SPCL Case Digests

CASE DIGESTS ON SPECIAL COMMERCIAL LAWS
Kenneth & King Hizon (3A) _____________________________________________

Facultad de Derecho Civil 1
UNIVERSITY OF SANTO TOMAS


Faculty of Civil Law
A.Y. 2012-2013
First Semester

SPECIAL COMMERCIAL LAWS

LETTERS OF CREDIT

BANK OF THE PHILIPPINE ISLANDS v. DE RENY FABRIC INDUSTRIES, INC., et al.
G.R. No. L-24821, 16 October 1970, EN BANC (Castro, J.)
The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify
whether what has been described in letters of credits or drafts or shipping documents actually tallies with what was loaded aboard
ship, having been positively proven as a fact, BPI is bound by this established usage.

On four (4) different occasions, the De Reny Fabric Industries, Inc. (De Reny), through Aurora Carcereny alias Aurora C.
Gonzales, and Aurora T. Tuyo, president and secretary, respectively of the corporation, applied to BPI for four (4) irrevocable
commercial letters of credit to cover the purchase by the corporation "dyestuffs of various colors" from the J.B. Distributing
Company (JBDC). All the applications of the corporation were approved, and the corresponding Commercial L/C Agreements were
executed pursuant to banking procedures. Under these agreements, Gonzales and Tuyo bound themselves personally as joint and
solidary debtors with De Reny. Pursuant to banking regulations then in force, De Reny delivered to BPI peso marginal deposits as
each letter of credit was opened.

Subsequently, BPI issued irrevocable commercial letters of credit addressed to its correspondent banks in the United States,
with uniform instructions for them to notify the beneficiary thereof, JBDC, that they have been authorized to negotiate JBDC's sight
drafts up to the amounts mentioned respectively, if accompanied, upon presentation, by a full set of negotiable clean "on board"
ocean bills of lading covering the merchandise appearing in the LCs that is, dyestuffs of various colors. Thus, JBDC drew upon,
presented to and negotiated with these banks, its sight drafts together with clean bills of lading, and collected the full value of the
drafts up to the amounts appearing in the L/Cs. On the other hand, these banks debited the account of BPI with them. In the
meantime, as each shipment covered by the letters of credit arrived in the Philippines, De Reny made partial payments to the Bank
amounting, in the aggregate, to P90,000. Further payments were, however, subsequently discontinued by De Reny when it became
established, as a result of a chemical test conducted by the National Science Development Board, that the goods that arrived in
Manila were colored chalks instead of dyestuffs. De Reny also refused to take possession of these goods, and for this reason, BPI
caused them to be deposited with a bonded warehouse paying therefor the amount of P12,609.64 up to the filing of its complaint.
The lower court ordered De Reny with Gonzales and Tuyo to pay the amount of P291,807.46, with interest thereon.

ISSUE:

Whether or not BPI is required to investigate that the goods shipped conformed with the item appearing in the L/Cs

HELD:

Petition DENIED.

Under the terms of their Commercial Letter of Credit Agreements with the Bank, De Reny, et al. agreed that BPI shall not be
responsible for the "existence, character, quality, quantity, conditions, packing, value, or delivery of the property purporting to be
represented by documents; for any difference in character, quality, quantity, condition, or value of the property from that expressed
in documents," or for "partial or incomplete shipment, or failure or omission to ship any or all of the property referred to in the
Credit," as well as "for any deviation from instructions, delay, default or fraud by the shipper or anyone else in connection with the
property the shippers or vendors and ourselves [purchasers] or any of us." But even without the stipulation recited above, De Reny,
et al. cannot shift the burden of loss to BPI on account of the violation by their vendor of its prestation. It was uncontrovertibly
proven by BPI that banks, in providing financing in international business transactions such as those entered into by the appellants,
do not deal with the property to be exported or shipped to the importer, but deal only with documents.

The existence of a custom in international banking and financing circles negating any duty on the part of a bank to verify
whether what has been described in letters of credits or drafts or shipping documents actually tallies with what was loaded
aboard ship, having been positively proven as a fact, BPI is bound by this established usage. They were, after all, the ones who
tapped the facilities afforded by the Bank in order to engage in international business.

PHILIPPINE VIRGINIA TOBACCO ADMINISTRATION v. HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of
Rizal, Branch IV (Quezon City), et al.
G.R. No. L-27829, 19 August, 1988, SECOND DIVISION (Paras, J.)
An irrevocable letter of credit cannot during its lifetime be cancelled or modified without the express permission of the
beneficiary.

Timoteo Sevilla, proprietor and General Manager of the Philippine Associated Resources (PAR) together with the
Nationwide Agro-Industrial Development Corp. (Nationwide) and the Consolidated Agro-Producers Inc. (Consolidated) were
awarded in a public bidding the right to import Virginia leaf tobacco for blending purposes and exportation by them of PVTA and
farmer's low-grade tobacco at a rate of one (1) kilo of imported tobacco for every nine (9) kilos of leaf tobacco actually exported.
Subsequently, Nationwide and Consolidated assigned their rights to PVTA.

The contract between PVTA and Sevilla was for the importation of 85 million kilos of Virginia leaf tobacco and a counterpart
exportation of 2.53 million kilos of PVTA and 5.1 million kilos of farmer's and/or PVTA at P3.00 a kilo. Sevilla purchased from PVTA
and actually exported 2,101.470 kilos of tobacco, paying the PVTA the sum of P2,482,938.50 and leaving a balance of P3,713,908.91.
Before Sevilla could import the counterpart blending Virginia tobacco, amounting to 525,560 kilos, Republic Act No. 4155 was
passed and took effect on June 20, 1 964, authorizing the PVTA to grant import privileges at the ratio of 4 to 1 instead of 9 to 1 and
to dispose of all its tobacco stock at the best price available. Thus, the subject contract which was already amended because of the
prevailing export or world market price under which Sevilla will be exporting at a loss was further amended to grant Sevilla the
privileges under aforesaid law, subject to the following conditions:

(1) that on the 2,101.470 kilos already purchased, and exported, the purchase price of about P3.00 a kilo was maintained;
(2) that the unpaid balance of P3,713,908.91 was to be liquidated by paying PVTA the sum of P4.00 for every kilo of imported
Virginia blending tobacco and;
(3) that Sevilla would open an irrevocable letter of credit No. 6232 with the Prudential Bank and Trust Co. in favor of the PVTA to
secure the payment of said balance, drawable upon the release from the Bureau of Customs of the imported Virginia blending
tobacco.

While Sevilla was trying to negotiate the reduction of the procurement cost, PVTA prepared two drafts to be drawn against
said letter of credit for amounts which have already become due and demandable. Sevilla then filed a complaint for damages with
preliminary injunction against PVTA in the amount of P5,000,000.00. A writ of preliminary injunction was issued enjoining PVTA from
drawing against the letter of credit. On motion, the lower court dismissed the complaint without prejudice and lifted the wri t of
preliminary injunction but PVTA's motion for reconsideration was granted. Then later on, without notice to PVTA, Judge Delos
Angeles issued the assailed Order directing the Prudential Bank & Trust Co. to make the questioned release of funds from the Letter
of Credit. Sevilla was able to secure the releaseof P300,000.00 and the rest of the amount.

ISSUE:

Whether or not Judge Delos Angeles violated the letter of credit

HELD:

Petition GRANTED.

In issuing the Order of July 17, 1967, Jugde Delos Angeles violated the irrevocability of the letter of credit issued by
Prudential Bank in favor of PVTA. Accordingly, an irrevocable letter of credit cannot during its lifetime be cancelled or modified
without the express permission of the beneficiary. Also, in the issuance of the Order, Judge Delos Angeles likewise violated Section
4 of Rule 15 of the Rules of Court which requires that notice of a motion be served by the applicant to all parties concerned at least
three days before the hearing thereof; Section 5 of the same Rule which provides that the notice shall be directed to the parties
concerned; and shall state the time and place for the hearing of the motion; and Section 6 of the same Rule which requires proof
of service of the notice thereof, except when the Court is satisfied that the rights of the adverse party or parties are not affected.

Also, in the case at bar there appears no urgency for the issuance of the writs of preliminary mandatory injunctions in the
Orders of July 17, 1967 and November 3, 1967; much less was there a clear legal right of Sevilla that has been violated by PVTA.
Indeed, it was an abuse of discretion on the part of Judge Delos Angeles to order the dissolution of the letter of credit on the basis of
assumptions that cannot be established except by a hearing on the merits nor was there a showing that R.A. 4155 applies
retroactively to respondent in this case, modifying his importation / exportation contract with PVTA. Furthermore, a writ of
preliminary injunction's enjoining any withdrawal from Letter of Credit 6232 would have been sufficient to protect the rights of
Sevilla should the finding be that he has no more unpaid obligations to PVTA.

INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE COMMERCIAL INTERNATIONAL BANK), v. HON. INTERMEDIATE APPELLATE
COURT, et al.
G.R. No. 74834, 17 November 1988, SECOND DIVISION (Melencio-Herrera, J.)
The standby L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount for which credit is given on the
faith of the instrument." They are primary obligations and not accessory contracts. Being separate and independent agreements, the
payments made by the Mendozas cannot be added in computing IBAA's liability under its own standby letters of credit.

Spouses Ben S. Mendoza and Juanita M. Mendoza obtained two (2) loans from Philippine American Life Insurance Co.
(Philam Life) in the total amount of P600,000.00 to finance the construction of their residential house at Mandaue City. The said
loans, with a 14% nominal interest rate, were to be liquidated in equal amortizations over a period of five (5) years. To secure
payment, Philam Life required that amortizations be guaranteed by an irrevocable standby letter of credit of a commercial bank.
Thus, the Mendozas contracted with petitioner Insular Bank of Asia and America (IBAA) for the issuance of two (2) irrevocable
standby Letters of Credit in favor of Philam Life for the total amount of P600,000.00. These two (2) irrevocable standby L/Cs were, in
turn, secured by a real estate mortgage for the same amount on the property of Respondent Spouses in favor of IBAA.

The Mendozas however, failed to pay Philam Life the amortization that fell due on 1 June 1978 so that Philam Life informed
IBAA that it was declaring both loans as "entirely due and demandable" and demanded payment of P492,996.30. However, because
IBAA contested the propriety of calling ill the entire loan, Philam Life desisted and resumed availing of the L/Cs by drawing on them
for five (5) more amortizations. Hence, Philam Life again informed IBAA that it was declaring the entire balance outstanding on both
loans, including liquidated damages, "immediately due and payable." Philam Life then demanded the payment of P274,779.56 from
IBAA but the latter took the position that, as a mere guarantor of the Mendozas who are the principal debtors, its remaining
outstanding obligation under the two (2) standby L/Cs was only P30,100.60.

As such, Philamlife filed suit against Spouses Mendoza and IBAA before the RTC of Manila, for the recovery of the sum of
P274,779.56, the amount allegedly still owing under the loan. The RTC found that IBAA had paid Philam Life only P342,127.05 and
not P372,227.65, as claimed by IBAA, because of a stale IBAA Manager's check in the amount of P30,100.60, which had to be
deducted. In so deciding, the RTC took the position that IBAA, "as surety" was discharged of its liability to the extent of the payment
made by the Mendozas, as the principal debtors, to the creditor, Philam Life. Then, the Court of Appeals reversed and ruled that
IBAA's liability was not reduced by virtue of the payments made by the Mendozas.

ISSUE:

Whether or not the partial payments made by the principal obligors (Sps. Mendoza) would have the corresponding effect of
reducing the liability of the petitioner as guarantor or surety under the terms of the standby LCs in question

HELD:

Petition DENIED.

In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties that must govern. Letters
of credit and contracts for the issuance of such letters are subject to the same rules of construction as are ordinary commercial
contracts. They are to receive a reasonable and not a technical construction and although usage and custom cannot control express
terms in letters of credit, they are to be construed with reference to all the surrounding facts and circumstances, to the particular and
often varying terms in which they may be expressed, the circumstances and intention of the parties to them, and the usages of the
particular trade of business contemplated.

The terms of the subject Irrevocable Standby Letters of Credit:

This credit secures the payment of any obligation of the accountee to you under that Loan Agreement hereto
attached as Annex 'A' and made a part hereof, including those pertaining to (a) surcharges on defaulted account;
stallments, (b) increased interest charges (in the event the law should authorize this increase), and (c) liabilities
connected with taxes stipulated to be for Accountee's and provided however, that our maximum liabilities
hereunder shall not exceed the amount of P500,000.00 (Pl00.000.00 for the other LC).
Each drawing under this credit shall be available at any time after one (1) day from due date of the obligations
therein secured. Each drawing under this credit shall be accomplished by your signed statement in duplicate that
the amount drawn represents payment due and unpaid by the accountee.

Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the Mendozas to Philam Life
including all interests, surcharges and expenses thereon but not to exceed P600,000.00. But while they are a security arrangement,
they are not converted thereby into contracts of guaranty. That would make them ultra vires rather than a letter of credit, which is
within the powers of a bank. The standby L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount
for which credit is given on the faith of the instrument." They are primary obligations and not accessory contracts. Being separate
and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA's liability under its own
standby letters of credit. Thus, the payments made by the Mendozas directly to Philam Life are in compliance with their own
prestation under the loan agreements. And although these payments could result in the reduction of the actual amount which could
ultimately be collected from IBAA, the latter's separate undertaking under its L/Cs remains.

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION), v. THE COURT OF APPEALS, and BERNARDO E.
VILLALUZ
G.R. No. 94209, 30 June 1991, THIRD DIVISION (Gutierrez, J.)
It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to
the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter.

Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen 2,000 cubic meters of lauan logs at $27.00 per
cubic meter FOB. On the arrangements made and upon the instructions of the consignee, Hanmi Trade Development, Ltd., de Santa
Ana, California, the Security Pacific National Bank of Los Angeles, California issued Irrevocable Letter of Credit No. IC-46268
available at sight in favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs. The said letter of credit was
mailed to the Feati Bank and Trust Company (now Citytrust) with the instruction to the latter that it "forward the enclosed letter of
credit to the beneficiary. The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by Christiansen. Before
its loading, the logs were inspected by custom inspectors and representatives all of whom certified to the good condition and
exportability of the logs.

After the loading of the logs was completed, the Chief Mate, issued a mate receipt of the cargo which stated the same are
in good condition. However, Christiansen refused to issue the certification as required in paragraph 4 of the letter of credit, despite
several requests made by the Villaluz. As such, because of the absence of the certification by Christiansen, the Feati Bank and Trust
Company refused to advance the payment on the letter of credit. The letter of credit lapsed without Villaluz receiving any
certification from Christiansen. Correspondingly, the persistent refusal of Christiansen to issue the certification prompted the Villaluz
to bring the matter before the Central Bank. In a memorandum dated August 16, 1971, the Central Bank ruled that any provision in
any letter of credit covering log exports requiring certification of buyer's agent or representative that said logs have been approved
for shipment as a condition precedent to negotiation of shipping documents shall not be allowed.

Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi Trade Development Company, to
whom Christiansen sold the logs for the amount of $37.50 per cubic meter, for a net profit of $10 per cubic meter. Hanmi Trade
Development Company, on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea. Since the demands by Villaluz
for Christiansen to execute the certification proved futile, Villaluz, , instituted an action for mandamus and specific performance
against Christiansen and the Feati Bank and Trust Company (now Citytrust) before the then Court of First Instance of Rizal. While
the case was still pending trial, Christiansen left the Philippines without informing the Court and his counsel. Hence, Villaluz, filed an
amended complaint to make Feati solidarily liable with Christiansen.

The RTC found the liability of Christansen as beyond dispute, and Villaluzs right to demand payment is absolute. The Court
of Appeals affirmed the RTCs decision.

ISSUE:

Whether or not the Featti can be held liable

HELD:

Petition DENIED.

It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly
conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents
required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it
accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the
case may be, the money thus paid to the beneficiary. Thus the rule of strict compliance.

In the United States, commercial transactions involving letters of credit are governed by the rule of strict compliance. In the
Philippines, the same holds true. The same rule must also be followed. Letters of credit are to be strictly complied with which
documents, and shipping documents must be followed as stated in the letter. There is no discretion in the bank or trust company to
waive any requirements. The terms of the letter constitutes an agreement between the purchaser and the bank. Although in some
American decisions, banks are granted a little discretion to accept a faulty tender as when the other documents may be considered
immaterial or superfluous, this theory could lead to dangerous precedents. Since a bank deals only with documents, it is not in a
position to determine whether or not the documents required by the letter of credit are material or superfluous. The mere fact
that the document was specified therein readily means that the document is of vital importance to the buyer.

In regard to the ruling of the RTC and affirmed by the CA that Feati is not a notifying bank but a confirming bank, the Court
finds the same erroneous.The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed credit. In its
decision, the trial court ruled that the petitioner, in accepting the obligation to notify the respondent that the irrevocable credit has
been transmitted to the petitioner on behalf of the private respondent, has confirmed the letter.
The trial court appears to have overlooked the fact that an irrevocable credit is not synonymous with a confirmed credit. These types
of letters have different meanings and the legal relations arising from there varies. A credit may be an irrevocable credit and at the
same time a confirmed credit or vice-versa.

An irrevocable credit refers to the duration of the letter of credit. What is simply means is that the issuing bank may not
without the consent of the beneficiary (seller) and the applicant (buyer) revoke his undertaking under the letter. The issuing bank
does not reserve the right to revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of obligation
assumed by the correspondent bank. In this case, the correspondent bank gives an absolute assurance to the beneficiary that it will
undertake the issuing bank's obligation as its own according to the terms and conditions of the credit. Hence, the mere fact that a
letter of credit is irrevocable does not necessarily imply that the correspondent bank in accepting the instructions of the issuing bank
has also confirmed the letter of credit. Another error which the lower court and the Court of Appeals made was to confuse the
obligation assumed by the petitioner.

In commercial transactions involving letters of credit, the functions assumed by a correspondent bank are classified
according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a
confirming bank. In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the
beneficiary the existence of the letter of credit. A negotiating bank, on the other hand, is a correspondent bank which buys or
discounts a draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no
liability with respect to the seller but after negotiation, a contractual relationship will then prevail between the negotiating bank and
the seller. In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a
primary one as if the correspondent bank itself had issued the letter of credit.

In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary."
Considering the aforesaid instruction to the petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that
the petitioner is only a notifying bank and not a confirming bank as ruled by the courts below. If the petitioner was a confirming
bank, then a categorical declaration should have been stated in the letter of credit that the petitioner is to honor all drafts drawn in
conformity with the letter of credit. What was simply stated therein was the instruction that the petitioner forward the original
letter of credit to the beneficiary. Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or
transmit the documentary of credit to the private respondent and its obligation ends there.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that
of the issuing bank and not with the beneficiary to whom he assumes no liability. It follows therefore that when the petitioner
refused to negotiate with the private respondent, the latter has no cause of action against the petitioner for the enforcement of
his rights under the letter. In order that the petitioner may be held liable under the letter, there should be proof that the petitioner
confirmed the letter of credit. The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed
the letter of credit. The only evidence in this case, and upon which the private respondent premised his argument, is the P75,000.00
loan extended by the petitioner to him.

PRUDENTIAL BANK, v. INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC.
and ANACLETO R. CHI
G.R. No. 74886, 8 December 1992, THIRD DIVISION (Davide, Jr., J.)
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.

Philippine Rayon Mills, Inc. entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries
under a five-year deferred payment plan . To effect payment for said machineries, Philippine Rayon applied for a commercial letter
of credit with the Prudential Bank and Trust Company in favor of Nissho. By virtue of said application, the Prudential Bank opened
Letter of Credit No. DPP-63762 for $128,548.78. Against this letter of credit, drafts were drawn and issued by Nissho, which were all
paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their faces, two of these
drafts were accepted by Philippine Rayon through its president, Anacleto R. Chi, while the others were not.

Upon the arrival of the machineries, the Prudential Bank indorsed the shipping documents to Philippine Rayon which
accepted delivery of the same. To enable Philippine Rayon to take delivery of the machineries, it executed, by prior arrangement
with the Prudential Bank, a trust receipt which was signed by Anacleto R. Chi in his capacity as President of Philippine Rayon. At the
back of the trust receipt is a printed form to be accomplished by two sureties who, by the very terms and conditions thereof, were
to be jointly and severally liable to the Prudential Bank should Philippine Rayon fail to pay the total amount or any portion of the
drafts issued by Nissho and paid for by Prudential Bank. Philippine Rayon was able to take delivery of the textile machineries and
installed the same at its factory site.

In 1967, Philippine Rayon ceased business operation and its factory was leased by Yupangco Cotton Mills for an annual
rental of P200,000.00. The obligation of Philippine Rayon arising from the letter of credit and the trust receipt remained unpaid and
unliquidated. Repeated formal for the payment of the said trust receipt yielded no result Hence, an action for the collection of the
principal amount of P956,384.95 was filed on against Philippine Rayon and Anacleto R. Chi. The trial court decided against Philippine
Rayon and dismissed the case for Chi. Accordingly, Chi cannot be held liable therefor because the records fail to show that
Prudential Bank had either exhausted the properties of Philippine Rayon or had resorted to all legal remedies as required in Article
2058 of the Civil Code. As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a guarantor is merely
accessory and subsidiary, respectively. Chi's liability would therefore arise only when the principal debtor fails to comply with his
obligation.

ISSUES:

1. Whether presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable thereon;
2. Whether Philippine Rayon is liable on the basis of the trust receipt; and
3. Whether private respondent Chi is jointly and severally liable with Philippine Rayon for the obligation sought to be
enforced and if not, whether he may be considered a guarantor; in the latter situation, whether the case should have been
dismissed on the ground of lack of cause of action as there was no prior exhaustion of Philippine Rayon's properties.

HELD:

1. Petition DENIED
2. Petition GRANTED
3. Petition DENIED.

A letter of credit is defined as 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 specified 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. In the instant case then,
the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there
was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). In no other case is presentment for acceptance
necessary in order to render any party to the bill liable. Obviously then, sight drafts do not require presentment for acceptance.The
acceptance of a bill is the signification by the drawee of his assent to the order of the drawer; this may be done in writing by the
drawee in the bill itself, or in a separate instrument.

The trial court likewise erred in disregarding the trust receipt and in not holding that Philippine Rayon was liable thereon.
This Court explains the nature of a trust receipt by quoting In re Dunlap Carpet Co. 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 first importance
that the fundamental factor in the transaction, the banker's 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 finally 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 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 fulfilled the other terms of the contract.

Under P.D. No. 115, otherwise known an the Trust Receipts Law, a trust receipt transaction is defined as "any transaction
by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee,
whereby the entruster, who owns or holds absolute title or security interests' over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a
signed document called the "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to
turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt
or the goods, instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions
specified in the trusts receipt, or for other purposes substantially equivalent to any one of the following: . . ."

In reading the questioned solidary guaranty clause yields no other conclusion than that the obligation of Chi is only that of
a guarantor. This is further bolstered by the last sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in
this case because the space therein for the party whose property may not be exhausted was not filled up. Under Article 2058 of the
Civil Code, the defense of exhaustion (excussion) may be raised by a guarantor before he may be held liable for the obligation.
Petitioner likewise admits that the questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a
contract of surety. It, however, described the guaranty as solidary between the guarantors; this would have been correct if two (2)
guarantors had signed it. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two (2) parties
who are to sign it or to the liability existing between themselves. It does not refer to the undertaking between either one or both of
them on the one hand and the petitioner on the other with respect to the liability described under the trust receipt. Elsewise stated,
their liability is not divisible as between them, i.e., it can be enforced to its full extent against any one of them.

Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should be resolved against the
petitioner. The trust receipt, together with the questioned solidary guaranty clause, is on a form drafted and prepared solel y by the
petitioner; Chi's participation therein is limited to the affixing of his signature thereon. It is, therefore, a contract of adhesion; as
such, it must be strictly construed against the party responsible for its preparation.

BANK OF AMERICA, NT & SA v. COURT OF APPEALS,
INTER-RESIN INDUSTRIAL CORPORATION, et al.
G.R. No. 105395, 10 December 1993, THIRD DIVISION (Vitug, J.)
As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the
letter of credit issued in its favor, let alone to confirm the letter of credit.

Bank of America, NT & SA, Manila, received by registered mail an Irrevocable Letter of Credit purportedly issued by Bank of
Ayudhya, Samyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of US$2,782,000.00 to cover the
sale of plastic ropes and "agricultural files," with Bank of America as advising bank and Inter-Resin Industrial Corporation as
beneficiary.

Bank of America wrote Inter-Resin informing the latter of the foregoing and transmitting, along with the bank's
communication, the latter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent Atty. Emiliano Tanay
to Bank of America to have the letter of credit confirmed. The bank did not. But the bank employee in charge of letters of credit,
however, explained that there was no need for confirmation because the letter of credit would not have been transmitted if it were
not genuine.

Inter-Resin sought to make a partial availment by submitting to Bank of America invoices. Finally, after being satisfied that
Inter-Resin's documents conformed with the conditions expressed in the letter of credit, Bank of America issued in favor of Inter-
Resin a Cashier's Check for P10,219,093.20. The check was picked up by Inter-Resin's Executive Vice-President Barcelina Tio.
Then,Bank of America wrote Bank of Ayudhya advising the latter of the availment under the letter of credit and sought the
corresponding reimbursement therefor.

Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the second availment under the same letter
of credit. Immediately upon receipt of a telex from the Bank of Ayudhya declaring the letter of credit fraudulent, Bank of America
stopped the processing of Inter-Resin's documents and sent a telex to its branch office in Bangkok requesting assistance in
determining the authenticity of the letter of credit.

Sensing a fraud, Bank of America sought the assistance of the National Bureau of Investigation (NBI). The NBI agents
discovered that the vans exported by Inter-Resin did not contain ropes but plastic strips, wrappers, rags and waste materials. Thus,
Bank of America sued Inter-Resin for the recovery of P10,219,093.20. On the other hand, Inter-Resin claimed that not only was it
entitled to retain P10,219,093.20 on its first shipment but also to the balance US$1,461,400.00 covering the second shipment.

The trial court favored Inter-Resin. The Court of Appeals sustained this.

ISSUE:

Whether or not Bank of America is a mere advising bank

HELD:

Petition GRANTED.

A letter of credit is a financial 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 latter 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.

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 finds 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 said
documents and control over the goods only after reimbursing the bank.

What characterizes letters of credit, as distinguished from other accessory contracts, is the engagement of the issuing bank
to pay the seller of 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.

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 receipts of the
documents of title;
(b) the bank issuing the letter of credit,
13
which undertakes to pay the seller upon receipt of the draft and proper document
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 confirming 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 thenegotiating bank,
18
to have the draft discounted.

Being a product of international commerce, the impact of this commercial instrument transcends national boundaries, and
it is thus not uncommon to find a dearth of national law that can adequately provide for its governance. This country is no
exception. Our own Code of Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof. It is no
wonder then why great reliance has been placed on commercial usage and practice, which, in any case, can be justified by the
universal acceptance of the autonomy of contract rules.

The crucial point of dispute in this case is whether under the "letter of credit," Bank of America has incurred any liability to
the "beneficiary" thereof, an issue that largely is dependent on the bank's participation in that transaction; as a mere advi sing or
notifying bank, it would not be liable, but as a confirming bank, had this been the case, it could be considered as having incurred that
liability.

It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only been an advising, not confirming,
bank, and this much is clearly evident, among other things, by the provisions of the letter of credit itself, the petitioner bank's letter
of advice, its request for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That Bank of America
has asked Inter-Resin to submit documents required by the letter of credit and eventually has paid the proceeds thereof, did not
obviously make it a confirming bank. The fact, too, that the draft required by the letter of credit is to be drawn under the account of
General Chemicals (buyer) only means the same had to be presented to Bank of Ayudhya (issuing bank) for payment. It may be
significant to recall that the letter of credit is an engagement of the issuing bank, not the advising bank, to pay the draft.

As an advising or notifying bank, Bank of America did not incur any obligation more than just notifying Inter-Resin of the
letter of credit issued in its favor, let alone to confirm the letter of credit. The bare statement of the bank employees,
aforementioned, in responding to the inquiry made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of
credit certainly did not have the effect of novating the letter of credit and Bank of America's letter of advise, nor can it justify the
conclusion that the bank must now assume total liability on the letter of credit. Indeed, Inter-Resin itself cannot claim to have been
all that free from fault. As the seller, the issuance of the letter of credit should have obviously been a great concern to it. It would
have, in fact, been strange if it did not, prior to the letter of credit, enter into a contract, or negotiated at the every l east, with
General Chemicals. In the ordinary course of business, the perfection of contract precedes the issuance of a letter of credit.

RELIANCE COMMODITIES, INC., v. DAEWOO INDUSTRIAL CO., LTD
G.R. No. L-100831, 17 December, 1993, THIRD DIVISION (Feliciano, J.)
The failure of Reliance to open, the appropriate L/C did not prevent the birth of that contract, and neither did such failure
extinguish that contract. The opening of the L/C in favor of Daewoo was an obligation of Reliance and the performance of that
obligation by Reliance was a condition of enforcement of the reciprocal obligation of Daewoo to ship the subject matter of the
contract the foundry pig iron to Reliance. But the contract itself between Reliance and Daewoo had already sprung into legal
existence and was enforceable.

Reliance Commodities, Inc. (Reliance) and Daewoo Industrial Co., Ltd. (Daewoo) entered into a contract of sale under the
terms of which Daweoo undertook to ship and deliver to the former 2,000 metric tons of foundry pig iron for the price of
US$404,000.00. The shipment was fully paid for. Upon arrival in Manila, the subject cargo was found to be short of 135.655 metric
tons as only 1,864.345 metric tons were discharged and delivered to Reliance.

Another contract was entered into between the same parties for the purchase of another 2,000 metric tons of foundry pig
iron. Daewoo acknowledged the short shipment of 135.655 metric tons under first contract and, to compensate Reliance therefor,
bound itself to reduce the price by US$1 to US$2 per metric ton of pig iron for succeeding orders. This undertaking was made part of
the next contract. However, that contract was not consummated and was later superseded by still another contract in July 1980.
Reliance, through its Mrs. Samuel Chuason, filed with the China Banking Corporation, an application for a Letter of Credit
(L/C) in favor of Daewoo covering the amount of US$380,600.00. The application was endorsed to the Iron and Steel Authority (ISA)
or approval but the application was denied. Reliance was instead asked to submit purchase orders from end-users to support its
application for a Letter of Credit. However, Reliance was not able to raise purchase orders for 2,000 metric tons. Reliance alleges
that it was able to raise purchase orders for 1,900 metric tons. Daewoo, upon the other hand, contends that Reliance was only able
to raise purchase orders for 900 metric tons. Thus, Reliance withdrew the application for the L/C.

Subsequently, Daewoo leaned that the failure of Reliance to open the L/C was due to the fact that Reliance has already
exceeded its foreign exchange allocation for 1980. Because of the failure of Reliance to comply with its undertaking contract,
Daewoo was compelled to sell the 2,000 metric tons to another buyer at a lower price, to cut losses and expenses Daewoo had
begun to incur due to its inability to ship the 2000 metric tons to Reliance under their contract.

Reliance, through its counsel, wrote Daewoo requesting payment of the amount of P226,370.48, representing the value of
the short delivery of 135.655 metric tons of foundry pig iron under the first contract. Not being heeded, Reliance filed an action for
damages against Daewoo with the trial court. The trial court favored Reliance.

ISSUE:

Whether or not the failure of the buyer to open the letter of credit prevented the perfection of the contract

HELD:

Petition DENIED.

A letter of credit is a financial 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 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.

documents or documents of title. To get paid, the seller executes a draft and pays cash to the seller if it finds 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
goods only after reimbursing the bank.

A letter of credit transaction may thus be seen to be a composite of at least three (3) distinct but intertwined relationships
being concretized in a contract:

(a) One contract relationship links the party applying for the L/C (the account party or buyer or importer) and the party for
whose benefit the L/C is issued (the beneficiary or seller or exporter). In this contract, the account party, here Reliance,
agrees, among other things and subject to the terms and conditions of the contract, to pay money to the beneficiary, here
Daewoo.

(b) 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 specified L/C and agrees to reimburse the bank for amounts paid by that bank pursuant to
the L/C.

(c) The third contract relationship is established between the issuing bank and the beneficiary, in order to support the
contract

The Court agrees with the Court of Appeals that Reliance and Daewoo, having reached "a meeting of minds" in respect of the subject
matter of the contract (2000 metric tons of foundry pig iron with a specified chemical composition), the price thereof (US
$380,600.00), and other principal provisions, "they had a perfected contract." The failure of Reliance to open, the appropriate L/C
did not prevent the birth of that contract, and neither did such failure extinguish that contract. The opening of the L/C in favor of
Daewoo was an obligation of Reliance and the performance of that obligation by Reliance was a condition of enforcement of the
reciprocal obligation of Daewoo to ship the subject matter of the contract the foundry pig iron to Reliance. But the contract
itself between Reliance and Daewoo had already sprung into legal existence and was enforceable.

The L/C provided for in that contract was the mode or mechanism by which payment was to be effected by Reliance of the
price of the pig iron. In undertaking to accept or pay the drafts presented to it by the beneficiary according to the tenor of an L/C,
and only later on being reimbursed by the account party, the issuing bank in effect extends a loan to the account party. This loan
feature, combined with the bank's undertaking to accept the beneficiary's drafts drawn on the bank, constitutes the L/C as a mode
of payment.
1
Logically, before the issuing bank open an L/C, it will take steps to ensure that it would indeed be reimbursed when the
time comes. Before an L/C can be opened, specific legal requirements must be complied with.

The Central Bank of the Philippines has established the following requirements for opening a letter of credit: All L/C's must
be opened on or before the date of shipment with maximum validity of one (1) year. Likewise, only one L/C should be opened for
each import transaction. for purposes of opening an L/C, importers shall submit to the commercial bank the following documents:
a) the duly accomplished L/C application;
b) firm offer/proforma invoice which shall contain information on the specific quantity of the importation, unit cost and
total cost, complete description/specification of the commodity and the Philippine Standard Commodity Classification
statistical code;
c) permits/clearances from the appropriate government agencies, whenever applicable;and
d) duly accomplished Import Entry Declaration (IED) form which shall serve as basis for payment of advance duties as
required under PD 1853.

The need for permits or clearances from appropriate government agencies arises when regulated commodities are to be
imported. Certain commodities are classified as "regulated commodities" for purposes of their importation, "for reasons of public
health and safety, national security, international commitments, and development/rationalization of local industry." The petitioner
in the instant case entered into a transaction to import foundry pig iron, a regulated commodity. In respect of the importation of this
particular commodity, the Iron and Steel Authority (ISA) is the government agency designated to issue the permit or clearance.

Prior to the issuance of such permit or clearance, ISA asks the buyer/importer to comply with particular requirements, such
as to show the availability of foreign exchange allocations. The issuance of an L/C becomes, among other things, an indication of
compliance by the buyer/importer with his own government's regulations relating to imports and to payment thereof.

The records shows that the opening of the L/C in the instant case became very difficult because Reliance had exhausted its
dollar allocation. Reliance knew that it had already exceeded its dollar allocation for the year 1980 when it entered into the 31 July
1980 transaction with Daewoo. As a rule, when the importer has exceeded its foreign exchange allocation, his application would be
denied. However, ISA could reconsider such application on a case to case basis. Thus, in the instant case, ISA required Reliance to
support its application by submitting purchase orders from end-users for the same quantity the latter wished to import. As earlier
noted, Reliance was able to present purchase orders for only 900 metric tons of the subject pig iron.
18
For having exceeded its
foreign exchange allocation before it entered into the 31 July 1980 contract with Daewoo, petitioner Reliance can hold only i tself
responsible. for having failed to secure end-users purchase orders equivalent to 2,000 metric tons, only Reliance should be held
responsible.


RODZSSEN SUPPLY CO. INC., v. FAR EAST BANK & TRUST CO.
G.R. No. 109087, 9 May 2001, THIRD DIVISION (Panganiban, J.)
Far Easts right to seek recovery from petitioner is anchored, not upon the inefficacious Letter of Credit, but on Article 2142
of the Civil Code which reads as follows: Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense of another.

Rodzssen Supply, Inc. opened with Far East Bank and Trust Co. a 30-day domestic letter of credit, LC No. 52/0428/79-D, in
the amount of P190,000.00 in favor of Ekman and Company, Inc. (Ekman) for the purchase from the latter of five units of hydraulic
loaders.

Three units of the hydraulic loaders were delivered to Far East for which Rodzssen paid Ekman the sum of P114,000.00. The
shipment of the remaining two units of hydraulic loaders valued at P76,000.00 sent by Ekman was 'readily received by Far East
before the expiry dateof subject LC.

Upon Ekman's presentation of the documents for the P76,000.00 'representing final negotiation' on the LC before the
expiry date, and 'after a series of negotiations', Rodzssen paid to Ekman the amount of P76,000.00 and that upon Rodzssens
demand on Far East to pay for said amount (P76,000.00), Far East refused to pay ... without any valid reason.

Rodzssen prays for judgment ordering defendant to pay the abovementioned P76,000.00 plus due interest thereon, plus
25% of the amount of the award as attorney's fees

The Court of Appeals favored Rodzssen.

ISSUE:

Whether or not it is proper for a banking institution to pay a letter of credit which has long expired or been cancelled

HELD:

Petition GRANTED.

Rodzssen applied for and obtained an irrevocable 30-day domestic Letter of Credit from Far East Bank and Trust Company
Inc. on January 15, 1979, in favor of Ekman and Company Inc., in order to finance the purchase of five units of hydraulic loaders in
the amount of P190,000. Originally set to expire on February 15, 1979, the subject Letter of Credit was amended several times to
extend its validity until October 16, 1979.

The Letter of Credit expressly restricted the negotiation to respondent bank and specifically instructed Ekman and Company
Inc. to tender the following documents: (1) delivery receipt duly acknowledged by the buyer, (2) accepted draft, and (3) duly signed
commercial invoices. Likewise, the instrument contained a provision with regard to its expiration date.

For the first three hydraulic loaders that were delivered, the bank paid the amount specified in the letter of credit. The
present dispute pertains only to the last two hydraulic loaders.

Clearly, the bank paid Ekman when the former was no longer bound to do so under the subject Letter of Credit. The
records show that respondent paid the latter P76,000 for the last two hydraulic loaders on March 14, 1980,five months after the
expiration of the Letter of Credit. The subject Letter of Credit had become invalid upon the lapse of the period fixed therein. Thus,
respondent should not have paid Ekman; it was not obliged to do so. In the same vein, of no moment was Ekman's presentation,
within the prescribed period, of all the documents necessary for collection, as the Letter of Credit had already expired and had in
fact been cancelled.

Be that as it may, we agree with the CA that petitioner should pay respondent bank the amount the latter expended for the
equipment belatedly delivered by Ekman and voluntarily received and kept by petitioner.

Far Easts right to seek recovery from petitioner is anchored, not upon the inefficacious Letter of Credit, but on Article 2142
of the Civil Code which reads as follows: Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense of another."

Indeed, equitable considerations behoove us to allow recovery by respondent. True, it erred in paying Ekman, but
petitioner itself was not without fault in the transaction. It must be noted that the latter had voluntarily received and kept the
loaders since October 1979.Petitioner claims that it accepted the late delivery of the equipment, only because it was bound to
accept it under the company's trust receipt arrangement with respondent bank.

Granting that petitioner was bound under such arrangement to accept the late delivery of the equipment, we note its unexplained
inaction for almost four years with regard to the status of the ownership or possession of the loaders. Bewildering was its lack of
action to validate the ownership and possession of the loaders, as well as its stolidity over the purported failed sales transaction.
Significant too is the fact that it formalized its offer to return the two pieces of equipment only after respondent's demand for
payment, which came more than three years after it accepted delivery.

When both parties to a transaction are mutually negligent in the performance of their obligations, the fault of one cancels the
negligence of the other and, as in this case, their rights and obligations may be determined equitably under the law proscribing
unjust enrichment.

RAMON L. ABAD v. HON. COURT OF APPEALS &
THE PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK
G.R. No. L-42735, 22 January 1990, FIRST DIVISION (Grino-Aquino, J.)
It is only fair then that the importer's marginal deposit (if one was made, as in this case), should be set off against his debt,
for while the importer earns no interest on his marginal deposit, the bank, apart from being able to use said deposit for its own
purposes, also earns interest on the money it loaned to the importer. It would be onerous to compute interest and other charges on
the face value of the letter of credit which the bank issued, without first crediting or setting off the marginal deposit whi ch the
importer paid to the bank.

TOMCO, Inc., now known as Southeast Timber Co. Phils., Inc., applied for, and was granted by the Philippine Commercial
and Industrial Bank (PCIB), a domestic letter of credit for P 80,000 in favor of its supplier, Oregon Industries, Inc., to pay for one
Skagit Yarder with accessories. PCIB paid to Oregon Industries the cost of the machinery against a bill of exchange for P 80,000, with
recourse, presentment and notice of dishonor waived, and with date of maturity on January 4, 1964.

After making the required marginal deposit of P28,000, TOMCO, Inc. signed and delivered to the bank a trust receipt
acknowledging receipt of the merchandise in trust for the bank, with the obligation "to hold the same in storage" as property of
PCIB, with a right to sell the same for cash provided that the entire proceeds thereof are turned over to the bank, to be applied
against acceptance(s) and any other indebtedness of TOMCO, Inc.

In consideration of the release to TOMCO, Inc. by PCIB of the machinery covered by the trust receipt, Ramon Abad signed
an undertaking entitled, "Deed of Continuing Guaranty" appearing on the back of the trust receipt, whereby Abad promised to pay
the obligation jointly and severally with TOMCO, Inc. Except for TOMCO's P28,000 marginal deposit in the bank, no payment has
been made to PCIB by either TOMCO, Inc. or its surety, Abad, on the P80,000 letter of credit.

Thus, the bank sued TOMCO, Inc. and Abad. PCIB presented in evidence a "Statement of Draft Drawn" showing that TOMCO
was obligated to it in the total sum of P125,766.13. TOMCO, on the other hand, did not deny its liability to PCIB under the letter of
credit but it alleged that inasmuch as it made a marginal deposit of P28,000, this amount should have been deducted from its
principal obligation, leaving a balance of P52,000 only, on which the bank should have computed the interest, bank charges, and
attorney's fees.

The trial court rendered judgment in favor of PCIB ordering TOMCO, Inc. and Abad to pay jointly and severally to the bank
the sum of P125,766.13. The Court of Appeals, on the other hand, affirmed in toto the decision of the trial court.

ISSUE:

Whether or not TOMCO's marginal deposit of P28,000 in the possession of the bank should first be deducted from its principal
indebtedness before computing the interest and other charges due

HELD:

Petition GRANTED.

A trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not
have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit
except through utilization, as collateral of the merchandise imported or purchased, ... . The bank does not become the real owner of
the goods. It is merely the holder of a security title for the advances it had made to the importer. The goods the importer had
purchased through the bank financing, remain the importer's property and he holds it at his own risk. The trust receipt arrangement
does not convert the bank into an investor; it remains a lender and creditor. This is so because the bank had previously extended a
loan which the letter of credit represents to the importer, and by that loan, the importer should be the real owner of the goods. If
under the trust receipt, the bank is made to appear as the owner, it was but an artificial expedient, more of a l egal fiction than fact,
for if it were so, it could dispose of the goods in any manner it wants, which it cannot do, just to give consistency with the purpose of
the trust receipt of giving a stronger security for the loan obtained by the importer. To consider the bank as the true owner from the
inception of the transaction would be to disregard the loan feature involved.

A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-
up, a bank extends a loan covered by the letter of credit, with the trust receipt as a security for the loan. In other words, the
transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt. A
trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods. It secures an
indebtedness and there can be no such thing as security interest that secures no obligation.

The marginal deposit requirement is a Central Bank measure to cut off excess currency liquidity which would create inflationary
pressure. It is a collateral security given by the debtor, and is supposed to be returned to him upon his compliance with his secured
obligation. Consequently, the bank pays no interest on the marginal deposit, unlike an ordinary bank deposit which earns interest in
the bank. As a matter of fact, the marginal deposit requirement for letters of credit has been discontinued, except in those cases
where the applicant for a letter of credit is not known to the bank or does not maintain a good credit standing therein.

It is only fair then that the importer's marginal deposit (if one was made, as in this case), should be set off against his
debt, for while the importer earns no interest on his marginal deposit, the bank, apart from being able to use said deposit for its
own purposes, also earns interest on the money it loaned to the importer. It would be onerous to compute interest and other
charges on the face value of the letter of credit which the bank issued, without first crediting or setting off the marginal deposit
which the importer paid to the bank. Compensation is proper and should take effect by operation of law because the requisites in
Article 1279 of the Civil Code are present and should extinguish both debts to the concurrent amount (Art. 1290, Civil Code).
Although Abad is only a surety, he may set up compensation as regards what the creditor owes the principal debtor, TOMCO (Art.
1280, Civil Code).

It is not farfetched to assume that the bank used TOMCO's marginal deposit to partially fund the P80,000 letter of credit it
issued to TOMCO, hence, the interests and other charges on said letter of credit should be levied only on the balance of P52,000
which was the portion that was actually funded or loaned by the bank from its own funds. Requiring the importer to pay interest on
the entire letter of credit without deducting first him marginal deposit, would be a clear case of unjust enrichment by the bank.

THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK) vs. THE COURT OF APPEALS, CONTINENTAL CEMENT
CORPORATION, GREGORY T. LIM and SPOUSE
G.R. No. 114286, 19 April 2001, FIRST DIVISION (Ynares-Santiago, J.)
Indeed, it would be onerous to compute interest and other charges on the face value of the letter of credit which the petitioner
issued, without first crediting or setting off the marginal deposit which the respondent Corporation paid to it. Compensation is
proper and should take effect by operation of law because the requisites in Article 1279 of the Civil Code are present and should
extinguish both debts to the concurrent amount.

Continental Cement Corporation (Continental) and Gregory T. Lim obtained from Consolidated Bank and Trust Corporation
Letter of Credit in the amount of P1,068,150.00 On the same date, Continental paid a marginal deposit of P320,445.00 to
Consolidated Bank. The letter of credit was used to purchase around 500 thousand liters of bunker fuel oil from Petrophil
Corporation, which Petrophil delivered directly to Continental in its plant. In relation to the same transaction, a trust receipt for the
amount of P1,001,520.93 was executed by respondent Corporation, with Lim as signatory.

Claiming that Continental failed to turn over the goods covered by the trust receipt or the proceeds thereof, Consolidated
Bank filed a complaint for sum of money with application for preliminary attachment before the RTC. In answer to the complaint,
Continental averred that the transaction between them was a simple loan and not a trust receipt transaction, and that the amount
claimed by Consolidated did not take into account payments already made by them. Lim also denied any personal liability in the
subject transactions. Continental also prayed for reimbursement of alleged overpayment to Consolidated Bank of the amount of
P490,228.90.

The trial court dismissed the complaint ordering Consolidated Bank to pay Continental P490,228.90 representing
overpayment of respondent Corporation, with interest thereon among others. The CA modified the decision and deleted the
attorneys fees.

ISSUE:

Whether or not the marginal deposit made by Continental should be deducted outright from the amount of the letter of
credit

HELD:

Petition GRANTED.

Consolidated Bank decries the lack of computation by the RTC as basis for its ruling that there was an overpayment
made. While such a computation may not have appeared in the Decision itself, the Court notes that the RTCs finding of
overpayment is supported by evidence presented before it. At any rate, the Court painstakingly reviewed and computed the
payments together with the interest and penalty charges due thereon and found that the amount of overpayment made by
respondent Bank to petitioner, i.e., P563,070.13, was more than what was ordered reimbursed by the RTC. However, since
Continental did not file an appeal in this case, the amount ordered reimbursed by the RTC should stand.

Moreover, petitioners contention that the marginal deposit made by respondent Corporation should not be deducted
outright from the amount of the letter of credit is untenable. Consolidated Bank argues that the marginal deposit should be
considered only after computing the principal plus accrued interests and other charges. However, to sustain Consolidated Bank on
this score would be to countenance a clear case of unjust enrichment, for while a marginal deposit earns no interest in favor of the
debtor-depositor, the bank is not only able to use the same for its own purposes, interest-free, but is also able to earn interest on
the money loaned to respondent Corporation. Indeed, it would be onerous to compute interest and other charges on the face
value of the letter of credit which the petitioner issued, without first crediting or setting off the marginal deposit which the
respondent Corporation paid to it. Compensation is proper and should take effect by operation of law because the requisites in
Article 1279 of the Civil Code are present and should extinguish both debts to the concurrent amount.

Hence, the interests and other charges on the subject letter of credit should be computed only on the balance of
P681,075.93, which was the portion actually loaned by the Consolidated Bank to respondent Continental.

METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM (MWSS) vs. HON. REYNALDO B. DAWAY (RTC OFQUEZON CITY) AND
MAYNILAD WATER SERVICES, INC., respondents.
G.R. No. 160732, 21 June 2004, FIRST DIVISION (Azcuna, J.)
First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to answer for its
non-performance of certain terms and conditions of the Concession Agreement, particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties, but
only those claims against guarantors and sureties who are not solidarily liable with the debtor. Maynilads claim that the banks are
not solidarily liable with the debtor does not find support in jurisprudence.
What distinguishes letters of credit from other accessory contracts, is the engagement of the issuing bank to pay the seller once
the draft and other required shipping documents are presented to it. They are definite undertakings to pay at sight once the
documents stipulated therein are presented.

In 1997, MWSS granted Maynilad under a Concession Agreement a 20-year period to manage, operate, repair,
decommission and refurbish the existing MWSS water delivery and sewerage services in the West Zone Service Area, for which
Maynilad undertook to pay the corresponding concession fees which, among other things, consisted of payments of MWSS mostly
foreign loans. To secure the concessionaires performance of its obligations under the Concession Agreement, Maynilad was
required under Section 6.9 of said contract to put up a bond, bank guarantee or other security acceptable to MWSS. In compliance
with this requirement, Maynilad arranged for a 3-year facility with a number of foreign banks, led by Citicorp International Limited,
for the issuance of an Irrevocable Standby Letter of Credit in the amount of $120,000,000 in favor of MWSS for the full and prompt
performance of Maynilads obligations to MWSS.

In 2000, respondent Maynilad requested MWSS for a mechanism by which it hoped to recover the losses it had allegedly
incurred and would be incurring as a result of the depreciation of the Philippine Peso against the US Dollar. Failing to get what it
desired, Maynilad issued a Force Majeure Notice and unilaterally suspended the payment of the concession fees. In an effort to
salvage the Concession Agreement, the parties entered into a Memorandum of Agreement (MOA) wherein Maynilad was allowed to
recover foreign exchange losses under a formula agreed upon between them. Then, Maynilad again filed another Force Majeure
Notice and, since MWSS could not agree with the terms of said Notice, the matter was referred to the Appeals Panel for arbitration.
Thus, the Concession Agreement was amended (Amendment No. 1) which provided inter alia for a formula that would
allow Maynilad to recover foreign exchange losses it had incurred or would incur under the terms of the Concession Agreement.

However, Maynilad served upon MWSS a Notice of Event of Termination claiming that MWSS failed to comply with its
obligations. This matter was eventually brought before the Appeals Panel.The Appeals Panel ruled that there was no Event of
Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and that, therefore, Maynilad should pay the
concession fees that had fallen due. Thus, MWSS, thereafter, submitted a written notice to Citicorp International Limited, as agent
for the participating banks, that by virtue of Maynilads failure to perform its obligations under the Concession Agreement, it was
drawing on the Irrevocable Standby Letter of Credit and thereby demanded payment in the amount of US$98,923,640.15. Prior to
this, however, Maynilad had filed a petition for rehabilitation which resulted in the issuance of the Stay Order.

ISSUE:

Whether or not a stay-order issued by the rehabilitation court apply to the beneficiary of the letter of credit

HELD:

Petition DENIED.

The concept of guaranteevis--vis the concept of an irrevocable letter of credit are inconsistent with each other

Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports its claim that the commencement of
the process to draw on the Standby Letter of Credit is an enforcement of claim prohibited by and under the Interim Rules and the
order of Maynilad. This is erroneous.

First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to answer for its
non-performance of certain terms and conditions of the Concession Agreement, particularly the payment of concession fees.
Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties, but
only those claims against guarantors and sureties who are not solidarily liable with the debtor. Maynilads claim that the banks
are not solidarily liable with the debtor does not find support in jurisprudence.

In Feati Bank & Trust Company v. Court of Appeals, the Court held that the concept of guaranteevis--vis the concept of an
irrevocable letter of credit are inconsistent with each other. The guarantee theory destroys the independence of the banks
responsibility from the contract upon which it was opened and the nature of both contracts is mutually in conflict with each other. In
contracts of guarantee, the guarantors obligation is merely collateral and it arises only upon the default of the person pri marily
liable. On the other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. The Court also has also defined
a letter of credit as an engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts or
other demands of payment upon compliance with the conditions specified in the credit.

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of
documents and is thus a commitment by the issuer that the party in whose favor it is issued and who can collect upon it will have his
credit against the applicant of the letter, duly paid in the amount specified in the letter. They are in effect absolute undertakings to
pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not
accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty. What
distinguishes letters of credit from other accessory contracts, is the engagement of the issuing bank to pay the seller once the
draft and other required shipping documents are presented to it. They are definite undertakings to pay at sight once the
documents stipulated therein are presented.

Letters of Credits have long been and are still governed by the provisions of the Uniform Customs and Practice for
Documentary Credits of the International Chamber of Commerce. In the 1993 Revision it provides in Art. 2 that the expressions
Documentary Credit(s) and Standby Letter(s) of Credit mean any arrangement, however made or described, whereby a bank acting
at the request and on instructions of a customer or on its own behalf is to make payment against stipulated document(s) and Art. 9
thereof defines the liability of the issuing banks on an irrevocable letter of credit as a definite undertaking of the issuing bank,
provided that the stipulated documents are presented to the nominated bank or the issuing bank and the terms and conditions of
the Credit are complied with, to pay at sight if the Credit provides for sight payment.

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to MWSS

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to MWSS as the prohibition is on the enforcement
of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The participating banks
obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not
conditioned on the prior exhaustion of the debtors assets. These are the same characteristics of a surety or solidary obligor.

Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case.
Property of the surety cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can be sued separatel y to
enforce his liability as surety for the debts or obligations of the debtor. The debts or obligations for which a surety may be liable
include future debts, an amount which may not be known at the time the surety is given.

The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not solidary with
those of respondent Maynilad. On the contrary, it is issued at the request of and for the account of Maynilad Water Services, Inc., in
favor of the Metropolitan Waterworks and Sewerage System, as a bond for the full and prompt performance of the obligations by
the concessionaire under the Concession Agreement
[28]
and herein petitioner is authorized by the banks to draw on it by the simple
act of delivering to the agent a written certification substantially in the form Annex B of the Letter of Credit. It provides further in
Sec. 6, that for as long as the Standby Letter of Credit is valid and subsisting, the Banks shall honor any written Certification made by
MWSS in accordance with Sec. 2, of the Standby Letter of Credit regardless of the date on which the event giving rise to such Written
Certification arose.

Taking into consideration our own rulings on the nature of letters of credit and the customs and usage developed over the
years in the banking and commercial practice of letters of credit, we hold that except when a letter of credit specifically stipulates
otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its
issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set
of documents required therein.

TRANSFIELD PHILIPPINES, INC., v. LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and
SECURITY BANK CORPORATION
G.R. No. 146717, 22 November 2004, SECOND DIVISION (Tinga, J.)
The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privi ty and a
meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary
contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying
contract. Since the banks customer cannot draw on the letter, it does not function as an assignment by the customer to the
beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability followi ng a default.
Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft
presented under it is often negotiable.
There being no specific provisions which govern the legal complexities arising from transactions involving letters of credit, not
only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicabil ity of
the UCP is undeniable.
To say that the independence principle may only be invoked by the issuing banks would render nugatory the purpose for which
the letters of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both the issuing
bank and the beneficiary.

Transfield and Luzon Hydro Corporation (LHC) entered into a Turnkey Contract1 whereby Transfield, as Turnkey Contractor,
undertook to construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun River in the
provinces of Benguet and Ilocos Sur (the Project). Transfield was given the sole responsibility for the design, construction,
commissioning, testing and completion of the Project.

The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or such later date as
may be agreed upon; and (2) Transfield is entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract,
among which are variations, force majeure, and delays caused by LHC itself. To secure performance of Transfields obligation,
Transfield opened in favor of LHC two (2) standby letters of credit (the Securities) with the local branch of respondent Australia
and New Zealand Banking Group Limited (ANZ Bank) and Security Bank Corporation (SBC) each in the amount of US$8,988,907.00.

In the course of the construction of the project, Transfield sought various EOT to complete the Project. The extensions were
requested allegedly due to several factors. This gave rise to a series of legal actions between the parties which culminated in the
instant petition.

Thus, there was a arbitration proceedings before the International Chamber of Commerce (ICC). Foreseeing that LHC would call
on the Securities pursuant to the pertinent provisions of the Turnkey Contract, Transfield advised ANZ Bank and SBC bank of the
arbitration proceedings already pending. Transfield also warned advised ANZ Bank and SBC bank that any transfer, release, or
disposition of the Securities in favor of LHC or any person claiming under LHC would constrain it to hold respondent banks liable for
liquidated damages.

LHC sent notice to Transfield that it failed to comply with its obligation to complete the Project. Despite the letters of
Transfield, however, advised ANZ Bank and SBC bank informed Transfield that they would pay on the Securities if and when LHC calls
on them. LHC asserted that additional extension of time would not be warranted; accordingly it declared Transfield in default/delay
in the performance of its obligations under the Turnkey Contract and demanded from Transfield the payment of US$75,000.00 for
each day of delay until actual completion of the Project.

Transfield filed a Complaint for Injunction, with prayer for temporary restraining order and writ of preliminary injunction,
against respondents before the RTC. Transfield sought to restrain LHC from calling on the Securities and respondent banks from
transferring, paying on, or in any manner disposing of the Securities or any renewals or substitutes thereof. The RTC issued a
seventy-two (72)-hour TRO on the same day then extended it to 17 days.

The RTC, then denied petitioners application for a writ of preliminary injunction. It ruled that Transfield had no legal right and
suffered no irreparable injury to justify the issuance of the writ. Employing the principle of independent contract in letters of
credit, the RTC ruled that LHC should be allowed to draw on the Securities for liquidated damages. The RTC further ruled that the
banks were mere custodians of the funds and as such they were obligated to transfer the same to the beneficiary for as long as the
latter could submit the required certification of its claims.

The Court of Appeals failed to act on the application for preliminary injunction until the temporary restraining order expired.
Immediately thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby
reducing the balance in ANZ Bank to US$1,852,814.00. Then, it affirmed the RTC.

ISSUE:

Whether or not the independence principle may be invoked by the beneficiary where the beneficiarys call thereon is
wrongful or fraudulent

HELD:

1 Turnkey-often used to describe a home built on the developer's land with the developer's financing ready for the customer to move in. If a contractor builds a "turnkey home" they frame the structure and finish the
interior. Everything is completed down to the cabinets and carpet.

Petition DENIED.

Transfield contends that the courts below improperly relied on the independence principle on letters of credit when this
case falls squarely within the fraud exception rule. LHC deliberately misrepresented the supposed existence of delay despite its
knowledge that the issue was still pending arbitration. Transfield asserts that LHC should be ordered to return the proceeds of the
Securities pursuant to the principle against unjust enrichment and that, under the premises, injunction was the appropriate remedy
obtainable from the local courts.

At the core of the present controversy is the applicability of the independence principle and fraud exception rule in
letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as credits, would provide a
better perspective of the case.

The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both
privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party
beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the
underlying contract. Since the banks customer cannot draw on the letter, it does not function as an assignment by the customer to
the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a
default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional,
yet the draft presented under it is often negotiable.

In commercial transactions, a letter of credit is a financial 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. The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the sale of goods. However,
credits are also used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale
settings have come to be known as standby credits.

Commercial vs. Stand-by letters of credit

There are three significant differences between commercial and standby credits. First, commercial credits involve the payment
of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that
show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certi fication
of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the
applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his
contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract.

Letter of credit defined

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money
or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee.
[33]
A letter of credit,
however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract
between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties
thereto.

Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from time to
time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit
area. The vast majority of letters of credit incorporate the UCP.

In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., this Court ruled that the observance of the UCP is justified by
Article 2 of the Code of Commerce which provides that in the absence of any particular provision in the Code of Commerce,
commercial transactions shall be governed by usages and customs generally observed. More recently, in Bank of America, NT & SA
v. Court of Appeals, this Court ruled that there being no specific provisions which govern the legal complexities arising from
transactions involving letters of credit, not only between or among banks themselves but also between banks and the seller or
the buyer, as the case may be, the applicability of the UCP is undeniable.

Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on
which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to
such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate
and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his
relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships
existing between the banks or between the applicant and the issuing bank.

Doctrine of independence

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required
documents are presented to it. The so-called independence principle assures the seller or the beneficiary of prompt payment
independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is
actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the
documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person
whomsoever.

The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the
justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both cases the payment may be enjoined if in the light of the purpose
of the credit the payment of the credit would constitute fraudulent abuse of the credit.

The beneficiary can invoke the independence principle

As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a
definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated documents are presented and the
conditions of the credit are complied with. Precisely, the independence principle liberates the issuing bank from the duty of
ascertaining compliance by the parties in the main contract. As the principles nomenclature clearly suggests, the obligation under
the letter of credit is independent of the related and originating contract. In brief, the letter of credit is separate and distinct from
the underlying transaction.

Given the nature of letters of credit, Transfields argumentthat it is only the issuing bank that may invoke the independence
principle on letters of creditdoes not impress this Court. To say that the independence principle may only be invoked by the
issuing banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the
independence doctrine works to the benefit of both the issuing bank and the beneficiary.

Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the issuing
bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the issuing bank, the party
who applied for and obtained it may confidently present the letter of credit to the beneficiary as a security to convince the
beneficiary to enter into the business transaction. On the other hand, the other party to the business transaction,i.e., the
beneficiary of the letter of credit, can be rest assured of being empowered to call on the letter of credit as a security in case the
commercial transaction does not push through, or the applicant fails to perform his part of the transaction. It is for this reason that
the party who is entitled to the proceeds of the letter of credit is appropriately called beneficiary.

Transfields argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration,
before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere guarantee.
Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement of a dispute
between the parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the argument is
incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the
contract entered into by the applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in
commercial transactions.

Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue: The standby credit is an
attractive commercial device for many of the same reasons that commercial credits are attractive. Essentially, these credits are
inexpensive and efficient. Often they replace surety contracts, which tend to generate higher costs than credits do and are usually
triggered by a factual determination rather than by the examination of documents.

Because parties and courts should not confuse the different functions of the surety contract on the one hand and the
standby credit on the other, the distinction between surety contracts and credits merits some reflection. The two commercial
devices share a common purpose. Both ensure against the obligors nonperformance. They function, however, in distinctly
different ways.

Traditionally, upon the obligors default, the surety undertakes to complete the obligors performance, usually by hiring
someone to complete that performance. Surety contracts, then, often involve costs of determining whether the obligor defaulted (a
matter over which the surety and the beneficiary often litigate) plus the cost of performance. The benefit of the surety contract to
the beneficiary is obvious. He knows that the surety, often an insurance company, is a strong financial institution that will perform if
the obligor does not. The beneficiary also should understand that such performance must await the sometimes lengthy and costly
determination that the obligor has defaulted. In addition, the suretys performance takes time.

The standby credit has different expectations. He reasonably expects that he will receive cash in the event of
nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor (the applicant) over
the nature of the applicants performance takes place. The standby credit has this opposite effect of the surety contract: it reverses
the financial burden of parties during litigation.

In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of the
obligors performance. The beneficiary may have to establish that fact in litigation. During the litigation, the surety holds the money
and the beneficiary bears most of the cost of delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon
presentation of the required documents. It may be that the applicant has, in fact, performed and that the beneficiarys presentation
of those documents is not rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of warranty;
but, during the litigation to determine whether the applicant has in fact breached the obligation to perform, the beneficiary, not the
applicant, holds the money. Parties that use a standby credit and courts construing such a credit should understand this allocation
of burdens. There is a tendency in some quarters to overlook this distinction between surety contracts and standby credits and to
reallocate burdens by permitting the obligor or the issuer to litigate the performance question before payment to the beneficiary.
[42]

While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the
credit by allowing him to draw thereon. The situation itself emasculates petitioners posture that LHC cannot invoke the
independence principle and highlights its puerility, more so in this case where the banks concerned were impleaded as parties by
petitioner itself.

ANZ Bank and SBC Bank had squarely raised the independence principle to justify their releases of the amounts due under the
Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent banks were left
with little or no alternative but to honor the credit and both of them in fact submitted that it was ministerial for them to honor the
call for payment.

A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated but also to all the
consequences which according to their nature, may be in keeping with good faith, usage, and law. A careful perusal of the Turnkey
Contract reveals the intention of the parties to make the Securities answerable for the liquidated damages occasioned by any
delay on the part of petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an
alternative recourse available to it upon the happening of the contingency for which the Securities have been proffered. Thus, even
without the use of the independence principle, the Turnkey Contract itself bestows upon LHC the right to call on the Securi ties in
the event of default.

Fraud exemption principle; The remedy for fraudulent abuse is an injunction.

It is worthy of note that the propriety of LHCs call on the Securities is largely intertwined with the fact of default which is the
self-same issue pending resolution before the arbitral tribunals. To be able to declare the call on the Securities wrongful or
fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of delay in the performance of its
obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of defaultsuch issue having been
submitted by the parties to the jurisdiction of the arbitral tribunals pursuant to the terms embodied in their agreement.

Most writers agree that fraud is an exception to the independence principle. The untruthfulness of a certificate
accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against
payment. The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless:
(a) there is clear proof of fraud;
(b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main
agreement; and
(c) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged.

Generally, injunction is a preservative remedy for the protection of ones substantive right or interest; it is not a cause of action
in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary
or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance
of the case, the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by
law.

Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right
to be protected and that the acts against which the writ is to be directed are violative of the said right.
[52]
It must be shown that the
invasion of the right sought to be protected is material and substantial, that the right of complainant is clear and unmistakable and
that there is an urgent and paramount necessity for the writ to prevent serious damage.
[53]
Moreover, an injunctive remedy may
only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any
standard compensation.

In the instant case, Transfield failed to show that it has a clear and unmistakable right to restrain LHCs call on the Securities
which would justify the issuance of preliminary injunction. By Transfields own admission, the right of LHC to call on the Securities
was contractually rooted and subject to the express stipulations in the Turnkey Contract. Indeed, the Turnkey Contract is plain and
unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of default.

The pendency of the arbitration proceedings would not per se make LHCs draws on the Securities wrongful or fraudulent
for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be
settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to
conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality
on the existence of default.

Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke
the fraud exception rule as a ground to justify the issuance of an injunction. What petitioner did assert before the courts below
was the fact that LHCs draws on the Securities would be premature and without basis in view of the pending disputes between
them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance
of an injunctive relief. Matters, theories or arguments not brought out in the proceedings below will ordinarily not be considered by
a reviewing court as they cannot be raised for the first time on appeal. The lower courts could thus not be faulted for not applying
the fraud exception rule not only because the existence of fraud was fundamentally interwoven with the issue of default still
pending before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the courts
below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHCs call upon the
Securities.

BANK OF COMMERCE v. TERESITA S. SERRANO
G.R. No. 151895, 16 February 2005, FIRST DIVISION (Quisumbing, J.)
A letter of credit is a separate document from a trust receipt. While the trust receipt may have been executed as a security on the
letter of credit, still the two documents involve different undertakings and obligations. A letter of credit 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 specified in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for the
promise to pay of 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.

Bank of Commerce (formerly Boston Bank of the Philippines) is a private domestic banking institution. Teresita S. Serrano is the
General Manager and Treasurer of Via Moda International, Inc., a domestic business entity primarily engaged in the import and
export of textile materials and fabrics. Via Moda represented by Serrano, obtained an export packing loan from petitioner, Bank of
Commerce (BOC)-Diliman Branch, in the amount of US$50,000 (P1,382,250), secured by a Deed of Assignment over Irrevocable
Transferable Letter of Credit. Serrano executed in favor of BOC Promissory Note for US$50,000 with maturity date. Via Moda then
opened a deposit account for the proceeds of the said loan.

BOC issued to Via Moda, Irrevocable Letter of Credit, in the amount of US$56,735, for the purchase and importation of fabric
and textile products from Tiger Ear Fabric Co. Ltd. of Taiwan. To secure the release of the goods covered, Serramio, in
representation of Via Moda, executed Trust Receipt for US$55,944.73 (P1,554,424.32). Under the terms of the trust receipt, Via
Moda agreed to hold the goods in trust for BOC as the latters property and to sell the same for the latters account. In case of sale,
the proceeds are to be remitted to the bank as soon as it is received, but not later than the maturity date. Said proceeds are to be
applied to the relative acceptances, with interest at the rate of 26% per annum, with a penalty of 36% per annum of the total
amount due until fully paid in case of non-payment of the trust receipt and relative acceptance at maturity date or, in the
alternative, to return the goods in case of non-sale.

The goods covered by the trust receipt were shipped by Via Moda to its consignee in New Jersey, USA, who sent an Export
Letter of Credit issued by the Bank of New York, in favor of BOC. The total value of the entrusted goods which were shipped per
export declaration was US$81,987 (P2,246,443.80). The proceeds of the entrusted goods sold were not credited to the trust receipt
but, were applied by the bank to the principal, penalties and interest of the export packing loan. The excess P472,114.85 was applied
to the trust receipt, leaving a balance ofP1,444,802.28.

BOC sent a demand letter to Via Moda to pay the said amount plus interest and penalty charges, or to return the goods
covered by Trust Receipt within 5 days from receipt. The demand was not heeded. The outstanding balance of Via Moda
was P4,783,487.15. Thus, Serrano was charged with the crime of estafa. The trial court found Serrano guilty. The CA acquitted her,
on the other hand.

ISSUE:

Petition Serrano and Via Moda are solidarily liable

HELD:

Petition

A letter of credit is a separate document from a trust receipt. While the trust receipt may have been executed as a
security on the letter of credit, still the two documents involve different undertakings and obligations. A letter of credit 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 specified in the credit. Through a letter of credit, the bank merely substitutes its
own promise to pay for the promise to pay of 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. By contrast, a trust receipt transaction is
one where the entruster, who holds an absolute title or security interests over certain goods, documents or instruments, released
the same to the entrustee, who executes a trust receipt binding himself to hold the goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents and instruments with the obligation to turn over to the entruster
the proceeds thereof to the extent of the amount owing to the entruster, or as appears in the trust receipt, or return the goods,
documents or instruments themselves if they are unsold, or not otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt.

However, the question of the liability of respondent based on the Guarantee Clause of the Letter of Credit, was not raised
either at the trial court or before the Court of Appeals. A question that was never raised in the courts below cannot be allowed to
be raised for the first time on appeal without offending basic rules of fair play, justice and due process. Such an issue was not
brought to the fore either in the trial court or the appellate court, and would have been disregarded by the latter tribunal for the
reasons previously stated. With more reason, the same does not deserve consideration by this Court.

On the second issue, the Court of Appeals held that respondent Serrano cannot be held civilly liable under the trust receipt
since she was not made personally liable nor was she a guarantor therein. The parties stipulated during the pre-trial that
respondent Serrano executed the trust receipt in representation of Via Moda, Inc., which has a separate personality from Serrano,
and petitioner BOC failed to show sufficient reason to justify the piercing of the veil of corporate fiction. It thus ruled that this was
not Serranos personal obligation but that of Via Moda and there was no basis of finding her solidarily liable with Via Moda.

Worthy of mention at this point is the Court of Appeals finding that there was no misappropriation or conversion by the
Serrano of the proceeds of the sale in the goods, subject of the trust receipt since the proceeds were actually received by petitioner
but the latter applied the same to Via Modas other obligations under the export packing loan. It further stated that such application
of payment to another obligation was done by petitioner on its own and should not create a criminal liability on the part of
respondent who did not take part nor had any knowledge thereof. It is on this premise that the respondent was acquitted of the
crime charged.

At any rate, petitioner BOC is not precluded from filing a separate civil action against the responsible party where the
abovementioned issues could be properly resolved or determined. The issues raised by BOC involve a determination of facts and
require the admission and examination of additional evidence for its resolution. That cannot be done in a petition for review
oncertiorari by merely appealing the civil aspect of an acquittal in a criminal case.

LAND BANK OF THE PHILIPPINES vs. MONETS EXPORT AND MANUFACTURING CORPORATION, SPOUSES VICENTE V. TAGLE, SR.
and MA. CONSUELO G. TAGLE
G.R. No. 161865, 10 March 2005, FIRST DIVISION (Ynares-Santiago,J.)
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.
Land Bank of the Philippinesand Monets Export and Manufacturing Corporation (Monet) executed an Export Packing Credit
Line Agreement under which Monet was given a credit line in the amount of P250,000.00, secured by the proceeds of its export
letters of credit, the continuing guaranty of the spouses Vicente V. Tagle, Sr. and Ma. Consuelo G. Tagle, and the third party
mortgage executed by Pepita C. Mendigoria.

The credit line agreement was renewed and amended several times until it was increased to P5,000,000.00. Owing to the
continued failure and refusal of Monet, notwithstanding repeated demands, to pay its indebtedness to Land Bank, which have
ballooned to P11,464,246.19, a complaint for collection of sum of money with prayer for preliminary attachment was filed by Land
Bank with the RTC.

In their joint Answer with Compulsory Counterclaim, Monet and the Tagle spouses alleged that Land Bank failed and
refused to collect the receivables on their export letter of credit against Wishbone Trading Company of Hong Kong in the sum of
US$33,434.00, while it made unauthorized payments on their import letter of credit to Beautilike (H.K.) Ltd. in the amount of
US$38,768.40, which seriously damaged the business interests of Monet.

The RTC granted the counter-claim. On the other hand, the Court of Appeals affirmed the RTC. In affirming the RTC, the CA
found that, indeed, Land Bank was responsible for the mismanagement of the Wishbone and Beautilike accounts of Monet. It held
that because of the non-collection and unauthorized payment made by Land Bank on behalf of Monet, and considering that the
latter could no longer draw from its credit line with Land Bank, it suffered from lack of financial resources sufficient to buy the
needed materials to fill up the standing orders from its customers.

ISSUES:

1. Whether or not Land Bank failed to protect Monets interest when it paid the suppliers despite discrepancies in the
shipment vis--vis the order specifications of Monet
2. Whether or not

HELD:

Petition GRANTED.

As regards the Beautilike account, the RTC and the CA erred in holding that Land Bank failed to protect Monets interest
when it paid the suppliers despite discrepancies in the shipment vis--vis the order specifications of Monet.

A letter of credit is a financial 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.

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 finds 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 acqui res the
said documents and control over the goods only after reimbursing the bank.

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.

Moreover, Article 3 of the Uniform Customs and Practice (UCP) for Documentary Credits provides that credits, by their
nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way
concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit.
Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under
the credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the
beneficiary.

In particular, Article 15 of the UCP states: Banks assume no liability or responsibility for the form, sufficiency, accuracy,
genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the
documents or superimposed thereon; nor do they assume any liability or responsibility for the description, weight, quality,
condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person
whomsoever.

In Transfield Philippines, Inc. v. Luzon Hydro Corporation, et al., it was held that the engagement of the issuing bank is to pay
the seller or beneficiary of the credit once the draft and the required documents are presented to it. The so-called independence
principle assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes
the issuing bank from determining whether the main contract is actually accomplished or not.

For, if the letter of credit is drawable only after the settlement of any dispute on the main contract entered into by the
applicant of the said letter of credit and the beneficiary, then there would be no practical and beneficial use for letters of credit in
commercial transactions.

Accordingly, the Court finds merit in the contention of Land Bank that, as the issuing bank in the Beautilike transaction
involving an import letter of credit, it only deals in documents and it is not involved in the contract between the parties. The
relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting
of the minds are lacking. Thus, upon receipt by Land Bank of the documents of title which conform with what the letter of credit
requires, it is duty bound to pay the seller, as it did in this case.

Thus, no fault or acts of mismanagement can be attributed to Land Bank relative to Monets import letter of credit. Its
actions find solid footing on the legal principles and jurisprudence earlier discussed. Consequently, it was error for the trial court
and for the Court of Appeals to grant opportunity losses to the respondents on this account.

On the matter, however, of the Wishbone transaction where it is alleged by respondents that petitioner failed in its duty to
protect its (Monets) interest in collecting the amount due to it from its customers, we find that the trial court and the Court of
Appeals committed no reversible error in holding Land Bank liable for opportunity losses.

Land Banks refusal to own its responsibility in the handling of the Wishbone account fails against the aforequoted provision. As
the attorney-in-fact of Monet in transactions involving its export letters of credit, such as the Wishbone account, Land Bank should
have exercised the requisite degree of diligence in collecting the amount due to the former. The records of this case are bereft of
evidence showing that Land Bank exercised the prudence mandated by its contractual obligations to Monet.

The failure of Land Bank to judiciously safeguard the interest of Monet is not without any repercussions vis--vis the viability of
Monet as a business enterprise. As correctly observed by the Court of Appeals:
In fine, because of the non-collection defendants-appellees suffered from a lack of financial resources sufficient to buy new
materials. And since they also could no longer draw on their existing credit line with Landbank, they could not purchase materials to
fill up the orders of their customers. Because of this the business reputation of Monets suffered which hastened its decline.

The right of the respondents to be awarded opportunity losses having been established, we now go to the determination of the
proper amount to be awarded to them under the circumstances obtaining in this case. The lower court awarded to herein
respondents opportunity losses in the amount of US$30,000.00 based on its findings of two (2) acts of mismanagement committed
by Land Bank. The Court of Appeals affirmed the amount of the award in the assailed decision. In view of our findings that Land
Bank is not guilty of mismanagement in its handling of Monets import letter of credit relative to the Beautilike transaction, we hold
that a reduction of the amount of the grant is in order. It is not possible for us to totally do away with the award of opportunity
losses having affirmed the findings of the trial court and the Court of Appeals that Land Bank, as the attorney-in-fact of Monet in its
transaction with Wishbone Trading Company, committed acts of mismanagement. On account of the foregoing reasons, we reduce
the amount of opportunity losses granted to Monet to US$15,000.00 payable in Philippine pesos at the official exchange rate when
payment is to be made.

TRUST RECEIPT LAW

FERNANDO ONG v. CA and Judge FIDEL P. PURISIMA
G.R. No. L-58476, 2 September 1983, FIRST DIVISION (Relova, J.)
Compromise of estafa case arising from trust receipt transaction, after the case has been filed in court does not amount to novation
and does not erase the criminal liability of the accused.

An information for estafa was filed before the CFI of Manila alleging that Fernando Ong obtained and received from Tramat
Mercantile, Inc. (Tramat) several units of machineries for a total value of P 133,550.00, in trust, for the purpose of displaying and
selling the machineries for cash, under the express obligation on the part of Ong of turning over to Tramat the proceeds from the
sale thereof , if sold, or of returning to the latter the said goods, if not sold, within 90 days, or immediately upon demand. Ong then
failed to turn over the proceeds of the sale or to return the goods under the aforementioned covenant.

The parties then entered into a compromise agreement to settle the claim in said civil case which the Trial Court approved.
Thereafter, Ong moved for the dismissal of the criminal charge of estafa on the ground of novation because of the compromise
agreement entered into between Ong and Tramat. The motion however was denied.

ISSUE:

Whether or not a compromise of estafa arising from a trust receipt transaction amounts to novation and thus, erase the
criminal liability of the accused

HELD:

Petition DENIED.

The novation theory may perhaps apply prior to the filing of the criminal Information in Court by the state prosecutors
because up to that time, the original trust relation may be converted by the parties into an ordinary creditor-debtor situation,
thereby placing the complainant in estoppel to insist on the original trust. But after the justice authorities have taken cognizance of
the crime and instituted action in Court, the offended party may no longer divest the prosecution of its power to exact the
criminal liability, as distinguished from the civil. The crime being an offense against the state, only the latter can renounce it
[People vs. Gervacio, 54 Off. Gaz., 2898: People vs. Velasco, 42 Phil., 76; U.S. vs. Montaes, 8 Phil. 620].

It may be observed in this regard that novation is not one of the means recognized by the Penal Code whereby criminal
liability can be extinguished; hence, the role of novation may only be to either prevent the rise of criminal liability or to cast doubt
on the true nature of the original basic transaction, whether or not it was such that its breach would not give rise to penal
responsibility, as when money loaned is made to appear as a deposit, or other similar disguise is resorted to.

SPOUSES TIRSO I. VINTOLA and LORETO DY VINTOLA v.
INSULAR BANK OF ASIA AND AMERICA
G.R. No. 73271, 29 May 1987, FIRST DIVISION (Melencio-Herrera, J.)
A trust receipt is a security agreement pursuant to which a bank acquires a security interest in goods. It secures an
indebtedness and there can be no such thing as security interest that secures no obligation. Since the entrustee under the trust
receipt is the real owner of the goods and a trust receipt is a security agreement, the entrustee cannot pay for his loan by
surrendering the goods if the lender is not willing to accept them. Also the acquittal of the entrustee in the criminal case as a result of
the surrender or consignation of the goods is not a bar to the filing of a separate civil action to enforce payment of the loan

In 1975 the spouses Tirso and Loreta Vintola (the Vintolas), doing business under the name and style "Dax Kin
International," engaged in the manufacture of raw sea shells into finished products, applied for and were granted a domestic letter
of credit by the Insular Bank of Asia and America (IBAA), Cebu City in the amount of P40,000.00. The Letter of Credit authorized the
bank to negotiate for their account drafts drawn by their supplier, one Stalin Tan, on Dax Kin International for the purchase of puka
and olive seashells. In consideration thereof, the VINTOLAS, jointly and severally, agreed to pay the bank.

Correspondingly, having received from Stalin Tan the puka and olive shells worth P40,000.00, the VINTOLAS executed a
Trust Receipt agreement with IBAA, Cebu City. Under that Agreement, the VINTOLAS agreed to hold the goods in trust for IBAA as
the "latter's property with liberty to sell the same for its account, "and "in case of sale" to turn over the proceeds as soon as received
to IBAA. VINTOLAS however defaulted and thus, IBAA demanded payment in a letter. The VINTOLAS, who were unable to dispose of
the shells, responded by offering to return the goods. IBAA refused to accept the merchandise, and due to the continued refusal of
the VINTOLAS to make good their undertaking, IBAA charged them with Estafa for having misappropriated, misapplied and
converted for their own personal use and benefit the aforesaid goods. During the trial, the VINTOLAS turned over the seashells to
the custody of the Trial Court.

The CFI of Cebu acquitted the Vintolas after finding that the element of misappropriation or, conversion was inxistent.
Accordingly, under trust receipt, in case of default or non-fulfillment on the part of the accused in their undertaking the bank is
entitled to take possession of the goods or to recover its equivalent value together with the usual charges. Thus, the remedy is civil
and not criminal in nature.

IBAA then commenced the civil action to recover the value of the goods before the RTC of Cebu but the same was
dismissed because of the acquittal in the criminal case. According to the Vintolas, their acquittal in the Estafa case bars IBAA's filing
of the civil action because IBAA had not reserved in the criminal case its right to enforce separately their civil liability. They maintain
that by intervening actively in the prosecution of the criminal case through a private prosecutor, IBAA had chosen to file the civil
action impliedly with the criminal action and that since the judgment in the criminal case had made a declaration that the facts from
which the civil action might arise did not exist, the filing of the civil action arising from the offense is now barred. Further, the
VINTOLAS take the position that their obligation to IBAA has been extinguished when they were unable to dispose of the seashells,
and that they have relinquished possession thereof to the IBAA, as owner of the goods, by depositing them with the Court.

ISSUE:

Whether or not the acquittal of the entrustee in the criminal case as a result of the surrender or consignation of the goods
is a bar to the filing of a separate civil action to enforce payment of the loan

HELD:

Petition DENIED.

A letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-
up, a bank extends a loan covered by the Letter of Credit, with the trust receipt as a security for the loan. In other words, the
transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt.

Thus, Section 4 of P.D. No. 115 defines a trust receipt transaction as any transaction by and between a person (entruster),
and another (entrustee), whereby the entruster, who owns or holds absolute title or security interests over certain specified goods,
documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the
entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instrument thereof
to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust
receipt, or for other purposes like in case of goods or documents, to sell the goods or procure their sale. A trust receipt, therefore, is
a security agreement, pursuant to which a bank acquires a "security interest" in the goods. "It secures an indebtedness and there
can be no such thing as security interest that secures no obligation." A security interest means a property interest in goods,
documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and
includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only.

As elucidated in Samo vs. People

a trust receipt is considered as a security transaction intended to aid in financing
importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise,
and who may not be able to acquire credit except through utilization, as collateral of the merchandise imported or purchased."

Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was merely the holder of a
security title for the advances it had made to the VINTOLAS. The goods the VINTOLAS had purchased through IBAA financing remain
their own property and they hold it at their own risk. The trust receipt arrangement did not convert the IBAA into an investor; the
latter remained a lender and creditor. If under the trust receipt, the bank is made to appear as the owner, it was but an artificial
expedient, more of a legal fiction than fact, for if it were so, it could dispose of the goods in any manner it wants, which it cannot do,
just to give consistency with the purpose of the trust receipt of giving a stronger security for the loan obtained by the importer. To
consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature thereof.

Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that because they have
surrendered the goods to IBAA and subsequently deposited them in the custody of the court, they are absolutely relieved of their
obligation to pay their loan because of their inability to dispose of the goods. The fact that they were unable to sell the seashells in
question does not affect IBAA's right to recover the advances it had made under the Letter of Credit.

Thus, it follows that the acquittal of the VINTOLAS in the Estafa case is no bar to the institution of a civil action for
collection. It is inaccurate for the VINTOLAS to claim that the judgment in the estafa case had declared that the facts from which the
civil action might arise, did not exist, for, it will be recalled that the decision of acquittal expressly declared that "the remedy of the
Bank is civil and not criminal in nature." The VINTOLAS are liable ex contractu for breach of the Letter of Credit Trust Receipt,
whether they did or they did not "misappropriate, misapply or convert" the merchandise as charged in the criminal case. Their civil
liability does not arise ex delicto, the action for the recovery of which would have been deemed instituted with the criminal-action
(unless waived or reserved) and where acquittal based on a judicial declaration that the criminal acts charged do not exist would
have extinguished the civil action. Rather, the civil suit instituted by IBAA is based ex contractu and as such is distinct and
independent from any criminal proceedings and may proceed regardless of the result of the latter.

TRINIDAD RAMOS v. THE HONORABLE COURT OF APPEALS and PEOPLE OF THE PHILIPPINES
G.R. No. L-39922-25, 21 August 1987, FIRST DIVISION (Narvasa, J.)
Where the proof of delivery of goods covered by a trust receipt to the accused is insufficient, conviction of estafa cannot lie.
Introduction of commercial invoices attached to the applications for letters of credit and of trust receipts, where such invoices are
actually not more than the list of items sought to be purchased and their prices, does not amount to delivery receipt.

The accused, Trinidad Ramos, filed with the Philippine National Cooperative Bank (PNCB) 4 applications for letters of
credit amounting to P10,000.00, P22,300.00, P24,000.00 and P24,600.00 respectively. After the applications were processed and
approved, domestic letters of credit were opened and in the amounts applied for. Among the papers filed for the issuance of the
domestic letters of credit were commercial invoices of the different suppliers of the merchandise sought to be purchased. The
different suppliers then drew sight drafts against the applicant payable to the order of the PNCB. The PNCB then drew its own drafts
against the accused as the buyer of the merchadise and which drafts were accepted by the accused. After such acceptance, the
corresponding trust receipts. The 4 trust receipts uniformly contain that the accused acknowledged to have received in trust from
the PNCB the merchandise covered by the above-mentioned documents and agrees to hold said merchandise in storage as the
property of said bank, with the liberty to sell the same for cash and for its account provided the proceeds thereof are turned over in
their entirety to the said bank to be applied against any acceptance(s) and any other indebtedness of the undersigned to the said
bank.

Accordingly, the drafts were supposed to be due in 90 days from the dates thereof. Yet, no payments were made excepting
a partial payment of P3,900.00, for the account under the letter of credit No. 006; and another partial payment of P2,000.00 on the
same letter of credit. These partial payments were evidently in pursuance of written demands for payment addressed by the PNCB
to the accused.

Trinidad Ramos pleads for acquittal. She asserts that it behooved the prosecution, which had charged her with estafa under
Article 315, par. 1 (b) of the RPC, to prove the essential elements thereof, numbering four, to wit: (1) that the accused received the
thing subject of the offense; (2) that the thing received is personal property susceptible of appropriation; (3) that the thing was
received for safe-keeping, or on commission, or for administration, or under any other obligation involving the duty to make delivery
of or return the same; and (4) that there was misappropriation or conversion by the accused of the thing received to the prejudice of
another. But, she contends, in her case (1) that there is no adequate proof of her receipt of the goods subject of the trust receipts
in question or of her having paid anything on account thereof or in connection therewith; (2) that complainant Bank had suffered
no damage whatever, since it had made no payment at all on account of the commercial invoices for which the trust receipts were
issued; and (3) that under the laws at the time, transactions involving trust receipts could only give rise to purely civil liability.

ISSUE:

Whether or not the introduction of commercial invoices attached to the applications for L/C and or trust receipts amount to
delivery of receipt

HELD:

Petition GRANTED.

Examined against the evidence of record, the assailed factual findings as to the receipt of the merchandise and the damage
sustained by the Bank cannot stand. The proofs are indeed inadequate on these propositions of fact. It is diffi cult to accept the
prosecution's theory that it has furnished sufficient proof of delivery by the introduction in evidence of the commercial invoices
attached to the applications for the letters of credit and of the trust receipts. The invoices are actually nothing more than lists of
the items sought to be purchased and their prices; and it can scarcely be believed that goods worth no mean sum actually
transferred hands without the unpaid vendor requiring the vendee to acknowledge this fact in some way, even by a simple
signature on these documents alone if not in fact by the execution of some appropriate document, such as a delivery receipt.

The trust receipts do not fare any better as proofs of the delivery to Ramos of the goods. Except for the invoices, an
documents relating to each trust receipt agreement, including the trust receipts themselves, appear to be standard Bank forms
accomplished by the Bank personnel, and were all signed by Ramos in one sitting, no doubt with a view to facilitating the pending
transactions between the parties. If, as she claims, Ramos was made to believe that bank usage or regulations require the signing of
the papers in this way, i.e., on a single occasion, there was neither reason nor opportunity for her to question the statement therein
of receipt of the goods since it was evidently assumed that delivery to her of the goods would shortly come to pass.

At any rate, Ramos has categorically and consistently denied ever having received the goods either from the Bank or the
suppliers. And this was because, according to her, the suppliers simply refused to part with the goods as no payment had been made
therefor by the Bank. Now, the issue could quite easily have been resolved by the production of the delivery receipts or the
testimony of the employees who made the supposed deliveries. And the prosecution could not have been unaware of such
evidence, its ready accessibility, and its importance, specially after the appellant had disclaimed receipt of the goods in question.
Certainly, this omission cannot be taken against the accused, who is presumed innocent until the contrary is proved beyond
reasonable doubt. It is after all the duty of the prosecution to establish the existence of all the elements of the crime charged.

The State however insists that Ramos' receipt of the goods is proven by the fact that she made marginal fee deposits on all
the letters of credit, and also tendered partial payments for the merchandise subject of the first trust receipt. But evidence of these
supposed deposits and payments is no less flimsy too. The only document presented in proof of the deposit of marginal fees was
Ramos' Statement of Account prepared by the complainant Bank. But no receipt for the claimed deposits was ever produced. On the
other hand, the prosecution offered two official receipts in evidence ostensibly showing that Ramos remitted partial payments to
the Bank for the goods allegedly received under the first trust receipt transaction. Yet these payments supposedly made on May
20 and May 28, 1965 are not even reflected in the 1967. Furthermore, although both PNCB receipts indicate that checks were
given in payment, the encashed checks were never exhibited, nor any reason advanced for their non-production.

The omission to present obvious and available primary items of proof is also perceived in the attempted substantiation of
the claim that the Bank paid the suppliers for the goods, and thereby suffered damage. Under its standard procedures, the Bank
effects payment on a negotiated letter of credit by the issuance of a check, the cancelled check being the invariable proof that
negotiation has been consummated. Again, not one such check issued by the Bank to the suppliers was ever submitted, or any
receipt signed by any supplier, or any of the Bank's books, ledgers, or journals reflecting any of the disbursements, in settlement of
Ramos' accounts with her suppliers.

ALLIED BANKING CORPORATION v. HON. SECRETARY SEDFREY ORDOEZ (Public Respondent) and ALFREDO CHING (Private
Respondent)
G.R. No. 82495, 10 December 1990, SECOND DIVISION (Padilla, J.)
PD 115 encompasses any act violative of an obligation covered by the trust receipt; it is not limited to the transactions in goods which
are to be sold.

In 1981, Philippine Blooming Mills (PBM) thru its duly authorized officer, Alfredo Ching (Ching), applied for the issuance of
commercial letters of credit with Allied Bank's Makati branch to finance the purchase of 500 M/T Magtar Branch Dolomites and one
(1) Lot High Fired Refractory Sliding Nozzle Bricks. Thus, the Bank issued an irrevocable L/C in favor of Nilkko Industry Co., Ltd.
(Nikko) by virtue of which Nikko drew 4 drafts which were accepted by PBM and duly honored and paid by the petitioner bank. To
secure payment of the amount covered by the drafts, and in consideration of the transfer by petitioner of the possession of the
goods to PBM, the latter as entrustee, thru private respondent, executed four (4) Trust Receipt Agreements acknowledging Allied's
ownership of the goods and its (PBM'S) obligation to turn over the proceeds of the sale of the goods, if sold, or to return the same, if
unsold within the stated period.

Despite demands however, PBM failed and refused to turn over of the proceeds of the sale of the goods or to return the
same. Thus, Allied filed a criminal complaint against Ching for the violation of PD 115. During the Preliminary Investigation however
wherein Ching failed to appear or submit a counter-affidavit, the Fiscal found prima facie case. Upon appeal to the DOJ, it denied
Chings contention that its obligation was purely civil one. Accordingly, respondent's failure to remit to the complainant proceeds of
the sale of the finished products if sold or the finished products themselves if not sold, at the maturity dates of the trust receipts,
constitutes a violation of P.D. 115."

Because of private respondent's clarification that the goods subject of the trust receipt agreements were dolomites which
were specifically used for patching purposes over the surface of furnaces and nozzle bricks which are insulating materials in the
lower portion of the ladle which do not form part of the steel product itself, Justice Secretary Sedfrey Ordoez, "rectified" his
predecessor's supposed reversible error, and held that PD 115 contemplates or covers goods which have, for their ultimate
destination, the sale thereof or if unsold, their surrender to the entruster, this whether the goods are in their original form or in their
manufactured/processed state. Since the goods covered by the trust receipts and subject matter of these proceedings are to be
utilized in the operation of the equipment and machineries of the corporation, they could not have been contemplated as being
covered by PD 115.

This time, Allied Bank filed a motion for reconsideration but the DOJ enunciated that PD 115 covers goods or components
of goods which are ultimately destined for sale. Accordingly, the goods subject of the instant case were shown to have been used
and/or consumed in the operation of the equipment and machineries of the corporation, and are therefore outside the ambit of the
provisions of PD 115 albeit covered by Trust Receipt agreements. Finally, it is noted that under the Sia vs. People and Vintola vs.
Insular Bank of Asia and America rulings, the trend in the Supreme Court appears to be to the effect that trust receipts under PD
115 are treated as security documents for basically loan transactions, so much so that criminal liability is virtually obliterated and
limiting liability of the accused to the civil aspect only.

ISSUE:

Whether or not the penal provisions of the Trust Receipt Law applies when the goods covered by a Trust Receipt do not
form part of the finished products which are ultimately sold but are instead utilized or used up in the operation of the equipment
and machineries of the entrustee-manufucturer

HELD:

Petition GRANTED (PD 115 encompasses any act violative of an obligation covered by the trust receipt; it is not limited to
transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component of a product ultimately sold)

A trust receipt transaction is any transaction by and between a person (entrustee), and another person referred to
(entrustee), whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents
or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a
signed document called a 'trust receipt' wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to
turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt
or the goods, documents or instruments themselves, if they are unsold or not otherwise disposed of, in accordance with the terms
and conditions specified in the trust receipt.

Respondent Ching contends that PBM is not in the business of selling Magtar Branch Dolomites or High Fired Refractory
Sliding Nozzle Bricks, it is a manufacturer of steel and steel products. But PBM, as entrustee under the trust receipts has, under Sec.
9 of PD 115, the following obligations, inter alia: (a) receive the proceeds of sale, in trust for the entruster and turn over the same to
the entruster to the extent of the amount owing to him or as appears on the trust receipt; (b) keep sai d goods or proceeds thereof
whether in money or whatever form, separate and capable of identification as property of the entruster; (c) return the goods,
documents or instruments in the event of non-sale, or upon demand of the entruster; and (d) observe all other terms and conditions
of the trust receipt not contrary to the provisions of said Decree.

The trust receipts, there is an obligation to repay the entruster. Their terms are to be interpreted in accordance with the
general rules on contracts, the law being alert in all cases to prevent fraud on the part of either party to the transaction. The
entrustee binds himself to sell or otherwise dispose of the entrusted goods with the obligation to turn over to the entruster the
proceeds if sold, or return the goods if unsold or not otherwise disposed of, in accordance with the terms and conditions specified
in the trust receipt. A violation of this undertaking constitutes estafa under Sec. 13, PD 115.

And even assuming the absence of a clear provision in the trust receipt agreement, Lee v. Rodil and Sia v. CA have held that
acts involving the violation of trust receipt agreements occurring after 29 January 1973 (when PD 115 was issued) would render the
accused criminally liable for estafa under par. 1(b), Art. 315 of the Revised Penal Code, pursuant to the explicit provision in Sec. 13 of
PD 115. The act punishable is malum prohibitum. Respondent Secretary's prognostication of the Supreme Court's supposed
inclination to treat trust receipts as mere security documents for loan transactions, thereby obliterating criminal liability, appears to
be a misjudgment.

In an attempt to escape criminal liability, private respondent claims PD 115 covers goods which are ultimately destined for
sale and not goods for use in manufacture. But the wording of Sec. 13 covers failure to turn over the proceeds of the sale of
entrusted goods, or to return said goods if unsold or disposed of in accordance with the terms of the trust receipts. Private
respondent claims that at the time of PBM's application for the issuance of the LC's, it was not represented to the petitioner that the
items were intended for sale, hence, there was no deceit resulting in a violation of the trust receipts which would constitute a
criminal liability. Again, we cannot uphold this contention. The non-payment of the amount covered by a trust receipt is an act
violative of the entrustee's obligation to pay. There is no reason why the law should not apply to all transactions covered by trust
receipts, except those expressly excluded.

The Court takes judicial notice of customary banking and business practices where trust receipts are used for importation of
heavy equipment, machineries and supplies used in manufacturing operations. We are perplexed by the statements in the assailed
DOJ resolution that the goods subject of the instant case are outside the ambit of the provisions of PD 115 albeit covered by Trust
Receipt Agreements (17 February 1988 resolution) and that not all transactions covered by trust receipts may be considered as trust
receipt transactions defined and penalized under PD 115 (11 January 1988 resolution). The penal provision of PD 115 encompasses
any act violative of an obligation covered by the trust receipt; it is not limited to transactions in goods which are to be sold (retailed),
reshipped, stored or processed as a component of a product ultimately sold.


PHILIPPINE NATIONAL BANK v. HON. GREGORIO G. PINEDA, in his capacity as Presiding Judge of the Court of First Instance of
Rizal, Branch XXI and TAYABAS CEMENT COMPANY, INC.
G.R. No. L-46658, 13 May 1991, THIRD DIVISION (Fernan, C.J.)
Since the trust receipt is a mere security agreement, the repossession of the machinery and equipment by the entruster cannot be
considered payment of loan/advances given to the entrustee under the letter of credit/trust receipt. Payment would legally result
only after the entruster has foreclosed on said securities, sold the same and applied the proceeds thereof to the entrustees obligation
under the trust receipts. Hence, unless the loan is paid, the entruster is not precluded from foreclosing the real estate mortgage
executed by the surety to secure the same loan.

In 1963, Ignacio Arroyo and Lourdes Tuason Arroyo (the Arroyo Spouses), obtained a loan of P580,000.00 from PNB to
purchase 60% of the subscribed capital stock, and thereby acquire the controlling interest of Tayabas Cement Company, Inc.
(TCC). As security for said loan, the spouses Arroyo executed a real estate mortgage over a parcel of land covered by the La Vista
property. Thereafter, TCC filed with petitioner bank an application and agreement for the establishment of an eight (8) year deferred
letter of credit (L/C) for $7,000,000.00 in favor of Toyo Menka Kaisha, Ltd. (Toyo) of Tokyo, Japan, to cover the importation of a
cement plant machinery and equipment. Upon approval of said application and opening of an L/C by PNB in favor of Toyo the Arroyo
spouses executed the following documents to secure this loan accommodation: Surety Agreement dated August 5, 1964 and
Covenant dated August 6, 1964.

The imported cement plant machinery and equipment arrived from Japan and were released to TCC under a trust receipt
agreement. Subsequently, Toyo made the corresponding drawings against the L/C as scheduled. TCC, however, failed to remit
and/or pay the corresponding amount covered by the drawings. Thus, pursuant to the trust receipt agreement, PNB notified TCC of
its intention to repossess, as it later did, the imported machinery and equipment for failure of TCC to settle its obligations under the
L/C. In the meantime, the personal accounts of the spouses Arroyo, which included another loan of P160,000.00 secured by a real
estate mortgage over parcels of agricultural land known as Hacienda Bacon located in Isabela, Negros Occidental, had likewise
become due. The spouses Arroyo having failed to satisfy their obligations with PNB, the latter decided to foreclose the real estate
mortgages executed by the spouses Arroyo in its favor.

At the auction sale for the La Vista property, PNB was the highest bidder with a bid price of P1,000,001.00. However, when
said property was about to be awarded to PNB, the representative of the mortgagor-spouses objected and demanded from the PNB
the difference between the bid price of P1,000,001.00 and the indebtedness of P499,060.25 of the Arroyo spouses on their personal
account. It was the contention of the spouses Arroyo's representative that the foreclosure proceedings referred only to the personal
account of the mortgagor spouses without reference to the account of TCC.

Thus, PNB filed a supplemental petition to proceed with the sale of the subject real properties to satisfy not only the
amount of P499,060.25 owed by the spouses Arroyos on their personal account but also the amount of P35,019,901.49 exclusive of
interest, commission charges and other expenses owed by said spouses as sureties of TCC. Said petition was opposed by the
spouses Arroyo and the other bidder, Jose L. Araneta.

Yet, Sheriff Diana L. Dungca issued a resolution which held that it cannot proper;y proceed with the foreclosure sale unless
and until there be a court ruling on the issues. The CFI of Quezon City, upon petition by the PNB, directed Dungca to proceed with
the foreclosure sale of the mortgaged properties. Before the decision could attain finality, TCC filed before the CFI of Rizal a
seeking, inter alia, the issuance of a writ of preliminary injunction to restrain the foreclosure of the mortgages over the La Vista
property and Hacienda Bacon as well as a declaration that its obligation with PNB had been fully paid by reason of the latter's
repossession of the imported machinery and equipment. Thus, Judge Pineda issue a restraining order and conrrespondingly a writ of
preliminary injunction.

ISSUE:
1. Whether or not the repossession of the machinery and equipment by the entruster can be considered as payment of
the loan/advances given to the entrustee; and
2. Whether or not PNB is precluded from foreclosing the real estate mortgage executed by the surety.

HELD:

Petition GRANTED.

Possession does not amount to payment

It must be remembered that PNB took possession of the imported cement plant machinery and equipment pursuant to the
trust receipt agreement executed by and between PNB and TCC giving the former the unqualified right to the possession and
disposal of all property shipped under the Letter of Credit until such time as all the liabilities and obligations under said letter had
been discharged. In the case of Vintola vs. Insular Bank of Asia and America wherein the same argument was advanced by the
Vintolas as entrustees of imported seashells under a trust receipt transaction, we said that a letter of credit-trust receipt
arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by
the Letter of Credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature
represented by the letter of credit, and a security feature which is in the covering trust receipt. A trust receipt, therefore, is a
security agreement, pursuant to which a bank acquires a "security interest" in the goods. It secures an indebtedness and there can
be no such thing as security interest that secures no obligation. Accordingly,

Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was merely the holder of a
security title for the advances it had made to the VINTOLAS. The goods the VINTOLAS had purchased through IBAA
financing remain their own property and they hold it at their own risk. The trust receipt arrangement did not convert the
IBAA into an investor; the latter remained a lender and creditor. Since the IBAA is not the factual owner of the goods, the
VINTOLAS cannot justifiably claim that because they have surrendered the goods to IBAA and subsequently deposited them
in the custody of the court, they are absolutely relieved of their obligation to pay their loan because of their inability to
dispose of the goods. The fact that they were unable to sell the seashells in question does not affect IBAA's right to recover
the advances it had made under the Letter of Credit.

PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances given to
TCC under the Letter of Credit, said possession by itself cannot be considered payment of the loan secured thereby. Payment would
legally result only after PNB had foreclosed on said securities, sold the same and applied the proceeds thereof to TCC's loan
obligation. Mere possession does not amount to foreclosure for foreclosure denotes the procedure adopted by the mortgagee to
terminate the rights of the mortgagor on the property and includes the sale itself.

Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is alienated to the
creditor in satisfaction of a debt in money and the same is governed by sales. Dation in payment is the delivery and transmission of
ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. As aforesaid, the
repossession of the machinery and equipment in question was merely to secure the payment of TCC's loan obligation and not for
the purpose of transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en pago was ever
accomplished.

PND has the right to foreclose the mortgages

Proceeding from this finding, PNB has the right to foreclose the mortgages executed by the spouses Arroyo as sureties of
TCC. A surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obl igation
of the latter, and their liabilities are interwoven as to be inseparable. As sureties, the Arroyo spouses are primarily liable as original
promissors and are bound immediately to pay the creditor the amount outstanding.

PEOPLE OF THE PHILIPPINES and ALLIED BANKING CORPORATION v. HON. JUDGE DAVID G. NITAFAN and BETTY SIA ANG
G.R. No. 81559-60, 6 April 1992, THIRD DIVISION (Gutierrez, J.)
What is sought to be penalized under the Trust Receipt Law is not the non-payment of debt but the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of another. It punishes the act not as an offense against property but
against public order.

Allied Banking Corporation (Allied) charged Betty Sia Ang (Ang) with estafa which alleged that Ang, being then the
proprietress of Eckart Enterprises, a business entity located at 756 Norberto Amoranto Avenue, Quezon City, did then and there
wilfully, unlawfully and feloniously defraud the Allied Banking Corporation, a banking institution, represented by its Account Officer,
Raymund S. Li, in the following manner, to wit: Ang received in trust from the aforesaid bank Gordon Plastics, plastic sheeting and
Hook Chromed, in the total amount of P398,000.00, specified in a trust receipt and covered by a L/C under the express obligation on
the part of said accused to sell the same and account for the proceeds of the sale thereof, if sold, or to return said merchandise, if
not sold, on or before October 16, 1980, or upon demand, but the said accused, once in possession of the said articles, far from
complying with the aforesaid obligation, notwithstanding repeated demands made upon her to that effect, paid only the amount of
P283,115.78, thereby leaving unaccounted for the amount of P114,884.22 which, once in her possession, with intent to defraud, she
misappropriated, misapplied and converted to her own personal use and benefit, to the damage and prejudice of said Allied Banking
Corporation.

Meanwhile, Ang filed a motion to quash which was granted by Judge Nitafan. The order was anchored on the premise that
the trust receipt is an evidence of loan being secured so that there is a creditor-debtor relationship. Accordingly, the penal clause of
Presidential Decree No. 155 on the Trust Receipts Law is inoperative because it does not actually punish an offense mala
prohibita. The law only refers to the relevant estafa provision in the Revised Penal Code.

ISSUE:

Whether or not an entrustee in a trust receipt agreement who fails to deliver the proceeds of the sale or to return the
goods if not sold to the entruster-bank is liable for the crime of estafa

HELD:

Petition GRANTED.

This Court notes that the petitioner bank brought a similar case before this Court in G.R. No. 82495, entitled Allied Banking
Corporation v. Hon. Secretary Sedfrey Ordoez and Alfredo Ching which we decided on December 10, 1990 (192 SCRA 246). In that
case, the petitioner additionally questioned, and we accordingly reversed, the pronouncement of the Secretary of Justice limi ting
the application of the penal provision of P.D. 115 only to goods intended to be sold to the exclusion of those still to be
manufactured. The relevant penal provision of P.D. 115 provides that the failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance
with the terms of the trust receipt shall constitute the crime of estafa. Section 1 (b), Article 315 of the RPC under which the
violation is made to fall, states that Swindling (estafa). Any person who shall defraud another by any of the means mentioned
herein below . . . By misappropriating or converting, to the prejudice of another, money, goods, or any other personal property
received by the offender in trust or on commission, or for administration, or under any other obligation involving the duty to make
delivery of or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying having
received such money, good, or other property.

The factual circumstances in the present case show that the alleged violation was committed sometime in 1980 or during
the effectivity of P.D. 115. The failure, therefore, to account for the P114,884.22 balance is what makes the accused-respondent
criminally liable for estafa. The Court reiterates its definitive ruling that, in the Cuevo and Sia(1983) cases relied upon by the
accused, P.D. 115 was not applied because the questioned acts were committed before its effectivity. (Lee v. Rodil, supra, p. 108) At
the time those cases were decided, the failure to comply with the obligations under the trust receipt was susceptible to two
interpretations. The Court in Sia adopted the view that a violation gives rise only to a civil liability as the more feasible view "before
the promulgation of P.D. 115," notwithstanding prior decisions where we ruled that a breach also gives rise to a liability for estafa.
Contrary to the reasoning of the respondent court and the accused, a trust receipt arrangement does not involve a simple
loan transaction between a creditor and debtor-importer. Apart from a loan feature, the trust receipt arrangement has a security
feature that is covered by the trust receipt itself. (Vintola v. Insular Bank of Asia and America, 151 SCRA 578 [1987]) That second
feature is what provides the much needed financial assistance to our traders in the importation or purchase of goods or
merchandise through the use of those goods or merchandise as collateral for the advancements made by a bank. (Samo v.
People, supra). The title of the bank to the security is the one sought to be protected and not the loan which is a separate and
distinct agreement.

The Trust Receipts Law punishes the dishonesty and abuse of confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the owner or not. The law does not seek to enforce payment of the loan.
Thus, there can be no violation of a right against imprisonment for non-payment of a debt. Trust receipts are indispensable contracts
in international and domestic business transactions. The prevalent use of trust receipts, the danger of their misuse and/or
misappropriation of the goods or proceeds realized from the sale of goods, documents or instruments held in trust for entruster-
banks, and the need for regulation of trust receipt transactions to safeguard the rights and enforce the obligations of the parties
involved are the main thrusts of P.D. 115. As correctly observed by the Solicitor General, P.D. 115, like Batas Pambansa Blg. 22,
punishes the act "not as an offense against property, but as an offense against public order. . . ." The misuse of trust receipts
therefore should be deterred to prevent any possible havoc in trade circles and the banking community. It is in the context of
upholding public interest that the law now specifically designates a breach of a trust receipt agreement to be an act that "shall"
make one liable for estafa.

The offense is punished as a malum prohibitum regardless of the existence of intent or malice. A mere failure to deliver the
proceeds of the sale or the goods if not sold, constitutes a criminal offense that causes prejudice not only to another, but more to
the public interest.

PRUDENTIAL BANK v. NATIONAL LABOR RELATIONS COMMISSION, et al.
G.R. No. 112592, 19 December 1995, FIRST DIVISION (Bellosillo, J.)
The law warrants the validity of petitioner's security interest in the goods pursuant to the written terms of the trust receipt
as against all creditors of the trust receipt agreement. The only exception to the rule is when the properties are in the hands of an
innocent purchaser for value and in good faith.

This petition impugns the Resolutions of the National Labor Relations Commission (NLRC) dismissing the appeal of
Prudential Bank from the order of the Labor Arbiter denying its third-party claim to the personal properties subject of levy on
execution based on its trust receipts. The records show that Interasia Container Industries, Inc. (INTERASIA), was embroiled in three
(3) labor cases which were eventually resolved against it. Thus monetary awards consisting of 13th-month pay differentials and
other benefits were granted to complainants. Subsequently the monetary award was recomputed to include separation pay in the
total sum of P126,788.30 occasioned by the closure of operations of INTERASIA. However, the Labor Arbiter declared the closure or
shutdown of operations effected by INTERASIA as illegal and awarded to complainants the sum of P1,188,466.32 as wage
differentials, separation pay and other benefits.

With the finality of the three (3) decisions, writs of execution were issued. The Sheriff levied on execution personal
properties located in the factory of INTERASIA. Correspondingly, Prudential Bank filed a third-party claim asserting ownership over
the seized properties on the strength of trust receipts executed by INTERASIA in its favor. However, the NLRC denied the claim and
instead directed the Sheriff to proceed with the levy of the properties. At the public auction sale, Angel Peliglorio emerges as the
highest bidder with an offer of P128,000.00 on the properties levied.

ISSUE:

Whether or not the goods covered by a trust receipt can be levied upon by the creditors of the entrustee (INTERASIA)

HELD:

Petition GRANTED.

We cannot subscribe to NLRC's simplistic interpretation of trust receipt arrangements. In effect, it has reduced the Trust
Receipt Agreements to a pure and simple loan transaction. This perception was clearly dispelled in People v. Nitafan,

citing the
Vintola and Samo cases, where we explained the nature of a trust receipt as an arrangement which does not involve a simple loan
transaction between a creditor and debtor-importer. Apart from a loan feature, the trust receipt arrangement has a security
feature that is covered by the trust receipt itself. (Vintola v. Insular Bank of Asia and America, 150 SCRA 578 [1987] That second
feature is what provides the much needed financial assistance to our traders in the importation or purchase of goods or
merchandise through the use of those goods or merchandise as collateral for the advancements made by a bank (Samo v. People,
115 Phil 346 [1962]). The title of the bank to the security is the one sought to be protected and not the loan which is a separate
and distinct agreement.

Reliance cannot be placed upon the Vintola case as an excuse for the dismissal of petitioner's claim. For in that case we
sustained, rather than frustrated, the claim of the bank for payment of the advances it had made to the purchaser of the goods,
notwithstanding that it was not the factual owner thereof and that petitioners had already surrendered the goods to it due to their
inability to sell them. We stated that the fact that the Vintolas were unable to sell the seashells in question did not affect IBAA's right
to recover the advances it had made under the loan covered by the Letter of Credit, with the trust receipt as a security for the loan.
Thus, except for our disquisition on the nature of a trust receipt as restated in Nitafan, Vintola hardly has any bearing on the case at
bench since the issue here involves the effect and enforcement of the security aspect whereas the former case deals with the loan
aspect of a trust receipt transaction. Apparently, the NLRC was confused about the nature of a trust receipt, specifically the security
aspect thereof.

The mechanics and effects flowing from a trust receipt transaction, particularly the importance given to the security held by
the entruster, i.e., the person holding title over the goods, were fully discussed in earlier decisions, as follows 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 first importance that the fundamental factor in the transaction, the banker's 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 finally 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 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 fulfilled the other terms of the contract (emphasis supplied).

In a certain manner, (trust receipt contracts) partake of the nature of a conditional sale as provided by the Chattel
Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. The
ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he
has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the
importer or by his representative or successor in interest (emphasis supplied).

More importantly, owing to the vital role trust receipts play in international and domestic commerce, Sec. 12 of P.D. No.
115

assures the entruster of the validity of his claim against all creditors The entruster's security interest in goods, documents, or
instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of
the trust receipt agreement.

From the legal and jurisprudential standpoint it is clear that the security interest of the entruster is not merely an empty or
idle title. To a certain extent, such interest, such interest becomes a "lien" on the goods because the entruster's advances will have
to be settled first before the entrustee can consolidate his ownership over the goods. A contrary view would be disastrous. For to
refuse to recognize the title of the banker under the trust receipt as security for the advance of the purchase price would be to strike
down a bona fide and honest transaction of great commercial benefit and advantage founded upon a well-recognized custom by
which banking credit is officially mobilized for manufacturers and importers of small means.

The NLRC argues that inasmuch as petitioner did not cancel the Trust Receipt Agreements and took possession of the
properties it could not claim ownership of the properties. We do not agree. Significantly, the law uses the word "may" in granting to
the entruster the right to cancel the trust and take possession of the goods. Consequently, petitioner has the discretion to avail of
such right or seek any alternative action, such as a third-party claim or a separate civil action which it deems best to protect its
right, at anytime upon default or failure of the entrustee to comply with any of the terms and conditions of the trust agreement.

Besides, as earlier stated, the law warrants the validity of petitioner's security interest in the goods pursuant to the
written terms of the trust receipt as against all creditors of the trust receipt agreement.
12
The only exception to the rule is when
the properties are in the hands of an innocent purchaser for value and in good faith. The records however do not show that the
winning bidder is such purchaser. Neither can private respondents plead preferential claims to the properties as petitioner has
the primary right to them until its advances are fully paid.

METROPOLITAN BANK and TRUST COMPANY v. JOAQUIN TONDA and MA. CRISTINA TONDA
G.R. No. 134436, 16 August 2000, THIRD DIVISION (Gonzaga-Reyes, J.)
The receipt of the bank of a sum of money without reference to the trust receipt obligation does not obligate the bank to apply
the money received against the trust receipt obligation. Neither does compensation arise because it is not proper when one of the
debts consists in civil liability arising from a criminal offense.

Spouses Joaquin G. Tonda and Ma. Cristina U. Tonda (Tondas) applied for and were granted commercial letters of credit by
petitioner Metropolitan Bank and Trust Company (METROBANK) in connection with the importation of raw textile materials to be
used in the manufacturing of garments. The TONDAS acting both in their capacity as officers of Honey Tree Apparel Corporation
(HTAC) and in their personal capacities, executed eleven (11) trust receipts to secure the release of the raw materials to HTAC. The
imported fabrics with a principal value of P2,803,000.00 were withdrawn by HTAC under the 11 trust receipts executed by the
TONDAS. Due to their failure to settle their obligations under the trust receipts upon maturity, METROBANK sent a letter making its
final demand upon the TONDAS to settle their past due TR/LC accounts. They were informed that by said date, the obligations would
amount to P4,870,499.13. Yet, despite repeated demands therefor, the TONDAS failed to comply with their obligations stated in the
trust receipts agreements, i.e. the TONDAS failed to account to METROBANK the goods and/or proceeds of sale of the merchandise,
subject of the trust receipts.

Thus, Metrobank filed with the Prosecutor of Rizal a complaint for violation of PD 115. The same was dismissed however, on
the ground that the complainants had failed to establish the existence of the essential elements of Estafa as charged. This was
reversed by the DOJ. On appeal, the CA granted TONDAs petition and ordered the criminal complaint against them dismissed.
Accordingly, METROBANK had failed to show a prima facie case that the TONDAS violated the Trust Receipts Law in relation to Art.
315 (1) (b) of the RPC in the face of convincing proof that "that the amount of P2.8 Million representing the outstanding obligation
of the TONDAS under the trust receipts account had already been settled by them in compliance with the loan restructuring
proposal; and that in the absence of a loan restructuring agreement, METROBANK could still validly apply the amount as payment
thereof." Accordingly, the parties were unable to arrive at a mutually agreeable loan restructured agreement. Subsequently,
respondent Joaquin and Wang deposited 2.8M to an account to pay the entire principal of the outstanding trust receipts account to
be applied anytime to the payment of the TR/LC Account upon the implementation by the parties of the terms of the
restructuring.

ISSUE:

Whether or not Metrobank can apply the amount deposited by Tondas as payment of the principal obligation under trust
receipts agreement despite the failure of the parties to agree on a restructured agreement

HELD:

Petition GRANTED.

The acts of the respondents constitute the crime of estafa ascontemplated in PD 115 and the RPC because they failed to
return the goods covered by the trust receipts or return the proceeds of the sale of the said goods. The handwritten note by the
Metrobank officer acknowledging receipt of the checks made no reference to the Tondas trust receipt obligations, and it cannot
be presumed that it was anything more than an ordinary bank deposit. The CA ruled that in making the deposit, the Tondas are
entitled to set off by way of compensation their obligations to Metrobank. However, Art 1288 of the Civil Code provides that
compensation shall not be proper when one of the debts consists in civil liability arising from a penal offense as in the case at bar.
If one of the debts consists in civil liability arising from a penal offense, compensation would be improper and inadvisable because
the satisfaction of such obligation is imperative.

The relevant penal provision of P.D. 115 provides that the failure of an entrustee to turn over the proceeds of the sale of
the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in
the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article 315 (b) of the RPC.
Accordingly, there is a violation by misappropriating or converting, to the prejudice of another, money, goods, or any other personal
property received by the offender in trust or on commission, or for administration, or under any other obligation involving the duty
to make delivery of or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying
having received such money, goods, or other property.

Based on the foregoing, it is plain to see that the Trust Receipts Law declares the failure to turn over the goods or the
proceeds realized from the sale thereof, as a criminal offense punishable under Article 315 (1) (b) of the Revised Penal Code. The
law is violated whenever the entrustee or the person to whom the trust receipts were issued in favor of fails to: (1) return the goods
covered by the trust receipts; or (2) return the proceeds of the sale of the said goods. The foregoing acts constitute estafa
punishable under Article 315 (1) (b) of the Revised Penal Code. Given that various trust receipts were executed by the TONDAS and
that as entrustees, they did not return the proceeds from the goods sold nor the goods themselves to METROBANK, there is no
dispute that that the TONDAS failed to comply with the obligations under the trust receipts despite several demands from
METROBANK.

As to the statement of the Court of Appeals that there is no evidence that METROBANK has been damaged by the proposal
and the deposit, it must be clarified that the damage can be traced from the non-fulfillment of an entrustee's obligation under the
trust receipts. The nature of trust receipt agreements and the damage caused to trade circles and the banking community in case of
violation thereof was explained in Vintola vs. IBAA and echoed in People vs. Nitafan. Accordingly, trust receipt arrangements do not
involve a simple loan transaction between a creditor and a debtor-importer. Apart from a loan feature, the trust receipt
arrangement has a security feature that is covered by the trust receipt itself. The second feature is what provides the much needed
financial assistance to traders in the importation or purchase of goods or merchandise through the use of those goods or
merchandise as collateral for the advancements made by the bank. The title of the bank to the security is the one sought to be
protected and not the loan which is a separate and distinct agreement. Trust receipts are indispensable contracts in international
and domestic business transactions. The prevalent use of trust receipts, the danger of their misuse and/or misappropriation of the
goods or proceeds realized from the sale of goods, documents or instruments held in trust for entruster-banks, and the need for
regulation of trust receipt transactions to safeguard the rights and enforce the obligations of the parties involved are the main
thrusts of P.D. 115. As correctly observed by the Solicitor General, P.D. 115, like Bata Pambansa Blg. 22, punishes the act "not as
an offense against property, but as an offense against public order. The misuse of trust receipts therefore should be deterred to
prevent any possible havoc in trade circles and the banking community. It is in the context of upholding public interest that the law
now specifically designates a breach of a trust receipt agreement to be an act that "shall" make one liable foe estafa."

MELVIN COLINARES and LORDINO VELOSO v. COURT OF APPEALS and THE PEOPLE OF THE PHILIPPINES
G.R. No. 90828, 5 September 2000, FIRST DIVISION (Davide, Jr., J.)
Where the execution of the trust receipt agreement was made only after the goods covered by it had been purchased by and
delivered to the entrustee and the latter as a consequence acquired ownership over the goods, the transaction does not involve a
trust receipt but a simple loan even though the parties denominated the transaction as one of trust receipt.

Melvin Colinares and Lordino Veloso were contracted for a consideration of P40,000 by the Carmelite Sisters of Cagayan
de Oro City to renovate the latters convent at Camaman-an, Cagayan de Oro City. Melvin and Lordina obtained 5,376 SF Solatone
acoustical board, 300 SF tanguile wood tiles, 260 SF Marcelo economy tiles and 2 gallons UMYLIN cement adhesive from CM
Builders Centre for the construction project. Thus, they applied for a commercial letter of credit with the Philippine Banking
Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM Builders Centre. PBC approved the letter of
credit for P22,389.80 to cover the full invoice value of the goods. Petitioners signed a pro-forma trust receipt as security. PBC then
debited P6,720 from Petitioners marginal deposit as partial payment of the loan.

Upon demand for payment, instead of complying with PBCs demand, Veloso confessed that they lost P19,195.83 in the
Carmelite Monastery Project and requested for a grace period of until 15 June 1980 to settle the account. A proposal to modify the
terms of payment was made but the petitioners were charged with the violation of P.D 115 in relation to Art. 315 of the RPC.

During trial, Veloso insisted that the transaction was a clean loan as per verbal guarantee of Cayo Garcia Tuiza, PBCs
former manager. He and petitioner Colinares signed the documents without reading the fine print, only learning of the trust receipt
implication much later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the trust receipt was a mere
formality. The Trial Court convicted the petitioners of estafa. Upon appeal, the CA affirmed the decision with some modification as
to the penalty.

ISSUE:
Whether or not the agreement is a simple loan

HELD:

Petition GRANTED.

Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction as any transaction by and between a
person referred to as the entruster, and another person referred to as the entrustee, whereby the entruster who owns or holds
absolute title or security interest over certain specified goods, documents or instruments, releases the same to the possession of the
entrustee upon the latters execution and delivery to the entruster of a signed document called a trust receipt wherein the
entrustee binds himself to hold the designated goods, documents or instruments with the obligation to turn over to the entruster
the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents
or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in
the trust receipt.

There are two possible situations in a trust receipt transaction. The first is covered by the provision which refers
to money received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The
second is covered by the provision which refers to merchandise received under the obligation to return it (devolvera) to the
owner. Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the trust receipt to the entruster or to
return said goods if they were not disposed of in accordance with the terms of the trust receipt shall be punishable as estafa under
Article 315 (1) of the RPC without need of proving intent to defraud.

A thorough examination of the facts obtaining in the case at bar reveals that the transaction intended by the parties was a
simple loan, not a trust receipt agreement. Petitioners received the merchandise from CM Builders. On that day, ownership over the
merchandise was already transferred to Petitioners who were to use the materials for their construction project. It was only a day
later, that they went to the bank to apply for a loan to pay for the merchandise. This situation belies what normally obtains in a pure
trust receipt transaction where goods are owned by the bank and only released to the importer in trust subsequent to the grant of
the loan. The bank acquires a security interest in the goods as holder of a security title for the advances it had made to the
entrustee. The ownership of the merchandise continues to be vested in the person who had advanced payment until he has been
paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by
his representative or successor in interest. To secure that the bank shall be paid, it takes full title to the goods at the very beginning
and continues to hold that title as his indispensable security until the goods are sold and the vendee is called upon to pay for them;
hence, the importer has never owned the goods and is not able to deliver possession. In a certain manner, trust receipts partake of
the nature of a conditional sale where the importer becomes absolute owner of the imported merchandise as soon as he has paid
its price. Trust receipt transactions are intended to aid in financing importers and retail dealers who do not have sufficient funds or
resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through
utilization, as collateral, of the merchandise imported or purchased. In the present case, PBC attempted to cover up the true delivery
date of the merchandise, yet the trial court took notice even though it failed to attach any significance to such fact in the judgment.

The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner. Here, it is
crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the
prejudice of PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts issued by PBC
acknowledging payment of the loan.

THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK) v. THE COURT OF APPEALS, CONTINENTAL CEMENT
CORPORATION, GREGORY T. LIM
G.R. No. 114286, 19 April 2001, FIRST DIVISION (Ynares-Santigao, J.)
Inasmuch as the debtor received the goods subject of the trust receipt before the trust receipt itself was entered into, the transaction
in question was a simple loan and not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over
the goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in a pure trust receipt
transaction, wherein the goods belong in ownership to the bank and are only released to the importer in trust after the loan is
granted.

ISSUE:

Whether or not the transaction is a mere simple loan

HELD:

Petition DENIED.

The recent case of Colinares v. Court of Appeals
[
appears to be foursquare with the facts obtaining in the case at bar. There,
we found that inasmuch as the debtor received the goods subject of the trust receipt before the trust receipt itself was entered
into, the transaction in question was a simple loan and not a trust receipt agreement. Prior to the date of execution of the trust
receipt, ownership over the goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in
a pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to the importer in trust
after the loan is granted.

In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods subject of the trust receipt occurred
long before the trust receipt itself was executed. More specifically, delivery of the bunker fuel oil to respondent Corporations
Bulacan plant commenced on July 7, 1982 and was completed by July 19, 1982. Further, the oil was used up by respondent
Corporation in its normal operations by August, 1982. On the other hand, the subject trust receipt was only executed nearly two
months after full delivery of the oil was made to respondent Corporation, or on September 2, 1982.

The danger in characterizing a simple loan as a trust receipt transaction was explained in Colinares. Accordingly, the Trust
Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another regardless of whether the latter is the owner. Here, it is crystal clear that
on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the prejudice of
PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging
payment of the loan.

The Information charges Petitioners with intent to defraud and misappropriating the money for their personal
use. The mala prohibita nature of the alleged offense notwithstanding, intent as a state of mind was not proved to be present in
Petitioners situation. Petitioners employed no artifice in dealing with PBC and never did they evade payment of their obligation nor
attempt to abscond. Instead, Petitioners sought favorable terms precisely to meet their obligation.

Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale, contrary to the express
provision embodied in the trust receipt. They are contractors who obtained the fungible goods for their construction project. At no
time did title over the construction materials pass to the bank, but directly to the Petitioners from CM Builders Centre. This
impresses upon the trust receipt in question vagueness and ambiguity, which should not be the basis for criminal prosecution in the
event of violation of its provisions.

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the
threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such
agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this
scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation, as had happened in this
case. Eventually, PBC showed its true colors and admitted that it was only after collection of the money, as manifested by its
Affidavit of Desistance.

Similarly, respondent Corporation cannot be said to have been dishonest in its dealings with petitioner. Neither has it been
shown that it has evaded payment of its obligations. Indeed, it continually endeavored to meet the same, as shown by the various
receipts issued by petitioner acknowledging payment on the loan. Certainly, the payment of the sum of P1,832,158.38 on a loan
with a principal amount of only P681,075.93 negates any badge of dishonesty, abuse of confidence or mishandling of funds on the
part of respondent Corporation, which are the gravamen of a trust receipt violation. Furthermore, respondent Corporation is not an
importer which acquired the bunker fuel oil for re-sale; it needed the oil for its own operations. More importantly, at no time did
title over the oil pass to petitioner, but directly to respondent Corporation to which the oil was directly delivered long before the
trust receipt was executed.

By all indications, then, it is apparent that there was really no trust receipt transaction that took place. Evidently,
respondent Corporation was required to sign the trust receipt simply to facilitate collection by petitioner of the loan it had extended
to the former.

PHILIPPINES BANK OF COMMUNICATIONS (PBC) v. HON. COURT OF APPEALS and BERNARDINO VILLANUEVA and FILIPINAS
TEXTILE MILLS, Inc.
G.R. No. 115678, 23 February 2001, FIRST DIVISION (Ynares-Santiago, J.)
A debt is fraudulently contracted if at the time of contracting it the debtor has preconceived plan or intention not to pay.
Thus, mere allegation is not sufficient for attachment to issue. Fraudulent intent not to honor the admitted obligation cannot be
inferred from the debtors inability to pay or to comply with the obligations. If the entrustee made partial payment, i t cannot be said
that the entrustee harbored a pre-conceived plan or intention not to pay the entruster.

The case commenced with the filing by PBC of a Complaint against private respondent Bernardino Villanueva, private
respondent Filipinas Textile Mills (Filipinas) and one Sochi Villanueva (now deceased) before the RTC of Manila. In the said
Complaint, PBC sought the payment of P2,244,926.30 representing the proceeds or value of various textile goods, the purchase of
which was covered by irrevocable letters of credit and trust receipts executed by PBC together with Filipinas Textile Mills as obligor;
which, in turn, were covered by surety agreements executed by Bernardino Villanueva and Sochi Villanueva. In their Answer, private
respondents admitted the existence of the surety agreements and trust receipts but countered that they had already made
payments on the amount demanded and that the interest and other charges imposed by petitioner were onerous.

According to PBC, violation of the trust receipts law constitutes estafa, thus providing ground for the issuance of a writ of
preliminary attachment and that attachment was necessary since Filipinas were disposing of their properties to its detriment as a
creditor. Finally, petitioner offered to post a bond for the issuance of such writ of attachment.

ISSUE:

Whether or not the debtors inability to pay or comply with the obligations constitutes fraud

HELD:

Petition DENIED.

We find an absence of factual allegations as to how the fraud alleged by petitioner was committed. As correctly held by CA
such fraudulent intent not to honor the admitted obligation cannot be inferred from the debtor's inability to pay or to compl y with
the obligations. On the other hand, as stressed, above, fraud may be gleaned from a preconceived plan or intention not to pay. This
does not appear to be so in the case at bar. In fact, it is alleged by private respondents that out of the total P419,613.96 covered by
the subject trust receipts, the amount of P400,000.00 had already been paid, leaving only P19,613.96 as balance. Hence, regardless
of the arguments regarding penalty and interest, it can hardly be said that private respondents harbored a preconceived plan or
intention not to pay petitioner.

As was frowned upon in D.P. Lub Oil Marketing Center, Inc., not only was petitioner's application defective for having
merely given general averments; what is worse, there was no hearing to afford private respondents an opportunity to ventilate their
side, in accordance with due process, in order to determine the truthfulness of the allegations of petitioner. As already mentioned,
private respondents claimed that substantial payments were made on the proceeds of the trust receipts sued upon. They also
refuted the allegations of fraud, embezzlement and misappropriation by averring that private respondent Filipinas Textile Mills could
not have done these as it had ceased its operations starting in June of 1984 due to workers' strike. These are matters which should
have been addressed in a preliminary hearing to guide the lower court to a judicious exercise of its discretion regarding the
attachment prayed for. On this score, respondent Court of Appeals was correct in setting aside the issued writ of preliminary
attachment.

Time and again, we have held that the rules on the issuance of a writ of attachment must be construed strictly against the
applicants. This stringency is required because the remedy of attachment is harsh, extraordinary and summary in nature. If al l the
requisites for the granting of the writ are not present, then the court which issues it acts in excess of its jurisdiction.

SOUTH CITY HOMES, INC., et al., v. BA FINANCE CORPORATION
G. R. No. 135462, 7 December 2001, FIRST DIVISION (Pardo, J.)
A surety may secure obligations incurred subsequent to the execution of the surety contract. Suretyship agreement
itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there would be
in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition
precedent.

Prior to the transactions covered by the subject drafts and trust receipts, Fortune Motors Corporation (Phils.) has been
availing of the credit facilities of BA Finance Corporation. Joseph L. G. Chua, President of Fortune Motors Corporation, executed in
favor of BA Finance a Continuing Suretyship Agreement, in which he jointly and severally unconditionally guaranteed the full,
faithful and prompt payment and discharge of any and all indebtedness of Fortune Motors Corporation to BA Finance Corporation.

Palawan Lumber Manufacturing Corporation represented by Joseph L.G. Chua, George D. Tan, Edgar C. Rodrigueza and
Joselito C. Baltazar, executed in favor of BA Finance a Continuing Suretyship Agreement in which, Palawan Lumber jointly and
severally unconditionally guaranteed the full, faithful and prompt payment and discharge of any and all indebtedness of Fortune
to BA Finance Corporation. South City Homes, Inc. represented by Edgar C. Rodrigueza and Aurelio F. Tablante, likewise executed a
Continuing Suretyship Agreement in which said corporation jointly and severally unconditionally guaranteed the full, faithful
and prompt payment and discharge of any and all indebtedness of Fortune to BA Finance. Canlubang Automotive Resources
Corporation (CARCO) drew six (6) Drafts in its own favor, payable thirty (30) days after sight, charged to the account of Fortune.
Fortune thereafter executed trust receipts covering the motor vehicles delivered to it by CARCO under which it agreed to remit to
the Entruster (CARCO) the proceeds of any sale and immediately surrender the remaining unsold vehicles. The drafts and trust
receipts were assigned to BA Finance, under Deeds of Assignment.

Upon failure of Fortune to pay the amounts due under the drafts and to remit the proceeds of motor vehicles sold or to
return those remaining unsold in accordance with the terms of the trust receipt agreements, BA Finance Corporation sent demand
letter to Edgar C. Rodrigueza, South City Homes, Inc., Aurelio Tablante, Palawan Lumber Manufacturing Corporation, Joseph L. G.
Chua, George D. Tan and Joselito C. Baltazar.. Since Fortune failed to settle their outstanding account with BA Finance, the latter
filed complaint for a sum of money with prayer for preliminary attachment, with the RTC. The defendants filed a Motion to
Dismiss. Therein, they alleged that conventional subrogation effected a novation without the consent of the debtor (Fortune) and
thereby extinguished the latters liability; that pursuant to the trust receipt transaction, it was premature under P. D. No. 115 to
immediately file a complaint for a sum of money as the remedy of the entruster is an action for specific performance; that the
suretyship agreements are null and void for having been entered into without an existing principal obligation; and that being such
sureties does not make them solidary debtors.

The RTC favored BA Finance. The CA affirmed this.

ISSUE:

(1) whether the suretyship agreement is valid;
(2) whether there was a novation of the obligation so as to extinguish the liability of the sureties; and
(3) whether respondent BAFC has a valid cause of action for a sum of money following the drafts and trust receipts
transactions

HELD:

Petition

Surety agreement is valid

South City Homes, et al. assert that the suretyship agreement they signed is void because there was no principal obligation
at the time of signing as the principal obligation was signed six (6) months later. The Civil Code, however, allows a suretyship
agreement to secure future loans even if the amount is not yet known. Article 2053 of the Civil Code provides that: Art. 2053 A
guaranty may also be given as security for future debts, the amount of which is not yet known.

A surety is not bound under any particular principal obligation until that principal obligation is born. But there is no
theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the
principal obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are
subject to a condition precedent are valid and binding before the occurrence of the condition precedent.

Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial
practice. A bank or financing company which anticipates entering into a series of credit transactions with a particular company,
commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing
such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with
such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit
accommodation extended to the principal debtor.

2
nd
issue:

An 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, dacion en pago, exchange or donation, and without the consent of the debtor, transfers his credit and accessory rights to
another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could enforce it against the
debtorAs a consequence, the third party steps into the shoes of the original creditor as subrogee of the latter. South City Homes
obligations were not extinguished. 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.

Definitely, 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. 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.
[8]

3
rd
Issue:

A trust receipt is a security transaction intended to aid in financing importers and retail dealers who do not have sufficient
funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except
through utilization, as collateral, of the merchandise imported or purchased. In the event of default by the entrustee on his
obligations under the trust receipt agreement, it is not absolutely necessary that the entruster cancel the trust and take possession
of the goods to be able to enforce his rights thereunder.

Significantly, the law uses the word may in granting to the entruster the right to cancel the trust and take possession of
the goods. Consequently, petitioner has the discretion to avail of such right or seek any alternative action, such as a third party
claim or a separate civil action which it deems best to protect its right, at any time upon default or failure of the entrustee to comply
with any of the terms and conditions of the trust agreement.

CHARLES LEE, et al. v. COURT OF APPEALS and PHILIPPINE BANK OF COMMUNICATIONS
G.R. NO. 117913-14, 1 February 2002, SECOND DIVISION (De Leon, J.)
Letters of credit and trust receipts are, however, not negotiable instruments. But drafts issued in connection with letters of
credit are negotiable instruments. While the presumption found under the Negotiable Instruments Law may not necessarily be
applicable to trust receipts and letters of credit, the presumption that the drafts drawn in connection with the letters of credit have
sufficient consideration.

Charles Lee, as President of MICO wrote Philippine Bank of Communications (PBCom) requesting for a grant of a
discounting loan/credit line in the sum of P3,000,000.00 for the purpose of carrying out MICOs line of business as well as to
maintain its volume of business. Lee requested for another discounting loan/credit line of P3,000,000.00 from PBCom for the
purpose of opening letters of credit and trust receipts. MICO sent a board resolution which states among others that Mr. Charles
Lee, and the Vice-President and General Manager, Mr. Mariano A. Sio are duly authorized and empowered for and in behalf of MICO
to apply for, negotiate and secure the approval of commercial loans and other banking facilities, the principal of all of which shall not
exceed the total amount of TEN MILLION PESOS (P10,000,000.00).

MICO availed of the first loan of One Million Pesos (P1,000,000.00) from PBCom. Upon maturity of the loan, MICO caused
the same to be renewed. Another loan of P1,000,000.00 was availed of by MICO from PBCom which was likewise later on renewed.
To complete MICOs availment of Three Million Pesos (P3,000,000.00) discounting loan/credit line with PBCom, MICO availed of
another loan from PBComin the sum of P1,000,000.00.

As security for the loans, MICO through Mariano Sio, executed a Deed of Real Estate Mortgage over its properties situated
in Pasig. Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap and Richard Velasco, in their personal capacities executed a Surety
Agreement in favor of PBCom whereby Chua, et al. jointly and severally, guaranteed the prompt payment on due dates or at
maturity of overdrafts, promissory notes, discounts, drafts, letters of credit, bills of exchange, trust receipts, and other obligations of
every kind and nature, for which MICO may be held accountable by PBCom. It was provided, however, that the liability of the
sureties shall not at any one time exceed the principal amount of P3,000,000.00 plus interest, costs, losses, charges and expenses
including attorneys fees incurred by PBCom in connection therewith.

Charles Lee, in his capacity as president of MICO, wrote PBCom and applied for an additional loan in the sum of Four Million
Pesos P4,000,000.00. The loan was intended for the expansion and modernization of MICOs machineries. Upon approval of the said
application for loan, MICO availed of the additional loan of P4,000,000.00. The proceeds of all the loan availments were credited
to MICOs current checking account with PBCom. To induce the PBCom to increase the credit line of MICO, Charles Lee, et al.,
executed another surety agreement in favor of PBCom. It was provided, however, that their liability shall not at any one time exceed
the sum of P7,500,000.00 including interest, costs, charges, expenses and attorneys fees incurred by MICO in connection therewith.
This was unanimously approved by MICO.

On July 2, 1981, MICO filed with PBCom an application for a domestic letter of credit in the sum of Three Hundred Forty-Eight
Thousand Pesos (P348,000.00).
[12]
The corresponding irrevocable letter of credit was approved and opened under LC No. L-
16060.
[13]
Thereafter, the domestic letter of credit was negotiated and accepted by MICO as evidenced by the corresponding bank
draft issued for the purpose.
[14]
After the supplier of the merchandise was paid, a trust receipt upon MICOs own initiative, was
executed in favor of PBCom.
[15]

On September 14, 1981, MICO applied for another domestic letter of credit with PBCom in the sum of Two Hundred Ninety
Thousand Pesos (P290,000.00).
[16]
The corresponding irrevocable letter of credit was issued on September 22, 1981 under LC No. L-
16334.
[17]
After the beneficiary of the said letter of credit was paid by PBCom for the price of the merchandise, the goods were
delivered to MICO which executed a corresponding trust receipt
[18]
in favor of PBCom.

MICO applied for a foreign letter of credit in favor of Ta Jih Enterprises Co., Ltd., and thus, the corresponding letter of credit
was then issued by PBCom. PBCom advised Ta Jih Enterprises Co., Ltd. that beneficiary may draw funds from the account
of PBCom in its correspondent banks New York Office. PBCom also informed its corresponding bank in Taiwan, the Irving Trust
Company, of the approved letter of credit. The correspondent bank acknowledged PBComs advice through a confirmation letter and
by debiting from PBComs account with the said correspondent bank the sum of $11 ,960.00. As in past transactions, MICO executed
in favor of PBCom a corresponding trust receipt.

Then, MICO applied, for another foreign letter of credit in the sum $1,900.00, with PBCom. Upon approval, the
corresponding letter of credit was issued whereupon PBCom advised its correspondent bank and MICO of the same. Again, a
corresponding trust receipt was executed by MICO in favor of PBCom.

In all the transactions involving foreign letters of credit, PBCom turned over to MICO the necessary documents such as the
bills of lading and commercial invoices to enable the latter to withdraw the goods from the port of Manila. MICO obtained
from PBCom another loan in the sum of P377,000.00 covered by Promissory Note.

Upon maturity of all credit availments obtained by MICO from PBCom, the latter made a demand for payment. For failure
of petitioner MICO to pay the obligations incurred despite repeated demands, PBCom extrajudicially foreclosed MICOs real estate
mortgage and sold the said mortgaged properties in a public auction sale. PBCom which emerged as the highest bidder in the
auction sale, applied the proceeds of the purchase price at public auction of P3,000,000.00 to the expenses of the foreclosure,
interest and charges and part of the principal of the loans, leaving an unpaid balance of P5,441,663.90 exclusive of penalty and
interest charges. Aside from the unpaid balance, MICO likewise had another standing obligation in the sum of P461,600.06
representing its trust receipts liabilities to PBCom.

PBCom filed a complaint with prayer for writ of preliminary attachment before the RTC alleging that MICO was no longer in
operation and had no properties to answer for its obligations. PBCom further alleged that petitioner Charles Lee has disposed or
concealed his properties with intent to defraud his creditors. Except for MICO and Charles Lee, the sheriff of the RTC failed to serve
the summons to Alfonso Co and Chua Siok Suy who was already sickly at the time and reportedly in Taiwan where he later died.

The RTC dismissed the complaint. The trial court likewise declared the real estate mortgage and its foreclosure null and
void. In ruling for herein petitioners, the trial court said that PBCom failed to adequately prove that the proceeds of the loans were
ever delivered to MICO. The RTC said that the lack of proof as regards the existence of the merchandise covered by the letters of
credit bolstered the claim of Lee, et al. that no purchases of the goods were really made and that the letters of credit transactions
were simply resorted to by the PBCom and Chua SiokSuy to accommodate the latter in his financial requirements. The CA reversed
this ruling.

ISSUE:

Whether or not a trust receipt is a negotiable instrument

HELD:

Petition DENIED.

Under Section 3, Rule 131 of the Rules of Court the following presumptions, among others, are satisfactory
if uncontradicted:
a) That there was a sufficient consideration for a contract and
b) That a negotiable instrument was given or indorsed for sufficient consideration. As observed by the Court of Appeals, a
similar presumption is found in Section 24 of the Negotiable Instruments Law which provides that every negotiable instrument is
deemed prima facie to have been issued for valuable consideration and every person whose signature appears thereon to have
become a party for value.

Negotiable instruments which are meant to be substitutes for money, must conform to the following requisites to be
considered as such
a) it must be in writing;
b) it must be signed by the maker or drawer;
c) it must contain an unconditional promise or order to pay a sum certain in money;
d) it must be payable on demand or at a fixed or determinable future time;
e) it must be payable to order or bearer; and
f) where it is a bill of exchange, the drawee must be named or otherwise indicated with reasonable certainty.

Negotiable instruments include promissory notes, bills of exchange and checks. Letters of credit and trust receipts are,
however, not negotiable instruments. But drafts issued in connection with letters of credit are negotiable instruments.

PBCom presented documentary evidence to prove Lee, et als credit availments and liabilities that show that proved
the solidary obligation of MICO and the Lee, et al, as sureties of MICO, in favor of PBCom. While the presumption found under the
Negotiable Instruments Law may not necessarily be applicable to trust receipts and letters of credit, the presumption that the
drafts drawn in connection with the letters of credit have sufficient consideration. Under Section 3(r), Rule 131 of the Rules of
Court there is also a presumption that sufficient consideration was given in a contract. Hence, Lee, et al, should have presented
credible evidence to rebut that presumption as well as the evidence presented by PBCom. The letters of credit show that the
pertinent materials/merchandise have been received by MICO. The drafts signed by the beneficiary/suppliers in connection with the
corresponding letters of credit proved that said suppliers were paid by PBCom for the account of MICO. On the other hand, aside
from their bare denials Lee et al. did not present sufficient and competent evidence to rebut the evidence of private
respondent PBCom. Petitioner MICO did not proffer a single piece of evidence, apart from its bare denials, to support its allegation
that the loan transactions, real estate mortgage, letters of credit and trust receipts were issued allegedly without any consideration.

Lee, et al, for their part, presented the By-Laws of Mico Metals Corporation (MICO) to prove that only the president of MICO is
authorized to borrow money, arrange letters of credit, execute trust receipts, and promissory notes and consequently, that the loan
transactions, letters of credit, promissory notes and trust receipts, most of which were executed by Chua SiokSuy in representation
of MICO were not allegedly authorized. A perusal of the By-Laws of MICO, however, shows that the power to borrow money for the
company and issue mortgages, bonds, deeds of trust and negotiable instruments or securities, secured by mortgages or pledges
of property belonging to the company is not confined solely to the president of the corporation. The Board of Directors of MICO
can also borrow money, arrange letters of credit, execute trust receipts and promissory notes on behalf of the corporation.

Lee, et al. allege that PBCom presented no evidence that it remitted payments to cover the domestic and foreign letters of
credit. Modern letters of credit are usually not made between natural persons. They involve bank to bank transactions.
Historically, the letter of credit was developed to facilitate the sale of goods between, distant and unfamiliar buyers and sellers. It
was an arrangement under which a bank, whose credit was acceptable to the seller, would at the instance of the buyer agree to pay
drafts drawn on it by the seller, provided that certain documents are presented such as bills of lading accompanied the
corresponding drafts. Expansion in the use of letters of credit was a natural development in commercial banking.

Parties to a letter of credit

Parties to a commercial letter of credit include (a) the buyer or the importer, (b) the seller, also referred to as beneficiary,
(c) the opening bank which is usually the buyers bank which actually issues the letter of credit, (d) the notifying bank whi ch is the
correspondent bank of the opening bank through which it advises the beneficiary of the letter of credit, (e) negotiating bank which is
usually any bank in the city of the beneficiary. The services of the notifying bank must always be utilized if the letter of credit is to be
advised to the beneficiary through cable, (f) the paying bank which buys or discounts the drafts contemplated by the letter of credit,
if such draft is to be drawn on the opening bank or on another designated bank not in the city of the beneficiary. As a rule, whenever
the facilities of the opening bank are used, the beneficiary is supposed to present his drafts to the notifying bank for negotiation and
(g) the confirming bank which, upon the request of the beneficiary, confirms the letter of credit issued by the opening bank.

From the foregoing, it is clear that letters of credit, being usually bank to bank transactions, involve more than just one
bank. Consequently, there is nothing unusual in the fact that the drafts presented in evidence by respondent bank were not made
payable to PBCom. As explained by respondent bank, a draft was drawn on the Bank of Taiwan by Ta Jih Enterprises Co., Ltd.
ofTaiwan, supplier of the goods covered by the foreign letter of credit. Having paid the supplier, the Bank of Taiwan then presented
the bank draft for reimbursement by PBComs correspondent bank in Taiwan, the Irving Trust Company which explains the reason
why on its face, the draft was made payable to the Bank of Taiwan. Irving Trust Company accepted and endorsed the draft
to PBCom. The draft was later transmitted to PBCom to support the latters claim for payment from MICO. MICO accepted the draft
upon presentment and negotiated it to PBCom.

A trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not
have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit
except through utilization, as collateral of the merchandise imported or purchased. A trust receipt, therefor, is a document of
security pursuant to which a bank acquires a security interest in the goods under trust receipt. Under a letter of credit-trust
receipt arrangement, a bank extends a loan covered by a letter of credit, with the trust receipt as a security for the loan. The
transaction involves a loan feature represented by a letter of credit, and a security feature which is in the covering trust receipt
which secures an indebtedness.

PILIPINAS BANK v. ALFREDO T. ONG and LEONCIA LIM
G.R. No. 133176, 8 August 2002, THIRD DIVISION (Sandoval-Gutierrez, J.)
Mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes violation of PD No. 115. However, what is
being punished by the law is the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another
regardless of whether the latter is the owner. In this case, no dishonesty nor abuse of confidence can be attributed to Ong and
Lim. Record shows that BMC failed to comply with its obligations upon maturity of the trust receipts due to serious liquidity
problems, prompting it to file a Petition for Rehabilitation and Declaration in a State of Suspension of Payments. It bears emphasis
that when Pilipinas Bank made a demand upon BMC to comply with its obligations under the trust receipts, BMC was already under
the control of the Management Committee created by the SEC.

Baliwag Mahogany Corporation (BMC), through its president, Alfredo T. Ong, applied for a domestic commercial letter of
credit with Pilipinas Bank to finance the purchase of about 100,000 board feet of "Air Dried, Dark Red Lauan" sawn lumber. Pilipinas
Bank approved the application and issued Letter of Credit in the amount of P3,500,000.00. To secure payment of the amount, BMC,
through Ong, executed two (2) trust receipts providing inter alia that it shall turn over the proceeds of the goods to the bank, if sold,
or return the goods, if unsold, upon maturity.

On due dates, BMC failed to comply with the trust receipt agreement. BMC filed with the Securities and Exchange
Commission (SEC) a Petition for Rehabilitation and for a Declaration in a State of Suspension of Payments under Section 6 (c) of
P.D. No. 902-A, as amended. After BMC informed its creditors (including Pilipinas Bank) of the filing of the petition, a Creditors'
Meeting was held to inform all creditor banks of the present status of BMC to avert any action which would affect the company's
operations, and (b) reach an accord on a common course of action to restore the company to sound financial footing. The SEC issued
an order creating a Management Committee wherein Pilipinas Bank is represented. The Committee shall, among others, undertake
the management of BMC, take custody and control of all its existing assets and liabilities, study, review and evaluate its operation
and/or the feasibility of its being restructured. BMC and a consortium of 14 of its creditor banks entered into a Memorandum of
Agreement (MOA) rescheduling the payment of BMCs existing debts.

The SEC approved the Rehabilitation Plan of BMC as contained in the MOA and declaring it in a state of suspension of
payments. However, BMC and Ong defaulted in the payment of their obligations under the rescheduled payment scheme provided
in the MOA. Pilipinas Bank filed a complaint charging Ong and Leoncia Lim with violation of the Trust Receipts Law (PD No. 115). The
bank alleged that both respondents failed to pay their obligations under the trust receipts despite demand.

The CA, at first, directed the prosecutors to file the appropriate criminal charges for violation of P.D. No. 115, otherwise
known as The Trust Receipts Law, against Ong and Lim. However, the CA reversed itself, holding that the execution of the MOA
constitutes novation which "places petitioner Bank in estoppel to insist on the original trust relation and constitutes a bar to the
filing of any criminal information for violation of the trust receipts law."

ISSUE:

Whether or not Lim and Ong can be held liable for violation of the Trust Receipts Law

HELD:

Petition DENIED.

Section 4 of PD No. 115 (The Trust Receipts Law) defines a trust receipt as any transaction by and between a person
referred to as the entruster, and another person referred to as the entrustee, whereby the entruster who owns or holds absolute
title or security interest over certain specified goods, documents or instruments, releases the same to the possession of the
entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein the
entrustee binds himself to hold the designated goods, documents or instruments with the obligation to turn over to the entruster
the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt, or the goods, documents
or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in
the trust receipt.

Failure of the entrustee to turn over the proceeds of the sale of the goods covered by a trust receipt to the entruster or
to return the goods, if they were not disposed of, shall constitute the crime of estafa under Article 315, par. 1(b) of the Revised
Penal Code. If the violation or offense is committed by a corporation, the penalty shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense. It is on this premise that Pilipinas Bank charged Ong and Lim with violation of the Trust Receipts Law.
Mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes violation of PD No. 115. However,
what is being punished by the law is the dishonesty and abuse of confidence in the handling of money or goods to the prejudice
of another regardless of whether the latter is the owner.

In this case, no dishonesty nor abuse of confidence can be attributed to Ong and Lim. Record shows that BMC failed to
comply with its obligations upon maturity of the trust receipts due to serious liquidity problems, prompting it to file a Petition for
Rehabilitation and Declaration in a State of Suspension of Payments. It bears emphasis that when Pilipinas Bank made a demand
upon BMC to comply with its obligations under the trust receipts, BMC was already under the control of the Management
Committee created by the SEC. The Management Committee took custody of all BMCs assets and liabilities, including the
red lauan lumber subject of the trust receipts, and authorized their use in the ordinary course of business operations. Clearly, it was
the Management Committee which could settle BMCs obligations. Moreover, it has not escaped this Courts observation that
respondent Ong paid P21,000,000.00 in compliance with the equity infusion required by the MOA. The mala prohibita nature of the
offense notwithstanding, respondents intent to misuse or misappropriate the goods or their proceeds has not been established by
the records.

MOA novated and extinguished the trust agreement between the parties

There are two ways which could indicate the presence of novation, thereby producing the effect of extinguishing an obligation
by another which substitutes the same. The first is when novation has been stated and declared in unequivocal terms. The second
is when the old and the new obligations are incompatible on every point. The test of incompatibility is whether or not the two
obligations can stand together. If they cannot, they are incompatible and the latter obligation novates the first. Corollarily, changes
that breed incompatibility must be essential in nature and not merely accidental. The incompatibility must take place in any of the
essential elements of the obligation, such as its object, cause or principal conditions, otherwise, the change is merely modificatory in
nature and insufficient to extinguish the original obligation.

The MOA did not only reschedule BMCs debts, but more importantly, it provided principal conditions which
are incompatible with the trust agreement. Indeed, what is automatically terminated in case BMC failed to comply with the
conditions under the MOA is not the MOA itself but merely the obligation of the lender (the bank) to reschedule the existing
credits. Moreover, it is erroneous to assume that the revesting of "all the rights of lenders against the borrower" means that
petitioner can charge respondents for violation of the Trust Receipts Law under the original trust receipt agreement. As explained
earlier, the execution of the MOA extinguished respondents obligation under the trust receipts. Respondents liability, if any,
would only be civil in nature since the trust receipts were transformed into mere loan documents after the execution of the
MOA. This is reinforced by the fact that the mortgage contracts executed by the BMC survive despite its non-compliance with the
conditions set forth in the MOA.

LORENZO M. SARMIENTO, JR. and GREGORIO LIMPIN, JR. v. COURT OF APPEALS
and ASSOCIATED BANKING CORP.
G.R. No. 122502, 27 December 2002, SECOND DIVISION (Austria-Martinez, J.)
In the present case, Associated Banking Corps complaint against petitioners was based on the failure of the latter to comply
with their obligation as spelled out in the Trust Receipt executed by them. This breach of obligation is separate and distinct from any
criminal liability for misuse and/or misappropriation of goods or proceeds realized from the sale of goods, documents or instruments
released under trust receipts, punishable under Section 13 of the Trust Receipts Law (P.D. 115) in relation to Article 315(1), (b) of the
Revised Penal Code. Being based on an obligation ex contractu and not ex delicto, the civil action may proceed independently of the
criminal proceedings instituted against petitioners regardless of the result of the latter.

In 1978, defendant Gregorio Limpin, Jr. and Antonio Apostol, doing business under the name and style of Davao Libra
Industrial Sales, filed an application for an Irrevocable Domestic Letter of Credit with the Associated Banking Corp. (Bank) for the
amount of P495,000.00 in favor of LS Parts Hardware and Machine Shop (LS Parts) for the purchase of assorted scrap irons. Said
application was signed Limpin and Apostol. The aforesaid application was approved, and the Bank issued Domestic Letter of Credit in
favor of LS Parts for P495,000.00. Thereafter, a Trust Receipt was executed by Limpin and Antonio Apostol. In said Trust Receipt, the
following stipulation, signed by Lorenzo Sarmiento, Jr. appears: -
In consideration of the Associated Banking Corporation releasing to Gregorio Limpin and Antonio Apostol goods
mentioned in the trust receipt, we hereby jointly and severally undertake and agree to pay, on demand, to the
Associated Bank Corporation all sums and amount of money which said Associated Banking Corporation may call
upon us to pay arising out of, pertaining to, and/or any manner connected with the trust receipt, WE FURTHER
AGREE that our liability in this undertaking shall be direct and immediate and not contingent upon the pursuit by
the Associated Banking Corporation of whatever remedies it may have against the aforesaid Gregorio Limpin and
Antonio Apostol.
SGD. T/LORENZO SARMIENTO, JR.
Surety/Guarantor (Exh. C-1)

The Trust Receipt also provided that in case of default, the merchandise covered by the documents are the property of the
Bank, with liberty to sell the same for cash for its accounts provided the proceeds thereof are turned over in their entirety to the
bank to be applied against acceptance and any other indebtedness of the defendants to the bank. Also, the defendants shall
immediately give notice to said Bank of any average damage, non-shipment, shortage, non-delivery or other happening not in the
usual and ordinary course of business.

However, Sarmiento and Limpin failed to pay their account. Legal action against Sarmiento and Limpin was deferred due to
the proposed settlement of the account. However, no settlement was reached. Hence the bank, thru counsel, sent a final letter of
demand. Then, a complaint for Violation of the Trust Receipt Law was filed against Sarmiento and Limpin. On the other hand,
Sarmiento and Limpin claim that they cannot be held liable as the 825 tons of assorted scrap iron, subject of the trust recei pt
agreement, were lost when the vessel transporting them sunk, and that said scrap iron were delivered to Davao Libra Industrial
Sales, a business concern over which they had no interest whatsoever. The barge was allegedly capsized.

The lower court favored Associated Banking Corporation. The Court of Appeals affirmed the judgment.

ISSUE:

Whether or not the civil liability is affected by the decision on the criminal case

HELD:

Petition DENIED.

In the Amended Information, Lorenzo Sarmiento, Jr. was dropped as an accused. Hence, with respect to Sarmiento Jr., Criminal
Case No. 14,126 cannot, in any way, bar the filing by private respondent of the present civil action against him.With respect to
Limpin, Jr., petitioners claim that the banks right to institute separately the civil action for the recovery of civil liability is already
barred on the ground that the same was not expressly reserved in the criminal action earlier filed against said respondent.

Under the Revised Rules of Criminal Procedure:
Section 1. Institution of criminal and civil actions. -- (a) When a criminal action is instituted, the civil action for the
recovery of civil liability arising from the offense charged shall be deemed instituted with the criminal action unless
the offended party waives the civil action, reserves the right to institute it separately or institutes the civil action
prior to the criminal action.
The reservation of the right to institute separately the civil action shall be made before the prosecution starts
presenting its evidence and under circumstances affording the offended party a reasonable opportunity to make
such reservation.
x x x.

While a reading of the aforequoted provisions shows that the offended party is required to make a reservation of his right to
institute a separate civil action, jurisprudence instructs that such reservation may not necessarily be express but may be
implied which may be inferred not only from the acts of the offended party but also from acts other than those of the latter.

In the Vintola case, the Vintolas contended that the civil action is already barred by the judgment in the criminal case
because IBAA did not reserve in the criminal case its right to enforce separately the Vintolas civil liability. They claim that by actively
intervening in the prosecution of the criminal case through a private prosecutor, IBAA had chosen to file the civil action impl iedly
with the criminal action, pursuant to Section 1, Rule 111 of the 1985 Rules on Criminal Procedure. In ruling that the Estafa case is not
a bar to the institution of a civil action for collection, this Court held that: It is inaccurate for the VINTOLAS to claim that the
judgment in the estafa case had declared that the facts from which the civil action might arise, did not exist, for it will be recalled
that the decision of acquittal expressly declared that the remedy of the Bank is civil and not criminal in nature. This amounts to a
reservation of the civil action in IBAAs favor for the Court would not have dwelt on a civil liability that it had intended to extinguish
by the same decision.

In the Bernaldes case, the court held that the failure of the court to make any pronouncement in its decision concerning
the civil liability of the driver and/or of his employer must therefore be due to the fact that the criminal action did not involve at
all any claim for civil indemnity.

Nothing in the records at hand shows that Associated Banking, Corp. ever attempted to enforce its right to recover civil
liability during the prosecution of the criminal action against petitioners.

Sarmiento and Lim correctly raised in that Associated Banking Corp.s counsel made a formal entry of appearance in
Criminal Case.
]
However, it is undisputed that in the early proceedings of the criminal action, Associated Banking Corps counsel
moved to withdraw his appearance. This Court has previously held that the appearance of the offended party in the criminal case
through a private prosecutor may not per se be considered either as an implied election to have his claim for damages
determined in said proceedings or a waiver of his right to have it determined separately. He must actually or actively intervene in
the criminal proceedings as to leave no doubt with respect to his intention to press a claim for damages in the same action. In the
present case, it can be said with reasonable certainty that by withdrawal of appearance of its counsel in the early stage of the
criminal proceedings, the private respondent, indeed, had no intention of submitting its claim for civil liability against petitioners
in the criminal action filed against the latter.

Furthermore, private respondents right to file a separate complaint for a sum of money is governed by the provisions of
Article 31 of the Civil Code, to wit: Article 31. When the civil action is based on an obligation not arising from the act or omission
complained of as a felony, such civil action may proceed independently of the criminal proceedings and regardless of the result of
the latter.

In the present case, Associated Banking Corps complaint against petitioners was based on the failure of the latter to
comply with their obligation as spelled out in the Trust Receipt executed by them. This breach of obligation is separate and
distinct from any criminal liability for misuse and/or misappropriation of goods or proceeds realized from the sale of goods,
documents or instruments released under trust receipts, punishable under Section 13 of the Trust Receipts Law (P.D. 115) in
relation to Article 315(1), (b) of the Revised Penal Code. Being based on an obligation ex contractu and not ex delicto, the civil
action may proceed independently of the criminal proceedings instituted against petitioners regardless of the result of the latter.

EDWARD C. ONG v. THE COURT OF APPEALS AND THE PEOPLE OF THE PHILIPPINES
G.R. No. 119858, 29 April 2003, FIRST DIVISION (Carpio, J.)
The Trust Receipts Law is violated whenever the entrustee fails to: (1) turn over the proceeds of the sale of the goods, or (2)
return the goods covered by the trust receipts if the goods are not sold. The mere failure to account or return gives rise to the crime
which is malum prohibitum. There is no requirement to prove intent to defraud. The Trust Receipts Law punishes dishonesty and
abuse of confidence in the handling of money or goods to the prejudice of public order. The mere failure to deliver the proceeds of the
sale or the goods if not sold constitutes a criminal offense that causes prejudice not only to the creditor, but also to the public
interest.

Edward C. Ong filed this petition for review on certiorari to nullify the Decision

of the Court of Appeals denying Ong's
motion for reconsideration. The assailed Decision affirmed in toto Ong's conviction by the Regional Trial Court on two counts
of estafa for violation of the Trust Receipts Law.

Allegedly, Ong, representing ARMAGRI International Corporation, conspiring and confederating together did then and
there willfully, unlawfully and feloniously defraud the SOLIDBANK Corporation represented by its Accountant, DEMETRIO LAZARO, a
corporation duly organized and existing under the laws of the Philippines. Allegedly, Ong received in trust from said SOLIDBANK
Corporation the following:
1. 10,000 bags of urea valued at P2,050,000.00 specified in a Trust Receipt Agreement and covered by a Letter of Credit in
favor of the Fertiphil Corporation; under the express obligation on the part of the said accused to account for said goods to
Solidbank Corporation and/or remit the proceeds of the sale thereof within the period specified in the Agreement or return
the goods, if unsold immediately or upon demand; but said accused, once in possession of said goods, far from complying
with the aforesaid obligation failed and refused and still fails and refuses to do so despite repeated demands made upon
him to that effect and with intent to defraud, willfully, unlawfully and feloniously misapplied, misappropriated and
converted the same or the value thereof to his own personal use and benefit, to the damage and prejudice of the said
Solidbank Corporation in the aforesaid amount of P2,050,000.00 Philippine Currency.

In another Criminal Case, allegedly, Ong, representing ARMAGRI International Corporation, did then and there willfully, unlawfully
and feloniously defraud the SOLIDBANK Corporation represented by its Accountant, DEMETRIO LAZARO, a and received in trust from
said SOLIDBANK Corporation:

2. 125 pcs. Rear diff. assy RNZO 49"
3. 50 pcs. Front & Rear diff assy. Isuzu Elof
4. 85 units 1-Beam assy. Isuzu Spz

all valued at P2,532,500.00 specified in a Trust Receipt Agreement and covered by a Domestic Letter of Credit in favor of
the Metropole Industrial Sales under the express obligation on the part of the said accused to account for said goods to
Solidbank Corporation and/or remit the proceeds of the sale thereof within the period specified in the Agreement or return
the goods, if unsold immediately or upon demand; but Ong, once in possession of said goods, far from complying with the
aforesaid obligation failed and refused and still fails and refuses to do so despite repeated demands to the prejudice of the
said Solidbank Corporation in the aforesaid amount of P2,532,500.00.

Ong both pleaded not guilty. The CA affirmed the trial court. The CA ruled that what made Ong liable was his failure to
account to the entruster Bank what he undertook to perform under the trust receipts. The CA held that ARMAGRI, which petitioner
represented, could not itself negotiate the execution of the trust receipts, go to the Bank to receive, return or account for the
entrusted goods. Based on the representations of Ong, the Bank accepted the trust receipts and, consequently, expected petitioner
to return or account for the goods entrusted. CA further ruled that the prosecution need not prove that Ong personally received and
misappropriated the goods subject of the trust receipts. Evidence of misappropriation is not required under the Trust Receipts
Law.

ISSUE:

Whether or not Ong comes within the purview of the Trust Receipts Law

HELD:

Petition GRANTED.

The pivotal issue for resolution is whether petitioner comes within the purview of Section 13 of the Trust Receipts Law
which provides: If the violation is committed by a corporation, partnership, association or other juridical entities, the penalty
provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible
for the offense, without prejudice to the civil liabilities arising from the offense.

Ong is a person responsible for violation of the Trust Receipts Law.

The relevant penal provision of the Trust Receipts Law reads:
SEC. 13. Penalty Clause. - The failure of the entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of
in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three Hundred and Fifteen, Paragraph One (b), of Act Numbered Three Thousand Eight
Hundred and Fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense
is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this
Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for
the offense, without prejudice to the civil liabilities arising from the criminal offense. (Emphasis supplied)

The Trust Receipts Law is violated whenever the entrustee fails to: (1) turn over the proceeds of the sale of the goods, or
(2) return the goods covered by the trust receipts if the goods are not sold. The mere failure to account or return gives rise to the
crime which is malum prohibitum. There is no requirement to prove intent to defraud.

The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a corporation. Hence, if
the entrustee is a corporation, the law makes the officers or employees or other persons responsible for the offense liable to
suffer the penalty of imprisonment. The reason is obvious: corporations, partnerships, associations and other juridical entities
cannot be put to jail. Hence, the criminal liability falls on the human agent responsible for the violation of the Trust Receipts Law.

In the instant case, the Bank was the entruster while ARMAGRI was the entrustee. Being the entrustee, ARMAGRI was the
one responsible to account for the goods or its proceeds in case of sale. However, the criminal liability for violation of the Trust
Receipts Law falls on the human agent responsible for the violation. Ong, who admits being the agent of ARMAGRI, is the person
responsible for the offense for two reasons. First, petitioner is the signatory to the trust receipts, the loan applications and the
letters of credit. Second, despite being the signatory to the trust receipts and the other documents, petitioner did not expl ain or
show why he is not responsible for the failure to turn over the proceeds of the sale or account for the goods covered by the trust
receipts.

The Bank released the goods to ARMAGRI upon execution of the trust receipts and as part of the loan transactions of
ARMAGRI. The Bank had a right to demand from ARMAGRI payment or at least a return of the goods. ARMAGRI failed to pay or
return the goods despite repeated demands by the Bank.

It is a well-settled doctrine long before the enactment of the Trust Receipts Law, that the failure to account, upon
demand, for funds or property held in trust is evidence of conversion or misappropriation. Under the law, mere failure by the
entrustee to account for the goods received in trust constitutes estafa. The Trust Receipts Law punishes dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of public order. The mere failure to deliver the proceeds of the sale
or the goods if not sold constitutes a criminal offense that causes prejudice not only to the creditor, but also to the public
interest. Evidently, the Bank suffered prejudice for neither money nor the goods were turned over to the Bank.

The Trust Receipts Law expressly makes the corporation's officers or employees or other persons therein responsible for
the offense liable to suffer the penalty of imprisonment. In the instant case, Ong signed the two trust receipts on behalf of
ARMAGRI 24 as the latter could only act through its agents. When Ong signed the trust receipts, he acknowledged receipt of the
goods covered by the trust receipts. In addition, petitioner was fully aware of the terms and conditions stated in the trust receipts,
including the obligation to turn over the proceeds of the sale or return the goods to the Bank.

Ong could have raised the defense that he had nothing to do with the failure to account for the proceeds or to return the
goods. Petitioner could have shown that he had severed his relationship with ARMAGRI prior to the loss of the proceeds or the
disappearance of the goods. Petitioner, however, waived his right to present any evidence, and thus failed to show that he is not
responsible for the violation of the Trust Receipts Law.

LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P. LUCENTE v. METROPOLITAN BANK & TRUST COMPANY
G.R. No. 159622, 30 July 2004, FIRST DIVISION (Ynares-Santiago, J.)
The second paragraph of Section 7 expressly provides that the entrustee shall be liable to the entruster for any deficiency after
the proceeds of the sale have been applied to the payment of the expenses of the sale, the payment of the expenses of re-taking,
keeping and storing the goods, documents or instruments, and the satisfaction of the entrustees indebtedness to the entruster. In
the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely petitioner corporations indebtedness to the
respondent bank. Respondent bank was thus well within its rights to institute the instant case to collect the deficiency.

Metropolitan Bank and Trust Company (Metrobank) filed a complaint for sum of money against Landl and Company (Phil.) Inc.
(Landl) and its directors, Percival G. Llaban and Manuel P. Lucente before the Regional Trial Court of Cebu. Metropolitan alleged that
Landl is engaged in the business of selling imported welding rods and alloys. Landl opened Commercial Letter of Credit with
Metropolitan Bank, in the amount of US$19,606.77, which was equivalent to P218,733.92 in Philippine currency at the time the
transaction was consummated. The letter of credit was opened to purchase various welding rods and electrodes from Perma Alloys,
Inc., New York, U.S.A., as evidenced by a Pro-Forma Invoice. Landl put up a marginal deposit of P50,414.00 from the proceeds of a
separate clean loan.

As an additional security, and as a condition for the approval of Landls application for the opening of the commercial letter of
credit, Metropolitan required Percival G. Llaban and Manuel P. Lucente to execute a Continuing Suretyship Agreement to the extent
of P400,000.00, excluding interest, in favor of Metroplolitan. Lucente also executed a Deed of Assignment in the amount of
P35,000.00 in favor of Metropolitan to cover the amount of Landls obligation to Metropolitan. Upon compliance with these
requisites, Metropolitan opened an irrevocable letter of credit for Landl.

To secure the indebtedness of Landl, Metropolitan required the execution of a Trust Receipt in an amount equivalent to the
letter of credit, on the condition that Landl would hold the goods in trust for respondent bank, with the right to sell the goods and
the obligation to turn over to respondent bank the proceeds of the sale, if any. If the goods remained unsold, Landl had the further
obligation to return them to Metropolitan.

Landl defaulted. Metropolitan demanded that Landl, as entrustees, turn over the goods subject of the trust receipt. Landl
turned over the subject goods to Metropolitan. Thus, in the presence of representatives of Landl and Metropolitan, the goods were
sold at public auction. The goods were sold for P30,000.00 to respondent bank as the highest bidder. The proceeds of the auction
sale were insufficient to completely satisfy petitioners outstanding obligation to respondent bank, notwithstanding the appl ication
of the time deposit account of petitioner Lucente. Accordingly, Metropolitan demanded that Landl, et al. pay the remaining balance
of their obligation. Landl, et al. failed to do so.

The trial court favored Metropolitan. The CA affirmed the trial court.

ISSUE:

Whether or not, in a trust receipt transaction, an entruster which had taken actual and juridical possession of the goods
covered by the trust receipt may subsequently avail of the right to demand from the entrustee the deficiency of the amount covered
by the trust receipt

HELD:

Petition GRANTED.

The resolution of the first assigned error hinges on the proper interpretation of Section 7 of Presidential Decree No. 115, or the
Trust Receipts Law, which reads:
Sec. 7. Rights of the entruster. - The entruster shall be entitled to the proceeds from the sale of the goods,
documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to
the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of
non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are not
contrary to the provisions of this Decree.

The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the
trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any
of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee,
and the entruster in possession of the goods, documents or instruments may, on or after default, give notice to the
entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the
goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a
purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the
expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or
instruments; (c) to the satisfaction of the entrustees indebtedness to the entruster. The entrustee shall receive
any surplus but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed sufficiently given
if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee's last
known business address.
There is no question that petitioners failed to pay their outstanding obligation to respondent bank. They contend,
however, that when the entrustee fails to settle his principal loan, the entruster may choose between two separate and alternative
remedies: (1) the return of the goods covered by the trust receipt, in which case, the entruster now acquires the ownership of the
goods which the entrustee failed to sell; or (2) cancel the trust and take possession of the goods, for the purpose of selling the same
at a private sale or at public auction. Landl, et al. assert that, under this second remedy, the entruster does not acquire ownership
of the goods, in which case he is entitled to the deficiency. Landl, et al. argue that these two remedies are so distinct that the
availment of one necessarily bars the availment of the other. Thus, when Metropolitan availed of the remedy of demanding the
return of the goods, the actual return of all the unsold goods completely extinguished petitioners liability.

A trust receipt is inextricably linked with the primary agreement between the parties. Time and again, we have
emphasized that a trust receipt agreement is merely a collateral agreement, the purpose of which is to serve as security for a
loan. A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a security interest in the goods. It
secures an indebtedness and there can be no such thing as security interest that secures no obligation.

The Trust Receipts Law was enacted to safeguard commercial transactions and to offer an additional layer of security to
the lending bank. Trust receipts are indispensable contracts in international and domestic business transactions. The prevalent
use of trust receipts, the danger of their misuse and/or misappropriation of the goods or proceeds realized from the sale of goods,
documents or instruments held in trust for entruster banks, and the need for regulation of trust receipt transactions to safeguard
the rights and enforce the obligations of the parties involved are the main thrusts of the Trust Receipts Law

The second paragraph of Section 7 provides a statutory remedy available to an entruster in the event of default or failure of
the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and
the entrustee. More specifically, the entruster may cancel the trust and take possession of the goods, documents or instruments
subject of the trust or of the proceeds realized therefrom at any time. The law further provides that the entruster in possession of
the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less
than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the
entruster may, at a public sale, become a purchaser. The proceeds of any such sale, whether public or private, shall be applied (a) to
the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or
instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall receive any surplus but shall
be liable to the entruster for any deficiency.

The right of repossession and subsequent sale at public auction which were availed of by respondent bank were rights
available upon default, and which were conferred by statute and reinforced by the contract between the parties. The initial
repossession by the bank of the goods subject of the trust receipt did not result in the full satisfaction of the petitioners loan
obligation. Petitioners are apparently laboring under the mistaken impression that the full turn-over of the goods suffices to divest
them of their obligation to repay the principal amount of their loan obligation. This is definitely not the case.

Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is alienated to the
creditor in satisfaction of a debt in money and the same is governed by sales. Dation in payment is the delivery and transmission of
ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. As aforesaid, the
repossession of the machinery and equipment in question was merely to secure the payment of TCC's loan obligation and not for the
purpose of transferring ownership thereof to PNB in satisfaction of said loan. Thus, no dacion en pago was ever
accomplished. (Citations omitted, underscoring supplied)
[10]

Metropolitans repossession of the properties and subsequent sale of the goods were completely in accordance with its
statutory and contractual rights upon default of Landl.

The second paragraph of Section 7 expressly provides that the entrustee shall be liable to the entruster for any deficiency
after the proceeds of the sale have been applied to the payment of the expenses of the sale, the payment of the expenses of re-
taking, keeping and storing the goods, documents or instruments, and the satisfaction of the entrustees indebtedness to the
entruster. In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely petitioner corporations
indebtedness to the respondent bank. Respondent bank was thus well within its rights to institute the instant case to collect the
deficiency.

ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO YUJUICO, v.
HOME BANKERS SAVINGS AND TRUST COMPANY
G.R. No. 137232, 29 June 2005, THIRD DIVISION (Sandoval-Gutierrezm J.)
It is thus clear that the principal transaction between petitioner RTMC and the bank is a contract of loan. RTMC used the proceeds of
this loan to purchase raw materials from a supplier abroad. In order to secure the payment of the loan, RTMC delivered the raw
materials to the bank as collateral. Trust receipts were executed by the parties to evidence this security arrangement. Simply stated,
the trust receipts were mere securities.

In 1989, Rosario Textile Mills Corporation (RTMC) applied from Home Bankers Savings & Trust Co. for an Omnibus Credit
Line for P10 million. Home Bankers approved RTMCs credit line but for only P8 million. The bank notified RTMC of the grant of the
said loan thru a which contains terms and conditions conformed by RTMC thru Edilberto V. Yujuico.

Yujuico signed a Surety Agreement in favor of the bank, in which he bound himself jointly and severally with RTMC for the
payment of all RTMCs indebtedness to the bank from 1989 to 1990. RTMC availed of the credit line by making numerous
drawdowns, each drawdown being covered by a separate promissory note and trust receipt. RTMC, represented by Yujuico,
executed in favor of the bank a total of eleven (11) promissory notes.

Despite the lapse of the respective due dates under the promissory notes and notwithstanding Home Bankers demand
letters, RTMC failed to pay its loans. Hence, Home Bankers filed a complaint for sum of money against RTMC and Yujuico.

In their answer, RTMC and Yujuico contend that they should be absolved from liability. They claimed that although the
grant of the credit line and the execution of the suretyship agreement are admitted, the bank gave assurance that the suretyship
agreement was merely a formality under which Yujuico will not be personally liable. They argue that the importation of raw
materials under the credit line was with a grant of option to them to turn-over to the bank the imported raw materials should these
fail to meet their manufacturing requirements. RTMC offered to make such turn-over since the imported materials did not conform
to the required specifications. However, the bank refused to accept the same, until the materials were destroyed by a fire which
gutted down RTMCs premises.

The lower court favored Home Bankers. On the Court of Appeals, it affirmed the trial courts judgment, holding that the
bank is merely the holder of the security for its advance payments to petitioners; and that the goods they purchased, through the
credit line extended by the bank, belong to them and hold said goods at their own risk.

ISSUE:

Whether or not there was a violation of the Trust Receipts Law

HELD:

Petition

On the first issue, petitioners theorize that when petitioner RTMC imported the raw materials needed for its manufacture,
using the credit line, it was merely acting on behalf of the bank, the true owner of the goods by virtue of the trust receipts. Hence,
under the doctrine of res perit domino, the bank took the risk of the loss of said raw materials. RTMCs role in the transaction was
that of end user of the raw materials and when it did not accept those materials as they did not meet the manufacturing
requirements, RTMC made a valid and effective tender of the goods to the bank. Since the bank refused to accept the raw
materials, RTMC stored them in its warehouse. When the warehouse and its contents were gutted by fire, petitioners obligation to
the bank was accordingly extinguished.

Petitioners stance, however, conveniently ignores the true nature of its transaction with the bank. We recall that RTMC
filed with the bank an application for a credit line in the amount of P10 million, but only P8 million was approved. RTMC then made
withdrawals from this credit line and issued several promissory notes in favor of the bank. In banking and commerce, a credit line is
that amount of money or merchandise which a banker, merchant, or supplier agrees to supply to a person on credit and general ly
agreed to in advance. It is the fixed limit of credit granted by a bank, retailer, or credit card issuer to a customer, to the full extent
of which the latter may avail himself of his dealings with the former but which he must not exceed and is usually intended to cover a
series of transactions in which case, when the customers line of credit is nearly exhausted, he is expected to reduce his
indebtedness by payments before making any further drawings.

It is thus clear that the principal transaction between petitioner RTMC and the bank is a contract of loan. RTMC used the
proceeds of this loan to purchase raw materials from a supplier abroad. In order to secure the payment of the loan, RTMC
delivered the raw materials to the bank as collateral. Trust receipts were executed by the parties to evidence this security
arrangement. Simply stated, the trust receipts were mere securities.

A trust receipt is a a security transaction intended to aid in financing importers and retail dealers who do not have sufficient
funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except
through utilization, as collateral, of the merchandise imported or purchased.

In Vintola vs. Insular Bank of Asia and America, the court elucidated further that a trust receipt, therefore, is a security
agreement, pursuant to which a bank acquires a security interest in the goods. It secures an indebtedness and there can be no
such thing as security interest that secures no obligation. Section 3 (h) of the Trust Receipts Law (P.D. No. 115) defines a security
interest as follows:
(h) Security Interest means a property interest in goods, documents, or instruments to secure performance of some obligation of
the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such
title is in substance taken or retained for security only.

Petitioners insistence that the ownership of the raw materials remained with the bank is untenable. If under the trust receipt,
the bank is made to appear as the owner, it was but an artificial expedient, more of legal fiction than fact, for if it were really so, it
could dispose of the goods in any manner it wants, which it cannot do, just to give consistency with purpose of the trust receipt of
giving a stronger security for the loan obtained by the importer. To consider the bank as the true owner from the inception of the
transaction would be to disregard the loan feature thereof...

Thus, petitioners cannot be relieved of their obligation to pay their loan in favor of the bank.

Anent the second issue, petitioner Yujuico contends that the suretyship agreement he signed does not bind him, the same
being a mere formality. The court rejects petitioner Yujuicos contentions for two reasons. First, there is no record to support his
allegation that the surety agreement is a mere formality; and Second, as correctly held by the Court of Appeals, the Suretyship
Agreement signed by petitioner Yujuico binds him. The terms clearly show that he agreed to pay the bank jointly and severally with
RTMC. The parole evidence rule under Section 9, Rule 130 of the Revised Rules of Court is in point, thus:
SEC. 9. Evidence of written agreements. When the terms of an agreement have been reduced in writing, it is
considered as containing all the terms agreed upon and there can be, between the parties and their successors in
interest, no evidence of such terms other than the contents of the written agreement.
However, a party may present evidence to modify, explain, or add to the terms of the written agreement if he puts
in issue in his pleading:
(a) An intrinsic ambiguity, mistake, or imperfection in the written agreement;
(b) The failure of the written agreement to express the true intent and agreement of the parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties or their successors in interest after the execution of the
written agreement.
x
Under this Rule, the terms of a contract are rendered conclusive upon the parties and evidence aliunde is not admissible to
vary or contradict a complete and enforceable agreement embodied in a document. We have carefully examined the Suretyship
Agreement signed by Yujuico and found no ambiguity therein. Documents must be taken as explaining all the terms of the
agreement between the parties when there appears to be no ambiguity in the language of said documents nor any failure to express
the true intent and agreement of the parties.
As to the third and final issue At the risk of being repetitious, we stress that the contract between the parties is a loan. What
respondent bank sought to collect as creditor was the loan it granted to petitioners. Petitioners recourse is to sue their supplier, if
indeed the materials were defective.

JOSE C. TUPAZ IV and PETRONILA C. TUPAZ v. THE COURT OF APPEALS AND
BANK OF THE PHILIPPINE ISLANDS
G.R. No. 145578, 18 November 2005, FIRST DIVISION (Carpio, J.)
BPIs suit against petitioner Jose Tupaz stands despite the Courts finding that he is liable as guarantor only. First, excussion
is not a pre-requisite to secure judgment against a guarantor. The guarantor can still demand deferment of the execution of the
judgment against him until after the assets of the principal debtor shall have been exhausted. Second, the benefit of excussion may
be waived. Under the trust receipt dated 30 September 1981, petitioner Jose Tupaz waived excussion when he agreed that his
liability in *the+ guaranty shall be DIRECT AND IMMEDIATE, without any need whatsoever on xxx [the] part [of respondent bank] to
take any steps or exhaust any legal remedies xxx. The clear import of this stipulation is that petitioner Jose Tupaz waived the benefit
of excussion under his guarantee.

Jose C. Tupaz IV and Petronila C. Tupaz \ were Vice-President for Operations and Vice-President/Treasurer, respectively, of El
Oro Engraver Corporation (El Oro Corporation). El Oro Corporation had a contract with the Philippine Army to supply the latter
with survival bolos. To finance the purchase of the raw materials for the survival bolos, petitioners, on behalf of El Oro
Corporation, applied Bank of the Philippine Islands (BPI) for two commercial letters of credit. The letters of credit were in favor of El
Oro Corporations suppliers, Tanchaoco Manufacturing Incorporated (Tanchaoco Incorporated) and Maresco Rubber and
Retreading Corporation (Maresco Corporation). BPI granted Tupas application and issued Letter of Credit for P564,871.05 to
Tanchaoco Incorporated and Letter of Credit for P294,000 to Maresco Corporation.

Simultaneous with the issuance of the letters of credit, Tupas signed trust receipts in favor of BPI. Jose C. Tupaz IV signed,
in his personal capacity, a trust receipt corresponding to Letter of Credit for P564,871.05. Jose Tupaz bound himself to sell the goods
covered by the letter of credit and to remit the proceeds to respondent bank, if sold, or to return the goods, if not sold. Also, The
Tupaz signed, in their capacities as officers of El Oro Corporation, a trust receipt corresponding to Letter of Credit for P294,000. They
bound themselves to sell the goods covered by that letter of credit and to remit the proceeds to respondent bank, if sold, or to
return the goods, if not sold.

After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to El Oro Corporation, respondent bank
paid the former P564,871.05 and P294,000, respectively. The Tupaz did not comply with their undertaking under the trust receipts.
BPI made several demands for payments but El Oro Corporation made partial payments only. BPI sent final demand letters to El Oro
Corporation. El Oro Corporation replied that it could not fully pay its debt because the Armed Forces of the Philippines had delayed
paying for the survival bolos.

BPI charged petitioners with estafa under Section 13, Presidential Decree No. 115 (Section 13) or Trust Receipts Law (PD
115). The RTC acquitted the Tupaz but held them civilly liable. The Court believes that the El Oro Engraver Corporation and both
accused Jose C. Tupaz and Petronila Tupaz, jointly and solidarily should be held civilly liable to the BPI. The CA affirmed the RTC.

ISSUE:

Whether or not petitioners bound themselves personally liable for El Oro Corporations debts under the trust receipts;
a.) whether petitioners liability is solidary with El Oro Corporation; and
b.) whether petitioners acquittal of estafa under Section 13, PD 115 extinguished their civil liability.

HELD:

Petition PARTLY GRANTED.

On Petitioners Undertaking Under the Trust Receipts

A corporation, being a juridical entity, may act only through its directors, officers, and employees. Debts incurred by these
individuals, acting as such corporate agents, are not theirs but the direct liability of the corporation they represent. As an
exception, directors or officers are personally liable for the corporations debts only if they so contractually agree or stipulate.

In the trust receipt, the Tupaz signed below this clause as officers of El Oro Corporation. Thus, under petitioner Petronila
Tupazs signature are the words Vice-PresTreasurer and under petitioner Jose Tupazs signature are the words Vice-Pres
Operations. By so signing that trust receipt, the Tupaz did not bind themselves personally liable for El Oro Corporations
obligation. A corporate representative signed a solidary guarantee clause in two trust receipts in his capacity as corporate
representative. There, the Court held that the corporate representative did not undertake to guarantee personally the payment of
the corporations debts.

For the trust receipt dated 30 September 1981, the dorsal portion of which petitioner Jose Tupaz signed alone, we find
that he did so in his personal capacity. Petitioner Jose Tupaz did not indicate that he was signing as El Oro Corporations Vice-
President for Operations. Hence, petitioner Jose Tupaz bound himself personally liable for El Oro Corporations debts. Not being a
party to the trust receipt dated 30 September 1981, petitioner Petronila Tupaz is not liable under such trust receipt.

The Nature of Petitioner Jose Tupazs Liability Under the Trust Receipt Dated 30 September 1981

As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:

To the Bank of the Philippine Islands

In consideration of your releasing to under the terms of this Trust Receipt the goods
described herein, I/We, jointly and severally, agree and promise to pay to you, on demand, whatever sum or sums
of money which you may call upon me/us to pay to you, arising out of, pertaining to, and/or in any way connected
with, this Trust Receipt, in the event of default and/or non-fulfillment in any respect of this undertaking on the
part of the said . I/we further agree that my/our liability in this guarantee shall be DIRECT
AND IMMEDIATE,without any need whatsoever on your part to take any steps or exhaust any legal remedies that
you may have against the said . Before making demand upon me/us. (Underlining
supplied; capitalization in the original)

The lower courts interpreted this to mean that petitioner Jose Tupaz bound himself solidarily liable with El Oro Corporation
for the latters debt under that trust receipt. This is error.

The Court interpreted a substantially identical clause in a trust receipt signed by a corporate officer who bound himself
personally liable for the corporations obligation. The petitioner in that case contended that the stipulation we jointly and severally
agree and undertake rendered the corporate officer solidarily liable with the corporation. The Court dismissed this claim and held
the corporate officer liable as guarantor only. The Court further ruled that had there been more than one signatories to the trust
receipt, the solidary liability would exist between the guarantors.

However, BPIs suit against petitioner Jose Tupaz stands despite the Courts finding that he is liable as guarantor only.
First, excussion is not a pre-requisite to secure judgment against a guarantor. The guarantor can still demand deferment of the
execution of the judgment against him until after the assets of the principal debtor shall have been exhausted. Second, the
benefit of excussion may be waived. Under the trust receipt dated 30 September 1981, petitioner Jose Tupaz waived excussion
when he agreed that his liability in *the+ guaranty shall be DIRECT AND IMMEDIATE, without any need whatsoever on xxx [the]
part *of respondent bank+ to take any steps or exhaust any legal remedies xxx. The clear import of this stipulation is that
petitioner Jose Tupaz waived the benefit of excussion under his guarantee.

Petitioner Jose Tupazs Acquittal did not Extinguish his Civil Liability

The rule is that where the civil action is impliedly instituted with the criminal action, the civil liability is not extingui shed by
acquittal. Where the acquittal is based on reasonable doubt xxx as only preponderance of evidence is required in civil cases; where
the court expressly declares that the liability of the accused is not criminal but only civil in nature xxx as, for instance, in the felonies
of estafa, theft, and malicious mischief committed by certain relatives who thereby incur only civil liability (See Art. 332, Revised
Penal Code); and, where the civil liability does not arise from or is not based upon the criminal act of which the accused was
acquitted xxx.

Here, respondent bank chose not to file a separate civil action to recover payment under the trust receipts. Instead,
respondent bank sought to recover payment in Criminal Case Nos. 8848 and 8849. Although the trial court acquitted petitioner Jose
Tupaz, his acquittal did not extinguish his civil liability. As the Court of Appeals correctly held, his liability arose not from the
criminal act of which he was acquitted (ex delito) but from the trust receipt contract (ex contractu) of 30 September 1981.
Petitioner Jose Tupaz signed the trust receipt of 30 September 1981 in his personal capacity.

DEVELOPMENT BANK OF THEP HILIPPINES v. PRUDENTIAL BANK
G.R. No. 143772, 22 November 2005, THIRD DIVISION (Corona, J.)
No one can transfer a right to another greater than what he himself has. Nemo dat quod non habet. Hence, Litex could not
transfer a right that it did not have over the disputed items. Corollarily, DBP could not acquire a right greater than what i ts
predecessor-in-interest had. The spring cannot rise higher than its source. DBP merely stepped into the shoes of Litex as trustee of the
imported articles with an obligation to pay their value or to return them on Prudential Banks demand. By its failure to pay or return
them despite Prudential Banks repeated demands and by selling them to Lyon without Prudential Banks knowledge and conformity,
DBP became a trustee ex maleficio.

In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with Prudential Bank for US$498,000.
This was in connection with its importation of 5,000 spindles for spinning machinery with drawing frame, simplex fly frame, ring
spinning frame and various accessories, spare parts and tool gauge. These were released to Litex under covering trust receipts it
executed in favor of Prudential Bank. Litex installed and used the items in its textile mill located in Montalban, Rizal. In 1980, DBP
granted a foreign currency loan in the amount of US$4,807,551 to Litex. To secure the loan, Litex executed real estate and chattel
mortgages on its plant site in Montalban, Rizal, including the buildings and other improvements, machineries and equipments there.
Among the machineries and equipments mortgaged in favor of DBP were the articles covered by the trust receipts.

Prudential Bank learned about DBPs plan for the overall rehabilitation of Litex. In a letter, Prudential Bank notified DBP of
its claim over the various items covered by the trust receipts which had been installed and used by Litex in the textile mill.
Prudential Bank informed DBP that it was the absolute and juridical owner of the said items and they were thus not part of the
mortgaged assets that could be legally ceded to DBP.

For the failure of Litex to pay its obligation, DBP extra-judicially foreclosed on the real estate and chattel mortgages,
including the articles claimed by Prudential Bank. During the foreclosure sale, DBP acquired the foreclosed properties as the highest
bidder. DBP caused to be published in an issue of the Times Journal an invitation to bid in the public sale. It called on interested
parties to submit bids for the sale of the textile mill formerly owned by Litex, the land on which it was built, as well as the
machineries and equipments therein. Learning of the intended public auction, Prudential Bank wrote a letter to DBP reasserting its
claim over the items covered by trust receipts in its name and advising DBP not to include them in the auction. It also demanded
the turn-over of the articles or alternatively, the payment of their value. In reply to Prudential Banks letter, DBP requested
documents to enable it to evaluate Prudential Banks claim. Prudential Bank provided DBP the requested documents.

There being no concrete action on DBPs part, Prudential Bank, in a letter made a final demand on DBP for the turn-over of
the contested articles or the payment of their value. Without the knowledge of Prudential Bank, however, DBP sold the Litex textile
mill, as well as the machineries and equipments therein, to Lyon Textile Mills, Inc. Prudential Bank filed a complaint for a sum of
money with damages against DBP. The RTC decided in favor of Prudential Bank. The CA affirmed the decision. It applied the
provisions of PD 115 and held that ownership over the contested articles belonged to Prudential Bank as entrustor, not to Litex.
Consequently, even if Litex mortgaged the items to DBP and the latter foreclosed on such mortgage, DBP was duty-bound to turn
over the proceeds to Prudential Bank, being the party that advanced the payment for them. Moreover, CA found that DBP was not a
mortgagee in good faith.

ISSUE:

Whether or not the ownership of the contested articles belonged to Prudential Bank and not to Litex

HELD:

Petition GRANTED.

Trust receipt transactions are governed by the provisions of PD 115 which defines such a transaction as follows:

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this
Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person
referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security
interests over certain specified goods, documents or instruments, releases the same to the possession of the
entrustee upon the latters execution and delivery to the entruster of a signed document called a trust receipt
wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over
to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially
equivalent to any of the following:

1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or
process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under
trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall
retain its title over the goods whether in its original or processed form until the entrustee has complied
fully with his obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal
with them in a manner preliminary or necessary to their sale; or

2. In the case of instruments, (a) to sell or procure their sale or exchange; or (b) to deliver them to a
principal; or (c) to effect the consummation of some transactions involving delivery to a depository or
register; or (d) to effect their presentation, collection or renewal.

The various agreements between Prudential Bank and Litex commonly denominated as trust receipts were valid. As the Court
of Appeals correctly ruled, their provisions did not contravene the law, morals, good customs, public order or public policy. The
articles were owned by Prudential Bank and they were only held by Litex in trust. While it was allowed to sell the items, Litex had
no authority to dispose of them or any part thereof or their proceeds through conditional sale, pledge or any other means.

Article 2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is essential that the pledgor or mortgagor
should be the absolute owner of the thing pledged or mortgaged. Article 2085 (3) further mandates that the person constituting the
pledge or mortgage must have the free disposal of his property, and in the absence thereof, that he be legally authorized for the
purpose. Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. Litex could not
have subjected them to a chattel mortgage. Their inclusion in the mortgage was void and had no legal effect. There being no valid
mortgage, there could also be no valid foreclosure or valid auction sale. Thus, DBP could not be considered either as a mortgagee
or as a purchaser in good faith.

No one can transfer a right to another greater than what he himself has. Nemo dat quod non habet. Hence, Litex could not
transfer a right that it did not have over the disputed items. Corollarily, DBP could not acquire a right greater than what its
predecessor-in-interest had. The spring cannot rise higher than its source. DBP merely stepped into the shoes of Litex as trustee of
the imported articles with an obligation to pay their value or to return them on Prudential Banks demand. By its failure to pay or
return them despite Prudential Banks repeated demands and by selling them to Lyon without Prudential Banks knowledge and
conformity, DBP became a trustee ex maleficio.

ALFREDO CHING v. THE SECRETARY OF JUSTICE, et al.
G. R. No. 164317, 6 February 2006, FIRST DIVISION (Callejo, Sr., J.)
Thus, failure of the entrustee to turn over the proceeds of the sale of the goods covered by the trust receipts to the entruster
or to return said goods if they were not disposed of in accordance with the terms of the trust receipt is a crime under P.D. No. 115,
without need of proving intent to defraud. The law punishes dishonesty and abuse of confidence in the handling of money or goods to
the prejudice of the entruster, regardless of whether the latter is the owner or not. A mere failure to deliver the proceeds of the sale
of the goods, if not sold, constitutes a criminal offense that causes prejudice, not only to another, but more to the public interest.

Ching was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime in September to October 1980,
PBMI, through Ching, applied with the Rizal Commercial Banking Corporation (RCBC) for the issuance of commercial letters of credit
to finance its importation of assorted goods. RCBC approved the application, and irrevocable letters of credit were issued in favor of
Ching. The goods were purchased and delivered in trust to PBMI. Ching signed 13 trust receipts as surety, acknowledging delivery of
the goods. Under the receipts, Ching agreed to hold the goods in trust for the said bank, with authority to sell but not by way of
conditional sale, pledge or otherwise; and in case such goods were sold, to turn over the proceeds thereof as soon as received, to
apply against the relative acceptances and payment of other indebtedness to RCBC. In case the goods remained unsold within the
specified period, the goods were to be returned to RCBC without any need of demand. Thus, said "goods, manufactured products or
proceeds thereof, whether in the form of money or bills, receivables, or accounts separate and capable of identification" were
RCBCs property.

When the trust receipts matured, Ching failed to return the goods to RCBC, or to return their value amounting
to P6,940,280.66 despite demands. Thus, RCBC filed a criminal complaint for estafa against Ching. The Prosectuor found probable
cause for estafa in relation to Presidential Decree (P.D.) No. 115, otherwise known as the Trust Receipts Law. Thirteen (13)
Informations were filed against Ching. The Minister of Justice later on ordered the withdrawal of the informations.

In the meantime, the Court rendered judgment in Allied Banking Corporation v. Ordoez, holding that the penal provision of
P.D. No. 115 encompasses any act violative of an obligation covered by the trust receipt; it is not limited to transactions i nvolving
goods which are to be sold (retailed), reshipped, stored or processed as a component of a product ultimately sold.

RCBC re-filed the criminal complaint for estafa. The City Prosecutor ruled that there was no probable cause. The Secretary
of Justice reversed the assailed resolution of the City Prosecutor. Accordingly, the execution of said receipts is enough to indict the
petitioner as the official responsible for violation of P.D. No. 115. The Court of Appeals (CA) dismissed the petition.

ISSUE:

Whether or not Ching violated P.D. 115

HELD:

Petition GRANTED.

Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:
Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this
Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person
referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security
interests over certain specified goods, documents or instruments, releases the same to the possession of the
entrustee upon the latters execution and delivery to the entruster of a signed document called a "trust receipt"
wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over
to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially
equivalent to any of the following:
1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process the
goods with the purpose of ultimate sale; Provided, That, in the case of goods delivered under trust receipt for the
purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods
whether in its original or processed form until the entrustee has complied fully with his obligation under the trust
receipt; or (c) to load, unload, ship or otherwise deal with them in a manner preliminary or necessary to their sale;
or
2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them to a principal; or c) to
effect the consummation of some transactions involving delivery to a depository or register; or d) to effect their
presentation, collection or renewal.

The sale of goods, documents or instruments by a person in the business of selling goods, documents or
instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in
such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other
interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is
outside the purview and coverage of this Decree.

An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt
transaction, and any successor in interest of such person for the purpose of payment specified in the trust receipt
agreement. The entrustee is obliged to: (1) hold the goods, documents or instruments in trust for the entruster
and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the
proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to
the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire,
theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form,
separate and capable of identification as property of the entruster; (5) return the goods, documents or
instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and
conditions of the trust receipt not contrary to the provisions of the decree.

The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust
receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the
goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust
receipt; provided, such are not contrary to the provisions of the document.

In the case at bar, the transaction between Ching and RCBC bank falls under the trust receipt transactions envisaged in P.D.
No. 115. RCBC imported the goods and entrusted the same to PBMI under the trust receipts signed by petitioner, as entrustee, with
the bank as entruster. It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of public
policy, the failure of person to turn over the proceeds of the sale of the goods covered by a trust receipt or to return said goods, if
not sold, is a public nuisance to be abated by the imposition of penal sanctions.

The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions involving goods procured as a
component of a product ultimately sold has been resolved in the affirmative in Allied Banking Corporation v. Ordoez. The law
applies to goods used by the entrustee in the operation of its machineries and equipment. The non-payment of the amount
covered by the trust receipts or the non-return of the goods covered by the receipts, if not sold or otherwise not disposed of,
violate the entrustees obligation to pay the amount or to return the goods to the entruster.

There are two possible situations in a trust receipt transaction. The first is covered by the provision which refers to money
received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second is
covered by the provision which refers to merchandise received under the obligation to return it (devolvera) to the owner. Thus,
failure of the entrustee to turn over the proceeds of the sale of the goods covered by the trust receipts to the entruster or to
return said goods if they were not disposed of in accordance with the terms of the trust receipt is a crime under P.D. No. 115,
without need of proving intent to defraud. The law punishes dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of the entruster, regardless of whether the latter is the owner or not. A mere failure to deliver the
proceeds of the sale of the goods, if not sold, constitutes a criminal offense that causes prejudice, not only to another, but more
to the public interest.

The Court rules that although Ching signed the trust receipts merely as Senior Vice-President of PBMI and had no physical
possession of the goods, he cannot avoid prosecution for violation of P.D. No. 115. The penalty clause of the law, Section 13 of P.D.
No. 115 reads:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods,
documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of
in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the
provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred
and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a
corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense,
without prejudice to the civil liabilities arising from the criminal offense.

The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph 1(b), Article 315 of the
Revised Penal Code, or estafa with abuse of confidence. It may be committed by a corporation or other juridical entity or by natural
persons.

Section 13 of PD 115 states: If the violation or offense is committed by a corporation, partnership, association or other
judicial entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials
or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense. There is no
dispute that it was Ching, who as senior vice-president of PBM, executed the thirteen (13) trust receipts. As such, the law points to
him as the official responsible for the offense. Since a corporation cannot be proceeded against criminally because it cannot commit
crime in which personal violence or malicious intent is required, criminal action is limited to the corporate agents guilty of an act
amounting to a crime and never against the corporation.

CHATTEL MORTGAGE

MAKATI LEASING and FINANCE CORPORATION v. WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF APPEALS
G.R. No. L-58469, 16 May 16 1983, SECOND DIVISION (De Castro, J.)
A chattel mortgage constituted on machinery permanently attached on the ground is to be considered as personal property
and the chattel mortgage constituted thereon is null and void, regardless of who owns the land. However, the chattel mortgage is
binding on the contracting parties but cannot prejudice innocent third parties. Accordingly, it is undeniable that the parties to a
contract may by agreement treat as personal property that which by nature would be real property, as long as no interest of third
parties would be prejudiced thereby.

In order to obtain financial accommodations from herein petitioner Makati Leasing and Finance Corporation (Makati), the
private respondent Wearever Textile Mills, Inc. (Wearever), discounted and assigned several receivables with the former under a
Receivable Purchase Agreement. To secure the collection of the receivables assigned, Weaver executed a Chattel Mortgage over
certain raw materials inventory as well as a machinery described as an Artos Aero Dryer Stentering Range.

Upon Wearevers default, Makati filed a petition for extrajudicial foreclosure of the properties mortgage to it. However,
the Deputy Sheriff assigned to implement the foreclosure failed to gain entry into Wearever's premises and was not able to effect
the seizure of the aforedescribed machinery. Makati thereafter filed a complaint for judicial foreclosure with the CFI of Rizal. Acting
on Makati's application for replevin, the lower court issued a writ of seizure, the enforcement of which was however subsequently
restrained upon Wearever's filing of a motion for reconsideration. Finally, the lower court issued an order lifting the restraining
order for the enforcement of the writ of seizure and an order to break open the premises of Wearever to enforce the writ. Thus, the
sheriff repaired to the premises and removed the main drive motor of the subject machinery.

The CA set aside the Orders of the lower court and ordered the return of the motor seized. Accordingly, the machinery in
suit cannot be the subject of replevin, much less of a chattel mortgage, because it is a real property pursuant to Article 415 of NCC,
the same being attached to the ground by means of bolts and the only way to remove it from Wearvert's plant would be to drill out
or destroy the concrete floor. According to Makati, Weaver is estopped from claiminh that the machine is real property by
constituting a chattel mortgage thereon.

ISSUE:

Whether or not the machinery is a personal property and thus the chattel mortgage constituted therein is valid.

HELD:

Petition GRANTED.

A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this Court, speaking through Justice
J.B.L. Reyes, ruled that although there is no specific statement referring to the subject house as personal property, yet by ceding,
selling or transferring a property by way of chattel mortgage defendants-appellants could only have meant to convey the house
as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand
by claiming otherwise. Moreover, the subject house stood on a rented lot to which defendants-appellants merely had a temporary
right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other
factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personali ty. Finally,
unlike in the Iya cases, Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery & Williamson, wherein third
persons assailed the validity of the chattel mortgage, it is the defendants-appellants themselves, as debtors-mortgagors, who are
attacking the validity of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the herein defendants-
appellants, having treated the subject house as personality.

If a house of strong materials, like what was involved in the above Tumalad case, may be considered as personal
property for purposes of executing a chattel mortgage thereon as long as the parties to the contract so agree and no innocent
third party will be prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its nature and becomes
immobilized only by destination or purpose, may not be likewise treated as such. This is really because one who has so agreed is
estopped from denying the existence of the chattel mortgage.

Xxx It must be pointed out that the characterization of the subject machinery as chattel by the private respondent is
indicative of intention and impresses upon the property the character determined by the parties. As stated inStandard Oil Co. of
New York v. Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by agreement treat as personal property that
which by nature would be real property, as long as no interest of third parties would be prejudiced thereby.

FILIPINAS MABLE CORPORATION v. IAC, DEVELOPMENT BANK OF THE PHILIPPINES (DBP), BANCOM SYSTEMS CONTROL, INC.
(Bancom), DON FERRY, CASIMERO TANEDO, EUGENIO PALILEO, ALVARO TORIO, JOSE T. PARDO, ROLANDO ATIENZA, SIMON A.
MENDOZA, Sheriff NORVELL R. LIM
G.R. No. L-68010, 30 May 1986, SECOND DIVISION (Gutierrez, Jr., J.)
In accordance with Art. 2125 of the Civil Code, an unregistered chattel mortgage is valid and binding between the parties because
registration is necessary only for the purpose of binding third persons.

Petitioner Filipinas Marble Corporation (Filipinas) filed an action for nullification of deeds and damages with prayer for a
restraining order and a writ of preliminary injunction against the private respondents. Accordingly, Filipinas applied for a loan in the
amount of $5,000,000.00 with respondent Development Bank of the Philippines (DBP) in its desire to develop the fun potentials of
its mining claims and deposits; that DBP granted the loan subject, however, to sixty onerous conditions, among which are: (a)
Filipinas shall have to enter into a management contract with respondent Bancom Systems Control, Inc. (Bancom); (b) DBP shall be
represented by no less than six (6) regular directors; xxx and (d) the $5 Million loan shall be secured by: 1) a final mortgage on the
following assets with a total approved value of P48,630,756.00 ... ; 2) the joint and several signatures with Filipinas Marble of Mr.
Pelagio M. Villegas, Sr., Trinidad Villegas, and Jose E. Montelibano and 3) assignment to DBP of the borrower firm's right over its
mining claims.

Correspondingly, Filipnas entered into a management contract with Bancom whereby the latter agreed to manage the
plaintiff company for a period of three years; that under the management agreement, the affairs of the petitioner were placed
under the complete control of DBP and Bancom including the disposition and disbursement of the $5,000,000 or P37,600,000 loan;
that the respondents and their directors/officers mismanaged and misspent the loan, after which Bancom resigned with the
approval of DBP even before the expiration date of the management contract, leaving Filipinas desolate and devastated; that among
the acts and omissions of the respondents are the following. (a) failure to purchase all the necessary machinery and equipment
needed by the petitioner's project for which the approved loan was intended; (b) failure to construct a processing plant; (c)
abandonment of imported machinery and equipment at the pier, (d) purchase of unsuitable lot for the processing plant at Binan; (e)
failure to develop even a square meter of the quarries in Romblon or Cebu; and (f) nearly causing the loss of petitioner's ri ghts over
its Cebu claims; and that instead of helping petitioner get back on its feet, DBP completely abandoned the petitioner's project and
proceeded to foreclose the properties mortgaged to it by Filipinas without previous demand or notice.

Filipinas seeks to annul the deeds of mortgage and deed of assignment which it executed. Accordingly, there was no loan at
all to secure since what DBP "lent" to petitioner with its right hand, it also got back with its left hand; and that, there was failure
of consideration with regard to the execution of said deeds as the loan was never delivered to Filipinas. It also prayed for a
restraining order and then a writ of preliminary injunction against the sheriffs to enjoin the latter from proceeding with the
foreclosure and sale of Filipinas properties in Metro Manila and Romblon.

DBP opposed the same stating that under PD No. 385, DBPs right to foreclose is mandatory and that no court can issue any
restraining order or injunction against it to stop the foreclosure since Filipinas Marble's arrearages had already reached at least
twenty percent of its total obligations.

The Trial Court denied Filipinas application. On appeal, the IAC upheld the trial courts decision. Filipinas contends that the
chattel mortgage has not been registered and thus, the same is null and void.

ISSUE:

Whether or not an unregistered chattel mortgage is null and void

HELD:

Petition DENIED.

We agree with the petitioner that a mortgage is a mere accessory contract and, thus, its validity would depend on the
validity of the loan secured by it. We, however, reject the petitioner's argument that since the chattel mortgage involved was not
registered, the same is null and void. Article 2125 of the Civil Code clearly provides that the non-registration of the mortgage does
not affect the immediate parties. Accordingly, in addition to the requisites stated in article 2085, it is indispensable, in order that a
mortgage may be validly constituted that the document in which it appears be recorded in the Registry of Property. If the
instrument is not recorded, the mortgage is nevertheless binding between the parties.

ALLIED BANKING CORPORATION v. HON. EMILIO V. SALAS, in his capacity as Presiding Judge of the CFI of Rizal, Branch I, Pasig,
Metro Manila and METROPOLITAN BANK AND TRUST CO.
G.R. No. L-49081, 13 December 1988, THIRD DIVISION (Fernan, CJ.)
A registered chattel mortgage lien attaches to the property wherever it may be. A subsequent attaching creditor acquired
the properties in question subject to the creditors mortgage lien as it existed thereon at the time of attachment. What may be
attached in this case is only the equity or right of redemption of the mortgagor.

Allied Banking Corporations (Allied) predecessor, General Bank and Trust Company granted Gencor Marketing, Inc.
(Gencor), a time loan in the principal amount of P400,000.00 evidenced by a Promissory Note executed by the latter through its
President, Dr. Clarencio S. Yujuico (Yujuico).

As security for the time loan and pursuant to a resolution of the Board of Directors of
Gencor Marketing, a Deed of Chattel Mortgage was executed by Gencor in favor of General Bank and Trust Company involving the
16 personal properties.

The Deed of Chattel Mortgage was duly recorded in the Chattel Mortgage Registry of Quezon City. However, Gencor failed
to pay its obligations. Thus, Allied Bank extrajudically foreclosed the Chattel Morgaged and requested the Sheriff to effect the said
foreclosure. Thus, Deputy Sheriff levied upon the mortgaged personal properties in question. It appears, however, that prior to the
extrajudicial foreclosure effected by Allied Bank involving the personal properties in question, Metropolitan Bank and Trust
Company (Metrobank) filed an action for a sum of money in the amount of P5,402,740.17 with preliminary attachment against
Clarencio Yujuico and Jesus Yujuico. Accordingly, a writ of preliminary attachment was issued in said case and the Sheriff of the CFI
of Rizal levied upon the personal properties in question.

Thus, upon learning of the impending sale of the foreclosed personal properties, Metrobank filed an urgent motion to
enjoin the sheriff of QC from foreclosing and selling at public auction the said properties alleging that the same belonged exclusively
to Yujuico and thus may not legally be foreclosed and sold at auction by the Sheriff of Quezon City. The CFI of Rizal issued an Order
restraining the Sheriff of QC from selling the printing machineries and equipment.

ISSUE:

Whether or not the subsequent attaching creditor (Metrobank) has a superior right

HELD:

Petition GRANTED.

While counsel for Allied Bank admitted during that the personal properties in question belonged to Clarencio Yujuico and
not to Gencor Marketing, Inc., the Court nevertheless finds that the chattel mortgage over the printing machineries and equipment
was ratified and approved by Clarencio Yujuico. As earlier stated and as pointed out by petitioner, it was Clarencio Yujuico as
president of Gencor Marketing, Inc., who signed the promissory note evidencing the time loan granted by petitioner's predecessor
General Bank and Trust Company in favor of Gencor Marketing, Inc.

Finding the chattel mortgage to be valid, the Court takes special note of the fact that said chattel mortgage was registered
and duly recorded in the Chattel Mortgage Registry of Quezon City on February 7, 1974, prior to April 22, 1977, the date the writ of
attachment of the properties in question was issued. This is a significant factor in determining who of two contending claimants
should be given preference over the same properties in question. The registration of the chattel mortgage more than three years
prior to the writ of attachment issued by respondent judge is an effective and binding notice to other creditors of its existence
and creates a real right or a lien, which being recorded, follows the chattel wherever it goes.

The chattel mortgage lien attaches
to the property wherever it may be. Thus, private respondent as attaching creditor acquired the properties in question subject to
petitioner's mortgage lien as it existed thereon at the time of the attachment.

In this regard, it must be stressed that the right of those who so acquire said properties should not and cannot be superior
to that of the creditor who has in his favor an instrument of mortgage executed with the formalities of law, in good faith, and
without the least indication of fraud. Applying the foregoing principle to the case at bar, the Court finds the lien of petitioner's
chattel mortgage over the mortgaged properties in question superior to the levy on attachment made on the same by private
respondent as creditor of chattel mortgagor Clarencio Yujuico. What may be attached by private respondent as creditor of said
chattel mortgagor is only the equity or right of redemption of the mortgagor.

SERVICEWIDE SPECIALISTS, INCORPORATED v. THE HONORABLE INTERMEDIATE APPELLATE COURT, GALICANO SITON AND JUDGE
JUSTINIANO DE DUMO
G.R. No. 74553, 8 June 1989, FIRST DIVISION (Medialdea, J.)
Since the mortgagor remains the owner of the chattel, he can sell it even if the chattel mortgage agreement prohibits the
mortgagor from selling the chattel without the consent of the mortgagee. The sale, however, is without prejudice to his criminal
prosecution under the permanent provisions of the RPC.

Galicano Siton (Siton) purchased from Car Traders Philippines, Inc. (Car Traders) a vehicle described as Mitsubishi Celeste
two-door with air-conditioning and paid P 25,000.00 as downpayment of the price. The remaining balance of P 68,400.00, includes
not only the remaining principal obligation but also advance interests and premiums for motor vehicle insurance policies.
Accordingly, Siton executed a promissory note in favor of Car Traders expressly stipulating that the face value of the note which is P
68,400. 00, shall "be payable, without need of notice of demand, in installments of the amounts following and at the dates
hereinafter set forth, to wit: P 1,900.00 monthly for 36 months due and payable on the 14th day of each month starting September
14, 1979, thru and inclusive of August 14, 1982".

As further security, Siton executed a Chattel Mortgage over the subject motor vehicle in favor of Car Traders. The Chattel
Mortgage Contract provides additional stipulations, such as: a) the waiver by the mortgagor of his rights under Art. 1252 of the Civil
Code to designate the application of his payments and authorize the mortgagee or its assigns to apply such payments to either his
promissory note or to any of his existing obligations to the mortgagee or its assigns at the latter's discretion; and b) concerning the
insurance of the subject motor vehicle, the mortgagor is under obligation to secure the necessary policy in an amount not less than
the outstanding balance of the mortgage obligation and that loss thereof shall be made payable to the mortgagee or its assigns as its
interest may appear, with the further obligation of the mortgagor to deliver the policy to the mortgagee. The mortgagor further
agrees that in default of his effecting or renewing the insurance and delivering the policy as endorsed to the mortgagee within five
(5) days after the execution of the mortgage or the expiry date of the insurance, the mortgagee may, at his option but without any
obligation to do so, effect such insurance or obtain such renewal for the account of the mortgagor. The credit covered by the
promissory note and chattel mortgage executed by respondent Siton was first assigned by Car Traders in favor of Filinvest Credit
Corporation (Filinvest). Subsequently, Filinvest Credit Corporation likewise reassigned said credit in favor of petitioner Servicewide
Specialists, Inc. (Servicewide) and respondent Siton was advised of this second assignment.

Upon failure to pay part of the installment, Servicewide filed an action against Siton. It sought for a Writ of Replevin over
subject motor vehicle or, in the alternative, for a sum of money of P 20,319.42 plus interest thereon at the rate of 14% per annum
from January 11, 1982 until fully paid; and in either case, for defendants to pay certain sum of money for attorney's fees, l iquidated
damages, bonding fees and other expenses incurred in the seizure of the motor vehicle plus costs of suit. Subsequently, Justiniano
de Dumo (Justiniano), inasmuch as he is in possession of the subject vehicle, filed his Answer with Counterclaim and with
Opposition to the prayer for a Writ of Replevin. Accordingly, he has bought the motor vehicle from Siton; that as such successor, he
stepped into the rights and obligations of the seller; that he has religiously paid the installments as stipulated upon in the promissory
note.

ISSUES:

1. Whether or not the sale between Siton and Justiniano is void; and
2. Whether or not Servicewide is bound by the deed of ale made by Siton to Justiniano;

HELD:

Petition DENIED.

Validity of the Sale

The rule is settled that the chattel mortgagor continues to be the owner of the property, and therefore, has the power to
alienate the same; however, he is obliged under pain of penal liability, to secure the written consent of the mortgagee. (Francisco,
Vicente, Jr., Revised Rules of Court in the Philippines, (1972), Volume IV-B Part I, p. 525). Thus, the instruments of mortgage are
binding, while they subsist, not only upon the parties executing them but also upon those who later, by purchase or otherwise,
acquire the properties referred to therein. Thus, the absence of the written consent of the mortgagee to the sale of the mortgaged
property in favor of a third person, therefore, affects not the validity of the sale but only the penal liability of the mortgagor under
the Revised Penal Code and the binding effect of such sale on the mortgagee under the Deed of Chattel Mortgage.

Binding effect of the sale as to Servicewide

Anent its second, third and fifth assigned errors, petitioner submits that it is not bound by the deed of sale made by Siton in
favor of De Dumo, as neither petitioner nor its predecessor has given their written or verbal consent thereto pursuant to the Deed of
Chattel Mortgage.

On this particular issue, it would really appear that, since the transfer, it was Atty. Justinaiano de Dumo who had been
paying said account, almost invariably with his personal checks. In fact, one of the checks that supposedly bounced, was Atty. de
Dumo's personal check. Note that plaintiff has been accepting such payments by defendant de Dumo. It would appear, therefore,
that there was an implied acceptance by the plaintiff and its predecessor of the transfer. Another reasonable conclusion is that,
while there was failure on the part of defendants to comply strictly and literaly with their contract, there was substantial compliance
therewith.

There is no dispute that the Deed of Chattel Mortgage executed between Siton and Servicewide requires the written
consent of the latter as mortgagee in the sale or transfer of the mortgaged vehicle. We cannot ignore the findings, however, that
before the sale, prompt inquiries were made by private respondents with Filinvest Credit Corporation regarding any possible future
sale of the mortgaged property; and that it was upon the advice of the company's credit lawyer that such a verbal notice is sufficient
and that it would be convenient if the account would remain in the name of the mortgagor Siton. Even the personal checks of de
Dumo were accepted by petitioner as payment of some of the installments under the promissory note. If it is true that petitioner has
not acquiesced in the sale, then, it should have inquired as to why de Dumo's checks were being used to pay Siton's obligations.

Based on the foregoing circumstances, the petitioner is bound by its predecessor company's representations. This is based
on the doctrine of estoppel, through which, "an admission or representation is rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person relying thereon" (Art. 1431, Civil Code). Like the related principles of volenti
non lit injuria (consent to injury), waiver and acquiescence, estoppel finds its origin generally in the equitable notion that one may
not change his position, and profit from his own wrongdoing when he has caused another to rely on his former representations (Sy
vs. Central Bank, No. L-41480, April 30, 1976, 70 SCRA 570). Further, it is worthy to note that despite the arguments of petitioner
that it is not bound by the sale of the vehicle to de Dumo, and that the latter is a stranger to the transaction between Filinvest and
Siton, nevertheless, it admitted de Dumo's obligation as purchaser of the property when it named the latter as one of the
defendants in the lower court. Petitioner even manifested in its prayer in the appellant's brief and in the petition before Us, that de
Dumo be ordered to pay petitioner, jointly and severally with Siton the unpaid balance on the promissory note.

BICOL SAVINGS & LOAN ASSOCIATION v. JAIME GUINHAWA and THE HON. PRESIDING JUDGE OF THE COURT OF FIRST INSTANCE
OF CAMARINES SUR (10th JUDICIAL DISTRICT), BRANCH III
G.R. No. L-62415, 20 August 1990, SECOND DIVISION (Paras, J.)
Where the obligation is one of loan secured by a chattel mortgage and not a sale where the price is payable on installments,
an independent civil action may be instituted for the recovery of said deficiency if after extra-judicial foreclosure of such chattel
mortgage, a deficiency exists. The payment of deficiency may be enforced against the principal debtor or his soli dary co-maker who
also acted as surety.
The bringing of an action against the principal debtor to enforce the payment of the obligation is not inconsistent with, and
does not preclude, the bringing of another action to compel the surety to fulfill his obligation under the agreement.

Victorio Depositario (Victorio) together with private respondent Jaime Guinhawa (Jaime), acting as solidary co-maker, took
a loan from petitioner Bicol Savings and Loan Association (BISLA) in the sum of P10,622.00, payable at P535.45 every 19th day of
each month beginning July 1980 until maturity on June 19, 1982. To secure the payment of the foregoing loan obligation, Victorio
put up as security a chattel mortgage a Yamaha Motorcycle. Said motorcycle was eventually foreclosed by reason of the failure of
Victorio and Jaime to pay the loan. As a result of the foreclosure, there was a deficiency in the amount of P5,158.06 where BISLA
made a demand to pay the same.

Thus, BISLA file a complaint for the recovery of a sum of money constituting the deficiency after the foreclosure of the
chattel mortgage. The City Court favored BISLA but the CFI of Camarines Sur reversed the same.

ISSUE:

Whether or not BISLA may recover the deficiency

HELD:

Petition GRANTED.

In a number of cases, we already held that if in an extrajudicial foreclosure of a chattel mortgage a deficiency exists, an
independent civil action may be instituted for the recovery of said deficiency. If the mortgagee has foreclosed the mortgage
judicially, he may ask for the execution of the judgment against any other property of the mortgagor for the payment of the
balance. To deny to the mortgagee the right to maintain an action to recover the deficiency after foreclosure of the chattel
mortgage would be to overlook the fact that the chattel mortgage is only given as a security and not as payment for the debt in case
of failure of payment. (Bank of the Philippine Islands vn Olutanga Lumber Co., 47 Phil. 20; Manila Trading & Supply Co. v. Tamaraw
Plantation Co., 47 Phil. 513.)

The case of Pascual, as cited by the respondent court, is not applicable in this instant case because it was a case of sale on
installment, where after foreclosure of the units the plaintiff guarantors who had likewise executed a real estate mortgage of up to
P50,000, cannot be held answerable anymore for the deficiency. The conclusion therefore reached by the lower court was
erroneous because in the case at bar, the obligation contracted by the principal debtor (Depositario) with a solidary co-maker
(private respondent herein), was one of loan secured by a chattel mortgage, executed by the principal debtor, and not a sale where
the price is payable on installments and where a chattel mortgage on the thing sold was constituted by the buyer and, further, the
obligation to pay the installments having been guaranteed by another.

Private respondent Guinhawa contends that he was not a party to the chattel mortgage executed by Depositario but merely
a co-maker on the promissory note executed by the latter and therefore cannot be held liable for the deficiency. Under Article 1216
of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long
as the debt has not been fully collected. And therefore, where the private respondent binds himself solidarily with the principal
debtor to pay the latter's debt, he may be proceeded against by the principal debtor. Private respondent as solidary co- maker is also
a surety (Art. 2047) and that under the law, the bringing of an action against the principal debtor to enforce the payment of the
obligation is not inconsistent with, and does not preclude, the bringing of another action to compel the surety to fulfill his obligation
under the agreement.

PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO v. HON. COURT
OF APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES
G.R. No. 106435, 14 July 1999, THIRD DIVISION (Gonzaga-Reyes, J.)
It is clear from Section 14 of Act No. 1508, as amended that the effects of foreclosure under the Chattel Mortgage Law run inconsistent with those of pledge
under Article 2115. Whereas, in pledge, the sale of the thing pledged extinguishes the entire principal obligation, such that the pledgor may no longer recover
proceeds of the sale in excess of the amount of the principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor to the balance of the
proceeds, upon satisfaction of the principal obligation and costs. Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale
proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in the price at public auction.

Neither do we find tenable the application by analogy of Article 1484 of the Civil Code to the instant case. As correctly pointed out by the trial court, the
said article applies clearly and solely to the sale of personal property the price of which is payable in installments. Although Article 1484, paragraph (3) expressly bars
any further action against the purchaser to recover an unpaid balance of the price, where the vendor opts to foreclose the chattel mortgage on the thing sold, should
the vendee's failure to pay cover two or more installments, this provision is specifically applicable to a sale on installments.

Petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of US$267,881.67, or the equivalent of
P2,000,000.00 from Development Bank of the Philippines (DBP). By virtue of this loan, PAMECA, through its President, petitioner
Herminio C. Teves, executed a promissory note for the said amount, promising to pay the loan by installment. As security for the
said loan, a chattel mortgage was also executed over PAMECAs properties in Dumaguete City, consisting of inventories, furniture
and equipment, to cover the whole value of the loan. Upon failure to pay, DBP extrajudicially foreclosed the chattel mortgage. The
sole bidder purchased the properties for a sum of P322,350.00. Thus, DBP filed a complaint for the collection of the balance of
P4,366,332.46 with the RTC of Makati City against PAMECA and private petitioners herein, as solidary debtors with PAMECA under
the promissory note.

The RTC of Makati ordered the petitioners to pay the deficiency. The same decision was affirmed by the CA.

ISSUES:

1. Whether or not the mortagagee cannot recover the deficiency in the proceeds of sale of the chattels;
2. Whether or not Article 1484 of the NCC applies; and
3. Whether or not the public aution sale was null and void as the chattels were bought in only 1/6 of the market value of
the property which is unconscionable and inequitable.

HELD:

Petition DENIED.

DBP may recover the deficiency

Petitioners are not the first to posit the theory of the applicability of Article 2115 to foreclosures of chattel mortgage. In
the leading case of Ablaza vs. Ignacio, the lower court dismissed the complaint for collection of deficiency judgment in view of Article
2141 of the Civil Code, which provides that the provisions of the Civil Code on pledge shall also apply to chattel mortgages, insofar as
they are not in conflict with the Chattel Mortgage Law. It was the lower courts opinion that, by virtue of Article 2141, the provisions
of Article 2115 which deny the creditor-pledgee the right to recover deficiency in case the proceeds of the foreclosure sale are less
than the amount of the principal obligation, will apply.

This Court reversed the ruling of the lower court and held that the provisions of the Chattel Mortgage Law regarding the
effects of foreclosure of chattel mortgage, being contrary to the provisions of Article 2115, Article 2115 in relation to Article 2141,
may not be applied to the case. Accordingly, Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states that the
officer making the sale shall, within thirty days thereafter, make in writing a return of his doings and file the same in the office of the
Registry of Deeds where the mortgage is recorded, and the Register of Deeds shall record the same. The fees of the officer for
selling the property shall be the same as the case of sale on execution as provided in Act Numbered One Hundred and Ninety, and
the amendments thereto, and the fees of the Register of Deeds for registering the officers return shall be taxed as a part of the
costs of sale, which the officer shall pay to the Register of Deeds. The return shall particularly describe the articles sold, and state
the amount received for each article, and shall operate as a discharge of the lien thereon created by the mortgage. The proceeds of
such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the
demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their
order, and the balance, after paying the mortgage, shall be paid to the mortgagor or persons holding under him on
demand. (Emphasis supplied)

It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run inconsistent with
those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged extinguishes the entire principal obligation,
such that the pledgor may no longer recover proceeds of the sale in excess of the amount of the principal obligation, Section 14 of
the Chattel Mortgage Law expressly entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal
obligation and costs.

Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is a
corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in the price at public
auction. As explained in Manila Trading and Supply Co. vs. Tamaraw Plantation Co., cited in Ablaza vs. Ignacio, while it is true that
section 3 of Act No. 1508 provides that a chattel mortgage is a conditional sale, it further provides that it is a conditi onal sale of
personal property as security for the payment of a debt, or for the performance of some other obligation specified therein. The
lower court overlooked the fact that the chattels included in the chattel mortgage are only given as security and not as a payment of
the debt, in case of a failure of payment.

The theory of the lower court would lead to the absurd conclusion that if the chattels mentioned in the mortgage, given as
security, should sell for more than the amount of the indebtedness secured, that the creditor would be entitled to the full amount
for which it might be sold, even though that amount was greatly in excess of the indebtedness. Such a result certainly was not
contemplated by the legislature when it adopted Act No. 1508. There seems to be no reason supporting that theory under the
provision of the law. The value of the chattels changes greatly from time to time, and sometimes very rapidly. If, for example, the
chattels should greatly increase in value and a sale under that condition should result in largely overpaying the indebtedness, and if
the creditor is not permitted to retain the excess, then the same token would require the debtor to pay the deficiency in case of a
reduction in the price of the chattels between the date of the contract and a breach of the condition.

Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors on the question of chattel mortgages,
have said, that in case of a sale under a foreclosure of a chattel mortgage, there is no question that the mortgagee or creditor
may maintain an action for the deficiency, if any should occur. And the fact that Act No. 1508 permits a private sale, such sale is
not, in fact, a satisfaction of the debt, to any greater extent than the value of the property at the time of the sale. The amount
received at the time of the sale, of course, always requiring good faith and honesty in the sale, is only a payment, pro tanto, and an
action may be maintained for a deficiency in the debt.

Art. 1484 will not apply

Neither do we find tenable the application by analogy of Article 1484 of the Civil Code to the instant case. As correctly
pointed out by the trial court, the said article applies clearly and solely to the sale of personal property the price of whi ch is payable
in installments. Although Article 1484, paragraph (3) expressly bars any further action against the purchaser to recover an unpaid
balance of the price, where the vendor opts to foreclose the chattel mortgage on the thing sold, should the vendees failure to
pay cover two or more installments, this provision is specifically applicable to a sale on installments.

To accommodate petitioners prayer even on the basis of equity would be to expand the application of the provisions of
Article 1484 to situations beyond its specific purview, and ignore the language and intent of the Chattel Mortgage Law. Equity,
which has been aptly described as justice outside legality, is applied only in the absence of, and never against, statutory law or
judicial rules of procedure.

Validity of the Public auction sale

We are also unable to find merit in petitioners submission that the public auction sale is void on grounds of fraud and
inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court of Appeals did they attempt
to prove inadequacy of price through the documents, i.e., the Open-End Mortgage on Inventory and inventory dated March 31,
1980, likewise attached to their Petition before this Court. Basic is the rule that parties may not bring on appeal issues that were not
raised on trial.

Furthermore, the mere fact that respondent bank was the sole bidder for the mortgaged properties in the public sale does not
warrant the conclusion that the transaction was attended with fraud. Fraud is a serious allegation that requires full and convincing
evidence, and may not be inferred from the lone circumstance that it was only respondent bank that bid in the sale of the foreclosed
properties. The sparseness of petitioners evidence in this regard leaves Us no discretion but to uphold the presumption of
regularity in the conduct of the public sale.

BA FINANCE CORPORATION v. HON. COURT OF APPEALS, Hon. Presiding Judge of Regional Trial Court of Manila, Branch 43,
MANUEL CUADY and LILIA CUADY
G.R. No. 82040, 27 August 1991, SECOND DIVISION (Paras, J.)
Where under the terms of the chattel mortgage agreement, the mortgage was constituted attorney-in-fact to file, prosecute and
settle any insurance claim, the assignee of the mortgage agreement is bound by the same stipulation and if the assignee failed to file
and prosecute the insurance claim when the car when the car was damaged totally, the mortgagor is relieved from his obligation to
pay as he suffered a loss because of the failure of the mortgagee to file the claim

Manuel Cuady and Lilia Cuady (Spouses Cuady) obtained from Supercars, Inc. (Supercars) a credit of P39,574.80, which
amount covered the cost of one unit of Ford Escort 1300, four-door sedan. Said obligation was evidenced by a promissory note
executed by Spouses Cuady in favor of Supercars obligating themselves to pay the latter or order the sum of P39,574.80, inclusive of
interest at 14% per annum, payable on monthly installments of P1,098.00. There was also stipulated a penalty of P10.00 for every
month of late installment payment. To secure the faithful and prompt compliance of the obligation under the said promissory note,
the Cuady spouses constituted a chattel mortage on the aforementioned motor vehicle. Subsequently, Supercars assigned the
promissory note, together with the chatter mortgage to B.A. Finance Corporation (B.A.). The Spouses Cuady paid a total of
P36,730.15 to the B.A. Finance Corporation, thus leaving an unpaid balance of P2,344.65. In addition thereto, the Cuadys owe B.A.
Finance Corporation P460.00 representing penalties or surcharges for tardy monthly installments.

Meanwhile, the B.A., as the assignee of the mortgage lien obtained the renewal of the insurance coverage over the
aforementioned motor vehicle for the year 1980 with Zenith Insurance Corporation (Zenith), when the Cuadys failed to renew said
insurance coverage themselves. Under the terms and conditions of the said insurance coverage, any loss under the policy shall be
payable to the B.A. Finance Corporation.

In 1980, the motor vehicle figured in an accident and was badly damaged. The unfortunate happening was reported to B.A.
and to the insurer, Zenith. The Cuadys asked the B.A. to consider the same as a total loss, and to claim from the insurer the face
value of the car insurance policy and apply the same to the payment of their remaining account and give them the surplus thereof, if
any. But instead of heeding the request of the Cuadys, B.A. prevailed upon the former to just have the car repaired. Not long
thereafter, however, the car bogged down. Thus, The Cuadys wrote B.A. Finance Corporation requesting the latter to pursue their
prior instruction of enforcing the total loss provision in the insurance coverage. When B.A. Finance Corporation did not respond
favorably to their request, the Cuadys stopped paying their monthly installments on the promissory note.

Thus, BA sued the spouses for the recovery of the remaining installments. It was dismissed. The appellate court affirmed
the said decision of the trial court.

ISSUE:

Whether or not BA has waived its right to collect the unpaid balance of the Spouses Cuady on the promissory note for
failure of BA to enforce the total loss provision in the insurance of the subject chattel

HELD:

Petition DENIED (As to BA and thus, the spouses Cuady are relived from their obligation)

B.A. Finance Corporation was deemed subrogated to the rights and obligations of Supercars, Inc. when the latter assigned
the promissory note, together with the chattel mortgage constituted on the motor vehicle in question in favor of the former.
Consequently, B.A. Finance Corporation is bound by the terms and conditions of the chattel mortgage executed between the Cuadys
and Supercars, Inc. Under the deed of chattel mortgage, B.A. Finance Corporation was constituted attorney-in-fact with full power
and authority to file, follow-up, prosecute, compromise or settle insurance claims; to sign execute and deliver the corresponding
papers, receipts and documents to the Insurance Company as may be necessary to prove the claim, and to collect from the latter the
proceeds of insurance to the extent of its interests, in the event that the mortgaged car suffers any loss or damage. In granting B.A.
Finance Corporation the aforementioned powers and prerogatives, the Cuady spouses created in the former's favor an agency. Thus,
under Article 1884 of the Civil Code of the Philippines, B.A. Finance Corporation is bound by its acceptance to carry out the agency,
and is liable for damages which, through its non-performance, the Cuadys, the principal in the case at bar, may suffer.

Unquestionably, the Cuadys suffered pecuniary loss in the form of salvage value of the motor vehicle in question, not to
mention the amount equivalent to the unpaid balance on the promissory note, when B.A. Finance Corporation steadfastly refused
and refrained from proceeding against the insurer for the payment of a clearly valid insurance claim, and continued to ignore the
yearning of the Cuadys to enforce the total loss provision in the insurance policy, despite the undeniable fact that Rea Auto Center,
the auto repair shop chosen by the insurer itself to repair the aforementioned motor vehicle, misrepaired and rendered it
completely useless and unserviceable.

Accordingly, there is no reason to depart from the ruling set down by the respondent appellate court. Accordingly, it is
unjust, unfair and inequitable to require the chattel mortgagors, appellees herein, to still pay the unpaid balance of their
mortgage debt on the said car, the non-payment of which account was due to the stubborn refusal and failure of appellant
mortgagee to avail of the insurance money which became due and demandable after the insured motor vehicle was badly
damaged in a vehicular accident covered by the insurance risk.

MANOLO P. CERNA v. THE HONORABLE COURT OF APPEALS and CONRAD C. LEVISTE
G.R. No. L-48359, 30 March 1993, SECOND DIVISION (Campos, Jr., J.)
Since the mortgage is merely an accessory contract, a third party who mortgages his motor vehicle to secure the payment of the loan
of another does not become solidarily liable with the borrower merely because of the execution of the mortgage. Accordingly, a
special power of attorney authorizing another to mortgage ones property as security of the obligation does not in itself make the
person executing the same as co-mortgagor thereof. It is only upon default of the principal debtor that the third party mortgagor
becomes liable and he is liable only to the extent of the property mortgaged. He is not liable to pay any deficiency.

Also, a mortgagee who files a collection case abandons the chattel mortgage constituted to secure the loan and cannot foreclose the
mortgage.

Celerino Delgado (Delgado) and Conrad Leviste (Leviste) entered into a loan agreement which was evidenced by a
promissory note whereby Delgado promised to pay to the order of Leviste within 90 days after date, the total sum of P17,000.00,
without necessity of demand, with interest at the rate of 12% per annum. On the same date, Delgado executed a chattel
mortgage over a Willy's jeep owned by him. And acting as the attorney-in-fact of herein petitioner, Manolo P. Cerna (Cerna), he also
mortgage a "Taunus' car owned by the latter.

Upon failure to pay the loan, Leviste filed a collection suit with the CFI of Rizal against Delgado and Cerna as solidary
debtors. Cerna filed a motion to dismiss for lack of cause of action and death of Delgado. Accordingly, the claim should have been
made in the proceedings for the settlement of Delgados estate. Moreover, he also stated that since Leviste already opted to collect
on the note, he could no longer foreclose the mortgage. This Motion to Dismiss was denied. This was affirmed by the CA.

ISSUE:

1. Whether or not Cerna is a solidary debtor; and
2. Whether or not Levistes act of filing a collection case is deemed as an abandonment of the chattel mortgage

HELD:

Petition DENIED.

In holding petitioner liable, the Court of Appeals held that petitioner and Delgado were solidary debtors. Thus, it held: "But
the herein petitioner pleads that the complaint states no cause of actions against the defendants Manolo P. Cerna on the following
grounds: 1) that the petitioner did not sign as joint obligator in the promissory note signed by the deceased Celerino Delgado hence,
even if the allegations of the complaint are hypothetically admitted there is no cause of action against the herein petitioner because
having proceeded against the promissory note he is deemed to have abandoned the foreclosure of the chattel mortgage contract.
This contention deserves scant consideration. The chattel mortgage contract, prima facie shows that it created the joint and solidary
obligation of petitioner and Celerino Delgado against private respondent."

We do not agree. Only Delgado signed the promissory note and accordingly, he was the only one bound by the contract of
loan. Nowhere did it appear in the promissory note that petitioner was a co-debtor. The law is clear that "(c)ontracts take effect only
between the parties . . ." But by some stretch of the imagination, petitioner was held solidarily liable for the debt allegedly because
he was a co-mortgagor of the principal debtor, Delgado. This ignores the basic precept that "(t)here is solidarily liability only when
the obligation expressly so states, or when the law or the nature of the obligation requires solidarity."

We have already stated that the contract of loan, as evidenced by the promissory note, was signed by Delgado only.
Petitioner had no part in the said contract. Thus, nowhere could it be seen from the agreement that petitioner was solidarily bound
with Delgado for the payment of the loan. There is also no legal provision nor jurisprudence in our jurisdiction which makes a third
person who secures the fulfillment of another's obligation by mortgaging his own property to be solidarily bound with the principal
obligor. A chattel mortgage may be "an accessory contract" to a contract of loan, but that fact alone does not make a third-party
mortgagor solidarily bound with the principal debtor in fulfilling the principal obligation that is, to pay the loan. The signatory to the
principal contract loan remains to be primarily bound. It is only upon the default of the latter that the creditor may have been
recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the amount of the loan.
And the liability of the third-party mortgagors extends only to the property mortgaged. Should there be any deficiency, the creditors
has recourse on the principal debtor.

In this case, however, the mortgage contract was also signed only by Delgado as mortgagor. But this alone does not make
petitioner a co-mortgagor especially so since only Delgado singed the chattel mortgage as mortgagor. The Special Power of Attorney
did not make petitioner a mortgagor. All it did was to authorized Delgado to mortgage certain properties belonging to petitioner.
And this is in compliance with the requirement in Article 2085 of the Civil Code which states that the persons constituting the
pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the
purpose." (Emphasis Ours.) In effect, petitioner lent his car to Delgado so that the latter may mortgage the same to secure his debt.
Thus, from the contract itself, it was clear that only Delgado was the mortgagor regardless of the fact the he used properties
belonging to a third person to secure his debt.

Granting, however, that petitioner was obligated under the mortgage contract to answer for Delgado's indebtedness, under
the circumstances, petitioner could not be held liable because the complaint was for recovery of a sum of money, and not for the
foreclosure of the security. We agree with petitioner that the filing of collection suit barred the foreclosure of the mortgage. Thus:
"A mortgage who files a suit for collection abandons the remedy of foreclosure of the chattel mortgage constituted over the
personal property as security for the debt or value of the promissory note which he seeks to recover in the said collection suit."
The reason for this rule is that: when, however, the mortgage elects to file a suit for collection, not foreclosure, thereby abandoning
the chattel as basis for relief, he clearly manifest his lack of desire and interest to go after the mortgaged property as security for the
promissory note . . ."

Hence, Leviste, having chosen to file the collection suit, could not now run after petitioner for the satisfaction of the debt.
This is even more true in this case because of the death of the principal debtor, Delgado. Leviste was pursuing a money claim against
a deceased person. Section 7, Rule 86 of the Rules of Court Provides that a creditor holding a claim against the deceased secured by
mortgaged or other collateral security, may abandon the security and prosecute his claim in the manner provided in this rule, and
share in the general distribution of the assets of the estate; or he may foreclose his mortgage or realize upon his security, by action
in court, making the executor or administrator a party defendant, and if there is a judgment for a deficiency, after the sale of the
mortgaged premises, or the property pledged, in the foreclosure or the other proceeding to realize upon security, he may clai m his
deficiency judgment in the manner provided in the preceding section; or he may upon his mortgage or other security alone, and
foreclosure the same at any time within the period of the statue of limitations, and in that event he shall not be admitted as a
creditor, and shall receive no share in the distribution of the other assets of the estate.

The above-quoted provision is substantially similar to Section 708 of the Code of Civil Procedure which states that a creditor
holding against the deceased, secured by mortgage or other collateral security, may abandon the security and prosecute his claim
before the committee, and share in the mortgage or realize upon his security, by ordinary action in court, making the executor or
administrator a party defendant; . . ."

The Supreme Court, in the case of Osorio vs. San Agustin, has made the following interpretation of the said provision,, to
wit: "It is clear by the provisions quoted section that a person holding a mortgage against the estate of a deceased person may
abandon such security and prosecute his claim before the committee, and share in the distribution of the general assets of the
estate. It provides also that he may, at his own election, foreclose the mortgage and realize upon his security. But the law does not
provide that he may have both remedies. If he elects one he must abandon the other. If he fails in one he fails utterly."

FILINVEST CREDIT CORPORATION v. HON. COURT OF APPEALS and SPOUSES EDILBERTO and MARCIANA TADIAMAN
G.R. No. 115902, 27 September 1995, FIRST DIVISION (Davide Jr., J.)
If a mortgagee cannot obtain possession of a mortgaged property for its sale on foreclosure, the mortgagee cannot take the
property by force but must institute the appropriate action in the court. He must bring a civil action for replevin either to recover such
possession as preliminary step on the extra-judicial foreclosure of the chattel mortgage or for judicial foreclosure. Nonetheless,
despite the filing of the appropriate action for replevin, the mortgagee can be held liable for damages if the manner of carrying out
the seizure of the property was attended by bad faith. For employing subterfuge as court appointed sheriffs and then hiding and
cannibalizing it, the mortgagee committed bad faith in violation of Art. 19 of the NCC

Defendants Edilberto and Marciana Tadiaman (Spouse Tadiaman), residents of Cabanatuan City, purchased a 10-wheeler
Izusu cargo truck from Jordan Enterprises, Inc. (Jordan), in Quezon City, in installments. Said spouses executed a promissory note
for P196,680.00 payable in 24 monthly installments in favor of Jordan and a Chattel Mortgage over the motor vehicle purchased to
secure the payment of the promissory note. Jordan assigned its rights and interests over the said instruments to Filinvest Finance
and Leasing Corporation (Filinvest Finance), which in turn assigned them to plaintiff Filinvest Credit Corporation (Filinvest Credit).

Spouse Tadiaman defaulted in the payment of the installments due on the promissory note, and Filinvest Credit filed an
action for replevin and damages against them. The writ of replevin was isusued and the truck was seized in Isabela by persons who
represented themselves as special sheriffs of the court but who turned out to be employees of Filinvest Credit. These persons
brought the truck to Metro Manila.

Consequently, Spouses Tadiaman filed a counterbond and the lower court ordered the return of the truck. However,
Filinvest Credit made some delaying tactics and when the spouses recovered the truck they found the same to be cannibalized. Thus,
the Spouses filed a counterclaim for damages. On the counterclaim, the court ruled in favor of the spouses. On appeal, the CA
affirmed in toto the decision of the Trial Court.

ISSUE:

Whether or not Filinvest Credit is liable

HELD:

As to the sole issue defined above, the Court of Appeals correctly ruled that Filinvest is liable for damages not because it
commenced an action for replevin to recover possession of the truck prior to its foreclosure, but because of the manner it carried
out the seizure of the vehicle. XXX In the instant case, it was not the sheriff or any other proper officer of the trial court who
implemented the writ of replevin. Because it was aware that no other person can implement the writ, Filinvest asked the trial court
to appoint a special sheriff. Yet, it used its own employees who misrepresented themselves as deputy sheriffs to seize the truck
without having been authorized by the court to do so. Filinvest justified its seizure by citing a statement in Bachrach Motor
Co. vs. Summers,

to wit, "the only restriction on the mode by which the mortgagee shall secure possession of the mortgaged
property after breach of condition is that he must act in an orderly manner and without creating a breach of the peace, subjecting
himself to an action for trespass."

This justification is misplace and misleading for Bachrach itself had ruled that if a mortgagee cannot obtain possession of a
mortgaged property for its sale on foreclosure, it must bring a civil action either to recover such possession as a preliminary step to
the sale or to obtain judicial foreclosure. Pertinent portions of Bachrach states that where, however, debtor refuses to yield up the
property, the creditor must institute an action, either to effect a judicial foreclosure directly, to secure possession as a preliminary
to the sale contemplated in the provision above quoted. He cannot lawfully take the property by force against the will of the
debtor. XXX In the Article of Chattel Mortgages, in Corpus Juris, we find the following statement of the law on the same point: "The
only restriction on the mode by which the mortgagee shall secure possession of the mortgaged property after breach of condition is
that he must act in an orderly manner and without creating a breach of the peace, subjecting himself to an action to trespass.
(11 C.J., 560; see also 5 R.C.L., 462.)

The reason why the law does not allow the creditor to possess himself of the mortgaged property with violence and against
the will of the debtor is to be found in the fact that the creditor's right of possession is conditioned upon the fact of default, and the
existence of this fact may naturally be the subject of controversy. The debtor, for instance, may claim in good faith, and ri ghtly or
wrongly, that the debt is paid, or that for some other reason the alleged default is nonexistent. His possession in this situation is as
fully entitled to protection as that of any other person, and in the language of article 446 of the Civil Code he must be respected
therein. To allow the creditor to seize the property against the will of the debtor would make the former to a certain extent both
judge and executioner in his own cause a thing which is inadmissible in the absence of unequivocal agreement in the contract
itself or express provision to that effect in the statute.

But whatever conclusion may be drawn in the premises with respect to the true nature of a chattel mortgage, the result
must in this case be the same; for whether the mortgagee becomes the real owner of the mortgaged property as some suppose
or acquires only certain rights therein, it is none the less clear that he has after default the right of possession; though it cannot
be admitted that he may take the law into his own hands and wrest the property violently from the possession of the mortgagor.
Neither can he do through the medium of a public officer that which he cannot directly do himself. The consequence is that in such
case the creditor must either resort to a civil action to recover possession as a preliminary to a sale, or preferably he may bring an
action to obtain a judicial foreclosure in conformity, so far as with the provisions of the Chattel to Mortgage Law.

Replevin is, of course, the appropriate action to recover possession preliminary to the extrajudicial foreclosure of a chattel
mortgage. Filinvest did in fact institute such an action and obtained a writ of replevin. And, by filing it, Filinvest admitted that it
cannot acquire possession of the mortgaged vehicle in an orderly or peaceful manner. Accordingly, it should have left the
enforcement of the writ in accordance with Rule 60 of the Rules of Court which it had voluntarily invoked.

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC v. HON. COURT OF APPEALS, PRODUCERS BANK OF THE
PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY
G.R. No. 103576, 22 August 1996, FIRST DIVISION (Vitug, J.)
While pledge, real estate mortgage, or anti-chresis may secure after-incurred obligations so long as these future debts are accurately
described, a chattel mortgage can only cover obligations existing at the time the mortgage is constituted. Although the promise
expressed in the chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled
upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly
contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the
form prescribed by the Chattel Mortgage Law.

Chua Pac, the president and general manager of Acme Shoe, Rubber & Plastic Corporation (ACME), executed on a chattel
mortgage in favor of private respondent Producers Bank of the Philippines (Producers Bank). The mortgage stood by way of
security for ACMEs corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to
the effect that in case the mortgagor executes subsequent promissory note or notes either as a renewal of the former note, as an
extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit, acceptances
and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security for the
payment of the said promissory note or notes and/or accommodations without the necessity of executing a new contract and this
mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing on the
date thereof. This mortgage shall also stand as security for said obligations and any and all other obligations of the MORTGAGOR to
the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or after the
constitution of this mortgage.

The loan of 3M was paid by ACME but subsequently, in 1981, it obtained from Producers Bank additional financial
accommodation totaling 2.7M. The same were paid. In 1984, the bank yet again extended to ACME a loan of 1M covered by four
promissory notes for P250,000.00 each. Due to financial constraints, the loan was not settled at maturity. Producers Bank
thereupon applied for an extrajudicial foreclosure of the chattel mortgage with the Sheriff of Caloocan City, prompting ACME to file
an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the RTC of Caloocan City. The Court
dismissed the complaint and ordered the foreclosure of the chattel mortgage. On appeal, the CA affirmed the decision of the RTC.

ISSUE:

Whether or not a clause in a chattel mortgage that purports to extend its coverage to obligations not yet contracted or
incurred is valid and effective

HELD:

Petition GRANTED.

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the
faithful performance of the obligation by the principal debtor is secured by the personal commitment of another (the guarantor or
surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance
of property - in pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of
the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument
encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to
receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and
thereafter to the principal of his credit - upon the essential condition that if the principal obligation becomes due and the debtor
defaults, then the property encumbered can be alienated for the payment of the obligation, but that should the obligation be duly
paid, then the contract is automatically extinguished proceeding from the accessory character of the agreement. As the law so puts
it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void.

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these
future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is
constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending
the old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to
execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of
the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts
extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed.

A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel
Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such
an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third
persons acting in good faith, the fact, however, that the statute has provided that the parties to the contract must execute an oath
that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose,
and that the same is a just and valid obligation, and one not entered into for the purpose of fraud- makes it obvious that the debt
referred to in the law is a current, not an obligation that is yet merely contemplated. In the chattel mortgage here involved, the
only obligation specified in the chattel mortgage contract was the P3M loan which petitioner corporation later fully paid. By virtue of
Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or
terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al., the Court held that a mortgage that contains a
stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date
of the mortgage."

The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist
coincidentally with the full payment of the P3M loan, there no longer was any chattel mortgage that could cover the new loans that
were concluded thereafter.

CEBU INTERNATIONAL FINANCE CORPORATION v. COURT OF APPEALS, ROBERT ONG and ANG TAY
G.R. No. 107554, 13 February 1997, FIRST DIVISION (Kapunan, J.)
The chattel mortgage on a vessel constituted by the buyer who was able to register the vessel in his name despite the
agreement with the seller that the vessel would not be so registered until after the full payment of the price, which did not appear in
the buyers copy of the deed of sale, is valid, for the mortgagee has the right to rely on good faith, on the certificate of registration.

The prevailing jurisprudence is that a mortgagee has the right to rely in good faith on the certificate of title of the
mortgagor to the property given as security and in the absence of any sign that may cause or arouse suspicion, has no obligation to
undertake further investigation. Although this rule generally pertains to real property, particularly registered land, it may also be
applied by analogy, to personal property, in this case specifically, since ship owners are, likewise required by law to register their
vessels.

Jacinto Dy (Dy) executed a Special Power of Attorney in favor of Ang Tay (Ang Tay), authorizing the latter to sell the cargo
vessel owned by Dy and christened LCT "Asiatic." Subsequently, Ang Tay sold the subject vessel to Robert Ong (Ong)
for P900,000.00. Ong paid the purchase price by issuing three (3) checks in the following amounts: P150,000.00, P600,000.00
and P150,000.00. However, since the payment was not made in cash, it was specifically stipulated in the deed of sale that the "LCT
Asiatic shall not be registered or transferred to Robert Ong until complete payment. Thereafter, Ong obtained possession of the
subject vessel so he could begin deriving economic benefits therefrom. He also obtained copies of the unnotarized deed of sale
allegedly to be shown to the banks to enable him to acquire a loan to replenish his (Ong's) capital. The aforequoted condition,
however, which was handwritten on the original deed of sale does not appear on Ong's copies.

Contrary to the aforementioned agreements and without the knowledge of Ang Tay, Ong had his copies of the deed of sale
(on which the aforementioned prohibition does not appear) notarized. Ong presented the notarized deed to the Philippine Coast
Guard which subsequently issued him a Certificate of Ownership and a Certificate of Philippine Register over the subject vessel.
Ong also succeeded in having the name of the vessel changed to LCT "Orient Hope."

In 1987, Ong acquired a loan from Cebu International Finance Corporation (Cebu International) in the amount
of P496,008.00 to be paid in installments as evidenced by a promissory note and as security for the loan, Ong executed a chattel
mortgage over the subject vessel, which mortgage was registered with the Philippine Coast Guard and annotated on the Certificate
of Ownership. Ong defaulted in the payment of the monthly installments. Consequently, Cebu International sent him a
letter demanding delivery of the mortgaged vessel for foreclosure or in the alternative to pay the balance of P437,802.00 pursuant
to paragraph 11 of the deed of chattel mortgage. Meanwhile, the two checks (worth P600,000.00 and P150,000.00) paid by Ong to
Ang Tay for the Purchase of the subject vessel bounced. Ang Tay's search for the elusive Ong and all attempts to confer with him
proved to be futile. A subsequent investigation and inquiry with the Office of the Coast Guard revealed that the subject vessel was
already in the name of Ong, in violation of the express undertaking contained in the original deed of sale.

Ang Tay and Dy filed a case for rescission and replevin with damages against Ong and his wife with the RTC of Cebu City.
The writ of replevin was issued and the vessel was seized and subsequently delivered to Ang Tay. However, in 1988, Cebu
International filed a case for replevin and damages agasin Ong and Ang Tay. The Court granted it and the vessel was seized and
placed in the custody of the trial court but Ang Tay posted a counterbond and the vessel was returned o his possession. The TC
favored Ang Ty and Dy. The sale of the vessel was rescinded and the registration of the vessel in Ongs name was nullified and the
registration in Dys name revived. CA affirmed the decision.

ISSUE:

Whether or not Cebu International is a mortgagee in good faith whose lien over the mortgaged vessel should be respected.

HELD:

Petition GRANTED.

The prevailing jurisprudence is that a mortgagee has a right to rely in good faith on the certificate of title of the mortgagor
to the property given as security and in the absence of any sign that might arouse suspicion, has no obligation to undertake further
investigation. Hence, even if the mortgagor is not the rightful owner of or does not have a valid title to the mortgaged property, the
mortgagee or transferee in good faith is nonetheless entitled to protection. Although this rule generally pertains to real property,
particularly registered land, it may also be applied by analogy to personal property, in this case specifically, since shipowners are,
likewise, required by law to register their vessels with the Philippine Coast Guard.

Ang Tay, however, contends that the aforementioned rule does not apply in the case at bar in the face of the numerous
"badges of bad faith" on the part of Cebu International. Accordingly, the fraud and conspiracy by Robert Ong and some responsible
employees of CIFC against Jacinto Dy and Ang Tay are thus brought to the open by this stipulation. Since CIFC appears in the
registered chattel mortgage to have sold the vessel in question to Robert Ong, the said contract is null and void because CIFC
never for a second or a moment became the owner of the vessel. CIFC was the one who prepared the chattel mortgage and the
one who registered the same without contemporaneous or subsequent correction or modification; it cannot, after it notified the
public by means of registration that it acquired the vessel and became its owner, now shy away from a stipulation which is the heart
and nerve-center of the contract and which it made and registered. This is both the essence and consequence of estoppel.
Applicable is Article 1459 of the Civil Code which provides inter alia: ". . . the vendor must have a right to transfer the ownership
thereof (the thing sold) at the time it is delivered."

Also, Robert Ong, CIFC's mortgagor, did not acquire ownership of the vessel because of an express stipulation which he
signed that the vessel "shall not be registered or transferred to Robert Ong until complete payment. This stipulation is expressly
covered by Article 1478 of the Civil Code: "The parties may stipulate that ownership in the thing shall not pass to the purchaser until
he has fully paid the price." Since Ong clearly was not the owner of the vessel at the time of the execution of the mortgage, the said
mortgage is null and void on that ground.

Ang Tay's contentions are unmeritorious. As previously discussed, paragraph 3 of the chattel mortgage contract was
erroneously but unintentionally filled up. The failure of petitioner to exercise due care in filling up the necessary provisi ons in the
chattel mortgage contract does not, however, amount to bad faith. It was a mere oversight and not a deliberate and malicious act.
Cebu International had every right to rely on the Certificate of Ownership and Certificate of Philippine Register duly issued by the
Philippine Coast Guard in Ong's name. Petitioner had no reason to doubt Ong's ownership over the subject vessel. The documents
presented by Ong, upon petitioner's insistence before accepting the said vessel as loan security, were all in order and properly
issued by the duly constituted authorities. There was no circumstance that might have aroused petitioner's suspicion or alerted it to
any infirmity committed by Ong. It had no participation in and was not privy to the sale transaction between Jacinto Dy (through Ang
Tay) and Ong. Petitioner, thus, had no obligation to undertake further investigation since it had the necessary documents to prove
Ong's ownership.

Anent the last issue, although Ang Tay may also be an innocent person, a similar victim of Ong's fraudulent machinations, it
was his act of confidence which led to the present fiasco. Ang Tay readily agreed to execute a deed of absolute sale in Ong's favor
even though Ong had yet to make a complete payment of the purchase price. It is true that in the copy of the said deed submitted in
evidence by Ang Tay there was an undertaking that ownership will not vest in Ong until full payment. However, Ong was able to
obtain several copies of the deedwith Ang Tay's signature and had these notarized without the aforementioned undertaking, as
evidenced by the copy of the deed of sale presented by petitioner. The Deed of Absolute Sale consisted of two (2) pages. The
signatures of Ang Tay and Ong appeared only on the first page of the deed. The second page contained the continuation of the
acknowledgment and the undertaking. Ong could have easily reproduced the second page without the undertaking since this page
was not signed by the contracting parties. To complete the deception, Ang Tay unwittingly allowed Ong to have possession of the
ship. Hence, in consonance with our ruling that as between two innocent persons, the mortgagee and the owner of the mortgaged
property, one of whom must suffer the consequence of a breach of trust, the one who made it possible by his act of confidence
must bear the loss.

FRANCISCO and SALVACION NICOL v. JOSE BLANCA, Sheriff IV, RTC, Legazpi City
A.M. No. P-99-1290, 19 May 1999, EN BANC (Per Curiam)
The officer who conducted the foreclosure must demand and actually receive the cash proceeds of the auction sale from
the highest bidder and turn over the balance to the mortgagor

Salvacion M. Nicol (Nicol) furnished the Office of the Court Administrator (OCA) with copies of two (2) criminal
informations for Direct Bribery filed by the Office of the Deputy Ombudsman for Luzon against respondent Jose Blanca (Blanca),
Sheriff IV, RTC of Legazpi City. The criminal informations accused respondent of taking advantage of his office as Sheriff by
demanding and receiving a total amount of three thousand pesos (P3,000.00) from Francisco and Salvacion Nicol for and in
consideration of discontinuing the auction sale of the latters motor vehicle (a mini-bus). She also called attention to Adm. Matter
No. P-89-281, where this Court found respondent guilty of abuse of authority and conduct unbecoming of a public officer. The OCA
treated the criminal informations as an administrative matter against respondent and required him to comment thereon.

In his Comment, Blanca averred that the amount of P3,000.00 is a loan he obtained from Salvacion Nicol prior to the time
he acted upon the petition for extra-judicial foreclosure of the mini-bus. He added that complainants charge is intended to harass
him since he did not accede to their request to extend the date of the auction sale until such time that they have sufficient amount
to pay their obligation to Radiowealth Finance Company, their creditor-mortgagee.

OCA referred the complaint to Executive Judge Rafael P. Santelices. Accordingly, Salvacion Nicol and her husband were
operators of a mini-bus. In 1993, they obtained a loan of P204,000.00 from Radiowealth Finance Company (RFC) in Legazpi City. The
loan was then restructured to P147,200.00 due to their failure to pay several monthly installments. As collateral to secure the
restructured loan, they mortgaged their mini-bus. Subsequently, and with the approval of the manager of RFC, she pledged the mini-
bus for two (2) months to a certain Engineer Rito for P50,000.00 to buy spare parts. They again defaulted on their payments to RFC
and their chattel was threatened to be foreclosed. Salvacion then went to the RFC office to request the non-foreclosure of their
mortgage. There, she met respondent Jose Blanca who was introduced by RFCs manager as its sheriff. Blanca then visited Nicols
office and told her t he would desist from the foreclosure if she would give him P5,000.00. She did not have P5,000.00 and instead
offered Blanca a check for P1,000.00. Blanca accepted the check and suspended the foreclosure. Blanca once again went to her
office and told her that he would issue the notice of auction sale if she would not pay him. Again, she gave him a check
worth P2,000.00, and Blanca did not proceed with the auction sale.

However, Nicol received a notice of auction sale signed by Blanca.She proceeded to the situs of the sale on the scheduled
date, but nobody was there and no sale took place. She inquired from the Clerk of Court regarding the auction sale, and was advised
to ask Blanca. Blanca informed her that Jose Bragais won in the bidding. She checked with RFC and got the information that it was
RFC that won in the bidding. She went to the office of RFC to arrange for the redemption of the mini-bus and met Blanca there. This
time, Blanca told her that it was Elbert Vibal who won in the bidding and not RFC. She then filed a letter-complainant with the
Ombudsman.

Blanca denied the allegations. He alleged that the two (2) checks he received from Salvacion Nicol were loans. He
contended that on these dates, the petition for extra-judicial foreclosure has not yet been filed. He maintained that he conducted
an auction sale. The RFC filed the petition for extra-judicial foreclosure. Blanco found the mini-bus in the possession of Engineer
Rito. He then sent RFC and the complainants a notice of auction sale. The auction sale was conducted on the scheduled date, time
and place. He opined that the charge was filed against him when he failed to accommodate Bragais who was recommended by
Salvacion Nicol to participate in the bidding.

On rebuttal, Nicol alleged that she could not have given Blanca any loan since she was financially distressed at that
time. For failing to meet her various financial obligations, she was charged with estafa and violation of B.P. 22. She maintained that
the auction sale never took place on the scheduled date and place. She also claimed that respondent never gave her the excess of
the bid price.

Judge Santelices then recommended that respondent be suspended for 6 months without pay.

ISSUE:

Whether or not Blanca is guilty of misconduct and gross negligence in the performance of his duties

HELD:

Petition GRANTED.

We find respondent guilty of grave misconduct and of gross negligence in the performance of his duties. Considering the
gravity of his offenses and his record showing a previous administrative conviction, we are not satisfied with the recommended
penalty of suspension. Respondent not only failed to comply with the strict and rigorous standards required of all public officers and
employees but worse, his act eroded the faith of the complainants in the judiciary. Thus, he must be punished with maximum
severity because all involved in the dispensation of justice must live up to the strictest standard of honesty and integrity in the public
service.

KENNETH S. NEELAND v. ILDEFONSO M. VILLANUEVA, Clerk of Court, Regional Trial Court, Bacolod City, and NELSON N.
ABORDAJE, Sheriff III, Municipal Trial Court in Cities, Branch 4, Bacolod City
A.M. No. P-99-1316, 29 October 1999, EN BANC (Per Curiam)
The officer who conducted the foreclosure must demand and actually receive the cash proceeds of the auction sale from the highest
bidder and turn over the balance to the mortgagor

Kenneth S. Neeland (Needland) filed with the Office of the Chief Justice a verified letter-complaint against Atty. Ildefonso
M. Villanueva, Jr. (Atty. Villanueva), Clerk of Court and Ex-Officio Provincial Sheriff, RTC of Negros Occidental and Nelson N.
Abordaje (Nelson), Sheriff III, Branch 04, Municipal Trial Court in Cities, Bacolod City, for gross misconduct.

Accordingly, in 1995, Sugarland Motor Sales (Sugarland) filed with the City Sheriff of Bacolod City, a request for foreclosure
of the chattel mortgage constituted on a Toyota Sedan, owned by the mortgagor, Kenneth S. Neeland, and its sale at public auction
to satisfy an obligation owing to the mortgagee, Sugarland in the amount of twenty thousand pesos (P20,000.00). Sheriff Nelson
then seized the motor vehicle and issued a notice of auction sale scheduling its sale at auction on February 6, 1996 at the Daewoo
Cars compound, Lacson St., Bacolod City. Nelson then sold the motor vehicle at public auction to the highest bidder, Sugarland for
forty thousand pesos (P40,000.00). On the same date, Clerk of Court AttyVillanueva, as ex-officio Provincial Sheriff, issued a
certificate of sale conveying the motor vehicle to Sugarland Motor Sales. However, the remaining balance between the sum at
which the vehicle was sold and the obligation sought to be satisfied and expenses of sale, amounting to twenty thousand pesos
(P20,000.00), was not turned over to Neeland. Hence, this complaint.

ISSUE:

Whether or not the sheriffs failure to turn over the mortgagor the excess of the bid price constituted if not dishonesty,
gross misconduct prejudicial to the best interest of the service
HELD:

Petition GRANTED.

Under the Chattel Mortgage Law, the sheriff conducting the auction sale must receive the winning bid in cash and apply
such proceeds to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or
obligation secured by such mortgage, and the residue shall be paid to the mortgagor or person holding under him on demand.
Thus, the officer who conducted the foreclosure must demand and actually receive the cash proceeds of the auction sale from the
highest bidder and turn over the balance to the mortgagor. It was, therefore, irregular for the sheriff not to demand and receive the
entire bid price in cash from the winning bidder, or at the very least, to demand the excess amount and turn it over to the
mortgagor.

Nelson admitted that he did not receive the remaining amount of twenty thousand pesos (P20,000.00) from the winning
bidder, Sugarland Motor Sales. He demanded the amount from Sugarland Motor Sales but was told that the amount was applied to
cover other charges which complainant had with Sugarland. This is not authorized under the law. Besides, respondent Nelson did
not reflect these facts and circumstances in his minutes of auction sale. Neither can respondent Villanueva, Jr. escape responsibility
for his failure to supervise Sheriff Abordaje in the performance of the latters duties. Clerk of Court Villanueva Jr. issued a certificate
of sale without ascertaining that the balance of Twenty Thousand pesos (P20,000.00) due from winning bidder Sugarland Motor
Sales was duly turned over and accounted to the mortgagor.

Respondent Villanueva, Jr., a lawyer occupying a position of responsibility, must be alert at all times to an honest conduct of
foreclosures of chattel mortgages. In this particular case, there was a difference of P20,000.00 between the winning bid and the
obligation of complainant, but respondent Abordaje did not turn over the amount to complainant. Thus, respondent Villanueva, Jr. is
equally guilty of gross misconduct in the performance of his duties. As an officer of the court, he was duty-bound to use reasonable
skill and diligence in the performance of his officially-designated duties.

Time and again, we have said that the conduct and behavior of every one connected with an office charged with the
dispensation of justice, from the presiding judge to the lowliest clerk, should be circumscribed with the heavy burden of
responsibility. His conduct, at all times must not only be characterized by propriety and decorum but above all else must be above
suspicion. Respondents failed to comply with the strict and rigorous standards required of all public officers and employees and
have caused an erosion of faith in the judiciary. Thus, respondents must be meted the maximum penalty because all involved in the
dispensation of justice must live up to the strictest standard of honesty and integrity in the public service.

RUBY L. TSAI v. HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and MAMERTO R. VILLALUZ
G.R. No. 120098, 2 October 2001, FIRST DIVISION (Quisumbing, J.)
The Chattel Mortgage Law which provides that the chattel mortgage shall be deemed to cover only the property described
therein and not the like or substituted property thereafter acquired by the mortgagor and placed in the same depositary as the
property originally mortgaged, anything in the mortgage to the contrary notwithstanding applies (Tsai v. CA, 366 SCRA 324, 2001).

Respondent Ever Textile Mills, Inc. (EVERTEX) obtained a P3,000,000.00 loan from petitioner Philippine Bank of
Communications (PBCom). As security for the loan, EVERTEX executed in favor of PBCom, a deed of Real and Chattel Mortgage over
the lot where its factory stands, and the chattels located therein. The mortgage includes machineries and equipments like 48 units of
Vayrow Knitting Machineries-Tompkins made in Hongkong, 16 sets of Vayrow knitting machineries in Taiwan, 2 circular knitting
machineries made in West Germany and 4 winding machineries. It shall also include any and all building and improvements on the
mentioned lot.

In 1979, PBCom granted a second loan of P3,356,000.00 to EVERTEX. The loan was secured by a Chattel Mortgage over
personal properties similar to those of the first mortgage deed. After the execution of the second mortgage, EVERTEX purchased
various machineries and equipments. However, in 1982, due to business reverses, EVERTEX filed insolvency proceedings before the
CFI of Pasay City. The latter then declared the corporation insolvent. Consequently, all its assets were taken into the custody of the
Insolvency Court, including the collateral, real and personal, securing the two mortgages. Meanwhile, upon the default of
EVERTEX, PBcom commenced extrajudicial foreclosure proceedings against EVERTEX. In both public auctions, PBCom emerged as the
highest bidder. In 1984, PBCom consolidated its ownership over the lot and all the properties in it. It then leased the entire factory
premises to petitioner Ruby L. Tsai for P50,000.00 a month. In 1988, PBCom sold the factory, lock, stock and barrel to Tsai for
P9,000,000.00, including the contested machineries.

In 1989, EVERTEX filed a complaint for annulment of sale, reconveyance, and damages with the RTC against PBCom,
alleging that the extrajudicial foreclosure of subject mortgage was in violation of the Insolvency Law. Accordingly, EVERTEX
claimed that no rights having been transmitted to PBCom over the assets of insolvent EVERTEX, therefore Tsai acquired no rights
over such assets sold to her, and should reconvey the assets. According to EVERTEX, PBCom appropriated the properties not
included in the Real and Chattel Mortgage. The RTC found that the lease and sale of said personal properties were irregular and
illegal because they were not duly foreclosed nor sold since these were not included in the schedules attached to the mortgage
contracts. On appeal, CA affirmed the decision.

ISSUE:

1. Whether or not the inclusion of the questioned properties in the foreclosed properties is proper;
2. Whether or not the sale of these properties to Tsai is valid; and
3. Whether or not Tsai is a purchaser in good faith.

HELD:

Petition DENIED.

Inclusion of the foreclosed properties is improper

The following are the facts as found by the RTC and affirmed by the Court of Appeals that are decisive of the issues: (1) the
"controverted machineries" are not covered by, or included in, either of the two mortgages, the Real Estate and Chattel Mortgage,
and the pure Chattel Mortgage; (2) the said machineries were not included in the list of properties appended to the Notice of Sale,
and neither were they included in the Sheriff's Notice of Sale of the foreclosed properties.

Petitioners contend that the nature of the disputed machineries, i.e., that they were heavy, bolted or cemented on the real
property mortgaged by EVERTEX to PBCom, make them ipso facto immovable under Article 415 (3) and (5) of the New Civil Code.
This assertion, however, does not settle the issue. Mere nuts and bolts do not foreclose the controversy. We have to look at the
parties' intent. While it is true that the controverted properties appear to be immobile, a perusal of the contract of Real and
Chattel Mortgage executed by the parties herein gives us a contrary indication. In the case at bar, both the trial and the appellate
courts reached the same finding that the true intention of PBCOM and the owner, EVERTEX, is to treat machinery and equipment
as chattels. Accordingly, the bank treated the machineries as chattels; never as real properties. Indeed, the 1975 mortgage contract,
it should be noted that the printed form used by appellant bank was mainly for real estate mortgages. But reflective of the true
intention of appellant PBCOM and appellee EVERTEX was the typing in capital letters, immediately following the printed caption of
mortgage, of the phrase "real and chattel." So also, the "machineries and equipment" in the printed form of the bank had to be
inserted in the blank space of the printed contract and connected with the word "building" by typewritten slash marks. Now, then, if
the machineries in question were contemplated to be included in the real estate mortgage, there would have been no necessity to
ink a chattel mortgage specifically mentioning the machineries covered thereby. It would have sufficed to list them as immovables in
the Deed of Real Estate Mortgage of the land and building involved. As regards the 1979 contract, the intention of the parties is clear
and beyond question. It refers solely to chattels. The inventory list of the mortgaged properties is an itemization of sixty-three (63)
individually described machineries while the schedule listed only machines and 2,996,880.50 worth of finished cotton fabrics and
natural cotton fabrics.

Too, assuming arguendo that the properties in question are immovable by nature, nothing detracts the parties from
treating it as chattels to secure an obligation under the principle of estoppel. As far back as Navarro v. Pineda, 9 SCRA 631 (1963), an
immovable may be considered a personal property if there is a stipulation as when it is used as security in the payment of an
obligation where a chattel mortgage is executed over it, as in the case at bar.

Accordingly, inasmuch as the subject mortgages were intended by the parties to involve chattels, insofar as equipment and
machinery were concerned, the Chattel Mortgage Law applies, which provides in Section 7 thereof that: "a chattel mortgage shall be
deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and
placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding." And,
since the disputed machineries were acquired in 1981 and could not have been involved in the 1975 or 1979 chattel mortgages, it
was consequently an error on the part of the Sheriff to include subject machineries with the properties enumerated in said chattel
mortgages.

Invalidity of the Sale to Tsai

As the auction sale of the subject properties to PBCom is void, no valid title passed in its favor. Consequently, the sale
thereof to Tsai is also a nullity under the elementary principle of nemo dat quod non habet, one cannot give what one does not have.

Tsai not a purchaser in good faith

Well-settled is the rule that the person who asserts the status of a purchaser in good faith and for value has the burden of
proving such assertion. Petitioner Tsai failed to discharge this burden persuasively. Moreover, a purchaser in good faith and for value
is one who buys the property of another without notice that some other person has a right to or interest in such property and pays a
full and fair price for the same, at the time of purchase, or before he has notice of the claims or interest of some other person in the
property. Records reveal, however, that when Tsai purchased the controverted properties, she knew of respondent's claim
thereon. As borne out by the records, she received the letter of respondent's counsel. Despite her knowledge of respondent's claim,
she proceeded to buy the contested units of machinery.

NORDIC ASIA LIMITED (now known as DnC Limited) and BANKERS TRUST COMPANY v. THE HONORABLE COURT OF APPEALS, et al.
G.R. No. 111159, 10 June 2003, FIRST DIVISION (Azcuna, J.)
A mortgagee of a vessel should not be allowed to intervene in a collection case filed by a co-claimant or co-creditor (unpaid
crew members) possessing a superior lien or preferred cerdit than the mortgagee solely for the purpose of opposing such claims so
that the share in the mortgaged chattel may not be diminished substantially, or to prevent it from, being dimished at all since the
higher the claims awarded to the crew members in the collection case, which would be recovered from the attached vessel, the lesser
the amount the mortgagee can obtain from their extra-judicial foreclosure proceedings.

A loan agreement was entered into between Nordic Asia Limited (Nordic) and Bankers Trust Company (Bankers), as
lenders, and Sextant Maritime, S.A. (Sextant), as borrower, involving the sum of US$5,300,000. The amount was used by Sextant to
purchase the vessel M/V Fylyppa. As a security for the loan, Sextant executed in favor of Nordic a First Preferred Mortgage over
the vessel M/V Fylyppa. Upon default by Sextant, Nordic instituted an extrajudicial foreclosure proceeding. As part of the said
proceedings, Nordic filed with the RTC of Pasay City a petition for the issuance of an arrest order against the vessel M/V Fylyppa.
Respondents Nam Ung Marine Co., Ltd. (Nam Ung) and the twenty-seven (27) crew members of the vessel M/V Fylyppa also filed
a complaint for a sum of money before the RTC of Manila against the vessel M/V Fylyppa. Respondents filed the suit to claim their
preferred maritime liens under the Code of Commerce and P.D. 1521, consisting of unpaid wages, overtime pay, allowances and
other benefits due to them for services rendered on board the vessel and for the manning and provisioning thereof. They impleaded
Sextant being the registered owner of the vessel.

The RTC of Pasay City then issued an order for the arrest of the vessel. Likewise, the RTC of Manila issued an order for the
arrest and/or attachment of the vessel. Subsequently, Nordic filed an urgent motion for leave to intervene in the collection case as
plaintiffs-intervenors against respondents. Nordic alleged that they hold and possess a Panamanian First Preferred Ship Mortgage
over the vessel M/V Fylyppa and that their intervention is only for the purpose of opposing the herein plaintiffs unfounded
and/or grossly exaggerated claim. The motion for leave was granted and the complaint-in-intervention admitted. Nordic then filed
a manifestation/motion with the RTC of Manila praying for the discharge of the attachment of the vessel M/V Fylyppa and
offering a counterbond in the amount of US$327,269.73. The RTC of Manila initially granted the manifestation/motion based on the
counterbond offered. However, upon motion for reconsideration filed by respondents, the amount of the bond was increased to
US$567,297.84. Petitioners posted the required bond and the attachment over the vessel was lifted.

The RTC of Manila then rendered a decision ordering M/V Fylyppa, Sextant Maritime, S.A., P.V. Christensen Lines, Theil
Bolvinkel, A.S., to pay respondents jointly and severally for the wages, allowances, medical expenses and overtime charges among
others. The CA meanwhile affirmed the said decision.

ISSUE:

Whether or not the mortgagee of a vessel can intervene in a collection case filed by a co-claimant or co-creditor possessing
a superior lien or preferred credit for the purpose of opposing such claims

HELD:

Petition DENIED.

A cursory reading of petitioners complaint-in-intervention plainly shows that petitioners intention in intervening in the
collection case was not to enforce their maritime lien against the defendants therein, it already being enforced through extrajudicial
foreclosure proceedings, but solely to oppose the claims of respondents. The reason is obvious. The higher the claims awarded to
respondents in the collection case, which would be recovered from the attached vessel, the lesser the amount petitioners can obtain
from their extrajudicial foreclosure proceedings given that respondents lien is superior to petitioners mortgage lien.

The purpose of intervention is not to obstruct nor unnecessarily delay the placid operation of the machinery of trial, but
merely to afford one not an original party, yet having a certain right or interest in the pending case, the opportunity to appear and
be joined so he could assert or protect such right or interest. Before this Court is a striking example of the disastrous results incident
to an improper intervention. By being admitted as intervenors, petitioners were able to elevate the collection case all the way to this
Court to contest.the award of damages that was not directed against them but against the main defendants who did not appeal
from the judgment.

In effect, petitioners intervention is a device to defeat the order of preference of claims enumerated in P.D. 1521. If
petitioners tactics were allowed, it would virtually pave the way for any creditor with a secondary lien or junior mortgage to
block the claims of a preferred creditor or claimant by simply intervening to oppose such credits or claims. This would inevitably
delay and prejudice the rights of the original parties, unnecessarily complicate the case, and result in expensive and interminable
litigation.

It is apt to mention Nordic Asia Limited v. Agton, wherein a similar procedure wrought havoc on the other claimants against
the vessel.

PHILIPP BROTHERS OCEANIC, INC. v. HONORABLE COURT OF APPEALS, BANK OF THE PHILIPPINES ISLANDS and SAN GRACE
MINING CORPORATION
G.R. Nos. 105416-17, 25 June 2003, FIRST DIVISION (Azcuna, J.)
The chattel mortgage is a mere accessory contract. Hence, it should be deemed automatically extinguished upon the
satisfaction of the principal obligation. It can be extended to guarantee the payment of the obligation of another entity which did not
participate in the execution of the contract in its own right and was not an assignee thereof.

A contract was entered into between Phillip Brothers Hong Kong, Ltd. (Philbro H.K.) and San Grace Mining Corporation
(Sagramco). In the contract, Sagramco agreed to sell and ship to Philbro H.K. at least 9,000 metric tons of chrome ore. In
consideration for the delivery of the chrome ore, Philbro H.K. agreed to open a letter of credit in the sum of US$195,000, under
which Sagramco would be allowed to withdraw advances to be charged against Sagramcos future deliveries of chrome ore. Philbro
H.K. opened the aforestated letter of credit with the Bank of the Philippine Islands (BPI) and the full amount of US$195,000 was
drawn by Sagramco. Meanwhile, to secure the advances, Sagramco executed a chattel mortgage in favor of Philbro H.K. over the
personal properties including 1 Kawasaki Shovel Loader; One Kimko Payloader; One Ford Bronco Ranger; and Two Komatsu Crawler
Tractors. However, aside from the dollar advance obtained from Philbro H.K., Sagramco separately received peso advances from
Philbro Oceanic, Philbro H.K.s principal corporation. Accordingly, Sagramcos indebtedness under the peso advance amounted
to P1,946,356.60. Sagramco was able to produce chrome ores the value of which is more than the dollar advance.

In 1980, Sagramco obtained from BPI a P300,000 loan which was followed by another loan in the amount of P700,000.00.
The two loans were secured by real estate mortgages executed by the Spouses de Gracia (as officers of the company) in favor of BPI.
As further security, Sagramco executed a Deed of Assignment in favor of BPI, assigning the proceeds of the letter of credit which
Philbro H.K. opened with BPI, and trust receipts and quedans over the 1,800 metric tons of chrome ore already produced and
stockpiled in the warehouse of Philbro Oceanic in Kauswagan, Cagayan de Oro City.

In 1982, Philbro H.K. assigned to Philbro Oceanic all its rights, interests and collectibles from Sagramco and from the deed
of chattel mortgage securing the same. BPI then sought to take possession of the 1,800 metric tons of chrome ore by filing with
the RTC of Misamis Oriental a complaint against Sagramco for delivery of personal property with a prayer a for a writ of replevin. BPI
alleged in its complaint that, by virtue of the trust receipts, it is the owner of the 1,800 metric tons of chrome ore held i n trust by
Sagramco and is, therefore, entitled to take possession of the said chrome ore.

A writ of replevin was issued by the RTC of Misamis Oriental. However, Philbro Oceanic filed a third party-claim alleging
that it is the rightful owner of the 1,800 metric tons of chrome ore. It thereby filed for injunction against Sagramco, in order to
prevent the removal of the chrome ore from its warehouse. Nonetheless, the RTC of Misamis Oriental also ordered the chrome ore
to be sold at public auction to prevent its further deterioration. Correspondingly, Philbro Oceanic also filed a third complaint against
Sagramco, for judicial foreclosure of chattel mortgage.

ISSUE:

1. Whether or not Philbro Oceanic can apply the stipulations in the contract referring to the obligations of Sagramco to
Philbro to the payment of another obligation owed by Sagramco to it; and
2. Whether or not the chattel mortgage can be called upon to satisfy the peso advance obtained from PhilBro Oceanic.

HELD:

The rule is that contracts take effect only between the parties, their assigns and heirs. This is the principle of relativity of
contracts. In the case at bar, in the absence of any stipulation on the manner of payment for the peso advance, Philbro Oceanic
cannot apply the stipulations contained in Contract No. 930562-P which refers only to the obligations of Sagramco to Philbro H.K.
and consequently, should only apply to the dollar advance owed to Philbro H.K. Contract No. 930562-P cannot be used to govern the
payment of another obligation owed by Sagramco to another entity.

Philbro Oceanic however claims that (in relation to the letter agreement), subsequently, it was agreed to credit to the peso
advance any chrome ore delivered after 1980. Philbro Oceanic argues that the aforementioned letter was executed in relation to the
peso advance and clearly signifies the parties intention to apply to the peso advance any chromite delivered to the plant after MV
IWATE sails. Hence, the 834 and 1,800 metric tons of chrome ore, which were delivered to Philbro Oceanics warehouse after the
MV IWATE had sailed, should be credited, not to the dollar advance, but to the peso advance.

The letter agreement cannot be considered a modification to Contract No. 930562-P. Philbro Oceanic did not participate in
the execution of Contract No. 930562-P in its own right and Philbro Oceanic was yet an assignee of Contract No. 930562-P at the
time the letter agreement was made. Hence, for all intents and purposes, Philbro Oceanic was a merely a third party and could not
amend a contract it was not an original party to by inserting its own interest and having the chrome ore answer for its own peso
advance instead of Philbro H.K.s dollar advance. But the most obvious reason for rejecting Philbro Oceanics claim comes from
Philbro Oceanics very own allegations. Contract No. 930562-P provides that the chrome ore should be credited to the dollar
advance. If there is truth to Philbro Oceanics claim that Contract No. 930562-P only refers to the purchase from Sagramco and the
sale to Philbro H.K. of Sagramcos entire production of chrome ore up to the end of 1980, and that it was the intention to credit any
chrome ore delivered after 1980 entirely to the peso advance, then Philbro Oceanics claim over the 834 and 1,800 metric tons of
chrome ore, all delivered after 1980, should not be based on the inherited Contract No. 930562-P but solely on the December 2,
1980 letter agreement executed in its own right.

There is no disputing the fact that the chattel mortgage was a security arrangement between Philbro H.K. and Sagramco. It
was constituted to guarantee Sagramcos payment of the dollar advance obtained from Philbro H.K. Philbro Oceanic, however,
maintains that the same chattel mortgage also secured its own peso advance by virtue of the December 2, 1980 letter agreement.
In the same manner that the principle of relativity of contracts bars Philbro Oceanic from applying the provisions of Contract
No. 930562-P, Philbro Oceanic is likewise prevented from making use of the chattel mortgage, entered into exclusively by Philbro
H.K. and Sagramco, to secure its peso advance. Philbro Oceanic did not participate in the execution of the chattel mortgage in its
own right and was not an assignee of the chattel mortgage at the time the December 2, 1980 letter agreement was made. Being a
third party to the security arrangement, Philbro Oceanic cannot avail of the chattel mortgage to remedy the absence of any security
for the peso advance. Hence, the chattel mortgage can only secure dollar advance obtained from Philbro H.K. and cannot be
extended to guarantee the payment of peso advance owed to another entity.

Since the chattel mortgage can only be called upon to satisfy the dollar advance obtained from Philbro H.K., it is proper
forthwith to dismiss the foreclosure case. The chattel mortgage is a mere accessory contract. Hence, it should be deemed
automatically extinguished upon the satisfaction of the principal obligation. In the case at bar, the delivery of the chrome ore to
Philbro Oceanic has fully satisfied the principal obligation, and even resulted in an excess payment. Since there is no more balance
due on the dollar advance, there can no longer exist a mortgage to foreclose upon. To allow a foreclosure upon the chattels, even
after Philbro Oceanic has been declared the owner of the chrome ore, would result in double indemnity and an unjust enrichment
for Philbro Oceanic.

POLIAND INDUSTRIAL LIMITED v. NATIONAL DEVELOPMENT COMPANY (NDC), DEVELOPMENT BANK OF THE PHILIPPINES, and THE
HONORABLE COURT OF APPEALS (Fourteenth Division)
If the mortgage of the vessel is constituted for the purpose of financing the construction, acquisition, purchase, or initial
operation of vessels, the mortgagee obtains a preferred status provided the formalities prescribed by the law are complied wi th.
Upon enforcement of the preferred mortgage and eventual foreclosure of the vessel, the proceeds of the sale shall first be applied to
the claim of the mortgage creditor unless there is a superior or preferrential claims under Sec. 17 of the same law.

Asian Hardwood Limited (Asian Hardwood), a Hong Kong corporation, extended credit accommodations in favor of
Galleon Shipping Corporation (GALLEON) totaling US$3,317,747.32. At that time, GALLEON, a domestic corporation organized in
1977 and headed by its president, Roberto Cuenca, was engaged in the maritime transport of goods. The advances were utilized to
augment GALLEONs working capital depleted as a result of the purchase of five new vessels and two second-hand vessels in 1979
and competitiveness of the shipping industry. GALLEON had incurred an obligation in the total amount of US$3,391,084.91 in favor
of Asian Hardwood.

To finance the acquisition of the vessels, GALLEON obtained loans from Japanese lenders, namely, Taiyo Kobe Bank, Ltd.,
Mitsui Bank Ltd. and Marubeni Benelux. GALLEON then, through Cuenca, and DBP executed a Deed of Undertaking whereby DBP
guaranteed the prompt and punctual payment of GALLEONs borrowings from the Japanese lenders. To secure DBPs guarantee
under the Deed of Undertaking, GALLEON promised, among others, to secure a first mortgage on the five new vessels and on the
second-hand vessels. Thus, GALLEON executed a mortgage contract over five of its vessels namely, M/V Galleon Honor, M/V
Galleon Integrity, M/V Galleon Dignity, M/V Galleon Pride, and M/V Galleon Trust in favor of DBP.

In 1981, President Marcos issued LOI No. 1155, directing NDC to acquire the entire shareholdings of GALLEON for the
amount originally contributed by its shareholders payable in five (5) years without interest cost to the government. In the same LOI,
DBP was to advance to GALLEON within three years from its effectivity the principal amount and the interest thereon of GALLEONs
maturing obligations. NDC then assumed management and operations of GALLEON and thereafter ppaid Asian Hardwood the
amount of US$1,000,000.00 as partial settlement of GALLEONs obligations. LOI No. 1195 was later on issued directing the
foreclosure of the mortgage on the five vessels. For failure of GALLEON to pay its debt despite repeated demands from DBP, the
vessels were extrajudicially foreclosed on various dates and acquired by DBP for the total amount of P539,000,000.00. DBP
subsequently sold the vessels to NDC for the same amount. In 1982, the Board of Directors of GALLEON changed the corporate
name from Galleon Shipping Corporation to National Galleon Shipping Corporation . Asian Hardwood then assigned its rights over
the outstanding obligation of GALLEON of US$2,315,747.32 to World Universal Trading and Investment Company, S.A. (World
Universal), embodied in a Deed of Assignmen. World Universal, in turn, assigned the credit to petitioner POLIAND.

President Cory Aquino then issued AO No. 64 directing NDC and Philippine Export and Foreign Loan Guarantee
Corporation (now Trade and Investment Development Corporation of the Philippines) to transfer some of their assets to the
National Government, through the Asset Privatization Trust (APT) for disposition. Among those transferred to the APT were the five
GALLEON vessels sold at the foreclosure proceedings.

POLIAND then made demands on GALLEON, NDC, and DBP for the satisfaction of the outstanding balance in the amount of
US$2,315,747.32. For failure to heed the demand, POLIAND instituted a collection suit against NDC, DBP and GALLEON claiming
that under LOI No. 1155 and the Memorandum of Agreement between GALLEON and NDC, defendants GALLEON, NDC, and DBP
were solidarily liable to POLIAND as assignee of the rights of the credit advances/loan accommodations to GALLEON. POLIAND
also claimed that it had a preferred maritime lien over the proceeds of the extrajudicial foreclosure sale of GALLEONs vessels
mortgaged by NDC to DBP. On the other hand, DBP countered that it was unaware of the Maritime Lien on the 5 vessels mortgaged.

The Trial Court ruled that Poliand had preference to the maritime lien over the proceeds of the extrajudicial sale of the
Galleons vessels since the loan advances/ credit accommodations utilized for the payment of expenses on the vessels were
obtained prior to the constitution of the mortgage in favor of DBP.

ISSUE:

Whether or not the mortgage lien of DBP is superior over the maritime lien of Poliand which was registered and which was
prior in time with the chattel mortgage

HELD:

Petition GRANTED (lien of Poliand is superior).

Articles 578 and 580 of the Code of Commerce, not applicable

NDC cites Articles 578 and 580 of the Code of Commerce to bolster its argument that the foreclosure of the vessels
extinguished all claims against the vessels including POLIANDs claim. Article 578 of the Code of Commerce is not relevant to the
facts of the instant case because it governs the sale of vessels in a foreign port. Said provision outlines the formal and registration
requirements in order that a sale of a vessel on voyage or in a foreign port becomes effective as against third persons. On the other
hand, the resolution of the instant case depends on the determination as to which creditor is entitled to the proceeds of the
foreclosure sale of the vessels. Clearly, Article 578 of the Code of Commerce is inapplicable.

Article 580, while providing for the order of payment of creditors in the event of sale of a vessel, had been repealed by the
pertinent provisions of Presidential Decree (P.D.) No. 1521, otherwise known as the Ship Mortgage Decree of 1978. In particular,
Article 580 provides that in case of the judicial sale of a vessel for the payment of creditors, the debts shall be satisfied in the order
specified therein. On the other hand, Section 17 of P.D. No. 1521also provides that in the judicial or extrajudicial sale of a vessel for
the enforcement of a preferred mortgage lien constituted in accordance with Section 2 of P.D. No. 1521, such preferred mortgage
lien shall have priority over all pre-existing claims against the vessel, save for those claims enumerated under Section 17, which have
preference over the preferred mortgage lien in the order stated therein. Since P.D. No. 1521 is a subsequent legislation and since
said law in Section 17 thereof confers on the preferred mortgage lien on the vessel superiority over all other claims, thereby
engendering an irreconcilable conflict with the order of preference provided under Article 580 of the Code of Commerce, it follows
that the Code of Commerce provision is deemed repealed by the provision of P.D. No. 1521, as the posterior law.

P.D. No. 1521 is applicable, not the Civil Code provisions on concurrence/preference of credits

Whether or not the order of preference under Section 17, P.D. No. 1521 may be properly applied in the instant case
depends on the classification of the mortgage on the GALLEON vessels, that is, if it falls within the ambit of Section 2, P.D. No. 1521,
defining how a preferred mortgage is constituted.

NDC and DBP both argue that POLIANDs claim cannot prevail over DBPs mortgage credit over the foreclosed vessels
because the mortgage executed in favor of DBP pursuant to the October 10, 1979 Deed of Undertaking signed by GALLEON and DBP
was an ordinary ship mortgage and not a preferred one, that is, it was not given in connection with the construction, acquisition,
purchase or initial operation of the vessels, but for the purpose of guaranteeing GALLEONs foreign borrowings.

Section 2 of P.D. No. 1521 recognizes the constitution of a mortgage on a vessel. Accordingly, any citizen of the Philippines,
or any association or corporation organized under the laws of the Philippines, at least sixty per cent of the capital of which is owned
by citizens of the Philippines may, for the purpose of financing the construction, acquisition, purchase of vessels or initial operation
of vessels, freely constitute a mortgage or any other lien or encumbrance on his or its vessels and its equipment with any bank or
other financial institutions, domestic or foreign.

If the mortgage on the vessel is constituted for the purpose stated under Section 2, the mortgage obtains a preferred status
provided the formal requisites enumerated under Section 4are complied with. Upon enforcement of the preferred mortgage and
eventual foreclosure of the vessel, the proceeds of the sale shall be first applied to the claim of the mortgage creditor unless there
are superior or preferential liens, as enumerated under Section 17, namely:

SECTION 17. Preferred Maritime Lien, Priorities, Other Liens. (a) Upon the sale of any mortgaged vessel in any extra-judicial
sale or by order of a district court of the Philippines in any suit in rem in admiralty for the enforcement of a preferred mortgage lien
thereon, all pre-existing claims in the vessel, including any possessory common-law lien of which a lienor is deprived under the
provisions of Section 16 of this Decree, shall be held terminated and shall thereafter attach in like amount and in accordance with
the priorities established herein to the proceeds of the sale. The preferred mortgage lien shall have priority over all claims against
the vessel, except the following claims in the order stated: (1) expenses and fees allowed and costs taxed by the court and taxes
due to the Government; (2) crew's wages; (3) general average; (4) salvage including contract salvage; (5) maritime liens arising
prior in time to the recording of the preferred mortgage; (6) damages arising out of tort; and (7) preferred mortgage registered
prior in time.

(b) If the proceeds of the sale should not be sufficient to pay all creditors included in one number or grade, the residue shall be
divided among them pro rata. All credits not paid, whether fully or partially shall subsist as ordinary credits enforceable by personal
action against the debtor. The record of judicial sale or sale by public auction shall be recorded in the Record of Transfers and
Encumbrances of Vessels in the port of documentation. (Emphasis supplied.)

There is no question that the mortgage executed in favor of DBP is covered by P.D. No. 1521. Contrary to NDCs assertion,
the mortgage constituted on GALLEONs vessels in favor of DBP may appropriately be characterized as a preferred mortgage under
Section 2, P.D. No. 1521 because GALLEON constituted the same for the purpose of financing the construction, acquisition, purchase
of vessels or initial operation of vessels. While it is correct that GALLEON executed the mortgage in consideration of DBPs guarantee
of the prompt payment of GALLEONs obligations to the Japanese lenders, DBPs undertaking to pay the Japanese banks was a
condition sine qua non to the acquisition of funds for the purchase of the GALLEON vessels. Without DBPs guarantee, the Japanese
lenders would not have provided the funds utilized in the purchase of the GALLEON vessels. The mortgage in favor of DBP was
therefore constituted to facilitate the acquisition of funds necessary for the purchase of the vessels.

NDC adds that being an ordinary ship mortgage, the Civil Code provisions on concurrence and preference of credits and not
P.D. No. 1521 should govern. NDC contends that under Article 2246, in relation to Article 2241 of the Civil Code, the credits
guaranteed by a chattel mortgage upon the thing mortgaged shall enjoy preference (with respect to the thing mortgaged), to the
exclusion of all others to the extent of the value of the personal property to which the preference exists. Following NDCs theory,
DBPs mortgage credit, which is fourth in the order of preference under Article 2241, is superior to POLIANDs claim, which enjoys no
preference.

NDCs argument does not persuade the Court.

The provision of P.D. No. 1521 on the order of preference in the satisfaction of the claims against the vessel is the more
applicable statute to the instant case compared to the Civil Code provisions on the concurrence and preference of credit. General
legislation must give way to special legislation on the same subject, and generally be so interpreted as to embrace only cases in
which the special provisions are not applicable.

POLIANDs maritime lien is superior to DBPs mortgage lien

Before POLIANDs claim may be classified as superior to the mortgage constituted on the vessel, it must be shown to be one
of the enumerated claims which Section 17, P.D. No. 1521 declares as having preferential status in the event of the sale of the
vessel. One of such claims enumerated under Section 17, P.D. No. 1521 which is considered to be superior to the preferred
mortgage lien is a maritime lien arising prior in time to the recording of the preferred mortgage. Such maritime lien is described
under Section 21, P.D. No. 1521, which reads:

SECTION 21. Maritime Lien for Necessaries; persons entitled to such lien. Any person furnishing repairs, supplies, towage, use of
dry dock or marine railway, or other necessaries to any vessel, whether foreign or domestic, upon the order of the owner of such
vessel, or of a person authorized by the owner, shall have a maritime lien on the vessel, which may be enforced by suit in rem, and it
shall be necessary to allege or prove that credit was given to the vessel.

Under the aforequoted provision, the expense must be incurred upon the order of the owner of the vessel or its authorized
person and prior to the recording of the ship mortgage. Under the law, it must be established that the credit was extended to the
vessel itself.
[

As stated in Section 21, P.D. No. 1521, a maritime lien may consist in other necessaries spent for the vessel. The ship
modification cost may properly be classified under this broad category because it was a necessary expenses for the vessels
navigation. As long as an expense on the vessel is indispensable to the maintenance and navigation of the vessel, it may properly be
treated as a maritime lien for necessaries under Section 21, P.D. No. 1521.

With respect to the claim for salary and wages of the crew, there is no doubt that it is also one of the enumerated claims
under Section 17, P.D. No. 1521, second only to judicial costs and taxes due the government in preference and, thus, having a status
superior to DBPs mortgage lien.

All told, the determination of the existence and the amount of POLIANDs claim for maritime lien is a finding of fact which is
within the province of the courts below. Findings of fact of lower courts are deemed conclusive and binding upon the Supreme Court
except when the findings are grounded on speculation, surmises or conjectures; when the inference made is manifestly mistaken,
absurd or impossible; when there is grave abuse of discretion in the appreciation of facts; when the factual findings of the trial and
appellate courts are conflicting; when the Court of Appeals, in making its findings, has gone beyond the issues of the case and such
findings are contrary to the admissions of both appellant and appellee; when the judgment of the appellate court is premised on a
misapprehension of facts or when it has failed to notice certain relevant facts which, if properly considered, will justify a different
conclusion; when the findings of fact are conclusions without citation of specific evidence upon which they are based; and when
findings of fact of the Court of Appeals are premised on the absence of evidence but are contradicted by the evidence on record.
The Court finds no sufficient justification to reverse the findings of the trial court and the appellate court in respect to the existence
and amount of maritime lien.

SPOUSES ALFREDO and BRIGIDA ROSARIO v. PCI LEASING AND FINANCE, INC.
G.R. No. 139233, 11 November 2005, SECOD DIVISION (Callejo, Sr., J.)
Art. 1484 of the NCC does notv apply as against a mortgagee who is not the vendor of the chattel mortgaged.Thus, a suit
for replevin is not equivalent to an exercise of the remedy of foreclosure under Art. 1484 of the NCC. Hence, a vendor-mortgagee is
not barred from making a claim for specific performance against the buyer-mortgagor, by the mere fact that the former was already
able to secure a writ of replevin.

The spouses Rosario purchased an Isuzu Elf Pick-up Utility vehicle from CarMerchants, Inc. The transaction was covered
by a Purchase Agreement whereby the spouses undertook to make a downpayment of P190,000.00 of the total purchase price
of P380,000.00. The spouses then applied for a loan with PCI Leasing to pay for the balance of P190,000.00. Upon the approval of
their loan application, the spouses Rosario executed a Promissory Note in favor of PCI Leasing covering the amount of the loan
plus P84,008.00 as finance charges, in the total amount of P274,008.00. The spouses undertook to pay the loan in monthly
installments of P11,417.00. The spouses Rosario also agreed that, in case of default, the payment of the outstanding sum with
interest shall immediately become due and payable. To secure the payment of the loan, they executed, on the same day, a Chattel
Mortgage in favor of PCI Leasing over the Isuzu Elf 4BD1. The motor vehicle was delivered to the spouses and it was registered in
their names.

However despite demands, the spouses failed to pay the amortizations on their loan. Thus, PCI leasing filed a complaint
against the spouses Roasrio in the RTC of Dagupan City. After PCI Leasing posted the necessary bond for the manual delivery of the
motor vehicle, the RTC issued an Order for the issuance of a writ of replevin. Thus, the Sheriff seized the motor vehicle and turned
over the possession of the vehicle to PCI Leasing.

In its answer, the spouses Rosario alleged that the chattel mortgage is payable in installments to be governed by Article
1484 of the NCC. They further alleged that since PCI Leasing opted to foreclose the chattel mortgage, it was estopped from
collecting the balance of their account under the promissory note and chattel mortgage.

The Trial Court rendered a decision in favor of PCI Leasing. On appeal, the CA declared that the spouses failed to prove the
PCI Leasing had agreed to be subrogated to the right of CarMerchants, Inc. to collect the unpaid balance of the purchase price of the
motor vehicle. The appellate court also ruled that even if Article 1484 of the New Civil Code were to be applied, the chattel
mortgage had not been foreclosed; hence, PCI Leasing was not precluded from collecting the balance of the appellants account. It
held that the remedy of the unpaid seller under Article 1484 of the New Civil Code is alternative and not cumulative.

ISSUE:

Whether or not Article 1484 applies as against a mortgagee who is not the venodor of the chattel mortgaged.

HELD:

Petition PARTIALLY GRANTED.

There is no factual basis for the petitioners claim that CarMerchants, Inc. had assigned its rights to collect the balance of
the purchase price to the respondent. The fact of the matter is that the petitioners admitted in their petition at bench that they
were declared in default and failed to prove such claim. The evidence on record clearly shows that the petitioners secured a loan
from the respondent to pay the P190,000.00 balance to CarMerchants, Inc., and even executed a promissory note evidencing their
loan in favor of the respondent. The petitioners forthwith executed a chattel mortgage in favor of the respondent over the vehicle
as security for the payment of their loan and the interests thereon.

It bears stressing that, under Article 1625 of the New Civil Code, an assignment of credit, right or action must appear in a
public document to bind third persons. There is no evidence on record to prove that Car Merchants, Inc. executed such a deed,
assigning its right to collect the balance of the purchase price of the vehicle from the petitioners; hence, Article 1484 of the New Civil
Code does not apply in this case.

Even a cursory reading of the respondents complaint in the RTC will readily show that the respondent did not allege that it
was the assignee of CarMerchants, Inc. insofar as the right to collect the balance of the purchase price of the vehicle from the
petitioners was concerned. Neither did the respondent adduce any evidence that it was such assignee. The respondent sued the
petitioners for sum of money with prayer for a writ of replevin based on the promissory note and the chattel mortgage executed by
the petitioners in its favor.

Even assuming that the respondent is the assignee of CarMerchants, Inc. and that Article 1484 of the New Civil Code is
applicable, it is not proscribed from suing the petitioners for their unpaid balance. The fact of the matter is that the respondent did
not foreclose the chattel mortgage, but opted to sue the petitioners for the balance of their account under the promissory note,
with a plea for a writ of replevin. By securing a writ of replevin, the respondent did not thereby foreclose the chattel
mortgage. Accordingly, if there has been no foreclosure of the chattel mortgage or a foreclosure sale, then the prohibition against
further collection of the balance of the price does not apply. Where the remedy is not foreclosure of the chattel mortgage, but
specific performance of the obligation to do payment, then the levy on the property is indeed not a foreclosure of the mortgage but
is instead a levy on execution (Tanjanlangit, et al. v. Southern Motors, Inc., L-10789, May 28, 1957; Southern Motors v. Moscoso, 2
SCRA 168). Also, a creditor is not obliged to foreclose a chattel mortgage even if there is one; precisely the law says that any of the
remedies may be exercised by the seller. He may still sue for fulfillment or for cancellation of the obligation, if he does not want to
foreclose (Bachrach Motor Co. v. Millan, 61 Phil. 409). As a matter of fact, he may avail himself of remedy no. 1 (specific
performance) and may still ask that a real estate mortgage be executed to secure the payment of the obligation, in which case, and
in the event of foreclosure, there can still be recovery of the deficiency (Manila Trading v. Jalandoni [CA]O.G., August 31, 1941, p.
1698).

In the case before us, that there was foreclosure of the chattel mortgage has not been established; as a matter of fact, this
is not obvious either in the evidence having been presented to the court. What is only apparent was the execution of the promissory
note and the chattel mortgage.

ANTONIO CHENG, substituted by WILLIAM CHIENG v. SPOUSES EULOGIO and TERESITA SANTOS
G.R. No. 169467, 31 August 2007, THIRD DIVISION (Chico-Nazario,J.)
Following the rule on alternative remedies of a mortgagee-creditor, the filing of criminal case for violation of BP 22 by the
mortgagee-creditor against the mortgagor will bar or preclude the former from availing himself of the other civil remedy of the
foreclosoure of the real estate mortgage because pursuant to Sec. 1 (b) of Rule 111 of the 2001 Rules on Criminal Procedure, he is
deemed to have already availed himself of the remedy of collection suit

Petitioner Antonio Chieng (Antonio) extended a loan in favor of respondent spouses Eulogio and Teresita Santos (Spouses
Santos). As security for such loan, the respondents executed in favor of petitioner a Deed of Real Estate Mortgage over a piece of
land, situated at West Bajac-Bajac, Olongapo City. On even date, the Deed of Real Estate Mortgage was registered with the Registry
of Deeds of Olongapo City and was duly annotated on TCT No. T-2570. Thereafter, respondent Eulogio issued several checks in favor
of petitioner as payment for the loan. Some of these checks were dishonored, prompting the petitioner to file a criminal case
against respondent Eulogio for violation of Batas Pambansa Blg. 22 before the Olongapo City RTC. Subsequently, the parties entered
into a compromise agreement. However, the spouses still failed to comply with it.

Thus, Chieng filed an action for the foreclosure of the mortgage.

ISSUE:

Whether or not the filing of a case in connection with BP 22 bars the mortgagee to foreclose the Real Estate Mortgage

HELD:

Petition GRANTED.

A mortgage-creditor may, in the recovery of a debt secured by a real estate mortgage, institute against the mortgage-
debtor either a personal action for debt or a real action to foreclose the mortgage. These remedies available to the mortgage-
creditor are deemed alternative and not cumulative. An election of one remedy operates as a waiver of the other. In sustaining the
rule that prohibits a mortgage-creditor from pursuing both remedies of a personal action for debt or a real action to foreclose the
mortgage, we held in Bachrach Motor Co., Inc. v. Icarangal,
[29]
that a rule which would authorize the mortgage-creditor to bring a
personal action against the mortgage-debtor and simultaneously or successively another action against the mortgaged property,
would result not only in multiplicity of suits so offensive to justice and obnoxious to law and equity, but would also subject the
mortgage-debtor to the vexation of being sued in the place of his residence or of the residence of the mortgage-creditor, and then
again in the place where the property lies. Hence, a remedy is deemed chosen upon the filing by the mortgage-creditor of the suit
for collection or upon his filing of the complaint in an action for foreclosure of mortgage, pursuant to the provisions of Rule 68 of the
Rules of Court.
[30]

Proceeding therefrom, we shall now determine whether petitioners filing of Criminal Cases No. 612-90 to 615-90 is
equivalent to the filing of a collection suit for the recovery of the mortgage-loan which, pursuant to the aforesaid rule on the
alternative remedies of collection and foreclosure, precludes the petitioner from subsequently availing himself of the action to
foreclose the mortgaged property.

When petitioner filed Criminal Cases No. 612-90 to No. 615-90 for violation of Batas Pambansa Blg. 22 against
respondent Eulogio, petitioners civil action for the recovery of the amount of the dishonored checks was impliedly instituted therein
pursuant to Section 1(b) of Rule 111 of the 2000 Rules on Criminal Procedure. In the case of Hyatt Industrial Manufacturing
Corporation v. Asia Dynamic Electrix Corporation, the court held that upon filing of the criminal cases for violation of B.P. 22, the civil
action for the recovery of the amount of the checks was also impliedly instituted under Section 1(b) of Rule 111 of the 2000 Rules on
Criminal Procedure. Under the present revised Rules, the criminal action for violation of B.P. 22 shall be deemed to include the
corresponding civil action. The reservation to file a separate civil action is no longer needed.

Consequently, when petitioner filed Criminal Cases No. 612-90 to No. 615-90, he was deemed to have already availed
himself of the remedy of collection suit. Following the rule on the alternative remedies of a mortgage-creditor, petitioner is barred
from subsequently resorting to an action for foreclosure.

However, it should be stressed that respondents have not yet fully paid the loan. In fact, respondents themselves
admitted that they still owe petitioner the balance of the loan. To allow respondents to benefit from the loan without paying its
whole amount to petitioner, and to preclude the petitioner from recovering the remaining balance of the loan, would constitute
unjust enrichment at the expense of petitioner. The principle that no person may unjustly enrich himself at the expense of another
(Nemo cum alterius detrimentolocupletari potest) is embodied in Article 22 of the New Civil Code states that every person who
through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of
the latter without just or legal ground, shall return the same to him.

INDUSTRIAL FINANCE CORPORATION v. CASTOR TOBIAS
G.R. No. L-41555, 27 July 1977, FIRST DIVISION (Martin, J.)
The remedies provided for in Art. 1484 are considered alternative, not cumulative such that the exercise of one would bar
the exercise by the others. Here, Industrial Finance has not cancelled the sale, nor has it exercised the remedy of foreclosure.
Foreclosure, judicial or extra-judicial, presupposes something more than a mere demand to surrender possession of the object of the
mortgage. Since Industrial Finance has not availed itself of the remedy of cancelling the sale of the truck in question or of foreclosi ng
the chattel mortgage on said truck, Industrial Finance is still free to avail of the remedy of exacting fulfillment of the obligation of
Tobias, the vendee of the truck in question.

Castor Tobias bought on installment 1 Dodge truck from Leelin Motors, Inc. To answer for his obligation Tobias executed a
promissory note in favor of Leelin, for the sum of P29.070.28 payable in thirty-six (36) equal installments with interest at the rate of
12% per annum payable in the amounts and dates indicated in said promissory note. To secure payment of the promissory note,
Tobias executed in favor of Leelin Motors, Inc. a chattel mortgage on the Dodge truck.

Leelin indorsed the promissory note and assigned the chattel mortgage to Industrial Finance Corporation. As a
consequence, Tobias paid six (6) installments on the promissory note directly to Industrial Finance Corporation.

Industrial Finance wrote Tobias to demand payment of P25,249.65 or to surrender within the same period the One (1) Unit
1969 Motor Vehicle Dodge; otherwise, the corresponding action will be filed against Tobias. In response, Tobias voluntarily and
willingly surrendered the truck. Accordingly, the truck has been with Leelin Motors when it met an accident; there is too much delay
in the repair of said truck; and that he is not satisfied with the repair of the finished portions. Industrial Finance then decided not to
get the truck.

Accordingly, Industrial Finance filed an action in the Court of First Instance against Tobias to recover the unpaid balance of
the promissory note. The CFI dismissed the complaint. The Court of Appeals affirmed the same.

ISSUE:

Whether or not Industrial Finance is barred from recovering the unpaid balance after it had demanded the return of the
truck

HELD:

Petition DENIED.

Art. 1484 is clear that "should the vendee or purchaser of a personal property be in default in the payment of two or more of
the agreed installments, the vendor or seller has the option to either exact fulfillment by the purchaser of -the obligation, or to cancel
the sale, or to foreclose the mortgage on the purchased personal property, if one was constituted. Since the case involves the sale of
personal property on installments Art. 1484 of the Civil Code should apply.

The remedies provided for in Art. 1484 are considered alternative, not cumulative such that the exercise of one would
bar the exercise by the others. Here, Industrial Finance has not cancelled the sale, nor has it exercised the remedy of foreclosure.
Foreclosure, judicial or extra-judicial, presupposes something more than a mere demand to surrender possession of the object of
the mortgage. Since Industrial Finance has not availed itself of the remedy of cancelling the sale of the truck in question or of
foreclosing the chattel mortgage on said truck, Industrial Finance is still free to avail of the remedy of exacting fulfillment of the
obligation of Tobias, the vendee of the truck in question.

The contract being a sale of machinery payable in installments, the applicable provision of law is Article 1484 of the Civil
Code, which gives the vendor the option to exercise any one of the alternative remedies therein mentioned: exact fulfillment of the
obligation, cancel the sale, or foreclose the chattel mortgage. But the vendor- mortgagor in the present case desisted, on its own
initiative, from consummating the auction sale, without gaining any advantage or benefit, and without causing any disadvantage, or
harm to the vendees-mortgagees. The least that could be said is that such desistance of the plaintiff from proceeding with auction
sale was a timely disavowal that cancelled and rendered useless its previous choice to foreclose; its acts, being extra-judicial,
brought no trouble upon any court, and were harmless to the defendants. For this reason, the plaintiff can not be considered as
having "exercised" |the remedy of foreclosure because of its incomplete implementation, and, therefore, the plaintiff is not
barred from suing on the unpaid account.

Besides, to hold Industrial Finance in estoppel, it must be shown that when it gave Tobias the choice of either paying the
balance of the purchase price or of surrending the truck, it had already knowledge of the accident and the consequent damage to
the truck. In the present case Industrial Finance claims it had no knowledge of the accident when it gave Tobias the choice of either
paying the balance of the promissory note or of surrendering the truck. It is hard to believe that Industrial Finance would make such
offer to Tobias either to pay the balance on the promissory, note or to surrender the truck in question if it knew that the truck has
had an accident. The more plausible thing it would have asked Tobias is to ask for the balance on the promissory note.

Besides the allegation of Industrial Finance that it had no knowledge of the accident is a negative allegation and needs no
evidence to support it, not being an essential part of the statement of the right on which the cause of action is founded. It is
therefore Tobias who has the burden of disproving the claim of Industrial Finance that he has no knowledge of the accident when
it made the offer to respondent either to pay the balance on the promissory note or to surrender the truck. Tobias failed in this.

It is claimed by Tobias that he has surrendered the truck to Industrial Finance. But the alleged surrender was ineffectual as
far as Industrial Finance is concerned because Industrial Finance ould not take possession of the truck in question as it was in the
custody of Leelin Motors, Inc., which had a mechanic's lien over it. Even Tobias cannot expect Industrial Finance to accept the term
of surrender because aside from the fact that the truck being surrendered met an accident petitioner was not satisfied with the
repair of the finished portion of the truck in question. Industrial Finance therefore was justified refusing to accept such surrender
and in bringing suit to recover the balance of the purchase price.

FILINVEST CREDIT CORPORATION v. PHILIPPINE ACETYLENE, CO., INC.
G.R. No. L-50449, 30 January 1982, SECOND DIVISION (De Castro, J.)
Estoppel would not set in sinceFilinvest never accepted the mortgaged motor vehicle in full satisfaction of the mortgaged
debt. If the vendor desisted, on his own initiative, from consummating the auction sale, such desistance was a timely disavowal of the
remedy of foreclosure, and the vendor can still sue for specific performance.

Philippine Acetylene Co., Inc., purchased from Alexander Lim, a motor vehicle described as Chevorlet, 1969 model for
P55,247.80 with a down payment of P20,000.00 and the balance of P35,247.80 payable at a monthly installment of P1,036.70 for 34
months.

As security for the payment, Acetylene executed a chattel mortgage over the same motor vehicle in favor of said Alexander
Lim. Subsequently, Alexander Lim assigned to the Filinvest Finance Corporation all his rights, title, and interests in the promissory
note and chattel mortgage. Then, as a consequence of its merger the intrest was assigned to Filinvest Credit Corporation.

Acetylene failed to comply with the terms and conditions set forth in the promissory note and chattel mortgage since it had
defaulted in the payment of nine successive installments. Filinvest then sent a letter demanding Acetylene to remit the aforesaid
amount in full in addition to stipulated interest and charges or return the mortgaged property to Filinvest. Acetylene, consequently,
returned the mortgaged property.

Then, Filinvest informed Acetylene that it cannot sell the motor vehicle as there were unpaid taxes on the said vehicle in
the sum of P70,122.00. On the last portion of the said letter, Filinvest requested Acetylene to update its account by paying the
installments in arrears and accruing interest in the amount of P4,232.21. also, Filinvest offered to return the motor vehicle but
Acetylene refused to accept it.

It is argued by Acetylene that its obligation towards Filinvest was extinguished when it returned the mortgaged property to
Filinvest, and that assuming arguendo that the return of the property did not extinguish its obligation, it was nonetheless justified in
refusing payment since Filinvest is not entitled to recover the same due to the breach of warranty committed by the original vendor-
assignor Alexander Lim.

The CFI favored Filinvest.

ISSUES:

1. Whether or not the return of Acetylene of the mortgaged property to Filinvest constitutes dacion en pago
2. Whether or not return of the mortgaged motor vehicle to the appellee by virtue of its voluntary surrender by the appellant
totally extinguished and/or cancelled its obligation to the appellee

HELD:

Petition DENIED.

Under Art. 1484, the following are the remedies of a creditor:
1) Exact fulfillment of the obligation, should the vendee fail to pay;
2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay
cover two or more installments. In this case, he shall have no further action against the purchaser to recover any
unpaid balance of the price. Any agreement to the contrary shall be void.

No Dation en Pago

The mere return of the mortgaged motor vehicle by the mortgagor, Acetylene, to the mortgagee, Filinvest, does not
constitute dation in payment or dacion en pago in the absence, express or implied of the true intention of the parties. Dacion en
pago, according to Manresa, is the transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent
of the performance of obligation. In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor
who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of sale,
that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor's debt.
As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must be present. In
its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered
as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is
considered as the purchase price. In any case, common consent is an essential prerequisite, be it sale or innovation to have the
effect of totally extinguishing the debt or obligation.

The evidence on the record fails to show that the mortgagee, Filinvest, consented, or at least intended, that the mere
delivery to, and acceptance by him, of the mortgaged motor vehicle be construed as actual payment, more specifically dation in
payment or dacion en pago. The fact that the mortgaged motor vehicle was delivered to him does not necessarily mean that
ownership thereof, as juridically contemplated by dacion en pago, was transferred from Acetylene to Filinvest. In the absence of
clear consent of Filinvest to the proferred special mode of payment, there can be no transfer of ownership of the mortgaged motor
vehicle from Acetylene to Filinvest. If at all, only transfer of possession of the mortgaged motor vehicle took place, for it is quite
possible that Filinvest, as mortgagee, merely wanted to secure possession to forestall the loss, destruction, fraudulent transfer of
the vehicle to third persons, or its being rendered valueless if left in the hands of Acetylene.

A more solid basis of the true intention of the parties is furnished by the document executed by Acetylene. An examination
of the language of the document reveals that the possession of the mortgaged motor vehicle was voluntarily surrendered by
Acetylene to Filinvest authorizing the latter to look for a buyer and sell the vehicle in behalf of the appellant who retains ownership
thereof, and to apply the proceeds of the sale to the mortgage indebtedness, with the undertaking of the appellant to pay the
difference, if any, between the selling price and the mortgage obligation. With the stipulated conditions as stated, Filinvest, in
essence was constituted as a mere agent to sell the motor vehicle which was delivered to Filinvest, not as its property, for if it were,
he would have full power of disposition of the property, not only to sell it as is the limited authority given him in the special power of
attorney. Had Appelle intended to completely release appellant of its mortgage obligation, there would be no necessity of executing
the document captioned "Voluntary Surrender with Special Power of Attorney To Sell." Nowhere in the said document can we find
that the mere surrender of the mortgaged motor vehicle to Filinvest extinguished Acetylene 's obligation for the unpaid price.

No estoppel on the part of Filinvest

Acetylene would also argue that by accepting the delivery of the mortgaged motor vehicle, Filinvest is estopped from
demanding payment of the unpaid obligation. Estoppel would not set in sinceFilinvest never accepted the mortgaged motor
vehicle in full satisfaction of the mortgaged debt.

Under the law, the delivery of possession of the mortgaged property to the mortgagee, Filinvest, can only operate to
extinguish Acetylene 's liability if Filinvest had actually caused the foreclosure sale of the mortgaged property when it recovered
possession thereof. It is worth noting that it is the fact of foreclosure and actual sale of the mortgaged chattel that bar the
recovery by the vendor of any balance of the purchaser's outstanding obligation not satisfied by the sale. As held by this Court, if
the vendor desisted, on his own initiative, from consummating the auction sale, such desistance was a timely disavowal of the
remedy of foreclosure, and the vendor can still sue for specific performance. This is exactly what happened in the instant case.

EUTROPIO ZAYAS, JR v. LUNETA MOTOR COMPANY and HONORABLE JUAN O. REYES
G.R. No. L-3058323 October 1982, FIRST DIVISION (Gutierrez, J.)
The established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel bars further recovery by the
vendor of any balance on the purchaser's outstanding obligation not so satisfied by the sale. This amendment prevents mortgagees
from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a
deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still
owing practically the full amount of his original indebtedness.

Eutropio Zayas, Jr, purchased on installment basis a motor vehicle described as 1 UNIT FORD THAMES FREIGHTER from Mr.
Roque Escao of the Escao Enterprises, dealer of Luneta Motor Company. The motor vehicle was delivered to the Zayas who paid
the initial payment in the amount of P1,006.82; and executed a promissory note in the amount of P7,920.00, the balance of the total
selling price, in favor of Luneta. Zayas also executed a chattel mortgage on the subject motor vehicle in favor of Luneta.

After paying a total amount of P3,148.00, Zayas was unable to pay further monthly installments prompting Luneta to extra-
judicially foreclose the chattel mortgage. The motor vehicle was sold at public auction with Luneta as the highest bidder in the
amount of P5,000.00. Since the payments made by Zayas plus the P5,000.00 realized from the foreclosure of the chattel mortgage
could not cover the total amount, Luneta filed a Civil Case for the recovery of the balance of P1,551.74.

Zayas denied his alleged outstanding liability of P1,551.74 arguing that they had already been discharged either by payment
or by sale in public auction of the said motor vehicle. In its Reply, Luneta denied the applicability of Article 1484 of the Civil Code, for
the simple reason that the contract involved between the parties is not one for a sale on installment.

The City court favored Zayas. In the CFI, the same was remanded to the lower court.

ISSUE:

Whether or nor Luneta is barred from recovering the balance of the debt after it chose to foreclose the chattel mortgage

HELD:

Petition GRANTED.

The Escao Enterprises was an agent of Luneta Motor Company. A very significant evidence which proves the nature of
the relationship between Luneta and Escao Enterprises is a Certification from the cashier of Escano Enterprises on the monthly
installments paid by Mr. Eutropio Zayas, Jr. In the certification, the promissory note in favor of Luneta was specifically mentioned.
There was only one promissory note executed by Zayas in connection with the purchase of the motor vehicle. Escano Enterprises, a
dealer of Luneta was merely a collecting-agent as far as the purchase of the subject motor vehicle was concerned. The principal and
agent relationship is clear.

But even assuming that the "distinct and independent entity" theory of Lunea is valid, the nature of the transaction as a
sale of personal property on installment basis remains. When, therefore, Escao Enterprises, assigned its rights vis-a-vis the sale to
respondent Luneta Motor Company, the nature of the transaction involving Escano Enterprises and Eutropio Zayas, Jr. did not
change at all. As assignee, Luneta had no better rights than assignor Escao Enterprises under the same transaction. The transaction
would still be a sale of personal property in installments covered by Article 1484 of the New Civil Code. To rule otherwise would
pave the way for subverting the policy underlying Article 1484 of the New Civil Code, on the foreclosure of chattel mortgages over
personal property sold on installment basis.
ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may
exercise any of the following remedies:
xxx xxx xxx
xxx xxx xxx
(3) Foreclose the chattel ;mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay

The established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel bars further recovery by
the vendor of any balance on the purchaser's outstanding obligation not so satisfied by the sale. The reason for this is to remedy
the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing
the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a defi ciency
judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing
practically the full amount of his original indebtedness. Under this amendment the vendor of personal property, the purchase price
of which is payable in installments, has the right to cancel the sale or foreclose the mortgage if one has been given on the property.
Whichever right the vendor elects he need not return to the purchaser the amount of the installments already paid, "if there be an
agreement to that effect". Furthermore, if the vendor avails himself of the right to foreclose the mortgage this amendment
prohibits him from bringing an action against the purchaser for the unpaid balance.

LUIS RIDAD and LOURDES RIDAD v. FILIPINAS INVESTMENT and FINANCE CORPORATION, JOSE D. SEBASTIAN
and JOSE SAN AGUSTIN, in his capacity as Sheriff
G.R. No. L-3980, 27 January 1983, SECOND DIVISION (De Castro, J.)
In the instant case, Filipinas Investment elected to foreclose its mortgage upon default by the Ridads in the payment of the
agreed installments. Having chosen to foreclose the chattel mortgage, and bought the purchased vehicles at the public auction as the
highest bidder, it submitted itself to the consequences of the law as specifically mentioned, by which it is deemed to have renounced
any and all rights which it might otherwise have under the promissory note and the chattel mortgage as well as the payment of the
unpaid balance.

Under the law, should the vendor choose to foreclose the mortgage, he has to content himself with the proceeds of the sale
at the public auction of the chattels which were sold on installment and mortgaged to him and having chosen the remedy of
foreclosure, he cannot nor should he be allowed to insist on the sale of the house and lot of the vendees, for to do so would be
equivalent to obtaining a writ of execution against them concerning other properties which are separate and distinct from those
which were sold on installment.

Luis and Lourdes Ridad purchased from the Supreme Sales arid Development Corporation two (2) brand new Ford Consul
Sedans complete with accessories, for P26,887 payable in 24 monthly installments. To secure payment thereof, the Ridads executed
on the same date a promissory note covering the purchase price and a deed of chattel mortgage not only on the two vehicles
purchased but also on another car (Chevrolet) and the Ridads franchise or certificate of public convenience granted by the defunct
Public Service Commission for the operation of a taxi fleet. Later on, Supreme Sales assigned its rights to Filipinas Investment.

Due to the failure of the Ridads to pay their monthly installments as per promissory note, Filipinas Investment foreclosed
the chattel mortgage extra-judicially, and at the public auction sale of the two Ford Consul cars, of which the Ridads were not
notified, Filipinas Investment corporation was the highest bidder and purchaser. Another auction sale was held, involving the
remaining properties subject of the deed of chattel mortgage since the Ridads' obligation was not fully satisfied by the sale of the
aforesaid vehicles, and at the public auction sale, the franchise of plaintiffs to operate five units of taxicab service was sold for
P8,000 to the highest bidder, Filipinas Investment, which subsequently sold and conveyed the same to Jose D. Sebastian, who then
filed with the Public Service Commission an application for approval of said sale in his favor.

The Ridads filed an action for annulment of contract before the Court of First Instance. The CFI declares the chattel
mortgage to be null and void in so far as the taxicab franchise and the used Chevrolet car of the Ridads are concerned, and the sale
at public auction conducted by the City Sheriff of Manila concerning said taxicab franchise, to be of no legal effect. Thus, the
assignment thereof made by Filipinas Investment in favor of defendant Jose Sebastian is declared void and of no legal effect. The CA
certified the appeal.

ISSUE:

Whether or not the chattel mortgage on the franchise and the used Chevrolet car were valid

HELD:

Petition DENIED.

The resolution of said issue is unquestionably governed by the provisions of Article 1484 of the Civil Code which states:
Art. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may
exercise y of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay

Under the above-quoted article of the Civil Code, the vendor of personal property the purchase price of which is payable in
installments, has the right, should the vendee default in the payment of two or more of the agreed installments, to exact ful fillment
by the purchaser of the obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one
was constituted. Whichever right the vendor elects, he cannot avail of the other, these remedies being alternative, not
cumulative. Furthermore, if the vendor avails himself of the right to foreclose his mortgage, the law prohibits him from further
bringing an action against the vendee for the purpose of recovering whatever balance of the debt secured not satisfied by the
foreclosure sale. The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment, otherwise, the mortgagor-
buyer would find himself without the property and still owing practically the full amount of his original indebtedness.

In the instant case, Filipinas Investment elected to foreclose its mortgage upon default by the Ridads in the payment of
the agreed installments. Having chosen to foreclose the chattel mortgage, and bought the purchased vehicles at the public
auction as the highest bidder, it submitted itself to the consequences of the law as specifically mentioned, by which it is deemed
to have renounced any and all rights which it might otherwise have under the promissory note and the chattel mortgage as well
as the payment of the unpaid balance.

Consequently, the lower court rightly declared the nullity of the chattel mortgage in question in so far as the taxicab
franchise and the used Chevrolet car of plaintiffs are concerned. There, we have the same situation wherein the vendees offered as
security for the payment of the purchase price not only the motor vehicles which were bought on installment, but also a residential
lot and a house of strong materials. This Court sustained the pronouncement made by the lower court on the nullity of the mortgage
in so far as it included the house and lot of the vendees, holding that under the law, should the vendor choose to foreclose the
mortgage, he has to content himself with the proceeds of the sale at the public auction of the chattels which were sold on
installment and mortgaged to him and having chosen the remedy of foreclosure, he cannot nor should he be allowed to insist on
the sale of the house and lot of the vendees, for to do so would be equivalent to obtaining a writ of execution against them
concerning other properties which are separate and distinct from those which were sold on installment. This would indeed be
contrary to public policy and the very spirit and purpose of the law, limiting the vendor's right to foreclose the chattel mortgage only
on the thing sold.

The vendor of personal property sold on the installment basis is precluded, after foreclosing the chattel mortgage on the
thing sold from having a recourse against the additional security put up by a third party to guarantee the purchaser's performance of
his obligation on the theory that to sustain the same would overlook the fact that if the guarantor should be compelled to pay the
balance of the purchase price, said guarantor will in turn be entitled to recover what he has paid from the debtor-vendee, and
ultimately it will be the latter who will be made to bear the payment of the of the balance of the price, despite the earlier
foreclosure of the chattel mortgage given by him, thereby indirectly subverting the protection given the latter. Consequently, the
additional mortgage was ordered cancelled. If the vendor under such circumstance is prohibited from having a recourse against the
additional security for reasons therein stated, there is no ground why such vendor should not likewise be precluded from further
extrajudicially foreclosing the additional security put up by the vendees themselves, as in the instant case, it being tantamount to a
further action that would violate Article 1484 of the Civil Code, for then is actually no between an additional security put up by the
vendee himself and such security put up by a third party insofar as how the burden would ultimately fall on the vendee himself is
concerned.

MONTELIBANO ESGUERRA v. HON. COURT OF APPEALS, G.A. MACHINERIES, INC., JOSE TINO and MANUEL DORE G.R. No. L-40102,
3 May 1989, THIRD DIVISION (Bidin, J.)
Having opted to foreclose the chattel mortgage, GAMI can no longer cancel the sale. The three remedies of the vendor in
case the vendee defaults, in a contract of sale of personal property the price of which is payable in installment under Article 1484 of
the Civil Code, are alternative and cannot be exercised simultaneously or cumulatively by the vendor-creditor.

This is a case for the recovery of a Ford-Trader cargo truck, alledgedly, unlawfully seized by the agents of G.A. Machineries,
Inc. (GAMI). This said cargo truck was sold by GAMI to Hilario Lagmay and Bonifacio Masilungan. Subsequently, the right to the
same was bought by Montelibano Esguerra, the latter assuming the unpaid purchase price of P20, 454.74. In so doing, Esguerra
executed in favor of GAMI a promissory note and a chattel mortgage over the said truck.

Esguerra, having defaulted in his obligation and GAMI having granted his request for extension, a new chattel mortgage and
a new promissory note were executed to secure the unpaid balance of P16,000.00. Esguerra had paid GAMI the total sum of
P1,297.00. Consequently, the said truck was taken by GAMI'S agents while the same was in the possession of Esguerra's driver,
Carlito Padua; and the same had remained in the possession of GAMI, notwithstanding demands for its return by Esguerra.

Esguerra filed a complaint with the then Court of First Instance to recover said truck and for damages. Esguerra alleged
among others, that due to his failure to pay the installments due, the agents of GAMI, Jose Tino and Samuel Dore representing
themselves as deputy sheriffs and with use of force, threats and intimidation, seized the cargo truck in question from his driver,
Carlito Padua, while unloading gravel and sand in Pasay City; and that despite repeated demands, GAMI refused and failed to return
the same. On the other hand, GAMI, et al. filed their answer with a counterclaim, alleging as affirmative defense that the plaintiff
gave his consent to the taking of the truck by the agents of GAMI on condition that he be allowed to recover its possession upon
payment of his back accounts. The CFI dismissed the complaint. The Court of Appeals sustained the decision.

ISSUE:

Whether or not the mortgage vendor of personal property sold on installment is legally obligated to foreclose the chattel
mortgage and sell the chattel subject thereof at public auction in case the mortgagor-vendee defaults in the payment of the agreed
installments

HELD:

Petition GRANTED.

The Chattel Mortgage Contract provides that should the mortgagor fail to make any of the payments or should he fail to
comply with anyone of the obligations or conditions, then the whole amount remaining unpaid under this mortgage shall
automatically become due and demandable, and the mortgage on the property herein described may be foreclosed by the
mortgagee either judicially or extra-judicially, at the option of the mortgagee in accordance with law. In case of foreclosure, it is
expressly agreed that the sale may be made by the mortgagee itself and the mortgagor expressly consents that the mortgaged
property may be taken by the mortgagee outside of the municipality or city where the mortgagee may conveniently sell the same.

Esguerra admitted that he is in defaults in the payments of his account. Consequently, the mortgagee, under the above
cited provision of the mortgage contract has the option to foreclose the mortgage either judicially or extrajudicially and in case of
foreclosure, it was expressly agreed by the parties that the mortgagee may take the property outside the municipality or city
where the mortgagee may conveniently sell the same.

Both the trial court and the CA found that there was no forcible taking of the cargo truck. Esguerra consented to the
repossession of the truck or at least did not make any objection thereto. Esguerra simply requested that he been given a chance to
settle the account.

The CA did not err in holding that while the mortgagee can take possession of the chattel, such taking did not amount to
the foreclosure of the mortgage. Otherwise stated, the taking of Esguerra's truck without proceeding to the sale of the same at
public auction, but instead, appropriating the same in payment of Esguerra's indebtedness, is not lawful.

As clearly stated in the chattel mortgage contract, the express purpose of the taking of the mortgaged property is to sell the
same and/or foreclose the mortgage constituted thereon either judicially or extrajudicially and thereby, liquidate the indebtedness
in accordance with law.

More than that, even if such automatic appropriation of the cargo truck in question can be inferred from or be
contemplated under the aforesaid mortgage contract, such stipulation would be pactum ommissorium which is expressly prohibited
by Article 2088 of the Civil Code and therefore, null and void.

Having opted to foreclose the chattel mortgage, GAMI can no longer cancel the sale. The three remedies of the vendor in
case the vendee defaults, in a contract of sale of personal property the price of which is payable in installment under Article 1484
of the Civil Code, are alternative and cannot be exercised simultaneously or cumulatively by the vendor-creditor.

Should the vendee or purchaser of a personal property default in the payment of two or more of the agreed installments,
the vendor or seller has the option to avail of any one of these three remedies either to exact fulfillment by the purchaser of the
obligation, or to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one was constituted. These
remedies have been recognized as alternative, not cumulative, that the exercise of one would bar the exercise of the others. It may
also be stated that the established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel bars further
recovery by the vendor of any balance on the purchaser's outstanding obligation not so satisfied by the sale.

DANIEL L. BORDON II AND FRANCISCO L. BORBON, v. SERVICEWIDE SPECIALISTS, INC. &
HON. COURT OF APPEALS
G.R. No. 106418, 11 July 1996, FIRST DIVISION (Vitug, J.)
When the seller assigns his credit to another person, the latter is likewise bound by the same law. Accordingly, when the
assignee forecloses on the mortgage, there can be no further recovery of the deficiency, and the seller-mortgagee is deemed to have
renounced any right thereto.
So, also, a mere demand to surrender the object which is not heeded by the mortgagor will not amount to a foreclosure, but
the repossession thereof by the vendor-mortgagee would have the effect of foreclosure.

Daniel L. Bordon and Francisco Bordon signed a promissory note with an amount of P122,856.00 for the purchase of a
jeepney type Izusu K.C. Cab from Pangasinan Auto Mart. The same is agreed to be payable without need of notice or demand, in
installments of the amounts. To secure the promissory note, the Bordons executed a chattel mortgage.

The rights of Pangasinan Auto Mart, Inc. was later assigned to Filinvest Credit Corporation. Then, Filinvest assigned its
rights to Servicewide Specialists. Because of the default on the part of the Bordons, Filinvest demanded the payment of their
installments due.

For their defense, the Bordons claim that what they intended to buy from Pangasinan Auto Mart was a jeepney type Isuzu
K. C. Cab. The vehicle that they bought was not delivered. Instead, through misrepresentation and machination, the Pangasinan
Motor, Inc. delivered an Isuzu crew cab, as this is the unit available at their warehouse. Despite Communications with the
Pangasinan Auto Mart, Inc., the latter was not able to replace the vehicle until the vehicle delivered was seized by order of this
court.

The Bordons claim that they are not in default of their obligation because the Pangasinan Auto Mart was first guilty of not
fulfilling its obligation in the contract. The Bordons claim that neither party incurs delay if the other does not comply with his
obligation. The lower court and the CA ruled that the Bordons could not avoid liability under the promissory note and the chattel
mortgage that secured it since Service Wide took the note for value and in good faith.

ISSUE:

Whether or not the award of unliquidated damages is proper

HELD:

Petition DENIED.

The Borbons invoke the provisions of Article 1484 of the Civil Code which reads:
ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of
the following remedies:
"(1) Exact fulfillment of the obligation, should the vendee fail to pay;
"(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
"(3) Foreclose the chattel mortgage or the thing sold, if one has been constituted, should the vendee's failure to pay cover two
or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any
agreement to the contrary shall be void."

The remedies under Article 1484 of the Civil Code are not cumulative but alternative and exclusive, which means, should
the vendee or purchaser of a personal property default in the payment of two or more of the agreed installments, the vendor or
seller has the option to avail of any of these three remedies either to exact fulfillment by the purchaser of the obligation, or to
cancel the sale, or to foreclose the mortgage on the purchased personal property, if one was constituted. These remedies have
been recognized as alternative, not cumulative, that the exercise of one would bar the exercise of the others."

When the seller assigns his credit to another person, the latter is likewise bound by the same law. Accordingly, when the
assignee forecloses on the mortgage, there can be no further recovery of the deficiency, and the seller-mortgagee is deemed to
have renounced any right thereto. A contrario, in the event the seller-mortgagee first seeks, instead, the enforcement of the
additional mortgages, guarantees or other security arrangements, he must then be held to have lost by waiver or non-choice his lien
on the chattel mortgage of the personal property sold by any mortgaged back to him, although, similar to an action for specific
performance, he may still levy on it.

In ordinary alternative obligations, a mere choice categorically and unequivocally made and then communicated by the
person entitled to exercise the option concludes the parties. The creditor may not thereafter exercise any other option, unless the
chosen alternative proves to be ineffectual or unavailing due to no fault on his part. This rule, in essence, is the difference between
alternative obligations, on the one hand, and alternative remedies, upon the other hand, where, in the latter case, the choice
generally becomes conclusive only upon the exercise of the remedy. For instance, in one of the remedies expressed in Article 1484
of the Civil Code, it is only when there has been a foreclosure of the chattel mortgage that the vendee-mortgagor would be
permitted to escape from a deficiency liability. Thus, if the case is one for specific performance, even when this action is selected
after the vendee has refused to surrender the mortgaged property to permit an extrajudicial foreclosure, that property may still be
levied on execution and an alias writ may be issued if the proceeds thereof are insufficient to satisfy the judgment credit. So, also, a
mere demand to surrender the object which is not heeded by the mortgagor will not amount to a foreclosure, but the
repossession thereof by the vendor-mortgagee would have the effect of foreclosure.

The parties here concede that the action for replevin has been instituted for the foreclosure of the vehicle in question. The
Bordons hold that under Article 1484 of the Civil Code, aforequoted, the vendor-mortgagee or its assignees loses any right "to
recover any unpaid balance of the price" and any "agreement to the contrary (would be) void.

The argument is aptly made. We have said that the phrase "any unpaid balance" can only mean the deficiency judgment to
which the mortgagee may be entitled to when the proceeds from the auction sale are insufficient to cover the "full amount of the
secured obligation which x x x include interest on the principal, attorney's fees, expenses of collection, and costs." In sum, we have
observed that the legislative intent is not to merely limit the proscription of any further action to the "unpaid balance of
the principal but to all other claims that may likewise be called for in the accompanying promissory note against the buyer-
mortgagor or his guarantor, including costs and attorney's fees.

The protection given to the buyer-mortgagor should not be considered to be without circumscription or as being preclusive
of all other laws or legal principles. Hence, where the mortgagor unjustifiably refused to surrender the chattel subject of the
mortgage upon failure of two or more installments, or if he concealed the chattel to place it beyond the reach of the mortgagee,
that thereby constrained the latter to seek court relief, the expenses incurred for the prosecution of the case, such as attorney's
fees, could rightly be awarded.

LEOVILLO C. AGUSTIN v. COURT OF APPEALS and FILINVEST FINANCE CORP.
G.R. No. 107846, 18 April 1997, THIRD DIVISION (Francisco, J.)
The necessary expenses incurred in the prosecution by the mortgagee of the action for replevin so that he can regain
possession of the chattel, should be borne by the mortgagor. Recoverable expenses would, in our view, include expenses properly
incurred in effecting seizure of the chattel and reasonable attorneys fees in prosecuting the action for replevin.

Leovillo C. Agustin executed a promissory note in favor of ERM Commercial for P 43,480.80. The note was payable in
monthly installments and secured by a chattel mortgage over an Isuzu diesel truck, both of which were subsequently assigned to
Filinvest Finance Corporation. When Agustin defaulted in paying the installments, Filinvest demanded from Agustin the payment of
the entire balance or, in lieu thereof, the possession of the mortgaged vehicle. Neither payment nor surrender was made.

Aggrieved, Filinvest filed a complaint with the Regional Trial Court praying for the issuance of a writ of replevin or, in the
alternative, for the payment of P32,723.97. A writ of replevin was issued by RTC. By virtue thereof, Filinvest acquired possession of
the vehicle. Upon repossession, the Filinvest discovered that the vehicle was no longer in running condition and that several parts
were missing which Filinvest replaced. The vehicle was then foreclosed and sold at public auction.

Filinvest subsequently filed a supplemental complaint claiming additional reimbursement worth P8,852.76 as value of
replacement parts and for expenses incurred in transporting the mortgaged vehicle from Cagayan to Manila. Agustin moved to
dismiss this. The RTC dismissed the same. The CA set aside the order of dismissal and ruled that repossession expenses incurred by
Filinvest should be reimbursed.

Agustin contends that the award of repossession expenses to Filinvest as mortgagee is "contrary to the letter, intent and
spirit of Article 1484.

ISSUE:

Whether or not the award of repossession expenses is still proper

HELD:

Petition GRANTED.

In Filipinas Investment & Finance Corporation v. Ridad, the Court recognized an exception to the rule stated under Article
1484(3). Where the mortgagor plainly refuses to deliver the chattel subject of the mortgage upon his failure to pay two or more
installments, or if he conceals the chattel to place it beyond the reach of the mortgagee, what then is the mortgagee expected to
do? It logically follows as a matter of common sense, that the necessary expenses incurred in the prosecution by the mortgagee of
the action for replevin so that he can regain possession of the chattel, should be borne by the mortgagor. Recoverable expenses
would, in our view, include expenses properly incurred in effecting seizure of the chattel and reasonable attorneys fees in
prosecuting the action for replevin.

BANKING LAWSA

REGISTER of DEEDS OF MANILA v. CHINA BANKING CORPORATION
G.R. No. L-11964, 28 April 1962, EN BANC (Dizon,J.)
An alien-owned commercial bank cannot acquire ownership of real property by virtue of the deed of transfer executed by its
former employee in satisfaction of a civil liability arising from the criminal offense since debts referred to in the law are only those
resulting from previous loans and similar transactions made or entered into by a bank in the ordinary course of its business.

In an information filed in 1953 in the CFI of Manila Alfonso Pangilinan (Pangilinan) and one Guillermo Chuan (Chua) were
charged with qualified theft, the money involved amounting to P275,000.00. In 1956, therefore, Pangilinan and his wife, Belen Sta.
Ana (Sta. Ana), executed a public instrument entitled DEED OF TRANSFER whereby, after admitting his civil liability in favor of his
employer, the China Banking Corporation (China Bank or transferee), in relation to the offense aforesaid, he ceded and transferred
to the latter, in satisfaction thereof, a parcel of land located in the City of Manila, registered in the name of "Belen Sta. Ana, married
to Alfonso Pangilinan". The deed was presented for registration to the Register of Deeds of the City of Manila, but because the
transferee was alien-owned and, as such, barred from acquiring lands in the Philippines, in accordance with the provisions of Section
5, Article XIII of the Constitution of the Philippines, said officer submitted the matter of its registration to the Land Registration
Commission for resolution. After granting the parties concerned ample opportunity to submit their views upon the issue, the
Commission issued the resolution appealed from.

ISSUE:

Whether or not China Bank (an alien owned bank) can acquire ownership of the residential lot by virtue of the deed of
transfer executed by Pangilinan to satisfy his civil liability arising from the crime

HELD:

Petition DENIED.

To support its view appellant relies particularly upon paragraphs (c) and (d), Section 25 of Republic Act 337 which states
that any commercial bank may purchase, hold, and convey real estate for the following purposes: (c) Such shall be conveyed to it in
satisfaction of debts previously contracted in the course of its dealings; and (d) Such as it shall purchase at sales under j udgments,
decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due to it. But no such bank shall hold the
possession of any real estate under mortgage or trust deed, or the title and possession of any real estate purchased to secure any
debt due to it, for a longer period than five years.

Assuming, arguendo, that under the provisions of the aforesaid Act any commercial bank, whether alien-owned or
controlled or not, may purchase and hold real estate for the specific purposes and in the particular cases enumerated in Section 25
thereof, we find that the case before Us does not fall under anyone of them.

Paragraph (c), Section 25 of Republic Act 337 allows a commercial bank to purchase and hold such real estate as shall be
conveyed to it in satisfaction of debts previously contracted in the course of its dealings, We deem it quite clear and free from
doubt that the "debts" referred to in this provision are only those resulting from previous loans and other similar transactions
made or entered into by a commercial bank in the ordinary course of its business as such. Obviously, whatever "civil liability"
arising from the criminal offense of qualified theft was admitted in favor of appellant bank by its former employee, Alfonso
Pangilinan, was not a debt resulting from a loan or a similar transaction had between the two parties in the ordinary course of
banking business.

Neither do the provisions of paragraph (d) of the Same section apply to the present case because the deed of transfer in
question can in no sense be considered as a sale made by virtue of a judgment, decree, mortgage, or trust deed held by appellant
bank. In the same manner it cannot be said that the real property in question was purchased by appellant "to secure debts due to
it", considering that, as stated heretofore, the term debt employed in the pertinent legal provision can logically refer only to such
debts as may become payable to appellant bank as a result of a banking transaction.

That the constitutional prohibition under consideration has for its purpose the preservation of the patrimony of the nation
cannot be denied, but appellant and the amici curiae claim that it should be liberally construed so that the prohibition be limited to
the permanent acquisition of real estate by aliens whether natural or juridical persons. This, of course, would make legal the
ownership acquired by appellant bank by virtue of the deed of transfer mentioned heretofore, subject to its obligation to dispose of
it in accordance with law, within 5 years from the date of its acquisition. We cannot give assent to this contention, in view of the fact
that the constitutional prohibition in question is absolute in terms. We have so held in Ong Sui Si Temple vs. The Register of Deeds of
Manila where we said, inter alia, that in view of the absolute terms of section 5, Title XIII, of the Constitution, the provisions of Act
271 of the old Philippine Commission must be deemed repealed since the Constitution was enacted, in so far as incompatible
therewith. In providing that save in cases of hereditary succession no private agricultural land shall be transferred or assigned
except to individuals, corporations or associations qualified to acquire or hold lands of the public domain in the Philippines. The
Constitution makes no exception in favor of religious associations. Neither is there any such saving found in Sections 1 and 2 of
Article XIII, restricting the acquisition of public agricultural lands and other natural resources to "corporations or associ ations at least
sixty per centum of the capital of which is owned by such citizens" (of the Philippines).

Even in the case of Smith Bell & Co. vs. Register of Deeds of Davao (50 O.G., 5239) where a lease of a parcel of land for a
total period of 50 years in favor of an alien corporation was held to be registerable, the reason we gave for such ruling was that a
lease unlike a sale does not involve the transfer of dominion over the land, the clear implication from this being that transfer
of ownership over land, even for a limited period of time, is not permissible in view of the constitutional prohibition. 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.

REPUBLIC OF THE PHILIPPINES v. SECURITY CREDIT AND ACCEPTANCE CORPORATION, ROSENDO T. RESUELLO, PABLO TANJUTCO,
ARTURO SORIANO, RUBEN BELTRAN, BIENVENIDO V. ZAPA, PILAR G. RESUELLO, RICARDO D. BALATBAT, JOSE SEBASTIAN and
VITO TANJUTCO JR.
G.R. No. L-20583, 23 January 1967, EN BANC (Concepcion, CJ.)
To engage in banking business, a corporation must first secure the administrative authority required by law

This is an original quo warranto proceeding, initiated by the Solicitor General, to dissolve the Security and Acceptance
Corporation (SAC) for allegedly engaging in banking operations without the authority required therefor by the General Banking
Act (Republic Act No. 337). Named as respondents in the petition are, in addition to said corporation, the following, as alleged
members of its Board of Directors and/or Executive Officers, namely: Rosendo T. Resuello (President and Chairman of the Board),
Pablo Tanjutco (Director), Arturo Soriano (Director), Ruben Beltran (Director), Bienvenido V. Zapa (Director and V-President), Pilar G.
Resuello (Director and Secretary-Treasurer), Ricardo D. Balatbat (Director and Auditor), Jose R. Sebastian (Director and Legal
Counsel), and Vito Tanjutco (Director and Personnel Manager).

Accordingly, the Articles of Incorporation of SAC were registered with the SEC and correspondingly, the Board of Directors
of the corporation adopted a set of by-laws, which were filed with said Commission. The Superintendent of Banks of the Central
Bank of the Philippines asked its legal counsel an opinion on whether or not said corporation is a banking institution, within the
purview of Republic Act No. 337; this was resolved in the affirmative. Thus, Resuello et al., sought a reconsideration of the said
opinion, which reconsideration was denied.

Subsequently, SAC applied with the SEC for the registration and licensing of its securities under the Securities Act. SEC then
referred it to the Central Bank which gave the SEC a copy of the said opinion, in line with which, the SEC advised the corporation to
comply with the requirements of the General Banking Act. The Municipal Court then issued a search warrant whereby members of
the intelligence division of the Central Bank and of the Manila Police Department searched the premises of the corporation and
seized documents and records thereof relative to its business operations; that, upon the return of said warrant, the seized
documents and records were, with the authority of the court, placed under the custody of the Central Bank of the Philippines; that,
upon examination and evaluation of said documents and records, the intelligence division of the Central Bank submitted a
memorandum finding that the corporation is performing banking functions without the requisite certificate of authority from the
Monetary Board of CB; soliciting and accepting savings deposits from the general public when the company's articles of
incorporation authorize it only to engage primarily in financing agricultural, commercial and industrial projects, and secondarily, in
buying and selling stocks and bonds of any corporation, thereby exceeding the scope of its powers and authority as granted under
its charter; consequently such acts are ultra-vires; that being a private credit and financial institution, it should come under the
supervision of the Monetary Board of the Central Bank, by virtue of the transfer of the authority, power, duties and functions of
the Secretary of Finance, Bank Commissioner and the defunct Bureau of Banking, to the said Board.

The Monetary Board ruled that SAC is performing banking functions without having first complied with the provisions of RA
No. 337. SAC was advised of the said resolution but SAC has been and still are performing the functions which had been declared to
constitute illegal banking operations;

ISSUE:

Whether or not SAC is a banking corporation engaged in banking operations

HELD:

Petition GRANTED (SAC is thus dissolved)

Although, admittedly, SAC has not secured the requisite authority to engage in banking, defendants deny that its
transactions partake of the nature of banking operations. It is conceded, however, that, in consequence of a propaganda campaign
therefor, a total of 59,463 savings account deposits have been made by the public with the corporation and its 74 branches, with an
aggregate deposit of P1,689,136.74, which has been lent out to such persons as the corporation deemed suitable therefor. It is clear
that these transactions partake of the nature of banking, as the term is used in Section 2 of the General Banking Act. Indeed, a bank
has been defined as a moneyed institute founded to facilitate the borrowing, lending and safe-keeping of money and to deal, in
notes, bills of exchange, and credits.

Moreover, it has been held that an investment company which loans out the money of its customers, collects the interest
and charges a commission to both lender and borrower, is a bank. (Western Investment Banking Co. vs. Murray, 56 P. 728, 730,
731; 6 Ariz 215. Any person engaged in the business carried on by banks of deposit, of discount, or of circulation is doing a banking
business, although but one of these functions is exercised. (MacLaren vs. State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18
Ann. Cas. 826; 9 C.J.S. 30.) Accordingly, defendant corporation has violated the law by engaging in banking without securing the
administrative authority required in Republic Act No. 337. It is conceded that a total of 59,463 savings account deposits have been
made by the public with the corporation and its 74 branches, with an aggregate deposit of P1,689,136.74, which has been lent out
to such persons as the corporation deemed suitable therefore. It is clear that these transactions partake of the nature of banking,
as the term is used in Section 2 of the General Banking Act. Hence, defendant corporation has violated the law by engaging in
banking without securing the administrative authority required in Republic Act No. 337.

That the illegal transactions thus undertaken by defendant corporation warrant its dissolution is apparent from the fact that
the foregoing misuser of the corporate funds and franchise affects the essence of its business, that it is willful and has been repeated
59,463 times, and that its continuance inflicts injury upon the public, owing to the number of persons affected thereby.

DAMASO P. PEREZ and REPUBLIC BANK, ETC., ET AL., v.
MONETARY BOARD, THE SUPERINTENDENT OF BANKS, CENTRAL BANK OF THE PHILIPPINES and SECRETARY OF JUSTICE
(Respondents-Appellees) and AURORA R. RECTO, et al. (intervenors-appellees)
G.R. No. L-23307, 30 June 1967, EN BANC (Bengzon, J.P., J.)
As a public offense, the prosecution of which is a matter of public offense, anyone even private individuals can denounce
such violations of the banking laws. Accordingly, The Central Bank or its officials are not the only individuals who can prosecuted such
violations.

Damaso P. Perez instituted mandamus proceedings in the CFI of Manila against the Monetary Board, et al. His object was
to compel these respondents to prosecute, among others, Pablo Roman (Roman) and several other Republic Bank officials for
violations of the General Banking Act and the Central Bank Act and for falsification of public or commercial documents in
connection with certain alleged anomalous loans amounting to P1,303,400.00 authorized by Roman and the other bank officials. On
their part, respondents assailed the propriety of mandamus. The Secretary of Justice claimed that it was not their specific duty to
prosecute the persons denounced by Perez. The Central Bank and its respondent officials, on the other hand, averred that they had
already done their duty under the law by referring to the special prosecutors of the Department of Justice for criminal investigation
and prosecution those cases involving the alleged anomalous loans.

The Monetary Board passed a resolution granting the request of Republic Bank for credit accommodations to cover the
unusual withdrawal of deposits by its depositors in view of the fact that said Bank was under investigation then by the
authorities. The grant, however, was conditioned upon the execution by the management and controlling stockholders of the
Republic Bank of a voting trust agreement in favor of a Board of Trustees to be chosen by the latter with the approval of the Central
Bank. Pursuant to this resolution, Roman and his family, is the controlling stockholders of Republic Bank, executed a voting trust
agreement in favor of a board of trustees composed of former Chief Justice Ricardo Paras, Hon. Miguel Cuaderno and Mr. Felix de la
Costa. Subsequently, this agreement was superseded by another one with the Philippine National Bank (PNB) as the trustee.

In view of these developments, the intervenors-appellees filed a motion to dismiss before the lower court claiming that the
ouster of Pablo Roman and his family from the management of the Republic Bank effected by the voting trust agreement rendered
the mandamus case moot and academic. Respondents-appellees also filed motion to dismiss in which they again raised the
impropriety of mandamus. The lower court granted the motions and dismissed the case.

ISSUES:

1. Whether or not mandamus lies to compel respondents to prosecute Roman and company; and
2. Whether or not CB et al. may be compelled to prosecute criminally the alleged violators of banking laws.

HELD:

Petition DENIED.

Mandamus cannot lie against the respondents and
CB is not bound to do the actual prosecution for violation of the Banking Act

Petitioners cannot seek by mandamus to compel respondents to prosecute criminally those alleged violators of the banking
laws. Although the Central Bank and its respondent officials may have the duty under the Central Bank Act and the General Banking
Act to cause the prosecution of those alleged violators, yet we find nothing in said laws that imposes a clear, specific duty on the
former to do the actual prosecution of the latter. The Central Bank is a government corporation created principally to administer
the monetary and banking system of the Republic, not a prosecution agency like the fiscal's office. Being an artificial person, the
Central Bank is limited to its statutory powers and the nearest power to which prosecution of violators of banking laws may be
attributed is its power to sue and be sued. But this corporate power of litigation evidently refers to civil cases only.

The Central Bank and its respondent officials have already done all they could, within the confines of their powers, to cause
the prosecution of those persons denounced by Perez. Accordingly, the cases of the alleged anomalous loans had already been
referred by the Central Bank to the special prosecutors of the Department of Justice for criminal investigation and prosecuti on.
For respondents to do the actual prosecuting themselves, as petitioners would have it, would be tantamount to an ultra vires act
already.

As for the Secretary of Justice, while he may have the power to prosecute through the office of the Solicitor General
criminal cases, yet it is settled rule that mandamus will not lie to compel a prosecuting officer to prosecute a criminal case in court.
Moreover, it does not appear from the law that only the Central Bank or its respondent officials can cause the prosecution of
alleged violations of banking laws. Said violations constitute a public offense, the prosecution of which is a matter of public
interest and hence, anyone even private individuals can denounce such violations before the prosecuting authorities. Since
Perez himself could cause the filing of criminal complaints against those allegedly involved in the anomalous loans, if any, then he
has a plain, adequate and speedy remedy in the ordinary course of law, which makes mandamus against respondents improper.

BANCO DE ORO v. JAIME Z. BAYUGA and ROBERTO P. TOLENTINO, et al.
G.R. No. L-49568, 17 October 1979, FIRST DIVISION (Melencio-Herrera, J.)
If the Bank finds that the barrower has not employed the funds barrowed for the purpose agreed upon, it may terminate the
loan and demand the immediate payment.

Respondent Roberto P. Tolentino (Tolentino) is a lawyer appearing on his own behalf and as counsel for his co-respondent
Jaime Z. Bayuga (Bayuga). Accordingly, as security for a loan of P375,000.00 Bayuga, as attorney-in-fact of respondent Tolentino, and
Leonardo Zaballero (Zaballero), executed a Real Estate Mortgage in favor of the Acme Savings Bank (now Banco de Oro or BDO)
over a parcel of land in the names of TOLENTINO and Zaballero situated at Mabato, Calamba, Laguna. The purpose of the loan was
for the "acquisition of real estate property." The mortgage was duly registered. BDO approved the loans subject to several
conditions: that the interest rate shall be l9% per annum; that the monthly amortization shall be P7,000.12; that the loan shall be
payable within ten (10) years; that the property sought to be acquired which is located in Tagaytay City, registered in the name of
Algue Incorporated shall be given as additional collateral among others. Bayuga et al. however contends that they were unaware of
the foregoing conditions, the same having been embodied only in the Minutes of the meeting of "the Board of Directors/Executive
Committee" of BDO and, therefore, self-serving, as held by the trial Court.

The Bank made partial release of P200,000.00 less charges of P6,000.00, which amount was credited to the account of
Tolentino. Then, out of the balance of 194k, Tolentino purchased from the BANK a certificate of time deposit in the amount of 50k.
He also withdrew 100k, and then 44k when TOLENTINO from the BANK a Manager's check in the total amount of P144,000.00.

Thereafter, claiming that the borrowers showed no indication of complying with his obligation to pay the amount of the
loan to the vendor (Algue, Inc.) of the Tagaytay City property, which constituted diversion in violation of Sec. 77, Republic Act No.
337, the BANK stopped payment of its Manager's check at the same time that it refused to release the balance of the loan. That
action was necessary, according to the BANK, in order to Bayuga et al. from perpetrating a fraud against it.

Bayuga et al. then filed an action for specific performance before the CFI of Rizal. This was granted. BDO then appealed to
the CA and while such appeal was pending, the lower court issued a writ of execution of its judgment. The CA then affirmed the
lower courts decision.

ISSUE:

Whether or not the bank may terminate the loan and demand its immediate payment

HELD:

Petition GRANTED.

While, prima facie, execution pending appeal seemed justified because of the unilateral cancellation of the release of the
loan by the BANK without notice, and the absence of complete supporting documents to the Petition, disclosures by the parties
during the hearing and pleadings and documents subsequently filed uphold a contrary view. Thus, during the hearing as well as in his
Comments Tolentino contended that he is not a party to the mortgage contract which was executed only between the BANK and
Bayuga; that he became a party only because he was "injured and damaged by the bad faith of the BANK;" that he is not willing to
co-sign a promissory note in the BANK's favor for the amount of P389,000.00, alleging that Bayuga had already signed a promissory
note in the sum of P200,000.00; and that neither he nor Bayuga had obligated himself to put up any additional collateral. Bayuga, for
his part, during the hearing, assumed a very passive role admitting that he was but an employee of TOLENTINO who was the prime
mover in the entire transaction. The lack of good faith and of a sense of fair play on the part of private respondents was all too
evident. 'They were treating the release of the amount of P389,000.00 in their favor more as a money judgment, which it is not,
rather than as a loan which it is. They want to avail of the full benefits of the loan without assumption of the corresponding
obligations, or very minimally at, that. Since receipt of the aforestated amount, they have even refused to make any monthly
amortizations even upon demand by the BANK, contending that "no amount of the said loan is due. It will only be paid ten (10) years
after the execution of the mortgage contract as interpreted by our Courts."

The unfairness and inequity of this posture to the banking business is too evident to require elaboration. Funds of a bank
are, in a sense, held in trust. There are the interests of depositors to be protected. The collateral the BANK has in its favor, with a
loan value of only P157,889.76, is far from adequate to answer for the amount of P389,000.00 that is now in the hands of private
respondents. The manner of repayment by private respondents of that amount remains nebulous. Of course, the BANK is not
without fault for this sorry state of affairs.

The special reason cited by the trial Court and upheld by the Court of Appeals, i.e., the "substantial injustice" wrought on private
respondents whose land had been mortgaged without any centavo paid for the loan, does not exist in law. As pointed out by the
BANK, the Calamba property need not have remained subject to the mortgage, the mortgage being but an accessory contract to the
contract of loan which is the principal obligation and which has been cancelled. The consideration of the mortgage is the same
consideration of the principal contract without which it cannot exist as an independent contract.
19
The "persuasive" factor
considered by the Court of Appeals "that the loan is intended to buy real estate property, the price of which varies as days go by"
was disproved by the fact that TOLENTINO utilized the amount initially released to purchase a certificate of time deposit and to open
bank accounts in his name rather than pay for the Algue property.

THE PEOPLE OF THE PHILIPPINES v.TERESA JALANDONI
G.R. No. L-57555, 30 May 1983, SECOND DIVISION (Abad Santos, J.)
Where it is established that a depositor had been granted overdraft or drawn against uncollected deposit privileges, no
criminal fraudulent intent can be inferred from her deposit of her personal check in one bank which were drawn payable to the order
of cash against the depositors current account at anonther bank.

Teresa Jalandoni (Jalandoni), with intent to defraud, and with grave abuse of confidence reposed upon her by the Bank of
the Philippine Islands (BPI), did then and there wilfully, unlawfully and feloniously defraud said bank by means of the following
fraudulent acts and false pretenses, to wit: the said accused making use of a current account she had earlier opened in the Rizal
Commercial Banking Corporation (RCBC), issued against said account the following personal checks paid to cash, amounting to 2 M.
Accordingly, knowing fully well that she did not have sufficient funds to cover the total amount of her said personal checks which
she then deposited in BPI, the said accused, by means of false statements and fraudulent representations made to the Manager, to
the effect that her said deposited personal checks are good and covered with sufficient funds and would be honored by RCBC, the
drawee bank thereof, and by means of other similar deceits induced and succeeded in inducing the Manager of BPI, to honor
checks drawn by her against her said deposited personal checks, in favor of other parties in the aggregate amount of
P2,041,780.00, the said accused knowing fully well that all her said pretenses and representations were false and untrue for the
reason that upon presentation of her said deposited personal checks to the RCBC, Greenhills Branch, for payment, the said checks,
(with the exception of RCBC No. 2424530 in the amount of P200,000.00), were dishonored and payment thereof refused, the
drawer thereof, Jalandoni, not having the funds to cover the amount of her said personal checks, and the said accused
notwithstanding due notice to her from BPI of said dishonor and demands from the same bank to make good her dishonored
personal checks, failed and refused to deposit the necessary amount to cover the amounts of her said dishonored personal checks or
the amounts of the checks drawn by her in favor of other persons, which had been honored by BPI on the strength of her said false
pretenses and fraudulent representations that her deposited personal checks against which they were drawn, were good and
covered with sufficient funds, to the damage and prejudice of the BPI.

The Court found Jalandoni guilty of the crime of estafa. On her part, Jalandoni does not question the veracity of the
transactions, but alleges as a defense that she had been previously granted an overdraft, and that it was not her intention to defraud
the bank.

ISSUE:

Whether or not Jalandoni acted fraudulently in her transactions

HELD:

Petition GRANTED (Jalandoni did not act fraudulently)

The record shows that the appellant had been accorded overdraft (OD) or drawn against uncollected deposit (DAUD)
privileges, not just for the nine (9) RCBC checks mentioned in the information, but for many other past transactions. Why she was
accorded the privileges was explained by Manuel L.Garcia who was the manager of the Plaza Cervantes branch of BPI when the
transactions took place. He said that the checks were honored because the bank considered her at least prior to the transaction
involving these checks that she had a good credit standing with the bank. Accordingly, he allowed this practice of honoring checks
drawn against uncollected deposit only if the check depositor precisely has a good credit standing with the bank.

Lending credence to the claim of the appellant that she had been given OD and/or DAUD privileges is the fact that Branch
Manager Manuel L. Garcia was not accused as a co-principal. During the, the Court was informed that Mr. Garcia was allowed to
retire. If the appellant had in fact acted fraudulently she could not have done so without the active cooperation of Mr. Garcia.
Hence, if Mr. Garcia was innocent of any criminal act, the same can be said for the appellant. Other circumstances militate against
the imputation of fraud. The circumstances have been stated by the Jalndoni is that, if she had criminal intent to defraud why did
she still fund or allow to be honored one of the nine (9) checks involved in the amount of P200,000.00; why did she draw the
checks aggregating P2,041,780.00, drawn against the nine (9) checks, in favor of third parties, instead of withdrawing said amount
of P2,041,780.00 for herself; why did she minimize or reduce the resulting damage to complainant bank to P1,391,780.00 instead
of grabbing the full value of the nine (9) checks in question, which is P2,150,000.00.

It is to be noted that the nine (9) RCBC checks had a total face value of P2,150,000.00. One of the checks with a face value
of P200.000.00 was honored, leaving an initial balance of P1,950.000.00. However, the appellant was able to reduce this balance by
other payments to BPI such that in the judgment she was ordered to pay only the amount of P1,600.000.00. Upon the other hand,
the Jalandoni claims that the resulting damage to BPI was reduced to P1,391,780.00. The appellant states without contradiction
"that, with the authority of her son, she mortgaged to the bank a lot belonging to the latter for a loan of P250,000.00, which was
applied to one of the dishonored checks in dispute, as; additionally, she also gave the president of the bank, Mr. Alberto F. de Villa-
Abrifle, a family friend, jewelry worth P300,000.00 as a token of her sincerity to pay. If the accused-appellant had the criminal
intent to defraud the bank, would she have encumbered the property of her son, obviously worth more than P250,000.00. Would
she have given up jewelry worth P300,000.00."

SEPARATE OPINION (Makasiar, J.)

The conviction of the accused herein should be affirmed. It is amply proven that the personal checks drawn by her in favor
of other persons had been honored by BPI because of her active false pretenses and fraudulent representations to the branch
manager that her deposited personal checks, against which they were drawn, were good and covered with sufficient funds, when in
fact they were not so covered.

PACIFIC BANKING CORPORATION and CHESTER G. BABST v. THE COURT OF APPEALS, JOSEPH C. HART and ELEANOR HART
G.R. No. L-45656, 5 May 1989, THIRD DIVISION (Gutimerrez, Jr., J.)
Where a bank officer ordered the premature foreclosure if a pledge afetr he had given an indefinite extension of time for the
payment of the loan, the officer and the bank were liable for damages arising from quasi -delict because the foreclosure of the pledge
was an act of bad faith.

Joseph and Eleanor Hart (The Harts) discovered an area consisting of 480 hectares of tidewater land in Tambac Gulf of
Lingayen which had great potential for the cultivation of fish and saltmaking. They organized Insular Farms Inc., (Insular Farms)
applied for and, after eleven months, obtained a lease from the Department of Agriculture for a period of 25 years, renewable for
another 25 years. Joseph Hart approached businessman John Clarkin (Clarkin), then President of Pepsi-Cola Bottling Co. in Manila,
for financial assistance. Joseph and Clarkin then signed a memorandum of agreement pursuant to which: a) of 1,000 shares out-
standing, Clarkin was issued 500 shares in his and his wife's name, one share to J. Lapid, Clarkin's secretary, and nine shares in the
name of the Harts were indorsed in blank and held by Clarkin so that he had 510 shares as against the Harts' 490; b) Hart was
appointed President and General Manager as a result of which he resigned as Acting Manager of the First National City Bank.

Yet, due to financial difficulties, Insular Farms barrowed 250k from Pacific Banking Corporation (Pacific Bank). Insular
executed a Promissory Note of P 250,000.00 to the bank payable in five equal annual installments. Said note provided that upon
default in the payment of any installment when due, all other installments shall become due and payable. This loan was effected and
the money released without any security except for the Continuing Guaranty executed of John Clarkin, who owned seven and half
percent of the capital stock of the bank, and his wife Helen.

Insular failed to pay but Pacific Bank did not demand payment for the initial July 1957 installment nor of the entire
obligation, but instead opted for more collateral in addition to the guaranty of Clarkin. Yet, as the business further deteriorated and
the situation became desperate, Hart agreed to Clarkin's proposal that all Insular Farms shares of stocks be pledged to petitioner
bank in lieu of additional collateral and to insure an extension of the period to pay the July 1957 installment. Said pledge was
executed. Pacific Farms Inc. was then organized to engage in the same business as Insular Farms Inc. and Pacific Bank wrote Insular
Farms Inc. giving the latter 48 hours to pay its entire obligation. Hart received notice that the pledged shares of stocks of Insular
Farms will be sold at public auction to satisfy Insular Farms obligation.

The Harts then filed an action for reconveyance and damages with the prayer for writ of preliminary injunction before the
CFI of Manila. On the same date the Court granted the prayer for a writ of pre- preliminary injunction. However, the same was later
on lifted. Thus, another notice from Pacific Bank that the shares of stocks of Insular Farms will be sold at public auction. Pacific Bank
sold the 1000 shares of stock of Insular to Pacific Farms for P 285,126.99. The latter then sold its shares of stocks to its own
stockholders, who constituted themselves as stockholders of Insular Farms and then resold back to Pacific Farms Inc. all of Insular
Farms assets except for a certificate of public convenience to operate an iceplant.

Hart then filed another case for recovery of sum of money comprising his investments and earnings against Insualr Farms.
This petition was granted.

ISSUE:

Whether or not Pacific Bank is liable

HELD:

Petition GRANTED.

First, petitioners allege that the Court of Appeals erred in deviating from the principle and rule of stare decisis by not
applying in favor of petitioners the ruling in the case of Philippine Engineering v. Green that "an agreement to extend the time of
payment in order to be valid must be for a definite time" which was relied upon by the trial court in overruling the private
respondents' claim that the petitioners had granted them orally an indefinite extension of time to pay the loan.

A reading of the Philippine Engineering Co. case shows that the authority quoted from was not the ground used by the
Court in not giving credit to therein defendant's statement as to the purported agreement for an indefinite extension of time for the
payment of the note. The principle relied upon in that case was the dead man's statute. The Court stated that the reason for not
believing the purported agreement for extension of time to pay the note was that there was no sufficient proof of the purported
agreement because here we have only the defendant's statement as to the purported agreement for an indefinite period of grace,
with one now dead. Such proof falls far short of satisfying the rules of evidence. In the case at bar, the parties to the purported
agreement, Hart and Babst, were still alive, and both testified in the trial court regarding the purported extension. Their testimonies
are in fact, quoted in the decision of the respondent Court of Appeals (pp. 49-54, Rollo).

We also note, that the rule which states that there can be no valid extension of time by oral agreement unless the
extension is for a definite time, is not absolute but admits of qualifications and exceptions. The general rule is that an agreement to
extend the time of payment, in order to be valid, must be for a definite time, although it seems that no precise date be fixed, it being
sufficient that the time can be readily determined. In case the period of extension is not precise, the provisions of Article 1197 of
the Civil Code should apply. In this case, there was an agreement to extend the payment of the loan, including the first installment
thereon which was due on or before July 1957. Accordingly, Hart had been given the assurance by the conduct of Babst, Executive
Vice President of Pacific Bank, that payment would not as yet be pressed, and under 1197 New Civil Code, the meaning must be that
there having been intended a period to pay modifying the fixed period in original promissory note, really, the cause of action of
Pacific Bank would have been to ask the Courts for the fixing of the term;

The pledge executed as collateral security on February 9, 1958 no longer contained the provision on an installment of P
50,000.00 due on or before July 1957. This can mean no other thing than that the time of payment of the said installment of P
50,000.00 was extended. It is settled that bills and notes may be varied by subsequent agreement. Thus, conditions may be
introduced and arrangements made changing the terms of payment. The agreement for extension of the parties is clearly indicated
and may be inferred from the acts and declarations of the parties, as testified to in court.

The pledge constituted on February 19, 1958 on the shares of stocks of Insular Farms, Inc. was sufficient consideration for
the extension, considering that this pledge was the additional collateral required by Pacific Banking in addition to the continuing
guarantee of Clarkin.

It was established that there was an agreement to extend indefinitely the payment of the installment of P50,000.00 in July
1957 as provided in the promissory note. Consequently, Pacific Banking Corporation was precluded from enforcing the payment of
the said installment of July 1957, before the expiration of the indefinite period of extension, which period had to be fixed by the
court as provided in Art. 1197 of the Civil Code. Even the pledge which modified the fixed period in the original promissory note, did
not provide for dates of payment of installments, nor of any fixed date of maturity of the whole amount of indebtedness.
Accordingly, the date of maturity of the indebtedness should be as may be determined by the proper court under Art. 1197 of the
Civil Code. Hence, the disputed foreclosure and the subsequent sale were premature.

SIMEX INTERNATIONAL (MANILA), INCORPORATED v. THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK
G.R. No. 88013, 19 March 1990, FIRST DIVISION (Cruz, J.)
The depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few
hundred pesos or of millions.
The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. 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 embarassment if
not also financial loss and perhaps even civil and criminal litigation.

Simex International Inc. (SIMEX) is a private corporation engaged in the exportation of food products. It buys these
products from various local suppliers and then sells them abroad, particularly in the United States, Canada and the Middle East.
Most of its exports are purchased by the petitioner on credit. SOMEX was a depositor of the Traders Royal Bank (Traders Bank) and
maintained a checking account in its branch at Romulo Avenue, Cubao, Quezon City. Accordingly, SIMEX deposited to its account in
the said bank the amount of P100,000.00, thus increasing its balance as of that date to P190,380.74. Subsequently, the SIMEX
issued several checks against its deposit but was surprised to learn later that they had been dishonored for insufficient funds.

As a consequence, the California Manufacturing Corporation (California Corporation) sent a letter of demand to SIMEX,
threatening prosecution if the dishonored check issued to it was not made good. It also withheld delivery of the order made by
SIMEX. Similar letters were sent to the SIMEX by the Malabon Long Life Trading (Malabon Trading), and by the G. and U.
Enterprises (G AND U). Malabon Trading also canceled the petitioner's credit line and demanded that future payments be made by
it in cash or certified check. Meantime, action on the pending orders of the petitioner with the other suppliers whose checks were
dishonored was also deferred.

SIMEX complained to the respondent bank and investigation disclosed that the sum of P100,000.00 deposited by SIMEX had
not been credited to it. The error was rectified on June 17, 1981, and the dishonored checks were paid after they were re-
deposited. Thus, SIMEX demanded reparation from Traders Bank. The demand was not met and thus a complaint was filed. The
same was denied. This was affirmed by the CA.

ISSUE:

Whether or not Traders Bank is liable for damages

HELD:

Petition GRANTED.

As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack of promptitude in repairing its
error, justifies the grant of moral damages. This rather lackadaisical attitude toward the complaining depositor constituted the gross
negligence, if not wanton bad faith, that the respondent court said had not been established by the petitioner. We also note that
while stressing the rectification made by the respondent bank, the decision practically ignored the prejudice suffered by the
petitioner. This was simply glossed over if not, indeed, disbelieved. The fact is that the petitioner's credit line was canceled and its
orders were not acted upon pending receipt of actual payment by the suppliers. Its business declined. Its reputation was
tarnished. Its standing was reduced in the business community. All this was due to the fault of the respondent bank which was
undeniably remiss in its duty to the petitioner.

Article 2205 of the Civil Code provides that actual or compensatory damages may be received "(2) for injury to the plaintiff s
business standing or commercial credit." There is no question that the petitioner did sustain actual injury as a result of the
dishonored checks and that the existence of the loss having been established "absolute certainty as to its amount is not
required." Such injury should bolster all the more the demand of the petitioner for moral damages and justifies the examination by
this Court of the validity and reasonableness of the said claim.

We agree that moral damages are not awarded to penalize the defendant but to compensate the plaintiff for the injuries he
may have suffered. In the case at bar, the petitioner is seeking such damages for the prejudice sustained by it as a result of the
private respondent's fault. The respondent court said that the claimed losses are purely speculative and are not supported by
substantial evidence, but if failed to consider that the amount of such losses need not be established with exactitude precisely
because of their nature. Moral damages are not susceptible of pecuniary estimation. Article 2216 of the Civil Code specifically
provides that "no proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or exemplary damages
may be adjudicated." That is why the determination of the amount to be awarded (except liquidated damages) is left to the sound
discretion of the court, according to "the circumstances of each case."

From every viewpoint except that of the petitioner's, its claim of moral damages in the amount of P1,000,000.00 is nothing
short of preposterous. Its business certainly is not that big, or its name that prestigious, to sustain such an extravagant pretense.
Moreover, a corporation is not as a rule entitled to moral damages because, not being a natural person, it cannot experience
physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish and moral shock. The only exception
to this rule is where the corporation has a good reputation that is debased, resulting in its social humiliation. We shall recognize
that the petitioner did suffer injury because of the private respondent's negligence that caused the dishonor of the checks issued
by it. The immediate consequence was that its prestige was impaired because of the bouncing checks and confidence in it as a
reliable debtor was diminished. The private respondent makes much of the one instance when the petitioner was sued in a
collection case, but that did not prove that it did not have a good reputation that could not be marred, more so since that case was
ultimately settled. It does not appear that, as the private respondent would portray it, the petitioner is an unsavory and
disreputable entity that has no good name to protect.

Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was not the proper relief to which
the petitioner was entitled. Under Article 2221 of the Civil Code, "nominal damages are adjudicated in order that a right of the
plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him." As we have found that the petitioner has indeed incurred loss through the
fault of the private respondent, the proper remedy is the award to it of moral damages, which we impose, in our discretion, i n the
same amount of P20,000.00. Now for the exemplary damages. The pertinent provisions of the Civil Code are the following: Art.
2229. Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral,
temperate, liquidated or compensatory damages. On the other hand, Art. 2232. In contracts and quasi-contracts, the court may
award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

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, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's
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 like the petitioner, 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.

In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists
only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo,
and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor
can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank,
such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and
perhaps even civil and criminal litigation. The point is that as a business affected with public interest and because of the nature of
its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the
fiduciary nature of their relationship. In the case at bar, it is obvious that the respondent bank was remiss in that duty and violated
that relationship. What is especially deplorable is that, having been informed of its error in not crediting the deposit in question to
the petitioner, the respondent bank did not immediately correct it but did so only one week later or twenty-three days after the
deposit was made. It bears repeating that the record does not contain any satisfactory explanation of why the error was made in the
first place and why it was not corrected immediately after its discovery. Such ineptness comes under the concept of the wanton
manner contemplated in the Civil Code that calls for the imposition of exemplary damages.

IDELITY SAVINGS AND MORTGAGE BANK v. HON. PEDRO D. CENZON, in his capacity as Presiding Judge of the Court of First
Instance of Manila (Branch XL) and SPOUSES TIMOTEO AND OLIMPIA SANTIAGO
G.R. No. L-46208, 15 April 1990, SECOND DIVISION (Regalado, J.)
A bank lends money, engages in international transactions, acquires foreclosed mortgaged properties or their proeeds and
generally enegages in other banking and financing activities in order that in can derive income therefrom. Therefore, unless a bank
can engage in those activities from which it can derive income, it is inconceivable how it can carry on as a depositor obligated to pay
interest on money deposited with it. Thus, a bank forbidden by Central Bank to do business has no obligation to pay interest on
deposit.

Timoteo and Olimpia Santiago (Spouses Santiago) deposited with the defendant Fidelity Savings and Mortgage Bank
(Fidelity) the amount of P50,000.00 under a savings account and another P50,000 under a certificate of time deposit. Hence, the
aggregate amount of the spouses deposit is P100,000. However, the Monetary Board subsequently issued a resolution declaring
Fidelity Savings Mortgage Bank insolvent and forbidden the bank from doing business in the Philippines. It also instructed the Acting
Superintendent o Bank to take charge of the Bank assets. Since February 19, 1969, the Superintendent of Banks has been taking
charge of the assets of Fidelity bank. Philippine Deposit Insurance Corporation (PDIC) was only able to pay the spouses the amount
of P10,000, leaving a deposit balance of P90,000. Through another resolution of the Monetary Board, the liquidation of the bank was
ordered and is still pending up to the present. After demand for the payment of the deposit balance, the spouses filed an action for
sum of money with damages against petitioner bank. The lower court ruled in favor of spouses and ordered the bank to pay interest
on unpaid deposits even after its closure plus moral and exemplary damages with attorneys fees and costs.

ISSUES:

1. Whether or not an insolvent Bank like Fidelity may be adjudged to pay interest on unpaid deposits even after its closure by
the Central Bank; and
2. Whether or not it may be adjudged to pay moral and exemplary damages when the insolvency is caused because of the
anomalous real estate transactions without violating provisions of the NCC on preference of credits.

HELD:

Petition DENIED.

It is settled jurisprudence that a banking institution which has been declared insolvent and subsequently ordered closed by
the Central Bank of the Philippines cannot be held liable to pay interest on bank deposits which accrued during the period when the
bank is actually closed and non-operational. In The Overseas Bank of Manila vs. Court of Appeals and Tony D. Tapia, we held that
what enables a bank to pay stipulated interest on money deposited with it is that thru the other aspects of its operation it is able
to generate funds to cover the payment of such interest. Unless a bank can lend money, engage in international transactions,
acquire foreclosed mortgaged properties or their proceeds and generally engage in other banking and financing activities from
which it can derive income, it is inconceivable how it can carry on as a depository obligated to pay stipulated interest.
Conventional wisdom dictates this inexorable fair and just conclusion. And it can be said that all who deposit money in banks are
aware of such a simple economic proposition. Consequently, it should be deemed read into every contract of deposit with a bank
that the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the duly
constituted authority, the Central Bank.

Thus, Fidelity cannot be held liable for interest on bank deposits which accrued from the time it was prohibited by the
Central Bank to continue with its banking operations, that is, when Resolution No. 350 to that effect was issued on February 18,
1969.

Although petitioner's formulation of the second issue that it poses is slightly inaccurate and defective, we likewise find the
awards of moral and exemplary damages and attorney's fees to be erroneous. The trial court found, and it is not disputed, that there
was no fraud or bad faith on the part of petitioner bank and the other defendants in accepting the deposits of private
respondents. Petitioner bank could not even be faulted in not immediately returning the amount claimed by private respondents
considering that the demand to pay was made and Civil Case No. 84800 was filed in the trial court several months after the
Central Bank had ordered petitioner's closure. By that time, petitioner bank was no longer in a position to comply with its
obligations to its creditors, including herein private respondents. Even the trial court had to admit that petitioner bank failed to pay
private respondents because it was already insolvent.
8
Further, this case is not one of the specified or analogous cases wherein
moral damages may be recovered.

In the absence of fraud, bad faith, malice or wanton attitude, petitioner bank may, therefore, not be held responsible for
damages which may be reasonably attributed to the non-performance of the obligation.
13
Consequently, we reiterate that under the
premises and pursuant to the aforementioned provisions of law, it is apparent that private respondents are not justifiably entitled to
the payment of moral and exemplary damages and attorney's fees.

FILIPINAS MILLS, INC., BUENAVENTURA TAN and VIRGINIA DUMLAO-TAN v. HON. ABELARDO M. DAYRlT, in his capacity as
Presiding Judge of the Court of First Instance of Manila, Branch II, ASSOCIATED CITIZENS BANK and OSCAR V. ATAYDE, in his
capacity as the Deputy Sheriff of the CFI-Manila, Branch II
G.R. No. 56620, 10 December 1990, FIRST DIVISION (Medialdea, J.)
An execution corporate creditor is not disqualified to purchase the shares of its own stockholder at an auction sale for judgment debt

Filipinas Mills, Inc., Buenaventura Tan and Virginia Dumlao-Tan obtained a loan from Citizens Bank and Trust Company
(CBTC) in the amount of P70,000.00 with interest at the rate of 14% per annum to be paid on or before March 16, 1976, as
evidenced by a promissory note. However, despite repeated demands, said loan remained unpaid. Consequently, Associated
Citizens Bank (ACB), which acquired all the assets and obligations of CBTC by virtue of an Agreement of Merger, filed a complaint
before the CFI of Manila for collection of the indebtedness of petitioners. The Trial Court ruled in favor of the ACB.

Subsequently, a writ of execution was issued pursuant to the said decision and thus the deputy sheriff levied on the
personal properties of the plaintiff. Tan directed the sheriff to levy first on their shares of stock at ACB before levying on their other
properties. The petitioners then filed an urgent to cancel the scheduled public auction sale alleging that they have the right to direct
the said deputy sheriff that their shares of stocks be levied and sold first and that the notice of public auction did not comply with
the requirements of publication. The said motion was denied by the court.

ISSUE:

1. Whether or not the judgment debtor has the right to direct the order in which real or personal property shall be sold
during the public action;
2. Whether or not an execution corporate creditor is disqualified to purchase the shares of stocks of its own stockholder.

HELD:

Petition GRANTED.

No doubt, this section grants to a judgment debtor the right to direct the order in which real or personal property shall be
sold, during the public auction sale. But, interpreting this particular provision in the case of People v. Hernandez, supra, we
expanded the scope of said right of a judgment debtor to include the case of attachment/levy (or prior to the public auction sale): ".
. . There is no question that a sheriff may attach the property of a judgment or execution debtor if he is clothed with the necessary
authority under a judicial writ, as provided for in section 453 of Act No. 190. However, it should not be construed to mean that,
having discretion in choosing the property to be attached, he should necessarily levy upon such property as is valued by the
execution debtor, particularly when the latter places other property at his disposal, as was done herein, the value of which is
greatly in excess of the amount of the judgment under execution. The aforesaid provision does not forbid the execution debtor, in
case he has sufficient property to answer for the payment of the judgment, to point out to the sheriff which of such property should
be attached and sold to satisfy the judgment with the proceeds thereof . On the contrary, it may be inferred from the provisions of
section 457 of the aforesaid Act that there would be no irregularity committed by such procedure. It should be noted that, after
describing the manner in which the personal property of the execution debtor should be sold at public auction, the last sentence of
the afore-cited section reads as follows:

"'The judgment debtor, if present at the sale, may direct the order in which property, real or personal, shall be sold,
when such property consists of several known lots or parcels of articles which can be sold to advantage separately,
and the officer must follow such directions.

"If this is permissible, and it is being followed in all cases, why may not the same be done in the case of an attachment
when there are several properties that may be attached and, furthermore, their value is sufficient to answer for the amount of the
judgment?"

Section 24 of the General Banking Act (Republic Act No. 337) provides that no commercial bank shall make any loan or
discount on the security of shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or
purchase be necessary to prevent loss upon a debt previously contracted in good faith, and the stock so purchased or acquired, or
purchased or acquired for any other reason in the course of its operations, shall, within six months from the time of its purchase or
acquisition, be sold or disposed of at public or private sale, or in default thereof, a receiver shall be appointed to close up the
business of the bank in accordance with law."

ACB must have misread this provision. It is plain enough that there is a "specific" exception ("unless such security or
purchase be necessary to prevent loss upon a debt previously contracted in good faith") and a "general" exception ("or purchased or
acquired for any other reason in the course of its operations") mentioned therein. Thus, if and when ACB decide to purchase those
shares of stocks in the public auction sale definitely, this circumstance will not result in a violation of Section 24 of the General
Banking Act as it is allowed under the "general" exception. It was, therefore, a grave abuse of discretion on the part of the trial court
for having denied the motion filed by petitioners. A court of law is competent to control the acts of its officers in the execution of its
process and when an officer has been guilty of irregularities in connection therewith, to the injury of parties having an interest in the
action, it should correct such irregularities. In this case, the trial court should have cancelled the scheduled public auction sale
because the Deputy Sheriff defied the directive of petitioners to levy and sell first their shares of stocks.

LUZAN SIA v. COURT OF APPEALS and SECURITY BANK and TRUST COMPANY
G.R. No. 102970, 13 May 1993, THIRD DIVISION (Davide, Jr., J.)
A bank is liable for the damages to a stamp collection deposited in a safety deposit box caused by its failure to notify the depositor to
retrieve stamps promptly when floodwater inundated the room where the safety deposit was located, because it is a depositary and
a stipulation that it is not a depositary and is not liable for the contents of the safety deposit box is void for being contrary to law and
public policy

Luzan Sia (Sia) rented the Safety Deposit Box No. 54 of the Security B ank and Trust Company (Security Bank) at its
Binondo Branch wherein he placed his collection of stamps. The said safety deposit box leased by the plaintiff was at the bottom or
at the lowest level of the safety deposit boxes of the defendant bank. During the floods that took place in 1985 and 1986,
floodwater entered into the defendant bank's premises, seeped into the safety deposit box leased by the plaintiff and caused,
according to the plaintiff, damage to his stamps collection. The defendant bank rejected the plaintiff's claim for compensation for his
damaged stamps collection, so, the plaintiff instituted an action for damages against the defendant bank. Accordingly, pursuant to
their agreement the liability of the Bank by reason of the lease, is limited to the exercise of the diligence to prevent the opening
of the safe by any person other than the Renter, his authorized agent or legal representative. The Bank also alleged that it is not a
depository of the contents of the safe and it has neither the possession nor the control of the same. The Bank has no interest
whatsoever in said contents, except as herein provided, and it assumes absolutely no liability in connection therewith."

Security Bank alleged that the contract with Sia was one of lease and not of deposit and that the destruction of the
plaintiff's stamps collection was due to a calamity beyond obligation on its part to notify Sia about the floodwaters that inundated its
premises at Binondo branch which allegedly seeped into the safety deposit box leased to the plaintiff. The Trial Court ruled in favor
of Sia but the Court of Appeals absolved Security Bank from any liability. Hence, this petition.

ISSUE:

Whether or not Security Bank is liable

HELD:

Petition GRANTED.

In the recent case CA Agro-Industrial Development Corp. vs. Court of Appeals, this Court explicitly rejected the contention
that a contract for the use of a safety deposit box is a contract of lease. Nor did we 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 We declared, a special kind of deposit. The prevailing
rule in American 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 for hire and mutual benefit has been adopted in this
jurisdiction. Accordingly, Section 72 of the General Banking Act [R.A. 337, as amended] pertinently provides that in addition to the
operations specifically authorized elsewhere in this Act, banking institutions other than building and loan associations may perform
the following services: (a) Receive in custody funds, documents, and valuable objects, and rent safety deposit boxes for the
safequarding of such effects. Note that the primary function is still found within the parameters of a contract of deposit, i.e., the
receiving in custody of funds, documents and other valuable objects for safekeeping. The renting out of the safety deposit boxes
is not independent from, but related to or in conjunction with, this principal function. A contract of deposit may be entered into
orally or in writing (Art. 1969, Civil Code] and, pursuant to Article 1306 of the Civil Code, the parties thereto may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good
customs, public order or public policy. Accordingly, the depositary would be liable if, in performing its obligation, it is found guilty of
fraud, negligence, delay or contravention of the tenor of the agreement [Art. 1170, id.]. In the absence of any stipulation prescribing
the degree of diligence required, that of a good father of a family is to be observed [Art. 1173, id.]. Hence, any stipulation exempting
the depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay would be void
for being contrary to law and public policy. In the instant case, petitioner maintains that conditions 13 and l4 of the questioned
contract of lease of the safety deposit box, which read:

"13. The bank is a depositary of the contents of the safe and it has neither the possession nor control of the same.
"14. The bank has no interest whatsoever in said contents, except as herein expressly provided, and it assumes absolutely no liability in
connection therewith."

are void as they are contrary to law and public policy. We find Ourselves in agreement with this proposition for indeed, said provisions are
inconsistent with the respondent Bank's responsibility as a depositary under Section 72 (a) of the General Banking Act. Both exempt the latter
from any liability except as contemplated in condition 8 thereof which limits its duty to exercise reasonable diligence only with respect to who
shall be admitted to any rented safe, to wit:
"8. The Bank shall use due diligence that no unauthorized person shall be admitted to any rented safe and beyond this, the Bank will not be
responsible for the contents of any safe rented from it."

Furthermore condition 13 stands on a wrong premise and is contrary to the actual practice of the Bank. It is not correct to assert that the Bank
has neither the possession nor control of the contents of the box since in fact, the safety deposit box itself is located in its premises and is under
its absolute control; moreover, the respondent Bank keeps the guard key to the said box. As stated earlier, renters cannot open their respective
boxes unless the Bank cooperates by presenting and using this guard key. Clearly then, to the extent above stated, the foregoing conditions in
the contract in question are void and ineffective. It has been said that withith 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 define 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 ."

In short, in all other situations, it would seem that SBTC is not bound to exercise diligence of any kind at all. Assayed in the
light of Our aforementioned pronouncements in CA Agro-lndustrial Development Corp., it is not at all difficult to conclude that both
conditions No. 9 and No. 13 of the "Lease Agreement" covering the safety deposit box in question (Exhibits "A" and "1") must be
stricken down for being contrary to law and public policy as they are meant to exempt SBTC from any liability for damage, loss or
destruction of the contents of the safety deposit box which may arise from its own or its agents' fraud, negligence or delay.
Accordingly, SBTC cannot take refuge under the said conditions.

Public respondent further postulates that SBTC cannot be held responsible for the destruction or loss of the stamp
collection because the flooding was a fortuitous event and there was no showing of SBTC's participation in the aggravation of the
loss or injury.

Both the law and authority cited are clear enough and require no further elucidation. Unfortunately, however, the public
respondent failed to consider that in the instant case, as correctly held by the trial court, SBTC was guilty of negligence. The facts
constituting negligence are enumerated in the petition and have been summarized in thisponencia. SBTC's
negligence aggravated the injury or damage to the stamp collection. SBTC was aware of the floods of 1985 and 1986; it also knew
that the floodwaters inundated the room where Safe Deposit Box No. 54 was located. In view thereof, it should have lost no time
in notifying the petitioner 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 of 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 Article 1170 of the Civil Code, which reads that those who in the performance of their obligation are guilty
of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages, thus comes to the
succor of the petitioner. The destruction or loss of the stamp collection which was, in the language of the trial court, the "product of
27 years of patience and diligence"
21
caused the petitioner pecuniary loss; hence, he must be compensated therefor.

PHILIPPINE COMMERCIAL INTERNATIONAL BANK v. COURT OF APPEALS and RORY W. LIM
G.R. No. 97785, 29 March 1996, THIRD DIVISION (Francisco, J.)
A stipulation that a bank will not be liable for damages in case of error or delay in transmitting a telegraphic transfer is not
valid for being against public policy.

Rory Lim (Lim) delivered to his cousin Lim Ong Tian (Tian) PCIB Check No. JJJ 24212467 in the amount of P200,000.00 for
the purpose of obtaining a telegraphic transfer from petitioner PCIB in the same amount. The money was to be transferred to
Equitable Banking Corporation, Cagayan de Oro Branch, and credited to private respondents account at the said bank. Upon
purchase of the telegraphic transfer, Lim issued the corresponding receipt which contained the assailed provision that in case of
fund transfer, the undersigned hereby agrees that such transfer will be made without any responsibility on the part of the BANK, or
its correspondents, for any loss occasioned by errors, or delays in the transmission of message by telegraph or cable compani es or by
the correspondents or agencies, necessarily employed by this BANK in the transfer of this money, all risks for which are assumed by
the undersigned.

Subsequent to the purchase of the telegraphic transfer Lim in turn issued and delivered eight (8) Equitable Bank checks to
his suppliers in different amounts as payment for the merchandise that he obtained from them. When the checks were presented
for payment, five of them bounced for insufficiency of funds, while the remaining three were held overnight for lack of funds upon
presentment. Consequent to the dishonor of these checks, Equitable Bank charged and collected the total amount of P1, 100.00
from private respondent. The dishonor of the checks came to private respondents attention only on April 2, 1986, when Equitable
Bank notified him of the penalty charges and after receiving letters from his suppliers that his credit was being cut-off due to the
dishonor of the checks he issued.

Upon verification by private respondent with the Gingoog Branch Office of petitioner PCIB, it was confirmed that his
telegraphic transfer had not yet been remitted to Equitable Bank, Cagayan de Oro branch. In fact, petitioner PCIB made the
corresponding transfer of funds only on April 3, 1986, twenty one (21) days after the purchase of the telegraphic transfer on March
13,1986.

Aggrieved, Lim demanded from petitioner PCIB that he be compensated for the resulting damage that he suffered due to
petitioners failure to make the timely transfer of funds which led to the dishonor of his checks. In a letter, PCIBs Branch Manager
Rodolfo Villarmia acknowledged their failure to transmit the telegraphic transfer on time as a result of their mistake in using the
control number twice and the petitioner banks failure to request confirmation and act positively on the disposition of the said
telegraphic transfer. Yet, PCIB refused to heed Lims demand prompting the latter to file a complaint for damages with the RTC of
Gingoog City. The RTC held PCIB liable. This was affirmed by the Court of Appeals.

ISSUE:

Whether or not PCIB is liable.

HELD:

Petition GRANTED (PCIB is liable).

A contract of adhesion is defined as one in which one of the parties imposes a ready-made form of contract, which the
other party may accept or reject, but which the latter cannot modify. One party prepares the stipulation in the contract, while the
other party merely affixes his signature or his adhesion thereto,+ giving no room for negotiation and depriving the latter of the
opportunity to bargain on equal footing. Nevertheless, these types of contracts have been declared as binding as ordinary contracts,
the reason being that the party who adheres to the contract is free to reject it entirely. It is equally important to stress, though, that
the Court is not precluded from ruling out blind adherence to their terms if the attendant facts and circumstances show that they
should be ignored for being obviously too one-sided.

On previous occasions, it has been declared that a contract of adhesion may be struck down as void and unenforceable, for
being subversive to public policy, only when the weaker party is imposed upon in dealing with the dominant bargaining party and is
reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on equal footing. And when it
has been shown that the complainant is knowledgeable enough to have understood the terms and conditions of the contract, or one
whose stature is such that he is expected to be more prudent and cautious with respect to his transactions, such party cannot later
on be heard to complain for being ignorant or having been forced into merely consenting to the contract.

The factual backdrop of the instant case, however, militates against applying the aforestated pronouncements. That
petitioner failed to discharge its obligation to transmit private respondents telegraphic transfer on time in accordance with their
agreement is already a settled matter as the same is no longer disputed in this petition. Neither is the finding of respondent
Court of Appeals that petitioner acted fraudulently and in bad faith in the performance of its obligation, being contested by
petitioner. Perforce, we are bound by these factual considerations.

Having established that petitioner acted fraudulently and in bad faith, we find it implausible to absolve petitioner from its
wrongful acts on account of the assailed provision exempting it from any liability. In Geraldez vs. Court of Appeals, it was
unequivocally declared that notwithstanding the enforceability of a contractual limitation, responsibility arising from a fraudulent
act cannot be exculpated because the same is contrary to public policy. Indeed, Article 21 of the Civil Code is quite explicit in
providing that *a]ny person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs or
public policy shall compensate the latter for the damage. Freedom of contract is subject to the limitation that the agreement
must not be against public policy and any agreement or contract made in violation of this rule is not binding and will not be
enforced. The prohibition against this type of contractual stipulation is moreover treated by law as void which may not be ratified or
waived by a contracting party. Article 1409 of the Civil Code states:

ART. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;
xxx xxx xxx
These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

Undoubtedly, the services being offered by a banking institution like petitioner are imbued with public interest. The use of
telegraphic transfers have now become commonplace among businessmen because it facilitates commercial transactions. Any
attempt to completely exempt one of the contracting parties from any liability in case of loss notwithstanding its bad faith, fault or
negligence, as in the instant case, cannot be sanctioned for being inimical to public interest and therefore contrary to public policy.
Resultingly, there being no dispute that petitioner acted fraudulently and in bad faith, the award of moral and exemplary damages
were proper.

TEODORO BAAS,

C. G. DIZON CONSTRUCTION, INC., and CENEN DIZON, v.
ASIA PACIFIC FINANCE CORPORATION
G.R. No. 128703., 18 October, 2000, SECOND DIVISION (Bellosillo, J.)
Clearly, the transaction between Baas, et al and ASIA PACIFIC was one involving not a loan but purchase of receivables at a
discount, well within the purview of "investing, reinvesting or trading in securities" which an investment company, like ASIA PACIFIC,
is authorized to perform and does not constitute a violation of the General Banking Act.

Baas executed a Promissory Note in favor of C. G. Dizon Construction whereby for value received he promised to pay to the
order of C. G. Dizon Construction the sum of P390,000.00 in installments of "P32,500.00 every month. Later, C. G. Dizon
Construction endorsed with recourse the Promissory Note to ASIA PACIFIC, and to secure payment thereof, C. G. Dizon Construction,
through its corporate officers, executed a Deed of Chattel Mortgage covering three (3) heavy equipment units of Caterpillar
Bulldozer Crawler Tractors in favor of ASIA PACIFIC. Dizon executed a Continuing Undertaking wherein he bound himself to pay the
obligation jointly and severally with C. G. Dizon Construction. However, C. G. Dizon Construction defaulted in the payment of the
remaining installments, prompting ASIA PACIFIC to send a Statement of Account to Cenen Dizon for the unpaid balance
of P267,737.50. As the demand was unheeded, ASIA PACIFIC sued Teodoro Baas, C. G. Dizon Construction and Cenen Dizon.

Baas, et al. admitted the genuineness and due execution of the Promissory Note, the Deed of Chattel Mortgage and
the Continuing Undertaking, they nevertheless maintained that these documents were never intended by the parties to be legal,
valid and binding but a mere subterfuge to conceal the loan of P390,000.00 with usurious interests. Moreover, Baas claimed that
since ASIA PACIFIC could not directly engage in banking business, it proposed to them a scheme wherein plaintiff ASIA PACIFIC could
extend a loan to them without violating banking laws: first, Cenen Dizon would secure a promissory note from Teodoro Baas with a
face value of P390,000.00 payable in installments; second, ASIA PACIFIC would then make it appear that the promissory note was
sold to it by Cenen Dizon with the 14% usurious interest on the loan or P54,000.00 discounted and collected in advance by ASIA
PACIFIC; and, lastly, Cenen Dizon would provide sufficient collateral to answer for the loan in case of default in payment and execute
a continuing guaranty to assure continuous and prompt payment of the loan. Baas, et al. also alleged that out of the loan
of P390,000.00 Baas, et al. actually received only P329,185.00 after ASIA PACIFIC deducted the discounted interest, service
handling charges, insurance premium, registration and notarial fees.

Dizon informed ASIA PACIFIC that he would be delayed in meeting his monthly amortization on account of business reverses.
Dizon made good his promise and tendered payment to ASIA PACIFIC in an amount equivalent to two (2) monthly amortizations. But
ASIA PACIFIC attempted to impose a 3% interest for every month of delay, which Dizon flatly refused to pay for being usurious.

Afterwards, ASIA PACIFIC allegedly made a verbal proposal to Dizon to surrender to it the ownership of the two (2) bulldozer
crawler tractors and, in turn, Dizon would treat Asia Pacific's account as closed and the loan fully paid. Cenen supposedly agreed and
accepted the offer. Baas, et al. averred that the value of the bulldozer crawler tractors was more than adequate to cover their
obligation to ASIA PACIFIC.

The RTC issued a writ of replevin against C.G. Dizon for the surrender of the bulldozer crawler tractors subject of the Deed of
Chattel Mortgage but out of the three (3) bulldozer crawler tractors, only two (2) were actually turned over by Baas, et al. The
mortgage was foreclosed and both units were sold both to ASIA PACIFIC as the highest bidder.

Subsequently, the RTC ruled in favor of ASIA PACIFIC holding Baas, et al.jointly and severally liable for the unpaid balance of
the obligation under the Promissory Note in the amount of P87,637.50 at 14% interest per annum, and attorney's fees. CA affirmed
the same.

ISSUE:

Whether or not the disputed transaction between Baas, et al and ASIA PACIFIC violated banking laws, hence, null and void

HELD:

Petition DENIED.

Baas, et al insist that ASIA PACIFIC was organized as an investment house which could not engage in the lending of funds
obtained from the public through receipt of deposits. The disputed Promissory Note, Deed of Chattel Mortgage and Continuing
Undertaking were not intended to be valid and binding on the parties as they were merely devices to conceal their real intention
which was to enter into a contract of loan in violation of banking laws.

The Court rejects the argument. 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. As defined in Sec. 2, par. (a), of
the Revised Securities Act, securities "shall include x x x x commercial papers evidencing indebtedness of any person, financial or
non-financial entity, irrespective of maturity, issued, endorsed, sold, transferred or in any manner conveyed to another with or
without recourse, such aspromissory notes x x x x"

Clearly, the transaction between Baas, et al and ASIA PACIFIC was one involving not a loan but purchase of receivables at a
discount, well within the purview of "investing, reinvesting or trading in securities" which an investment company, like ASIA
PACIFIC, is authorized to perform and does not constitute a violation of the General Banking Act. Moreover, Sec. 2 of the General
Banking Act provides in part -
Sec. 2. Only entities duly authorized by the Monetary Board of the Central Bank may engage in the lending of funds obtained from the public
through the receipt of deposits of any kind, and all entities regularly conducting such operations shall be considered as banking institutions and
shall be subject to the provisions of this Act, of the Central Bank Act, and of other pertinent laws.

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. But here, the funds supposedly "lent" to petitioners have not been shown
to have been obtained from the public by way of deposits, hence, the inapplicability of banking laws.

On Baas, et al's submission that the true intention of the parties was to enter into a contract of loan, we have examined
the Promissory Note and failed to discern anything therein that would support such theory. On the contrary, we find the terms and
conditions of the instrument clear, free from any ambiguity, and expressive of the real intent and agreement of the parties.

GREGORIO H. REYES and CONSUELO PUYAT-REYES v. THE HON. COURT OF APPEALS and
FAR EAST BANK AND TRUST COMPANY
G.R. No. 118492, 15 August 2001, SECOND DIVISION (De Leon, J.)
The degree of diligence required of banks, is more than that of a good father of a family where the fiduciary 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 fiduciary 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 fiduciary relationship with their depositors.

In view of the 20
th
Asian Racing Conference, the Philippine Racing Club, Inc. (PRCI) sent four (4) delegates to the said
conference. Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer, and director of PRCI, sent Godofredo
Reyes, the clubs chief cashier, to Far East Bank to apply for a foreign exchange demand draft in Australian dollars.

Godofredo went to Far East Banks Buendia Branch to apply for a demand draft in the amount AU$1,610.00 payable to the
order of the 20
th
Asian Racing Conference Secretariat of Sydney, Australia. Godofredo was attended to by Far East Banks assistant
cashier, Mr. Yasis, who at first denied the application for the reason that Far East Bank bank did not have an Australian dollar
account in any bank in Sydney. Godofredo asked if there could be a way for Far East Bank to accommodate PRCIs urgent need to
remit Australian dollars to Sydney. Yasis then informed Godofredo of a roundabout way of effecting the requested remittance to
Sydney thus: the Far East Bank would draw a demand draft against Westpac Bank in Sydney, Australia (Westpac-Sydney for brevity)
and have the latter reimburse itself from the U.S. dollar account of the Far East Banki n Westpac Bank in New York, U.S.A. This
arrangement has been customarily resorted to since the 1960s and the procedure has proven to be problem-free. PRCI and the
Gregorio H. Reyes, acting through Godofredo, agreed to this arrangement or approach in order to effect the urgent transfer of
Australian dollars payable to the Secretariat of the 20
th
Asian Racing Conference.

Far East Bank approved the said application of PRCI and issued Foreign Exchange Demand Draft in the sum applied for payable
to the order of the 20
th
Asian Racing Conference Secretariat of Sydney, Australia, and addressed to Westpac-Sydney as the drawee
bank.

Upon due presentment of the foreign exchange demand draft, the same was dishonored, with the notice of dishonor stating
the following: xxx No account held with Westpac. \Westpac-New York sent a cable to Far East Bank informing the latter that its
dollar account in the sum of AU$1,610.00 was debited. Upon its second presentment for payment, the demand draft was again
dishonored by Westpac-Sydney for the same reason, that is, that Far East Bank has no deposit dollar account with the drawee
Westpac-Sydney.

Spouses Gregorio H. Reyes and Consuelo Puyat-Reyes left for Australia to attend the said racing conference. When petitioner
Gregorio H. Reyes arrived, he went directly to the lobby of Hotel Regent Sydney to register as a conference delegate. At the
registration desk, in the presence of other delegates from various member countries, he was told by a lady member of the
conference secretariat that he could not register because the foreign exchange demand draft for his registration fee had been
dishonored for the second time. It was only two (2) days later, or on September 20, 1988, that he was given the dishonored demand
draft and a covering letter. It was then that he actually paid in cash the registration fees as he had earlier promised.

Consuelo Puyat-Reyes arrived in Sydney. She too was embarrassed and humiliated at the registration desk of the conference
secretariat. At the time the incident took place, Consuelo Puyat-Reyes was a member of the House of Representatives representing
the lone Congressional District of Makati, Metro Manila. She has been an officer of the Manila Banking Corporation

Spouses filed a complaint for damages against Far East Bank due to the dishonor of the said foreign exchange demand draft
issued by Far East Bank. The RTC favored Far East Bank. The CA affirmed the decision.

ISSUE:

Whether or not the standard of diligence of an ordinary prudent person was validly applied

HELD:

Petition GRANTED.

Spouses Reyes are estopped

The courts a quo found that Far East Bank did not misrepresent that it was maintaining a deposit account with Westpac-
Sydney. Far East Banks assistant cashier explained to Godofredo Reyes, representating PRCI and Gregorio H. Reyes, how the
transfer of Australian dollars would be effected through Westpac-New York where the Far East Bank has a dollar account to
Westpac-Sydney where the subject foreign exchange demand draft (FXDD No. 209968) could be encashed by the payee, the
20
th
Asian Racing Conference Secretatriat. PRCI and its Vice-President for finance, petitioner Gregorio H. Reyes, through their said
representative, agreed to that arrangement or procedure. In other words, Spouses Reyes are estopped from denying the said
arrangement or procedure. Similar arrangements have been a long standing practice in banking to facilitate international
commercial transactions. In fact, the SWIFT cable message sent by respondent bank to the drawee bank, Westpac-Sydney, stated
that it may claim reimbursement from its New York branch, Westpac-New York where respondent bank has a deposit dollar account.

The facts as found by the courts a quo show that Far East Bank did not cause an erroneous transmittal of its SWIFT cable
message to Westpac-Sydney. It was the erroneous decoding of the cable message on the part of Westpac-Sydney that caused the
dishonor of the subject foreign exchange demand draft. An employee of Westpac-Sydney in Sydney, Australia mistakenly read the
printed figures in the SWIFT cable message of respondent bank as MT799 instead of as MT199. As a result, Westpac-Sydney
construed the said cable message as a format for a letter of credit, and not for a demand draft. The appellate court correctly found
that the figure before 99 can still be distinctly seen as a number 1 and not number 7. Indeed, the line of a 7 is i n a slanting
position while the line of a 1 is in a horizontal position. Thus, the number 1 in MT199 cannot be construed as 7

Degree of diligence required

With these established facts, we now determine the degree of diligence that banks are required to exert in their commercial
dealings. The degree of diligence required of banks, is more than that of a good father of a family where the fiduciary 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 fiduciary
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 fiduciary relationship with their depositors.

Considering the foregoing, Far East Bank was not required to exert more than the diligence of a good father of a family in
regard to the sale and issuance of the subject foreign exchange demand draft. The case at bar does not involve the handling of
petitioners deposit, if any, with the respondent bank. Instead, the relationship involved was that of a buyer and seller, that is,
between the respondent bank as the seller of the subject foreign exchange demand draft, and PRCI as the buyer of the same, with
the 20
th
Asian Racing Conference Secretariat in Sydney, Australia as the payee thereof. As earlier mentioned, the said foreign
exchange demand draft was intended for the payment of the registration fees of the petitioners as delegates of the PRCI to the
20
th
Asian Racing Conference in Sydney.

The evidence shows that the Far East Bank did everything within its power to prevent the dishonor of the subject foreign
exchange demand draft. The erroneous reading of its cable message to Westpac-Sydney by an employee of the latter could not
have been foreseen by Far East Bank. Being unaware that its employee erroneously read the said cable message, Westpac-Sydney
merely stated that the respondent bank has no deposit account with it to cover for the amount of AU$1610.00 indicated in the
foreign exchange demand draft. Thus, the Far East Bank had the impression that Westpac-New York had not yet made available the
amount for reimbursement to Westpac-Sydney despite the fact that respondent bank has a sufficient deposit dollar account with
Westpac-New York. That was the reason why the respondent bank had to re-confirm and repeatedly notify Westpac-New York to
debit its (respondent banks) deposit dollar account with it and to transfer or credit the corresponding amount to Westpac-Sydney
to cover the amount of the said demand draft.

THE CONSOLIDATED BANK and TRUST CORPORATION vs.
COURT OF APPEALS and L.C. DIAZ and COMPANY, CPAs
G.R. No. 138569, 11 September 2003, FIRST DIVISION (Carpio, J.)
The bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary
nature of their relationship. This fiduciary relationship means that the banks obligation to observe high standards of integrity and
performance is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking
requires banks to assume a degree of diligence higher than that of a good father of a family.

Solidbank is a domestic banking corporation organized and existing under Philippine laws. L.C. Diaz and Company,
CPAs (L.C. Diaz), is a professional partnership engaged in the practice of accounting.

L.C. Diaz opened a savings account with Solidbank. L.C. Diaz through its cashier, Mercedes Macaraya filled up a savings (cash)
deposit slip for P990 and a savings (checks) deposit slip for P50. Macaraya instructed the messenger of L.C. Diaz, Ismael Calapre to
deposit the money with Solidbank. Macaraya also gave Calapre the Solidbank passbook.

Calapre went to Solidbank and presented to Teller No. 6 the two deposit slips and the passbook. The teller acknowledged
receipt of the deposit by returning to Calapre the duplicate copies of the two deposit slips. Since the transaction took time and
Calapre had to make another deposit for L.C. Diaz with Allied Bank, he left the passbook with Solidbank. Calapre then went to Allied
Bank. When Calapre returned to Solidbank to retrieve the passbook, Teller No. 6 informed him that somebody got the passbook.
Calapre went back to L.C. Diaz and reported the incident to Macaraya. When Macaraya asked Teller No. 6 if Calapre got the
passbook, Teller No. 6 answered that someone shorter than Calapre got the passbook. Calapre was then standing beside Macaraya.

Teller No. 6 handed to Macaraya a deposit slip for the deposit of a check for P90,000 drawn on Philippine Banking Corporation
(PBC). This PBC check of L.C. Diaz was a check that it had long closed. PBC subsequently dishonored the check because of
insufficient funds and because the signature in the check differed from PBCs specimen signature. Failing to get back the passbook,
Macaraya went back to her office and reported the matter to the Personnel Manager of L.C. Diaz, Emmanuel Alvarez.

L.C. Diaz through its Chief Executive Officer, Luis C. Diaz (Diaz), called up Solidbank to stop any transaction using the same
passbook until L.C. Diaz could open a new account. On the same day, Diaz formally wrote Solidbank to make the same request. It
was also on the same day that L.C. Diaz learned of the unauthorized withdrawal of P300,000 from its savings account. The
withdrawal slip for the P300,000 bore the signatures of the authorized signatories of L.C. Diaz, namely Diaz and Rustico L. Murillo.
The signatories, however, denied signing the withdrawal slip. A certain Noel Tamayo received the P300,000.

L.C. Diaz charged its messenger, Emerano Ilagan (Ilagan) and one Roscon Verdazola with Estafa through Falsification of
Commercial Document. The Regional Trial Court of Manila dismissed the criminal case. On the other hand, L.C. Diaz through its
counsel demanded from Solidbank the return of its money. Solidbank refused. Thus, L.C. Diaz filed a Complaint for Recovery of a
Sum of Money against Solidbank with the RTC. The RTC absolved Solidbank. CA reversed the decision

ISSUE:

Whether or not Solidbank should be held liable

HELD:

Petition GRANTED.

Solidbanks Fiduciary Duty under the Law

We hold that Solidbank is liable for breach of contract due to negligence, or culpa contractual.
The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan. 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.

The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (RA
8791) declares that the State recognizes the fiduciary nature of banking that requires high standards of integrity and
performance. This new provision in the general banking law, introduced in 2000, is a statutory affirmation of Supreme Court
decisions, starting with the 1990 case of Simex International v. Court of Appeals, holding that the bank is under obligation to treat
the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.

This fiduciary relationship means that the banks obligation to observe high standards of integrity and performance is
deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks
to assume a degree of diligence higher than that of a good father of a family. Article 1172 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.Section 2 of RA 8791 prescribes the statutory diligence required from banks that banks must observe high
standards of integrity and performance in servicing their depositors. Although RA 8791 took effect almost nine years after the
unauthorized withdrawal of the P300,000 from L.C. Diazs savings account, jurisprudence at the time of the withdrawal already
imposed on banks the same high standard of diligence required under RA No. 8791.

However, the fiduciary 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. 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 fiduciary 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.

Solidbanks Breach of its Contractual Obligation

Article 1172 of the Civil Code provides that responsibility arising from negligence in the performance of every kind of
obligation is demandable. For breach of the savings deposit agreement due to negligence, or culpa contractual, the bank is liable to
its depositor.

Calapre left the passbook with Solidbank because the transaction took time and he had to go to Allied Bank for another
transaction. The passbook was still in the hands of the employees of Solidbank for the processing of the deposit when Calapre left
Solidbank. Solidbanks rules on savings account require that the deposit book should be carefully guarded by the depositor and
kept under lock and key, if possible. When the passbook is in the possession of Solidbanks tellers during withdrawals, the law
imposes on Solidbank and its tellers an even higher degree of diligence in safeguarding the passbook.

Likewise, Solidbanks 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. For failing to
return the passbook to Calapre, the authorized representative of L.C. Diaz, Solidbank and Teller No. 6 presumptively failed to
observe such high degree of diligence in safeguarding the passbook, and in insuring its return to the party authorized to receive the
same.

Proximate Cause of the Unauthorized Withdrawal

Proximate cause is that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause,
produces the injury and without which the result would not have occurred.
[26]
Proximate cause is determined by the facts of each
case upon mixed considerations of logic, common sense, policy and precedent.

L.C. Diaz was not at fault that the passbook landed in the hands of the impostor. Solidbank was in possession of the
passbook while it was processing the deposit. After completion of the transaction, Solidbank had the contractual obligation to
return the passbook only to Calapre, the authorized representative of L.C. Diaz. Solidbank failed to fulfill its contractual obligation
because it gave the passbook to another person.

Solidbanks failure to return the passbook to Calapre made possible the withdrawal of the P300,000 by the impostor who took
possession of the passbook. Under Solidbanks rules on savings account, mere possession of the passbook raises the presumption of
ownership. It was the negligent act of Solidbanks Teller No. 6 that gave the impostor presumptive ownership of the passbook. Had
the passbook not fallen into the hands of the impostor, the loss of P300,000 would not have happened. Thus, the proximate cause of
the unauthorized withdrawal was Solidbanks negligence in not returning the passbook to Calapre.

Doctrine of last clear chance

The doctrine of last clear chance states that where both parties are negligent but the negligent act of one is appreciably later
than that of the other, or where it is impossible to determine whose fault or negligence caused the loss, the one who had the last
clear opportunity to avoid the loss but failed to do so, is chargeable with the loss. Stated differently, the antecedent negligence of
the plaintiff does not preclude him from recovering damages caused by the supervening negligence of the defendant, who had the
last fair chance to prevent the impending harm by the exercise of due diligence.

We do not apply the doctrine of last clear chance to the present case. Solidbank is liable for breach of contract due to
negligence in the performance of its contractual obligation to L.C. Diaz. This is a case of culpa contractual, where neither the
contributory negligence of the plaintiff nor his last clear chance to avoid the loss, would exonerate the defendant from liability.
Such contributory negligence or last clear chance by the plaintiff merely serves to reduce the recovery of damages by the plaintiff
but does not exculpate the defendant from his breach of contract.

CITIBANK, N.A., v. SPS. LUIS and CARMELITA CABAMONGAN and their sons L
UISCABAMONGAN, JR. and LITO CABAMONGAN
G.R. No. 146918, 2 May 2006, FIRST DIVISION (Austria-Martinez, J.)
The Court has repeatedly emphasized that, since the banking business is impressed with public interest, of paramount
importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence is expected, and
high standards of integrity and performance are even required, of it. By the nature of its functions, a bank is "under obligation to
treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship."

Spouses Luis and Carmelita Cabamongan opened a joint "and/or" foreign currency time deposit in trust for their sons Luis,
Jr. and Lito at the Citibank, N.A., Makati branch in the amount of $55,216.69 for a term of 182 days or until February 14, 1994, at
2.5625 per cent interest per annum. Prior to maturity, a person claiming to be Carmelita went to the Makati branch and pre-
terminated the said foreign currency time deposit by presenting a passport, a Bank of America Versatele Card, an ATM card and a
Mabuhay Credit Card. She filled up the necessary forms for pre-termination of deposits with the assistance of Account Officer Yeye
San Pedro. While the transaction was being processed, she was casually interviewed by San Pedro about her personal circumstances
and investment plans. Since the said person failed to surrender the original Certificate of Deposit, she had to execute a notarized
release and waiver document in favor of Citibank, pursuant to Citibank's internal procedure, before the money was released to her.
The release and waiver document was not notarized on that same day but the money was nonetheless given to the person
withdrawing.

After said person left, San Pedro realized that she left behind an identification card. Thus, San Pedro called up Carmelita's
listed address on the same day to have the card picked up. Marites, the wife of Lito, received San Pedro's call and was stunned by
the news that Carmelita preterminated her foreign currency time deposit because Carmelita was in the United States at that
time. The Cabamongan spouses work and reside in California. Marites made an overseas call to Carmelita to inform her about what
happened. The Cabamongan spouses were shocked at the news. It seems that an unidentified person broke in at the couple's
residence. It was only then that the Cabamongan spouses realized that their passports and bank deposit certificates were lost.

Through various overseas calls, the Cabamongan spouses informed Citibank, thru San Pedro, that Carmelita was in the
United States and did not preterminate their deposit and that the person who did so was an impostor who could have also been
involved in the break-in of their California residence. San Pedro told the spouses to submit the necessary documents to support their
claim but Citibank concluded nonetheless that Carmelita indeed preterminated her deposit.

Cabamongan spouses, made a formal demand upon Citibank for payment of their preterminated deposit in the amount of
$55,216.69 with legal interests. Citibank refused the Cabamongan spouses' demand for payment, asserting that the subject deposit
was released to Carmelita upon proper identification and verification.

Cabamongan spouses filed a complaint against Citibank before the Regional Trial Court for Specific Performance with
Damages. Citibank insists that it was not negligent of its duties since the subject deposit was released to Carmelita only upon proper
identification and verification. The RTC rendered a decision in favor of the Cabamongan spouses and against Citibank. The CA
affirmed the RTC.

ISSUE:

Whether or not Citibank should be held liable

HELD:

Petition GRANTED.

The Court has repeatedly emphasized that, since the banking business is impressed with public interest, of paramount
importance thereto is the trust and confidence of the public in general. Consequently, the highest degree of diligence is
expected, and high standards of integrity and performance are even required, of it. By the nature of its functions, a bank is "under
obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their
relationship."

In this case, it has been sufficiently shown that the signatures of Carmelita in the forms for pretermination of deposits
are forgeries. Citibank, with its signature verification procedure, failed to detect the forgery. Its negligence consisted in the
omission of that degree of diligence required of banks. The Court has held that a bank is "bound to know the signatures of its
customers; and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot ordinarily
charge the amount so paid to the account of the depositor whose name was forged." Such principle equally applies here.

Citibank cannot label its negligence as mere mistake or human error. Banks handle daily transactions involving millions of
pesos. By the very nature of their works the degree of responsibility, care and trustworthiness expected of their employees and
officials 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.

The Court agrees with the observation of the CA that Citibank, thru Account Officer San Pedro, openly courted disaster
when despite noticing discrepancies in the signature and photograph of the person claiming to be Carmelita and the failure to
surrender the original certificate of time deposit, the pretermination of the account was allowed. Even the waiver document was not
notarized, a procedure meant to protect the bank. For not observing the degree of diligence required of banking institutions, whose
business is impressed with public interest, Citibank is liable for damages.

BANCO DE ORO-EPCI, INC. v.
JAPRL DEVELOPMENT CORPORATION, RAPID FORMING CORPORATION AND JOSE U. AROLLADO
G.R. No. 179901, 14 April 2008, FIRST DIVISION (Corona, J.)
A bank may demand from its credit applicants a statement of their assets and liabilities and of their income and
expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the
bank to properly evaluate the credit application which includes the corresponding financial 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 credit accommodation granted on the basis of said statements and shall have the right to demand
immediate repayment or liquidation of the obligation.

After evaluating the financial statements of JAPRL Development Corporation (JAPRL) for fiscal years 1998, 1999 and 2000,
Banco de Oro-EPCI, Inc. extended credit facilities to it amounting to P230,000,000. Rapid Forming Corporation (RFC) and Jose U.
Arollado acted as JAPRL's sureties. Despite its seemingly strong financial position, JAPRL defaulted in the payment of four trust
receipts soon after the approval of its loan.

BDO later learned from MRM Management, JAPRL's financial adviser, that JAPRL had
altered and falsified its financial statements. It allegedly bloated its sales revenues to post a big income from operations for the
concerned fiscal years to project itself as a viable investment.

Citing relevant provisions of the Trust Receipt Agreement, BDO demanded immediate payment of JAPRL's outstanding
obligations amounting to P194,493,388.98.

SP Proc. No. Q-03-064

JAPRL (and its subsidiary, RFC) filed a petition for rehabilitation in the Regional Trial Court (RTC). It disclosed that it had
been experiencing a decline in sales for the three preceding years and a staggering loss in 2002. Because the petition was sufficient
in form and substance, a stay order was. However, the proposed rehabilitation plan for JAPRL and RFC was eventually rejected.

Civil Case No. 03-991

Because JAPRL ignored its demand for payment, BDO filed a complaint for sum of money with an application for the
issuance of a writ of preliminary attachment against respondents in the RTC. BDO essentially asserted that JAPRL was guilty of fraud
because it (JAPRL) altered and falsified its financial statements. The RTC subsequently denied the application.

ISSUE:

Whether or not BDO may annul the credit accommodation in view of the fraud committed by respondents

HELD:

Petition GRANTED.

Respondents abused procedural technicalities (albeit unsuccessfully) for the sole purpose of preventing, or at least
delaying, the collection of their legitimate obligations. Their reprehensible scheme impeded the speedy dispensation of justice.
More importantly, however, considering the amount involved, respondents utterly disregarded the significance of a stable and
efficient banking system to the national economy.

Banks are entities engaged in the lending of funds obtained through deposits

from the public. They borrow the public's
excess money (i.e., deposits) and lend out the same. Banks therefore redistribute wealth in the economy by channeling idle savings
to profitable investments.

Banks operate (and earn income) by extending credit facilities financed primarily by deposits from the public. They
plough back the bulk of said deposits into the economy in the form of loans. Since banks deal with the public's money, their
viability depends largely on their ability to return those deposits on demand. For this reason, banking is undeniably imbued with
public interest. Consequently, much importance is given to sound lending practices and good corporate governance.

In this case, BDO alleged that JAPRL fraudulently altered and falsified its financial statements in order to obtain its credit
facilities. The protective remedy of rehabilitation was never intended to be a refuge of a debtor guilty of fraud.

The Makati RTC should proceed to hear Civil Case No. 03-991 against the three respondents guided by Section 40 of the
General Banking Law which states:
Section 40. 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 fulfilling his commitments to the bank.

Towards this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their
income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to
enable the bank to properly evaluate the credit application which includes the corresponding financial 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 credit accommodation granted on the basis of said statements and shall have the right to
demand immediate repayment or liquidation of the obligation.

IPPINE SAVINGS BANK v. CHOWKING FOOD CORPORATION
G.R. No. 177526, 4 July 2008, THIRD DIVISION (Reyes, R.T., J.)
PS Bank failed to prove that it has observed the due diligence required of banks under the law. Contrary to PS Bank's view,
its negligence is the proximate cause of respondent's loss. It cannot be over emphasized that the banking business is impressed with
public interest. Of paramount importance is the trust and confidence of the public in general in the banking industry. Consequently,
the diligence required of banks is more than that of a Roman pater familias or a good father of a family. The highest degree of
diligence is expected.

Joe Kuan Food Corporation issued in favor of Chowking five (5) PSBank checks. The total amount of the subject checks
reached P556,981.86. Chowking's acting accounting manager, Rino T. Manzano, endorsed and encashed said checks with the Bustos
branch of respondent PSBank. All the 5 checks were honored by defendant Santos, even with only the endorsement of Manzano
approving them. The signatures of the other authorized officers of Chowking were absent in the 5 checks, contrary to usual banking
practice. Unexpectedly, Manzano absconded with and misappropriated the check proceeds.

When Chowking found out Manzano's scheme, it demanded reimbursement from PSBank. When PSBank refused to pay,
Chowking filed a complaint

for a sum of money with damages before the RTC. Likewise impleaded were PSBank's president, Antonio
S. Abacan, and Bustos branch head, Santos.

However, summonses were not served upon third party defendant Manzano.
Meanwhile, PS Bank caused the service of its summons on the cross-claim and third party complaints through publication. On its
subsequent motion, Manzano was declared in default.

In its Answer, PS Bank did not controvert the foregoing facts, but denied liability to Chowking for the encashed checks. PS Bank
maintained it exercised due diligence in the supervision of all its employees. It even dismissed defendant Santos after she was found
guilty of negligence in the performance of her duties. On the other hand, Santos denied that she had been negligent in her job. She
averred that she merely followed the bank's practice of honoring Chowking's checks even if accompanied only by Manzano's
endorsement.

PS Bank pointed out that the proximate cause of respondent's loss was its own negligence. The RTC favored Chowking.
Upon Motion for reconsideration, it favored Chowking. The Court of Appeals, on the other hand, both petitioner PSBank and Santos
should bear the loss.

ISSUE:

Whether or not PS Bank should be held liable

HELD:

Petition GRANTED.

The doctrine of equitable estoppel or estoppel in pais finds no application in the present case.

Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person relying thereon. A party may not go back on his own acts and representati ons
to the prejudice of the other party who relied upon them. In the law of evidence, whenever a party has, by his own declaration, act,
or omission, intentionally and deliberately led another to believe a particular thing true, to act upon such belief, he cannot, in any
litigation arising out of such declaration, act, or omission, be permitted to falsify it.

In estoppel by pais, as related to the party sought to be estopped, it is necessary that there be a concurrence of the
following requisites:
(a) conduct amounting to false representation or concealment of material facts or at least calculated to convey the
impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert;
(b) intent, or at least expectation that this conduct shall be acted upon, or at least influenced by the other party; and
(c) knowledge, actual or constructive of the actual facts.

Estoppel may vary somewhat in definition, but all authorities agree that a party invoking the doctrine must have been
misled to one's prejudice. That is the final and, in reality, most important of the elements of equitable estoppel. It is this element
that is lacking here.

Chowking did not make any false representation or concealment of material facts in relation to the encashments of the
previous checks. As adverted to earlier, Chowking may have allowed Manzano to previously encash its checks, but it has always
been accompanied with the endorsements of the other authorized signatories. Chowking did not allow petitioner to have its checks
encashed without the signature of all of its authorized signatories.

As related to the party claiming the estoppel, the essential elements are
(1) lack of knowledge and of the means of knowledge of the truth as the facts in question;
(2) reliance, in good faith, upon the conduct and statements of the party to be estopped;
(3) action or inaction based thereon of such character as to change the position or status of the party claiming the estoppel,
to his injury, detriment or prejudice.

Here, the first two elements are wanting. PS Bank has knowledge of the truth and the means to it as to the proper
endorsements necessary in encashing Chowking's checks. Chowking has an account with PS Bank and, as such, is privy to the
proper signatories to endorse respondent's checks.

Neither can petitioner claim good faith.

PS Bank failed to prove it observed the due diligence required

PS Bank failed to prove that it has observed the due diligence required of banks under the law. Contrary to PS Bank's
view, its negligence is the proximate cause of respondent's loss. It cannot be over emphasized that the banking business is
impressed with public interest. Of paramount importance is the trust and confidence of the public in general in the banking
industry. Consequently, the diligence required of banks is more than that of a Roman pater familias or a good father of a family.
The highest degree of diligence is expected.

In its declaration of policy, the General Banking Law of 2000 requires of banks the highest standards of integrity and
performance. Needless to say, a bank is "under obligation to treat the accounts of its depositors with meticulous care. The
fiduciary nature of the relationship between the bank and the depositors must always be of paramount concern.

Proximate cause is determined by the facts of the case. It is that cause which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred.

Measured
by the foregoing yardstick, the proximate cause of the loss is not respondent's alleged negligence in allowing Manzano to take hold
and encash respondent's checks. The proximate cause is petitioner's own negligence in the supervision of its employees when i t
overlooked the irregular practice of encashing checks even without the requisite endorsements.

PHILIPPINE NATIONAL BANK, v. ERLANDO T. RODRIGUEZ AND NORMA RODRIGUEZ
G.R. No. 170325, 26 September 2008, THIRD DIVISION (Reyes, R.T., J.)
The bank failed to satisfy a requisite condition of a fictitious-payee situation - that the maker of the check intended for the
payee to have no interest in the transaction. In a checking transaction, the drawee bank has the duty to verify the genuineness of the
signature of the drawer and to pay the check strictly in accordance with the drawer's instructions, i.e., to the named payee in the
check. It should charge to the drawer's accounts only the payables authorized by the latter. Otherwise, the drawee will be violating
the instructions of the drawer and it shall be liable for the amount charged to the drawer's account.

Spouses Erlando and Norma Rodriguez were clients of petitioner Philippine National Bank (PNB), Amelia Avenue, Cebu
City. Spouses Rodriguez maintained savings and demand/checking. Spouses Rodriguez were engaged in the informal lending
business. In line with their business, Spouses Rodriguez had a discounting arrangement with the Philnabank Employees Savings and
Loan Association (PEMSLA), an association of PNB employees. Naturally, PEMSLA was likewise a client of PNB Amelia Avenue
Branch. The association maintained current and savings accounts with PNB.

PEMSLA regularly granted loans to its members. Spouses Rodriguez would rediscount the postdated checks issued to
members whenever the association was short of funds. As was customary, Spouses Rodriguez would replace the postdated checks
with their own checks issued in the name of the members.

It was PEMSLA's policy not to approve applications for loans of members with outstanding debts. To subvert this policy,
some PEMSLA officers devised a scheme to obtain additional loans despite their outstanding loan accounts. They took out loans in
the names of unknowing members, without the knowledge or consent of the latter. The officers carried this out by forging the
indorsement of the named payees in the checks.

In return, Spouses Rodriguez issued their personal checks (Rodriguez checks) in the name of the members and delivered the
checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were deposited by Spouses Rodriguez to their account.
Meanwhile, the Rodriguez checks were deposited directly by PEMSLA to its savings account without any indorsement from the
named payees. This was an irregular procedure made possible through the facilitation of Edmundo Palermo, Jr., treasurer of
PEMSLA and bank teller in the PNB Branch.

Spouses Rodriguez issued sixty nine (69) checks, in the total amount of P2,345,804.00. These were payable to forty seven
(47) individual payees who were all members of PEMSLA. PNB eventually found out about these fraudulent acts. To put a stop to
this scheme, PNB closed the current account of PEMSLA. As a result, the
PEMSLA checks deposited by the spouses were returned or dishonored for the reason "Account Closed."

The corresponding Rodriguez checks, however, were deposited as usual to the PEMSLA savings account. The amounts were
duly debited from the Rodriguez account. Thus, because the PEMSLA checks given as payment were returned, spouses Rodriguez
incurred losses from the rediscounting transactions.

Spouses Rodriguez filed a civil complaint for damages against PEMSLA and PNB. Spouses Rodriguez sought to recover the
value of their checks that were deposited to the PEMSLA savings account amounting to P2,345,804.00. The spouses contended that
because PNB credited the checks to the PEMSLA account even without indorsements, PNB violated its contractual obligation to
them as depositors. PNB paid the wrong payees, hence, it should bear the loss.

The RTC favored Spouses Rodriguez. The CA, on the other hand, favored PNB. But, on motion for reconsideration, the CA
favored Spouses Rodriguez. The CA ruled that the checks were payable to order. According to the appellate court, PNB failed to
present sufficient proof to defeat the claim of the spouses Rodriguez that they really intended the checks to be received by the
specified payees. Thus, PNB is liable for the value of the checks which it paid to PEMSLA without indorsements from the named
payees.

ISSUE:

Whether or not PNB Bank can be held liable

HELD:

Petition GRANTED.

The instrument is an ORDER instrument

As a rule, when the payee is fictitious or not intended to be the true recipient of the proceeds, the check is considered as
a bearer instrument. A check is "a bill of exchange drawn on a bank payable on demand." It is either an order or a bearer
instrument. Sections 8 and 9 of the NIL states:
SEC. 8. When payable to order. - The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be
drawn payable to the order of -
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty.

SEC. 9. When payable to bearer. - The instrument is payable to bearer -
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any person; or
(e) Where the only or last indorsement is an indorsement in blank.
[12]
(Underscoring supplied)

The distinction between bearer and order instruments lies in their manner of negotiation. Under Section 30 of the NIL, an
order instrument requires an indorsement from the payee or holder before it may be validly negotiated. A bearer instrument, on the
other hand, does not require an indorsement to be validly negotiated. It is negotiable by mere delivery. The provision reads:
SEC. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to another in such manner as to
constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the
indorsement of the holder completed by delivery.

1. Fictitious-payee rule

A check that is payable to a specified payee is an order instrument. However, under Section 9(c) of the NIL, a check
payable to a specified payee may nevertheless be considered as a bearer instrument if it is payable to the order of a fictiti ous or
non-existing person, and such fact is known to the person making it so payable.

The more recent case upheld the fictitious-payee rule. The rule protects the depositary bank and assigns the loss to the
drawer of the check who was in a better position to prevent the loss in the first place. Due care is not even required from the
drawee or depositary bank in accepting and paying the checks.

2. Commercial bad faith exception

However, there is a commercial bad faith exception to the fictitious-payee rule. A showing of commercial bad faith on
the part of the drawee bank, or any transferee of the check for that matter, will work to strip it of this defense. The exception will
cause it to bear the loss. Commercial bad faith is present if the transferee of the check acts dishonestly, and is a party to the
fraudulent scheme.

For the fictitious-payee rule to be available as a defense, PNB must show that the makers did not intend for the named
payees to be part of the transaction involving the checks. At most, the bank's thesis shows that the payees did not have knowledge
of the existence of the checks. This lack of knowledge on the part of the payees, however, was not tantamount to a lack of
intention on the part of respondents-spouses that the payees would not receive the checks' proceeds. Considering that
respondents-spouses were transacting with PEMSLA and not the individual payees, it is understandable that they relied on the
information given by the officers of PEMSLA that the payees would be receiving the checks.

Verily, the subject checks are presumed order instruments. This is because, as found by both lower courts, PNB failed to
present sufficient evidence to defeat the claim of respondents-spouses that the named payees were the intended recipients of the
checks' proceeds. The bank failed to satisfy a requisite condition of a fictitious-payee situation - that the maker of the check
intended for the payee to have no interest in the transaction.

PNB Bank should be held liable

Because of a failure to show that the payees were "fictitious" in its broader sense, the fictitious-payee rule does not apply.
Thus, the checks are to be deemed payable to order. Consequently, the PNB Bank bears the loss.

PNB was remiss in its duty as the drawee bank. It does not dispute the fact that its teller or tellers accepted the 69 checks
for deposit to the PEMSLA account even without any indorsement from the named payees. It bears stressing that order instruments
can only be negotiated with a valid indorsement.

A bank that regularly processes checks that are neither payable to the customer nor duly indorsed by the payee is
apparently grossly negligent in its operations. This Court has recognized the unique public interest possessed by the banking
industry and the need for the people to have full trust and confidence in their banks. For this reason, banks are minded to treat
their customer's accounts with utmost care, confidence, and honesty.

In a checking transaction, the drawee bank has the duty to verify the genuineness of the signature of the drawer and to
pay the check strictly in accordance with the drawer's instructions, i.e., to the named payee in the check. It should charge to the
drawer's accounts only the payables authorized by the latter. Otherwise, the drawee will be violating the instructions of the
drawer and it shall be liable for the amount charged to the drawer's account.

In the case at bar, Spouses Rodriguez were the bank's depositors. The checks were drawn against Spouses Rodriguez
accounts. PNB, as the drawee bank, had the responsibility to ascertain the regularity of the indorsements, and the genuineness of
the signatures on the checks before accepting them for deposit. Lastly, PNB was obligated to pay the checks in strict accordance with
the instructions of the drawers. Petitioner miserably failed to discharge this burden.

The facts clearly show that the bank did not pay the checks in strict accordance with the instructions of the drawers,
respondents-spouses. Instead, it paid the values of the checks not to the named payees or their order, but to PEMSLA, a third
party to the transaction between the drawers and the payees. Moreover, PNB was negligent in the selection and supervision of
its employees. The trustworthiness of bank employees is indispensable to maintain the stability of the banking industry. Thus,
banks are enjoined to be extra vigilant in the management and supervision of their employees.

CENTRAL BANK OF THEPHILIPPINES v. CITYTRUST BANKING CORPORATION
G.R. No. 141835, 4 February 2009, SECOND DIVISION (Carpio-Morales, J.)
to assume a degree of diligence higher than that of a good father of a family.

Pursuant to Republic Act No. 625, the old Central Bank Law, Citytrust Banking Corporation (Citytrust), formerly Feati Bank,
maintained a demand deposit account with petitioner Central Bank of the Philippines, now Bangko Sentral ng Pilipinas.

Citytrust furnished Central Bank with the names and corresponding signatures of five of its officers authorized to sign
checks and serve as drawers and indorsers for its account. And it provided Citytrust with the list and corresponding signatures of its
roving tellers authorized to withdraw, sign receipts and perform other transactions on its behalf. Central Bank later issued security
identification cards to the roving tellers one of whom was Rounceval Flores (Flores).

Flores presented for payment to Central Banks Senior Teller Iluminada dela Cruz (Iluminada) two Citytrust checks of even
date, payable to Citytrust, one in the amount of P850,000 and the other in the amount of P900,000, both of which were signed and
indorsed by Citytrusts authorized signatory-drawers.

After the checks were certified by Central Banks Accounting Department, Iluminada verified them, prepared the cash
transfer slip on which she affixed her signature, stamped the checks with the notation Received Payment and asked Flores to, as
he did, sign on the space above such notation. Instead of signing his name, however, Flores signed as Rosauro C. Cayabyab a
fact Iluminada failed to notice.

Iluminada thereupon sent the cash transfer slip and checks to Central Banks Cash Department where an officer verified and
compared the drawers signatures on the checks against their specimen signatures provided by Citytrust, and finding the same in
order, approved the cash transfer slip. Central Bank then debited the amount of the checks totaling P1,750,000 from Citytrusts
demand deposit account.

Citytrust, by letter alleged that the checks were already cancelled because they were stolen, demanded Central Bank to
restore the amounts covered thereby to its demand deposit account. Central Bank did not heed the demand, however.

Citytrust later filed a complaint for estafa, with reservation on the filing of a separate civil action, against Flores. Flores was
convicted. Citytrust thereafter filed before RTC a complaint for recovery of sum of money with damages against Central Bank which
it alleged erred in encashing the checks and in charging the proceeds thereof to its account, despite the lack of authority of Rosauro
C. Cayabyab.

The RTC found Citytrust and Central Bank negligent and held them equally liable for loss. The CA affirmed the same.

ISSUE:

Whether or not Central Bank can be held liable

HELD:

Petition DENIED.

Central Bank maintains that Flores having been an authorized roving teller, Citytrust is bound by his acts. Also maintaining
that it was not negligent in releasing the proceeds of the checks to Flores, the failure of its teller to properly verify his signature
notwithstanding, Central Bank contends that verification could be dispensed with, Flores having been known to be an authorized
roving teller of Citytrust who had had numerous transactions with it Central Bank.

Central Banks teller Iluminada did not verify Flores signature on the flimsy excuse that Flores had had previous
transactions with it for a number of years. That circumstance did not excuse the teller from focusing attention to or at least glancing
at Flores as he was signing, and to satisfy herself that the signature he had just affixed matched that of his specimen signature. Had
she done that, she would have readily been put on notice that Flores was affixing, not his but a fictitious signature.

Given that Central Bank is the government body mandated to supervise and regulate banking and other financial
institutions it must be noted that the contract between the bank and its depositor is governed by the provisions of the Civil Code on
simple loan. Article 1980 of the Civil Code expressly provides that savings 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.

The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791
(RA 8791) declares that the State recognizes the fiduciary nature of banking that requires high standards of integrity and
performance.

to assume a degree of diligence higher than that of a good father of a family. Article 1172 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. Section 2 of RA 8791 prescribes the statutory diligence required from banks that banks must observe high
standards of integrity and performance in servicing their depositors. Although RA 8791 took effect almost nine years after the
unauthorized withdrawal of the P300,000 from L.C. Diazs savings account, jurisprudence at the time of the withdrawal already
imposed on banks the same high standard of diligence required under RA No. 8791.

Citytrusts failure to timely examine its account, cancel the checks and notify Central Bank of their alleged loss/theft should
mitigate petitioners liability, in accordance with Article 2179 of the Civil Code which provides that if the plaintiffs negligence was
only contributory, the immediate and proximate cause of the injury being the defendants lack of due care, the plaintiff may recover
damages, but the courts shall mitigate the damages to be awarded. For had Citytrust timely discovered the loss/theft and/or
subsequent encashment, their proceeds or part thereof could have been recovered.

The Court deems it proper to allocate the loss between petitioner and Citytrust on a 60-40 ratio.

BANK OF AMERICA, NT & SA, v. ASSOCIATED CITIZENS BANK, BA-FINANCE CORPORATION, MILLER OFFSET PRESS, INC., UY KIAT
CHUNG, CHING UY SENG, UY CHUNG GUAN SENG, and COURT OF APPEALS
G.R. No. 141001, 21 May 2009, FIRST DIVISION (Carpio, J.)
A drawee should charge to the drawers accounts only the payables authorized by the latter; otherwise, the drawee will be
violating the instructions of the drawer and shall be liable for the amount charged to the drawers account.

BA-Finance Corporation (BA-Finance) entered into a transaction with Miller Offset Press, Inc. (Miller), through the latters
authorized representatives, i.e., Uy Kiat Chung, Ching Uy Seng, and Uy Chung Guan Seng. BA-Finance granted Miller a credit line
facility through which the Miller could assign or discount its trade receivables with the BA Finance.

Uy Kiat Chung, Ching Uy Seng, and Uy Chung Guan Seng executed a Continuing Suretyship Agreement with BA-Finance
whereby they jointly and severally guaranteed the full and prompt payment of any and all indebtedness which Miller may incur with
BA-Finance.

Miller discounted and assigned several trade receivables to BA-Finance by executing Deeds of Assignment in favor of BA
Finance. In consideration of the assignment, BA-Finance issued four checks payable to the "Order of Miller Offset Press, Inc." with
the notation "For Payees Account Only." These checks were drawn against Bank of America. The four checks were deposited by
Ching Uy Seng, then the corporate secretary of Miller, in Associated Citizens Bank (Associated Bank). Associated Bank stamped the
checks with the notation "all prior endorsements and/or lack of endorsements guaranteed," and sent them through clearing. Later,
Bank of America, honored the checks and paid the proceeds to Associated Bank as the collecting bank.

Miller failed to deliver to BA-Finance the proceeds of the assigned trade receivables. BA-Finance filed a Complaint against
Miller for collection of the amount of P731,329.63 which BA-Finance allegedly paid in consideration of the assignment, plus interest
at the rate of 16% per annum and penalty charges. Likewise impleaded as party defendants in the collection case were Uy Kiat
Chung, Ching Uy Seng, and Uy Chung Guan Seng.

Bank of America filed a Third Party Complaint against Associated Bank. In its Answer to the Third Party Complaint,
Associated Bank admitted having received the four checks for deposit in the joint account of Ching Uy Seng (a.k.a. Robert Ching) and
Uy Chung Guan Seng, but alleged that Robert Ching, being one of the corporate officers of Miller, was duly authorized to act for and
on behalf of Miller.

The RTC decided against Bank of America. Judgment is likewise rendered ordering the third-party defendant Associated
Citizens Bank to reimburse Bank of America. The CA affirmed the RTCs decision.

ISSUE:

Whether or not Bank of America is liable to BA-Finance for the amount of the 4 checks

HELD:

Petition GRANTED.

Bank of America is liable to pay BA-Finance the amount of the four checks

Bank of America denies liability for paying the amount of the four checks issued by BA-Finance to Miller, alleging that Bank
of America relied on the stamps made by Associated Bank stating that "all prior endorsement and/or lack of endorsement
guaranteed," through which Associated Bank assumed the liability of a general endorser under Section 66 of the Negotiable
Instruments Law. Moreover, Bank of America contends that the proximate cause of BA-Finances injury, if any, is the gross
negligence of Associated Bank which allowed Ching Uy Seng (Robert Ching) to deposit the four checks issued to Miller in the
personal joint bank account of Ching Uy Seng and Uy Chung Guan Seng.

The bank on which a check is drawn, known as the drawee bank, is under strict liability, based on the contract between
the bank and its customer (drawer), to pay the check only to the payee or the payees order. The drawers instructions are
reflected on the face and by the terms of the check. When the drawee bank pays a person other than the payee named on the
check, it does not comply with the terms of the check and violates its duty to charge the drawers account only for properly
payable items.

A drawee should charge to the drawers accounts only the payables authorized by the latter; otherwise, the drawee will
be violating the instructions of the drawer and shall be liable for the amount charged to the drawers account.

Among the different types of checks issued by a drawer is the crossed check. This Court has taken judicial cognizance of the
practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited and could not be
converted into cash. Thus, the effect of crossing a check relates to the mode of payment, meaning that the drawer had intended
the check for deposit only by the rightful person, i.e., the payee named therein.

The crossing may be "special" wherein between the two parallel lines is written the name of a bank or a business
institution, in which case the drawee should pay only with the intervention of that bank or company, or "general" wherein between
two parallel diagonal lines are written the words "and Co." or none at all, in which case the drawee should not encash the same but
merely accept the same for deposit.

In this case, the four checks were drawn by BA-Finance and made payable to the "Order of Miller Offset Press, Inc." The
checks were also crossed and issued "For Payees Account Only." Clearly, the drawer intended the check for deposit only by Miller
Offset Press, Inc. in the latters bank account. Thus, when a person other than Miller, i.e., Ching Uy Seng, a.k.a. Robert Ching,
presented and deposited the checks in his own personal account (Ching Uy Sengs joint account with Uy Chung Guan Seng), and
the drawee bank, Bank of America, paid the value of the checks and charged BA-Finances account therefor, the drawee Bank of
America is deemed to have violated the instructions of the drawer, and therefore, is liable for the amount charged to the
drawers account.

Bank of America should reimburse

When Associated Bank stamped the back of the four checks with the phrase "all prior endorsements and/or lack of
endorsement guaranteed," that bank had for all intents and purposes treated the checks as negotiable instruments and, accordingly,
assumed the warranty of an endorser. Being so, Associated Bank cannot deny liability on the checks.

Associated Bank was also clearly negligent in disregarding established banking rules and regulations by allowing the four
checks to be presented by, and deposited in the personal bank account of, a person who was not the payee named in the checks.
The checks were issued to the "Order of Miller Offset Press, Inc.," but were deposited, and paid by Associated Bank, to the personal
joint account of Ching Uy Seng (a.k.a. Robert Ching) and Uy Chung Guan Seng. It could not have escaped Associated Banks attention
that the payee of the checks is a corporation while the person who deposited the checks in his own account is an individual. Verily,
when the bank allowed its client to collect on crossed checks issued in the name of another, the bank is guilty of negligence.

One who accepts and encashes a check from an individual knowing that the payee is a corporation does so at his peril.
Accordingly, we hold that Associated Bank is liable for the amount of the four checks and should reimburse the amount of the
checks to Bank of America.

EMERITO M. RAMOS, et al. v. CENTRAL BANK OF THE PHILIPPINES
G.R. No. L-29352, 4 October 1971, EN BANC (Reyes, J.B.L., J.)
An estoppel may arise from the making of a promise, even though without consideration, if it was intended that the promise
should be relied upon and in fact it was relied upon, and if a refusal to enforce it would be virtually to sanction the perpetration of
fraud or would result in other injustice. In this respect, the reliance by the promisee is generally evidenced by action or forbearance
on his part, and the idea has been expressed that such action or forbearance would reasonably have been expected by the promissor.
Mere omission by the promisee to do whatever the promisor promised to do has been held insufficient "forbearance" to give rise to a
promissory estoppel.

The Overseas Bank of Manila (OBM) is a commercial banking corporation duly organized and existing under the laws of the
Philippines. The OBM was opened for business with authorized capital of P30 million, P10 million subscribed and P8 million thereof
paid, but had been suspended by Central Bank from clearing with the CB and from lending operations for various violations of the
banking laws and implementing regulations. Ramos, et al. charged that the OBM became financially distressed because of this
suspension and the deprivation by the CB of all the usual credit facilities and accommodations accorded to the other banks.

The financial situation of the OBM had caused mounting concern in the CB. The parties finally met with CB on the necessity
and urgency of rehabilitating the OBM through the extension of necessary financial assistance. Ramos, et al. executed the Voting
Trust Agreement. Ramos, et al. likewise conveyed by way of mortgage to the CB all their private properties and holdings to secure
the obligations of the OBM to the CB, but there is no agreement as to the value of these properties, Ramos, et al. contending that
they are worth over 141 million, but the CB appraised them at around 67 million.

Mr. Martin Oliva, who had become president of OBM only since 1967, had written to the Superintendent of Banks that
transactions worth around P48 million, of which over P43 million were time deposits, at usurious rates of interest, had not been
incorporated in the Bank's books nor reported to the Board of Directors. It was explained

that the OBM management had resorted
to these unrecorded transactions because the suspension of its lending activities after 14 months of operation reduced OBM to
virtual inactivity, and it had to agree to pay high premiums or interests on such deposits because this high costs is comparatively
cheaper than the Central Bank's interests on overdrawings at the rate of 12% per annum and a penalty of 36% per annum on reserve
deficiencies.

Oliva's letter prompted a further investigation of OBM records by the CB examiners that revealed allegedly unrecorded
deposits and transactions amounting to 48,007,211, diversion of deposits to accounts controlled by certain OBM officials (so-called
COFICO and EMRACO accounts) and loans to the Ramos family and firms controlled by them.

Ramos, et al. contend that these
transactions were recorded in subsidiary ledger accounts that were linked to the general ledger accounts of the Bank under the so-
called EMRACO and COFICO accounts, and finally incorporated in OBM's regular books in September, 1967 upon instructions of
President Martin Oliva.

The Superintendent of Banks reported that the condition of the OBM was one of insolvency, calling for application of
Section 29 of the Central Bank Act and liquidation of OBM. However, with the listing of Ramos properties worth 100 million, it was
added, a new possibility emerged to recapitalize the OBM in 100 million.

Central Bank governor wrote to petitioner, Emerito Ramos, reiterating the need for the OBM stockholders to execute a
voting trust agreement "to stave of liquidation. CB announced that only P10 million were available as emergency loan to OBM and
requested the management of the latter (appointed under the Voting Trust Agreement to replace the old Board elected by the
stockholders) to project how it could help bail out OBM.

Then, Superintendent of Banks recommended to the Monetary Board that OBM be liquidated under Section 29, Republic
Act 265. Ramos, et al. aver that no adequate financial assistance was granted to the OBM after the execution of the Voting Trust
Agreement. They further ]claim that the said agreement is not only bilateral, imposing reciprocal obligations for valuable
consideration, but was also entered into by respondent CB in the performance of its duties under the law; and that under said
agreement the obligation of the CB was to act and work for the "rehabilitation, normalization and stabilization" of the OBM, through
the extension of adequate and necessary financial assistance to stave off liquidation, is legally demandable, as well as a duty
specifically enjoined and imposed by law. And that in violation of its obligations, the CB, "after eight months of delay", adopted the
questioned resolutions, without notice to or hearing the Ramos, et al.

ISSUE:

Whether or nor CB Resolutions Nos. 1263, 1290 and 1333 were adopted in abuse of discretion

HELD:

Petition GRANTED.

Even in the absence of contract, the record plainly shows that the CB made express representations to Ramos, et al herein
that it would support the OBM, and avoid its liquidation if the petitioners would execute
(a) the Voting Trust Agreement turning over the management of OBM to the CB or its nominees, and
(b) mortgage or assign their properties to the Central Bank to cover the overdraft balance of OBM.

Ramos, et al. having complied with these conditions and parted with value to the profit of the CB which thus acquired
additional security for its own advances), the CB may not now renege on its representations and liquidate the OBM, to the
detriment of its stockholders, depositors and other creditors, under the rule of promissory estoppels.

Doctrine of promissory estoppels

The broad general rule to the effect that a promise to do or not to do something in the future does not work an estoppel
must be qualified, since there are numerous cases in which an estoppel has been predicated on promises or assurances as to future
conduct. The doctrine of "promissory estoppel" is by no means new, although the name has been adopted only in comparatively
recent years. According to that doctrine, an estoppel may arise from the making of a promise, even though without consideration,
if it was intended that the promise should be relied upon and in fact it was relied upon, and if a refusal to enforce it woul d be
virtually to sanction the perpetration of fraud or would result in other injustice. In this respect, the reliance by the promisee is
generally evidenced by action or forbearance on his part, and the idea has been expressed that such action or forbearance would
reasonably have been expected by the promissor. Mere omission by the promisee to do whatever the promisor promised to do
has been held insufficient "forbearance" to give rise to a promissory estoppel.

Disingenuously, the CB pleaded that the Voting Trust agreement was binding only upon the trustee, the Superintendent of
Banks. But as already pointed out this proposition is unacceptable since the trust could have no private interest in the matters. Not
only that, but CB subsequently caused its own team of nominees to take over the direction and management of the OBM, through
the voting of the shares conveyed to the trustee. Even more, in August, 1970, the CB gave notice that it would not extend or renew
the voting trust, and attempted to turn back the shares covered by it to the petitioners, thereby recognizing the obligations under
the agreement as its own, and repudiating its original disclaimer thereof.

We are constrained to agree with Ramos, et al. that the conduct of the CB reveals a calculated attempt to evade
rehabilitating OBM despite its promises. What is more aggravating is that by the ordered liquidation, depositors and other
creditors would have to share in the assets of the OBM, while the CB's own credits for advances were secured by the new
mortgages it had obtained from the petitioners, thereby gaining for it what amounts to an illegal preference. To cap it all, the CB
disregarded its representations and promises to rehabilitate and normalize the financial condition of OBM, as it had previously
done with the Republic Bank, without even offering to discharge the mortgages, given by petitioners in consideration for its
promises, or notifying petitioners that it desired to rescind its contract, or bringing action in court for the purpose. And all the
while CB knew that the situation of the OBM was deteriorating daily, with penalties at 3% per month continually accumulating, while
its creditors, depositors and stockholders awaited the promised aid that never came, and which apparently CB never intended to
give.

The deception practiced by the Central Bank, not only on petitioners but on its own management team, was in violation of
Articles 1159 and 1315 of the Civil Code of the Philippines:
ART. 1159. Obligations arising from contracts have the force of law between the contracting parties andshould be complied with in
good faith.
ART. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of
what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good
faith, usage and law.)

The CB excuses itself by pleading that the OBM officers had resorted to non-recording of time deposits in the Bank's books
and diverting such deposits to accounting controlled by certain bank officials, and other irregularities. It is well to note, however,
that these "unrecorded" deposits were revealed to the CB by the then President of the OBM, Mr. Martin Oliva, who had no hand in
such irregularities and who informed the Superintendent of Banks that time deposits worth P43,188,009.29 had not been carried in
the books and had not been reported to the OBM directors. In fact, CB had already ordered its examiners to investigate the Bank's
records and determine the parties responsible. Notwithstanding knowledge of these irregularities, the CB did not withdraw its
promised support, and insisted on the execution of the Voting Trust Agreement. Such attitude imports that, in its opinion, the
irregularities disclosed were not to be blamed on the OBM itself or its depositors and creditors, but on the officials responsible;
and further, that the OBM could still be saved by adequate aid and management reform, which was required by CB's duty to
maintain the stability of the banking system and the preservation of public confidence in it.

CENTRAL BANK OF THE PHILIPPINES v. HONORABLE COURT OF APPEALS, ISIDRO E. FERNANDEZ,
and JESUS R. JAYME
G.R. No. L-50031-32, 27 July 1981, SECOND DIVISION (Concepcion, Jr., J.)
While the closure and liquidation of a bank may be considered an exercise of police power, the validity of such exercise of
police power is subject to judicial inquiry and could be set aside if it is either capricious, discriminatory, whimsical, arbitrary, unjust, or
a denial of due process and equal protection clauses of the Constitution.

The Provident Savings Bank (PROVIDENT) was incorporated after the Central Bank had approved its establishment under a
Monetary Board Resolution. Its Articles of Incorporation was registered with the Securities and Exchange Commission. Private
respondents, Isidro E. Fernandez and Jesus R. Jayme, are the majority and controlling stockholders thereof, holding 41% and 22%,
respectively, of the total subscribed capital stock of the bank.

In 1968, PROVIDENT among others, experienced a bank run. In view of the unusually heavy withdrawals, PROVIDENT had
no recourse but to request emergency loans from the Central Bank to meet the demands of the depositors. The Monetary Board,
however, denied these requests for emergency loans. PROVIDENT, therefore, had to borrow from other banks, foremost of which is
the Banco Filipino Mortgage and Savings Bank which granted PROVIDENT advances up to P8 million. But, these loans were not
enough to meet the demands of the depositors. As a result, PROVIDENT was forced to temporarily close its doors to the public.

Central Bank extended emergency loans to PROVIDENT in order to stop the bank run and to prevent the bank run from
eroding the confidence of the public in the banking system, thus enabling PROVIDENT to reopen. But, the assistance given to
PROVIDENT was not sufficient to meet and service the unusually heavy withdrawals of deposits. Fernandez and Jayme appealed to
the Central Bank for continued assistance. Fernandez and Jayme were summoned to the Central Bank for a conference with the
Governor and Deputy Governor and were introduced to representatives of the Iglesia Ni Kristo (INK) which had a sizeable deposit of
P5.5 million with PROVIDENT and was having difficulty in withdrawing the same.

Central Bank Deputy Governor Amado Brias voiced the decision of the Central Bank that unless Fernandez and Jayme
relinquished and turned over the management and control of PROVIDENT to the Iglesia Ni Kristo, the Central Bank would not
further support and assist the distressed PROVIDENT. Left with no other alternative, but to accede, and in order to protect their
investment, Fernandez and Jayme reluctantly executed a Memorandum Agreement with the Eagle Broadcasting Corporation.

The Eagle Broadcasting Corporation, however, did not comply with its obligations. Subsequently, CB Monetary Board
issued a resolution declaring the closure of Provident Savings Bank and ordering its liquidation. Hence, Fernandez and Jayme filed
with the CFI a petition for certiorari, prohibition, and mandamus against Central Bank to annul the resolution and restrain CB from
proceeding with the liquidation which the court granted. Court of Appeals affirmed CFIs decision.

ISSUE:

Whether or not the closure of the bank is subject to judicial review

HELD:

Petition GRANTED.

Indeed, CA, in reviewing a judgment on appeal, should dispose of a question according to the law prevailing at the time of
such disposition and not according to the law prevailing at the time of the rendition of the appealed judgment. Accordingly, Section
29 of Republic Act No. 265, as amended by Presidential Decree No. 1007, should be applied.

Under this section, as amended, the action of the Monetary Board in ordering the closure and liquidation of an insolvent
bank is final and executory and can be set aside only if there is convincing proof that the action is plainly arbitrary and made in
bad faith.

The petition filed, however, should not be dismissed for while there may not be gross and evident bad faith on the part
of the Central Bank and Eagle Broadcasting Corporation to sustain the award of damages to Fernandez and Jayme, as ordered by
the trial court, the action of the Monetary Board in forbidding PROVIDENT from doing business in the Philippines and ordering its
liquidation is clearly arbitrary and was made in bad faith.

The arbitrariness and bad faith of Central Board is evident from the fact that it pressured Fernandez and Jayme into
relinquishing the management and control of PROVIDENT to the Iglesia Ni Kristo cranad(INK) which did not have any intention of
restoring the bank into its former sound financial condition but whose interest was merely to recover its deposits from PROVI DENT,
and, thereafter, allowing the Iglesia Ni Kristo to mismanage PROVIDENT until the banks financial deterioration and subsequent
closure.

APOLLO M. SALUD, as Attorney-in-Fact for its Stockholders, in his behalf and for and in behalf of the Rural Bank of
Muntinlupa, Inc v. CENTRAL BANK OF THE PHILIPPINES, AND CONSOLACION V. ODRA, in her capacity as Liquidator of
the Rural Bank of Muntinlupa, Inc.
G.R. No. L-17620, 19 August 1986, FIRST DIVISION (Narvasa, J.)
There is no provision of law which expressly or even by implication imposes the requirement for a separate
proceeding exclusively occupied with adjudicating this issue. Moreover, to declare the issue as beyond the scope of
matters cognizable in a proceeding for assistance in liquidation would be to engender that multiplicity of proceedings
which the law abhors.

The Rural Bank of Muntinlupa, Inc. and its stockholders have petitioned this Court for a writ of certiorari to
annul two (2) resolutions of the Intermediate Appellate Court upon the theory that said resolutions are so far contrary
to the provisions of Section 29 of the Central Bank Act and relevant rulings of this Court as to constitute grave abuse of
discretion.

As will be noted, whenever it shall appear prima facie that a banking institution is in "a condition of insolvency"
or so situated "that its continuance in business would involve probable loss to its depositors or creditors," the Monetary
Board has authority:

1. To forbid the institution to do business and appoint a receiver therefor; and
2. to determine, within 60 days, whether or not:
a. the institution may be reorganized and rehabilitated to such an extent as to be permitted to resume business with safety to
depositors, creditors and the general public; or
b. it is indeed insolvent or cannot resume business with safety to depositors, creditors and the general public, and public
interest requires that it be liquidated.

In this latter case (i.e., the bank can no longer resume business with safety to depositors, creditors and the
public, etc.) its liquidation will be ordered and a liquidator appointed by the Monetary Board. The Central Bank shall
thereafter file a petition in the Regional Trial Court praying for the Court's assistance in the liquidation of the bank.

It is noteworthy that the actions of the Monetary Board in this regard are explicitly declared to be "final and
executory." They may not be set aside or even restrained or enjoined by the court, except only upon "convincing proof
that the action is plainly arbitrary and made in bad faith."

It was on the basis of this Section 29, expressly invoked, that a "Petition for Assistance in the Liquidation of the
Rural Bank of Muntinlupa, Inc." was filed with the Court of First Instance by the Central Bank. The petition alleged that
the Monetary Board had adopted two (2) resolutions, viz:
1) Resolution No. 213 forbidding the Muntinlupa Bank to do business and designating Consolacion Odra its statutory
receiver; and
2) Resolution No. 1523 ordering liquidation of the Muntinlupa Bank after confirmation that it was insolvent and could
not resume business with safety to all concerned, and that public interest did require said liquidation.

Muntinlupa Bank filed a pleading denominated "OPPOSITION." Allegedly, the liquidation was premature and
void, because Section 28-A of the same Central Bank Act mandates that prior to liquidation, it is the Central Bank's
"primordial duty to reorganize the management and to restore its viability;" and that the action of liquidation was
"arbitrary and in bad faith" because (a) contrary to the actuality that Muntinlupa Bank is still capable of rehabilitation,
and (b) inconsistent with prior actions of the Central Bank of rehabilitating "similarly distressed banks.

The Regional Trial Court, treating the opposition of the bank as a motion to dismiss, ruled in favor of it and
declared the action of the Monetary Board arbitrary after finding that the bank had more assets than liabilities. The
Intermediate Appellate Court reversed the decision and gave due course to the petition for liquidation.

ISSUE:

Whether or not the rehabilitation of the bank is subject to judicial review

HELD:

Petition GRANTED.

Resolutions of the Monetary Board under Section 29 of the Central Bank Act-e.g., forbidding banking
institutions to do business on account of a "condition of insolvency" or because "its continuance in business would
involve probable loss to depositors or creditors;" or appointing a receiver to take charge of the bank's assets and
liabilities; or determining whether the banking institutions may be rehabilitated, or should be liquidated and appointing
a liquidator towards this end are by law "final and executory," as earlier pointed out. But they "can be set aside by the
court" on one specific ground, and that is, "if there is convincing proof that the action is plainly arbitrary and made in
bad faith."

This Court perceives no reason whatever why a banking institution's claim that a resolution of the Monetary
Board under Section 29 of the Central Bank Act should be set aside as plainly arbitrary and made in bad faith cannot be
asserted as an affirmative defense or a counterclaim in the proceeding for assistance in liquidation, but only as a cause
of action in a separate and distinct action. There is no provision of law which expressly or even by implication imposes
the requirement for a separate proceeding exclusively occupied with adjudicating this issue. Moreover, to declare the
issue as beyond the scope of matters cognizable in a proceeding for assistance in liquidation would be to engender
that multiplicity of proceedings which the law abhors.

It is inconsequential that there were two (2) separate proceedings. This was entirely fortuitous. It came about
merely because by pure chance the petition to annul the Monetary Board resolution authorizing liquidation was filed
ahead of the petition for assistance in liquidation. In fact, the two (2) proceedings were at the parties' instance jointly
heard and decided, a certain indication of the intimate relationship in issues between said proceedings, if not in truth of
the preferential nature of the question of whether or not the Monetary Board resolution was "plainly arbitrary and
made in bad faith."

No reason exists to preclude determination of this question in the very proceeding for assistance in
liquidation instituted pursuant to Section 29 of the Central Bank Act.

SPOUSES ROMEO LIPANA and MILAGROS LIPANA v. DEVELOPMENT BANK OF RIZAL
G.R. No. 73884, 24 September 1987, SECOND DIVISION (Paras, J.)
The rule that once a decision becomes final and executory, it is the ministerial duty of the court to order its execution, admits
of certain exceptions as in cases of special and exceptional nature where it becomes imperative in the higher interest of justice to
direct the suspension of its execution; whenever it is necessary to accomplish the aims of justice; or when certain facts and
circumstances transpired after the judgment became final which could render the execution of the judgment unjust.

Spouses Lipana opened and maintained both time and savings deposits with Development Bank of Rizal all in the
aggregate amount of P939,737.32. When some of the Time Deposit Certificates matured, Spouses Lipana were not able to cash
them but instead were issued a manager's check which was dishonored upon presentment. Demands for the payment of both time
and savings deposits having failed, Spouses Lipana filed with the Regional Trial Court a Complaint With Prayer For Issuance of a Writ
of Preliminary Attachment for collection of a sum of money with damages. Respondent Judge, ordered the issuance of a writ of
attachment, and pursuant thereto, a writ of attachment was issued in favor of the petitioners. s

Meanwhile, the Monetary Board, in its Resolution decided to place it under receivership. Subsequently, the motion for execution
pending appeal filed by petitioners was granted by the court but was also stayed by the trial judge. The motion filed by petitioners to
lift the stay order having been denied, this petition was filed.

ISSUE:

Whether or not respondent judge could legally stay execution of judgment that has already become final and executory

HELD:

Petition GRANTED.

The rule that once a decision becomes final and executory, it is the ministerial duty of the court to order its execution,
admits of certain exceptions as in cases of special and exceptional nature where it becomes imperative in the higher interest of
justice to direct the suspension of its execution; whenever it is necessary to accomplish the aims of justice; or when certain facts
and circumstances transpired after the judgment became final which could render the execution of the judgment unjust.

In the instant case, the stay of the execution of judgment is warranted by the fact that Development Bank was placed
under receivership. To execute the judgment would unduly deplete the assets of respondent bank to the obvious prejudice of other
depositors and creditors, since after the Monetary Board has declared that a bank is insolvent and has ordered it to cease
operations, the Board becomes the trustee of its assets for the equal benefit of all the creditors, including depositors. The assets
of the insolvent banking institution are held in trust for the equal benefit of all creditors, and after its insolvency, one cannot
obtain an advantage or a preference over another by an attachment, execution or otherwise.

OVERSEAS BANK OF MANILA v. COURT OF APPEALS and NATIONAL WATERWORKS AND SEWERAGE AUTHORITY
G.R. No. L-45866, 19 April 1989, FIRST DIVISION (Narvasa, J.)
Moreover, the suspension of operations could not possibly excuse non-compliance with the obligations in question which
matured in 1966. Again, the claim that the Central Bank, by suspending the Overseas Bank's banking operations, had made it
impossible for the Overseas Bank to pay its debts, whatever validity might be accorded thereto, or the further claim that it had fallen
into a "distressed financial situation," cannot in any sense excuse it from its obligation to the NAWASA, which had nothing whatever
to do with the Central Bank's actuations or the events leading to the bank's distressed state.

In relation to a contract of sale between NAWASA, as vendor and a certain Bonifacio Regalado, as vendee, and by authority
of the former's board of directors, the amount of P327,257.20 was placed on a time deposit with the Overseas Bank by the NAWASA
Treasurer for a period of 6 months. The amount corresponding to a payment earlier made by Regalado to the NAWASA, and the
time deposit was made so that a refund could quickly be made to Regalado in the event that his contract with the NAWASA be
disapproved by the Office of the President

A second was made by Regalado in the same sum of P327,257.20 and another time deposit was made by the NAWASA
Treasurer with the Overseas Bank. The period of this second deposit was fixed at one (1) year. Subsequently, NAWASA's Acting
General Manager wrote to the Overseas Bank advising that (1) as regards the first time deposit which had already matured,
NAWASA wished to withdraw it immediately, and (2) with respect to the second time deposit of, it intended to withdraw it 60 days
thereafter as authorized by the parties' agreement set forth in the certificate of the deposit. Despite several letter request, nothing
was heard from the Overseas Bank. It did however pay to NAWASA interest on its time deposits.

After maturity of the second time deposit and Overseas Bank not responding to the letter request of NAWASA for the
remittance of the time deposits, NAWASA then wrote to the Central Bank Governor about the matter. Apparently, even the Central
Bank was ignored by Overseas Bank.

NAWASA thus brought suit to recover its deposits and damages. CFI Manila rendered judgment in favor of NAWASA and
ordered the bank to pay. CA affirmed the trial courts ruling.

ISSUE:

Whether or not the suspension of the operations of a bank excuse non-compliance with its obligation to remit the deposit
of depositors

HELD:

Petition DENIED.

The first argument advanced by the Overseas Bank is that as of July 30,1 968, by reason of "punitive action taken by the
Central Bank," it had been prevented from undertaking banking operations "which would have generated funds to pay not only its
depositors and creditors but likewise, the interests due on the deposits."

The argument is palpably without merit. There is in the first place absolutely no evidence of these facts in the record: and
this is simply because the petitioner bank had made no effort whatever to set aside the default order against it so that it could
present evidence in its behalf before the Trial Court. Moreover, the suspension of operations could not possibly excuse non-
compliance with the obligations in question which matured in 1966. Again, the claim that the Central Bank, by suspending the
Overseas Bank's banking operations, had made it impossible for the Overseas Bank to pay its debts, whatever validity might be
accorded thereto, or the further claim that it had fallen into a "distressed financial situation," cannot in any sense excuse it from
its obligation to the NAWASA, which had nothing whatever to do with the Central Bank's actuations or the events leading to the
bank's distressed state.

CENTRAL BANK OF THE PHILIPPINES and HON. JOSE B. FERNANDEZ, v. HON. COURT OF APPEALS, RTC JUDGE TEOFILO GUADIZ, JR.,
PRODUCERS BANK OF THE PHILIPPINES and PRODUCERS PROPERTIES, INC.
G.R. No. 88353, 8 May 1992, EN BANC (Davide, Jr. J.)
When a bank is forbidden to do business in the Philippines and placed under receivership, the person designated as receiver
shall immediately take charge of the bank's assets and liabilities, as expeditiously as possible, collect and gather all the assets and
administer the same for the benefit of its creditors, and represent the bank personally or through counsel as he may retain in all
actions or proceedings for or against the institution, exercising all the powers necessary for these purposes including, but not limited
to, bringing and foreclosing mortgages in the name of the bank. Pendency of the case did not diminish the powers and authority of
the designated liquidator to effectuate and carry on the administration of the bank.

Top Management Programs Corporation and Pilar Development Corporation are corporations engaged in the business of
developing residential subdivisions. Top Management and Pilar Development obtained several loans from Banco Filipino all secured
by real estate mortgage in their various properties in Cavite.

The Monetary Board issued a resolution finding Banco Filipino insolvent and placing it under receivership. The Monetary
Board issued another resolution placing the bank under liquidation and designated a liquidator. By virtue of her authority as
liquidator, Valenzuela appointed the law firm of Sycip, Salazar, et al. to represent Banco Filipino in all litigations.

Banco Filipino filed the petition for certiorari questioning the validity of the resolutions issued by the Monetary Board
authorizing the receivership and liquidation of Banco Filipino. A temporary restraining order was issued enjoining the further acts of
liquidation of the bank. However, acts and other transactions pertaining to normal operations of a bank are not enjoined.

Subsequently, Top Management and Pilar Development failed to pay their loans on the due date. Hence, the law firm of
Sycip, Salazar, et al. acting as counsel for Banco Filipino under authority of the liquidator, applied for extra-judicial foreclosure of
the mortgage over Top Management and Pilar Developments properties. Thus, the Ex-Officio Sheriff of the Regional Trial Court of
Cavite issued a notice of extra-judicial foreclosure sale of the properties. Top Management and Pilar Development filed 2 separate
petitions for injunction and prohibition with the respondent appellate court seeking to enjoin the Regional Trial Court of Cavite, the
ex-officio sheriff of said court and Sycip, Salazar, et al. from proceeding with foreclosure sale which were subsequently dismissed by
the court.

ISSUE:

Whether or not liquidator has the authority to prosecute as well as to defend suits and to foreclose mortgages

HELD:

Petition GRANTED.

Order of conservatorship

PBP has been under conservatorship since 20 January 1984. Pursuant to Section 28-A of the Central Bank Act, a
conservator, once appointed, takes over the management of the bank and assumes exclusive powers to oversee every aspect of
the bank's operations and affairs. Central Bank, et al. now maintain that this power includes the authority to determine "whether or
not to maintain suit in the bank's name." The trial court overruled this contention stating that the section alluded to "does not
prohibit the Board of Directors of a bank to file suit to lift the conservatorship over it, to question the validity of the conservator's
fraudulent acts and abuses and the arbitrary action of the conservator's principal the Monetary Board of the Central Bank.

Obviously, the trial court was of the impression that what was sought for in Civil Case No. 17692 is the lifting of the
conservatorship because it was arbitrarily and illegally imposed. There is nothing in the amended complaint to reflect an
unequivocal intention to ask for its lifting.

If it were to lift the conservatorship because it was arbitrarily imposed, then the case should have been dismissed on the
grounds of prescription and lack of personality to bring the action. The following requisites, therefore, must be present before the
order of conservatorship may be set aside by a court:
1. The appropriate pleading must be filed by the stockholders of record representing the majority of the capital
stock of the bank in the proper court;
2. Said pleading must be filed within ten (10) days from receipt of notice by said majority stockholders of the order
placing the bank under conservatorship; and
3. There must be convincing proof, after hearing, that the action is plainly arbitrary and made in bad faith.

In the instant case, PBP was placed under conservatorship on 20 January 1984. The original complaint was filed only on 27
August 1987, or three (3) years, seven (7) months and seven (7) days later, long after the expiration of the 10-day period deferred to
above.

The original complaint in Civil Case No. 17692 was not initiated by the majority of the stockholders, hence it should have
been dismissed. However, confronted with this fatal flaw, counsel for PBP, through shrewd maneuvering, attempted to save the day
by impleading as co-plaintiff a corporation, the PPI, which was not under conservatorship.

Effect of closure of bank on collection and foreclosure of mortgages

Section 29 of the Republic Act No. 265, as amended known as the Central Bank Act, provides that when a bank is forbidden
to do business in the Philippines and placed under receivership, the person designated as receiver shall immediately take charge
of the bank's assets and liabilities, as expeditiously as possible, collect and gather all the assets and administer the same for the
benefit of its creditors, and represent the bank personally or through counsel as he may retain in all actions or proceedings for or
against the institution, exercising all the powers necessary for these purposes including, but not limited to, bringing and
foreclosing mortgages in the name of the bank. Pendency of the case did not diminish the powers and authority of the designated
liquidator to effectuate and carry on the administration of the bank.

However, the assailed order of the Monetary Board liquidating the bank was annulled and set aside. Central Bank and the
Monetary Board were ordered to reorganize petitioner bank and allow the latter to resume business under their comptrollership.

FIRST PHILIPPINE INTERNATIONAL BANK (Formerly Producers Bank of the Philippines) and MERCURIO RIVERA, v. COURT OF
APPEALS, CARLOS EJERCITO, in substitution of DEMETRIO DEMETRIA, and JOSE JANOLO
G.R. No. 115849, 24 January 1996, THIRD DIVISION (Panganiban, J.)
Obviously, therefore, Section 28-A merely gives the conservator power to revoke contracts that are, under existing law, deemed to be
defective - i.e., void, voidable, unenforceable or rescissible. Hence, the conservator merely takes the place of a banks board of
directors. What the said board cannot do - such as repudiating a contract validly entered into under the doctrine of implied authority
- the conservator cannot do either.

Petitioner First Philippine International Bank is a banking institution organized and existing under the laws of the Republic of
the Philippines. Petitioner Mercurio Rivera was the Head Manager of the Property Management Department of the Bank. On the
other hand, Carlos Ejercito is the assignee of original plaintiffs-appellees Demetrio Demetria and Jose Janolo.

Producer Bank of the Philippines acquired six parcels of land. The property used to be owned by BYME Investment and
Development Corporation which had them mortgaged with the bank as collateral fora loan. The original plaintiffs, Demetrio
Demetria and Jose O. Janolo, wanted to purchase the property and thus initiated negotiations for that purpose. Demetria, et al. met
with defendant Mercurio Rivera, Manager of the Property Management Department of First Philippine International Bank.

After the meeting, plaintiff Janolo, following the advice of defendant Rivera, made a formal purchase offer to the bank through
a letter. The letter drew no response for more than four months. Then, Demetria, et al. made a final demand for compliance by First
Philippine International Bank with its obligations under the considered perfected contract of sale. In a reply letter First Philippine
International Bank, through Acting Conservator Encarnacion, repudiated the authority of and claimed that his dealings with
Demetria, et al., particularly his counter-offer of P5.5 Million are unauthorized or illegal. On that basis, First Philippine International
Bank was justified the refusal of the tenders of payment and the non-compliance with the obligations under what the plaintiffs
considered to be a perfected contract of sale.

Demetria, et al. filed a suit for specific performance with damages against First Philippine International Bank, its Manager
Rivera and Acting Conservator Encarnacion. The basis of the suit was that the transaction had with the bank resulted in a perfected
contract of sale.

ISSUE:

Whether or not the conservator can revoke the contract

HELD:

Petition DENIED.

Was The Contract Perfected?

Article 1318 of the Civil Code enumerates the requisites of a valid and perfected contract as follows: (1) Consent of the
contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is
established. There is no dispute on requisite no. 2. The object of the questioned contract consists of the six (6) parcels of land in
Sta. Rosa, Laguna. There is, however, a dispute on the first and third requisites.

First Philippine International Bank allege that there is no counter-offer made by the Bank, and any supposed counter-offer
which Rivera (or Co) may have made is unauthorized. Since there was no counter-offer by the Bank, there was nothing for Ejercito to
accept.

The authority of a corporate officer in dealing with third persons may be actual or apparent. The doctrine of apparent
authority, with special reference to banks, was laid out: A bank is liable for wrongful acts of its officers done in the interests of
the bank or in the course of dealings of the officers in their representative capacity but not for acts outside the scope of their
authority. A bank holding out its officers and agents as worthy of confidence will not be permitted to profit 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 benefit may accrue to the bank therefrom. It is obvious that Rivera has apparent or implied
authority to act for the Bank in the matter of selling its acquired assets.

However, the above-cited authorities and precedents cannot apply in the instant case because, as found by the respondent
Court what was accepted by Janolo was the Banks offer of P5.5 million as confirmed and reiterated to Demetria and Atty. Jose
Fajardo by Rivera and Co during their meeting on September 28, 1987. Hence, assuming arguendo that the counter-offer of P4.25
million extinguished the offer of P5.5 million, Luis Cos reiteration of the said P5.5 million price during the September 28,
1987 meeting revived the said offer. And by virtue of the September 30, 1987 letter accepting this revived offer, there was a meeting
of the minds, as the acceptance in said letter was absolute and unqualified.

We note that the Banks repudiation, through Conservator Encarnacion, of Riveras authority and action, particularly the
latters counter-offer of P5.5 million, as being unauthorized and illegal came only on May 12, 1988 or more than seven (7) months
after Janolos acceptance. Such delay, and the absence of any circumstance which might have justifiably prevented the Bank from
acting earlier, clearly characterizes the repudiation as nothing more than a last-minute attempt on the Banks part to get out of a
binding contractual obligation.

May the Conservator Revokethe Perfected and Enforceable Contract?

It is not disputed that First Philippine International Bank was under a conservator placed by the Central Bank of
the Philippines during the time that the negotiation and perfection of the contract of sale took place. First Philippine International
Bank energetically contended that the conservator has the power to revoke or overrule actions of the management or the board of
directors of a bank, under Section 28-A of Republic Act No. 265.

Whenever the Monetary Board finds that a bank or a non-bank financial intermediary performing quasi - banking functions is in a state of
continuing inability or unwillingness to maintain a state of liquidity deemed adequate to protect the interest of depositors and creditors, the
Monetary Board may appoint a conservator to take charge of the assets, liabilities, and the management of that institution, collect all
monies and debts due said institution and exercise all powers necessary to preserve the assets of the institution, reorganize the
management thereof, and restore its viability. He shall have the power to overrule or revoke the actions of the previous management and
board of directors of the bank or non-bank financial intermediary performing quasi-banking functions, any provision of law to the contrary
notwithstanding, and such other powers as the Monetary Board shall deem necessary.

In the first place, this issue of the Conservators alleged authority to revoke or repudiate the perfected contract of sale was
raised for the first time in this Petition - as this was not litigated in the trial court or Court of Appeals. As already stated earlier,
issues not raised and/or ventilated in the trial court, let alone in the Court of Appeals, cannot be raised for the first time on appeal
as it would be offensive to the basic rules of fair play, justice and due process.

In the second place, there is absolutely no evidence that the Conservator, at the time the contract was perfected, actually
repudiated or overruled said contract of sale. The Banks acting conservator at the time, Rodolfo Romey, never objected to the
sale of the property to Demetria and Janolo. What petitioners are really referring to is the letter of Conservator Encarnacion, who
took over from Romey after the sale was perfected on September 30, 1987 (Annex V, petition) which unilaterally repudiated - not
the contract - but the authority of Rivera to make a binding offer - and which unarguably came months after the perfection of the
contract.

In the third place, while admittedly, the Central Bank law gives vast and far-reaching powers to the conservator of a bank, it
must be pointed out that such powers must be related to the (preservation of) the assets of the bank, (the reorganization of) the
management thereof and (the restoration of) its viability. Such powers, enormous and extensive as they are, cannot extend to
the post-facto repudiation of perfected transactions, otherwise they would infringe against the non-impairment clause of the
Constitution.

Obviously, therefore, Section 28-A merely gives the conservator power to revoke contracts that are, under existing law,
deemed to be defective - i.e., void, voidable, unenforceable or rescissible. Hence, the conservator merely takes the place of a
banks board of directors. What the said board cannot do - such as repudiating a contract validly entered into under the doctrine
of implied authority - the conservator cannot do either. Ineluctably, his power is not unilateral and he cannot simply repudiate valid
obligations of the Bank. His authority would be only to bring court actions to assail such contracts - as he has already done so in the
instant case. A contrary understanding of the law would simply not be permitted by the Constitution. Neither by common sense. To
rule otherwise would be to enable a failing bank to become solvent, at the expense of third parties, by simply getting the
conservator to unilaterally revoke all previous dealings which had one way or another come to be considered unfavorable to the
Bank, yielding nothing to perfected contractual rights nor vested interests of the third parties who had dealt with the Bank.

JERRY ONG v. COURT OF APPEALS and RURAL BANK OF OLONGAPO, INC., represented by its Liquidator, GUILLERMO G. REYES, JR.
and Deputy Liquidator ABEL ALLANIGUE
G.R. No. 112830, 1 February 1996, FIRST DIVISION (Bellosillo, J.)
All claims against the insolvent bank should be filed in the liquidation proceeding. The judicial liquidation is intended to
prevent multiplicity of actions against the insolvent bank. It is a pragmatic arrangement designed to establish due process and
orderliness in the liquidation of the bank, to obviate the proliferation of litigations and to avoid injustice and arbitrariness. It is not
necessary that a claim be initially disputed in a court or agency before it is filed with the liquidation court.

Jerry Ong filed with the Regional Trial Court a petition for the surrender of TCT Nos. 13769 and 13770 against Rural Bank of
Olongapo, Inc. (RBO), represented by its liquidator Guillermo G. Reyes, Jr. and deputy liquidator Abel Allanigue.

Allegedly, the RBO was the owner in fee simple of two parcels of land including the improvements thereon situated in
Tagaytay City. Subsequently, they were duly mortgaged by RBO in favor of Ong to guarantee the payment of Omnibus Finance, Inc.,
which is likewise now undergoing liquidation proceedings of its money market obligations to petitioner in the principal amount of
P863,517.02 . When Omnibus Finance, Inc., was unable to seasonably settle its obligations to Ong, the latter proceeded to effect the
extrajudicial foreclosure of said mortgages. RBO failed to seasonably redeem said parcels of land.

To date, Ong has not been able to effect the registration of said parcels of land in his name in view of the persistent refusal
of RBO.

RBO filed a motion to dismiss on the ground of res judicata and that it was undergoing liquidation and it is the liquidation
court which has exclusive jurisdiction to take cognizance of petitioner's claim. Trial court denied the motion to dismiss because it
found that the causes of action in the previous and present cases were different although it was silent on the jurisdictional issue.
RBO filed a motion for reconsideration but was similarly rejected. The Court of Appeals, through a certiorari filed by RBO, annulled
the challenged orders of the trial court which sustained the jurisdiction of the trial court and denied reconsideration thereof.
Moreover, the trial judge was ordered to dismiss the civil case without prejudice to the right of petitioner to file his claim in the
liquidation proceedings pending before the Regional Trial Court .

ISSUE:

Whether or not the civil case against RBO may proceed independently from the liquidation proceedings

HELD:

Petition DENIED.

Section 29, par. 3, of R.A. 265 as amended by P. D. 1827 provides

If the Monetary Board shall determine and confirm within (sixty days) that the bank x x x is insolvent or cannot resume business with safety to its
depositors, creditors and the general public, it shall, if the public interest requires, order its liquidation, indicate the manner of its liquidation and
approve a liquidation plan. The Central Bank shall, by the Solicitor General, file a petition in the Court of First Instance[7] reciting the
proceedings which have been taken and praying the assistance of the court in the liquidation of such institution. The court shall have jurisdiction
in the same proceedings to adjudicate disputed claims against the bank x x x and enforce individual liabilities of the stockholders and do all that
is necessary to preserve the assets of such institution and to implement the liquidation plan approved by the Monetary Board

The fact that the insolvent bank is forbidden to do business, that its assets are turned over to the Superintendent of Banks,
as a receiver, for conversion into cash, and that its liquidation is undertaken with judicial intervention means that, as far as lawful
and practicable, all claims against the insolvent bank should be filed in the liquidation proceeding.

We explained therein the rationale behind the provision, i.e., the judicial liquidation is intended to prevent multiplicity of
actions against the insolvent bank. It is a pragmatic arrangement designed to establish due process and orderliness in the
liquidation of the bank, to obviate the proliferation of litigations and to avoid injustice and arbitrariness. The lawmaking body
contemplated that for convenience only one court, if possible, should pass upon the claims against the insolvent bank and that
the liquidation court should assist the Superintendent of Banks and regulate his operations.

The phrase (T)he court shall have jurisdiction in the same proceedings to adjudicate disputed claims against the bank
appears to have misled Ong. He argues that to the best of his personal knowledge there is no pending action filed before any court
or agency which contests his right over subject properties. Thus his petition before the Regional Trial Court of Quezon City cannot
be considered a disputed claim as contemplated by law.

It is not necessary that a claim be initially disputed in a court or agency before it is filed with the liquidation court. As may
be gleaned in the Hernandez case, the term disputed claim in the provision simply connotes that

In the course of the liquidation, contentious cases might arise wherein a full-dress hearing would be required and legal
issues would have to be resolved. Ong must have overlooked the fact that since RBO is insolvent other claimants not privy to their
transaction may be involved. As far as those claimants are concerned, in the absence of certificates of title in the name of
petitioner, subject lots still form part of the assets of the insolvent bank.

DOMINGO R. MANALO v. COURT OF APPEALS (Special Twelfth Division) and
PAIC SAVINGS AND MORTGAGE BANK
G.R. No. 141297, 8 October 2001, FIRST DIVISION (Puno, J.)
The exclusive jurisdiction of the liquidation court pertains only to the adjudication of claims against the bank. It does not cover
the reverse situation where it is the bank which files a claim against another person or legal entity. Petition for the Issuance of a Writ
of Possession in Civil Case No. 9011 is not in the nature of a disputed claim against the bank. On the contrary, it is an action
instituted by the respondent bank itself for the preservation of its asset and protection of its property. It was filed upon the instance
of the respondents liquidator in order to take possession of a tract of land over which it has ownership claims.

S. Villanueva Enterprises, represented by its president, Therese Villanueva Vargas, obtained a loan of 3 million pesos and 1
million pesos from PAIC Savings and Mortgage Bank and the Philippine American Investments Corporation (PAIC), respectively. To
secure payment of both debts, Vargas executed in favor of and PAIC a Joint First mortgage

over the 2 parcels of land registered
under her name. One of the lots is the subject of the present case. S. Villanueva Enterprises failed to settle its loan obligation. PAIC
instituted extrajudicial foreclosure proceedings over the mortgaged lots and acquired the same as the highest bidder. After the lapse
of one year, title was consolidated in respondent's name for failure of Vargas to redeem.

Central Bank of the Philippines filed a petition for assistance in the liquidation of the respondent PAIC with the Regional
Trial Court. After a few years, PAIC petitioned the RTC for the issuance of a writ of possession for the subject property. However,
during the pendency of civil case for the issuance of a writ of possession, Vargas executed a deed of absolute sale selling,
transferring, and conveying ownership of the disputed lot in favor of a certain Armando Angsico. Notwithstanding this sale, Vargas,
still representing herself to be the lawful owner of the property, leased the same to petitioner Domingo R. Manalo. Later, Armando
Angsico, as buyer of the property, assigned his rights therein to Manalo.

The RTC subsequently issued the writ of possession but Villanueva Enterprises and Vargas moved for its quashal. Manalo, on
the strength of the lease contract and deed of assignment made in his favor, submitted a permission to file an ex-parte motion to
intervene. Both motions were denied by the court. Court of Appeals upheld the order of the lower court.

ISSUE:

Whether or not the jurisdiction for the issuance of the writ of possession filed by the respondent bank is vested solely on
the liquidation court

HELD:

Petition DENIED.

Manalo postulates that the RTC should have dismissed respondents Ex-Parte Petition for Issuance of Writ of Possession for
want of jurisdiction over the subject matter of the claim. The power to hear the same, Manalo insists, exclusively vests with the
Liquidation Court pursuant to Section 29 of Republic Act No. 265, otherwise known as The Central Bank Act. Moreover, Manolo
alleged that there is forum shopping.

These contentions can not pass judicial muster. The pertinent portion of Section 29 states:
The liquidator designated as hereunder provided shall, by the Solicitor General, file a petition in the Regional Trial Court reciting the
proceedings which have been taken and praying the assistance of the court in the liquidation of such institution. The court shall have
jurisdiction in the same proceedings to assist in the adjudication of disputed claims against the bank or non-bank financial intermediary
performing quasi-banking functions and the enforcement of individual liabilites of the stockholders and do all that is necessary to preserve the
assets of such institution and to implement the liquidation plan approved by the Monetary Board. x x x

Manalo apparently failed to appreciate the correct meaning and import of the above-quoted law. The legal provision only finds
operation in cases where there are claims against an insolvent bank. In fine, the exclusive jurisdiction of the liquidation court
pertains only to the adjudication of claims against the bank. It does not cover the reverse situation where it is the bank which
files a claim against another person or legal entity.

This interpretation of Section 29 becomes more obvious in the light of its intent. The requirement that all claims against the
bank be pursued in the liquidation proceedings filed by the Central Bank is intended to prevent multiplicity of actions against the
insolvent bank and designed to establish due process and orderliness in the liquidation of the bank, to obviate the proliferation of
litigations and to avoid injustice and arbitrariness. The lawmaking body contemplated that for convenience, only one court, if
possible, should pass upon the claims against the insolvent bank and that the liquidation court should assist the Superintendents of
Banks and regulate his operations.

It then ought to follow that petitioners reliance on Section 29 and the Valenzuela case is misplaced. The Petition for the
Issuance of a Writ of Possession in Civil Case No. 9011 is not in the nature of a disputed claim against the bank. On the
contrary, it is an action instituted by the respondent bank itself for the preservation of its asset and protection of its property. It
was filed upon the instance of the respondents liquidator in order to take possession of a tract of land over which it has
ownership claims.

RURAL BANK OF STA. CATALINA, INC., represented by The Philippine Deposit Insurance Corporation, in its capacity as Liquidator
v. LAND BANK OF THE PHILIPPINES
G.R. No. 148019, 26 July 2004, SECOND DIVISION (Callejo, Sr., J.)
The records show that the Sta. Catalina was served with a copy of summons and the complaint, but failed to file its answer
thereto. It also failed to file a verified motion to set aside the Order of default despite its receipt of a copy thereof.

Land Bank of the Philippines, filed a complaint against Sta. Catalina Rural Bank, Inc., in the Regional Trial Court for the
collection of the sum of P2,809,280.25. On motion of the Sta. Catalina, the trial court issued an Order declaring the Sta. Catalina in
default for its failure to file its answer to the complaint. Despite its receipt of the copy of the said order, Sta. Catalina failed to file a
motion to set aside the order of default.

Sta. Catalina presented 2 witnesses. The first witness, Mr. Mervin Sison, the chief loans and creditor of the Land Bank of
the Philippines, testified that he knows of the rediscounting line agreements entered into by and between the plaintiff and the
defendant. Said agreements were identified by him in court for P 3,500,000.00. In case of defendant's default, the availments shall
be subject to 3% penalty per month from due date of note as agreed upon. During the effectivity of the first and second
rediscounting line agreement, defendant made several separate availments, each is subject to a certain interest per annum and with
a term of 180 days. Ms. Elenita del Castillo, corroborated the testimony of Mr. Sison. The grand total of all the availments plus
corresponding penalties amounted more than P 5 million.

In the meantime, the Monetary Board approved the placement of the Sta. Catalina's assets under receivership. The
Philippine Deposit Insurance Corporation (PDIC) was designated as receiver (conservator) of Sta. Catalina, and the latter was
prohibited from doing business in the Philippines. Unaware of the action of the CB, the trial court rendered judgment by default
against Sta. Catalina ordering the bank to pay its obligation to respondent LBP plus interests and damages.

Sta. Catalina, through the PDIC, appealed the decision to the Court of Appeals. Sta. Catalina claim that since it was placed
under receivership and prohibited from doing business in the Philippines it should no longer be held liable for interests and penalties
on its account to the respondent bank. However, CA rendered judgment affirming the decision of the RTC.

ISSUE:

Whether or not Sta. Catalina may be held liable to pay interests and penalties after being declared in default

HELD:

Petition GRANTED.

The records show that the Sta. Catalina was served with a copy of summons and the complaint, but failed to file its answer
thereto. It also failed to file a verified motion to set aside the Order of default despite its receipt of a copy thereof.

We note that the trial court rendered judgment only on April 7, 1998 or more than a year after the issuance of the default
order; yet, Sta. Catalina failed to file any verified motion to set aside the said order before the rendition of the judgment of
default. The PDIC was designated by the Central Bank of the Philippines as receiver (conservator) as early as January 14, 1998, and
in the course of its management of Sta. Catalinas affairs, it should have known of the pendency of the case against the latter in the
trial court. Moreover, Sta. Catalina, through the PDIC, received a copy of the decision of the trial court but did not bother filing a
motion for partial reconsideration, under Rule 37 of the Rules of Court, appending thereto the orders of the Monetary Board or a
motion to set aside the order of default. Instead, Sta. Catalina appealed the decision, and even failed to assign as an error the
default order of the trial court. Sta. Catalina is, thus, barred from relying on the orders of the Monetary Board of the Central Bank of
the Philippines placing its assets and affairs under receivership and ordering its liquidation.

It bears stressing that a defending party declared in default loses his standing in court and his right to adduce evidence and
to present his defense. He, however, has the right to appeal from the judgment by default and assail said judgment on the
ground, inter alia, that the amount of the judgment is excessive or is different in kind from that prayed for, or that the plaintiff
failed to prove the material allegations of his complaint, or that the decision is contrary to law.

LETICIA G. MIRANDA v. PHILIPPINE DEPOSIT INSURANCE CORPORATION, BANGKO SENTRAL NG PILIPINAS and PRIME SAVINGS
BANK
G.R. No. 169334, 8 September 2006, FIRST DIVISION (Ynares-Santiago, J.)
The claim lodged by Miranda qualifies as a disputed claim subject to the jurisdiction of the liquidation court. Regular courts
do not have jurisdiction over actions filed by claimants against an insolvent bank, unless there is a clear showing that the action
taken by the BSP, through the Monetary Board in the closure of financial institutions was in excess of jurisdiction, or with grave abuse
of discretion.

Leticia G. Miranda was a depositor of Prime Savings Bank. Later, Miranda withdrew substantial amounts from her account,
but instead of cash she opted to be issued a crossed cashier's check. Miranda was thus issued cashier's check in the sum of
P2,500,000.00 and another in the amount of P3,002,000.00. Miranda deposited the 2 checks into her account in another bank on
the same day, however, Bangko Sentral ng Pilipinas (BSP) suspended the clearing privileges of Prime Savings Bank. Thus, the 2
checks of Miranda were returned to her unpaid.

Prime Savings Bank declared a bank holiday. BSP placed Prime Savings Bank under the receivership of the Philippine Deposit
Insurance Corporation (PDIC). Miranda filed a civil action for sum of money in RTC to recover the funds from her unpaid checks
against Prime Savings Bank, PDIC and the BSP. The case was decided in favor of Miranda but the CA reversed the same.

ISSUE:

Whether or not the claim is within jurisdiction of the liquidation court

HELD:

Petition

Miranda argues that the present claim is not a disputed claim in contemplation of Section 30 of the New Central Bank Act.
Since disputed claims refer to all claims, whether they be against the assets of the insolvent bank, for specific performance, breach
of contract, or damages, it is manifest that Miranda's claim cannot fall within the purview of a disputed claim because she is
recovering assigned funds which are segregated monies of Prime Savings Bank.

Miranda further states that by the mere issuance of the cashier's check, the funds represented by the check are transferred
from the credit of the maker to that of the payee or holder. Hence, Miranda alleges that she cannot be placed on the same footing
with the ordinary creditors of the bank because Section 30 of R.A. No. 7653 is for equality among creditors. Miranda avers that she is
not a creditor thus is entitled to the immediate payment of her claim, pursuant to Section 189 of the Negotiable Instruments Law
and existing jurisprudence. She argues that putting her on equal footing with ordinary creditors, would contravene the provisions of
the Negotiable Instruments Law and would greatly diminish her rights as a holder in due course of said two cashier's checks.

The claim lodged by Miranda qualifies as a disputed claim subject to the jurisdiction of the liquidation court. Regular
courts do not have jurisdiction over actions filed by claimants against an insolvent bank, unless there is a clear showing that the
action taken by the BSP, through the Monetary Board in the closure of financial institutions was in excess of jurisdiction, or with
grave abuse of discretion.

The power and authority of the Monetary Board to close banks and liquidate them thereafter when public interest so
requires is an exercise of the police power of the State. Police power, however, is subject to judicial inquiry. It may not be
exercised arbitrarily or unreasonably and could be set aside if it is either capricious, discriminatory, whimsical, arbitrary, unjust,
or is tantamount to a denial of due process and equal protection clauses of the Constitution.

"Disputed claims" refer to all claims, whether they be against the assets of the insolvent bank, for specific performance,
breach of contract, damages, or whatever. Miranda's claim which involved the payment of the two cashier's checks that were not
honored by Prime Savings Bank due to its closure falls within the ambit of a claim against the assets of the insolvent bank. The
issuance of the cashier's checks by Prime Savings Bank to the petitioner created a debtor/creditor relationship between them. This
disputed claim should therefore be lodged in the liquidation proceedings by the petitioner as creditor, since the closure of Prime
Savings Bank has rendered all claims subsisting at that time moot which can best be threshed out by the liquidation court and not
the regular courts.

It is well-settled in both law and jurisprudence that the Central Monetary Authority, through the Monetary Board, is vested
with exclusive authority to assess, evaluate and determine the condition of any bank, and finding such condition to be one of
insolvency, or that its continuance in business would involve a probable loss to its depositors or creditors, forbid bank or non-bank
financial institution to do business in the Philippines; and shall designate an official of the BSP or other competent person as receiver
to immediately take charge of its assets and liabilities.

No solidary liability

It is only Prime Savings Bank that is liable to pay for the amount of the two cashier's checks. Solidary liability cannot attach
to the BSP, in its capacity as government regulator of banks, and the PDIC as statutory receiver under R.A. No. 7653, because they
are the principal government agencies mandated by law to determine the financial viability of banks and quasi-banks, and facilitate
receivership and liquidation of closed financial institutions, upon a factual determination of the latter's insolvency.

BSP should not be held liable on the crossed cashier's checks for it was not a party to the issuance of the same; nor can it be
held liable for imposing the sanctions on Prime Savings Bank which indirectly affected Miranda, since it is mandated under Sec. 37 of
R.A. No. 7653 to act accordingly. The BSP, through the Monetary Board was well within its discretion to exercise this power granted
by law to issue a resolution suspending the interbank clearing privileges of Prime Savings Bank, having made a factual determination
that the bank had deficient cash reserves deposited before the BSP. There is no showing that the BSP abused this discretionary
power conferred upon it by law.

PDIC was impleaded as a party-litigant only in its representative capacity as the receiver/liquidator of Prime Savings
Bank. Both BSP and PDIC cannot therefore be held directly and solidarily liable for the payment of the two cashier's checks. Sole
liability rests with Prime Savings Bank.

In the absence of fraud, the purchase of a cashier's check, like the purchase of a draft on a correspondent bank, creates the
relation of creditor and debtor, not that of principal and agent, with the result that the purchaser or holder thereof is not entitled to
a preference over general creditors in the assets of the bank issuing the check, when it fails before payment of the check. However,
in a situation involving the element of fraud, where a cashier's check is purchased from a bank at a time when it is insolvent, as its
officers know or are bound to know by the exercise of reasonable diligence, it has been held that the purchase is entitled to a
preference in the assets of the bank on its liquidation before the check is paid.

ABACUS REAL ESTATE DEVELOPMENT CENTER, INC, v. THE MANILA BANKING CORPORATION
G.R. No. 162270, 6 April 2005, THIRD DIVISION (Garcia, J.)
Clearly, the receiver appointed by the Central Bank to take charge of the properties of Manil a Bank only had authority
to administer the same for the benefit of its creditors. Granting or approving an exclusive option to purchase is not an act of
administration, but an act of strict ownership, involving, as it does, the disposition of property of the bank. Not being an act of
administration, the so-called approval by Atty. Renan Santos amounts to no approval at all, a bank receiver not being authorized to
do so on his own.

Manila Banking Corporation (Manila Bank), owns a 1,435-square meter parcel of land located in Makati City. Prior to 1984,
Manila Bank began constructing on said land a 14-storey building. Not long after, however, Manila Bank encountered financial
difficulties that rendered it unable to finish construction of the building.

The Central Bank ordered the closure of Manila Bank and placed it under receivership, with Feliciano Miranda, Jr. being initially
appointed as Receiver. The legality of the closure was contested by Manila Bank before the proper court. The Central Bank, by
virtue of Monetary Board (MB) Resolution No. 505, ordered the liquidation of Manila Bank and designated Atty. Renan V. Santos as
Liquidator. The liquidation, however, was held in abeyance pending the outcome of the earlier suit filed by Manila Bank regarding
the legality of its closure.

In the interim, Manila Banks then acting president Vicente G. Puyat, in a bid to save the banks investment, started scouting
for possible investors who could finance the completion of the building. A group of investors, represented by Calixto Y. Laureano
wrote Vicente G. Puyat offering to lease the building for ten (10) years and to advance the cost to complete the same, with the
advanced cost to be amortized and offset against rental payments during the term of the lease. Likewise, the group wanted to be
given the exclusive option to purchase the building and the lot on which it was constructed.

An arrangement was thought of whereby the property would first be leased to Manila Equities Corporation (MEQCO), a
wholly-owned subsidiary of Manila Bank, with MEQCO thereafter subleasing the property to the Laureano group. Later, the building
was leased to MEQCO for a period of ten (10) years pursuant to a contract of lease bearing that date. MEQCO subleased the
property to Abacus Real Estate Development Center, Inc. (Abacus, for short), a corporation formed by the Laureano group for the
purpose, under identical provisions as that of the October 31, 1989 lease contract between Manila Bank and MEQCO.

The Laureano group was, however, unable to finish the building due to the economic crisis. The Laureano group offered its
rights in Abacus and its exclusive option to purchase to Benjamin Bitanga for P20,500,000.00. Bitanga would later allege that
because of the substantial amount involved, he first had to talk with Atty. Renan Santos, the Receiver appointed by the Central Bank,
to discuss Abacus offer. Bitanga further alleged that, over lunch, Atty. Santos then verbally approved his entry into Abacus and his
take-over of the sublease and option to purchase.

Laureano group transferred and assigned to Bitanga all of its rights in Abacus and the exclusive option to purchase the
subject land and building. Abacus sent a letter to Manila Bank informing the latter of its desire to exercise its exclusive option to
purchase. However, Manila Bank refused to honor the same.

The RTC rendered judgment for Abacus. The Court of Appeals, reversed and set aside the appealed decision.

ISSUE:

Whether or not Abacus acquired the right to purchase the lot and building in question

HELD:

Petition

Abacus insists that the option to purchase the lot and building in question granted to it by the late Vicente G. Puyat, then
acting president of Manila Bank, was binding upon the latter. On the other hand, Manila Bank has consistently maintained that the
late Vicente G. Puyat had no authority to act for and represent Manila Bank, the latter having been placed under receivership by the
Central Bank at the time of the granting of the exclusive option to purchase.

Manila Bank was under receivership, pursuant to Central Banks MB Resolution No at the time the late Vicente G. Puyat
granted the exclusive option to purchase to the Laureano group of investors. Owing to this defining reality, the appellate court
was correct in declaring that Vicente G. Puyat was without authority to grant the exclusive option to purchase the lot and building
in question.

With respondent bank having been already placed under receivership, its officers, inclusive of its acting president, Vicente
G. Puyat, were no longer authorized to transact business in connection with the banks assets and property. Clearly then, the
exclusive option to purchase granted by Vicente G. Puyat was and still is unenforceable against Manila Bank.

Abacus, however, asseverates that the exclusive option to purchase was ratified by Manila Banks receiver, Atty. Renan
Santos. Not true. Concededly, a contract unenforceable for lack of authority by one of the parties may be ratified by the person in
whose name the contract was executed. However, even assuming, in gratia argumenti, that Atty. Renan Santos, Manila Banks
receiver, approved the exclusive option to purchase granted by Vicente G. Puyat, the same would still be of no force and effect.

Section 29 of the Central Bank Act, as amended, pertinently provides:
Sec. 29. Proceedings upon insolvency. Whenever, upon examination by the head of the appropriate supervising and examining department or his examiners or
agents into the condition of any banking institution, it shall be disclosed that the condition of the same is one of insolvency, or that its continuance in business would
involve probable loss to its depositors or creditors, it shall be the duty of the department head concerned forthwith, in writing, to inform the Monetary Board of the
facts, and the Board may, upon finding the statements of the department head to be true, forbid the institution to do business in the Philippines and shall designate
an official of the Central Bank as receiver to immediately take charge of its assets and liabilities, as expeditiously as possible collect and gather all the assetsand
administer the same for the benefit of its creditors, exercising all the powers necessary for these purposes including, but not limited to, bringing suits and foreclosing
mortgages in the name of the banking institution. (Emphasis supplied)

Clearly, the receiver appointed by the Central Bank to take charge of the properties of Manila Bank only had authority
to administer the same for the benefit of its creditors. Granting or approving an exclusive option to purchase is not an act of
administration, but an act of strict ownership, involving, as it does, the disposition of property of the bank. Not being an act of
administration, the so-called approval by Atty. Renan Santos amounts to no approval at all, a bank receiver not being
authorized to do so on his own.

IN RE: PETITION FOR ASSISTANCE IN THE LIQUIDATION OF THE RURAL BANK OF BOKOD (BENGUET), INC., PHILIPPINE DEPOSIT
INSURANCE CORPORATION v. BUREAU OF INTERNAL REVENUE
G.R. No. 158261, 18 December 2006, FIRST DIVISION (Chico-Nazario, J.)
Tax Code provision and regulations refer to a voluntary dissolution and/or liquidation of a corporation through its adoption
of a resolution or plan to that effect, or an involuntary dissolution of a corporation by order of the SEC. They make no reference at all
to a situation similar to the one at bar in which a banking corporation is ordered closed and placed under receivership by the BSP and
its assets judicially liquidated.

A special examination of Rural Bank of Bokod (Benguet), Inc. (RBBI) was conducted by the Supervision and Examination
Sector (SES) Department III of what is now the Bangko Sentral ng Pilipinas (BSP), wherein various loan irregularities were uncovered.

SES Department III required the RBBI management to infuse fresh capital into the bank, within 30 days from date of the
advice, and to correct all the exceptions noted. However, no concrete action was taken by the RBBI management. In view of the
irregularities noted and the insolvent condition of RBBI, the members of the RBBI Board of Directors were called for a conference at
the BSP. Only one RBBI Director, Mr. Wakit, attended the conference, and the examination findings and related recommendations
were discussed with him. SES Department III warned the RBBI Board of Directors that, unless substantial remedial measures are
taken to rehabilitate the bank, it will recommend that the bank be placed under receivership.

The Monetary Board of the BSP decided to take the following:
a. forbid the bank to do business in the Philippines and place its assets and affairs under receivership in accordance with
Section 29 of R.A. No. 265, as amended;
b. designate the Special Assistant to the Governor and Head, SES Department III, as Receiver of the bank;
c. refer the cases of irregularities/frauds to the Office of Special Investigation for further investigation and possible filing
of appropriate charges against the following present/former officers and employees of the Rural Bank

A memorandum and report, were submitted by the Director of the SES Department III concluding that the RBBI remained in
insolvent financial condition and it can no longer safely resume business with the depositors, creditors, and the general public.

Thus, the Monetary Board, ordered the liquidation of the bank and designated the Director of the SES Department III as
liquidator. This caused the filing with the RTC of a Petition for Assistance in the Liquidation of RBBI. Subsequently, the Monetary
Board transferred to herein Philippine Deposit Insurance Corporation (PDIC) the receivership/liquidation of RBBI.

PDIC then filed a Motion for Approval of Project of Distribution of the assets of RBBI. The Bureau of Internal Revenue (BIR)
manifested that PDIC should secure a tax clearance certificate from the appropriate BIR Regional Office, pursuant to Section 52(C) of
Republic Act No. 8424, or the Tax Code of 1997, before it could proceed with the dissolution of RBBI.

The RTC issued order directing PDIC to comply with Section 52(C) of the Tax Code of 1997 within 30 days from receipt of a
copy of the said order. Pending compliance therewith, the RTC held in abeyance the Motion for Approval of Project of Distribution.
In order therefore that all taxes due the government should be paid, petitioner should secure a tax clearance from the Bureau of
Internal Revenue.

Hence, PDIC filed the present Petition for Review on Certiorari, under Rule 45 raising pure questions of law. PDIC argues
that the closure of banks under Section 30 of the New Central Bank Act is summary in nature and procurement of tax clearance as
required under Section 52(C) of the Tax Code of 1997 is not a condition precedent thereto; that under Section 30, in relation to
Section 31, of the New Central Bank Act, asset distribution of a closed bank requires only the approval of the liquidation court; and
that the BIR is not without recourse since, subject to the applicable provisions of the Tax Code of 1997, it may therefore assess the
closed RBBI for tax liabilities, if any.

ISSUE:

Whether or not RBBI, as represented by its liquidator, PDIC, still needs to secure a tax clearance from the BIR before the
RTC could approve the Project of Distribution of the assets of RBBI

HELD:

Petition DENIED.

The BIR anchors its position that a tax clearance is necessary on Section 52(C) of the Tax Code of 1997, which provides
SEC. 52. Corporation Returns.
x x x x
(C) Return of Corporation Contemplating Dissolution or Reorganization. Every corporation shall, within thirty days (30) after the adoption by
the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a
corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization,
render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information
as the Secretary of Finance, upon recommendation of the Commissioner, shall, by rules and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate
of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the
Securities and Exchange Commission.

The afore-quoted Tax Code provision and regulations refer to a voluntary dissolution and/or liquidation of a corporation
through its adoption of a resolution or plan to that effect, or an involuntary dissolution of a corporation by order of the SEC. They
make no reference at all to a situation similar to the one at bar in which a banking corporation is ordered closed and placed under
receivership by the BSP and its assets judicially liquidated.

Now, the determining question is, whether Section 52(C) of the Tax Code of 1997 and BIR-SEC Regulations No. 1 could be
made to apply to the present case. This Court rules in the negative.

First, Section 52(C) of the Tax Code of 1997 and the BIR-SEC Regulations No. 1 regulate the relations only as between the
SEC and the BIR, making a certificate of tax clearance a prior requirement before the SEC could approve the dissolution of a
corporation.

It is conceded that the SEC has the authority to order the dissolution of a corporation pursuant to Section 121 of Batas
Pambansa Blg. 68, otherwise known as the Corporation Code of the Philippines, which reads
Sec. 121. Involuntary dissolution. A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified
complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations.

The Corporation Code, however, is a general law applying to all types of corporations, while the New Central Bank Act
regulates specifically banks and other financial institutions, including the dissolution and liquidation thereof. As between a
general and special law, the latter shall prevail generalia specialibus non derogant.

The liquidation of RBBI is undertaken according to Sections 30 of the New Central Bank Act. Section 30 of the New Central Bank Act
lays down the proceedings for receivership and liquidation of a bank. The said provision is silent as regards the securing of a tax
clearance from the BIR. The omission, nonetheless, cannot compel this Court to apply by analogy the tax clearance requirement of
the SEC, as stated in Section 52(C) of the Tax Code of 1997 and BIR-SEC Regulations No. 1, since, again, the dissolution of a
corporation by the SEC is a totally different proceeding from the receivership and liquidation of a bank by the BSP. This Court
cannot simply replace any reference by Section 52(C) of the Tax Code of 1997 and the provisions of the BIR-SEC Regulations No. 1 to
the "SEC" with the "BSP." To do so would be to read into the law and the regulations something that is simply not there, and woul d
be tantamount to judicial legislation.

It should be noted that there are substantial differences in the procedure for involuntary dissolution and liquidation of a
corporation under the Corporation Code, and that of a banking corporation under the New Central Bank Act, so that the
requirements in one cannot simply be imposed in the other.

Irrefragably, liquidation proceedings cannot be summary in nature. It requires the holding of hearings and presentation of
evidence of the parties concerned, i.e., creditors who must prove and substantiate their claims, and the liquidator disputing the
same. It also allows for multiple appeals, so that each creditor may appeal a final order rendered against its claim. Hence, liquidation
proceedings may very well be highly-contested and drawn-out, because, at the end of it all, all claims against the corporation
undergoing litigation must be settled definitively and its assets properly disposed off.

RURAL BANK OF SAN MIGUEL, INC. and HILARIO P. SORIANO, in his capacity as majority stockholder in the Rural Bankof San
Miguel, Inc., v. MONETARY BOARD, BANGKO SENTRAL NG PILIPINAS and PHILIPPINE DEPOSIT INSURANCE CORPORATION
G.R. No. 150886, 16 February 2007, FIRST DIVISION (Corona, J.)
The absence of an examination before the closure of RBSM did not mean that there was no basis for the closure order.
Needless to say, the decision of the MB and BSP, like any other administrative body, must have something to support itself and its
findings of fact must be supported by substantial evidence. But it is clear under RA 7653 that the basis need not arise from an
examination as required in the old law.

To assist its impaired liquidity and operations, the RBSM was granted emergency loans on different occasions in the aggregate
amount of P375 million. Land Bank of the Philippines (LBP) advised RBSM that it will terminate the clearing of RBSMs checks in view
of the latters frequent clearing losses and continuing failure to replenish its Special Clearing Demand Deposit with LBP. The BSP
interceded with LBP not to terminate the clearing arrangement of RBSM to protect the interests of RBSMs depositors and creditors.

LBP informed the BSP of the termination of the clearing facility of RSBM in view of the clearing problems of RBSM. MB
approved the release of P26.189 million which is the last tranche of the P375 million emergency loan for the sole purpose of
servicing and meeting the withdrawals of its depositors. Of the P26.180 million, xxx P12.6 million xxx was not used to service
withdrawals *and+ remains unaccounted for as admitted by *RBSMs Treasury Officer and Officer-in-Charge of Treasury]. Instead of
servicing withdrawals of depositors, RBSM paid Forcecollect Professional Solution, Inc. and Surecollect Professional, Inc., entities
which are owned and controlled by Hilario P. Soriano and other RBSM officers.

RBSM declared a bank holiday. RBSM and all of its 15 branches were closed from doing business. Alarmed and disturbed by
the unilateral declaration of bank holiday, [BSP] wanted to examine the books and records of RBSM but encountered problems.
Thereafter, PDIC implemented the closure order and took over the management of RBSMs assets and affairs.

In their petition before the CA, petitioners claimed that respondents MB and BSP committed grave abuse of discretion in
issuing Resolution No. 105. The petition was dismissed by the CA. It held, among others, that the decision of the MB to issue
Resolution No. 105 was based on the findings and recommendations of the Department of Rural Banks Supervision and Examination
Sector, the comptroller reports. Such could be considered as substantial evidence.

On the basis of reports prepared by PDIC stating that RBSM could not resume business with sufficient assurance of
protecting the interest of its depositors, creditors and the general public, the MB passed resolution directing PDIC to proceed with
the liquidation of RBSM.

ISSUE:

Whether or not the complete examination of the bank is necessary before it can be closed and placed under receivership

HELD:

Petition DENIED.

It is well-settled that the closure of a bank may be considered as an exercise of police power. The action of the MB on this
matter is final and executory. Such exercise may nonetheless be subject to judicial inquiry and can be set aside if found to be in
excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction.

Section 30 of RA 7653 provides:
SECTION 30. Proceedings in Receivership and Liquidation. Whenever, upon report of the head of the supervising or examining department,
the Monetary Board finds that a bank or quasi-bank:
(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay
caused by extraordinary demands induced by financial panic in the banking community;
(b) has insufficient realizable assets, as determined by the [BSP] to meet its liabilities; or
(c) cannot continue in business without involving probable losses to its depositors or creditors; or
(d) has willfully violated a cease and desist order under Section 37 that has become final, involving acts or transactions which amount to fraud
or a dissipation of the assets of the institution; in which cases, the Monetary Board may summarily and without need for prior hearing forbid
the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking
institution.

The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be final and executory, and
may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of
jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only
be filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of
directors of the institution of the order directing receivership, liquidation or conservatorship.

Petitioners contend that there must be a current, thorough and complete examination before a bank can be closed under
Section 30 of RA 7653. They argue that this section should be harmonized with Sections 25 and 28 of the same law:
SECTION 25. Supervision and Examination. The [BSP] shall have supervision over, and conduct periodic or special examinations of, banking
institutions and quasi-banks, including their subsidiaries and affiliates engaged in allied activities.

SECTION 28. Examination and Fees. The supervising and examining department head, personally or by deputy, shall examine the books of
every banking institution once in every twelve (12) months, and at such other time as the Monetary Board by an affirmative vote of five (5)
members may deem expedient and to make a report on the same to the Monetary Board: Provided that there shall be an interval of at least
twelve (12) months between annual examinations. (Emphasis supplied)

There is no question that under Section 29 of the Central Bank Act, the following are the mandatory requirements to be
complied with before a bank found to be insolvent is ordered closed and forbidden to do business in the Philippines: Firstly, an
examination shall be conducted by the head of the appropriate supervising or examining department or his examiners or agents
into the condition of the bank; secondly, it shall be disclosed in the examination that the condition of the bank is one of insolvency,
or that its continuance in business would involve probable loss to its depositors or creditors; thirdly, the department head
concerned shall inform the Monetary Board in writing, of the facts; and lastly, the Monetary Board shall find the statements of the
department head to be true.

Respondents counter that RA 7653 merely requires a report of the head of the supervising or examining department. They
maintain that the term "report" under Section 30 and the word "examination" used in Section 29 of the old law are not synonymous.
"Examination" connotes in-depth analysis, evaluation, inquiry or investigation while "report" connotes a simple disclosure or
narration of facts for informative purposes.

However, RA 265, including Section 29 thereof, was expressly repealed by RA 7653 which took effect in 1993. Resolution
No. 105 was issued. In RA 7653, only a "report of the head of the supervising or examining department" is necessary. It is an
established rule in statutory construction that where the words of a statute are clear, plain and free from ambiguity, it must be given
its literal meaning and applied without attempted interpretation.

This plain meaning rule or verba legis derived from the maxim index animi sermo est (speech is the index of intention) rests
on the valid presumption that the words employed by the legislature in a statute correctly express its intention or will and preclude
the court from construing it differently. The legislature is presumed to know the meaning of the words, to have used words
advisedly, and to have expressed its intent by use of such words as are found in the statute. Verba legis non est recedendum, or from
the words of a statute there should be no departure.

The word "report" has a definite and unambiguous meaning which is clearly different from "examination." A report, as a
noun, may be defined as "something that gives information" or "a usually detailed account or statement."
26
On the other hand, an
examination is "a search, investigation or scrutiny."

This Court cannot look for or impose another meaning on the term "report" or to construe it as synonymous with
"examination." From the words used in Section 30, it is clear that RA 7653 no longer requires that an examination be made before
the MB can issue a closure order. We cannot make it a requirement in the absence of legal basis.

The absence of an examination before the closure of RBSM did not mean that there was no basis for the closure order.
Needless to say, the decision of the MB and BSP, like any other administrative body, must have something to support itself and its
findings of fact must be supported by substantial evidence. But it is clear under RA 7653 that the basis need not arise from an
examination as required in the old law.

RUFA C. SUAN, v. ATTY. RICARDO D. GONZALEZ
A.C. No. 6377, 12 March 2007, THIRD DIVISION (Ynares-Santiago, J.)
The filing of the intra-corporate case before the RTC does not amount to forum-shopping. It is a formal demand of
respondents legal rights in a court of justice in the manner prescribed by the court or by the law with respect to the controversy
involved.
7
The relief sought in the case is primarily to compel the bank to disclose its stockholdings, to allow them the inspection of
corporate books and records, and the payment of damages. It was also prayed that a TRO be issued to enjoin the holding of the
annual stockholders meeting and the election of the members of the Board, which, only courts of justice can issue.

Atty. Gonzales filed a case for Mandamus, Computation of Interests, Enforcement of Inspection, Dividend and Appraisal
Rights, Damages and Attorneys Fees against the Rural Green Bank of Caraga, Inc. and the members of its Board of Directors before
the Regional Trial Court (RTC) praying, inter alia, that a temporary restraining order be issued enjoining the conduct of the annual
stockholders meeting and the holding of the election of the Board of Directors.

The RTC issued the TRO. Thereafter, Atty. Gonzales submitted JCL Bond No. 01626 issued by Stronghold Insurance
Company, Incorporated (SICI) with a Certification that SICI has no pending obligation and/or liability to the government insofar as
confiscated bonds in civil and criminal cases are concerned.

Based on the foregoing, Suan filed this complaint alleging that Atty. Gonzales engaged in unlawful, dishonest, immoral or
deceitful conduct when he submitted the certification to the RTC despite knowing that the same is applicable only for transactions
before the MTCC; and that the bond was defective because it was released by SICI despite respondents failure to put up the
required P100,000.00 collateral.

Suan also claimed that in the complaint filed by Gonzales before the Bangko Sentral ng Pilipinas (BSP) against Ismael E.
Andaya and the members of the Board of Directors of the Rural Green Bank of Caraga, Inc. for alleged gross violation of the
principles of good corporate governance, they represented themselves as the banks minority stockholders with a total holdings
amounting to more or less P5 million while the controlling stockholders own approximately 80% of the authorized capital stock.

Suan claimed that Gonzales is guilty of forum shopping because the causes of action of the cases he filed before the RTC
and the Bangko Sentral ng Pilipinas are the same.

The instant administrative complaint was referred to the Integrated Bar of the Philippines (IBP) for investigation, report and
recommendation. The Board of Governors of the IBP approved the dismissal of the complaint.

ISSUE:

Whether or not the filing of intra-corporate case before RTC and a complaint with the BSP amount o judicial proceeding and
thus, constitute forum shopping

HELD:

Petition DENIED.

The filing of the intra-corporate case before the RTC does not amount to forum-shopping. It is a formal demand of
respondents legal rights in a court of justice in the manner prescribed by the court or by the law with respect to the controversy
involved.
7
The relief sought in the case is primarily to compel the bank to disclose its stockholdings, to allow them the inspection
of corporate books and records, and the payment of damages. It was also prayed that a TRO be issued to enjoin the holding of the
annual stockholders meeting and the election of the members of the Board, which, only courts of justice can issue.

On the other hand, the complaint filed with the Bangko Sentral ng Pilipinas was an invocation of the BSPs supervisory
powers over banking operations which does not amount to a judicial proceeding. It brought to the attention of the BSP the alleged
questionable actions of the banks Board of Directors in violation of the principles of good corporate governance. It prayed for the
conduct of an investigation over the alleged unsafe and unsound business practices of the bank and to make necessary corrective
measures to prevent the collapse of the bank.

As such, the two proceedings are of different nature praying for different relief. Likewise, a ruling by the BSP concerning the
soundness of the bank operations will not adversely or directly affect the resolution of the intra-corporate controversies pending
before the trial court.

Furthermore, to merit disciplinary action, forum shopping must be willful and deliberate. Section 5, Rule 7 of the Rules of
Court requires that, should there be any pending action or claim before any court, tribunal or quasi-judicial agency, a complete
statement of its status should be given. The Certification of Non-Forum-shopping attached by respondent substantially complied
with this requirement by providing therein that he has also filed a Complaint before the BSP. Likewise, such disclosure negates the
allegation that he willfully and deliberately committed forum-shopping.

It bears stressing that disbarment proceedings are matters of public interest, undertaken for public welfare and for the
purpose of preserving courts of justice from the official ministration of the persons unfit to practice them.
9
However, the power to
disbar must be exercised with great caution and only in a clear case of misconduct which seriously affects the standing and
character of the lawyer as an officer of the Court and member of the bar.

LAW ON SECRECY OF BANK DEPOSITS

LOURDES DE LA RAMA v. AUGUSTO R. VILLAROSA, ET AL. AND LUZON SURETY COMPANY, INC.
G.R. No. L-17927, 29 June 1963, EN BANC (Labrador, J.)
Mere garnishment of funds belonging to the party upon order of the court does not have the effect of delivering the money
garnished to the sheriff or to the party in whose favor the attachment is issued.

Plaintiff lessor Lourdes de la Rama (Dela Rama) brought an action in the CFI of Negros Occidental against defendant lessee Augusto
R. Villarosa (Villarosa) and the latter's surety, the Luzon Surety Co., Inc. (Luzon Surety) for judicial confirmation of the cancellation,
rescission and annulment of a contract of lease of sugarland (and the payment of the unpaid balance of the rental for the 1953-54
sugarcane crop year (P11,885.35), the rental for the 1954-55 crop year (P18,799.31), rental and partly the reasonable value for the
use and occupation of the leased premises for the 1955-56 crop year (P21,318.92), with stipulated attorney's fees, and interests, etc.

The RTC then decreed the lease rescinded, cancelled and annulled and ordered Villarosa to surrender and deliver to plaintiff or her
representatives the possession of the leased premises, etc. it issued an order for the issuance of a writ of execution directing the
sheriff of Manila to satisfy the judgment. Accordingly, the sheriff of Manila garnished the deposit of Villarosa with the Philippine
Trust Co. to the amount of P71,533.99. and required the latter not to deliver, transfer or otherwise dispose of the said amount
belonging to Villarosa, to any person except to the sheriff, or suffer the penalties prescribed by law. The Philippine Trust Co.,
complying with such notice, set aside the amount of P71,533.99 out of the deposit of the defendant-appellant in its possession for
the benefit of the sheriff of Manila and Dela Rama.

Luzon Surety, meanwhile, perfected an appeal. The garnishee, the Philippine Trust Co., refused to deliver to the sheriff of Manila,
the amount garnished by the latter to satisfy the writ of execution, so the lower court ordered said company to pay the sheriff out
of the deposit of the Luzon Surety the amount stated. The latter however filed a petition for certiorari with preliminary injunction
with CA. In its main decision, the CA ordered Luzon Surety to pay the sum of P 24,864.78.

The defendant-appellant, invoking the provisions of section 5 of Rule 39, Rules of Court, and demanded for the restitution of the
amount of P39,998.42 plus interest thereon at the rate of 6%. The above amount represents the balance refundable to it after the
CA modified the decision of the lower court, plus a 6% interest thereon, invoking the provision of section 5 of Rule 39. However, this
was denied.

ISSUE:

Whether or not garnishment has the effect of delivering the money garnished to the sheriff or to the party in whose favor the
garnishment was issued.

HELD:

Petition DENIED.

There are various reasons why the petition for interest on the balance of the amount garnished cannot be awarded to the
defendant-appellant. In the first place, the amount garnished was not actually taken possession of by the sheriff, even from the
time of the garnishment, because upon the perfection of the defendant-appellant's appeal to the Court of Appeals this Court issued
an injunction prohibiting execution of the judgment. In the second place, the mere garnishment of funds belonging to the party
upon order of the court does not have the effect of delivering the money garnished to the sheriff or to the party in whose favor
the attachment is issued. The fund is retained by the garnishee or the person holding the money for the defendant.

The garnishee, or one in whose hands property is attached or garnished, is universally regarded as charged with its legal custody
pending the outcome of the attachment of garnishment, unless, by local statute and practice, he is permitted to surrender or pay
the garnished property or funds into court, to the attaching officer, or to a receiver or trustee appointed to receive them. (5 Am. Jur.
14)

The effect of the garnishment, therefore, was to require the Philippine Trust Company, holder of the funds of the Luzon Surety Co.,
to set aside said amount from the funds of the Luzon Surety Co. and keep the same subject to the final orders of the Court. In the
case at bar there was never in order to deliver the full amount garnished to the plaintiff-appellee; all that was ordered to be
delivered after the judgment had become final was the amount found by the Court of Appeals to be due. The balance of the amount
garnished, therefore, remained all the time in the possession of the bank as part of the funds of the Luzon Surety Co., although the
same could not be disposed of by the owner.

PHILIPPINE NATIONAL BANK and EDUARDO Z. ROMUALDEZ, in his capacity as President of the Philippine National Bank v. EMILIO
A. GANCAYCO and FLORENTINO FLOR
G.R. No. L-18343, 30 September 1965, EN BANC (Regala, J.)
Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason is seen why these two classes of
cases cannot be excepted from the rule making bank deposits confidential.

Emilio A. Gancayco (Gancayco) and Florentino Flor (Flor), special prosecutors of the Department of Justice, required the Philippine
National Bank (PNB) to produce the records of the bank deposits of Ernesto T. Jimenez (Jimenez), former administrator of the
Agricultural Credit and Cooperative Administration (ACCA), who was then under investigation for unexplained wealth. In declining
to reveal its records, the plaintiff bank invoked Sec. 2 of the Republic Act No. 1405. PNB also called the attention to the penal
provision of law (Section 5). Gancayco and Flor cited the Anti-Graft and Corrupt Practices Act (Republic Act No. 3019) in support of
their claim of authority and demanded anew that Eduardo Z. Romualdez (Romualdez), as bank president, produce the records or he
would be prosecuted for contempt. The law invoked by the defendant states that if a public official has been found to have acquired
during his incumbency, whether in his name or in the name of other persons, an amount of property and/or money manifestly out
of proportion to his salary and to his other lawful income, that fact shall be a ground for dismissal or removal. Properties in the
name of the spouse and unmarried children of such public official may be taken into consideration, when their acquisition through
legitimate means cannot be satisfactorily shown. Bank deposits shall be taken into consideration in the enforcement of this section,
notwithstanding any provision of law to the contrary (Section 8 of RA No. 3019).

The CFI of Manila sustained the power of Gancayco and Flor to compel the disclosure of bank accounts of ACCFA Administrator
Jimenez. The court said that, by enacting section 8 of, the Anti-Graft and Corrupt Practices Act, Congress clearly intended to provide
an additional ground for the examination of bank deposits. Without such provision, the court added prosecutors would be
hampered if not altogether frustrated in the prosecution of those charged with having acquired unexplained wealth while in public
office.

PNB appealed. Accordingly Section 8 of RA 3019 "simply means that such bank deposits may be included or added to the assets of
the Government official or employee for the purpose of computing his unexplained wealth if and when the same are discovered or
revealed in the manner authorized by Section 2 of Republic Act 1405, which are (1) Upon written permission of the depositor; (2) In
cases of impeachment; (3) Upon order of a competent court in cases of bribery or dereliction of duty of public officials; and (4) In
cases where the money deposited or invested is the subject matter of the litigation."

ISSUE:

Whether or not a bank can be compelled to disclose the records of accounts of a depositor who is under investigation for
unexplained wealth

HELD:

Petition GRANTED (the bank can be compelled to disclose the records of accounts of the depositor).
Inconsistency between RA 3019 and RA 1405

Contrary to their claim that their position effects a reconciliation of the provisions of the two laws, plaintiffs are actually making the
provisions of Republic Act No. 1405 prevail over those of the Anti-Graft Law, because even without the latter law the balance
standing to the depositor's credit can be considered provided its disclosure is made in any of the cases provided in Republic Act No.
1405. The truth is that these laws are so repugnant to each other than no reconciliation is possible. Thus, while Republic Act No.
1405 provides that bank deposits are "absolutely confidential ... and [therefore] may not be examined, inquired or looked into,"
except in those cases enumerated therein, the Anti-Graft Law directs in mandatory terms that bank deposits "shall be taken into
consideration in the enforcement of this section, notwithstanding any provision of law to the contrary." The only conclusion possible
is that section 8 of the Anti-Graft Law is intended to amend section 2 of Republic Act No. 1405 by providing additional exception
to the rule against the disclosure of bank deposits.

With regard to the claim that disclosure would be contrary to the policy making bank deposits confidential, it is enough to point out
that while section 2 of Republic Act 1405 declares bank deposits to be "absolutely confidential," it nevertheless allows such
disclosure in the following instances:

a. Upon written permission of the depositor;
b. In cases of impeachment;
c. Upon order of a competent court in cases of bribery or dereliction of duty of public officials;
d. In cases where the money deposited is the subject matter of the litigation. Cases of unexplained wealth are similar to cases
of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot be excepted from the rule
making bank deposits confidential. The policy as to one cannot be different from the policy as to the other. This policy
express the motion that a public office is a public trust and any person who enters upon its discharge does so with the full
knowledge that his life, so far as relevant to his duty, is open to public scrutiny.

BANCO FILIPINO SAVINGS AND MORTGAGE BANK v.
HON. FIDEL PURISIMA, etc., and HON. VICENTE ERICTA and JOSE DEL FIERO, etc.
G.R. No. L-56429, 28 May 1988, FIRST DIVISION (Narvasa, J.)
Section 8 of the Anti-Graft and Corrupt Practices Act, Congress clearly intended to provide an additional ground for the
examination of bank deposits for without such provision, the prosecutors would be hampered if not altogether frustrated in the
prosecution of those charged with having acquired unexplained wealth while in public office.

The Customs special agent Manuel Caturla (Caturla), was accused for violation of RA 3019 and the accusation against him was filed
by the Bureau of Internal Revenue (BIR). In the course of the preliminary investigation thereof, the Tanodbayan issued a
subpoenaduces tecum to the Banco Filipino Savings & Mortgage Bank (Banco Filipino), commanding its representative to furnish
the bank with duly certified copies of the records in all its branches and extension offices, of the loans, savings and time deposits and
other banking transactions, dating back to 1969, appearing in the names of Caturla, his wife, Purita Caturla, their children Manuel,
Jr., Marilyn and Michael and/or Pedro Escuyos.

Caturla moved to quash the said subpoena. Then Tanodbayan Vicente Ericta not only denied the motion for lack of merit, and
directed compliance with the subpoena, but also expanded its scope through a second subpoena duces tecum,

this time requiring
production by Banco Filipino of the bank records in all its branches and extension offices, of Siargao Agro-Industrial Corporation,
Pedro Escuyos or his wife, Emeterio Escuyos, Purita Caturla, Lucia Escuyos or her husband, Romeo Escuyos, Emerson Escuyos,
Fraterno Caturla, Amparo Montilla, Cesar Caturla, Manuel Caturla or his children, Manuel Jr., Marilyn and Michael, LTD
Pub/Restaurant, and Jose Buo or his wife, Evelyn. Two other subpoena of substantially the same tenor as the second were released
by the Tanodbayan's Office.

Meanwhile, Banco Filipino ask the CFI of Manila for a judicial declaration as to whether its compliance with the subpoenae duces
tecum would constitute an infringement of the provisions of R.A. No. 1405 in relation to Section 8 of R.A. No. 3019.

ISSUE:

Whether or not the law on secrecy of bank deposits precludes production by subpoena duces tecum of bank records of transactions
by or in the names of the wife, children and friends of a special agent of the Bureau of Customs, accused before theTanodbayan of
having allegedly acquired property manifestly out of proportion to his salary and other lawful income, in violation of the "Anti-Graft
and Corrupt Practices Act."

HELD:

Petition GRANTED.

In Philippine National Bank v. Gancayco, we upheld the judgment of the Trial Court "sustaining the power of the defendants
(special prosecutors of the Department of Justice) to compel the disclosure (by PNB) of bank accounts of ACCFA Administrator
Jimenez (then under investigation for unexplained wealth), .. (it being ruled) that, by enacting section 8 of the Anti-Graft and
Corrupt Practices Act, Congress clearly intended to provide an additional ground for the examination of bank deposits .. (for) without
such provision, the .. prosecutors would be hampered if not altogether frustrated in the prosection of those charged with having
acquired unexplained wealth while in public office.

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. This proposition is made clear by R.A. No. 3019 which quite
categorically states that the term, "legitimately acquired property of a public officer or employee shall not include property
unlawfully acquired by the respondent, but its ownership is concealed by its being recorded in the name of, or held by, respondent's
spouse, ascendants, descendants, relatives or any other persons."

To sustain the petitioner's theory, and restrict the inquiry only to property held by or in the name of the government official or
employee, or his spouse and unmarried children is unwarranted in the light of the provisions of the statutes in question, and would
make available to persons in government who illegally acquire property an easy and fool-proof means of evading investigation and
prosecution; all they would have to do would be to simply place the property in the possession or name of persons other than their
spouse and unmarried children. This is an absurdity that we will not ascribe to the lawmakers. The power of the Tanodbayan to issue
subpoenae ad testificandcum and subpoenae duces tecum at the time in question is not disputed, and at any rate does not admit of
doubt. The subpoenae issued by him, will be sustained against the petitioner's impugnation.

LOURDES T. MARQUEZ, in her capacity as Branch Manager, Union Bank of the Philippines v. HON. ANIANO A. DESIERTO, (in his
capacity as OMBUDSMAN, Evaluation and Preliminary Investigation Bureau, Office of the Ombudsman, ANGEL C. MAYOR-ALGO,
JR., MARY ANN CORPUZ-MANALAC and JOSE T. DE JESUS, JR., in their capacities as Chairman and Members of the Panel
G.R. No. 135882, 27 June 2001, EN BANC (Pardo, J.)
Ombudsman cannot order an in camera inspection unless there is a pending case before a court of competent jurisdiction.

In May 1998, Lourdes T. Marquez (Marquez) received an Order from the Ombudsman Aniano A. Desierto (Desierto) to produce
several bank documents for purposes of inspection in camera relative to various accounts maintained at Union Bank of the
Philippines, where Marquez is the branch manager. The accounts to be inspected involved in a case pending with the Ombudsman
entitled, Fact-Finding and Intelligence Bureau (FFIB) v. Amado Lagdameo, et. al. Accordingly, the specific provision of R.A. 6770
(Ombudsman Act), a later legislation, modifies the law on the Secrecy of Bank Deposits (R.A. 1405) and places the office of the
Ombudsman in the same footing as the courts of law in this regard.

The basis of the Ombudsman in ordering an in camera inspection of the accounts is a trail of managers checks purchased by one
George Trivinio (Trivinio). Accordingly, Trivinio purchased fifty one (51) Managers Checks (MCs) for a total amount of P272.1 Million
at Traders Royal Bank. Out of the 51 MCs, eleven (11) MCs in the amount of P70.6 million, were deposited and credited to an
account maintained at the Union Bank.

However, Marquez wrote the Ombudsman explaining to him that the accounts in question cannot readily be identified and asked for
time to respond to the order. The reason forwarded by petitioner was that despite diligent efforts and from the account numbers
presented, they cannot identify these accounts since the checks are issued in cash or bearer. Also, these accounts have long been
dormant, hence are not covered by the new account number generated by the Union Bank system.
The Ombudsman however found the explanation unacceptable and warned that her failure to comply would subject her in pain of
contempt and prosecution for obstruction. Instead of complying, Marquez filed a petition for declaratory relief to clear the rights
and duties of the petitioner. This was denied by the TC.

ISSUE:

Whether or not the order of the Ombudsman to have an in camera inspection of an account is allowed as an exception to RA No.
1405,

HELD:

Petition DENIED.

An examination of the secrecy of bank deposits law (R. A. No. 1405) would reveal the following exceptions:

a. Where the depositor consents in writing;
b. Impeachment case;
c. By court order in bribery or dereliction of duty
cases against public officials;
d. Deposit is subject of litigation;
e. Sec. 8, R. A. No. 3019, in cases of unexplained
wealth as held in the case of PNB vs. Gancayco

Before an in camera inspection may be allowed:

a. There must be a pending case before a court of
competent jurisdiction.
b. Further, the account must be clearly identified;
c. The inspection must be limited to the subject matter
of the pending case before the court of competent
jurisdiction.
d. The bank personnel and the account holder must be
notified to be present during the inspection, and
such inspection may cover only the account
identified in the pending case.

In Union Bank of the Philippines v. Court of Appeals, we held that Section 2 of the Law on Secrecy of Bank Deposits, as amended,
declares bank deposits to be absolutely confidential except:

a. In an examination made in the course of a special or general examination of a bank that is specifically authorized by
the Monetary Board after being satisfied that there is reasonable ground to believe that a bank fraud or serious
irregularity has been or is being committed and that it is necessary to look into the deposit to establish such fraud or
irregularity,
b. In an 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,
c. Upon written permission of the depositor,
d. In cases of impeachment,
e. Upon order of a competent court in cases of bribery or dereliction of duty of public officials, or
f. In cases where the money deposited or invested is the subject matter of the litigation

In the case at bar, there is yet no pending litigation before any court of competent authority. What is existing is an investigation by
the office of the Ombudsman. In short, what the Office of the Ombudsman would wish to do is to fish for additional evidence to
formally charge Amado Lagdameo, et. al., with the Sandiganbayan. Clearly, there was no pending case in court which would warrant
the opening of the bank account for inspection.

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 a public officer 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 officer, the 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.

RIZAL COMMERCIAL BANKING CORPORATION v. THE HONORABLE PACIFICO P. DE CASTRO and PHILIPPINE VIRGINIA TOBACCO
ADMINISTRATION
G.R. No. L-34548, 29 November 1988, THIRD DIVISION (Cortes, J.)
No breach of trust or dereliction of duty can be attributed to RCBC in delivering its depositor's funds pursuant to a court order
which was merely in the exercise of its power of control over such funds. The garnishment of property to satisfy a writ of
execution operates as an attachment and fastens upon the property a lien by which the property is brought under the jurisdiction
of the court issuing the writ. It is brought into custodia legis, under the sole control of such court.

In the case of Badoc Planters, Inc. v. Philippine Virginia Tobacco Administration (PVTA), et al., which was an action for recovery of
unpaid tobacco deliveries, an Order (Partial Judgment) was issued by Hon. Lourdes P. San Diego (San Diego) ordering the PVTA to
pay jointly and severally, Badoc Planters, Inc. within 48 hours the amount of P206,916.76, with legal interests thereon.

BADOC filed an Urgent Ex-Parte Motion for a Writ of Execution of the said Partial Judgment which was granted on the same day by
Judge De Castro who acted in place of the Hon. Judge San Diego who had just been elevated as a Justice of the Court of Appeal s.
Accordingly, the Branch Clerk of Court on the very same day, issued a Writ of Execution addressed to Special Sheriff Faustino Rigor,
who then issued a Notice of Garnishment addressed to the General Manager and/or Cashier of RCBC requesting a reply within five
(5) days to said garnishment as to any property which PVTA might have in the possession or control of petitioner or of any debts
owing by the petitioner to said defendant. Upon receipt of such Notice, RCBC notified PVTA thereof to enable the PVTA to take the
necessary steps for the protection of its own interest.

Subsequently, RCBC was ordered to deliver in check the amount garnished to Sheriff Faustino Rigor and Sheriff Rigor in turn i s
ordered to cash the check and deliver the amount to the judgement creditor. In compliance with said Order, petitioner delivered to
Sheriff Rigor a certified check in the sum of P 206,916.76.

PVTA filed a motion for reconsideration which was granted setting aside the orders of execution and payment and writ of execution
and ordered RCBC and BADOC "to restore, jointly and severally, the account of PVTA with the said bank in the same condition and
state it was before the issuance of the aforesaid Orders by reimbursing the PVTA of the amount of P 206, 916.76 with interests at
the legal rate from January 27, 1970 until fully paid to the account of the PVTA.

An MR was filed by RCBC but it was denied. Accordingly, RCBC merely obeyed a mandatory directive from the respondent Judge
ordering RCBC "to deliver in check the amount garnished to Sheriff Faustino Rigor and Sheriff Rigor is in turn ordered to cash the
check and deliver the amount to the plaintiffs representative and/or counsel on record." PVTA however claims that the manner in
which the bank complied with the Sheriffs Notice of Garnishment indicated breach of trust and dereliction of duty on the part of
the bank as custodian of government funds. It insistently urges that the premature delivery of the garnished amount by RCBC to the
special sheriff even in the absence of a demand to deliver made by the latter, before the expiration of the five-day period given to
reply to the Notice of Garnishment, without any reply having been given thereto nor any prior authorization from its depositor,
PVTA and even if the court's order of January 27, 1970 did not require the bank to immediately deliver the garnished amount
constitutes such lack of prudence as to make it answerable jointly and severally with the plaintiff for the wrongful release of the
money from the deposit of the PVTA.

ISSUE:

Whether or not the bank should be liable for reimbursement of the garnished funds delivered to the sheriff who in turn delivered it
to the judgment creditor in compliance with a court order

HELD:

Petition DENIED.

It is important to stress, at this juncture, that there was nothing irregular in the delivery of the funds of PVTA by check to the
sheriff, whose custody is equivalent to the custody of the court, he being a court officer. The order of the court dated January 27,
1970 was composed of two parts, requiring: 1) RCBC to deliver in check the amount garnished to the designated sheriff and 2) the
sheriff in turn to cash the check and deliver the amount to the plaintiffs representative and/or counsel on record. It must be noted
that in delivering the garnished amount in check to the sheriff, the RCBC did not thereby make any payment, for the law
mandates that delivery of a check does not produce the effect of payment until it has been cashed. [Article 1249, Civil Code.]

Moreover, by virtue of the order of garnishment, the same was placed in custodia legis and therefore, from that time on, RCBC was
holding the funds subject to the orders of the court a quo. That the sheriff, upon delivery of the check to him by RCBC encashed it
and turned over the proceeds thereof to the plaintiff was no longer the concern of RCBC as the responsibility over the garnished
funds passed to the court. Thus, no breach of trust or dereliction of duty can be attributed to RCBC in delivering its depositor's
funds pursuant to a court order which was merely in the exercise of its power of control over such funds. The garnishment of
property to satisfy a writ of execution operates as an attachment and fastens upon the property a lien by which the property is
brought under the jurisdiction of the court issuing the writ. It is brought into custodia legis, under the sole control of such court.

As stated earlier, the order directing the bank to deliver the amount to the sheriff was distinct and separate from the order directing
the sheriff to encash the said check. The bank had no choice but to comply with the order demanding delivery of the garnished
amount in check. The very tenor of the order called for immediate compliance therewith. On the other hand, the bank cannot be
held liable for the subsequent encashment of the check as this was upon order of the court in the exercise of its power of control
over the funds placed in custodia legis by virtue of the garnishment.

In Engineering Construction Inc., v. National Power Corporation, this Court absolved a garnishee from any liability for prompt
compliance with its order for the delivery of the garnished funds. The rationale behind such ruling deserves emphasis in the present
case:

But while partial restitution is warranted in favor of NPC, we find that the Appellate Court erred in not absolving MERALCO, the garnishee, from
its obligations to NPC with respect to the payment of ECI of P 1,114,543.23, thus in effect subjecting MERALCO to double liability. MERALCO
should not have been faulted for its prompt obedience to a writ of garnishment. Unless there are compelling reasons such as: a defect on the
face of the writ or actual knowledge on the part of the garnishee of lack of entitlement on the part of the garnisher, it is not incumbent upon
the garnishee to inquire or to judge for itself whether or not the order for the advance execution of a judgment is valid.

Garnishment is considered as a specie of attachment for reaching credits belonging to the judgment debtor and owing to him
from a stranger to the litigation. Under the above-cited rule, the garnishee [the third person] is obliged to deliver the credits, etc. to
the proper officer issuing the writ and "the law exempts from liability the person having in his possession or under his control any
credits or other personal property belonging to the defendant, ..., if such property be delivered or transferred, ..., to the clerk,
sheriff, or other officer of the court in which the action is pending. [3 Moran, Comments on the Rules of Court 34 (1970 ed.)]

From the foregoing, it may be concluded that the charge of breach of trust and/or dereliction of duty as well as lack of prudence in
effecting the immediate payment of the garnished amount is totally unfounded. Upon receipt of the Notice of Garnishment, RCBC
duly informed PVTA thereof to enable the latter to take the necessary steps for its protection. However, right on the very next day
after its receipt of such notice, RCBC was already served with the Order requiring delivery of the garnished amount. Confronted as it
was with a mandatory directive, disobedience to which exposed it to a contempt order, it had no choice but to comply.

PVTA funds are not public funds exempt from garnishment

Republic Act No. 2265 created the PVTA as an ordinary corporation with all the attributes of a corporate entity subject to the
provisions of the Corporation Law. Hence, it possesses the power "to sue and be sued" and "to acquire and hold such assets and
incur such liabilities resulting directly from operations authorized by the provisions of this Act or as essential to the proper conduct
of such operations." [Section 3, Republic Act No. 2265.]

Among the specific powers vested in the PVTA are: 1) to buy Virginia tobacco grown in the Philippines for resale to local bona fide
tobacco manufacturers and leaf tobacco dealers [Section 4(b), R.A. No. 2265]; 2) to contracts of any kind as may be necessary or
incidental to the attainment of its purpose with any person, firm or corporation, with the Government of the Philippines or with any
foreign government, subject to existing laws [Section 4(h), R.A. No. 22651; and 3) generally, to exercise all the powers of a
corporation under the Corporation Law, insofar as they are not inconsistent with the provisions of this Act [Section 4(k), R.A. No.
2265.]

From the foregoing, it is clear that PVTA has been endowed with a personality distinct and separate from the government which
owns and controls it. Accordingly, this Court has heretofore declared that the funds of the PVTA can be garnished since "funds of
public corporation which can sue and be sued were not exempt from garnishment"

MELLON BANK, N.A v. HON. CELSO L. MAGSINO, in his capacity as Presiding Judge of Branch CLIX of the Regional Trial Court at
Pasig; MELCHOR JAVIER, JR., VICTORIA JAVIER; HEIRS OF HONORIO POBLADOR, JR., et al.
G.R. No. 71479, 18 October 1990, THIRD DIVISION (Fernan, CJ.)
Section 2 of said law allows the disclosure of bank deposits in cases where the money deposited is the subject matter of the
litigation.

Dolores Ventosa (Ventosa) requested the transfer of $1,000 from the First National Bank (FNB) of Moundsville, West Virginia,
U.S.A. to Victoria Javier (Javier) in Manila through the Prudential Bank. Accordingly, the FNB requested the petitioner, Mellon Bank
(Mellon Bank) to effect the transfer. Unfortunately the wire sent by Mellon Bank to Manufacturers Hanover Bank (MHB), a
correspondent of Prudential Bank, indicated the amount transferred as "US$1,000,000.00" instead of US$1,000.00. Hence
Manufacturers Hanover Bank transferred one million dollars less bank charges of $6.30 to the Prudential Bank for the account of
Javier.

Javier then opened a new dollar account in the Prudential Bank and deposited $999,943.70. Immediately Javier and her husband,
Melchor Javier, Jr., made withdrawals from the account, deposited them in several banks only to withdraw them later in an
apparent plan to conceal, "launder" and dissipate the erroneously sent amount.

Demands of Mellon Bank and MHF through Prudential Bank found to be futile. Thus, Mellon Bank filed a complaint in the Superior
Court of California against the Javiers. It alleged that it had mistakenly and inadvertently cause the transfer of the sum of
$999,000.00 to Jane Doe Javier; that it believes that the defendants had withdrawn said funds; that "the defendants and each of
them have used a portion of said funds to purchase real property located in Kern County, California." It prayed that the defendants
and each of them be declared as holders of the property in trust for the plaintiff; that defendants be compelled to transfer legal title
and possession of the property to the plaintiff; that defendants be made to pay the costs of the suit, and that other reliefs be
granted them.

Mellon Bank also filed in the CFI of Rizala complaint against the Javier spouses, Honorio Poblador, Jr., Domingo L. Jhocson, Jr., Jose
Marquez, Roberto Gario, Elnor Investment Co., Inc., F.C. Hagedorn & Co., Inc. and Paramount Finance Corporation. After its
amendment, Rafael Caballero and Tri-Arc Investment & Management Company, Inc. were also named defendants


In due course, the defendants filed their answers and hearing of the case ensued. Yet, the testimonies of these witnesses were
objected to by the defense on the grounds of res inter alios acta, immateriality, irrelevancy and confidentiality. To resolve the
matter, the court ordered the parties to submit memoranda. Also, they were objected for it violates RA 1405. Initially, the l ower
court allowed the testimonies but subsequently, was moved to be stricken off.

ISSUE:

Whether or not there can be disclosure of bank deposits in cases where the money deposited is the subject matter or litigation.

HELD:

Section 2 of said law allows the disclosure of bank deposits in cases where the money deposited is the subject matter of the
litigation. Inasmuch as Civil Case No. 26899 is aimed at recovering the amount converted by the Javiers for their own benefit,
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.

PHILIPPINE COMMERCIAL & INDUSTRIAL BANK and JOSE HENARES v.
THE HON. COURT OF APPEALS and MARINDUQUE MINING AND INDUSTRIAL CORPORATION
G.R. No. 84526, 28 January 1991, SECOND DIVISION (Sarmiento, J.)
The prohibition against examination or inquiry into bank deposit under R.A. 1405 does not prelcude its being garnished
to ensure satisfaction of a judgment since the disclosure is purely incidental to the execution process and it was the intention of
the legislature to place bank deposits beyond the reach of judgment creditor.

Since there is no evidence that PCIB and Henares themselves divulged the information that Marinduque had an account
with the petitioner bank and it is undisputed that the said account was properly the object of the notice of garnishment and writ
of execution carried out by the deputy sheriff, a duly authorized officer of the court, we can not therefore hold the PCIB and
Henares liable under R.A. 1405.

The instant case originated from an action

filed with the National Labor Relations Commission (NLRC) by a group of
laborers who obtained therefrom a favorable judgment for the payment of backwages amounting to P205,853.00 against
Marinduque Mining and Industrial Corp. (Marinduque). The NLRC issued a writ of execution directing the Deputy Sheriff of Negros
Occidental, Damian Rojas, to enforce the aforementioned judgment.

Thus, Rojas went to the mining site of the private respondent and served the writ of execution but nothing seemed to have
happened thereat. Consequently, Rojas prepared a Notice of Garnishment addressed to six (6) banks one of which being Philippine
Commercial & Industrial Bank (PCIB), directing them to immediately issue a check in the name of the Deputy Provincial Sheriff of
Negros Occidental in an amount equivalent to the amount of the garnishment and that proper receipt would be issued therefor.
Atty. Rexes V. Alejano, house lawyer of Marinduque received a tip regarding the garnishment and communicated the same to Jose
Henares, PCIBs bank manager. Marinduque requested for the withholding of any release of the deposit of the Marinduque with the
PCIB.

Rojas presented the Notice of Garnishment and the Writ of Execution attached therewith to Henares and demanded from
the latter, under pain of contempt, the release of the deposit of the Marinduque. Henares issued a manager's check in the name of
the Deputy Provincial Sheriff of Negros Occidental for the amount of P37,466.18, which was the exact balance of the private
respondent's account as of that day. The check was encashed.

Marinduque filed a complaint before the RTC against PCIB, Henares and Rojas, alleging that the Marinduque's current
deposit with PCIB was levied upon, garnished, and with undue haste unlawfully allowed to be withdrawn, and notwithstanding the
alleged unauthorized disclosure of the said current deposit and unlawful release thereof, PCIB has failed and refused to restore the
amount of P37,466.18 to the former's account despite repeated demands. The RTC favored Marinduque. The Court also, in the end,
favored Marinduque.

ISSUE:

Whether or not PCIB violated the RA 1405

HELD:

Petition DENIED.

Garnishment is considered as a specie of attachment for reaching credits belonging to the judgment debtor and owing to
him from a stranger to the litigation. Under the above-cited rule, the garnishee [the third person] is obliged to deliver the credits,
etc. to the proper officer issuing the writ and "the law exempts from liability the person having in his possession or under his control
any credits or other personal property belonging to the defendant, . . . if such property be delivered or transferred, . . . to the clerk,
sheriff, or other officer of the court in which the action is pending."

Moreover, there is no issue concerning the indebtedness of the PCIB to Marinduque since the latter has never denied the
existence of its deposit with the former, the said deposit being considered a credit in favor of the depositor against the bank.

We
therefore see no application for Sec. 39, Rule 39 of the Rules of Court invoked by Marinduque as to necessitate the "examination of
the debtor of the judgment debtor."

The court further believes that PCIB should rather be commended for having acted with urgent dispatch despite attempts
by Marinduque, as with so many scheming employers, to frustrate or unjustifiably delay the prompt satisfaction of final judgments
which often result in undue prejudice to the legitimate claims of labor.

It is clear from the discussion of the conference committee report on Senate Bill No. 351 and House Bill No. 3977, which
later became Republic Act 1405, that the prohibition against examination of or inquiry into a bank deposit under Republic Act
1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and
if 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.

Since there is no evidence that PCIB and Henares themselves divulged the information that Marinduque had an account
with the petitioner bank and it is undisputed that the said account was properly the object of the notice of garnishment and writ
of execution carried out by the deputy sheriff, a duly authorized officer of the court, we can not therefore hold the PCIB and
Henares liable under R.A. 1405.

ALEXANDER VAN TWEST and THE HON. SALVADOR P. DE GUZMAN, in his capacity as Presiding Judge of the Regional Trial Court of
Makati, Branch 142 v. THE HON. COURT OF APPEALS and GLORIA ANACLETO
G.R. No. 106253, 10 February 1994, THIRD DIVISION (Feliciano, J.)
Where the foreign currency deposits belonged to one of the depositors and were held in trust for him by the other depositor who
unilaterally closed the joint account and transferred the funds to her personal account, the latter cannot invoke the exemption
from court process under RA 6426 because she is not the owner of the deposit in the account. Thus, the depositor who owned the
funds can have her enjoined from making withdrawals from her personal account.

Alexander Van Twest (Alexander) alleged in his complaint that in 1989, he and Gloria Anacleto (Gloria) opened a joint foreign
currency savings account with Interbank to hold funds which "belonged entirely and exclusively" to Alexander, to "facilitate the
funding of certain business undertakings" of both of them and which funds were to be "temporarily (held) in trust" by Gloria, who
"shall turnover the same to Alexander upon demand." He further alleged that withdrawals from the account were always made
through their joint signatures; that when his business relationship with private respondent turned sour, the latter unilaterally closed
their joint account, withdrew the remaining balance of Deutschmark (DM) 269,777.37 and placed the money in her own personal
account with the same bank. Thus, Alexander sought an injunctive writ to prevent private respondent from withdrawing the money.
The RTC granted the writ of preliminary injunction. However, the CA reversed the order holding that Gloria is a co-owner of the
funds who could unilaterally control its application.

Gloria contends that the personal currency deposit she is maintaining is exempt from process issued by the courts pursuant to RA
6426 (Foreign Currency Deposit Act).

ISSUE:

Whether or not RA 6426 applies in this case

HELD:

Petition DENIED.

Private respondent's contentions do not persuade. Her belated invocation of the provisions of R.A. No. 6426 as amended violates
basic procedural due process by interposing a new matter before this Court the consideration of which would further delay a final
disposition on the propriety of petitioner of petitioner's application for an injunctive writ.

On a substantive, the Court holds that the privileges extended by the statute cited by private respondent are actually enjoyed, and
are invocable only, by the petitioner, both because private respondent's transactions fall outside the ambit of the statute, and
because petitioner is the owner of the foreign exchange fund subject of this case. This conclusion is anchored on the consistent and
contemporaneous administrative construction by the Central Bank of the basic statute, as manifested in the relevant circulars issued
by it in implementation of that law, which are entitled to great respect by the courts.

Section 8 of R.A. No. 6426 (the Foreign Currency Deposit Act), as amended by P.D. No. 1246, are hereby declared as and considered
of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall such foreign
currency deposits be examined, inquired or looked into by any person, government official, bureau or office, whether judicial or
administrative or legislative or any other entity whether public or private: Provided, however, that said foreign currency shall be
exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any
administrative body whatsoever.

Section one hundred-two of Circular No. 960, Series of 1983, provides in relevant part:

a. Foreign exchange purchased from authorized agent banks in accordance with existing regulations such as excess travel funds; unspent financial
assistance of dependents abroad of Philippine residents; foreign exchange acquired from any resident persons, firm, association and corporation; and
transfers to foreign currency deposit account or receipt from another foreign currency deposit account, whether for payment of legitimate obligation or
otherwise, are not eligible for deposit under the System.
xxx xxx xxx

This Circular was in force at the time private respondent undertook her questioned transactions; thus, such local transfer from the
original joint foreign currency account to another (personal) foreign currency account, was not an eligible foreign currency deposit
within the coverage of R.A. No. 6426 and not entitled to the benefit of the confidentiality provisions of R.A. No. 6426. Circular No.
960 was superseded by Circular No. 1318, Series of 1992, which did not reenact and continue the administrative provision above-
mentioned (Section 102).

Section forty-nine, Chapter five of the same Circular, dealing with the Offshore Banking System, stated in part:

d. "Deposit" shall refer to funds in foreign currencies which are accepted and held by an OBUbusiness, with the obligation to return an equivalent
amount to the owner thereof, with or without interest;

In other words, although transfers from one foreign currency deposit account to another foreign currency deposit account in the
Philippines are now eligible deposits under the Central Bank's Foreign Currency Deposit System, private respondent is still not
entitled to the confidentiality provisions of the relevant circulars. For, as noted earlier, private respondent is not the owner of such
foreign currency funds and her personal deposit account is not, under Section 49 of Circular No. 1318, protected by this Circular.

Circular No. 1318 was superseded for a brief period by Circular No. 1353, Series of 1992, which in turn was superseded by Circular
No. 1389, Series of 1993. Circular No. 1389 is the current implementing issuance for R.A. No. 6426; the relevant provisions (Sections
74 and 49) of Circular No. 1318 have been incorporated en toto in the current Circular.

EMMANUEL C. OATE and ECON HOLDINGS CORPORATION v. HON. ZEUS C. ABROGAR, as Presiding Judge of Branch 150 of the
Regional Trial Court of Makati, and SUN LIFE ASSURANCE COMPANY OF CANADA
G.R. No. 107303, 23 February 1995, SECOND DIVISION (Nocon, J.)
The examination of the bank account in which the money paid by an insurance company for treasury bills was deposited by R.A.
No. 1405 even if the insurance company sued the seller of the treasury bills for failure to deliver the treasury bills, for the money is
not subject matter of the litigation.

Emmanuel Oate offered to sell to Sun Life Assurance Company of Canada treasury bills at a discounted price. Sun Life paid
the price by means of check payable to Brunner Development Corp. On the other hand, Brunner issued a receipt with an
undertaking to deliver the said treasury bills to Sun Life. Brunner, however, delivered a promissory note in which it was made to
appear that the transaction was a money placement instead of treasury bills. Hence, Sublife sued Oate, ECON Holdings as well as
Brunner.

During the trial, the judge ordered the examination of the books of accounts and ledgers of Brunner at the Urban Bank and
the records of account of Oate at BPI. The orders were based on the allegations of Sun Life that the money paid by it to Brunner
was subsequently withdrawn from Urban Bank after it had been deposited by Brunner and then transferred to Oates account in
the BPI and to the unnamed account in the PNB.

According to Oate, these orders were a violation of the RA 1405.

ISSUE:

Whether or not the examination of the bank accounts is a violation of RA 1405

HELD:

Petition GRANTED.

First. Sun Life defends these court orders on the ground that the money paid by it to Brunner was subsequently withdrawn
from the Urban Bank after it had been deposited by Brunner and then transferred to BPI and to the unnamed account in the
petitioner Oate's account in the BPI and to the unnamed account in the PNB.

The issue before the trial court, however, concerns the nature of the transaction between petitioner Brunner and Sun Life.
In its complaint, Sun Life alleges that Oate, in his personal capacity and as president of Econ, offered to sell to Sun Life
P46,990,000.00 worth of treasury bills owned by Econ and Brunner at the discounted price of P39,526,500.82; that on November 27,
1991, Sun Life paid the price by means of a check payable to Brunner; that Brunner, through its president Noel L. Dio, issued to it a
receipt with undertaking to deliver the treasury bills to Sun Life; and that on December 4, 1991, Brunner and Dio delivered instead
a promissory note, dated November 27, 1991, in which it was made to appear that the transaction was a money placement instead
of sale of treasury bills.

Thus the issue is whether the money paid to Brunner was the consideration for the sale of treasury bills, as Sun Life claims,
or whether it was money intended for placement, as petitioners allege. Oate do not deny receipt of P39,526,500.82 from Sun Life.
Hence, whether the transaction is considered a sale or money placement does not make the money the "subject matter of litigation"
within the meaning of 2 of Republic Act No. 1405 which prohibits the disclosure or inquiry into bank deposits except "in cases where
the money deposited or invested is the subject matter of litigation." Nor will it matter whether the money was "swindled" as Sun
Life contends.

Second. The examination of bank books and records cannot be justified under Rule 57, (10). This provision states:
Sec. 10. Examination of party whose property is attached and persons indebted to him or controlling his property;delivery of property to officer. -
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, sheriff, or other proper officer on such terms as may be just, having reference to any lien thereon or claims
against the same, to await the judgment in the action.

Since, as already stated, the attachment of Oate's properties was invalid, the examination ordered in connection with
such attachment must likewise be considered invalid. Under Rule 57, (10), as quoted above, such examination is only proper where
the property of the person examined has been validly attached.

KAREN E. SALVACION et al. v. CENTRAL BANK OF THE PHILIPPINES, CHINA BANKING CORPORATION and GREG BARTELLI y
NORTHCOTT
G.R. No. 94723, 21 August 1997, EN BANC (Torres, J.)
The provisions of Sec 113 of CB circular 960 and PD 1246, in so far as it amends Section 8 of RA 6426 are inapplicable to this case
because of its peculiar circumstances. CBC is required to comply with the writ of execution and release to Karen the dollar deposit
of Bartelli in such amount would satisfy the judgment.

Greg Bartelli y Northcott (Greg), an American tourist, coaxed and lured Karen Salvacion (Salvacion), then 12 years old to go with
him to his apartment. Therein, Greg detained Salvacion for four day and was able to rape the child ten times. Thus, after policemen
and people living nearby rescued Karen, Greg Bartelli was arrested and detained at the Makati Municipal Jail. The policemen
recovered from Bartelli the following items: 1.) Dollar Check No. 368, US 3,903.20; 2.) COCOBANK Bank Book No. 104-108758-8
(Peso Acct.); 3.) Dollar Account China Banking Corp.,; 4.) ID-122-30-8877; 5.) Philippine Money (P234.00) cash; 6.) Door Keys 6
pieces; 7.) Stuffed Doll (Teddy Bear) used in seducing the complainant.

Subsequently, Fiscal Edwin G. Condaya (Condoya) filed against Greg cases for Serious Illegal Detention and four (4) counts of
Rape. Salvacion then filed with the RTC of Makati civil case for damages with preliminary attachment against Greg. However, Greg
escaped and pending the arrest of the accused the criminal cases were archived. With regard to the civil case, the Judge issued a
writ of preliminary attachment. The Deputy Sheriff of Makati then served a notice of garnishment on China Banking Corporation
(China Bank). However, China Bank invoked RA No. 1405. In its reply, Sheriff of Makati Armando de Guzman states that the
garnishment did not violate the secrecy of bank deposits since the disclosure is merely incidental to a garnishment properly and
legally made by virtue of a court order which has placed the subject deposits in custodia legis. In its answer, China Bank
nonetheless invoked Section 113 of Central Bank Circular No. 960 to the effect that the dollar deposits of defendant Greg Bartelli
are exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any
administrative body, whatsoever.

Upon inquiry with the Central Bank (CB), the latter said that CB Circular 960 is absolute. It has no exception nor has the same been
amended, or repealed. The purpose of the law is to encourage dollar accounts within the countrys banking system which would
help in the development of the economy. There is no intention to render futile the basic rights of a person as was suggested in your
subject letter. The law may be harsh as some perceive it, but it is still the law. Compliance is, therefore, enjoined.

Petitioners aver as heretofore stated that Section 113 of Central Bank Circular No. 960 providing that Foreign 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 should be adjudged as unconstitutional on the grounds that: 1.) it has taken away the
right of petitioners to have the bank deposit of defendant Greg Bartelli y Northcott garnished to satisfy the judgment rendered in
petitioners favor in violation of substantive due process guaranteed by the Constitution; XXX 3.) it has provided a safe haven for
criminals like the herein respondent Greg since criminal could escape civil liability for their wrongful acts by merely converting their
money to a foreign currency and depositing it in a foreign currency deposit account with an authorized bank.

ISSUE:

Whether or not execution on the accused foreign account is proper despite the exemption from the court

HELD:

Petition GRANTED.

It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time when the countrys economy was in a shambles; when
foreign investments were minimal and presumably, this was the reason why said statute was enacted. But the realities of the
present times show that the country has recovered economically; and even if not, the questioned law still denies those entitl ed to
due process of law for being unreasonable and oppressive. The intention of the questioned law may be good when enacted. The
law failed to anticipate the iniquitous effects producing outright injustice and inequality such as as the case before us.

The Offshore Banking System and the Foreign Currency Deposit System were designed to draw deposits from
foreign lenders and investors (Vide second Whereas of PD No. 1034; third Whereas of PD No. 1035). It is these depositors that
are induced by the two laws and given protection and incentives by them. Obviously, the foreign currency deposit made by a
transient or a tourist is not the kind of deposit encourage by PD Nos. 1034 and 1035 and given incentives and protection by said
laws because such depositor stays only for a few days in the country and, therefore, will maintain his deposit in the bank only
for a short time. Respondent Greg Bartelli, as stated, is just a tourist or a transient. He deposited his dollars with respondent
China Banking Corporation only for safekeeping during his temporary stay in the Philippines.

In fine, the application of the law depends on the extent of its justice. Eventually, if we rule that the questioned Section 113 of
Central Bank Circular No. 960 which exempts from attachment, garnishment, or any other order or process of any court.
Legislative body, government agency or any administrative body whatsoever, is applicable to a foreign transient, injustice would
result especially to a citizen aggrieved by a foreign guest like accused Greg Bartelli. This would negate Article 10 of the New Civil
Code which provides that in case of doubt in the interpretation or application of laws, it is presumed that the lawmaking body
intended right and justice to prevail. Ninguno non deue enriquecerse tortizerzmente con damo de otro. Simply stated, when
the statute is silent or ambiguous, this is one of those fundamental solutions that would respond to the vehement urge of
conscience. (Padilla vs. Padilla, 74 Phil. 377)

It would be unthinkable, that the questioned Section 113 of Central Bank No. 960 would be used as a device by accused Greg Bartelli
for wrongdoing, and in so doing, acquitting the guilty at the expense of the innocent.

Call it what it may but is there no conflict of legal policy here? Dollar against Peso? Upholding the final and executory judgment of
the lower court against the Central Bank Circular protecting the foreign depositor? Shielding or protecting the dollar deposit of a
transient alien depositor against injustice to a national and victim of a crime? This situation calls for fairness legal tyranny.

UNION BANK OF THE PHILIPPINES v. COURT OF APPEALS and ALLIED BANK CORPORATION
G.R. No. 134699, 23 December 1999, FIRST DIVISION (Kapunan, J.)
The subject matter of the dispute may be the amount of P999,000.00 that Union Bank seeks from private respondent as a
result of the latters alleged failure to inform the former of the discrepancy; but it is not the P999,000.00 deposited in the drawers
account. By the terms of R.A. No. 1405, the money deposited itself should be the subject matter of the litigation.

A check (Check No. 11669677) in the amount of P1,000,000.00 was drawn against Account No. 0111-01854-8 with Allied
Bank payable to the order of one Jose Alvarez. The payee deposited the check with Union Bank who credited the P1,000,000.00 to
the account of Mr. Alvarez. Union Bank sent the check for clearing through the Philippine Clearing House Corporation (PCHC). When
the check was presented for payment, a clearing discrepancy was committed by Union Banks clearing staff when the amount of One
Million Pesos (P1,000,000.00) was erroneously under-encoded to One Thousand Pesos (P1,000.00) only.

Union Bank only discovered the under-encoding almost a year later. Union Bank Notified Allied Bank of the discrepancy by
way of a charge slip for Nine Hundred Ninety-Nine Thousand Pesos (P999,000.00) for automatic debiting against the account of
Allied Bank. Allied Bank, however, refused to accept the charge slip since the transaction was completed per your *Union Banks+
original instruction and clients account is now insufficiently funded.

Subsequently, Union Bank filed a complaint against Allied Bank before the PCHC Arbitration Committee (Arbicom) praying
for the payment of the P999,0000.00 among others. Thereafter, Union Bank filed in the Regional Trial court (RTC) of Makati a
petition for the examination of Account No. 111-01854-8. Judgment on the arbitration case was held in abeyance pending the
resolution of said petition. The RTC dismissed the motion of the basis that the case of the Union Bank does not fall under any of the
foregoing exceptions to warrant a disclosure of or inquiry into the ledgers/books of account of Allied Checking Account No. 111-
01854-8. The Court of Appeals affirmed the dismissal.

HELD:

Whether or not the case falls under the last exception for its

ISSUE:

Petition DENIED.

Union Bank is now before this Court insisting that the money deposited in Account No. 0111-01854-8 is the subject matter
of the litigation. By the phrase subject matter of the action is meant the physical facts, the things real or personal, the money,
lands, chattels, and the like, in relation to which the suit is prosecuted, and not the delict or wrong committed by the defendant.

The argument is well taken. The Court notes with approval the difference between the subject of the action from the cause
of action. We also find petitioners definition of the phrase subject matter of the action is consistent with the term subject
matter of the litigation, as the latter is used in the Bank Deposits Secrecy Act.

Union Banks theory is that Allied Bank should have informed Union Bank of the under-encoding pursuant to the provisions of
Section 25.3.1 of the PCHC Handbook, which states:
25.3.1. The Receiving Bank should inform the erring Bank about the under-encoding of amount not later than 10:00 A.M. of the following
clearing day.

Failing in that duty, Union Bank holds Allied Bank directly liable for the P999,000.00 and other damages. It does not appear
that Union Bank is seeking reimbursement from the account of the drawer.
Allied Bank by its acceptance thru the clearing exchange of the check deposit from its client cannot be said to be free from
any liability for the unpaid portion of the check amount considering that defendant as the drawee bank, is remiss in its duty of
verifying possible technicalities on the face of the check.

Since the provisions of the PCHC Rule Book has so imposed upon the Allied Bank being the Receiving Bank of a discrepant
check item to give that timely notification and defendant failing to comply with such requirement, then it can be said that defendant
is guilty of negligence. He who is guilty of negligence in the performance of its [sic] duty is liable for damages (Art. 1170, New Civil
Code.). Art. 1172 of the Civil Code provides that:

Responsibility arising from negligence in the performance of every kind of obligation is also demandable,
but such liability may be regulated by the courts, according to the circumstances.

Hence, the amount actually debited from the subject account becomes very material and germane to Union Banks claim
for reimbursement as it is only upon examination of subject account can it be proved that indeed a discrepancy in the amount
credited to petitioner was committed, thereby, rendering respondent Allied Bank liable to petitioner for the deficiency. The
money deposited in aforesaid account is undeniably the subject matter of the litigation since the issue in the Arbicom case is
whether respondent Bank should be held liable to petitioner for reimbursement of the amount of money constituting the difference
between the amount of the check and the amount credited to petitioner, that is, P999,000.00, which has remained deposited in
aforesaid account.

In other words, only a disclosure of the pertinent details and information relating to the transactions involving subject
account will enable Union Bank to prove its allegations in the pending Arbicom case.

In short, Union Bank is fishing for information so it can determine the culpability of private respondent and the amount of
damages it can recover from the latter. It does not seek recovery of the very money contained in the deposit. The subject matter of
the dispute may be the amount of P999,000.00 that Union Bank seeks from private respondent as a result of the latters alleged
failure to inform the former of the discrepancy; but it is not the P999,000.00 deposited in the drawers account. By the terms of R.A.
No. 1405, the money deposited itself should be the subject matter of the litigation.

That Union Bank feels a need for such information in order to establish its case against private respondent does not, by
itself, warrant the examination of the bank deposits. The necessity of the inquiry, or the lack thereof, is immaterial since the case
does not come under any of the exceptions allowed by the Bank Deposits Secrecy Act.

MARQUEZ v. DESIERTO (2001)

OFFICE OF THE OMBUDSMAN v.HON. FRANCISCO B. IBAY, in his capacity as Presiding Judge of the Regional Trial Court, Makati
City, Branch 135, UNION BANK OF THE PHILIPPINES, and LOURDES T. MARQUEZ, in her capacity as Branch Manager of UBP Julia
Vargas Branch
G.R. No. 137538, 3 September 2001, SECOND DIVISION (Quisumbing, J.)
If there is no pending litigation yet before a court of competent jurisdiction, but only an investigation by the Ombudsman, any
order for the opening of the bank account for inspection is clearlu premature and legally unjustified

The Ombudsman conducted an investigation on the alleged "scam" on the Public Estates Authority-Amari Coastal Bay
Development Corporation. The case, entitled Fact-Finding and Intelligence Bureau vs. Amadeo Lagdameo, et al. The Initial result
of the investigation revealed that the alleged anomaly was committed through the issuance of checks which were subsequently
deposited in several financial institutions. Thus, the Ombudsman issued an Order directing Lourdes Marquez (Marquez), branch
manager of Union Bank of the Philippines (Union Bank) to produce several bank documents for inspection of several accounts
reportedly maintained in the said branch. The documents referred to include bank account application forms, signature cards,
transactions history, bank statements, bank ledgers, debit and credit memos, deposit and withdrawal slips, application for purchase
of manager's checks, used manager's checks and check microfilms. The inspection would be done "in camera" wherein the bank
records would be examined without bringing the documents outside the bank premises. Its purpose was to identify the specific bank
records prior to the issuance of the required information not in any manner needed in or relevant to the investigation.

However, Lourdes failed to comply with the order

as the subject accounts pertain to International Corporate Bank (Interbank)
which merged with Union Bank in 1994. She added that despite diligent efforts, the bank could not identify these accounts since the
checks were issued in cash or bearer forms. She informed petitioner that she had to first verify from the Interbank records in its
archives the whereabouts of said accounts.

The ombudsman found this explanation untenable. It reminded Marquez

that her acts constitute disobedience or resistance to a
lawful order and is punishable as indirect contempt. The same might also constitute willful obstruction of the lawful exercise of
the functions of the Ombudsman. Thus, it issued an order to Marquez to produce the requested bank documents for "in camera"
inspection. In the event of her failure to comply as directed, private respondent was ordered to show cause why she should not be
cited for contempt and why she should not be charged for obstruction.

Marquez however filed a petition for declaratory relief with an application for TRO and/or preliminary injunction

where she
averredthat under Sections 2 and 3 of R.A. 1405 (Law on Secrecy of Bank Deposits), she had the legal obligation not to divulge any
information relative to all deposits of whatever nature with banks in the Philippines. But petitioner's Order cited Section 15 (8) of
R.A. 6770 stating that the Ombudsman had the power to examine and have access to bank accounts and records. The Court ruled
that the Ombudsman assumed jurisdiction over the case and issued orders with grave abuse of discretion and clear lack of
jurisdiction.

ISSUE:

Whether or not the Ombudsman has the authority to order an in camera inspection of the questioned account pending the
investigation as it is allowed as an exception to the law on secrecy of bank deposits

HELD:

Petition DENIED (Ombudsman cannot order the inspection).

In any event, the relief being sought by private respondent in her action for declaratory relief before the RTC of Makati City has been
squarely addressed by our decision in Marquez vs. Desierto. In that case, we ruled that before an in camera inspection of bank
accounts may be allowed, there must be a pending case before a court of competent jurisdiction. Further, the account must be
clearly identified, and 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 notified to be present during the inspection, and such inspection may cover
only the account identified in the pending case. In the present case, since there is no pending litigation yet before a court of
competent authority, but only an investigation by the Ombudsman on the so-called "scam", any order for the opening of the bank
account for inspection is clearly premature and legally unjustified.


CARMEN LL. INTENGAN, ROSARIO LL. NERI, and RITA P. BRAWNER v. COURT OF APPEALS, DEPARTMENT OF JUSTICE, AZIZ
RAJKOTWALA, WILLIAM FERGUSON, JOVEN REYES, and VIC LIM
G.R. No. 128996, 15 February 2002, SECOND DIVISION (De Leon, Jr., J.)
The filing of the comlaint for violation of RA 1405 did toll the running of the prescriptive period to file the appropriate complaint
for violation of R.A. 6426.

Citibank filed a complaint for violation of section 31, in relation to section 144 of the Corporation Code against two (2) of its officers,
Dante L. Santos (Santos), and Marilou Genuino (Genuino) pursuant to the investigation of certain anomalous and highly irregular
activities of the Treasurer of the Global Consumer Group of the of the bank. Accordingly, the two appeared to have been actively
engaged in business endeavors that were in conflict with the business of the bank. It was found that with the use of two (2)
companies in which they have personal financial interest, namely Torrance Development Corporation and Global Pacific
Corporation, they managed or caused existing bank clients/depositors to divert their money from Citibank, N.A., such as those
placed in peso and dollar deposits and money placements, to products offered by other companies that were commanding higher
rate of yields. This was done by first transferring bank clients monies to Torrance and Global which in turn placed the monies of the
bank clients in securities, shares of stock and other certificates of third parties. It also appeared that out of these transactions, Mr.
Dante L. Santos and Ms. Marilou Genuino derived substantial financial gains.

The complaints were subsequently amended to include a charge of estafa under Article 315, paragraph 1(b) of the Revised Penal
Code. As an incident to the foregoing, Intengan, et al. filed respective motions for the exclusion and physical withdrawal of their
bank records that were attached to Lims affidavit. Accordingly, documents were presented to substantiate the case which included
documents pertaining to US Dollar accounts of the petitioners. Subsequently, the Provincial Prosecutor directed the filing of
information against the officers of the bank for violation of RA 1405. Yet, the DOJ ordered the withdrawal of the informations which
was sustained by the Court of Appeals.

ISSUE:

Whether or not the filing of information for violation of RA 1405 is proper

HELD:

Actually, this case should have been studied more carefully by all concerned. The finest legal minds in the country - from the parties
respective counsel, the Provincial Prosecutor, the Department of Justice, the Solicitor General, and the Court of Appeals - all appear
to have overlooked a single fact which dictates the outcome of the entire controversy. A circumspect review of the record shows us
the reason. The accounts in question are U.S. dollar deposits; consequently, the applicable law is not Republic Act No.
1405 but Republic Act (RA) No. 6426, known as the Foreign Currency Deposit Act of the Philippines, section 8 of which provides
that all foreign currency deposits authorized under this Act, as amended by Presidential Decree No. 1035, as well as foreign
currency deposits authorized under Presidential Decree No. 1034, are hereby declared as and considered of an absolutely
confidential nature and, except upon the written permission of the depositor, in no instance shall such foreign currency deposits be
examined, inquired or looked into by any person, government official bureau or office whether judicial or administrative or legislative
or any other entity whether public or private: Provided, however, that said foreign 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.

Thus, under R.A. No. 6426 there is only a single exception to the secrecy of foreign currency deposits, that is, disclosure is allowed
only upon the written permission of the depositor. Incidentally, the acts of private respondents complained of happened before the
enactment on September 29, 2001 of R.A. No. 9160 otherwise known as the Anti-Money Laundering Act of 2001.

A case for violation of Republic Act No. 6426 should have been the proper case brought against private respondents. Private
respondents Lim and Reyes admitted that they had disclosed details of petitioners dollar deposits without the latters written
permission. It does not matter if that such disclosure was necessary to establish Citibanks case against Dante L. Santos and
Marilou Genuino. Lims act of disclosing details of petitioners bank records regarding their foreign currency deposits, with the
authority of Reyes, would appear to belong to that species of criminal acts punishable by special laws, called malum prohibitum.

Furthermore, ordinarily, the dismissal of the instant petition would have been without prejudice to the filing of the proper charges
against private respondents. The matter would have ended here were it not for the intervention of time, specifically the lapse
thereof. So as not to unduly prolong the settlement of the case, we are constrained to rule on a material issue even though i t was
not raised by the parties. We refer to the issue of prescription.

Republic Act No. 6426 being a special law, the provisions of Act No. 3326, as amended by Act No. 3763, are applicable:
xxxx
Violations of the regulations or conditions of certificates of public convenience issued by the Public Service Commission shall
prescribe after two months.

SEC. 2. Prescription shall begin to run from the day of the commission of the violation of the law, and if the same be not known at
the time, from the discovery thereof and the institution of judicial proceedings for its investigation and punishment.

The prescription shall be interrupted when proceedings are instituted against the guilty person, and shall begin to run again if the
proceedings are dismissed for reasons not constituting jeopardy.

The filing of the complaint or information in the case at bar for alleged violation of Republic Act No. 1405 did not have the effect of
tolling the prescriptive period. For it is the filing of the complaint or information corresponding to the correct offense which
produces that effect.

JOSEPH VICTOR G. EJERCITO v. SANDIGANBAYAN (SPECIAL DIVISION) AND PEOPLE OF THE PHILIPPINES
G.R. Nos. 157294-95, 30 November 2006, EN BANC (Carpio-Morales, J.)

Joseph Victor Estrada is the owner of both Trust Account No. 858 and Savings Account No. 0116-17345-9 which were
originally opened at the Urban Bank but now maintained in Export and Industry Bank (EIC), purchaser of the former Urban Bank.
Estrada also has an Urban Bank Managers Check.

Previously, in the case of People v. Estrada, a criminal case involving plunder, the Special Prosecution Panel filed, a Request
for Issuance of Subpoena Duces Tecum directed to President of EIB or his authorized representative to produce certain documents
concerning the Trust Account, the Savings account and the Managers check.

Another request for the issuance of Subpoena Duces Tecum/Ad testificandum directed to the authorized representative of
Equitable-PCI Bank to produce statements of account pertaining to certain accounts in the name of Jose Velarde and to testify
thereon was filed by the Special Prosecution Panel.

The Special Prosecution Panel filed still another Request for Issuance of Subpoena Duces Tecum/Ad Testificandum for the
President of EIB or his/her authorized representative to produce the same documents subject of the Subpoena Duces Tecum and to
testify thereon. Both requests were granted.

Estrada, unassisted by counsel, filed a Motion to Quash Subpoena Duces Tecum/Ad Testificandum praying that the
subpoenas previously issued to the President of the EIB be quashed. He claimed that his bank accounts are covered by R.A. No. 1405
(The Secrecy of Bank Deposits Law) and do not fall under any of the exceptions stated therein.

Before the Motion to Quash was resolved by the Sandiganbayan, the prosecution filed another Request for the Issuance of
Subpoena Duces Tecum/Ad Testificandum again to direct the President of the EIB to produce the same documents and some
additional documents. These subpoenae were again issued.

Estrada, this time assisted by counsel, filed an Urgent Motion to Quash Subpoenae Duces Tecum/Ad Testificandum
praying that the subpoena to Aurora Baldoz be quashed. This was denied by the Sandiganbayan. Thus, this petition for certiorari
under Rule 65.

The argument of the People is that the Trust account may be inquired into, not merely because it falls under the
exceptions to the coverage of R.A. 1405, but because it is not even contemplated therein. Accordingly, the law applies only to
deposits which strictly means the money delivered to the bank by which a creditor-debtor relationship is created between the
depositor and the bank.

ISSUES:

1. Whether or not Estradas Trust Account is covered by the term deposit as used in R.A. 1405; GRANTED
2. Whether or not Estradas Trust Account and Savings Account are excepted from the protection of R.A. 1405;
GRANTED
3. Whether the extremely-detailed information contained in the Special Prosecution Panels requests for subpoena
was obtained through a prior illegal disclosure of petitioners bank accounts, in violation of the fruit of the
poisonous tree doctrine; GRANTED

HELD:

Petition GRANTED.

Trust accounts are covered in the term deposits

The contention that trust accounts are not covered by the term deposits, as used in R.A. 1405, by the mere fact that they
do not entail a creditor-debtor relationship between the trustor and the bank, does not lie. An examination of the law shows that
the term deposits used therein is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor
relationship between the depositor and the bank. The policy behind the law is laid down in Section 1:

SECTION 1. It is hereby declared to be the policy of the Government 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.

If the money deposited under an account may be used by banks for authorized loans to third persons, then such account,
regardless of whether it creates a creditor-debtor relationship between the depositor and the bank, falls under the category of
accounts which the law precisely seeks to protect for the purpose of boosting the economic development of the country.

Trust Account is, without doubt, one such account. The Trust Agreement between Estrada and Urban Bank provides that
the trust account covers deposit, placement or investment of funds by Urban Bank for and in behalf of Estrada. The money
deposited under Trust Account was, therefore, intended not merely to remain with the bank but to be invested by it
elsewhere. To hold that this type of account is not protected by R.A. 1405 would encourage private hoarding of funds that could
otherwise be invested by banks in other ventures, contrary to the policy behind the law.

Section 2 of the same law in fact even more clearly shows that the term deposits was intended to be understood broadly:

SECTION 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political
subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official,
bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials,
or in cases where the money deposited or invested is the subject matter of the litigation. (Emphasis and underscoring supplied)

It is clear from the immediately quoted provision that, generally, the law applies not only to money which is deposited
but also to those which are invested. This further shows that the law was not intended to apply only to deposits in the strict
sense of the word. Otherwise, there would have been no need to add the phrase or invested.

Plunder is excepted from the protection of RA 1405

The protection afforded by the law is, however, not absolute, there being recognized exceptions thereto, as above-quoted
Section 2 provides. In the present case, two exceptions apply, to wit:
1. the examination of bank accounts is upon order of a competent court in cases of bribery or dereliction of duty of public
officials, and
2. the money deposited or invested is the subject matter of the litigation.

Estrada contends that since plunder is neither bribery nor dereliction of duty, his accounts are not excepted from the
protection of R.A. 1405. However, based on jurisprudence, cases of unexplained wealth are similar to cases of bribery or
dereliction of duty and no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits
confidential. This policy expresses the notion that a public office is a public trust and any person who enters upon its discharge does
so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny.

The crime of bribery and the overt acts constitutive of plunder are crimes committed by public officers, and in either case
the noble idea that a public office is a public trust and any person who enters upon its discharge does so with the full knowledge
that his life, so far as relevant to his duty, is open to public scrutiny applies with equal force. Plunder being thus analogous to
bribery, the exception to R.A. 1405 applicable in cases of bribery must also apply to cases of plunder.

The accounts fall under subject matter of the litigation

Respecting Estradas claim that the money in his bank accounts is not the subject matter of the litigation, a distinction
should be made
1. The cause of action is the legal wrong threatened or committed, while the object of the action is to prevent or redress
the wrong by obtaining some legal relief;
2. but the subject of the action is neither of these since it is not the wrong or the relief demanded, the subject of the
action is the matter or thing with respect to which the controversy has arisen, concerning which the wrong has been
done, and this ordinarily is the property or the contract and its subject matter, or the thing in dispute.

The plunder case now pending with the Sandiganbayan necessarily involves an inquiry into the whereabouts of the amount
purportedly acquired illegally by former President Joseph Estrada. Thus, the subject matter of the litigation cannot be limited to
bank accounts under the name of President Estrada alone, but must include those accounts to which the money purportedly
acquired illegally or a portion thereof was alleged to have been transferred. Trust Account and Savings Account in the name of
petitioner fall under this description and must thus be part of the subject matter of the litigation.

In a further attempt to show that the subpoenas issued by the Sandiganbayan are invalid and may not be enforced,
petitioner contends, as earlier stated, that the information found therein, given their extremely detailed character, could only
have been obtained by the Special Prosecution Panel through an illegal disclosure by the bank officials concerned. Petitioner thus
claims that, following the fruit of the poisonous tree doctrine, the subpoenas must be quashed.

The exclusionary rule (fruit of poisonous tree doctrine) not applicable in case of unlawful examination of bank accounts

Estradas attempt to make the exclusionary rule applicable to the instant case fails. R.A. 1405, it bears noting, nowhere
provides that an unlawful examination of bank accounts shall render the evidence obtained therefrom inadmissible in
evidence. Section 5 of R.A. 1405 only states that *a+ny violation of this law will subject the offender upon conviction, to an
imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the
court.

Even assuming arguendo, however, that the exclusionary rule applies in principle to cases involving R.A. 1405, the Court
finds no reason to apply the same in this particular case. Clearly, the fruit of the poisonous tree doctrine presupposes a violation of
law. If there was no violation of R.A. 1405 in the instant case, then there would be no poisonous tree to begin with, and, thus, no
reason to apply the doctrine.

CHINA BANKING CORPORATION v. THE HONORABLE COURT OF APPEALS and JOSE "JOSEPH" GOTIANUY as substituted by
ELIZABETH GOTIANUY LO
G.R. No. 140687, 18 December 2006, FIRST DIVISION (Chico-Nazario, J.)
Pro hac vice ruling
If the foreign currency deposit is co-owned by 2 payees of whom withdrew the funds exclusively owned by the other the latter is
entitled to hearing on the whereabouts of the funds even over the objection of the former and such inquiry does not violate the
law on secrecy of foreign currency deposits

Jose Gotianuy (Gotianuy) accused his daughter Mary Margaret Dee (Dee) of stealing, among his other properties, US dollar deposits
with Citibank N.A. (Citibank) amounting to not less than P35,000,000.00 and US$864,000.00. Dee received these amounts from
Citibank N.A. through checks which she allegedly deposited at China Banking Corporation (China Bank). He likewise accused his son-
in-law, George Dee, husband of his daughter, Mary Margaret, of transferring his real properties and shares of stock in George Dee's
name without any consideration. Gotianuy, died during the pendency of the case before the trial court. He was substituted by his
daughter, Elizabeth Gotianuy Lo (Elizabeth). The latter presented the US Dollar checks withdrawn by Mary Margaret Dee from his
US dollar placement with Citibank.

Upon motion of Elizabeth, thr TC issued a subpoena to Cristota Labios (Labios) and Isabel Yap (Yap), employees of China Bank, to
testify on the case. China Bank moved for a reconsideration but it was denied. The TC held that the disclosure as to the name or
whose name the said fund is deposited is not violative of the law. This was affirmed by the TC. Accordingly, the law protects only the
deposit itself but not the name of the depositor.

ISSUE:

Whether or not Gotianuy as the co-payee of foreign currency depositor in checks deposited in the account of Dee is a depositor and
thus can ask for the examination of such account

HELD:

Under Sec.8 of the PD 1246, all foreign currency deposits authorized under Republic Act No. 6426, as amended by Sec. 8,
Presidential Decree No. 1246, Presidential Decree No. 1035, as well as foreign currency deposits authorized under Presidential
Decree No. 1034 are considered absolutely confidential in nature and may not be inquired into. There is only one exception to the
secrecy of foreign currency deposits, that is, disclosure is allowed upon the written permission of the depositor.

This much was pronounced in the case of Intengan v. Court of Appeals, where it was held that the only exception to the secrecy of
foreign currency deposits is in the case of a written permission of the depositor. As to the deposit in foreign currencies entitled to be
protected under the confidentiality rule, Presidential Decree No. 1034, defines deposits to mean funds in foreign currencies which
are accepted and held by an offshore banking unit in the regular course of business, with the obligation to return an equival ent
amount to the owner thereof, with or without interest.

It is in this light that the court in the case of Salvacion v. Central Bank of the Philippines, allowed the inquiry of the foreign currency
deposit in question mainly due to the peculiar circumstances of the case such that a strict interpretation of the letter of the law
would result to rank injustice.

The following facts are established: (1) Jose Gotianuy and Mary Margaret Dee are co-payees of various Citibank checks; (2) Mary
Margaret Dee withdrew these checks from Citibank; (3) Mary Margaret Dee admitted in her Answer to the Request for Admissions
by the Adverse Party sent to her by Jose Gotianuy that she withdrew the funds from Citibank upon the instruction of her father Jose
Gotianuy and that the funds belonged exclusively to the latter; (4) these checks were endorsed by Mary Margaret Dee at the dorsal
portion; and (5) Jose Gotianuy discovered that these checks were deposited with China Bank as shown by the stamp of China Bank at
the dorsal side of the checks.

As CA ruled:

Furthermore, it is indubitable that the Citibank checks were drawn against the foreign currency account with Citibank, NA. The monies subject
of said checks originally came from the late Jose Gotianuy, the owner of the account. Thus, he also has legal rights and interests in the CBC
account where said monies were deposited. More importantly, the Citibank checks readily demonstrate that the late Jose Gotianuy is one of the
payees of said checks. Being a co-payee thereof, then he or his estate can be considered as a co-depositor of said checks. Ergo, since the late
Jose Gotianuy is a co-depositor of the CBC account, then his request for the assailed subpoena is tantamount to an express permission of a
depositor for the disclosure of the name of the account holder.

Thus, with this, there is no issue as to the source of the funds. Mary Margaret Dee declared the source to be Jose Gotianuy. There is
likewise no dispute that these funds in the form of Citibank US dollar Checks are now deposited with China Bank. As the owner of
the funds unlawfully taken and which are undisputably now deposited with China Bank, Jose Gotianuy has the right to inquire i nto
the said deposits. A depositor, in cases of bank deposits, is one who pays money into the bank in the usual course of business, to be
placed to his credit and subject to his check or the beneficiary of the funds held by the bank as trustee.

It must also be remembered that in the complaint of Jose Gotianuy, he alleged that his US dollar deposits with Citibank were illegally
taken from him. On the other hand, China Bank employee Cristuta Labios testified that Mary Margaret Dee came to China Bank and
deposited the money of Jose Gotianuy in Citibank US dollar checks to the dollar account of her sister Adrienne Chu. This fortifies our
conclusion that an inquiry into the said deposit at China Bank is justified. At the very least, Jose Gotianuy as the owner of these funds
is entitled to a hearing on the whereabouts of these funds.


REPUBLIC OF THE PHILIPPINES, Represented by THE ANTI-MONEY LAUNDERING COUNCIL (AMLC) v. HON. ANTONIO M. EUGENIO,
JR., AS PRESIDING JUDGE OF RTC, MANILA, BRANCH 34, PANTALEON ALVAREZ and LILIA CHENG
G.R. No. 174629, 14 February 2008, SECOND DIVISION (Tinga, J.)

There is ni need for a pre-existing or pending case in court for violation of the Anti-Money Laundering Law before a bank inquiry
order may be issued by a court. Nonetheless, a bank inquiry order, unlike a freeze order cannot be issued unless notice is given to
the owners of the account, allowing them the opportunity to contest the issuance of such order.

Following the promulgation of Agan v. PIATCO, a series of investigations concerning the award of the NAIA 3 contracts to PIATCO
were undertaken by the Ombudsman and the Compliance and Investigation Staff (CIS) of petitioner Anti-Money Laundering
Council (AMLC). Correspondingly, the Office of the Solicitor General (OSG) wrote the AMLC requesting the latters assistance in
obtaining more evidence to completely reveal the financial trail of corruption surrounding the *NAIA 3+ Project, and also noting
that petitioner Republic of the Philippines was presently defending itself in two international arbitration cases filed in relation to the
NAIA 3 Project. The CIS conducted an intelligence database search on the financial transactions of certain individuals involved in the
award, including respondent Pantaleon Alvarez (Alvarez) who had been the Chairman of the PBAC Technical Committee, NAIA-IPT3
Project.
[
By this time, Alvarez had already been charged by the Ombudsman with violation of Section 3(j) of R.A. No. 3019.
[
The
search revealed that Alvarez maintained eight (8) bank accounts with six (6) different banks.

As such, AMLC issued a resolution authorizing its executive director to sign and verify an application to inquire into and/or examine
the [deposits] or investments of Alvarez, et al. and their related web of accounts wherever these may be found and to authorize the
AMLC Secretariat to conduct an inquiry into subject accounts once the RTC of Makati grants the application to inquire into and/or
examine the bank accounts of those four individuals. The RTC grants the application.

Subsequently, the CIS proceeded to inquire and examine the deposits, investment and related web accounts. Again. AMLC filed an
application in Manila RTC to inquire into and/or examine the 13 accounts and 2 related web of accounts allegedly having been used
to facilitate corruption in connection with the NAIA 3 project. The RTC of Manila issued an order granting ex parte the application.
Alvarez, however, filed an urgent motin to stay the enforcement of the said order. He argued that
nothing in R.A. No. 9160 authorized the AMLC to seek the authority to inquire into bank accounts ex parte. In this case, the RTC
stayed the order but later on reinstated the same.

ISSUE:

1. Whether or not there should be a pending or pre-existing case in court before the AMLC can require the examination of
bank deposits; and
2. Whether or not a bank inquiry order can be ordered ex parte

No need for a pending or pre-existing case

Money laundering has been generally defined by the International Criminal Police Organization (Interpol) `as any act or attempted
act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources.
Section 4 of the AMLA states that *m+oney laundering is a crime whereby the proceeds of an unlawful activity as *defined in the
law] are transacted, thereby making them appear to have originated from legitimate sources.

Respondents posit that a bank inquiry order under Section 11 may be obtained only upon the pre-existence of a money laundering
offense case already filed before the courts. The conclusion is based on the phrase upon order of any competent court in cases of
violation of this Act, the word cases generally understood as referring to actual cases pending with the courts.

We are unconvinced by this proposition, and agree instead with the then Solicitor General who conceded that the use of the phrase
in cases of was unfortunate, yet submitted that it should be interpreted to mean in the event there are violations of the AMLA,
and not that there are already cases pending in court concerning such violations. If the contrary position is adopted, then the bank
inquiry order would be limited in purpose as a tool in aid of litigation of live cases, and wholly inutile as a means for the government
to ascertain whether there is sufficient evidence to sustain an intended prosecution of the account holder for violation of the AMLA.
Should that be the situation, in all likelihood the AMLC would be virtually deprived of its character as a discovery tool, and thus
would become less circumspect in filing complaints against suspect account holders. After all, under such set-up the preferred
strategy would be to allow or even encourage the indiscriminate filing of complaints under the AMLA with the hope or expectation
that the evidence of money laundering would somehow surface during the trial. Since the AMLC could not make use of the bank
inquiry order to determine whether there is evidentiary basis to prosecute the suspected malefactors, not filing any case at all would
not be an alternative. Such unwholesome set-up should not come to pass. Thus Section 11 cannot be interpreted in a way that
would emasculate the remedy it has established and encourage the unfounded initiation of complaints for money laundering.

No exparte bank inquiry order

Still, even if the bank inquiry order may be availed of without need of a pre-existing case under the AMLA, it does not follow that
such order may be availed of ex parte. There are several reasons why the AMLA does not generally sanction ex parteapplications and
issuances of the bank inquiry order.

It is evident that Section 11 does not specifically authorize, as a general rule, the issuance ex parte of the bank inquiry order.
Accordingly, notwithstanding the provisions of Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic
Act No. 8791, and other laws, the AMLC may inquire into or examine any particular deposit or investment with any banking
institution or non bank financial institution upon order of any competent court in cases of violation of this Act, when it has been
established that there is probable cause that the deposits or investments are related to an unlawful activity as defined in Section
3(i) hereof or a money laundering offense under Section 4 hereof, except that no court order shal l be required in cases involving
unlawful activities defined in Sections 3(i)1, (2) and (12) (Section 11).

To ensure compliance with this Act, the BSP may inquire into or examine any deposit of investment with any banking institution or
non bank financial 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.

Of course, Section 11 also allows the AMLC to inquire into bank accounts without having to obtain a judi cial order in cases where
there is probable cause that the deposits or investments are related to:

a. kidnapping for ransom,
b. certain violations of the Comprehensive Dangerous Drugs Act of 2002,
c. hijacking and other violations under R.A. No. 6235,
d. destructive arson and
e. murder.
Since such special circumstances do not apply in this case, there is no need for us to pass comment on this proviso. Suffice it to say,
the proviso contemplates a situation distinct from that which presently confronts us, and for purposes of the succeeding discussion,
our reference to Section 11 of the AMLA excludes said proviso.

In the instances where a court order is required for the issuance of the bank inquiry order, nothing in Section 11 specifical ly
authorizes that such court order may be issued ex parte. It might be argued that this silence does not preclude the ex parteissuance
of the bank inquiry order since the same is not prohibited under Section 11. Yet this argument falls when the immediately preceding
provision, Section 10, is examined.

SEC. 10. Freezing of Monetary Instrument or Property. The Court of Appeals, upon application ex parte by the AMLC and after
determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activi ty as
defined in Section 3(i) hereof, may issue a freeze order which shall be effective immediately. The freeze order shall be for a period
of twenty (20) days unless extended by the court.

Although oriented towards different purposes, the freeze order under Section 10 and the bank inquiry order under Section 11 are
similar in that they are extraordinary provisional reliefs which the AMLC may avail of to effectively combat and prosecute money
laundering offenses. Crucially, Section 10 uses specific language to authorize an ex parte application for the provisional relief therein,
a circumstance absent in Section 11. If indeed the legislature had intended to authorize ex parte proceedings for the issuance of the
bank inquiry order, then it could have easily expressed such intent in the law, as it did with the freeze order under Section 10.

That the AMLA does not contemplate ex parte proceedings in applications for bank inquiry orders is confirmed by the present
implementing rules and regulations of the AMLA, promulgated upon the passage of R.A. No. 9194. With respect to freeze orders
under Section 10, the implementing rules do expressly provide that the applications for freeze orders be filed ex parte, but no similar
clearance is granted in the case of inquiry orders under Section 11. These implementing rules were promulgated by the Bangko
Sentral ng Pilipinas, the Insurance Commission and the Securities and Exchange Commission, and if it was the true belief of these
institutions that inquiry orders could be issued ex parte similar to freeze orders, language to that effect would have been
incorporated in the said Rules. This is stressed not because the implementing rules could authorize ex parte applications for inquiry
orders despite the absence of statutory basis, but rather because the framers of the law had no intention to allow such ex
parte applications.

Without doubt, a requirement that the application for a bank inquiry order be done with notice to the account holder will alert
the latter that there is a plan to inspect his bank account on the belief that the funds therein are involved in an unlawful activity
or money laundering offense. Still, the account holder so alerted will in fact be unable to do anything to conceal or cleanse his bank
account records of suspicious or anomalous transactions, at least not without the whole-hearted cooperation of the bank, which
inherently has no vested interest to aid the account holder in such manner.

The necessary implication of this finding that Section 11 of the AMLA does not generally authorize the issuance ex parte of the bank
inquiry order would be that such orders cannot be issued unless notice is given to the owners of the account, allowing them the
opportunity to contest the issuance of the order. Without such a consequence, the legislated distinction between ex
parte proceedings under Section 10 and those which are not ex parte under Section 11 would be lost and rendered useless.

There certainly is fertile ground to contest the issuance of an ex parte order. Section 11 itself requires that it be established that
there is probable cause that the deposits or investments are related to unlawful activities, and it obviously is the court which
stands as arbiter whether there is indeed such probable cause. The process of inquiring into the existence of probable cause would
involve the function of determination reposed on the trial court. Determination clearly implies a function of adjudication on the part
of the trial court, and not a mechanical application of a standard pre-determination by some other body. The word "determination"
implies deliberation and is, in normal legal contemplation, equivalent to "the decision of a court of justice."
[81]

The court receiving the application for inquiry order cannot simply take the AMLCs word that probable cause exists that the
deposits or investments are related to an unlawful activity. It will have to exercise its own determinative function in order to be
convinced of such fact. The account holder would be certainly capable of contesting such probable cause if given the opportunity to
be apprised of the pending application to inquire into his account; hence a notice requirement would not be an empty spectacl e. It
may be so that the process of obtaining the inquiry order may become more cumbersome or prolonged because of the noti ce
requirement, yet we fail to see any unreasonable burden cast by such circumstance. After all, as earlier stated, requiring notice to
the account holder should not, in any way, compromise the integrity of the bank records subject of the inquiry which remain in the
possession and control of the bank.

PHILIPPINE DEPOSIT INSURANCE CORPORATION v. COURT OF APPEALS, ROSA AQUERO, GERARD YU, ERIC YU, MINA YU,
ELIZABETH NGKAION, MERLY CUESCANO, LETICIA TAN, FELY RUMBANA, LORNA ACUB, represented by their Attorney-in-Fact,
JOHN FRANCIS COTAACO
G.R. No. 118917, 22 December 1997, FIRST DIVISION (Kapunan, J.)
Deposit means the unpaid balance of money or equivalent received by a bank in the usual in the course of business and for which
it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by
passbook, check or certificate of deposit printed or issued in accordance with the CB rules and regulations and other applicable
laws, together with such other obligations of a bank which, consistent with banking usage and practices, the board of directors
shall determine and prescribe by regulations to be deposit liabilities of the bank.

Rosa Aquero (Aquero), et al. invested in money market placements with the Premiere Financing Corporation (PFC) in the sum
of P10,000.00 each for which they were issued by the PFC corresponding promissory notes and checks. Subsequently, John Francis
Cotaoco (Cataoco), for and in behalf of Aquero et al., went to the PFC to encash the promissory notes and checks, but the PFC
referred him to the Regent Saving Bank (RSB). Instead of paying the promissory notes and checks, the RSB, upon agreement of
Cotaoco, issued the subject 13 certificates of time deposit each stating, among others, that the same certifies that the bearer
thereof has deposited with the RSB the sum of P10,000.00; that the certificate shall bear 14% interest per annum; that the
certificate is insured up to P15,000.00 with the PDIC; and that the maturity date thereof is on November 3, 1983.

On the date of maturity, Cataoco went to RSB to encash the said certificates. However, RSB Exec.Vice President Jose M. Damian
(Damian) requested Cotaoco for a deferment or an extension of a few days to enable the RSB to raise the amount to pay for the
same. Cotaoco agreed. Despite said extension, the RSB still failed to pay the value of the certificates. Instead, RSB advised Cotaoco
to file a claim with the PDIC.

Meanwhile, the Monetary Board of the CB issued Resolution No. 788 suspending the operations of RSB. Eventually, the records of
RSB were secured and its deposit liabilities were eventually determined. Another resolution was issued liquidating RSB. A masterlist
or inventory of the RSB assets and liabilities was then prepared. However, the certificates of time deposit of Aquero, et al. were not
included in the list on the ground that the certificates were not funded by the PFC or duly recorded as liabilities of RSB.

Aquero et al, then filed with the PDIC their respective claims for the amount of the certificates. To their dismay, PDIC refused the
aforesaid claims on the ground that the Traders Royal Bank for the amount of P125,846.07 issued by PFC for the aforementioned
certificates was returned by the drawee bank for having been drawn against insufficient funds; and said check was not replaced by
the PFC, resulting in the cancellation of the certificates as indebtedness or liabilities of RSB.

Hence, Aquero et al filed an action for collection against PDIC, RSB and the Central Bank. The TC declared CB in default and ordered
PDIC and RSB to pay Aquero et al., jointly and severally, the amount corresponding to the latters certificates of time deposit. This
was affirmed by the CA.

ISSUE:

Whether or not PDIC is liable

HELD:

Petition DENIED (The petitioner is absolved from liability).

The fact that the certificates state that the certificates are insured by PDIC does not ipso facto make the latter liable for the same
should the contingency insured against arise. As stated earlier, the deposit liability of PDIC is determined by the provisions of R.A.
No. 3519, and statements in the certificates that the same are insured by PDIC are not binding upon the latter. x x x The mere fact
that a certificate recites on its face that a certain sum has been deposited, or that officers of the bank may have stated that the
deposit is protected by the guaranty law, does not make the guaranty fund liable for payment, if in fact a deposit has not been
made xxx. The banks have nothing to do with the guaranty fund as such. It is a fund raised by assessments against all state banks,
administered by officers of the state to protect deposits in banks.

In order that a claim for deposit insurance with the PDIC may prosper, the law requires that a corresponding deposit be placed in the
insured bank. This is implicit from a reading of the following provisions of R.A. 3519:

SECTION 1. There is hereby created a Philippine Deposit Insurance Corporation. xxx which shall insure, as provided, the deposits of all banks which are entitled to the
benefits of insurance under this Act xxx. (Italics supplied).
xxx
SEC. 10 (a) xxx
xxx
( c) Whenever an insured bank shall have been closed on account of insolvency, payment of the insured deposits in such bank shall be made by the Corporation as
soon as possible xxx. (Italics supplied.)

A deposit as defined in Section 3(f) of R.A. No. 3591, may be constituted only if money or the equivalent of money is received by a
bank. Deposit means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for
which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidence by
passbook, check and/or certificate of deposit printed or issued in accordance with Central Bank rules and regulations and other
applicable laws, together with such other obligations of a bank which, consistent with banking usage and practices, the Board of
Directors shall determine and prescribe by regulations to be deposit liabilities of the Bank xxx.

Did RSB receive money or its equivalent when it issued the certificates of time deposit? The Court of Appeals, in resolving who
between RSB and PFC issued the certificates to private respondents, answered this question in the negative. A perusal of the
impugned decision, however, reveals that such finding is grounded entirely on speculation, and thus, cannot bind this Court.
Equally unimpressive is the contention of PDIC and RSB that the certificates were issued to PFC which did not acquire the same for
value because the check issued by the latter for the certificates bounced for insufficiency of funds. First, granting arguendo that the
certificates were originally issued in favor of PFC, such issuance could only give rise to the presumption that the amount stated in
the certificates have been deposited to RSB. Had not PFC deposited the amount stated therein, then RSB would have surely refused
to issue the certificates certifying to such fact. Second, why did not RSB demand that PFC pay the certificates or file a claim against
PFC on the ground that the latter failed to pay for the value of the certificates? It could very well be that the reason why RSB did not
run after PFC for payment of the value of the certificates was because the instruments were issued to the latter by RSB for value or
were already paid to RSB by plaintiffs-appellees. Third, if it is true at the time RSB issued the certificates to PFC, the instruments
were paid for with checks still to be encashed, then why did not RSB specifically state in the certificates that the validity thereof
hinges on the encashment of said check? Fourth, even if it is true that PFC did not deposit with or pay the RSB the amount stated in
the certificates, the latter is not be such reason freed from civil liability to plaintiffs-appellees. For, by issuing the certificates, RSB
bound itself to pay the amount stated therein to whoever is the bearer upon its presentment for encashment. Truly, there is no
reason to depart from the established principle that were a bank issues a certificate of deposit acknowledging a deposit made with a
third person or an officer of the bank, or with another bank representing it to be the certificate of the bank, upon which assurance
the depositor accepts it, the bank is liable for the amount of the deposit.

Moreover, such finding totally ignores the evidence presented by defendants. Cardola de Jesus, RSB Deputy Liquidator, testified
that RSB received three (3) checks in consideration for the issuance of several CTDs, including the ones in dispute. The first check
amounted to P159,153.93, the second, P121,665.95, and the third, P125,846.07. In consideration of the third check, private
respondents received thirteen (13) certificates of deposit with Nos. 09648 to 09660, inclusive, with a value of P10,000.00 each or a
total ofP130,000.00. To conform with the value of the third check, CTD No. 09648 was chopped, and only the sum of P5,846.07
was credited in favor of private respondents. The first two checks made good in the clearing while the third was returned for
being drawn against insufficient funds.

The check in question described in RSBs offer of evidence as Traders Royal Bank Check dated September 22, 1983 covering the
amount or P125,846.07 xxx issued by Premiere Financing Corporation. At the back of said check are the words Refer to Drawer,
indicating that the drawee bank (Traders Royal Bank) refused to pay the value represented by said check. By reason of the checks
dishonor, RSB cancelled the corresponding as evidenced by an RSB ticket dated November 4, 1983. These pieces of evidence
convincingly show that the subject CTDs were indeed issued without RSB receiving any money therefor. No deposit, as defined in
Section 3 (f) of R.A. No. 3591, therefore came into existence. Accordingly, petitioner PDIC cannot be held liable for value of the
certificates of time deposit held by private respondents.

PHILIPPINE DEPOSIT INSURANCE CORPORATION v. THE HONORABLE COURT OF APPEALS and JOSE ABAD, LEONOR ABAD, SABINA
ABAD, JOSEPHINE JOSIE BEATA ABAD-ORLINA, CECILIA ABAD, PIO ABAD, DOMINIC ABAD, TEODORA ABAD
G.R. No. 126911, 30 April 2003, THIRD DIVISION (Carpio-Morales, J.)
Under its charter, R.A. 3591, PDIC is liable only for deposits received by a bank in the usual course of business. Even though a
bank was prohibited from doin other businesss on the ground of insolvency, the bank and its clients could be given the benefit of
the doubt that they were not aware that the monetary board resolution had been passed, given the necessity of confidentiality of
palcing a banking institution under receivership. If on the next banking days following the insurance of the monetary board
resolution, the depositor pre-terminated his time deposits and re-deposited the funds into smaller denominations; said deposits
were still for a consideration and covered by the PDIC insurance coverage.

Prior to 1997, Jose Abad et al., individually or jointly with each other, had 71 certificates of time deposits denominated as Golden
Time Deposits (GTD) with an aggregate face value of P1,115,889.96. In 1987, the Monetary Board of the CB issued a resolution
prohibiting Manila Banking Corporation (MBC) to do business in the Philippines, and placing its assets and affairs under
receivership. Subsequently, following the resolution, Jose Abad was at the MBC at 9:00 a.m. for the purpose of pre-terminating the
71 aforementioned GTDs and re-depositing the fund represented thereby into 28 new GTDs in denominations of P40,000.00 or less
under the names of herein respondents individually or jointly with each other. Of the 28 new GTDs, Jose Abad pre-terminated 8 and
withdrew the value thereof in the total amount of P320,000.00. Abad et al. thereafter filed their claims with the PDIC for the
payment of the remaining 20 insured GTDs.

In 1988, PDIC paid Abad et al. the value of 3 claims in the total amount of P120,000.00. PDIC, however, withheld payment of the 17
remaining claims after Washington Solidum, Deputy Receiver of MBC-Iloilo, submitted a report to the PDIC that there was massive
conversion and substitution of trust and deposit accounts on May 25, 1987 at MBC-Iloilo. Because of the report, PDIC entertained
serious reservation in recognizing respondents GTDs as deposit liabilities of MBC-Iloilo. Thus, it filed a petition for declaratory relief
against respondents with the RTC of Iloilo City, for a judicial declaration determination of the insurability of respondents GTDs at
MBC-Iloilo. The RTC declared the 20 GTDs of Abad et al to be deposited liabilities of MBC. On appeal, this was affirmed by the CA.

PDIC further posits that there was no consideration for the 20 GTDs subject of respondents claim. In support of this submission, it
states that prior to March 25, 1987, when the 20 GTDs were made, MBC had been experiencing liquidity problems, e.g., at the start
of banking operations on March 25, 1987, it had only P2,841,711.90 cash on hand and at the end of the day it was left
with P27,805.81 consisting mostly of mutilated bills and coins. Hence, even if respondents had wanted to convert the face amounts
of the GTDs to cash, MBC could not have complied with it.

ISSUE:

Whether or not PDIC is liable

HELD:

Petition GRANTED (PDIC is liable).

Under its charter, PDIC is liable only for deposits received by a bank in the usual course of business. Being of the firm conviction
that, bank transactions were so massive, hence, irregular, PDIC essentially seeks a judicial declaration that such transactions were
not made in the usual course of business and, therefore, it cannot be made liable for deposits subject thereof. It also poi nts out
that as MBC was prohibited from doing further business by MB Resolution as of May 22, 1987, all transactions subsequent to such
date were not done in the usual course of business.

While the MB issued Resolution 505 on May 22, 1987, a copy thereof was served on MBC only on May 26, 1987. MBC and its clients
could be given the benefit of the doubt that they were not aware that the MB resolution had been passed, given the necessity of
confidentiality of placing a banking institution under receivership. The evident implication of the law, therefore, is that the
appointment of a receiver may be made by the Monetary Board without notice and hearing but its action is subject to judicial
inquiry to insure the protection of the banking institution. Stated otherwise, due process does not necessarily require a prior
hearing; a hearing or an opportunity to be heard may be subsequent to the closure. One can just imagine the dire consequences of a
prior hearing: bank runs would be the order of the day, resulting in panic and hysteria. In the process, fortunes may be wiped out,
and disillusionment will run the gamut of the entire banking community.

That no actual money in bills and/or coins was handed by respondents to MBC does not mean that the transactions on the new
GTDs did not involve money and that there was no consideration therefor. For the outstanding balance of respondents 71 GTDs in
MBC prior to May 26, 1987 in the amount of P1,115,889.15 as earlier mentioned was re-deposited by respondents under 28 new
GTDs. Admittedly, MBC had P2,841,711.90 cash on hand more than double the outstanding balance of respondents 71 GTDs at
the start of the banking day on May 25, 1987. Since respondent Jose Abad was at MBC soon after it opened at 9:00 a.m. of that day,
petitioner should not presume that MBC had no cash to cover the new GTDs of respondents and conclude that there was no
consideration for said GTDs.

Hence, the 28 new GTDs were deposited in the usual course of business of MBC.

THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK) v. THE HONORABLE COURT OF APPEALS, GEORGE AND
GEORGE TRADE, INC., GEORGE KING TIM PUA and PUA KE SENG
G.R. No. 91494, 14 July 1995, FIRST DIVISION (Quason, J.)
Banks are allowed to collect handling charges on loans over P500,000 with amaturity of 730 days or less. However, in the case at
bar, Consolidated Bank was no tallowed to collect from the private respondents handling charges because it failed to conform to
the Truth in Lending Act. All banks and non-bank financial 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, therefore, cannot charge private
respondent such handling charges.

George King Tim Pua (George Pua), in his personal capacity, applied for, and was granted, by Consolidated Bank and Trust
Corporation (Solidbank) bank a loan for the sum of P500,000.00 for which he executed a promissory note (for the same amount,
payable on August 22, 1977. Another loan was granted to him for the sum of P400,000.00 for which he executed a promissory note,
payable on August 29, 1979. Later on, he again secured a loan from the Solidbank for the sum of P400,000.00 for which he executed
a promissory note payable on September 5, 1977.

In 1977, George Pua again applied for an was granted 3 loans amounting to P220,000.00, P450,000.00 and P65,000.00, for which he
executed three separate promissory notes payable on May 23, 1977. In 1979, he again obtained a loan ofP300,000.00 for which he
executed a promissory note on behalf of defendant corporation, with defendants George King Tim Pua and Pua Ke Seng as co-
makers, which loan bears an interest of 13.23% per annum and is payable on June 22, 1979.

In 1979, George and George Trade Inc. (George Trade) through George Pua applied for, and was granted, another loan of
P200,000.00 from the bank, for which defendant George King Tim Pua executed a promissory note on behalf of defendant
corporation, with defendants George King Tim Pua and Pua Ke Seng as co-makers, which loan bears an interest of 14% per
annum and is payable on May 21, 1979. Once more, he obtained a loan for P150,000.00, for which defendant George King Tim Pua
executed a promissory note on behalf of defendant corporation, with defendants George King Tim Pua and Pua Ke Seng as co-
makers, which loan bears an interest of 14% per annum and is payable on September 17, 1979.

The 3 PNs provides that in case of default of payment, the defendants agree to pay interest at an increased rate of 14% per
annum on the amount due, compounded monthly, until fully paid, as well as an additional sum equivalent to 10% of the total
amount due as and for attorney's fees in addition to expenses and costs of suit, such amount to bear interest at the rate of 1% per
month until paid. On the other hand, under the 2 PNs, the defendants further bound themselves to pay a penalty at the rate of
3% per annum on the amount due until fully paid.

In order to secure the payment of defendant George King Tim Pua's obligation with the bank he assigned unto the latter the
proceeds of a fire insurance policy issued by the Kerr Insurance Company in the amount of P2,908,485.00 The proceeds of the
insurance policy were subsequently paid to the bank which applied the same to the personal account of defendant George King Tim
Pua. The personal account of defendant George King Tim Pua was fully satisfied through the remittances of the fire insurance
proceeds.

According to the bank, after it had deducted from the insurance proceeds the entirety of George Pua's personal account, there
remained of the insurance proceeds the amount of P383,302.42. It then proceeded to apply said amount to the unpaid loans of
respondent George and George Trade, Inc. which amounted to P671,772.22 thus leaving a balance of P288,469.80 of the loans.

ISSUE:

Whether or not the bank can collect handling charges

HELD:

Petition DENIED.

The records show that respondent George King Tim Pua had two sets of accounts with petitioner bank: his personal account and his
account for George and George Trade, Inc. For his personal account, he obtained from petitioner on different dates six separate
loans with different due dates, viz:

Loan I
22-Apr-77 500,000.00
Payable August 22, 1977
Loan II 29-Apr-77 400,000.00
Payable August 29, 1977
Loan III 5/6/77 400000.00
Payable September 5, 1977
Loan IV (a) 2/21/1977 220,000.00
(b) 450,000.00
(c) 65,000.00

Payable on May 3, 1977 735,000.00
T O T A L 2,035,000.00
============

All of these loans bore a 14% rate of interest, which was to be compounded monthly, in case of failure on the part of respondent
George King Tim Pua to pay on maturity. In which case, he further undertook to pay an additional sum equivalent to 10% of the total
amount due but in no case less than P200.00 as attorney's fees. The maturity dates of the loans were extended up to either
December 1 or December 5, 1977 and all interests were paid up to March 5, 1978.

Under the account of George and George Trade, Inc., respondent George King Tim Pua, together with his co-maker, respondent Pua
Ke Seng, obtained the following loans:

Loan A 23-Jan-79 300,000.00
Payable June 22, 1979
Loan B 19-Apr-79 200,000.00
Payable May 21, 1979
Loan C 8/2/79 150,000.00
Payable Sept. 17, 1979
T O T A L P 650,000.00
============

The first loan bore an annual interest of 13.23%, which was to be increased to 14% in case of failure to pay on due date,
compounded monthly, until fully paid. An additional amount equivalent to 10% of the total amount but not less than P200.00 was to
be imposed in case of failure to pay on due date as attorney's fees. The second and third loans bore an interest rate of 14% per
annum and carried a penalty of 3% per annum on the amount due in case of failure to pay on the date of maturity. An additional
sum equivalent to 10% of the total amount due, but not less than P200.00, was to be imposed as and for attorney's fees. Interest
were paid on the loans up to their date of maturity.

The records further show that payments were made as follows:

September 12, 1978

P

230,000.00
October 28, 1978 149,000.00
November 28, 1978 100,000.00
June 8, 1979 525,000.00
September 6, 1979 2,383,485.00

TOTAL PAYMENTS P 3,387,985.00
===========

The 14% interest rate charged by petitioner was within the limits set by Section 3 of the Usury Law, as amended. 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 v. 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, compounded monthly, should they fail to pay the principal loan on the date of maturity.

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 financial 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.
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 v. 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 onl y
3% per annum of the unpaid balance of the principal of said Loan B, is considered reasonable and proper. The same cannot,
however, be said of the payment being insisted upon by petitioner of the attorney's fees stipulated in all the promissory notes,
consisting of 10% of the total amount due and payable.

A stipulation regarding the payment of attorney's 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 v. Almeda, 168 SCRA 474 [1988]; Reparations Commission v. Visayan Packing Corporation, 193 SCRA 531 [1991]). As
stated in the promissory notes, respondent George King Tim Pua agreed to pay attorney's fees only "in addition to expenses and
costs of suit." In other words, petitioner is entitled to collect from respondent George King Tim Pua the attorney's fees agreed upon
only in case it was compelled to litigate with third persons or to incur expenses to protect its interest (China Airlines, Ltd. v.
Intermediate Appellate Court, 169 SCRA 226 [1989]; Songcuan v. Intermediate Appellate Court, 191 SCRA 28 [1990]). These
conditions are not obtaining in the case at bench. There was no need for petitioner to litigate to protect its interest inasmuch as
private respondents had fully paid their obligations months before it filed the complaint for recovery of sum of money. Neither has it
been shown by competent proof that petitioner had to engage the services of a lawyer or incur expenses in collecting the fire
insurance proceeds from Kerr and Company.

DEVELOPMENT BANK OF THE PHILIPPINES v. FELIPE P. ARCILLA, JR.
G.R. No. 161397, SECOND DIVISION (Callejo, Sr., J.)
DBP failed to disclose the requisite information in the disclosure statement form authorized by the Central Bank, but did
so in the loan transaction documents between it and Arcilla. There is no evidence on record that DBP sought to collect or collected
any interest, penalty or other charges, from Arcilla other than those disclosed in the said deeds/documents.

Atty. Felipe P. Arcilla, Jr. was employed by the Development Bank of the Philippines (DBP). Arcilla decided to avail of a loan
under the Individual Housing Project (IHP) of the bank. DBP and Arcilla executed a Deed of Conditional Sale over a parcel of land, as
well as the house to be constructed thereon. Arcilla borrowed the said amount from DBP for the purchase of the lot and the
construction of a residential building thereon. Arcilla obliged himself to pay the loan in 25 years, with a monthly amortization
of P1,417.91, with 9% interest per annum, to be deducted from his monthly salary.

Arcilla was notified of the periodic release of his loan. However, Arcilla opted to resign from the bank in December 1986,
thus, the balance of his loan account with the bank had been converted to a regular housing loan. Arcilla signed three Promissory
Notes for the total amount of P186,364.15. He was also obliged to pay service charge and interests among others. However, Arcilla
also agreed to the reservation by the DBP of its right to increase (with notice to him) the rate of interest on the loan, as well as
all other fees and charges on loans and advances pursuant to such policy as it may adopt from time to time during the period of
the loan; Provided, that the rate of interest on the loan shall be reduced by law or by the Monetary Board; Provided, further, that
the adjustment in the rate of interest shall take effect on or after the effectivity of the increase or decrease in the maximum rate of
interest.

Upon his request, DBP agreed to grant Arcilla an additional cash advance of P32,000.00. Arcilla failed to pay his loan
account, advances, penalty charges and interests. Arcilla filed a complaint against DBP with the Regional Trial Court (RTC) of
Antipolo. Arcilla alleged that DBP failed to furnish him with the disclosure statement required by Republic Act (R.A.) No. 3765 and
Central Bank (CB) Circular No. 158 prior to the execution of the deed of conditional sale and the conversion of his loan account with
the bank into a regular housing loan account. Despite this, DBP immediately deducted the account from his salary as early as 1984.

The DBP alleged that it substantially complied with R.A. No. 3765 and CB Circular No. 158 because the details required in
said statements were particularly disclosed in the promissory notes, deed of conditional sale and the required notices sent to
Arcilla. In any event, its failure to comply strictly with R.A. No. 3765 did not affect the validity and enforceability of the subject
contracts or transactions. DBP interposed a counterclaim for the possession of the property.

The RTC favored Arcilla. The Court of Appeals set aside the decision of the RTC.

ISSUE:

Whether or not DBP complied with the disclosure requirement of R.A. No. 3765 and CB Circular No. 158, Series of 1978

HELD:

Petition GRANTED.

The petition of Arcilla has no merit.

Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan transaction, the bank, as creditor, is obliged to
furnish a client with a clear statement, in writing, setting forth, to the extent applicable and in accordance with the rules and
regulations prescribed by the Monetary Board of the Central Bank of the Philippines, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) 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;
(5) the total amount to be financed;
(6) the finance charges expressed in terms of pesos and centavos; and
(7) the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual
rate on the outstanding unpaid balance of the obligation.

Under Circular No. 158 of the Central Bank, the information required by R.A. No. 3765 shall be included in the contract
covering the credit transaction or any other document to be acknowledged and signed by the debtor. Furthermore, the contract or
document shall specify additional charges, if any, which will be collected in case certain stipulations in the contract are not met by
the debtor.

If the borrower is not duly informed of the data required by the law prior to the consummation of the availment or
drawdown, the lender will have no right to collect such charge or increases thereof, even if stipulated in the promissory note.
However, such failure shall not affect the validity or enforceability of any contract or transaction.

DBP failed to disclose the requisite information in the disclosure statement form authorized by the Central Bank, but did
so in the loan transaction documents between it and Arcilla. There is no evidence on record that DBP sought to collect or
collected any interest, penalty or other charges, from Arcilla other than those disclosed in the said deeds/documents.

UNITED COCONUT PLANTERS BANK v. SPOUSES MANUEL AND ODETTE BELUSO
G.R. No. 159912, 17 August 2007, THIRD DIVISION (Chico-Nazario, J.)
As the penalty depends on the finance charge required of the borrower, the borrowers cause of action would only accrue
when such finance charge is required. The action to recover the penalty may be instituted by the aggrieved private person
separately and independently from the criminal case for the same offense.

UCPB granted the spouses Beluso a Promissory Notes Line under a Credit Agreement whereby Sps. Beluso could avail from
UCPB credit of up to a maximum amount of P1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso constituted,
other than their promissory notes, a real estate mortgage over parcels of land in Roxas City as additional security for the
obligation. The Credit Agreement was subsequently amended to increase the amount of the Promissory Notes Line to a maximum
of P2.35 Million pesos and to extend the term thereof. .

The 3 promissory notes were renewed several times. The payment of the principal and interest of the latter two
promissory notes were debited from the spouses Belusos account with UCPB; yet, a consolidated loan for P1.3 Million was again
released to the spouses Beluso under one promissory note. To completely avail themselves of the P2.35 Million credit line extended
to them by UCPB, the spouses Beluso executed two more promissory notes for a total ofP350,000.00:

However, the spouses Beluso alleged that the amounts covered by these last two promissory notes were never released or
credited to their account and, thus, claimed that the principal indebtedness was only P2 Million. In any case, UCPB applied interest
rates on the different promissory notes ranging from 18% to 34%. From 1996 to February 1998 the spouses Beluso were able to pay
the total sum of P763,692.03.

The spouses Beluso, however, failed to make any payment of the foregoing amounts. UCPB demanded that the spouses
Beluso pay their total obligation but the spouses Beluso failed to comply therewith. UCPB foreclosed the properties mortgaged by
the spouses Beluso.

Spouses Beluso filed a Petition for Annulment, Accounting and Damages against UCPB with the RTC of Makati City. The RTC
favored Sps. Beluso. The Court of Appeals affirmed the RTC.

ISSUE:

Whether or not there was a violation of the Truth in Lending Act

HELD:

Petition GRANTED.

On the matter of allegation of the violation of the Truth in Lending Act, the Court of Appeals ruled:

Admittedly the original complaint did not explicitly allege a violation of the Truth in Lending Act and no action to formally admit the
amended petition was made either by [respondents] spouses Beluso and the lower court. In such transactions, the debtor and the lending
institutions do not deal on an equal footing and this law was intended to protect the public from hidden or undisclosed charges on their loan
obligations, requiring a full disclosure thereof by the lender. We find that its infringement may be inferred or implied from allegations that
when [respondents] spouses Beluso executed the promissory notes, the interest rate chargeable thereon were left blank. Thus, [petitioner]
UCPB failed to discharge its duty to disclose in full to [respondents] Spouses Beluso the charges applicable on their loans.

The Court agrees with the CA. The allegations in the complaint, much more than the title thereof, are controlling. Other
than that stated by the Court of Appeals, we find that the allegation of violation of the Truth in Lending Act can also be inferred
from the same allegation in the complaint we discussed earlier:

b.) In unilaterally imposing an increased interest rates (sic) respondent bank has relied on the provision of their promissory note
granting respondent bank the power to unilaterally fix the interest rates, which rate was not determined in the promissory note but was left
solely to the will of the Branch Head of the respondent Bank, x x x.

The action has not yet prescribed

UCPBs contention that this action to recover the penalty for the violation of the Truth in Lending Act has already prescribed
is likewise without merit. The penalty for the violation of the act is P100 or an amount equal to twice the finance 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 finance charge required of the borrower, the borrowers cause of action would
only accrue when such finance charge is required. In the case at bar, the date of the demand for payment of the finance charge
is 2 September 1998, while the foreclosure was made on 28 December 1998. The filing of the case on 9 February 1999 is
therefore within the one-year prescriptive period.

UCPB argues that a violation of the Truth in Lending Act, being a criminal offense, cannot be inferred nor implied from the
allegations made in the complaint. Pertinent provisions of the Act read:

Sec. 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of
this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance
charge 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. In any action under this subsection in which any person is entitled to a recovery, the
creditor shall be liable for reasonable attorneys fees and court costs as determined by the court.

x x x x

(c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fined 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.

As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the violation of the said Act gives rise to
both criminal and civil liabilities. Section 6(c) considers a criminal offense the willful violation of the Act, imposing the
penalty therefor of fine, imprisonment or both. Section 6(a), 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 finance 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.

Section 4 of the Truth in Lending Act clearly provides that the disclosure statement must be furnished prior to the
consummation of the transaction:

SEC. 4. 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, to the extent applicable and in accordance with rules and regulations
prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2)
(4) 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;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the
outstanding unpaid balance of the obligation.

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. Upholding UCPBs claim of substantial compliance would defeat these purposes of the Truth in Lending
Act. The belated discovery of the true cost of credit will too often not be able to reverse the ill effects of an already
consummated business decision.

In addition, the promissory notes, the copies of which were presented to the spouses Beluso after execution, are not
sufficient notification from UCPB. As earlier discussed, the interest rate provision therein does not sufficiently indicate with
particularity the interest rate to be applied to the loan covered by said promissory notes.

WAREHOUSE RECEIPTS LAW

LIBERATA ANTONIO ESTRADA, CANUTO CENIZAN, NAZARIO DE LA CRUZ, GENARO ALVARO, et al. v. COURT OF AGRARIAN
RELATIONS and FAUSTINO F. GALVAN
G.R. Nos. L-17481 and L-17537 to L-17559, 15 August 1961, EN BANC (Natividad J.)
When the Court ordered the manager of the bonded warehouse to deliver the deposited palay to certain specified parties, and
the person ordered to present the original warehouse receipts failed to do so because they were allegedly lost on fire, the Court
may order said manager to release the palay on the proper parties upon their issuing a receipt thereof, without necessity of
producing and surrendering the original receipts.

The petition dated June 10, 1961 asked that the manager of the Moncada Bonded Warehouse (Moncada) and Faustino F. Galvan
(Galvan) be declared in contempt of court and punished accordingly. In a resolution, the Court ordered the owner of Moncada to
release and give to petitioners the remaining deposits 10% of the net produce of the first crop minus P300.00 and 15% of the net
produce of the second crop minus P200.00. In 1961, the SC, passing upon motion filed by the petitioners in which they alleged that
the manager of the Moncada had refused to comply with the above resolution unless "the original of the receipts of palay
deposits be presented and surrendered to him." Thus, it issued another resolution ordering Galvan to surrender the original
receipts of the palay deposits to manager or owner of the Moncada. Still, Moncada and Galvan refused and still refuse to comply
with the orders for the reason that petitioners could not surrender to him the original of the warehouse receipts issued for the palay
in question, and the latter, because, he could not locate any more said receipts "as they were scattered, misplaced, destroyed or lost
when the contents of the Office of said Galvan, in the Galvan-Cabrera Building in Ylaya Street, Manila, were being desperately
evacuated therefrom during the fire which burned the Divisoria market and said Galvan-Cabrera Building in May, 1961.

ISSUES:

1. Whether or not Moncada and Galvans excuses are valid
2. Whether or not there should be release and delivery of the remaining shares in palay

HELD:

1. Petition GRANTED.
2. Petition GRANTED.

Validity of the excuse

The excuses respectively offered by the manager of the Moncada Bonded Warehouse and respondent Faustino F. Galvan are not
without some merits. The former unquestionably had the right to protect the interest of the bonded warehouse of which he was
manager, as the warehouse receipts issued for the palay in question might have been for the value in favor of innocent third parties;
and the latter, or Faustino F. Galvan, might have in fact lost said warehouse receipts in the manner above stated.

Release and Delivery of the shares of palay

Such incidents, however, do not constitute a valid excuse to evade compliance with the order of this Court that the palay in
question be delivered to the petitioners, and, considering that the petitioners are in dire need of said palay for their subsistence, the
Courts order must be carried out in the meantime that this cases have not been finally decided in order to ameliorate the
precarious situation in which said petitioners find themselves.

Thus, it is hereby ordered that the manager or the owner of the Moncada Bonded Warehouse in Moncada, Tarlac, and Faustino F.
Galvan release and deliver to the petitioners the portion still remaining to be delivered to them or their shares in the palay involved
in these cases.

CONSOLIDATED TERMINALS, INC. v. ARTEX DEVELOPMENT CO., INC.
G.R. No. L-25748, 10 March 1975, SECOND DIVISION (Aquino, J.)
A warehouseman has no cause of action for repossession and damages against a person to whom it is delivered deposited articles
on the basis of an alleged falsified delivery permit where the real parties interested in the questioned articles have not yet sued
the warehouseman for damages on account of wrongful delivery.

Consolidated Terminals, Inc. (CTI) appealed from the order of Judge Jesus Y. Perez of the CFI of Manila, dismissing its amended
complaint for damages against Artex Development Co., Inc. (Artex). The dismissal was predicated on lack of cause of action.
Accordingly, CTI was the operator of a customs bonded warehouse located at Port Area, Manila. It received on deposit one hundred
ninety-three (193) bales of high density compressed raw cotton valued at P99,609.76. It was understood that CTI would keep the
cotton in behalf of Luzon Brokerage Corporation (Luzon) until the consignee thereof, Paramount Textile Mills, Inc (Paramount), had
opened the corresponding letter of credit in favor of shipper, Adolph Hanslik Cotton of Corpus Christi, Texas. Correspondingly, by
virtue of an allegedly forged permit to deliver imported goods, purportedly issued by the Bureau of Customs, Artex was able to
obtain delivery of the bales of cotton after paying CTI P15,000 as storage and handling charges. At the time the merchandise was
released to Artex, the letter of credit had not yet been opened and the customs duties and taxes due on the shipment had not been
paid.

CTI, in its original complaint, sought to recover possession of the cotton by means of a writ of replevin. The writ could not be
executed. CTI then filed an amended complaint by transforming its original complaint into an action for the recovery from Artex of
P99,609.76 as compensatory damages, P10,000 as nominal and exemplary damages and P20,000 as attorney's fees.

It should be clarified that CTI in its affidavit for manual delivery of personal property and in paragraph 7 of its original complaint
alleged that Artex acquired the cotton from Paramount Textile Mills, Inc., the consignee. Artex alleged in its motion to dismiss that
it was not shown in the delivery permit that Artex was the entity that presented that document to the CTI. Artex further averred that
it returned the cotton to Paramount Textile Mills, Inc. when the contract of sale between them was rescinded because the cotton
did not conform to the stipulated specifications as to quality. No copy of the rescissory agreement was attached to Artex's motion to
dismiss.

Judge Perez dismiss the complaint since CTI is only a warehouseman and that it was already paid the warehousing and handling
charges. Hence, it can no longer recover as a warehouseman. Accordingly, the fact that the delivery of the goods was obtained by
Artex without opening the corresponding letter of credit cannot be the basis of a cause of action of CTI because such failure of the
defendant to open the letter of credit gives rise to a cause of action in favor of the shipper of the goods and not in favor of the
plaintiff. With respect to the allegation that the goods were taken by the defendant without paying the customs duties and other
revenues (sic) assessed thereon, this does not give rise to a cause of action in favor of CTI for the party aggrieved is the government.

ISSUE;

Whether or not CTI is entitled to the repossession of the bales of cotton

HELD:

Petition DENIED.

CTI in this appeal contends that, as warehouseman, it was entitled to the possession (should be repossession) of the bales of cotton;
that Artex acted wrongfully in depriving CTI of the possession of the merchandise because Artex presented a falsified delivery
permit, and that Artex should pay damages to CTI. The only statutory rule cited by CTI is section 10 of the Warehouse Receipts Law
which provides that "where a warehouseman delivers the goods to one who is not in fact lawfully entitled to the possession of
them, the warehouseman shall be liable as for conversion to all having a right of property or possession in the goods.

We hold that CTI's appeal has not merit. Its amended complaint does not clearly show that, as warehouseman, it has a cause of
action for damages against Artex. The real parties interested in the bales of cotton were Luzon Brokerage Corporation as depositor,
Paramount Textile Mills, Inc. as consignee, Adolph Hanslik Cotton as shipper and the Commissioners of Customs and Internal
Revenue with respect to the duties and taxes. These parties have not sued CTI for damages or for recovery of the bales of cotton or
the corresponding taxes and duties.

The case might have been different if it was alleged in the amended complaint that the depositor, consignee and shipper had
required CTI to pay damages, or that the Commissioners of Customs and Internal Revenue had held CTI liable for the duties and
taxes. In such a case, CTI might logically and sensibly go after Artex for having wrongfully obtained custody of the merchandise.
But that eventuality has not arisen in this case. So, CTI's basic action to recover the value of the merchandise seems to be
untenable. It was not the owner of the cotton. How could it be entitled to claim the value of the shipment?

In other words, on the basis of the allegations of the amended complaint, the lower court could not render a valid judgment in
accordance with the prayer thereof. It could not render such valid judgment because the amended complaint did not unequivocal ly
allege what right of CTI was violated by Artex, or, to use the familiar language of adjective law, what delict or wrong was committed
by Artex against CTI which would justify the latter in recovering the value of bales of cotton even if it was not the owner thereof.

PHILIPPINE NATIONAL BANK v. NOAH'S ARK SUGAR REFINERY, ALBERTO T. LOOYUKO, JIMMY T. GO, WILSON T. GO, respondents.
G.R. No. 107243, 1 September 1993, SECOND DIVISION (Narvasa, CJ.)
The validity of the negotiation cannot be impaired by the fact that the owner or warehouseman was deprived of the possession of
the same fraud, mistake or conversion.

In accordance with Act No. 2137, the Warehouse Receipts Law, Noah's Ark Sugar Refinery (Noahs Ark) issued on several dates
warehouse receipts (quedans) On March 1, 1989 covering sugar deposited by Rosa Sy; March 7, 1989 covering sugar deposited by
RNS Merchandising (Rosa Ng Sy); March 21, 1989 covering sugar deposit by RNS; March 31, 1989 covering sugar deposited by St.
Therese Merchandising; and April 1, 1989 covering sugar deposited by RNS. Substantially in the form, and contain the terms,
prescribed for negotiable warehouse receipts by Section 2 of the law.

Subsequently, warehouse receipts Numbered 18080 and 18081 (covering sugar deposited by RNS Merchandising) were negotiated
and indorsed to Luis T. Ramos; and receipts Numbered 18086 (sugar of St. Therese Merchandising), 18087 (sugar of RNS
Merchandising) and 18062 (sugar of Rosa Sy) were negotiated and indorsed to Cresencia K. Zoleta. Zoleta and Ramos then used
the quedans as security for loans obtained by them from the Philippine National Bank (PNB) in the amounts of P23.5 million and
P15.6 million, respectively. These quedans they indorsed to the bank.

Both Zoleta and Ramos failed to pay their loans. Consequently, PNB wrote to Noah's Ark, demanding delivery of the sugar covered
by the quedans indorsed to it by Zoleta and Ramos. When Noah's Ark refused to comply with the demand, PNB filed with the RTC of
Manila a verified complaint for "Specific Performance with Damages and Application for Writ of Attachment" against Noah's Ark, et
al. However, this was denied by the Court. Meanwhile, Noahs Ark then filed their responsive pleading entitled in which they
claimed that they "are still the legal owners of the subject quedans and the quantity of sugar represented thereon. Accordingly,
Noahs Ark agreed to sell to Rosa od RNS and Teresita Ng of St. Therese Merchandising the total volume of sugar in the quedan for
63M. The payments by the vendees however were dishonored by the drawee banks. Upon proper notification to the vendees and
the plaintiff, Noas Ark refused to deliver to vendees therein the quantity of sugar covered by subject quedans. Considering
therefore that the vendees and first indorsers of subject quedans did not acquire ownership thereof, the subsequent indorsers and
plaintiff itself did not acquire a better right of ownership than the original vendees/first indorsers.

Noahs Ark also adverted to PNB's supposed awareness "that subject quedans are not negotiable instruments within the purview of
the Warehouse Receipts Law but simply an internal guarantee of defendants in the sale of their stocks of sugar. The answer also
incorporated a third party complaint against Rosa Ng Sy and Teresita Ng praying that the latter be ordered to deliver or return to
them the quedans (eventually indorsed to the PNB and now subject of this suit) and pay damages and litigation expenses.

PNB filed a motion for summary judgment asserting that there is no genuine isse and that the defenses set up by Noahs Ark involve
purely questions of law i.e., (a) that the vendees of the sugar covered by the quedans in dispute never acquired title to the goods
because of their failure to pay the stipulated purchase price and hence, ownership over the sugar was retained by Noah's Ark, et al.;
and (b) PNB's action is premature since as pledgee it failed to exercise the remedies provided in the contract of pledge and the Civil
Code. And it specified in no little detail the admissions and documents on record demonstrating the absence of any genuine factual
issue.

The RTC denied the motion for summary judgment. Accordingly, an examination of the pleadings and the record readily shows that
there exists sharply conflicting claims among the parties relative to the ownership of the sugar quedans as to whether or not the
subject quedans falls squarely within the coverage of the Warehouse Receipt Law and whether or not the transaction between
plaintiff and third party defendants is governed by contract of pledge that would require plaintiff's compliance with Art. 2112, Civil
Code on pledge as regards the disposition of the subjects quedans."

Upon PNBs petition for certiorari, the CA nullified and set aside the orders of the RTC and commands that"summary judgment be
rendered forthwith in favor of the PNB against Noah's Ark Sugar Refinery, et al. The judgment became final and the case was
remanded to the Court of origin. However, the RTC rendered a decision in favor of Noahs Ark. It dismissed PNBs complaint for lack
of cause of action. Hence, this appeal.

ISSUE:

Whether or not the negotiation of the warehouse receipt by the buyer of the goods purchased from and deposited to the
warehouse is valid even if the warehouseman was not paid by the buyer

HELD:

Petition GRANTED.

The Court considers the Appellate Court's conclusions of fact and law to be correct.

The Trial Judge's argument that the Appellate Court's decision failed to take account of other "material facts established on the basis
of the pleadings, documentary evidence on record, stipulations and admissions during the proceedings on the application for a writ
of preliminary attachment," is quite transparently specious. For the matters cited by His Honor, as allegedly not examined by the
Court of Appeals, were in fact duly considered by the latter i.e., that "the various postdated checks issued by the buyers (RNS
Merchandising and St. Therese Merchandising) in favor of Noah's Ark were dishonored when presented for payment . . (and hence)
the buyers never acquired title to the sugar evidenced by the quedans," and that PNB "did not follow the procedure stated in Article
2112 of the Civil Code." In its decision, as just pointed out, the Court of Appeals explicitly ruled that the "validity of the negotiation"
of the quedans to PNB" cannot be impaired by the fact that the negotiation between Noah's Ark and RNS Merchandising and St.
Therese Merchandising was made in breach of faith on the part of the merchandising firms or by the fact that the owner (Noah' s
Ark) was deprived of the possession of the same by fraud, mistake or conversion . . ." It also ruled that the quedans were
negotiable documents and had been duly negotiated to the PNB which thereby acquired the rights set out in Article 1513 of the Civil
Code"

The Court of Appeals found correctly that the indications in the pleadings to the contrary notwithstanding, no substantial triable
issue of fact actually existed, and that certain issues raised in answer, even if taken as established, would not materially change the
ultimate findings relative to the main claim. Its decision is entirely in accord with this Court's rulings regarding the propriety of
summary judgments invoked by the Appellate Tribunal,i.e., Vergara, Sr. v. Suelto, and Mercado v. Court of Appeals. According
to Vergara, for instance, "even if the answer does tender issues and therefore a judgment on the pleadings is not proper a
summary judgment may still be rendered on the plaintiff's motion if he can show to the Court's satisfaction that "except as to the
amount of damages, there is no genuine issue as to any material fact," that is to say, the issues thus tendered are not genuine, are
in other words sham, fictitious, contrived, set up in bad faith, patently unsubstantial.
11
The determination may be made by the
Court on the basis of the pleadings, and the depositions, admissions and affidavits that the movant may submit, as well as those
which the defendant may present in turn."

In any event, the conclusions of fact and law set out in the Appellate Court's decision are undeniably binding on all the parties to the
case, the respondent Regional Trial Judge included. Having been rendered by a competent court within its jurisdiction, and having
become final and executory, the decision now operates as the immutable law among the parties, the respondent Trial Judge
included; it has become the law of the case and may no longer, in subsequent proceedings, be altered or modified in any way, much
less reversed or set at naught, by the latter, or any other judge, not even by the Supreme Court; it is an unalterable determination of
the propriety of a summary judgment in the action in question, and upon all the issues therein raised or which could have been
raised relative to the merits of said action.

The Trial Judge may not evade compliance with the final judgment of the Court of Appeals on the theory that the latter had acted
only on a mere interlocutory order (the order denying PNB's motion for summary judgment), while he had subsequently adjudged
the action for specific performance on the merits. Quite obvious is that the Court of Appeals had decided that a summary judgment
was proper in said action of specific performance, that this was in truth a determination of the merits of the suit, that that decision
had become final and executory, and that the decision expressly commanded His Honor to render such a judgment. Under the
circumstances, the latter's duty was clear and inescapable.

PHILIPPINE NATIONAL BANK v. HON. PRES. JUDGE BENITO C. SE, JR., RTC, BR. 45, MANILA; NOAHS ARK SUGAR REFINERY;
ALBERTO T. LOOYUKO, JIMMY T. GO and WILSON T. GO
G.R. No. 119231, 18 April 1996, FIRST DIVISION (Hermosisima, J.)
While the PNB is entitled to the stocks of sugar as the endorsee of the quedans, delivery to it shall be effected only upon payment
of the storage fees. Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in
accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by surrendering
possession thereof. In other words, the lien may be lost where the warehouseman surrenders the possession of the goods without
requiring payment of his lien, because a warehousemans lien is possessory in nature.

In accordance with Act No. 2137, the Warehouse Receipts Law, Noahs Ark Sugar Refinery issued on several dates, the following
Warehouse Receipts (Quedans): (a) March 1, 1989, Receipt No. 18062, covering sugar deposited by Rosa Sy; (b) March 7, 1989,
Receipt No. 18080, covering sugar deposited by RNS Merchandising (Rosa Ng Sy); (c) March 21, 1989, Receipt No. 18081, covering
sugar deposited by St. Therese Merchandising; (d)March 31, 1989, Receipt No. 18086, covering sugar deposited by St. Therese
Merchandising; and (e) April 1, 1989, Receipt No. 18087, covering sugar deposited by RNS Merchandising.

Subsequently, Warehouse Receipts Nos. 18080 and 18081 were negotiated and endorsed to Luis T. Ramos; and Receipts Nos. 18086,
18087 and 18062 were negotiated and endorsed to Cresencia K. Zoleta. Ramos and Zoleta then used the quedans as security for two
loan agreements - one for P15.6 million and the other for P23.5 million - obtained by them from the Philippine National Bank. The
aforementioned quedans were endorsed by them to the PNB.

Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans. Consequently, on March 16, 1990, the PNB wrote to Noahs Ark
Sugar Refinery demanding delivery of the sugar stocks covered by the quedans endorsed to it by Zoleta and Ramos. Noahs Ark
Sugar Refinery refused to comply with the demand alleging ownership thereof, for which reason the PNB filed with the Regional Trial
Court of Manila a verified complaint for Specific Performance with Damages and Application for Writ of Attachment against
Noahs Ark Sugar Refinery, Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, the last three being identified as the sole proprietor,
managing partner, and Executive Vice President of Noahs Ark, respectively.

Respondent Judge Benito C. Se, Jr., in whose sala the case was raffled, denied the Application for Preliminary Attachment.
Reconsideration therefor was likewise denied. Noahs Ark and its co-defendants filed an Answer with Counterclaim and Third-Party
Complaint in which they claimed that they are the owners of the subject quedans and the sugar represented therein. The Answer
incorporated a Third-Party Complaint by Alberto T. Looyuko, Jimmy T. Go and Wilson T. Go, doing business under the trade name
and style Noahs Ark Sugar Refinery against Rosa Ng Sy and Teresita Ng, praying that the latter be ordered to deliver or return to
them the quedans (previously endorsed to PNB and the subject of the suit) and pay damages and litigation expenses. The Answer of
Rosa Ng Sy and Teresita Ng is essentially to the effect that the transaction between them, on the one hand, and Jimmy T. Go, on the
other, concerning the quedans and the sugar stocks covered by them was merely a simulated one being part of the latters complex
banking schemes and financial maneuvers, and thus, they are not answerable in damages to him.

PNB filed a motion for summary judgment. This was denied. On petition for certiorari, CA reversed and set aside the orders of the
RTC. Yet, instead of rendering judgment in favor of PNB, the RTC (when the case was remanded to it) dismiss the complaint against
Noahs Ark for lack of cause of action.

PNB appealed from the RTC decision with the SC. SC ruled in favor of PNB. Noahs Ark thereupon filed before the trial court an
Omnibus Motion seeking among others the deferment of the proceedings until it is heard on their claim for warehousemans lien.
Meanwhile, PNB filed a Motion for the Issuance of a Writ of Execution and an Opposition to the Omnibus Motion filed by private
respondents.

The TC granted Noahs Ark Omnibus Motion and set the reception of evidence on their claim for warehousemans lien. PNB
subsequently filed a Manifestation with Urgent Motion to Nullify Court Proceedings. This was denied was the court finds that there
exists a valid warehousemans lien in favor of Noahs Ark.

ISSUE

Whether or not he warehouseman can enforce his warehousemans lien before delivering the sugar stocks as ordered by the Court
of Appeals or need he file a separate action to enforce payment of storage fees

HELD:

The issues presented before us in this petition revolve around the legality of the questioned orders of respondent judge, issued as
they were after we had denied with finality private respondents contention that the PNB could not compel them to deliver the
stocks of sugar in their warehouse covered by the endorsed quedans or pay the value of the said stocks of sugar. According to PNB,
Noahs Ark have lost their right to recover warehousemans lien on the sugar stocks covered by the five (5) Warehouse Receipts for
the reason that they failed to set up said claim in their Answer before the trial court and that private respondents did not appeal
from the decision in this regard. Petitioner asseverates that the denial by this Court on March 9, 1994 of the motion seeking
clarification of our decision, dated September 1, 1993, has foreclosed private respondents right to enforce their warehousemans
lien for storage fees and preservation expenses under the Warehouse Receipts Act.

Noahs Ark maintain however that they could not have claimed the right to a warehouseman s lien in their Answer to the complaint
before the trial court as it would have been inconsistent with their stand that they claim ownership of the stocks covered by the
quedans since the checks issued for payment thereof were dishonored. If they were still the owners, it would have been absurd for
them to ask payment for storage fees and preservation expenses. They further contend that our resolution, denying their motion for
clarification did not preclude their right to claim their warehousemans lien under Sections 27 and 31 of Republic Act 2137.

We have carefully examined our resolution, which denied Noahs Arks motion for clarification of our decision wherein we affirmed
in full and adopted the Court of Appeals earlier decision. We are not persuaded by the petitioners argument that our said
resolution carried with it the denial of the warehousemans lien over the sugar stocks covered by the subject Warehouse Recei pts.
We have simply resolved and upheld in our decision, dated September 1, 1993, the propriety of summary judgment which was then
assailed by private respondents. In effect, we ruled therein that, considering the circumstances obtaining before the trial court, the
issuance of the Warehouse Receipts not being disputed by the private respondents, a summary judgment in favor of PNB was
proper. We in effect further affirmed the finding that Noahs Ark is a warehouseman which was obliged to deliver the sugar
stocks covered by the Warehouse Receipts pledged by Cresencia K. Zoleta and Luis T. Ramos to the petitioner pursuant to the
pertinent provisions of Republic Act 2137.
In disposing of the private respondents motion for clarification, we could not contemplate the matter of warehousemans lien
because the issue to be finally resolved then was the claim of private respondents for retaining ownership of the stocks of sugar
covered by the endorsed quedans. Stated otherwise, there was no point in taking up the issue of warehousemans lien since the
matter of ownership was as yet being determined. Neither could storage fees be due then while no one has been declared the
owner of the sugar stocks in question.

Of considerable relevance is the pertinent stipulation in the subject Warehouse Receipts which provides for respondent Noahs Arks
right to impose and collect warehousemans lien:
Storage of the refined sugar quantities mentioned herein shall be free up to one (1) week from the date of the quedans covering said
sugar and thereafter, storage fees shall be charged in accordance with the Refining Contract under which the refined sugar covered
by this Quedan was produced.

It is not disputed, therefore, that, under the subject Warehouse Receipts provision, storage fees are chargeable. PNB anchors its
claim against private respondents on the five (5) Warehouse Receipts issued by the latter to third-party defendants Rosa Ng Sy of
RNS Merchandising and Teresita Ng of St. Therese Merchandising, which found their way to petitioner after they were negotiated to
them by Luis T. Ramos and Cresencia K. Zoleta for a loan of P39.1 Million. Accordingly, petitioner PNB is legally bound to stand by
the express terms and conditions on the face of the Warehouse Receipts as to the payment of storage fees. Even in the absence of
such a provision, law and equity dictate the payment of the warehouseman s lien pursuant to Sections 27 and 31 of the Warehouse
Receipts Law (R.A. 2137), to wit:

SECTION 27. What claims are included in the warehousemans lien. - Subject to the provisions of section thirty, a warehouseman
shall have lien on goods deposited or on the proceeds thereof in his hands, for all lawful charges for storage and preservati on of
the goods; also for all lawful claims for money advanced, interest, insurance, transportation, labor, weighing coopering and other
charges and expenses in relation to such goods; also for all reasonable charges and expenses for notice, and advertisement of
sale, and for sale of the goods where default has been made in satisfying the warehousemans lien.
xxx xxx xxx
SECTION 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid against the person
demanding the goods may refuse to deliver the goods to him until the lien is satisfied.

Thus, PNB cannot legally be deprived of their right to enforce their claim for warehousemans lien, for reasonable storage fees and
preservation expenses. Pursuant to Section 31 which we quote hereunder, the goods under storage may not be delivered until said
lien is satisfied.

SECTION 31. Warehouseman need not deliver until lien is satisfied. - A warehouseman having a lien valid against the person
demanding the goods may refuse to deliver the goods to him until the lien is satisfied.

Considering that petitioner does not deny the existence, validity and genuineness of the Warehouse Receipts on which it anchors its
claim for payment against private respondents, it cannot disclaim liability for the payment of the storage fees stipulated therein. As
contracts, the receipts must be respected by authority of Article 1159 of the Civil Code, to wit:

ART. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with
in good faith.

Petitioner is in estoppel in disclaiming liability for the payment of storage fees due the private respondents as warehouseman while
claiming to be entitled to the sugar stocks covered by the subject Warehouse Receipts on the basis of which it anchors its claim for
payment or delivery of the sugar stocks. The unconditional presentment of the receipts by the petitioner for payment against private
respondents on the strength of the provisions of the Warehouse Receipts Law (R.A. 2137) carried with it the admission of the
existence and validity of the terms, conditions and stipulations written on the face of the Warehouse Receipts, including the
unqualified recognition of the payment of warehousemans lien for storage fees and preservation expenses. Petitioner may not now
retrieve the sugar stocks without paying the lien due private respondents as warehouseman.

In view of the foregoing, the rule may be simplified thus: While the PNB is entitled to the stocks of sugar as the endorsee of the
quedans, delivery to it shall be effected only upon payment of the storage fees. Imperative is the right of the warehouseman to
demand payment of his lien at this juncture, because, in accordance with Section 29 of the Warehouse Receipts Law, the
warehouseman loses his lien upon goods by surrendering possession thereof. In other words, the lien may be lost where the
warehouseman surrenders the possession of the goods without requiring payment of his lien, because a warehousemans lien is
possessory in nature.

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