2007, the Supreme Court held:
When petitioner Natividad Nisce deposited her US$20,500.00 with the PCIB on July 19, 1984, PCIB became the debtor of petitioner. However, when upon petitioners request, the amount of US$20,000.00 was transferred to PCI Capital (which forthwith issued Certicate of Deposit No. 01612), PCI Capital, in turn, became the debtor of Natividad Nisce. Indeed, a certicate of deposit is a written acknowledgment by a bank or borrower of the receipt of a sum of money or deposit which the Bank or borrower promises to pay to the depositor, to the order of the depositor; or to some other person; or to his order whereby the relation of debtor and creditor between the bank and the depositor is created.82 The issuance of a certicate of deposit in exchange for currency creates a debtor-creditor relationship.83 Admittedly, PCI Capital is a subsidiary of respondent Bank. Even then, PCI Capital [PCI Express Padala (HK) Ltd.] has an independent and separate juridical personality from that of the respondent Bank, its parent company; hence, any claim against the subsidiary is not a claim against the parent company and vice versa.84 The ev-
v.
Ma vs. Community Bank, 494 F. Supplement 252. Gendrickson vs. Buchbinder, 465 F. Supplement 1250. 84 Velarde vs. Lopez, Inc., G.R. No. 153886, January 14, 2004, 419 SCRA 422,
82 83
431.
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idence on record shows that PCIB, which had been merged with Equitable Bank, owns almost all of the stocks of PCI Capital. However, the fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufcient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiarys separate existence shall be respected, and the liability of the parent corporation, as well as the subsidiary shall be conned to those arising in their respective business.85 A corporation has a separate personality distinct from its stockholders and from other corporations to which it may be conducted. This separate and distinct personality of a corporation is a ction created by law for convenience and to prevent injustice.86 This Court, in Martinez vs. Court of Appeals87 held that, being a mere ction of law, peculiar situations or valid grounds can exist to warrant, albeit sparingly, the disregard of its independent being and the piercing of the corporate veil. The veil of separate corporate personality may be lifted when, inter alia, the corporation is merely an adjunct, a business conduit or an alter ego of another corporation or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation; or when the corporation is used as a cloak or cover for fraud or illegality; or to work injustice; or where necessary to achieve equity or for the protection of the creditors. In those cases where valid grounds exist for piercing the veil of corporate entity, the corporation will be considered as a mere association of persons. The liability will directly attach to them.88 The Court likewise declared in the same case that the test in determining the application of the instrumentality or alter ego doctrine is as follows: 1. Control, not mere majority or complete stock control, but complete dominion, not only of nances but of policy and business practice in respect to the transaction attacked so that the corporate entity as
85
MR Holdings, Ltd. vs. Bajar, G.R. No. 138104, April 11, 2002, 380 SCRA 617, Spouses Nisce vs. Equitable PCI Bank, Inc., G.R. No. 167434, February 19, G.R. No. 131673, September 10, 2004, 438 SCRA 130. Id. at 150-151.
641.
86
2007.
87 88
171
to this transaction had at the time no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal rights; and The aforesaid control and breach of duty must proximately cause the injury or unjust loss complaint of.
3.
The Court emphasized that the absence of any one of these elements prevents piercing the corporate veil. In applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendants relationship to that operation.89
O.
Development Assistance Incentives
The Bangko Sentral shall provide incentives to banks which, without government guarantee, extend loans to nance educational institutions, cooperatives, hospitals and other medical services, socialized or low-cost housing, local government units and other activities with social content.90 P. Renewal or Extension of Loans and Other Credit Accommodations
The Monetary Board may, by regulation, prescribe the conditions and limitations under which a bank may grant extensions or renewals of its loans and other credit accommodations.91 Q. Banks Cannot Extend Peso Loans to Non-Residents
To curb undue speculation in the foreign exchange market and to further reinforce the memorandum that peso deposits should be funded from inward foreign exchange remittance, the Monetary Board decided to prohibit banks from extending peso loans to nonresidents.92
Id. at 151. Section 46, GBL. 91 Section 48, GBL. 92 BSP Circular No. 222, Date Issued: 12.24.1999.
89 90
172
* Note: Overseas Filipino Workers are considered residents and, accordingly, could avail of peso loans from Philippine Banks for utilization in the Philippines.93
R.
Provisions for Losses and Write-Offs
All debts due to any bank on which interest is past due and unpaid for such period as may be determined by the Monetary Board, unless the same are well-secured and in the process of collection shall be considered bad debts (within the meaning of this Section). The Monetary Board may x, by regulation or by order in a specic case, the amount of reserves for bad debts or doubtful accounts or other contingencies. Writing off of loans, other credit accommodations, advances and other assets shall be subject to regulations issued by the Monetary Board.94 S. Extraordinary Ination or Deation
Article 1250 of the Civil Code reads, In case an extraordinary ination or deation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. Extraordinary ination exists when there is an unusual decrease in the purchasing power of currency (that is, beyond the common uctuation in the value of currency) and such decrease could not be reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the obligation. Extraordinary deation, on the other hand, involves an inverse situation.95 It is well-settled that Article 1250 of the Civil Code becomes applicable only when there is extraordinary ination or deation of the currency. Ination has been dened as the sharp increase of money or credit or both without a corresponding increase in business transaction. There is ination when there is an increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level.96 In
Circular Letter dated 06.18.2004. Section 49, GBL. 95 Equitable PCI Bank vs. Ng Sheurig Ngor, G.R. No. 171545, December 19,
93 94
2007.
96
Huibonhoa vs. Court of Appeals, 378 Phil. 386, 410 (1999).
173
Singson vs. Caltex (Philippines), Inc.,97 the Supreme Court already provided a discourse as to what constitutes as extraordinary ination or deation of currency, thus
We have held extraordinary ination to exist when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common uctuation in the value of said currency, and such increase or decrease could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. An example of extraordinary ination, as cited by the Court in Filipino Pipe and Foundry Corporation vs. NAWASA, supra, is that which happened to the deutschmark in 1920. Thus: More recently, in the 1920s, Germany experienced a case of hyperination. In early 1921, the value of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached 4.2 trillion to the U.S. dollar! (Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third Edition]). As reported, prices were going up every week, then every day, then every hour. Women were paid several times a day so that they could rush out and exchange their money for something of value before what little purchasing power was left dissolved in their hands. Some workers tried to beat the constantly rising prices by throwing their money out of the windows to their waiting wives, who would rush to unload the nearly worthless paper. A postage stamp cost millions of marks and a loaf of bread, billions. (Sidney Rutberg, The Money Balloon, New York: Simon and Schuster, 1975, p. 19, cited in Economics, An Introduction by Villegas & Abola, 3rd ed.) The supervening of extraordinary ination is never assumed. The party alleging it must lay down the factual basis for the application of Article 1250. Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous records and statistics submitted by plaintiff-appellant proved that there has been a decline in the purchasing power of the Philippine peso, but this downward fall cannot be considered extraordinary but was simply a universal trend that has not spared our country. Similarly, in Huibonhoa vs. Court of Appeals, the Court dismissed plaintiff-appellants unsubstantiated allegation that the
97
396 Phil. 245, 253-255 (2000).
174
Aquino assassination in 1983 caused building and construction costs to double during the period July 1983 to February 1984. In Serra vs. Court of Appeals, the Court again did not consider the decline in the pesos purchasing power from 1983 to 1985 to be so great as to result in an extraordinary ination. Like the Serra and Huibonhoa cases, the instant case also raises as basis for the application of Article 1250 the Philippine economic crisis in the early 1980s when, based on petitioners evidence, the ination rate rose to 50.34% in 1984. We hold that there is no legal or factual basis to support petitioners allegation of the existence of extraordinary ination during this period, or, for that matter, the entire time frame of 1968 to 1983, to merit the adjustment of the rentals in the lease contract dated July 16, 1968. Although by petitioners evidence there was a decided decline in the purchasing power of the Philippine peso throughout this period, we are hard put to treat this as an extraordinary ination within the meaning and intent of Article 1250. Rather, we adopt with approval the following observations of the Court of Appeals on petitioners evidence, especially the NEDA certication of ination rates based on consumer price index: xxx (a) from the period 1966 to 1986, the ofcial ination rate never exceeded 100% in any single year; (b) the highest ofcial ination rate recorded was in 1984 which reached only 50.34%; (c) over a twenty one (21) year period, the Philippines experienced a single-digit ination in ten (10) years (i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and 1986); (d) in other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981, 1982, 1984 and 1989) when the Philippines experienced doubledigit ination rates, the average of those rates was only 20.88%; (e) while there was a decline in the purchasing power of the Philippine currency from the period 1966 to 1986, such cannot be considered as extraordinary; rather, it is a normal erosion of the value of the Philippine peso which is a characteristic of most currencies. Erosion is indeed an accurate description of the trend of decline in the value of the peso in the past three to four decades. Unfortunate as this trend may be, it is certainly distinct from the phenomenon contemplated by Article 1250. Moreover, this Court has held that the effects of extraordinary ination are not to be applied without an ofcial declaration thereof by competent authorities.
The burden of proving that there had been extraordinary ination or deation of the currency is upon the party that alleges
175
it. Such circumstance must be proven by competent evidence, and it cannot be merely assumed. The Supreme Court in the case of Citibank, N.A. vs. Sabeniano, G.R. No. 156132, February 6, 2007 held:
In this case, petitioners presented no proof as to how much, for instance, the price index of goods and services had risen during the intervening period.98 All the information petitioners provided was the drop of the U.S. dollar-Philippine peso exchange rate by 17 points from June 1997 to January 1998. While the said gure was based on the statistics of the Bangko Sentral ng Pilipinas (BSP), it is also signicant to note that the BSP did not categorically declare that the same constitute as an extraordinary ination. The existence of extraordinary ination must be ofcially proclaimed by competent authorities, and the only competent authority so far recognized by this Court to make such an ofcial proclamation is the BSP.99 Neither can this Court, by merely taking judicial notice of the Asian currency crisis in 1997, already declare that there had been extraordinary ination. It should be recalled that the Philippines likewise experienced economic crisis in the 1980s, yet this Court did not nd that extraordinary ination took place during the said period so as to warrant the application of Article 1250 of the Civil Code. Furthermore, it is incontrovertible that Article 1250 of the Civil Code is based on equitable considerations. Among the maxims of equity are (1) he who seeks equity must do equity, and (2) he who comes into equity must come with clean hands. The latter is a frequently stated maxim which is also expressed in the principle that he who has done inequity shall not have equity.100 Petitioner Citibank, hence, cannot invoke Article 1250 of the Civil Code because it does not come to court with clean hands. The delay in the recovery101 by respondent of her dollar accounts with Citibank-Geneva was due to the unlawful act of petitioner Citibank in using the same to liquidate respondents loans. Petitioner Citibank even attempted to justify the off-setting or compensation of respondents loans using her dollar accounts with Citibank-Geneva by the presentation of a highly suspicious and irregular, and even possibly forged, Declaration of Pledge.
98 Sangrador vs. Valderrama, G.R. No. L-79552, November 29, 1988, 168 SCRA 215, 228-229. 99 Ramos vs. Court of Appeals, G.R. No. 119872, July 7, 1997, 275 SCRA 167, 175. 100 Pilapil vs. Garchitorena, G.R. No. 128790, November 25, 1998, 299 SCRA 343, 359; University of the Philippines vs. Catungal, Jr., G.R. No. 121863, May 5, 1997, 272 SCRA 221, 237. 101 See Gatlabayan vs. Ramirez, 134 Phil. 267, 272 (1968).
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For extraordinary ination (or deation) to affect an obligation, the following requisites must be proven: 1. that there was an ofcial declaration of extraordinary ination or deation from the Bangko Sentral ng Pilipinas (BSP); that the obligation was contractual in nature; and that the parties expressly agreed to consider the effects of the extraordinary ination or deation.
2. 3.
T.
Purpose of Attorneys Fees
Attorneys fees are not an integral part of the cost of borrowing, but arise only when collecting upon the Notes becomes necessary. The purpose of these fees is not to give a lender a larger compensation for the loan than the law already allows, but to protect him against any future loss or damage by being compelled to retain counsel inhouse or not to institute judicial proceedings for the collection of its credit.102 Courts have has the power103 to determine their reasonableness104 based on quantum meruit105 and to reduce106 the amount thereof if excessive.107 VIII. Truth In Lending108 A. Policy
To protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy.
102 De Leon, supra, p. 64. See Andreas vs. Green, 48 Phil. 463, 465, December 16, 1925. 103 The Bachrach Garage and Taxicab Co., Inc. vs. Golingco, 39 Phil. 912, 920921, July 12, 1919; and Bachrach vs. Golingco, 39 Phil. 138, 143-144, November 13, 1918. 104 Article 2208 of the Civil Code. 105 Agpalo, Legal Ethics (4th ed., 1989), p. 323. 106 Sangrador vs. Spouses Valderrama, 168 SCRA 215, 229, November 29, 1988. 107 Manila Trading & Supply Co. vs. Tamaraw Plantation Co., 47 Phil. 513, 524, February 28, 1925. 108 Republic Act No. 3765 (An Act to Require the Disclosure of Finance Charges in Connection with Extensions of Credit).
177
B.
Disclosure
Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth the following information: (1) (2) (3) (4) the cash price or delivered price of the property or service to be acquired; the amounts, if any, to be credited as down payment and/ or trade-in; the difference between the amounts set forth under clauses (1) and (2); the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; the total amount to be nanced; the nance charge expressed in terms of pesos and centavos; and the percentage that the nance bears to the total amount to be nanced expressed as a simple annual rate on the outstanding unpaid balance of the obligation.
(5) (6) (7)
The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their loan, to enable them to give full consent to the contract, and to properly evaluate their options in arriving at business decisions.109 Substantial compliance would not sufce. C. Denitions i. Credit 1. 2.
109
any loan, mortgage, deed of trust, advance, or discount; any conditional sales contract;
UCPB vs. Sps. Beluso, G.R. No. 159912, August 17, 2007.
178
3.
any contract to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase contract; any contract or arrangement for the hire, bailment, or leasing of property; any option, demand, lien, pledge, or other claim against, or for the delivery of, property or money; any purchase, or other acquisition of, or any credit upon the security of, any obligation of claim arising out of any of the foregoing; and any transaction or series of transactions having a similar purpose or effect.
4. 5. 6. 7.
8. ii.
Finance charge: interest, fees, service charges, discounts, and such other charges incident to the extension of credit as the Board may by regulation prescribe. Creditor: any person engaged in the business of extending credit (including any person who as a regular business practice make loans or sells or rents property or services on a time, credit, or installment basis, either as principal or as agent) who requires as an incident to the extension of credit, the payment of a nance charge.
iii.
D.
Penalties 1. Civil Any creditor who in connection with any credit transaction fails to disclose to any person the abovestated information shall be liable to such person in the amount of P100 or in an amount equal to twice the nance charged required by such creditor in connection with such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. The creditor shall be liable for reasonable attorneys fees and court costs as determined by the Court.
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2.
Criminal Any person who willfully violates the disclosure requirement shall be ned by not less than P1,000 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both. A nal judgment rendered in any criminal proceeding to the effect that a defendant has willfully violated the law requiring disclosure shall be prima facie evidence against such defendant in an action or proceeding brought by any other party against such defendant as to all matters respecting which said judgment would be an estoppel as between the parties thereto.
The penalty for the violation of the Truth in Lending Act (TILA) is P100 or an amount equal to twice the nance charge required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed P2,000.00 on any credit transaction. As this penalty depends on the nance charge required of the borrower, the borrowers cause of action would only accrue when such nance charge is required.110 As can be gleaned from the foregoing, the violation of the TILA gives rise to both criminal and civil liabilities. Section 6(c) of the TILA considers a criminal offense the willful violation of the Act, imposing the penalty therefor of ne, imprisonment or both. Section 6(a) of the TILA, on the other hand, clearly provides for a civil cause of action for failure to disclose any information of the required information to any person in violation of the Act. The penalty therefor is an amount of P100 or in an amount equal to twice the nance charge required by the creditor in connection with such transaction, whichever is greater, except that the liability shall not exceed P2,000.00 on any credit transaction. The action to recover such penalty may be instituted by the aggrieved private person separately and independently from the criminal case for the same offense.111 The civil action to recover the penalty under Section 6(a) of the TILA can be jointly instituted with (1) the action to declare the interests in the promissory notes void, and (2) the action to declare the foreclosure void. This joinder is allowed under Rule 2, Section 5 of the Rules of Court, which provides:
110 111
Ibid. Ibid.
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SEC. 5. Joinder of causes of action. A party may in one pleading assert, in the alternative or otherwise, as many causes of action as he may have against an opposing party, subject to the following conditions: (a) The party joining the causes of action shall comply with the rules on joinder of parties; (b) The joinder shall not include special civil actions or actions governed by special rules; (c) Where the causes of action are between the same parties but pertain to different venues or jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes of action falls within the jurisdiction of said court and the venue lies therein; and (d) Where the claims in all the causes of action are principally for recovery of money, the aggregate amount claimed shall be the test of jurisdiction. The above actions belong to the jurisdiction of the RTC. Subsection (c) of the above-quoted Section 5 of the Rules of Court on Joinder of Causes of Action provides: (c) Where the causes of action are between the same parties but pertain to different venues or jurisdictions, the joinder may be allowed in the Regional Trial Court provided one of the causes of action falls within the jurisdiction of said court and the venue lies therein.
E.
Effect of Violation
Violation shall not affect the validity or enforceability of any contract or transactions.
* Notes: 1. In Consolidated Bank and Trust Corporation (Solidbank) vs. Court of Appeals, G.R. No. 91494, July 14, 1995, the Supreme Court held that the lender cannot charge those that are not stipulated in the promissory notes: The charging of compounded interest has been held as proper as long as the payment thereof has been agreed upon by the parties. In Mambulao Lumber Company vs. Philippine National Bank, 22 SCRA 359 (1968), we ruled that the parties may, by stipulation, capitalize the interest due and unpaid, which as added principal shall earn new interest. In the instant case, private respondents agreed to the payment of 14% interest per annum, com-
181
pounded monthly, should they fail to pay the principal loan on the date of maturity. xxx As to handling charges, banks are authorized under Central Bank Circular No. 504 to collect such charges on loans over P500,000.00 with a maturity of 730 days or less at the rate of 2% per annum, on the principal or the outstanding balance thereof, whichever is lower; 1.75% on loans over P500,000.00 but not over P1,000,000.00; 1.50% on loans over P1,000,000.00 but not over 2,000,000.00, etc. Section 7 of the same Circular, however, provides that all banks and non-bank nancial intermediaries authorized to engage in quasi-banking functions are required to strictly adhere to the provisions of Republic Act No. 3765 otherwise known as the Truth in Lending Act and shall make the true and effective cost of borrowing an integral part of every loan contract. The promissory notes signed by private respondents do not contain any stipulation on the payment of handling charges. Petitioner bank cannot, therefore, charge private respondents such handling charges. xxx The payment of penalty is sanctioned by law, although the penalty may be reduced by the courts if it is iniquitous or unconscionable (Equitable Banking Corporation vs. Liwanag, 32 SCRA 293 [1970]). The payment of penalty was provided for under the terms and conditions of the promissory notes for Loans B and C of George and George Trade, Inc. The penalty actually imposed, being only 3% per annum of the unpaid balance of the principal of said Loan B, is considered reasonable and proper. xxx A stipulation regarding the payment of attorneys fees is neither illegal nor immoral and is enforceable as the law between the parties as long as such stipulation does not contravene law, good morals, good customs, public order or public policy (Social Security Commission vs. Almeda, 168 SCRA 474 [1988]; Reparations Commission vs. Visayan Packing Corporation, 193 SCRA 531 [1991]). xxx The award of attorneys fees lies within the discretion of the court and depends upon the circumstances of each case. However, the discretion of the court to award attorneys fees under Article 2208 of the Civil Code of the Philippines demands factual, legal and equitable justication, without which the award is a conclusion without a premise and improperly left to speculation and conjec-
182
ture. It becomes a violation of the proscription against the imposition of a penalty on the right to litigate (Universal Shipping Lines, Inc. vs. Intermediate Appellate Court, 188 SCRA 170 [1990]). The reason for the award must be stated in the text of the courts decision. If it is stated only in the dispositive portion of the decision, the same shall be disallowed. As to the award of attorneys fees being an exception rather than the rule, it is necessary for the court to make ndings of fact and law that would bring the case within the exception and justify the grant of the award (Refractories Corporation of the Philippines vs. Intermediate Appellate Court, 176 SCRA 539 [1989]). 2. On the other hand, in the case of UCPB vs. Spouses Beluso, G.R. No. 159912, August 17, 2007, the Supreme Court held: The interest rate provisions in the case at bar are illegal not only because of the provisions of the Civil Code on mutuality of contracts, but also, as shall be discussed later, because they violate the Truth in Lending Act. Not disclosing the true nance charges in connection with the extensions of credit is, furthermore, a form of deception which we cannot countenance. It is against the policy of the State as stated in the Truth in Lending Act: xxx
F.
Exemption of Government
No punishment or penalty shall apply to the Philippine Government or any agency or any political subdivision thereof. G. Required Disclosures on Consumer Loans not under Open-End Credit Plan
Any creditor extending a consumer loan or in a transaction which is neither a consumer credit sale nor under an open-end consumer credit plan shall disclose, to the extent applicable, the following information: a) the amount of credit of which the debtor will have the actual use, or which is or will be paid to him or for his account or to another person on his behalf; all charges, individually, itemized, which are included in the amount of credit extended but which are included in the amount of credit extended but which are not part of the nance charge;
b)
183
c) d) e) f)
the total amount to be nanced or the sum of the amounts referred to in paragraphs (a) and (b); the nance charge expressed in terms of pesos and centavos; the effective interest rate; the percentage that the nance charge bears to the total amount to be nanced expressed as a simple annual rate on the outstanding unpaid balance of the obligation; the default, delinquency or similar charges payable in the event of late payments; a description of any security interest held or to be held or to be retained or acquired by the creditor in connection with the extension of credit and a clear identication of the property to which the security interest relates.112
g) h)
H.
Exempted Transaction
The foregoing requirements on consumer credit transactions shall not apply to the following credit transactions: Those involving extension of credits for business or commercial purposes, or to the Government and governmental agencies and instrumentalities, juridical entities or to organizations.113
* Notes: i. Courts have the authority to strike down or to modify provisions in promissory notes that grant the lenders unrestrained power to increase interest rates, penalties and other charges at the latters sole discretion and without giving prior notice to and securing the consent of the borrowers. As previously noted, this unilateral authority is anathema to the mutuality of contracts and enable lenders to take undue advantage of borrowers. Although the Usury Law has been effectively repealed, courts may still reduce iniquitous or unconscionable rates charged for the use of money. Furthermore, excessive interests, penalties and other charges not revealed in disclosure statements issued by banks, even if stipulated in the prom-
112 113
Article 142, R.A. 7394 (Consumer Act). Article 145, R.A. 7394 (Consumer Act).
184
issory notes, cannot be given effect under the Truth in Lending Act.114 ii. The Truth in Lending Act is an often ignored. Interestingly, the Supreme Court in one case said: The time is now ripe to give teeth to the often ignored forty-one-year old Truth in Lending Act115 and thus transform it from a snivelling paper tiger to a growling nancial watchdog of hapless borrowers.116
IX. Foreclosure Of Real Estate Mortgage A. Procedure Section 47 of the GBL provides for the following procedures: (i) In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specied in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the conrmation of the auction sale and administer the same in accordance with law.
(ii)
114 Philippine Bank of Communications vs. Diamond Seafoods Corporation, G.R. No. 142420, January 29, 2007. 115 R.A. 3765, effective upon approval on June 22, 1963. 116 Philippine Bank of Communications vs. Diamond Seafoods Corporation, G.R. No. 142420, January 29, 2007.
185
* Notes:
1.
Compare this with Section 7 of Act No. 3135, as amended,117 which provides: Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance (now RTC) of the province or place where the property or any part thereof is situated, to give him possession thereof during the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or without complying with the requirements of this Act. Such petition shall be made under oath and led in the form of an ex parte motion in the registration or cadastral proceedings if the property is registered, or in special proceedings in the case of property registered under the Mortgage Law or under section one hundred and ninety-four of the Administrative Code, or of any other real property encumbered with a mortgage duly registered with any existing law, and in each case the clerk of the court shall, upon the ling of such petition, collect the fees specied in paragraph eleven of section one hundred and fourteen of Act numbered twenty-eight hundred and sixty-six, and the court shall upon approval of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property is situated, who shall execute said order immediately.
2.
Note that a purchaser in case of foreclosure by banks is not required to set up a bond and may enter the property immediately after the date of conrmation of the auction sale. A writ of possession may also be issued after consolidation of ownership of the property in the name of the purchaser. It is settled that the buyer in a foreclosure sale becomes the absolute owner of the property purchased if it is not redeemed during the period of one year after the registration of sale. Hence, he is entitled to the possession of the property and
3.
117 An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages.
186
can demand it at any time following the consolidation of ownership in his name and the issuance to him of a new transfer certicate of title. In such a case, the bond required in Section 7 of Act No. 3135 is no longer necessary. Possession of the land then becomes an absolute right of the purchaser as conrmed owner. Upon proper application and proof of title, the issuance of the writ of possession becomes a ministerial duty of the court.118
(iii) Any petition in court to enjoin or restrain the conduct of foreclosure proceedings shall be given due course only upon the ling by the petitioner of a bond in an amount xed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. (iv) Notwithstanding Act 3135 (An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgage), juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property until, but not after, the registration of the certicate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier.119
* Notes: 1. In the accessory contract120 of real mortgage,121 in which immovable property or real rights thereto are used as security122 for the fulllment of the principal loan obligation,123 the bid price may be lower than the propertys
118 Id. at 253-254. LZK Holdings and Development Corp. vs. Planters Development Bank, G.R. No. 167998, April 27, 2007. 119 Owners of property that has been sold in a foreclosure sale prior to the effectivity of the GBL shall retain their redemption rights until their expiration. Section 47, GBL. 120 Rodriguez, Credit Transactions (2nd ed., 1992), pp. 143-144. 121 Also known as a mortuum vadium. Noblejas and Noblejas, Registration of Land Titles and Deeds (1992 rev. ed.), p. 510. 122 It is a mere lien on and does not create title to the property. Pea, Pea Jr., and Pea, Registration of Land Titles and Deeds (1994 rev. ed.), p. 253. 123 Contracts of loan, being consensual, are deemed perfected at the time the Mortgage is executed. Bonnevie vs. Court of Appeals, 210 Phil. 100, 108, October 24, 1983.
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fair market value.124 In fact, the loan value itself is only 70 percent of the appraised value. A low bid price will make it easier125 for the owner to effect redemption126 by subsequently reacquiring the property or by selling the right to redeem and thus recover alleged losses. 2. Real property may be mortgaged to aliens, both individuals and corporations. Rep. Act No. 133, as amended by Rep. Act No. 4882 reads: SEC. 1. Any provision of law to the contrary notwithstanding, private real property may be mortgaged in favor of any individual, corporation, or association, but the mortgagee or his successorin-interest, if disqualied to acquire or hold lands of the public domain in the Philippines, shall not take possession of the mortgaged property during the existence of the mortgage and shall not take possession of mortgaged property except after default and for the sole purpose of foreclosure, receivership, enforcement or other proceedings and in no case for a period of more than ve years from actual possession and shall not bid or take part in any sale of such real property in case of foreclosure: Provided, That said mortgagee or successor-ininterest may take possession of said property after default in accordance with the prescribed judicial procedures for foreclosure and receivership and in no case exceeding ve years from actual possession. 3. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualied to acquire or hold lands of the public domain.127 The redemption period is counted from the date of the registration of the certicate of sale with the Register of Deeds.128
4.
De Leon, supra, pp. 398-399. The Abaca Corp. of the Philippines, represented by the Board of Liquidators vs. Garcia, 338 Phil. 988, 993, May 14, 1997; citing Tiongco vs. Philippine Veterans Bank, 212 SCRA 176, August 5, 1992. 126 Aquino, Land Registration and Related Proceedings (2002 rev. ed.), p. 201. 127 Section 7, Article 12, 1987 Constitution. 128 Government Service Insurance System vs. Court of First Instance of Iloilo, 175 SCRA 19; Limpin vs. IAC, 166 SCRA 87; Huerta Alba Resort, Inc. vs. Court of Appeals, G.R. No. 128567, June 20, 2001.
124 125
188
5.
Pursuant to Section 47 of the GBL, a mortgagor whose real property has been sold at a public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, shall have the right, within one year after the sale of the real estate to redeem the property. The one-year period is actually to be reckoned from the date of the registration of the sale. The failure to exercise that right of redemption by paying the redemption price within the period prescribed by law effectively divested him of said right.129 An action for annulment of the mortgage does not toll the running of the one year period of redemption. In the case of Sumerariz vs. Development Bank of the Philippines, petitioners therein contended that the one-year period to redeem the property foreclosed by respondent was suspended by the institution of an action to annul the foreclosure sale led three (3) days before the expiration of the period. To this the Supreme Court ruled that: We have not found, however, any statute or decision in support of this pretense. Moreover, up to now plaintiffs have not exercised the right of redemption. Indeed, although they have intimated their wish to redeem the property in question, they have not deposited the amount necessary therefor. It may not be amiss to note that, unlike Section 30 of Rule 39 of the Rules of Court, which permits the extension of the period of redemption of mortgaged properties, Section 3 of Commonwealth Act No. 459, in relation to Section 9 of Republic Act No. 85, which governs the redemption of property mortgaged to the Bank does not contain a similar provision. Again this question has been denitely settled by the previous case declaring that plaintiffs right of redemption has already been extinguished in view of their failure to exercise it within the statutory period. Also, in the more recent case of Vaca vs. Court of Appeals, the Supreme Court declared that the pendency of an action questioning the validity of a mortgage cannot bar the issuance of the writ of possession after title to the property has been consolidated in the mortgagee.
129 Union Bank of the Philippines vs. Court of Appeals, G.R. No. 134068, June 25, 2001.
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The implication is clear: the period of redemption is not interrupted by the ling of an action assailing the validity of the mortgage, so that at the expiration thereof, the mortgagee who acquires the property at the foreclosure sale can proceed to have the title consolidated in his name and a writ of possession issued in his favor. To rule otherwise, and allow the institution of an action questioning the validity of a mortgage to suspend the running of the one year period of redemption would constitute a dangerous precedent. A likely offshoot of such a ruling is the institution of frivolous suits for annulment of mortgage intended merely to give the mortgagor more time to redeem the mortgaged property. Incidentally, the Supreme Court had the occasion to rule that Section 47 of the GBL (previously Section 78 of the General Banking Act130 had the effect of amending Section 6 of Act No. 3135131 insofar as the redemption price is concerned when the mortgagee is a bank or a banking or credit institution. The apparent conict between the provisions of Act No. 3135 and the General Banking Act was, therefore, resolved in favor of the latter, being a special and subsequent legislation. This pronouncement was reiterated in the case of Sy vs. Court of Appeals where it was held that the amount at which the foreclosed property is redeemable is the amount due under the mortgage deed, or the outstanding obligation of the mortgagor plus interest and expenses in accordance with Section 47 of the GBL.
130 Sec. 78. In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking or credit institution, within the purview of this Act, shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property by paying the amount xed by the court in the order of execution. 131 Sec. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time within the term of one year from and after the date of the sale.
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6.
No personal notice132 is required,133 in case of extrajudicial foreclosure because an extrajudicial foreclosure is an action in rem, requiring only notice by publication and posting, in order to bind parties interested in the foreclosed property.134 In case no redemption135 was exercised within one year after the date of registration of the Certicate of Sale with the Registry of Deeds,136 the highest bidder has the right to a writ of possession, the nal process that will consummate the extrajudicial foreclosure. On the other hand, the mortgagors shall lose all their rights to the property.137
7.
B.
Demand Before Foreclosure Essential
The issue of whether demand was made before the foreclosure was effected is essential. If demand was made and duly received by the mortgagor and the latter still did not pay, then they were already in default and foreclosure was proper. However, if demand was not made, then the loans had not yet become due and demandable. This meant that the mortgagor had not defaulted in their payments and the foreclosure by the mortgagee was premature. Foreclosure is valid only when the debtor is in default in the payment of his obligation.138 Unless demand is proven, one cannot be held in default.139 The mortgagees cause of action do not accrue on the maturity dates stated in the promissory notes. It is only when demand to pay is made and subsequently refused that the mortgagor can be
132 Philippine National Bank vs. Spouses Rabat, 344 SCRA 706, 716, November 15, 2000. 133 Pea, Pea Jr., and Pea, supra, p. 295. 134 Langkaan Realty Development, Inc. vs. United Coconut Planters Bank, 347 SCRA 542, 559, December 8, 2000. 135 It is an absolute and personal privilege, the exercise of which is entirely dependent upon the will and discretion of the redemptioner. De Leon, supra, p. 408. 136 Sec. 6 of Art No. 3135 and Sec. 47 of R.A. 8791. The right becomes functus ofcio on the date of its expiry. Noblejas and Noblejas, supra, p. 572. 137 State Investment House, Inc. vs. Court of Appeals, 215 SCRA 734, 744-747, November 13, 1992. 138 State Investment House, Inc. vs. Court of Appeals, G.R. No. 99308, November 13, 1992, 215 SCRA 734, 744, citation omitted. 139 Nuez vs. GSIS Family Bank (Formerly ComSavings Bank), G.R. No. 163988, November 17, 2005.
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considered in default and the mortgagee obtains the right to le an action to collect the debt or foreclose the mortgage.140 As held in China Banking Corporation vs. Court of Appeals:141
Well-settled is the rule that since a cause of action requires, as essential elements, not only a legal right of the plaintiff and a correlative duty of the defendant but also an act or omission of the defendant in violation of said legal right, the cause of action does not accrue until the party obligated refuses, expressly or impliedly, to comply with its duty. Otherwise stated, a cause of action has three elements, to wit, (1) a right in favor of the plaintiff by whatever means and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not to violate such right; and (3) an act or omission on the part of such defendant violative of the right of the plaintiff or constituting a breach of the obligation of the defendant to the plaintiff. It bears stressing that it is only when the last element occurs that a cause of action arises. Accordingly, a cause of action on a written contract accrues only when an actual breach or violation thereof occurs. Applying the foregoing principle to the instant case, we rule that private respondents cause of action accrued only on July 20, 1995, when its demand for payment of the Home Notes was refused by petitioner. It was only at that time, and not before that, when the written contract was breached and private respondent could properly le an action in court. The cause of action cannot be said to accrue on the uniform maturity date of the Home Notes as petitioner posits because at that point, the third essential element of a cause of action, namely, an act or omission on the part of petitioner violative of the right of private respondent or constituting a breach of the obligation of petitioner to private respondent, had not yet occurred.142 (emphasis supplied)
Further, in the case of Development Bank of the Philippines vs. Licuanan, G.R. No. 150097, February 26, 2007, it was held:
The acceleration clause of the promissory notes stated that [i]n case of non-payment of this note or any portion of it on demand, when
140 Caltex Philippines, Inc. vs. Intermediate Appellate Court, G.R. No. 74730, August 25, 1989, 176 SCRA 741, 751. 141 G.R. No. 153267, June 23, 2005, 461 SCRA 162. 142 Id., pp. 167-168, citations omitted.
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due, on account of this note, the entire obligation shall become due and demandable .143 Hence, the maturity dates only indicate when payment can be demanded. It is the refusal to pay after demand that gives the creditor a cause of action against the debtor.
C.
Equity of Redemption vs. Right of Redemption
In the case of Huerta Alba Resort Inc. vs. Court of Appeals, G.R. No. 128567, September 1, 2000, the Supreme Court citing the case of Limpin vs. Intermediate Appellate Court144 held: The equity of redemption is, to be sure, different from and should not be confused with the right of redemption. The right of redemption in relation to a mortgage understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure sale exists only in the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine National Bank or a bank or banking institution. Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year from the registration of the sheriffs certicate of foreclosure sale. Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale when conrmed by an order of the court. . . . shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law. Such rights exceptionally allowed by law (i.e., even after conrmation by an order of the court) are those granted by the charter of the Philippine National Bank (Acts No. 2747 and 2938), and the General Banking Act (R.A. No. 337). These laws confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure after conrmation by the court of the foreclosure sale which right may be exercised within a period of one (1) year, counted from the date of registration of the certicate of sale in the Registry of Property.
143 144
Rollo, pp. 12 and 26, emphasis supplied. 166 SCRA 87.
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But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a case, the foreclosure sale, when conrmed by an order of the court. . . shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser. There then exists only what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes nal, in accordance with Rule 68, or even after the foreclosure sale but prior to its conrmation. Section 2, Rule 68 provides that . . . If upon the trial . . . the court shall nd the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and costs, and shall render judgment for the sum so found due and order the same to be paid into court within a period of not less than ninety (90) days from the date of the service of such order, and that in default of such payment the property be sold to realize the mortgage debt and costs. This is the mortgagors equity (not right) of redemption which, as above stated, may be exercised by him even beyond the 90-day period from the date of service of the order, and even after the foreclosure sale itself, provided it be before the order of conrmation of the sale. After such order of conrmation, no redemption can be effected any longer.
* Note: Section 2, Rule 68 under the 1997 Revised Rules of Civil Procedures now reads as follows: Sec. 2. Judgment on foreclosure for payment or sale. If upon the trial in such action the court shall nd the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment.
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D.
Right of Redemption may be Extended by Agreement
The right of legal redemption must be exercised within specied time limits.145 However, the statutory period of redemption can be extended by agreement of the parties.146 E. Estoppel
It could be said that a bank consented to the extension of redemption period specially if it had time to object and did not. When circumstances imply a duty to speak on the part of the person for whom an obligation is proposed, his silence can be construed as consent. Thus, in one case the Supreme Court held: By its silence and inaction, petitioner misled private respondents to believe that they had two years within which to redeem the mortgage. After the lapse of two years, petitioner is estopped from asserting that the period for redemption was only one year and that the period had already lapsed. Estoppel in pais arises when one, by his acts, representations or admissions, or by his own silence when he ought to speak out, intentionally or through culpable negligence, induces another to believe certain facts to exist and such other rightfully relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny the existence of such facts.147 F. Redemption after the Prescriptive Period
The right to redeem becomes functus ofcio on the date of its expiry, and its exercise after the period is not really one of redemption but a repurchase. Distinction must be made because redemption is by force of law; the purchaser at public auction is bound to accept redemption. Repurchase however of foreclosed property, after redemption period, imposes no such obligation. After expiry, the purchaser may or may not re-sell the property but no law will compel him to do so. And, he is not bound by the bid price; it is
145 Spouses Estanislao, Jr. vs. Court of Appeals, 414 Phil. 509 (2001); Citing Basbas vs. Entena, 28 SCRA 665 (1969). 146 Ibaan Rural Bank, Inc. vs. Court of Appeals, 378 Phil. 707 (1999). 147 Ibaan Rural Bank, Inc. vs. Court of Appeals, G.R. No. 123817, December 17, 1999.
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entirely within his discretion to set a higher price, for after all, the property already belongs to him as owner.148 Query: Whether or not an alien-owned bank can acquire ownership of residential lot by virtue of a deed of transfer as settlement of a debt. No. The reason for this is manifestly the desire and purpose of the Constitution to place and keep in the hands of the people the ownership over private lands in order not to endanger the integrity of the nation. Inasmuch as when an alien buys land he acquires and will naturally exercise ownership over the same, either permanently or temporarily, to that extent his acquisition jeopardizes the purpose of the Constitution.149 Transfer of ownership over land, even for a limited period of time, is not permissible in view of the constitutional prohibition.150
* Note: A lease of a parcel of land for a total period of 50 years in favor of an alien corporation is registerable. A lease unlike a sale does not involve the transfer of dominion over the land.151
G.
Offer to Repurchase Not Waiver to Question the Sale
The Supreme Court has already ruled that an offer to repurchase should not be construed as a waiver of the right to question the sale.152 Instead, it must be taken as an intention to avoid further litigation and thus is in the nature of an offer to compromise.153 By offering to redeem the properties, the debtor/mortgagor can attain their ultimate objective: to pay off their debt and regain ownership of their lands.154
Spouses Robles vs. Court of Appeals, G.R. No. 128053, June 10, 2004. Register of Deeds of Manila vs. China Banking Corporation, G.R. No. L11964, April 28, 1962. 150 Ibid. 151 Smith Bell & Co. vs. Register of Deeds of Davao (50 O.G., 5239). 152 Rosales vs. Court of Appeals, G.R. No. 137566, February 28, 2001, 353 SCRA 179, 191. 153 Id. 154 Id., pp. 191-192.
148 149
196
H.
No Right to Recover if Foreclosure is Not Valid In one case,155 the Supreme Court ruled:
While it is true that in extrajudicial foreclosure of mortgage, the mortgagee has the right to recover the deciency from the debtor,156 this presupposes that the foreclosure must rst be valid.157
I.
Preferred Status of Banks Not Impaired In Case The Borrower Is Under Rehabilitation i. In Metropolitan Bank & Trust Company vs. ASB Holdings, Inc., G.R. No. 166197, February 27, 2007, the Supreme Court held that in case of rehabilitation of a corporate debtor, the rights of a creditor bank are merely suspended, to wit:
We are not convinced that the approval of the Rehabilitation Plan impairs petitioner banks lien over the mortgaged properties. Section 6[c] of P.D. No. 902A provides that upon appointment of a management committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body shall be suspended. By that statutory provision, it is clear that the approval of the Rehabilitation Plan and the appointment of a rehabilitation receiver merely suspend the actions for claims against respondent corporations. Petitioner banks preferred status over the unsecured creditors relative to the mortgage liens is retained, but the enforcement of such preference is suspended. The loan agreements between the parties have not been set aside and petitioner bank may still enforce its preference when the assets of ASB Group of Companies will be liquidated. Considering that the provisions of the loan agreements are merely suspended, there is no impairment of contracts, specically its lien in the mortgaged properties.
155 Development Bank of the Philippines vs. Licuanan, G.R. No. 150097, February 26, 2007 156 Prudential Bank vs. Martinez, G.R. No. 51768, September 14, 1990, 189 SCRA 612, 615. 157 See Delta Motor Sales Corporation vs. Mangosing, G.R. No. L-41667, April 30, 1976, 70 SCRA 598, 602.
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ii.
As stressed in Rizal Commercial Banking Corporation vs. Intermediate Appellate Court,158 such suspension shall not prejudice or render ineffective the status of a secured creditor as compared to a totally unsecured creditor, for what P.D. No. 902-A merely provides is that all actions for claims against the distressed corporation, partnership or association shall be suspended. This arrangement provided by law is intended to give the receiver a chance to rehabilitate the corporation if there should still be a possibility for doing so, without being unnecessarily disturbed by the creditors actions against the distressed corporation. However, in the event that rehabilitation is no longer feasible and the claims against the distressed corporation would eventually have to be settled, the secured creditors shall enjoy preference over the unsecured creditors.159 The purpose of rehabilitation proceedings is to enable the company to gain new lease on life and thereby allows creditors to be paid their claims from its earnings.160 Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the nancially distressed corporation to its former position of successful operation and solvency.161 This is in consonance with the States objective to promote a wider and more meaningful equitable distribution of wealth to protect investments and the public.162
iii.
J.
Writ of Possession i. It is basic that after consolidation of title in the buyers name for failure of the mortgagor to redeem, the writ of possession becomes a matter of right and its issuance to a purchaser in an extra-judicial foreclosure is merely a ministerial function.163
G.R. No. 74851, December 9, 1999, 320 SCRA 279. Metropolitan Bank & Trust Company vs. ASB Holdings, Inc., G.R. No. 166197, February 27, 2007. 160 Rubberworld (Phils.), Inc. vs. NLRC, G.R. No. 126773, April 14, 1999, 305 SCRA 721. 161 Ruby Industrial Corporation vs. Court of Appeals, G.R. Nos. 124185-87, January 20, 1998, 284 SCRA 445. 162 P.D. 902-A, as amended, First Whereas clause. 163 Heirs of Nicolas vs. Metropolitan Bank and Trust Company, G.R. No. 137548, September 3, 2007.
158 159
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ii.
After the lapse of the redemption period, a writ of possession may be issued in favor of the purchaser in a foreclosure sale as the mortgagor is now considered to have lost interest over the foreclosed property Consequently, the purchaser, who has a right to possession after the expiration of the redemption period, becomes the absolute owner of the property when no redemption is made. In this regard, the bond is no longer needed. The purchaser can demand possession at any time following the consolidation of ownership in his name and the issuance to him of a new TCT. After consolidation of title in the purchasers name for failure of the mortgagor to redeem the property, the purchasers right to possession ripens into the absolute right of a conrmed owner. At that point, the issuance of a writ of possession, upon proper application and proof of title, to a purchaser in an extrajudicial foreclosure sale becomes merely a ministerial function. Effectively, the court cannot exercise its discretion.164 An injunction to prohibit the issuance of a writ of possession is utterly out of place. And once the writ of possession has been issued, the court has no alternative but to enforce the said writ without delay.165 It must be emphasized that the proceeding in a petition for a writ of possession is ex-parte and summary in nature. It is a judicial proceeding brought for the benet of one party only and without need of notice to any person claiming an adverse interest. It is a proceeding wherein relief is granted even without giving the person against whom the relief is sought an opportunity to be heard. By its very nature, an ex-parte petition for issuance of a writ of possession is a non-litigious proceeding authorized under Act No. 3135, as amended. Be that as it may, the debtor or mortgagor is not without recourse. Section 8 of Act No. 3135, as amended, provides: Section 8. Setting aside of sale and writ of possession. The debtor may, in the proceedings in which possession was requested, but not later than
iii.
iv.
164 Spouses Saguan vs. Philippine Bank of Communications, G.R. No. 159882, November 23, 2007. 165 Spouses Maliwat vs. Metropolitan Bank and Trust Co., G.R. No. 165971, September 3, 2007.
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thirty days after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled, specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in accordance with the provisions hereof, and the court shall take cognizance of this petition in accordance with the summary procedure provided for in section one hundred and twelve of Act Numbered Four hundred and ninety-six; and if it nds the complaint of the debtor justied, it shall dispose in his favor of all or part of the bond furnished by the person who obtained possession. Either of the parties may appeal from the order of the judge in accordance with section fourteen of Act Numbered Four hundred and ninety-six; but the order of possession shall continue in effect during the pendency of the appeal. Thus, a party may le a petition to set aside the foreclosure sale and to cancel the writ of possession in the same proceedings where the writ of possession was requested. X. Major Investments For the purpose of enhancing bank supervision, the Monetary Board shall establish criteria for reviewing major acquisitions or investments by a bank including corporate afliations or structures that may expose the bank to undue risks or in any way hinder effective supervision.166 A. Ceiling on Investments in Certain Assets (i) (ii) Any bank may acquire real estate as shall be necessary for its own use in the conduct of its business. The total investment in such real estate and improvements thereof, including bank equipment, shall not exceed fty percent (50%) of combined capital accounts.
(iii) The equity investment of a bank in another corporation engaged primarily in real estate shall be considered as
166
Section 50, GBL.
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part of the banks total investment in real estate, unless otherwise provided by the Monetary Board.167 (iv) In determining compliance with such ceiling, the following rules shall apply: a. The investment shall include all real estate and equipment necessary for the banks immediate use in the transaction of its business, such as: (1) Bank Premises Land and Buildings, Buildings under Construction, Leasehold Rights and Improvements and Furniture, Fixtures and Equipment (as dened in the Manual of Accounts for All Banks), owned and used by the bank in the conduct of its business, including staff houses, recreational facilities and landscaping costs, net of accumulated depreciation: Provided, however, That appraisal increment on bank premises shall not be included in the total investment in real estate and improvements for purposes of these guidelines; and Real properties, equipment or other chattels purchased by the bank in its name for the benet of its ofcers and employees, net of depreciation and in the case of land or other nondepreciable property, net of payments already made to the bank by the ofcers and employees for whose benets the property was bought, where such property has not yet been fully paid and ownership has not yet been transferred to them.
(2)
b.
The following shall be included in the computation of a banks total investment in bank premises: (1) (a) The cost of real estate leased in whole or in part by the bank from a corporation, other than a corporation primarily engaged in real estate in which the bank has equity, equivalent to the amount obtained by applying the percentage
167
Section 51, GBL.
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of the equity of the bank in the lessor to the cost of of that portion of the property being leased, or (b) the amount of equity in the lessor, whichever is lower, plus the amount obtained by applying the percentage of the equity of the bank in the lessor to any outstanding loans of the lessor with the bank, the proceeds of which were used to purchase, construct or develop the real estate used for the banks purposes. (2) The lower of (a) the cost of real estate leased in whole or in part by the bank from a corporation in which any or a group of stockholders owning ten percent (10%) or more of the voting stock of the bank, directors and/or ofcers of the bank, hold or own more than fteen percent (15%) of the subscribed capital stock of the lessor, equivalent to the amount obtained by applying the percentage of the equity of said stockholders/directors/ofcers in the lessor to the cost of that portion of the property being leased by the bank, or the amount obtained by applying the percentage of the equity of the stockholders/directors/ofcers in the lessor to any outstanding loans of the corporation with the bank, the proceeds of which were used to purchase, construct or develop the real estate used for the banks purposes. The equity investment of a bank in a corporation engaged primarily in real estate shall be included in the computation of the banks total investment in real estate, unless otherwise provided by the Monetary Board.168
(b)
168
Section X606.2, Manual of Regulations for Banks.
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Problem: Sometime in 1979, BF Savings and Mortgage Bank (BF) had to unload some of its branch sites since it has reached its allowable limit under the General Banking Law as regards real properties. Under the law, a bank may purchase, hold and convey real estate as necessary for its accommodation in the transaction of its business, provided, that the total investment in such real estate and improvements thereof, including bank equipment, shall not exceed 50% of its net worth. Thus, the major stockholders of BF formed a corporation known as TALA Realty Services Corporation (Tala). Tala stands for the names of BFs four major stockholders. Tala then would purchase the existing bank sites of BF and lease them back to the latter. BF defaulted from the payment of rents and in defense thereof raised the arrangement as an argument. Tala led a collection case and denied the arrangement with BF. Is Tala entitled to the rents? No. Equity dictates that Tala should not be allowed to collect rent from BF. The factual milieu of the instant case clearly shows that both BF and Tala participated in the deceptive creation of a trust to circumvent the real estate investment limit under the General Banking Law. Just as BF should not be allowed to benet from its deceptive warehousing agreement, Tala should not also benet from the arrangement as it was BFs major stockholders that proposed the arrangement and incorporated Tala. Tala committed deception by participating in the warehousing agreement, and committed another deception when it turned the tables on BF and denied the arrangement. Allowing Tala to further benet from the warehousing agreement is unconscionable, to say the least.169 BF and Tala are in pari delicto, thus, no afrmative relief should be given to one against the other.170 BF should not be allowed to dispute the sale of its lands to Tala nor should Tala be allowed to further collect rent from BF. The clean hands doctrine will not allow the creation or the use of a juridical relation such as a trust to subvert, directly or indirectly, the law.171 Neither BF nor Tala came to court with clean hands; neither will obtain relief from the court
169 Tala Realty Services Corporation vs. Banco Filipino Savings and Mortgage Bank, G.R. No. 143263, January 29, 2004. 170 Silangan vs. Intermediate Appellate Court, 196 SCRA 774 (1991). 171 Heirs of Lorenzo Yap vs. Court of Appeals, 312 SCRA 603 (1999).
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as one who seeks equity and justice must come to court with clean hands.172 B. Acquisition of Real Estate By Way of Satisfaction of Claims (i) Notwithstanding the limitations, a bank may acquire, hold or convey real property under the following circumstances: 1. 2. Such as shall be mortgaged to it in good faith by way of security for debts; Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it.
3.
(ii)
Any real property acquired or held under the circumstances above shall be disposed of by the bank within a period of ve (5) years or as may be prescribed by the Monetary Board.
(iii) The bank may, after said period, continue to hold the property for its own use, subject to the limitations (50% of combined capital accounts) under Section 51 of the GBL.173
* Notes: 1. Relate the phrase it shall purchase to secure debts due it to Article 1302 of the Civil Code: Art. 1302. It is presumed that there is legal subrogation: (1) When a creditor pays another creditor who is preferred, even without the debtors knowledge; (2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;
172 173
Roque vs. Lapuz, 96 SCRA 741 (1980). Section 52, GBL.
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(3) When, even without the knowledge of the debtor, a person interested in the fulllment of the obligation pays, without prejudice to the effects of confusion as to the latters share. 2. See discussion on Special Purpose Vehicles in Chapter 9.
XI. Other Banking Services A bank may also perform the following services: 1. 2. Receive in custody funds, documents and valuable objects; Act as nancial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities; Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; Upon prior approval of the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and Rent out safety deposit boxes.
3.
4.
5.
In this connection, the GBL provides that: The bank shall perform the services permitted under 1, 2, 3 and 4 as depositary or as an agent. Accordingly, it shall keep the funds, securities and other effects which it receives duly separate from the banks own assets and liabilities. The Monetary Board may regulate the operations in order to ensure that such operations do not endanger the interests of the depositors and other creditors of the bank. In case a bank or quasi-bank noties the Bangko Sentral or publicly announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days, the Monetary Board may summarily and without need for prior hearing close such banking institution and place it under receivership of the Philippine Deposit Insurance Corporation.174
174
Section 53, GBL.
205
* Note:
The last sentence is a misplaced provision.
A.
Safety Deposit Box 1. Special Kind of Deposit
The contract governing safety deposit box is a special kind of deposit. It cannot be characterized as an ordinary contract of lease under Article 1643 of the Civil Code because the full and absolute possession and control of the safety deposit box is not given to the renters. The guard key of the box remains with the bank; without this key, the renters could not open the box. On the other hand, the bank could not likewise open the box without the renters key.175
Thus: (i) In case the said key had a duplicate which was made so that joint renters could have access to the box, the bank is not liable to either of the renters in case of loss attributable to either of them. Since both renters agreed that each should have one (1) renters key, it was obvious that either of them could ask the bank for access to the safety deposit box and, with the use of such key and the banks own guard key, could open the said box, without the other renter being present. Where a bank was not aware of an agreement between joint renters to the effect that the articles were withdrawable from the safety deposit box only upon both parties joint signatures, and that no evidence was submitted to reveal that the loss was due to the fraud or negligence of the bank, the bank is not liable.176 Bailor and Bailee
(ii)
2.
The Supreme Court explicitly rejected the contention that a contract for the use of a safety deposit box is a contract of lease nor did it fully subscribe to the view that it is a contract of deposit to be strictly governed by the Civil Code provision on deposit. It is, as it declared, a special kind of deposit. The prevailing rule in American
175 CA Agro-Industrial Development Corp. vs. Court of Appeals, G.R. No. 90027, March 3, 1993. 176 Ibid.
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jurisprudence that the relation between a bank renting out safe deposit boxes and its customer with respect to the contents of the box is that of a bailor and bailee, the bailment being for hire and mutual benet has been adopted in this jurisdiction.177 3. Duties May Be Dened By The Parties
With respect to property deposited in a safe-deposit box by a customer of a safe-deposit company, the parties, since the relation is a contractual one, may by special contract dene their respective duties or provide for increasing or limiting the liability of the deposit company, provided such contract is not in violation of law or public policy. It must clearly appear that there actually was such a special contract, however, in order to vary the ordinary obligations implied by law from the relationship of the parties; liability of the deposit company will not be enlarged or restricted by words of doubtful meaning. The company, in renting safe-deposit boxes, cannot exempt itself from liability for loss of the contents by its own fraud or negligence or that of its agents or servants, and if a provision of the contract may be construed as an attempt to do so, it will be held ineffective for the purpose. Although it has been held that the lessor of a safe-deposit box cannot limit its liability for loss of the contents thereof through its own negligence, the view has been taken that such a lessor may limit its liability to some extent by agreement or stipulation.178 Problem: A rented the Safety Deposit Box of B Bank wherein he placed his collection of stamps. The said safety deposit box leased by A was at the bottom or at the lowest level of the safety deposit boxes of the bank. Floodwater entered into the banks premises, seeped into the safety deposit box leased by A and caused damage to his stamps collection. B Bank failed to notify A. The bank rejected As claim for compensation for his damaged stamps collection, so, A instituted an action for damages against the bank. Is the bank guilty of negligence? Yes. The bank was guilty of negligence. Banks negligence aggravated the injury or damage to A which resulted from the loss or
Luzan Sia vs. Court of Appeals, G.R. No. 102970, May 13, 1993. CA Agro-Industrial Development Corp. vs. Court of Appeals, G.R. No. 90027, March 3, 1993.
177 178
207
destruction of the stamp collection. B Bank was aware of the oods; it also knew that the oodwaters inundated the room where the Safe Deposit Box was located. In view hereof, it should have lost no time in notifying A in order that the box could have been opened to retrieve the stamps, thus saving the same from further deterioration and loss. In this respect, it failed to exercise the reasonable care and prudence expected of a good father or a family, thereby becoming a party to the aggravation of the injury or loss. Accordingly, the aforementioned fourth characteristic of a fortuitous event is absent and Article 1170 of the Civil Code, which reads: Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. The destruction or loss of the stamp collection caused A pecuniary loss; hence, he must be compensated therefor.179 XII. Electronic Transactions The Bangko Sentral shall have full authority to regulate the use of electronic devices, such as computers, and processes for recording, storing and transmitting information or data in connection with the operations of a bank, quasi-bank or trust entity, including the delivery of services and products to customers by such entity.180 XIII. Outsourcing of Information Technology Systems/Processes Subject to prior approval of the Monetary Board, banks may outsource all information technology systems and processes except for inherent banking functions. Certain functions affecting the ability of the bank to ensure the t of technology services deployed to meet its strategic and business objectives and to comply with all pertinent banking laws and regulations, such as, but not limited to, strategic planning for the use of information technology; determination of system functionalities; change management inclusive of quality assurance and testing; service level and contract management; and security policy and administration, may not be outsourced. Subject to prior approval of the Monetary Board and submission of documentary requirements, consultants and/or service providers
179 180
Sia vs. Court of Appeals, G.R. No. 102970, May 13, 1993. Section 59, GBL.
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may be engaged to provide assistance/support to the bank personnel assigned to perform such functions.181 XIV. Outsourcing Of Other Functions i. Subject to prior approval of the Monetary Board, banks may outsource data imaging, storage, retrieval and other related systems; clearing and processing of checks not included in the Philippine Clearing House System; printing of bank deposit statements; and such other activities as may be determined by the Monetary Board. Banks may outsource credit card services; printing of bank loan statements and other non-deposit records, bank forms and promotional materials; credit investigation and collection; processing of export, import and other trading transactions; transfer agent services for debt and equity securities; property appraisal; property management services; messenger, courier and postal services; security guard services; vehicle service contracts; janitorial services; public relations services; procurement services; temporary stafng; legal services from local legal counsel; Provided, That these activities do not include servicing/ handling bank deposits or other inherent banking functions; and such other activities as may be determined by the Monetary Board. XV. Credit Card Transactions182 A. General Policy
ii.
The Bangko Sentral ng Pilipinas (BSP) shall foster the development of consumer credit through innovative products such as credit cards under conditions of fair and sound consumer credit practices. The BSP likewise encourages competition and transparency to ensure more efcient delivery of services and fair dealings with customers.
181 182
X169.2, Manual of Regulations for Banks. Circular No. 398 Series of 2003 as amended by Circular No. 454, Series of
2004.
209
B.
Denition of Terms a) Credit Card means any card, plate, coupon book or other credit device existing for the purpose of obtaining money, property, labor or services on credit. Credit Card Receivables represents the total outstanding balance of credit cardholders arising from purchases of goods and services, cash advances, annual membership/ renewal fees as well as interest, penalties, insurance fees, processing/service fees and other charges. Minimum Amount Due or Minimum Payment Required means the minimum amount that the credit cardholder needs to pay on or before the payment due date for a particular billing period/cycle as dened under the terms and conditions or reminders stated in the statement of account/billing statement which may include: (a) total outstanding balance multiplied by the required payment percentage or a xed amount whichever is higher; (b) any amount which is part of any xed monthly installment that is charged to the card; (c) any amount in excess of the credit line; and (d) all past due amounts, if any. Default or Delinquency shall mean non-payment of, or payment of any amount less than, the Minimum Amount Due or Minimum Payment Required within two (2) cycle dates, in which case, the Total Amount Due for the particular billing period as reected in the monthly statement of account may be considered in default or delinquent. Acceleration Clause shall mean any provision in the contract between the bank and the cardholder that gives the bank the right to demand the obligation in full in case of default or non-payment of any amount due or for whatever valid reason.
b)
c)
d)
e)
C.
Risk Management System
To safeguard their interests, banks and subsidiary credit card companies are required to establish an appropriate system for managing risk exposures from credit card operations which shall be documented in a complete and concise manner. The risk management system shall cover the organizational set-up, records and reports, accounting, policies and procedures and internal control.
210
Written policies, procedures and internal control guidelines shall be established on the following aspects of credit card operations: i. ii. iii. iv. v. vi. Requirements for application; Solicitation and application processing; Determination and approval of credit limits; Pre-approved cards; Issuance, distribution and activation of cards; Supplementary or extension cards;
vii. Cash advances; viii. Billing and payments; ix. x. xi. Deferred Payment Program or Special Installment Plans; Collection of past due accounts; Handling of accounts for write-off;
xii. Suspension, cancellation and withdrawal or termination of card; xiii. Renewal of cards, upgrade or downgrade of credit limit; xiv. Lost or stolen cards and their replacement; xv. Accounts of directors, ofcers, stockholders and related interests (DOSRI) and employees;
xvi. Disposition of errors and/or questions about the billing statement/statement of account and other customers complaints; and xvii. Dealings with marketing agents/collection agents D. Minimum Requirements
Before issuing credit cards, banks and/or their subsidiary credit card companies must exercise proper diligence by ascertaining that applicants possess good credit standing and are nancially capable of fullling their credit commitments. The net take home pay of applicants who are employed, the net monthly receipts of those engaged in trade or business, or the net worth or cash ow inferred from deposits of those who are neither employed nor engaged in trade or business or the credit behavior exhibited by the applicant
211
from his other existing credit cards, or other lifestyle indicators such as but not limited to club memberships, ownership and location of residence and motor vehicle ownership shall be determined and used as basis for setting credit limits. The gross monthly income may also be used provided reasonable deductions are estimated for income taxes, premium contributions, loan amortizations and other deductions. All credit card applications, especially those solicited by third party representatives/agents, shall undergo a strict credit risk assessment process and the information stated thereon validated and veried by persons other than those handling marketing. E. Information to be Disclosed
Banks or their subsidiary credit card companies shall disclose to each person to whom the credit card privilege is extended in the agreement, contract or any equivalent document governing the issuance or use of the credit card or any amendment thereto or in such other statement furnished the cardholder from time to time, prior to the imposition of the charges and to the extent applicable, the following information: i. non-nance charges, individually itemized, which are paid or to be paid by the cardholder in connection with the transaction but which are not incident to the extension of credit; the percentage that the interest bears to the total amount to be nanced expressed as a simple monthly or annual rate, as the case may be, on the outstanding balance of the obligation; the effective interest rate per annum; for installment loans, the number of installments, amount and due dates or periods of payment schedules to repay the indebtedness; the default, late payment/penalty fees or similar delinquency-related charges payable in the event of late payments; the conditions under which interest may be imposed, including the time period, within which any credit extended may be repaid without interest;
ii.
iii. iv.
v.
vi.
vii. the method of determining the balance upon which interest and/or delinquency charges may be imposed;
212
viii. the method of determining the amount of interest and/ or delinquency charges, including any minimum or xed amount imposed as interest and/or delinquency charge; ix. where one or more periodic rates may be used to compute interest, each such rate, the range of balances to which it is applicable, and the corresponding simple annual rate; and Other fees, such as membership/renewal fees, processing fees, collection fees, credit investigation fees and attorneys fees. For transactions made in foreign currencies and/or outside the Philippines, for dual currency accounts (peso and dollar billings), as well as payments made by credit cardholders in any currency other than the billing currency: the application of payments; the manner of conversion from the transaction currency and payment currency to Philippine pesos or billing currency; denition or general description of veriable blended exchange/conversion rates (e.g., MASTERCARD and/or VISA International rates on the day the item was processed/posted to the billing statement, plus mark-up, if any) including conversion commission; and/or other currency conversion charges and costs arising from the purchase by the card company of foreign currency to settle the customers transactions shall also be disclosed.
x.
xi.
F.
Accrual of Interest Earned
Interest accrued and/or booked shall be reversed and no accrual of interest shall be allowed ninety (90) days after the credit card receivable has become past due as dened in Subsec. X 306.1 of the Manual of Regulations for Banks. G. Finance Charges
The amount of nance charges in connection with any credit card transaction shall refer to interest charged to the cardholder. H. Deferral Charges
The bank and the cardholder may, prior to the consummation of the transaction, agree in writing to a deferral of all or part of one
213
or more unpaid installments and the bank may collect a deferral charge which shall not exceed the rate previously disclosed pursuant to the provisions on disclosure. I. Late Payment/Penalty Fees
No late payment or penalty fee shall be collected from cardholders unless the collection thereof is fully disclosed in the contract between the issuer and the cardholder: Provided, That late payment or penalty fees shall be based on the unpaid minimum amount due or a prescribed minimum xed amount: Provided, further, That said late payment or penalty fees may be based on the total outstanding balance of the credit card obligation, including amounts payable under installment terms or deferred payment schemes, if the contract between the issuer and the cardholder contains acceleration clause and the total outstanding balance of the credit card is classied and reported as past due. J. Condentiality of Information
Banks and subsidiary credit card companies shall keep strictly condential the data on the cardholder or consumer, except under the following circumstances: i. ii. disclosure of information is with the consent of the cardholder or consumer; release, submission or exchange of customer information with other nancial institutions, credit information bureaus, credit card issuers, their subsidiaries and afliates; upon orders of court of competent jurisdiction or any government ofce or agency authorized by law, or under such conditions as may be prescribed by the Monetary Board; disclosure to collection agencies, counsels and other agents of the bank or card company to enforce its rights against the cardholder; disclosure to third party service providers solely for the purpose of assisting or rendering services to the bank or card company in the administration of its credit card business; and
iii.
iv.
v.
214
vi.
disclosure to third parties such as insurance companies, solely for the purpose of insuring the bank from cardholder default or other credit loss, and the cardholder from fraud or unauthorized charges.
K.
Suspension, Termination of Effectivity and Reactivation
Banks or their subsidiary credit card companies shall formulate criteria or parameters for suspension, revocation and reactivation of the right to use the card and shall include in their contract with cardholders a provision authorizing the issuer to suspend or terminate its effectivity, if circumstances warrant. L. Inspection of Records Covering Credit Card Transactions
Banks or their subsidiary credit card companies shall make available for inspection or examination by the appropriate supervising and examining department of the Bangko Sentral ng Pilipinas complete and accurate les on card applicant/cardholder to support the consideration for approval of the application and determination of the credit limit which shall be in accordance with the veried debt repayment ability and/or net worth of the card applicant/cardholder. M. Offsets
For purposes of transparency and adequate disclosure, the credit card issuer shall inform/notify the credit cardholder in the agreement, contract or any equivalent document governing the issuance or use of the credit card that, pursuant to the provisions of Articles 1278 to 1290 of the New Civil Code of the Philippines, as amended the use of his credit card will subject his deposit/s with the bank to offset against any amount/s due and payable on his credit card which have not been paid in accordance with the terms of the agreement/contract. N. Handling of Complaints
Banks or subsidiary credit card companies shall give cardholders at least twenty (20) calendar days from statement date to examine charges posted in his/her statement of account and inform the bank/subsidiary credit card companies in writing of any billing error or discrepancy. Within ten (10) calendar days from receipt of
215
such written notice, the bank/subsidiary credit card company shall send a written acknowledgement to the cardholder unless the action required is taken within such ten-day period. Not later than two (2) billing cycles or two months which in no case shall exceed ninety (90) days after receipt of the notice and prior to taking any action to collect the contested amount, or any part thereof, banks/subsidiary credit card companies shall make appropriate corrections in their records and/or send a written explanation or clarication to the cardholder after conducting an investigation. Nothing in this Subsection shall be construed to prohibit any action by the bank/ subsidiary credit card company to collect any amount which has not been indicated by the cardholder to contain a billing error or apply against the credit limit of the cardholder the amount indicated to be in error. O. Unfair Collection Practices
Banks, subsidiary/afliate credit card companies, collection agencies, counsels and other agents may resort to all reasonable and legally permissible means to collect amounts due them under the credit card agreement: Provided, That in the exercise of their rights and performance of duties, they must observe good faith and reasonable conduct and refrain from engaging in unscrupulous or untoward acts. Without limiting the general application of the foregoing, the following conduct is a violation: i. the use or threat of violence or other criminal means to harm the physical person, reputation, or property of any person; the use of obscenities, insults, or profane language which amount to a criminal act or offense under applicable laws; disclosure of the names of credit cardholders who allegedly refuse to pay debts, except as allowed under Subsec. X320.9 and 4301N.9; threat to take any action that cannot legally be taken; communicating or threat to communicate to any person credit information which is known to be false, including failure to communicate that a debt is being disputed; any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a cardholder; and
ii.
iii.
iv. v.
vi.
216
vii. making contact at unreasonable/inconvenient times or hours which shall be dened as contact before 6:00 A.M. or after 10:00 P.M., unless the account is past due for more than sixty (60) days or the cardholder has given express permission or said times are the only reasonable or convenient opportunities for contact. P. Additional Deposit Does Not Increase Credit Limit
In the case of Aznar vs. Citibank, N.A., (Philippines), G.R. No. 164273, March 28, 2007, the Supreme Court held: Petitioner next argues that with the additional deposit he made in his account which was accepted by Citibank, there was an implied novation and Citibank was under the obligation to increase his credit limit and make the necessary entries in its computerized systems in order that petitioner may not encounter any embarrassing situation with the use of his credit card. Again, the Court nds that petitioners argument on this point has no leg to stand on. Q. Contract of Adhesion
It is settled that contracts between cardholders and the credit card companies are contracts of adhesion, so-called, because their terms are prepared by only one party while the other merely afxes his signature signifying his adhesion thereto.183 R. Blanket Freedom from Liability Invalid The Supreme Court held in one case: In this case, paragraph 7 of the terms and conditions states that [Citibank is] not responsible if the Card is not honored by any merchant afliate for any reason x x x. While it is true that Citibank may have no control of all the actions of its merchant afliates, and should not be held liable therefor, it is incorrect, however, to give it blanket freedom from liability if its card is dishonored by any merchant afliate for any reason. Such phrase renders the statement vague and as the said terms and conditions constitute a contract of adhesion,
183 Aznar vs. Citibank, N.A., (Philippines), G.R. No. 164273, March 28, 2007; BPI Express Card Corp. vs. Olalia, 423 Phil. 593, 599 (2001).
217
any ambiguity in its provisions must be construed against the party who prepared the contract,184 in this case Citibank.185 XVI. Rules on Price Tags/Labels and Providing Prohibition Against the Imposition of a Surcharge, Extra Charge or Additional Charge in the Use of Credit/Automated Teller Machine (ATM)/Debit Cards for Payment of Purchases of Consumer Products or Services186 A. One Price Tag Requirement
Every retailer is required to display a price tag to indicate the price of each consumer good and/or services, as required in Articles 81 to 83 of the Consumer Act of the Philippines or R.A. 7394.187 The price tag must be written clearly, indicating the price of the consumer product including Value Added Tax (VAT) whenever the consumer product is VATABLE. Service charge, if any, shall not be included in the price tag. B. Modes of Payment and other Price Tag Practices
It is necessary to consider business practices relative to the mode of payment to determine compliance with Price Tag Law. These practices include the following:
Polotan, Sr. vs. Court of Appeals, 357 Phil. 250, 258 (1998). Aznar vs. Citibank, N.A., (Philippines), G.R. No. 164273, March 28, 2007. 186 Department of Trade and Industry Department Administrative Order No. 10, Series of 2006. 187 Art. 81. Price Tag Requirement. It shall be unlawful to offer any consumer product for retail sale to the public without an appropriate price tag, label or marking publicly displayed to indicate the price of each article and said products shall not be sold at a price higher than that state therein and without discrimination to all buyers: Provided, That lumber sold, displayed or offered for sale to the public shall be tagged or labeled by indicating thereon the price and the corresponding ofcial name of the wood: Provided, further, that if consumer products for sale are too small or the nature of which makes it impractical to place a price tag thereon price list placed at the nearest point where the products are displayed indicating the retail price of the same may sufce. Art. 82. Manner of Placing Price Tags. Price tags, labels or markings must be written clearly, indicating the price of the consumer product per unit in pesos and centavos. Art. 83. Regulations for Price Tag Placement. The concurred department shall prescribe rules and regulations for the visible placement of price tags for specic consumer products and services. There shall be no erasures or alterations of any sort of price tags, labels or markings.
184 185
218
1. 2.
When the consumer pays in cash, he shall pay only the price indicated in the price tag. When the consumer pays through a credit/ATM/debit card, he shall pay only the price indicated in the price tag. When the retailer offers the consumer an option to pay in cash, card or on installment, the same is allowed provided the payment options shall be disclosed by way of a separate information to the consumer but not in the price tag. Price tag indicating a separate CASH PRICE TAG and REGULAR PRICE TAG on each product or service is not allowed. Price tag indicating a separate CASH PRICE TAG and CARD PRICE TAG on each product or service is not allowed.
3.
4.
5.
C.
Prohibition Against Surcharging by Retailers
All retailers who honor/accept credit/ATM/debit cards for payment shall not require the cardholders to pay a surcharge, extra charge, or additional charge over and above the price tag on the consumer goods and services.
For Mama, Eileen, Enon and Manny
iii
iv
PREFACE TO THE SECOND EDITION

The latest decisions of the Supreme Court and Bangko Sentral ng Pilipinas Issuances have been incorporated in the appropriate sections of this work. Apart from these changes, the basic format of this work has been maintained. Thanks to all law professors, students and practitioners who provided encouragement in improving this humble work. E.L.D. E.V.M.D.
Quezon City, Philippines 25 October 2008
vi
PREFACE
This humble work is the result of the authors sincere desire and earnest attempt to make banking laws and jurisprudence simpler to understand and easier to apply when confronted with actual situations. It is hoped that this book could extend help or benet to students, barristers and those who nd interest in or use for banking laws and selected cases decided by the Supreme Court. Professionals may also nd this book handy and helpful in their practice.
E.L.D. E.V.M.D.
Quezon City, Philippines 15 July 2006
vii
viii
CONTENTS
Chapter 1 Banks and the Business of Banking
I. Declared Policy of the State .............................................. II. Denition of Banks............................................................ III. Nature of Banking Business ............................................. A. Debtor-Creditor Relationship................................... B. Fiduciary Duty .......................................................... C. Not a Trust Agreement............................................. D. Indispensable Institution ......................................... E. Impressed With Public Interest ............................... F. Degree of Diligence ................................................... G. Treatment of Accounts With Meticulous Care ........ H. Duty to Keep Records ............................................... I. Banks are not Gratuitous Bailees............................ J. Banks not Expected to be Infallible ......................... K. Dealing with Registered Lands................................ L. Banks may Exclude Persons in their Premises .................................................. M. Charging of Interest for Loans ................................. IV. Liability for Acts of Ofcers and Employees .................... A. Negligence of Manager ............................................. B. Negligence of Ofcers ............................................... C. Negligence of Tellers ................................................ D. Right to Recover From Employees ........................... E. Liability for Damages ............................................... F. Respondeat Superior, Diligence in the Selection and Supervision of Employees......................... V. Classication of Banks ...................................................... A. Business Name ......................................................... B. Universal Banks ....................................................... C. Commercial Banks.................................................... D. Rural Banks ..............................................................
ix
1 1 2 2 3 4 4 5 6 8 8 9 9 10 19 19 19 20 20 21 22 22 26 26 27 28 28 29
E. Thrift Banks .............................................................. F. Cooperative Banks .................................................... G. Islamic Banks ........................................................... H. Other Banks .............................................................. I. Non-Stock Savings and Loan Associations ............. J. Quasi-Banks .............................................................. K. Offshore Banks ......................................................... VI. Authority to Engage in Banking and Quasi-Banking Functions ........................................ A. Authority from the Bangko Sentral ......................... B. Determination by the Monetary Board ................... C. Authority of Supervising and Examining Department ...................................................... D. Extension of Examining Powers .............................. E. Certicate of Authority to Register ......................... VII. Service of Summons Upon Banks ..................................... A. Service under the Rules of Court ............................. B. Strict Compliance is Necessary................................ Chapter 2 Organization, Management and Administration of Banks, Quasi-Banks and Trust Entities I. Organization of Banks ...................................................... A. Conditions ................................................................. B. Capabilities ............................................................... C. Capital Requirements............................................... D. Incorporators/Subscribers ........................................ E. Bank Branches .......................................................... II. Stockholdings..................................................................... A. Treasury Stocks ........................................................ B. Foreign Stockholdings .............................................. C. Acquisition of Voting Stock in a Domestic Bank ................................................. D. Family Groups or Related Interests ........................ III. Board of Directors ............................................................. A. Number of Directors ................................................. B. Directors of Merged or Consolidated Banks............ C. Meetings .................................................................... D. Compensation and Other Benets of Directors and Ofcers ...................................... IV. Fit and Proper Rule ........................................................... A. Powers of the Monetary Board.................................
x
29 33 34 36 37 37 38 42 42 43 45 45 46 48 48 48
50 50 50 51 52 53 53 53 54 56 57 57 57 58 58 59 60 60
Disqualications ....................................................... Disqualications/Prohibitions Under the Corporation Code ....................................... D. Disqualications/Prohibitions Under the NCBA ......................................................... E. Disqualication/Prohibition Under the PDIC (Philippine Deposit Insurance Corporation) Law ............................................. F. Disqualication/Prohibition Under Republic Act No. 7353 ...................................... G. Disqualication/Prohibition Under Appendix 38, Manual of Regulations for Banks (Guidelines for the Organization of Cooperative Banks) ...................................... H. Prohibition on Public Ofcials ................................. V. Banking Days and Hours .................................................. A. Number of Days and Hours...................................... B. Rules and Regulations .............................................. VI. Automated Teller Machines.............................................. A. Off-site Automated Teller Machines (ATMs) .......... B. Mobile ATMs ............................................................. VII. Independent Auditor ......................................................... VIII. Financial Statements ........................................................ A. Publication of Financial Statements ....................... IX. Publication of Capital Stock ............................................. X. Settlement of Disputes ...................................................... XI. Strikes and Lockouts......................................................... A. Unsettled Labor Disputes ........................................ B. Reports of Strikes and Lockouts .............................. XII. Laws Governing Other Types of Banks ........................... Chapter 3 Deposit Functions of Banks I. Kinds of Deposits ............................................................... A. Demand Deposits ...................................................... B. Savings Deposits ....................................................... C. Negotiable Order of Withdrawal (NOW) Accounts............................................................ D. Time Deposits ........................................................... E. Deposit Substitute Operations (Quasi-Banking Functions) ...................................... F. Foreign Currency Deposits.......................................
xi
B. C.
61 65 65
67 67
67 68 68 68 69 71 71 72 72 73 73 76 76 76 76 77 77
78 78 87 89 90 91 92
II.
III.
IV.
V.
VI.
VII.
G. Anonymous and Numbered Accounts ...................... Administration of Deposits ............................................... A. Specimen Signatures, ID Photos ............................. B. Minors and Corporations as Depositors .................. C. Time of Payment of Interest on Time Deposits/Deposit Substitutes .......................... D. Treatment of Matured Time Deposits/ Deposit Substitutes .......................................... E. Clearing Cut-Off Time .............................................. F. Booking of Cash Deposits ......................................... G. Booking of Non-Cash Deposits ................................. H. Booking of Deposits After Regular Banking Hours ................................................. I. Average Daily Balance ............................................. Survivorship Agreement ................................................... A. Denition................................................................... B. Survivorship Agreement not Invalid per se but may be Violative of Law ........................ Nature of Bank Deposits ................................................... A. Nature ....................................................................... B. Set-Off ....................................................................... Duties of Banks ................................................................. A. Meticulous Care ........................................................ B. Payment to Proper Party.......................................... C. In Case of Death of Depositor .................................. Secrecy Of Bank Deposits ................................................. A. Purposes .................................................................... B. Privacy ....................................................................... C. Absolute Condentiality ........................................... Exceptions to Secrecy of Deposits..................................... A. Exceptions Under the Bank Secrecy Law ............... B. Garnishment ............................................................. C. Secrecy and Exemption from Attachment and Garnishment of Foreign Currency Deposits Cannot be Used as Device for Wrongdoing ...................................................... D. Graft and Corruption................................................ E. Authority to Inquire Into Bank Deposits Under the Anti-Money Laundering Act .......... F. Periodic or Special Examination .............................. G. In Camera Inspection by the Ombudsman ............. H. Preliminary Attachment .......................................... I. Disclosure of Dormant Accounts ..............................
xii
94 96 96 97 98 99 99 100 100 100 100 101 101 102 102 102 104 105 105 105 105 106 106 106 107 108 108 109
111 113 114 114 115 116 116
J. K.
Authority of the Commissioner of Internal Revenue to Inquire into Deposits .................... Waiver by DOSRI ..................................................... Chapter 4
117 118
Investments, Loans and Other Functions of Banks Operations of Universal Banks ........................................ A. Powers of a Universal Bank ..................................... B. Equity Investments of a Universal Bank: ............... C. Equity Investments of a Universal Bank in Financial Allied Enterprises ....................... D. Equity Investments of a Universal Bank in Non-Financial Allied Enterprises ............... E. Equity Investments of a Universal Bank in Non-Allied Enterprises .................................... F. Investments in Non-Allied or Non-Related Undertakings.............................. G. Equity Investments in Quasi-Banks ....................... II. Operations Of Commercial Banks .................................... A. Powers of a Commercial Bank ................................. B. Issuance of Letters of Credit .................................... C. Equity Investments of a Commercial Bank ............ D. Equity Investments of a Commercial Bank in Financial Allied Enterprises ....................... E. Equity Investments of a Commercial Bank in Non-Financial Allied Enterprises ................... III. Risk-Based Capital ............................................................ A. Minimum Ratio ......................................................... B. Effect of Non-Compliance ......................................... IV. Limit on Loans, Credit Accommodations and Guarantees......................................................... A. Single Borrowers Limit ............................................ B. Inclusions to the Limit ............................................. C. Exclusions to the Limit ............................................ D. Bank Guarantee........................................................ E. Contingent Accounts................................................. F. Assignment of Credits .............................................. G. No Pacto Commissorio in Assignment of Deposits ........................................................ V. Restriction on Bank Exposure to Directors, Ofcers, Stockholders and Their Related Interests............... A. Approval and Other Requirements..........................
xiii
I.
120 120 120 121 122 123 124 124 124 124 125 129 129 129 130 130 131 131 131 140 141 142 142 142 144 144 144
Directors .................................................................... Ofcers ...................................................................... Stockholder ............................................................... Related Interests ...................................................... Effect of Violation ..................................................... Limits of Loans ......................................................... Exclusions to the Limit ............................................ Applicability of DOSRI Rules and Regulations to Government Borrowings.............................. VI. Securities on Loans and Other Credit Accommodations ....................................................... A. Loans and Other Credit Accommodations Against Real Estate ......................................... B. Loans and Other Credit Accommodations on Security of Chattels and Intangible Properties ......................................................... C. Joint and Solidary Agreement ................................. D. Effect of Surety Agreement ...................................... VII. Grant and Purpose of Loans and Other Credit Accommodations ................................. A. Amount and Purpose of Loan ................................... B. Requirement for Grant of Loans or Other Credit Accommodations ........................ C. Reason for Stringent Rules in Granting Loans................................................................. D. Unsecured Loans or Other Credit Accommodations............................................... E. Other Security Requirements for Bank Credits .............................................................. F. Authority to Prescribe Terms and Conditions of Loans and Other Credit Accommodations............................................... G. Amortization on Loans and Other Credit Accommodations ................................... H. Escalation Clause; When Allowable ........................ I. Unilateral Increase of Rates .................................... J. Iniquitous, Unconscionable and Exorbitant Interests............................................................ K. Effect of Void Interest Rate ...................................... L. Reduction of Interest, Penalty and Attorneys Fees ................................................. M. Prepayment of Loans and Other Credit Accommodations............................................... N. Legal Compensation .................................................
xiv
B. C. D. E. F. G. H. I.
145 145 145 146 147 147 148 148 150 150 150 151 151 153 153 153 155 156 156 156 157 157 160 162 166 167 167 167
Development Assistance Incentives ........................ Renewal or Extension of Loans and Other Credit Accommodations ........................ Q. Banks Cannot Extend Peso Loans to Non-Residents .................................................. R. Provisions for Losses and Write-Offs....................... S. Extraordinary Ination or Deation ....................... T. Purpose of Attorneys Fees ....................................... VIII. Truth in Lending ............................................................... A. Policy ......................................................................... B. Disclosure .................................................................. C. Denitions ................................................................. D. Penalties .................................................................... E. Effect of Violation ..................................................... F. Exemption of Government ....................................... G. Required Disclosures on Consumer Loans Not Under Open-End Credit Plan................... H. Exempted Transaction ............................................. IX. Foreclosure of Real Estate Mortgage ............................... A. Procedure .................................................................. B. Demand Before Foreclosure Essential .................... C. Equity of Redemption vs. Right of Redemption................................................... D. Right of Redemption May be Extended by Agreement ................................................... E. Estoppel ..................................................................... F. Redemption after the Prescriptive Period ............... G. Offer to Repurchase Not Waiver to Question the Sale ............................................. H. No Right to Recover if Foreclosure is Not Valid ..... I. Preferred Status of Banks Not Impaired in Case the Borrower is Under Rehabilitation ............ J. Writ of Possession ..................................................... X. Major Investments ............................................................ A. Ceiling on Investments in Certain Assets ............... B. Acquisition of Real Estate By Way of Satisfaction of Claims ...................................... XI. Other Banking Services .................................................... A. Safety Deposit Box .................................................... XII. Electronic Transactions .................................................... XIII. Outsourcing of Information Technology Systems/Processes .................................................... XIV. Outsourcing of Other Functions .......................................
xv
O. P.
171 171 171 172 172 176 176 176 177 177 178 180 182 182 183 184 184 190 192 194 194 194 195 196 196 197 199 199 203 204 205 207 207 208
XV. Credit Card Transactions ................................................. A. General Policy ........................................................... B. Denition of Terms ................................................... C. Risk Management System........................................ D. Minimum Requirements .......................................... E. Information to be Disclosed...................................... F. Accrual of Interest Earned ....................................... G. Finance Charges ....................................................... H. Deferral Charges....................................................... I. Late Payment/Penalty Fees ..................................... J. Condentiality of Information ................................. K. Suspension, Termination of Effectivity and Reactivation ............................................... L. Inspection of Records Covering Credit Card Transactions ............................................ M. Offsets........................................................................ N. Handling of Complaints ........................................... O. Unfair Collection Practices ...................................... P. Additional Deposit Does Not Increase Credit Limit ...................................................... Q. Contract of Adhesion ................................................ R. Blanket Freedom from Liability Invalid ................. XVI. Rules on Price Tags/Labels and Providing Prohibition Against the Imposition of a Surcharge, Extra Charge or Additional Charge in the Use of Credit/Automated Teller Machine (ATM)/Debit Cards for Payment of Purchases of Consumer Products or Services ........................... A. One Price Tag Requirement ..................................... B. Modes of Payment and Other Price Tag Practices .................................................... C. Prohibition Against Surcharging by Retailers ........ Chapter 5 Prohibited Transactions and Cessation of Banking Business I. Prohibited Transactions .................................................... A. Prohibition to Act as Insurer ................................... B. Prohibited Acts ......................................................... C. Prohibition Against Outsourcing Certain Banking Functions ............................. Conducting Business in an Unsafe or Unsound Manner ......................................................
xvi
208 208 209 209 210 211 212 212 212 213 213 214 214 214 214 215 216 216 216
217 217 217 218
219 219 220 221 221
II.
III. Prohibition on Dividend Declaration................................ IV. Unauthorized Advertisement or Business Representation .......................................................... V. Placement Under Conservatorship .................................. A. Governing Law .......................................................... B. Grounds for Appointment of Conservator ............... C. Qualications of Conservator................................... D. Period of Conservatorship ........................................ E. Remuneration ........................................................... F. Expenses of Conservatorship ................................... G. Terminations of Conservatorship ............................ H. Final and Executory ................................................. I. Exclusive Power to Appoint ..................................... J. Not a Precondition .................................................... K. Powers of Conservator Cannot Impair the Obligations of Contracts .................................. VI. Cessation of Banking Business......................................... A. Voluntary Liquidation .............................................. B. Receivership and Involuntary Liquidation ............. C. Close Now Hear Later Scheme ................................ D. Effect of Filing a Petition for Review....................... E. Reasons Behind Receivership and Involuntary Liquidation .................................. F. Effects of Receivership and Liquidation .................. VII. Disposition and Distribution of Assets............................. A. Distribution of Assets ............................................... B. Disposition of Revenues and Earnings .................... C. Disposition of Banking Franchise ............................ D. Liabilities .................................................................. Chapter 6 Foreign Banks and Trust Operations I. Foreign Banks ................................................................... A. Transacting Business in the Philippines................. B. Acquisition of Voting Stock in a Domestic Bank ................................................. C. Local Branches of Foreign Banks ............................ D. Head Ofce Guarantee ............................................. E. Summons and Legal Process .................................... F. Laws Applicable ........................................................ G. Revocation of License of a Foreign Bank................. Entry of Foreign Banks .....................................................
xvii
222 224 225 225 225 227 227 227 227 227 228 228 228 228 230 230 231 247 248 249 250 257 257 258 258 258
259 259 260 261 261 268 270 271 271
II.
III. Trust Operations ............................................................... A. Authority to Engage in Trust Business ................... B. Conduct of Trust Business ....................................... C. Registration of Articles of Incorporation and By-Laws of a Trust Entity ........................ D. Minimum Capitalization .......................................... E. Powers of a Trust Entity .......................................... F. Transactions Requiring Prior Authority ................. G. Deposit for the Faithful Performance of Trust Duties ................................................. IV. Bond of Certain Persons for the Faithful Performance of Duties .............................................. A. Bond Requirements .................................................. B. Exemption of Trust Entity from Bond Requirement ..................................................... V. Operations of Trust Entity................................................ A. Separation of Trust Business from General Business ............................................. B. Investment Limitations of a Trust Entity ............... C. Real Estate Acquired by a Trust Entity .................. D. Investment of Non-Trust Funds .............................. E. Sanctions and Penalties ........................................... F. Exemption of Trust Assets from Claims.................. G. Establishment of Branches of a Trust Entity ...................................................... H. Advertisement of Services ........................................ I. Money of Government .............................................. Chapter 7 The Bangko Sentral ng Pilipinas I. Creation, Responsibilities And Corporate Powers of the Bangko Sentral .................................. A. Declared Policy of the State ..................................... B. Creation of the Bangko Sentral ng Pilipinas .......... C. Responsibility and Primary Objective of the Bangko Sentral ...................................... D. Corporate Powers of the Bangko Sentral................................................. E. Power to Prosecute ................................................... F. Estoppel ..................................................................... Authority of the Bangko Sentral ...................................... A. Supervisory Powers of the Bangko Sentral .............
xviii
276 276 277 278 279 279 280 281 282 282 283 283 283 284 285 286 286 286 286 287 287
288 288 288 289 290 290 291 292 292
II.
Phase Out of Bangko Sentral Powers Over Building and Loan Associations ...................... C. Policy Direction; Ratios, Ceilings and Limitations ................................................ III. The Monetary Board ......................................................... A. Composition .............................................................. B. Vacancies ................................................................... C. Qualications of Members of the Monetary Board ............................................... D. Disqualications of Monetary Board Members ........................................................... E. Grounds for the Removal of Monetary Board Members ................................................ F. Meetings, Quorum, Decisions and Proceedings of the Monetary Board ................ G. Deputy Governors may Attend Meetings of the Monetary Board ..................................... H. Salaries of the Governor and Members of the Monetary Board ..................................... I. Personal or Pecuniary Interest ................................ J. Scope of Authority of the Monetary Board .............. K. Responsibility of Members of the Monetary Board, Ofcials, Examiners, and Employees of the Bangko Sentral ............ IV. The Governor and Deputy Governors of the Bangko Sentral ......................................................... A. Powers and Duties of the Governor ......................... B. Powers of the Governor as Representative of Monetary Board and the Bangko Sentral .............................................................. C. Emergencies .............................................................. D. Limitations on Outside Interests of the Governor and the Full-time Members of the Board ...................................................... E. Number and Functions of Deputy Governors ......................................................... V. Operations Of The Bangko Sentral .................................. A. Research and Statistics of the Bangko Sentral .............................................................. B. Scope of Authority of Bangko Sentral to Obtain Data and Information.......................... C. Training of Technical Personnel .............................. D. Scope of Supervision and Examination by the Bangko Sentral .....................................
xix
B.
293 293 294 294 294 295 295 296 297 302 302 302 302 306 307 307 308 308 309 309 310 310 310 311 311
E. Restraining Order or Injunction .............................. VI. Director, Ofcer or Stockholder, and Related Interest ........................................................ A. Contracting Loans .................................................... B. Prohibitions Against Personnel of the Bangko Sentral................................................. VII. Examination of Banking Institutions .............................. A. Frequency of Examination ....................................... B. Affording Opportunity to Examine .......................... C. Service Fees .............................................................. VIII. Administration .................................................................. A. Operating Departments of the Bangko Sentral .............................................................. B. Required Reports and Publications of the Bangko Sentral .......................................... C. Annual Report of the Bangko Sentral ..................... D. Signatures on Statements: ....................................... IX. Prots, Losses, and Special Accounts............................... A. Fiscal Year ................................................................ B. Computation of Prots and Losses .......................... C. Distribution of Net Prots........................................ D. Revaluation Prots and Losses ................................ E. The Auditor ............................................................... X. Penalty for Violation ......................................................... A. Penalty for Refusal to Make Reports or Permit Examination .................................... B. Penalty for the Willful Making of a False or Misleading Statement on a Material Fact ................................................. C. Proceedings Upon and Penalty for Violation of NCBA and Other Banking Laws, Rules, Regulations, Orders or Instructions ...................................................... D. Administrative Sanctions on Banks and Quasi-Banks .............................................. Chapter 8 Currency, Monetary Stabilization and Functions of the BSP I. The Unit of Monetary Value ............................................. A. The Peso .................................................................... B. Denition of Currency ..............................................
xx
312 313 313 314 315 315 315 315 316 316 316 317 318 318 318 318 318 319 319 320 320
320
321 321
324 324 324
C. Value of Currency ..................................................... Issue of Means of Payment ............................................... A. Exclusive Issue Power .............................................. B. An Exception to Territoriality of Penal Laws ......... C. Liability for Notes and Coins ................................... D. Legal Tender Power .................................................. E. Characteristics of the Currency ............................... F. Printing of Notes and Mining of Coins .................... G. Interconvertibility of Currency ................................ H. Replacement of Currency Unt for Circulation ........................................................ I. Retirement of Old Notes and Coins ......................... III. Domestic Monetary Stabilization ..................................... A. Guiding Principle on Monetary Stabilization ......... B. Power to Dene Terms ............................................. C. Action When Abnormal Movements Occur in the Monetary Aggregates, Credit, or Price Level ....................................... IV. International Monetary Stabilization .............................. A. International Monetary Stabilization ..................... B. International Reserves ............................................. C. Composition of the International Reserves ............. D. Action When the International Stability of the Peso is Threatened ................................ E. Means of Action ........................................................ V. Operations In Gold And Foreign Exchange ..................... A. Purchases and Sales of Gold .................................... B. Purchases and Sales of Foreign Exchange .............. C. Foreign Asset Position of the Bangko Sentral .............................................................. D. Emergency Restrictions on Exchange Operations ........................................................ E. Acquisition of Inconvertible Currencies .................. F. Exchange Rates......................................................... G. Operations with Foreign Entities ............................ VI. Regulation of Foreign Exchange Operations of the Banks .............................................................. A. Foreign Exchange Holdings of the Banks ............... B. Requirement of Balanced Currency Position ............................................................. C. Regulation of Non-Spot Exchange Transactions ..................................................... D. Other Exchange Prots and Losses ......................... II.
xxi
324 325 325 327 328 328 329 330 330 330 330 331 331 331
331 333 333 333 333 334 335 335 335 336 337 337 338 338 339 339 339 340 340 340
E. Information on Exchange Operations...................... VII. Loans to Banking and Other Financial Institutions................................................................ A. Guiding Principles .................................................... B. Authorized Types of Credit Operations ................... C. Loans for Liquidity Purposes ................................... VIII. Emergency Loans and Advances ...................................... A. Nature of Emergency Loans or Advances ............... B. When Granted ........................................................... C. Limits ........................................................................ D. First Tranche ............................................................ E. Second Tranche ......................................................... F. Shares As Collateral ................................................. G. Overdraft ................................................................... IX. Credit Terms...................................................................... A. Interest and Rediscount ........................................... B. Endorsement ............................................................. C. Repayment of Credits ............................................... D. Other Requirements ................................................. E. Provisional Advances to the National Government ...................................................... F. Prohibitions ............................................................... X. Open Market Operations for the Account of the Bangko Sentral ............................................... A. Principles of Open Market Operations .................... B. Purchases and Sales of Government Securities .......................................................... C. Issue and Negotiation of Bangko Sentral Obligations ....................................................... XI. Composition Of Bangko Sentrals Portfolio ..................... XII. Bank Reserves ................................................................... A. Reserve Requirements .............................................. B. Denition of Deposit Substitutes ............................. C. Required Reserves Against Peso Deposits .............. D. Required Reserves Against Foreign Currency Deposits ............................................ E. Reserves Against Unused Balances of Overdraft Lines ................................................ F. Increase in Reserve Requirements .......................... G. Computation on Reserves......................................... H. Reserve Deciencies ................................................. I. Interbank Settlement ............................................... J. Exemption from Attachment and Other Purposes.................................................
xxii
340 341 341 341 343 344 344 344 345 345 346 346 346 347 347 347 347 348 348 348 349 349 349 349 350 350 350 351 352 352 352 352 353 353 354 355
XIII. Selective Regulation of Bank Operations ........................ A. Guiding Principle ...................................................... B. Margin Requirements Against Letters of Credit ............................................................ C. Required Security Against Bank Loans .................. D. Portfolio Ceilings ...................................................... E. Minimum Capital Ratios .......................................... F. Coordination of Credit Policies ................................ XIV. Functions As Banker of The Government........................ A. Designation of Bangko Sentral as Banker of the Government .............................. B. Representation with the International Monetary Fund................................................. C. Representation with Other Financial Institutions ....................................................... D. Ofcial Deposits ........................................................ E. Fiscal Operations ...................................................... F. Other Banks as Agents of the Bangko Sentral .............................................................. G. Remuneration for Services ....................................... XV. The Marketing and Stabilization of Securities for the Account of the Government .......................... A. Issue of Government Obligations............................. B. Methods of Placing Government Securities ............ C. Servicing and Redemption of the Public Debt ....................................................... D. The Securities Stabilization Fund ........................... E. Resources of the Securities Stabilization Fund .................................................................. F. Prots and Losses of the Fund ................................. XVI. Functions As Financial Advisor of The Government............................................................... A Financial Advice on Ofcial Credit Operations ........................................................ B. Representation on the National Economic and Development Authority ............................ XVII. Privileges .......................................................................... A. Tax Exemptions ........................................................ B. Exemption from Customs Duties ............................. C. Applicability of the Civil Service Law ..................... XVIII. Transitory Provisions of the NCBA ............................... A. Phase-out of Fiscal Agency Functions .....................
355 355 355 355 356 356 356 356 356 357 357 357 357 358 358 358 358 358 359 359 359 360 360 360 361 361 361 362 362 363 363
xxiii
B.
C. D. E. F. G. H. I.
Phase-out of Regulatory Powers Over the Operations of Finance Corporations and Other Institutions Performing Similar Functions............................................. Implementing Details ............................................... Transfer of Assets and Liabilities ............................ Mandate to Organize ................................................ Separation Benets .................................................. Repealing Clause ...................................................... Transfer of Powers .................................................... Suspense Accounts.................................................... Chapter 9 Unclaimed Balances and Trust Receipts
364 364 365 366 366 367 367 367
I.
II.
Unclaimed Balances .......................................................... A. Denition................................................................... B. Procedures ................................................................. C. Penalties .................................................................... D. Immunity from suit .................................................. E. Disclosure of Service and Maintenance Fees on Dormant Accounts....................................... F. Reclassication ......................................................... G. Escheats Under the Rules of Court ......................... H. The State as an Heir of a Decedent ......................... Trust Receipts.................................................................... A. Policy ......................................................................... B. Denition of Terms ................................................... C. Trust Receipt Transaction........................................ D. Form of Trust Receipts; Contents ............................ E. Currency in which a Trust Receipt may be Denominated ............................................... F. Rights of the Entruster ............................................ G. Entruster not Responsible on Sale by Entrustee ..................................................... H. Obligations of the Entrustee .................................... I. Liability of Entrustee for Loss ................................. J. Rights of Purchaser for Value and in Good Faith ........................................................ K. Validity of Entrusters Security Interest as Against Creditors ........................................ L. Violation of the Trust Receipts Law ........................
xxiv
368 368 368 371 371 372 372 372 374 377 377 378 379 381 382 382 385 385 386 386 386 386
M. N.
Application ................................................................ Penalty ...................................................................... Chapter 10 Deposit Insurance
388 388
Roles of Philippine Deposit Insurance Corporation ............................................................... II. Powers of PDIC as a Corporate Body ............................... III. Board of Directors ............................................................. A. Composition .............................................................. B. Disqualication of Appointive Members ................. C. Quorum ..................................................................... D. Per Diem.................................................................... E. Authority of the Board.............................................. IV. Ofcers ............................................................................... A. The President ............................................................ B. The Vice-President ................................................... C. Bank Examiners ....................................................... D. Claim Agents............................................................. E. Investigators ............................................................. V. Deposit Insurance Coverage ............................................. A. Deposit Liabilities ..................................................... B. Statutory Liability of PDIC ...................................... C. A Deposit Must in Fact be Made.............................. D. Holder in Due Course not Applicable ...................... E. Liability Under the Negotiable Instrument vs. The Guaranty Fund.................................... F. Deposit Insurance of Foreign Currency Deposits ............................................ G. Duty to Indicate Insurance on Deposits .................. VI. Assessment ........................................................................ A. Assessment Rate ....................................................... B. Certied Statement of Assessment Base and Assessment Due ........................................ C. Refund and Credit .................................................... D. Termination .............................................................. E. Trust Funds .............................................................. F. Payment of Dividends and/or Interests ................... G. Civil Penalties ........................................................... VII. Deposit Insurance Fund.................................................... VIII. Unsound Practice .............................................................. IX. Reports by Insured Banks ................................................
xxv
I.
393 393 395 395 396 396 396 396 398 398 399 399 400 400 400 400 401 402 404 404 404 405 405 405 406 407 407 408 408 409 409 410 411
X. Prohibitions on PDIC Personnel....................................... XI. Legal Assistance ................................................................ XII. Dealings by PDIC Personnel with Banks ........................ A. Designation as Directors and Ofcers of Banks ............................................................ B. Borrowing from Banks ............................................. XIII. Receivership....................................................................... A. Appointment ............................................................. B. Powers ....................................................................... C. Suits Filed by PDIC .................................................. D. Distribution of Assets ............................................... XIV. Payments of Insured Deposits .......................................... A. Manner of Payment .................................................. B. Proof of Claims .......................................................... C. Settlement Period and Penalties in Case of Failure to Settle ........................................... D. Notice......................................................................... E. Discharge................................................................... F. Recognition of Owner ............................................... G. Withholding of Payment........................................... H. Prescription ............................................................... XV. Investment by PDIC.......................................................... XVI. Extension of Loans ............................................................ XVII. Borrowings ....................................................................... XVIII. Issuance of Bonds ........................................................... XIX. Reports and Audit ............................................................. XX. Miscellaneous .................................................................... A. Signs .......................................................................... B. Merger or Consolidation of Insured Banks ............. C. Protection Against Losses ........................................ D. Directors, Ofcers and Employees of Insured Banks .................................................. XXI. Criminal Penalties ............................................................ XXII. Fines ................................................................................. XXIII. TRO and Injunction ........................................................ XXIV. Reorganization ................................................................ Chapter 11 Anti-Money Laundering I. Concepts ............................................................................. A. Policies....................................................................... B. Covered Institutions .................................................
xxvi
412 413 414 414 414 414 414 415 416 417 417 417 418 419 419 420 420 420 420 421 421 423 423 424 424 424 424 425 425 425 427 427 427
430 432 432
C. Covered and Suspicious Transaction ....................... D. Monetary Instrument ............................................... E. Unlawful Activities ................................................... F. Money Laundering Offense ...................................... II. Jurisdiction and Prosecution ............................................ A. Jurisdiction of Money Laundering Cases ................ B. Prosecution of Money Laundering ........................... III. Anti-Money Laundering Council ...................................... A. Composition .............................................................. B. Functions ................................................................... IV. Prevention of Money Laundering; Customer Identication Requirements and Record Keeping ......................................................... A. Customer Identication............................................ B. Record Keeping ......................................................... C. Reporting of Covered and Suspicious Transactions ..................................................... D. Freezing of Monetary Instrument or Property........................................................ E. Authority to Inquire into Bank Deposits................. V. Ex Post Facto Clause ......................................................... VI. Forfeiture ........................................................................... A. Civil Forfeiture ......................................................... B. Claim on Forfeiture Assets ...................................... C. Payment in Lieu of Forfeiture.................................. VII. Mutual Assistance among States ..................................... A. Request for Assistance from a Foreign State .................................................................. B. Powers of the AMLC to Act on a Request for Assistance From a Foreign State............... C. Obtaining Assistance From Foreign States ............ D. Limitations on Request for Mutual Assistance ......................................................... E. Requirements for Requests for Mutual Assistance From Foreign States ..................... F. Authentication of Documents................................... G. Extradition ................................................................ VIII. Penalties ............................................................................ A. Penalties for the Crime of Money Laundering ....................................................... B. Penalties for Failure to Keep Records ..................... C. Malicious Reporting ..................................................
xxvii
433 434 434 435 436 436 436 436 436 437
438 438 439 439 440 440 452 454 454 454 454 455 455 455 456 456 457 457 458 458 458 459 459
IX. X. XI.
D. Breach of Condentiality ......................................... Prohibitions Against Political Harassment ..................... Implementing Rules and Regulations .............................. Congressional Oversight Committee................................ A. Composition .............................................................. B. Powers of the Congressional Oversight Committee ....................................... XII. Rules and Regulations for Banks and Non-Bank Financial Institutions to Combat Money Laundering ................................................................ XIII. Prosecution of Money Laundering Rule ...........................
460 460 460 461 461 461
461 463
Chapter 12 Special Purpose Vehicle A. B. C. D. E. F. G. H. I. J. K. L. M. N. O. P. Q. R. S. T. U. V. Policies....................................................................... Denitions ................................................................. Organization ............................................................. Powers of An SPV ..................................................... Period for Filing of Applications .............................. Authorized, Subscribed and Paid-Up Capital of the SPV............................................ Submission of SPV Plan ........................................... Approval .................................................................... Issuance of IUIs ........................................................ Permitted Investors .................................................. Notice and Manner of Transfer of Assets ................ Nature of Transfer .................................................... Assumption of Rights and Obligations .................... Tax Exemptions and Fee Privileges ........................ Additional Tax Exemptions and Privileges ............. Privileges of Participating FIs ................................. Abuse of Tax Exemptions and Privileges ................ Redemption Periods .................................................. Books of Accounts and Records ................................ Reports ...................................................................... Penalties .................................................................... Applicability Clause.................................................. 466 466 470 470 471 472 473 474 474 478 480 481 483 483 488 489 489 490 490 491 495 495
xxviii
APPENDICES A B C Bar Questions ........................................................... Republic Act No. 7653 The New Central Bank Act ...................................................... Republic Act No. 8791 The General Banking Law of 2000 ................................................ 499 520 574
xxix
ABBREVIATIONS GBL NCBA MORB PDIC BSP SPV AMLA General Banking Law New Central Bank Act Manual of Regulations for Banks Philippine Deposit Insurance Corporation Bangko Sentral ng Pilipinas Special Purpose Vehicle Anti-Money Laundering Act
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Chapter 1 Banks and the Business of Banking

BANKING LAWS & JURISPRUDENCE

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

BANKING LAWS & JURISPRUDENCE

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

BANKING LAWS & JURISPRUDENCE

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

BANKING LAWS & JURISPRUDENCE

Duty to Keep Records

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

BANKING LAWS & JURISPRUDENCE

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

BANKING LAWS & JURISPRUDENCE

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

BANKING LAWS & JURISPRUDENCE

Manlapat vs. Court of Appeals, G.R. No. 125585, June 8, 2005.

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

BANKING LAWS & JURISPRUDENCE

G.R. No. 145794, January 26, 2005, 449 SCRA 284.

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

BANKING LAWS & JURISPRUDENCE

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

Banks may Exclude Persons in their Premises

BANKING LAWS & JURISPRUDENCE

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

BANKING LAWS & JURISPRUDENCE

Right to Recover from Employees

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

Prudential Bank vs. Court of Appeals, supra, Note 59. Ibid.

BANKING LAWS & JURISPRUDENCE

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

BANKING LAWS & JURISPRUDENCE

Respondeat Superior, Diligence in the Selection and Supervision of Employees

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

Business Name (i)

BANKING LAWS & JURISPRUDENCE

Asian Bonds Glossary (asianbondsonline.adb.org).

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

The operations of commercial banks are discussed in Chapter 4. D. Rural Banks

BANKING LAWS & JURISPRUDENCE

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

The following are the powers of thrift banks: (a) (b)

BANKING LAWS & JURISPRUDENCE

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

BANKING LAWS & JURISPRUDENCE

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

BANKING LAWS & JURISPRUDENCE

Website of Philippine Veterans Bank (www.veteransbank.com.ph).

CHAPTER 1 BANKS AND THE BUSINESS OF BANKING

ph). Republic Act No. 8367. Ibid. 101 Section 4, GBL.

BANKING LAWS & JURISPRUDENCE

Section 95, NCBA.

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BANKING LAWS & JURISPRUDENCE

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BANKING LAWS & JURISPRUDENCE

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Determination by the Monetary Board

BANKING LAWS & JURISPRUDENCE

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Section 6, GBL. Section 7, GBL.