Commercial Papers (3) person constituting mortgage has free disposal of his property

CP: (4) execution of a public instrument acknowledged before a notary public

-evidence of indebtedness of corporation (5) must cover IMMOVABLE PROPERTY, if land, state the description and location thereof
(6) registration in the Register of Deeds where the property is located
REVISED SECURITIES ACT (BP78): CPs are included in the enumeration of securities *note: there is some formality in REM (see numbers 4 and 6)
-under the SECURITIES REGULATION CODE, CPs are not expressly mentioned as securities. Look at SEC 112 of Property Registration Act?
BUT they can qualify as such under the CATCH ALL PROVISION If mortgage is over parcels of land, notary public has to mention that in notarial …
2 witnesses must sign
GR: before CPs can be sold to the public, they must first be registered w/ the SEC On the left hand margin of each and every page sign
X: It should be mentioned by the notary public in the notarial accounts: Notary public should state
1. Exempt securities that
1. They are sold in exempt transactions *it is a REM
*location of property
SEC rules regarding registration of CP: *signatories
1 . Rules on registration of short-term CP (w/ maturity of less than 365days) *that it was signed in each and every page
2 . Rules on registration of long-term CP (w/maturity of more than 365 days) Note the new rules of notarial practice provides stringent requirements for
…these 2 rules are attached as appendix to MANUAL OF REGULATION OF BANKS …something like that

Commercial papers (CPs) What is the effect if the notary public fails to mention those details in the notarial accounts???
-no longer stated in SRC, but you cannot draw the conclusion that … [it's not included anymore] >>>Still arguable that it is valid, binding to 3rd persons (registration would bind them)
...There a term in SRC "evidence of indebtedness"
-there's a provision that require registration of CPs if it is long term. Sir said that to prevent No registration of REM if DST not paid (payable w/n 5 months after the month of execution - 2%)
registration requirement, short term na lang?
-next version of SRC would not contain anymore dapat long term CPs but the person who (b) Chattel Mortgage
drafted it forgot to define CPs in the SRC Requisites:
-Rules in registration of short term and long term CPs, CPs are supposed to be issued by (1) must cover PERSONAL PROPERTY
Corporations BUT in SRC, even individuals could issue CPs (2) constituted to secure the fulfillment of an obligation
-SRC created certain exemption from registration… (3) person constituting mortgage has free disposal of his property
(4) mortgagor must be the owner of the personal property
Security Devices and Other Credit Supports/Enhancements (5) execution of a public instrument acknowledged before a notary public
-Further obligation of the obligor to support its credit (6) the instrument must contain an AFFIDAVIT OF GOOD FAITH
-there's a form!
1. Types -in its absence, the instrument is still binding BETWEEN THE PARTIES BUT NOT AGAINST
2 general types of security devices: 3RD PERSONS
(1) personal security (7) registration in the Register of Deeds where the property is located and/or where mortgagor
-obligation secured by the personal commitment of another resides
-person would provide the guaranty to support the credit of the obligor/debtor/borrower *double registration requirement: where the mortgagor and morgagee's domicile is not the same!
e.g. guaranty, surety If the mortgagor is outside the RP, register in the place where property is located
X: when the property is more than P5k ???
(2) real security (res = property) --no registration if DST not paid
-obligation secured by AN ENCUMBRANCE OF REAL PROPERTY
-requires the execution of a public instrument or corresponding deed encumbering the property
in the form prescribed by law (c) Mortgage Trust Indenture
-collateral (add from reviewer)
e.g. pledge, mortgage, antichresis -REM/chattel mortgage
-only difference:
MORTGAGE (MOR- Gage) In a bilateral mortgage document, the mortgagee is the obligee of the lender but in an MTI, the
-really a debt pledge morgagee is not necessarily a lender but a trustee (usu, trust dept of a bank) - trustee acting in
-a pledge to forfeit a property in case of default the benefit of the lenders
-debt: if the borrower is unable to fulfill the principal obligation, the borrower's property is -Mortgage Participation Certificate issued to represent interest in the mortgage collateral
forfeited in favor of the lender; but if able to pay off the principal obligation, wala na…. -lenders would come and go but the MTI is supposed to remain there
"By the way, it's silent 'T', mor-gage, not morTgage" e.g. borrower was able to obtain a loan facility, then wanted more. There would be a
supplementary mortgage trust indenture with a second set of lenders (listed in the supplement)
and so on
1. REAL SECURITIES But it is not necessarily the case that when the borrower borrows, a second set of lenders
(a) Real Estate Mortgage (REM) allowed to be joined (because the property of the borrower may not be enough) so there is a
-Requisites: requirement to preserve the collateral to a percentage of the outstanding obligations (150%
(1) mortgagor must be the owner of the real property collateral maintained as to 100% outstanding obligation) or else, borrower would provide
(2) constituted to secure the fulfilment of an obligation additional property as collateral.
1|Cha’s banking notes
 -IBAA claimed that AS GUARANTOR, its remaining outstanding balance was the balance not
(d) Pledge paid by the sps. Later it even claimed overpayment
-there is a requirment to deliver the property being pledged to the pledgee -IBAA foreclosed the securities of the standby letter of credit.
Must describe the pledge properly -Philam filed collection suit vs. IBAA and the sps for revocery of P274k allegedly still owed under
Must be dated the loan
*to bind 3P RTC: IBAA was a surety, and discharged of its liability to the extent of the payment made by
-if the property being pledge is an incorporeal right, then it must be endorsed to the pledgee! Mendozas
In a stock certificate, the dorsal side of it may contain endorsement form so that the pledgor CA: reversed RTC. IBAA's liability was not reduced by payments made by Mendoza Sps.
would just sign the form to endorse it
-afterwards, stock certificates delivered to the pledgee H: Affirm CA
IS IT ALWAYS THE CASE THAT DELIVERY REQUIRED? NO MORE -Even if its a
SECTION 45 OF SECURITIES REGISTRATION CODE Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the
-you can constitute a pledge by entries in the book, that entry is deemed to be delivery under the Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to
civil code so in a sense, Civil code is deemed amended 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
There is even a procedure for pledging uncertificated securiities: entries needed is within the powers of a bank (Section 74[e], RA 337, General Banking Act). 1 The standby
You can uplift the shares in a scriptless (?) system?: shareholder given the physical stock L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount for which
certificate credit is given on the faith of the instrument.". They are primary obligations and not accessory
If you are able to payoff the obligation, you could re-enter the same into the scriptless system 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. Payments
1. PERSONAL SECURITIES made by the Mendozas directly to Philam Life are in compliance with their own prestation under
(e) Guarantee/suretyship/standby letter of credit the loan agreements. And although these payments could result in the reduction of the actual
Tri-Party amount which could ultimately be collected from IBAA, the latter's separate undertaking under its
1. Lender L/Cs remains.
1. Borrower Both the Trial Court and the Appellate Court found, as a fact, that there still remains a balance
1. Guarantor/surety on the loan, Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape
the obligation to pay Philam Life for this unexpended balance. The Appellate Court found it to be
P222,000.00, arrived at by the Trial Court and adopted by the Appellate Court, as follows: ... In
Guarantor SURETY the summary of application of payments (Exhibit "KK") the plaintiff applied Pl,918.00 as
commitment fee, P4,397.66 as surcharges, P199,683.40 as interests, and P320,000.00 on the
Benefit of excusion (should go after the guaranteed No benefit of excussion principal. The P58,000.00 which is covered by OR No. 74396 was also applied "against the total
party first loan." Since plaintiff applied P378,000.00 against the total indebtedness of P600,000.00 there
still remains an outstanding balance on the principal P322,000.00 (should be P222,000.00)
aside from the agreed penalty interest until the whole amount is fully paid. ... (Decision, Trial
Standby LC Court, p. 50, Rollo)
-EXAMPLE OF A SURETY
-GUARANTEE PAID ON 1ST DEMAND The amount of P222,000.00, therefore, considered as "any obligation of the accountee" under
-used as guarantee prior to enactment of GBL the L/Cs will still have to be paid by IBAA under the explicit terms thereof, which IBAA had itself
-section 74 of sir's book (78-79): there was a prohibition against the bank being able to extend supplied. Letters of credit are strictly construed to the end that the rights of those directly parties
guarantee except in certain cases to them may be preserved and their interest safeguarded. Like any other writing, it will be
So in Item e, there's a reference to standby arrangement (construed as standby L/C) construed most strongly against the writer and so as to be.
-now, section 74 no longer found so it is arguable that a bank may issue a guarantee now (and
not just standby L/C) As to the liability of the Mendozas to IBAA, it bears recalling that the Mendozas, upon their
application for the opening and issuance of the Irrevocable Standby Letters of Credit in favor of
Philam Life, had executed a Real Estate Mortgage as security to IBAA for any payment that the
latter may remit to Philam Life on the strength of said Letters of Credit; and that IBAA had
Insular Bank of Asia & America vs CA recovered from the Mendozas the amount of P432,386.07 when it foreclosed on the mortgaged
F: Mendoza sps obtained 2 loans from Philam Life for P600k to finance construction of their property of said spouses in the concept of "principal (unpaid advances under the 2 standby L/Cs
residential house. plus interest and charges)." In addition, IBAA had recovered P255,364.95 representing its clean
-as security for payment, Philam Life required that the amortizations be guaranteed by an loans to the Mendozas plus accrued interest besides the fact that it now has the foreclosed
irrevocable standby letter of credit of a commercial bank. Thus, Mendoza Sps. Contracted with property. As between IBAA and the Mendozas, therefore, there has been full liquidation. The
IBAA for the issuance of 2 irrevocable standby letters of credit for a total of P600k. These remaining obligation of P222,000.00 on the loan of the Mendozas, therefore, is now IBAA's sole
standby letters of credit were secured by real estate mortgage for the same amount. responsibility to pay to Philam Life by virtue of its absolute and irrevocable undertaking under
-Mendoza sps executed PNs in favor of IBAA which authorized IBAA to sell the real estate the standby L/Cs. Specially so, since the promissory notes executed by the Mendozas in favor
securities for purpose of applying their proceeds to such payments of Mendoza to IBAA of IBAA authorized the sale of the mortgaged security "for the purpose of applying their
-Mendozas failed to pay Philam Life for June amortization so Philam Life demanded from IBAA proceeds to ... payments" of their obligations to IBAA!
but IBAA contested the default. Mendoza sps failed again to pay for September the next year so
Philam Life again demanded from IBAA> SO final decision: IBAA lang magbabayad!!!

2|Cha’s banking notes

*"That would make them ultra vires rather than a letter of credit, which is within the powers of a
bank (Section 74[e], RA 337, General Banking Act)." - sabi ni sir, dapat daw INTRA VIRES, not documents that he has performed his applicant has not performed. Beneficiary
contract must certify that his obligor has not
ultra vires
*accessory contract: sir said that SL/C is not an accessory contract, court probably refers to the performed.
independence principle, there's even a UN Convention on standby L/Cs….it is not accessory to
anything but it is actually a guarantee; it is an accessory in the sense that it cannot exist without By definition, a letter of credit is a written instrument whereby the writer requests or authorizes
a valid obligation the addressee to pay money or deliver goods to a third person and assumes responsibility for
L/Cs are not covered by NCC lang, also covered by ICP 80 etc. payment of debt therefor to the addressee. 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
Transfield Philippines vs. Luzon Hydro Corp, supra or disputes between the parties thereto.
F: Transfield, a Turnkey contractor, and Luzon Hydro Corporation (LHC) entered into a Turnkey
Contract wherein Transfield would construct a power station. SC here was citing Prof. Dolan; but it is not applicable to Philippine situation. A surety obligation
To secure performance of its obligation, Transfield opened in favor of LHC 2 standby letters of is a monetary obligation
credit each in the amount of US$8,988,907.
-however, due to force majeure, Transfield delayed in the construction and its requests for Ong vs. PCIB
extensions were denied by LHC. F: Ong (treasurer) and Alfredo (President) acted as SURETIES for the loan acquired by the
-The parties first underwent arbitration before CIAC and another in ICC. BMC. BMC defaulted. PCIB filed a collection suit. BMC applied for rehabilitation and suspension
-Foreseeing that LHC would claim the standby letters of credit which are their securities for the of payments with SEC. PCIB and BMC executed a MOA. BMC filed MTD the complaint, arguing
performance of the obligation, Transfield advised respondents banks of the arbitration that the MOA suspended any pending civil action against BMC.
proceedings already pending and asserted THAT LHC had no right to call on the securities until RTC: denied
the resolution of the disputes before the arb tribunals and any transfer, release, or disposition of CA: affirm: a creditor can proceed against petitioners Ong and Alfredo as surety independently
the Securities in favor of LHC would constrain it to hold respondent banks liable for liquidated of its right to proceed vs. BMC
damages. - banks said that they would pay LHC when it calls on them (HAHA! Wala kaming
paki sa inyo!) H: Ong and Alfredo acted as principal obligors. As sureties, even if the principal debtor was
-LHC declared Transfield in default, so it served notice to the banks that it would call on the granted suspension of payments, they are not affected by it.
securities. -the provisions they are citing are for guarantors, not sureties. (difference between surety and
-Transfield filed complaint for injunction w/TRO vs. banks and LHC, praying that LHC refrain guarantors)
from calling on the securities and the banks from disposing any securities
RTC: DENY, employ, "independent contract" doctrine Guarantee vs. suretyship.
CA: Affirm
ON L/C Suretyship in NCC (A2476) solidarily bound Guarantor has benefit of
Nature of LC. The letter of credit evolved as a mercantile specialty, and the only way to with principal debtor. Therefore, a surety is a principle of excussion. Should
understand all its facets is to recognize that it is an entity unto itself. The relationship between principal debtor in the beginning. collect from Principal borrower
the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity first. Not a primary obligor.
and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable
right. On contracts saying "not only a primary obligor, more than a surety" -so what is it? A surety is a
Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a primary obligor! This contract is actually a suretyship.
letter regardless of problems subsequently arising in the underlying contract. Since the bank’s
customer cannot draw on the letter, it does not function as an assignment by the customer to the International Finance Corporation vs. Imperial Textile Mills
beneficiary. F: IFC granted a P7M loan obligation of PPIC, PPIC executed REM. Also, ITM and Grantex
Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary guaranteed it (primarily bound) but contract called guaranty.
liability following a default. -PPIC defaulted. IFC foreclosed REM but kulang, so demand from ITM and Grantex
Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and ITM and Grantex: used guarantors and guarantee
is generally conditional, yet the draft presented under it is often negotiable.
SC: for IFC
Commercial vs Standby Credits. -"jointly and severally liable daw", even if called guarantors.
Commercial credits Standby credits
SC did not really explained meaning of the phrase commented on by sir: "primary obligor and
Involve the payment of money under The credit is payable upon certification of not merely as surety". Just said primary obligor and surety have same legal consequences.
a contract of sale. Such credits a party's nonperformance of the What should have been stated is that ITC was acting as a primary obligor and surety and not
become payable upon presentation agreement. merely as a guarantor to be consistent with NCC.
by seller-beneficiary of documents IFC is the investment arm of the World Bank. So it was couched in language familiar with the
that show he has taken affirmative world bank.
steps to comply with the sales
agreement.
JN Dev't Corp vs. Phil Export and Foreign Loan Guarantee Corp
Beneficiary must demonstrate by Documents would tend to show that the
3|Cha’s banking notes
F: Credit line covered by REM and a guarantee. Letter of guaranty covers 70% of credit line. JN
failed to pay traders royal bank. Pursuant to L/C, Traders collected from Phil Guaranty. Phil
Guaranty collected from JN. SO collection case filed by Phil Guaranty vs. JN.
JN:
1. the guaranty letter, by the time that Phil Guaranty paid, was already expired. SO at the time
Phil Guaranty paid the obligation to Traders, it has actually no obligation to pay such
2. Failure to object of Phil Guaranty to the extension precluded it to collect
SC: the obligation fell w/n the period for guaranty. So payment by Phil Guaranty's payment was
warranted.
-on failure to object: it was not a defense. Failure to object is not a defense available to JN
-while the guarantor enjoys the benefit of excussion, it is a benefit that can be waived.
FOR Phil GUARANTY. Can collect from JN
The benefit of excussion is waivable. It is in favor of the guarantor so it is up to him to exercise
this right. If the guarantor chooses to pay immediately without resorting to remedies against
borrower, guarantor could still collect from principal debtor
(f) Aval
(Insert notes from reviewer)
-a French word for "foot or bottom"
-a 2nd layer of guaranty over and above that provided by acceptor (BoE draft accepted,
acceptor would be primary liable)
SEC 74 (page 78): among the permissible forms of guarantee is acceptance of drafts or BOE;
according to ARTICLE 487, Code of Commerce, the obligation of the avalista is that of a
guarantor and is independent (486) of that contracted by the acceptor.
*Avalista signs "for aval", it is signed at the foot of a BOE. But there are avalistas signing at the
side, not anymore at the bottom. So does that make the "avalista" a "sidelista"?
(g) Hold-out
-term was injected into banking laws through the PD 71?
-there's a holdout if the depositor cannot withdraw …
WHY: if there's a deposit held-out, the bank can easily settle off
-guaranteed party able to fulfill its obligations with the bank
-normally if you look a a holdout document, in addition to holdout provision, it is coupled with a
set off provision (which looks redundant. But it assumes significance when the depositor agreed
to a holdout when it is a mere accommodation party) - there's no legal compensation because
not creditor-debtor relation
-under NY banking law, no more term "holdout"
Term is not an original from RP, it is borrowed from US
(h) Assignment by way of security
In cases, you'll notice that this was characterized as a "pledge" under chattel mortgage because
justices' mindset is tied to what is found in civil code
-but there is NCC provision on freedom to contract, and obscure provision (A1454) which states
that an absolute conveyance of property is made to secure an obligation there is an implied
trust. If the obligation is fulfilled by the grantor, he may demand conveyance of property. -
Article 1454 remains obscure
People's Bank and Trust Co. vs. Odom
F:
H: the parties intended the assignment to be security. Odom still liable to pay
SC paid attention to wording of document. Language found in chattel mortgage loan
-if obli fulfilled then mortgage becomes null and void
SC said it sounds like a chattel mortgage so it is not an absolute assignment
Case is replete with citation from US Sources. At that time, decision of SC RP were appealable
to US SC.
4|Cha’s banking notes
Lopez vs. CA
F: Lopez applied for a loan, and was required to secure it with a surety bond. Philamgen
executed a surety in favor of Lopez. Lopez signed "stock assignment separate from Certificate"
which provided the 4k shares of lopez sold, transferred and assigned to Philamgen
inconsideration of the surety bond
Lopez defaulted, Philamgen was ordered to pay by Court.
Philamgen sued Lopez to recover amount.
LOPEZ: obli already extinguished by stock assignment (dacion en pago)
H: Lopez stock assignment IS NOT DACION EN PAGO. Lopez' obligation would only arise only
when he would default in the payment of the loan and the surety had to pay for it.
-no express provision in the stock assignment that the loan is immediately extinguished by
reason of assignment
-this is an absolute conveyance? No. There's a continuous obligation which is not extinguished.
-all the requisite of pledge is available
This case could have been decided the other way: when the stock certificates were cancelled
and issued to Philamgen, you cannot just issue a stock certificate to replace an old one unless
the incoming shareholder (buyer/transferee) is able to submit proof that the shares of stocks
have been paid. Evidence of payment is CAR (certificate of Arising Registration?) + DST
Manila Banking Corporation vs. Teodoro
F: Teodoros, in order to comply with a loan contract, they executed a deed of assigment of
receivables in favor of MBC
-Teodoros defaulted. MBC sued for recovery.
H: Assignment did not result from a sale transaction. It cannot be said to have been constituted
by virtue of a dacion en pago.
-the intention of the parties is primordial
Court characterized the assignment as a collateral (vs. ODON: chattel mortgage; vs. LOPEZ:
pledge)
Sir: Odon is a male. But court referred to Odon here as a female
Note: Concurring opinion of Justice Feliciano: absolute conveyance of credit + security
arrangement (A1454 to but not able to pinpoint said provision): purpose of the document was to
sell upfront the receivables to sidestep the provision of pactum promissorium….?
Referred to Continuing Guaranty
Integrated Realty Corp vs. PNB
F: IRC acquired loan from PNB. To secure loan, a deed of assignment over time deposits of
President was made. IRC unable to pay. PNB demanded payment
IRC, President: deed of assignment already payment
H: Deed of Assignment is a pledge, citing Lopez vs. CA
Liability of OBM: not liable for interest during time it was suspended by CB
Time deposit assigned to PNB. Deposit secured PNB's loan.
Was the loan subjected to "Single Borrower's Limit"? Here, the loan is a risk item because the
deposit used as a security is not contained in the lending bank but with another bank. If the
deposit used as a collateral is w/ PNB, it is not covered by the SBL (SEC 35.5 c)
Legal rate of Interest: 6%, not 12% - it is difficult to find the precise legal citation of the 12%
X305.1
Yau Chu vs. CA
F: Mrs. Chua executed Deed of Assignment w/ Family savings bank as security
Mrs Chua filed a case vs. bank for restoration of her money in Time deposit
H: Pledge!
Pactum Commissorium does not apply. Money involved here is lower than the amount of debt.
What is pledged is already in liquid form so no need to resort to sale by public auction.
Foreclosure dispensed with
A2118, NCC? It is there that was stated that what is pledged is credit and it is due, collect
amount of credit and apply amount of proceeds in payment of the loan (so no foreclosure
needed)
A2112 cited by SC: question arises is it always the case that the foreclosure must always be
done in a public auction???
SIR: You can argue that a private sale is permissible. "creditor may proceed…" if auction done
privately in the pledge contract, allowed.
Caltex Phil vs. CA
F: A certain de la cruz opened a loan with bank and opened time deposit there. De la cruz also
had an obligation in favor of Caltex, and assigned the certificate of time deposit. De la cruz
alleged that he los the certificate of time deposit so he was issued new ones. He assigned it to
the bank.
(i) Trust Receipt
security involved in the issuance of letters of credit where the entrustor (bank) releases to the
entrustee (borrower) goods for the latter to sell in order and such proceeds shall be used to pay
obligation with entrustor.
Sir: this is not a good solution. What would the bank do with the goods? What if the goods were
shells? Would they put up a Hawaiian something??? (to that effect)
Violation of trust receipts law is malum prohibitum. However, it is prosecuted in relation to estafa
under Section 315(1)(b), RPC.
Allied Banking Corp vs. Ordonez
F: L/C issued in favor of seller, seller issued drafts in favor of PBM. PBM issued trust receipts.
-Trust receipt agreement recognized bank's ownership over goods and PBM's obligation to
deliver proceeds to bank
WON PD 115 covers goods that do not form finished products
H: nonpayment of amount covered by trust receipt which gives rise to liability, regardless of the
product covered (regardless if it is to be sold or just used by trustor in its trade)
Trust receipt transaction: transaction between trustor and trustee wherein trustor who has
absolute title over object transfers such title to trustee upon execution of trust receipt wherein
trustee undertakes to keep such title in trust to the trustor and the proceeds delivered to the
trustor
SC expanded the coverage of trust receipts law. Even goods ultimately not for sale deemed
included. (The doctrine was reiterated in DBP v. Prudential Bank)
Sir: This is wrong. The law is clear and penal laws must be strictly construed. As a
consequence, trust receipts have been used to burden or frighten debtors with possible penal
indictment.
Not all trust receipts should be covered by trust receipt law.
There's no annotation of trust receipt law. Difficult to understand this. SC even more confused!
On reference to Estafa: it is malum in se. But trust receipt law is malum prohibitum!
Colinares vs. CA
Consolidated vs. CA
5|Cha’s banking notes
DBP vs. Prudential Bank
F: Litex opened a L/C w/ prudential Bank for importation of spindles, and were released to Litex
under Trust receipt agreement. Litex obtained loan from DBP and executed REM and Chattel
Mortgage over spindles under trust receipt agreement with Prudential Bank. DBP wanted to
foreclose the REM and Chattel Mortgage so Prudential Bank protested to DBP. Still, DBP
continued with the foreclosure. So Prudential Bank filed action vs. DBP.
TC: DBP liable to Prudential Bank
CA: Affirm
H: There was a trust receipt agreement!
Litex only a entrustee of DBP, cannot assign the products to another. Can only sell it then pay
the proceeds to Prudential Bank.
(1)SC did not even bother to ask why spindles are subject to trust receipts which were not meant
to be sold (but used by Litex)! (2) Prudential banks forever the owner attached to the machines?
Pano yun, di nila pede gamitin?if the goods not intended to be sold, here the bank would be
forever the owner.
Something on security interest. Under trust receipts law, absolute ownership may also mean
security interest.
Rosario Textile Mills vs. Home Bankers Savings and Trust Company
H: Trust receipt merely as a security interest. What the bank here has is only a security interest,
a property interest on the goods to secure the obligation.
SC undermined Trust Receipts Law
pROBLEM: Section 4 lang ata nabasa ng SC! Section 10 clearly answers the problem! The risk
of law shall be bourne by the entrustee!
Vintola vs. IBAA
The transaction has two features: 1) loan feature and 2) security feature. Given the definition of
security interest, it was necessary for the law in Section 10, PD 115 to provide that it is the
entrustee who bears the loss.
People vs. Nitafan
Acts involving the violation of the trust receipts agreement occurring after the enactment of PD
115 would make accused criminally liable for estafa pursuant to Section 13, PD 115.
Sir: The statement in the case that provides that the title of the bank to the security is the one
sought to be protected is WRONG. The TR is not separate from the L/C, it is but an accessory to
the loan transaction.
(j) Set-off/Netting
This refers to the concept of compensation in the Civil Code. This is a mode of extinguishment
of obligations usually used in a hold-out. To be able to use this in a conventional manner, all
requisites of legal compensation must exist.
The ISDA Master Agreement is a good example where set-off or netting is used. This has been
upheld in our jurisdiction.
(k) Comfort Letter
Comfort letters are usually sent by a parent company for a subsidiary to the would-be lender
bank that it will maintain fiscal integrity and/or controlling interest in the subsidiary.
The loan secured by a comfort letter is an unsecured, clean loan. This is not a guarantee but
rather more of a moral obligation imposed by parent company unto itself to ensure that
subsidiary will not default.
Why issue a comfort letter?
1. parent company may be prohibited to issue guarantees under contract
2. comfort letters do not affect credit standing of parent company since it is not required to be
footnoted in statement of assets and liabilities
3. company policy may prohibit the issuance of guarantees
These letters may not be enforced in Philippine courts. But in case subsidiary defaults and
parent does not help out, reputation of letter-issuer is affected. Thus, parent company usually
make good their moral duties.
Section 41, GBL
SECTION 41. Unsecured Loans or Other Credit Accommodations. —
The Monetary Board
is hereby authorized
to issue such regulations as it may deem necessary
with respect to unsecured loans or
other credit accommodations that may be granted by banks.
Til Before Part III. Other blah….Bukidnon Doctor's Hospital case…. (16 cases)
Review
Assignment by way of security
In cases, you'll notice that this was characterized as a "pledge" under chattel mortgage because
justices' mindset is tied to what is found in civil code
-but there is NCC provision on freedom to contract, and obscure provision (A1454) which states
that an absolute conveyance of property is made to secure an obligation there is an implied
trust. If the obligation is fulfilled by the grantor, he may demand conveyance of property. -
Article 1454 remains obscure
From Jurisprudence, SC would either characterize "Assignment by way of security" as a pledge
or a chattel mortgage, because SC justices probably has their minds set within the 4 corners of
the Civil Code: mortgage or a pledge or a trust receipts (under Trust Receipts law)
-when the documentation is replete with words such as "by way of security", "guaranty"… SC
would recharacterize the assignment as a pledge or a mortgage
In Sycip, Salazar: "Deed of Assignment without recourse by way of Security"
-elements:
1. Avoids security language such as "by way of security" to secure…
---in order to secure the prompt payment of the obligation, assign absolutely the receivables
defined below
(so absolute assignment which transfers from day one both legal and beneficial title from the
assignor to the assignee)
1. Provision that would clarify that no dacion en pago intended from day 1
"notwithstanding the assignment, it is not the intention of the parties to extinguish the obligation.
Principal obligation extinguished by the time the proceeds are actually applied to payment"
(avoid argument that there is dacion en pago, therefore extinguishment of the obligation)
1. Reconveyance of the receivable
"once the obligation is satisfied, there's an automatic reconveyance from the assignee to the
assignor (in accordance with A1454 of NCC)
1. "Nothing in this assignment shall be construed as creating a pledge or a chattel
mortgage" (so as to clarify the intention of the parties)
Pages 97 and 98 of the book
If assignment is construed as a pledge, foreclosure would extinguish the obligation
If Chattel Mortgage, there is registration requirements. Unless satisfied, the mortgage is not valid
as against third persons. There would be no affidavit of good faith in deed of assignments
6|Cha’s banking notes
This kind of document is similar to a deed of assignment…We're goint to take that up in
derivative transactions
Certain Issues
Typical issue:
Scope of the Mortgage: Obligations and property covered
In Chattel Mortgage Law, AAP and AIC not included because of Section 5 and 7 of Chattel
Mortgage Law:
Affidavit of Good Faith is interpreted to cover only Present obligations and only the properties
listed therein.
What if the CM provides a contractual stipulation that the CM covers "future obligations"?
Court said that it is an enforceable obligation for the execution of either a new document or
amend the existing document
Section 7: covers only PROPERTIES described in the deed.
-so any provision cannot do the trick. No way out but to execute a new contract or amend the
existing document. Pag hindi nakalista, wala na!
Floating charge? (vs. Fixed charge)
-in Philippines, fixed charged only. Specific properties are subject to a lien.
a. Validity of "AFTER ACQUIRED PROPERTY" AND "AFTER INCURRED
OBLIGATION" CLAUSES in a CHATTEL mortgage
Art. 2091. The contract of
pledge
or mortgage
may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory
condition.
-this appears to suggest that even future obligations may be covered by the CM. However, you
must be careful in understanding the Civil Code provisions on Mortgage under Chapter 16.
When it speaks of a mortgage, it doesn't cover both REM and CM, only REM. Chattel Mortgage
is governed by another chapter! A2091 is under Chapter 16 so only concerns REM, not CM!
Plus Section 5 & 7 of CM
A stipulation in mortgage documents which seeks to cover properties (obligations) acquired
(incurred) by mortgagor after execution of mortgage agreement.
AFTER-ACQUIRED PROPERTY (AAP)
-properties acquired/bought by the debtor after the conclusion of a chattel mortgage agreement
Is AAP valid in REM/ Chattel Mortgage?
REM: Yes, in view of Article 2085, CC.
Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;
(3) 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.
Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property. (1857)
CM: No, in view of Section 7 of Chattel Mortgage Law. However, there are exceptions to
this.
-Chattel Mortgage Law provides that ONLY SUCH PERSONAL PROPERTY AS STATED IN
THE MORTGAGE DOCUMENT SHALL BE COVERED BY THE SAME MORTGAGE.
X:
○ Torres vs. Limjap: revolving stock or goods which are for retail sale
○ (accdg to Prof. Catindig): perishable goods, subjet to wear-and-tear
○ When the Mortgage Agreement provides that after-acquired properties may be
included as securities to the obligation, and a new contract or amendment of the contract is
executed (as required in ACME Shoe, Rubber & Plastic Corp vs. CA)
*it is still necessary to include a supplement of REM to cover after acquired properties and
register it with the Registrar of deeds so that at foreclosure time, there would be no issue as to
the scope of the REM.
AFTER INCURRED OBLIGATION (AIO)
Is AIO valid in REM/ chattel mortgage?
REM: Article 2091, CC ("all kinds of obligations") suggests that even future properties are
subject to mortgages.
Note: Belgian Missionary Case (see the case na lang)
CM: No, in view of Section 5, Chattel Mortgage Law re affidavit of good faith.
-Section 5, CML requires that the mortgage be made for the purpose of securing the obligation
SPECIFIED IN THE CONDITIONS THEREOF, AND FOR NO OTHER PURPOSE. As held in
Acme Shoe, Rubber & Plastic Corp, the said provision contemplates the obligation existing at
the time the mortgage was executed AND NOT SUBSEQUENT ONES. If the mortgage contract
provides for AIO, there should still be either a new contract or an amended contract containing
the new obligation.
*Note: The Affidavit of Good Faith which specifies the properties subject to the agreement and
the obligations incurred therefor. If not listed, not included in the Chattel Mortgage
Torres v. Limjap (1931)
F: Henson allegedly obtained Loans from Torres which were secured by two chattel mortgages
on the drug store. Henson failed to pay the loan so the Plaintiffs wanted to take possession of
the chattels and foreclose their mortgages thereon (the drugstores dito).
-Henson's heirs (patay na si Henson) alleged the following defenses:
(1) chattel mortgages VOID for lack of sufficient particularity in the description of the property
mortgage
(2) chattels sought to be recovered by the plaintiffs were not the same property described in the
mortgage
*NOTE: THERE WAS A STIPULATION IN THE MORTGAGE AUTHORIZING HENSON TO
SELL THE GOODS COVERED BY THE MORTGAGE AND REPLACE THEM WITH THE
OTHER GOODS THEREAFTER ACQUIRED
TC:
(1) Hensons defaulted in payment
(2) mortgages became due
(3) plaintiffs, as mortgagees, were entitled to the possession of the DRUG STORES
*question: If it was the drugstores, bakit revolving stock ang focus?
HELD: Affirm. Allowed AAP to be included in the mortgage; the provision of the last paragraph of
section 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the
nature of a revolving and floating business
INTENT OF CML: to promote business and trade in these Islands and to give impetus to the
economic development of the country
...it could not have been the intention of the Philippine Commission to apply the provision of
section 7 above quoted to stores open to the public for retail business, where the goods are
constantly sold and substituted with new stock, such as drug stores, grocery stores, dry-goods
stores, etc. If said provision were intended to apply to this class of business, it would be
practically impossible to constitute a mortgage on such stores without closing them, contrary to
the very spirit about a handicap to trade and business, would restrain the circulation of capital,
and would defeat the purpose for which the law was enacted, to wit, the promotion of business
and the economic development of the country.
STIPULATION VALID AND BINDING: where the after-acquired property is in renewal of, or in
substitution for, goods on hand when the mortgage was executed, or is purchased with the
proceeds of the sale of such goods, etc. Cobbey, a well-known authority on Chattel Mortgages,
recognizes the validity of stipulations relating to after-acquired and substituted chattels.
-DAPAT BY EXPRESS STIPULATION: the mortgage must expressly provide that such future
acquisitions shall be held as included in the mortgage
This case presents exception to validity of AAP. It is practicable and sound. Joke about
mortgage stamped on your sardines. "There goes your breakfast"
PEOPLE'S BANK AND TRUST CO. VS DAHICAN
F: AG&P sold and assigned all its rights to Dahican Lumber Concession to DALCO for $500k
(but only $50k was paid).
-1ST MORTGAGE: DALCO thereafter obtained loans from PBTC amounting to P200k. In
addition, DALCO obtained from Export-Import Bank a loan of $250k evidenced by 5 PNs of $50k
each. As security, DALCO executed in favor of PBTC (also as trustee for Export-Import Bank) a
7|Cha’s banking notes
deed of mortgage covering 5 parcels of land in Camarines Norte + all the buildings,
improvements and other personal property in DALCO's place of business.
*DALCO and DAMCO pledged to bank 7,296 shares of stock of DALCO and 9,286 of DAMCO
to secure same obligations.
-2ND MORTGAGE: DALCO also executed on the same date ANOTHER DEED OF
MORTGAGE ON THE SAME PROPERTIES in favor of AG&P
*both deeds of mortgage contained a provision EXTENDING THE MORTGAGE LIEN TO
PROPERTIES TO BE SUBSEQUENTLY ACQUIRED (AFTER ACQUIRED PROPERTIES) BY
DALCO.
*both mortgages were registered in the Office of the Register of Deeds of Camarines Norte
-DEFAULT: DALCO & DAMCO failed to pay the 5th PN - but was given by PBTC up extension
to pay the overdue PN
-before the deadline given by PBTC, DALCO purchased various machines, equipment, and
spare parts and supplies in addition to or in replacement of some of those already owned
and used by it. PURSUANT TO THE AFTER ACQUIRED PROPERTIES PROVISION IN THE
MORTGAGE, PBTC requested DALCO to submit the complete list of properties acquired.
-DALCO failed to provide PBTC the list requested. It subsequently decided (through Board of
directors) to rescind the alleged sales of property recently acquired and corresponding
agreements of rescission of sale were executed.
-PBTC (in its own behalf and that of AG&P) DEMANDED THE CANCELLATION OF THE
RESCISSION AGREEMENTS. DAMCO refused.
-PBTC & AG&P commenced foreclosure proceedings in CFI over the machineries, equipment
and supplies of DALCO. The proceeds of the sale were agreed to be divided between
"UNDEBATED PROPERTIES" AND "AFTER ACQUIRED PROPERTIES" and were deposited
with the TC pending litigation. TC ruled in favor of PBTC & AG&P.
1. WON AFTER ACQUIRED PROPERTIES ARE INCLUDED IN THE DEED OF
MORTGAGE?
YES
-it is clear from the provision in both deeds of mortgage that the Lumber concession "shall
immediately be and become subject to the lien" of both mortgages as if already included therein
at the time of execution.
- It is common and logical in cases where
• the properties given as collateral are perishable
• or subject to inevitable wear and tear
• or were intended to be sold
• or were intended to be used thus becoming inevitable to wear and tear
-purpose: to maintain, to the extent allowed by circumstances, the original value of the
properties given as security.
1. WON the mortgage of the after acquired properties is void because they were not
registered in accordance with the Chattel Mortgage Law
CML DOES NOT APPLY TO THIS CASE. THIS CONCERNS REAL ESTATE MORTGAGE!
-The Mortgages were executed when the OLD CIVIL CODE was still in force. Still, BOTH old
and new civil codes recognize that machinery, receptacles, instruments or replacements
intended by the owner of the tenement for an industry or works which may be carried on in a
building or on a piece of land, and shall tend directly to meet the needs of the said industry or
works. SO, the properties in dispute should be deemed as real estate and the mortgages
executed are REMs not CMs!
*So does not need to be registered a second time as chattel mortgages in order to bind the
"after acquired properties" and affect third parties.
*DAVAO SAW MILL CASE not applicable because in this case both parties recognized the after
acquired properties as REAL PROPERTIES and not as chattel.
(ruling on other issues deleted)
This is a mortgage-trust indenture since the bank is a trustee for the foreign bank. You could
actually cite this case …
On the discussion of perishable collateral…then goes on to say that it is not immoral, etc. poor
judgment on the creditor not to include such provision in the agreement. BUT THERE's
SECTION 7 WHICH PROHIBITS PRECISELY INCLUSION OF AFTER-ACQUIRED
PROPERTY CLAUSE!!! How can it be poor judgment????
Plus sweeping pronouncement on exclusion of collaterals subject to wear and tear. BUT ALL
PROPERTIES ARE SUBJECT TO WEAR AND TEAR!!! No need even to discuss the said
exception since this involves property which was considered REAL ESTATE MORTGAGE, NOT
CHATTEL MORTGAGE!!!
BELGIAN CATHOLIC MISSIONARIES VS. MAGALLANES PRESS
F: Magallanes Press obtained two loans:
1st loan: from JP Heilbronn for P14k. CHATTEL MORTGAGE on all its printing machinery and
accessories was executed in favor of HEILBRONN
2nd Loan: from Belgian Catholic Missionaries for P30k. CHATTEL MORTGAGE on the same
properties executed in favor of Belgian Catholic Missionaries
-Heilbronn transferred all its mortgage credit to Memije
Extension of 1st loan: Memije, as successor in interest of Heilbronn, extended an additional
P5k loan, and the chattel mortgage executed before was made to cover the new P5k loan
-fire occurred. Properties covered by the CM were burned. Since it was covered by an insurance
policy, Memije could have recovered the amount due from the insurance policy but Belgian
Catholic Missionaries filed a petition for writ of injunction to stop the award of the proceeds of the
insurance to Memije with the action to cancel the document of transfer of mortgage
WON Mortgage extension made by Memije (so that the CM would cover after incurred
obligation) is void?
YES
-increase made by Memije in the mortgage credit and the extension made by Magallanes press
of the mortgage to the additional credit, w/o the knowledge or consent of Belgian Catholic as
2nd mortgagee, prejudices the credit of the 2nd mortgagee inasmuch as the security for the
payment of said credit was reduced = fraud that vitiates the contract of extension of the
mortgage, VOID
"The increase of P5,895.59 made by the defendant Jose Ma. Memije of the mortgage thereto,
are not only subordinate to the mortgage credit of the plaintiff company, being subsequent in
time and in registration, but said increase in the security is also void."
*NOTE: court recognized that the mortgage in favor of JP Heilbronn was preferenced vs. the
mortgage in favor of Belgian Catholic. But as to the extension granted by Memije, Belgian
Catholic would be preferred, as the said extension is void (plus prefer Belgian because the after
incurred obligation was executed after the mortgage in favor of Belgian Catholic, and thus,
subordinate to it.
The increase of the mortgage security becomes a new mortgage in itself, inasmuch as the
original mortgage did not contain any stipulation in regard to the increase of the mortgage credit,
and even if it did, said increase would take effect only from the date of the increase. 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.
In accordance with the provisions of section 5 of Act No. 1508, known as the Chattle Mortgage
Law, the parties to the original deeds swore that the same was mortgaged "to secure the
obligations specified therein and for no other purpose." Neither the increase in question, nor the
extension of the mortgage to secure the payment of the same is specified in the deed,
consequently said extension is void. "Where the statute provides that the parties to a chattel
mortgage must make oath that the debt is a just debt, honestly due and owing from the
mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt
to be thereafter contacted."
On SC statement on p655 of SCRA: "The increase of the mortgage security becomes a new
mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to
the increase of the mortgage credit, and even if it did, said increase would take effect only from
the date of the increase". BUT THE INCREASE IN THE FINANCIAL CREDIT ACCOMODATION
WOULD NOT BE COVERED BY THE CM IF NO ADDITIONAL DOCUMENTATION! This
statement by the SC gives rise to the mistaken notion that we could do away with the
documentation requirements!
Remember this because this case is cited in the next case!
ACME SHOE, RUBBER & PLASTIC CORP VS. CA
F: ACME SHOE obtained a loan for P3M from Producer's Bank. ACME also executed a CM
which provides that the mortgage shall also stand as security for any subsequent loans
extended by the bank (Producer's Bank) to ACME SHOE.
-initial P3M Loan was paid by ACME SHOE (therefore at this point, the CM was extinguished).
8|Cha’s banking notes
-subsequently, ACME Shoe obtained another loan from Producer's Bank for P1M (note: NO new
CM was executed)
-ACME shoe defaulted on their P1M obligation so Producer's Bank sought the EXTRAJUDICIAL
FORECLOSURE OF THE CHATTEL MORTGAGE
WON a clause in a chattel mortgage that purports to likewise extend its coverage to obligations
yet to be contracted or incurred is valid
NO. Rule in favor of ACME
-VOID. Should
• execute a new CM over the new debt OR
• Amend the old contract conformably with the form prescribed in the CML
*Refusal to execute a new agreement by the borrower = default
*the remedy of foreclosure can only cover debts extent at the time of constitution and during the
life of the CM sought to be foreclosed.
*SEC5, CML: Affidavit of GF: the parties 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…
…the debt referred to in the law is a current, not an obligation that is yet merely contemplated.
DECISION IN ACME SHOE COULD HAVE BEEN ALRIGHT WITHOUT CITING THE BELGIAN
CATHOLIC CASE. BY JUST CITING SECTION 5, IT’S CLEAR. Belgian contradicts the early
position. Section 5 still requires documentation but the Belgian case doesn't!!!
NOTE: SIR INTENDS TO CHANGE HIS QUESTIONS! HIS STUDENTS TEND TO CITE ACME
SHOE AND BELGIAN IN REM!!!!!! ACME and BELGIAN concerns CM!!!!!
ONG LIONG TIAK VS. LUNETA MOTOR CO.
F: Chao Siong purchased a Chrysler Sedan from Luneta Motors co for P1.8k, secured by 18
PNs for P100 each and a CM in favor of Luneta. CM included a clause as follows:
. . it being expressly agreed further that this mortgage shall also serve as security for the
payment to the said mortgagee in addition to the aforesaid notes of the purchase price or cost of
any and all gasoline, tires, automobile accessories or parts, and repairs furnished or made by
the said mortgagee at any time up to the date this mortgage is completely satisfied as and when
the same becomes due, and of any other indebtedness of the mortgagor in favor of the
mortgagee incurred in any other manner whatever.
-Choa Siong acted as surety for P300 for a certain Angeles for paints and accessories the latter
obtained from Macondray. Macondray assigned its credit to Luneta, as Choa Siong still had
P140 balance. Chao Siong paid P40 so there was P100 left unpaid.
-Choa Siong was able to pay all the PNs though. But since there is still P100 left unpaid arising
from the surety made by Choa Siong, the credit of which was assigned to Luneta, Luneta
refused to extinguish the CM.
-Chao Siong sold the auto to Ong Liong Tiak.
-For the nonpayment of the P100, Luneta sought the forclosure of the CM. Sheriff attached the
auto (ppor Ong Liong Tiak :( )
-Ong Liong Tiak filed petition for writ of injunction and damages vs. Luneta. CFI ruled against
him
WON the surety secured by Ong Liong Tiak is included in the CM executed by Ong Liong Tiak in
favor of Luneta Motor Co?
YES
Instruments of mortgage, as said Exhibit 2, 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.
The right of those who so acquire said properties should not and can not be superior to that of
the creditor who has in his favor an instrument of mortgage executed for the formalities of the
law, in good faith, and without the least indication of fraud. This is all the more true in the present
case, because, when the plaintiff purchased the automobile in question on august 22, 1933, he
knew, or at least, it is presumed that he knew, by the mere fact that the instrument of mortgage,
Exhibit 2, was registered in the office of the register of deeds of Manila, that said automobile
was subject to a mortgage lien. In purchasing it, with full knowledge that such circumstances
existed, it should be presumed that he did so, very much willing to respect the lien existing
thereon, since he should not have expected that with the purchase, he would acquire a better
right than that which the vendor then had.
Kawawa naman si OLT! Walang napunta sa kanya. May COA ba sha against Chao Siong?
SC validated an AIP w/o even explaining why. Sir included this case so that you would know that
there's a SC that contradicts what is provided in law. This case supports the wrong position. But
since it is also supported by SC, "legal practice becomes more interesting…"
PRUDENTIAL BANK VS. ALVIAR
F: (loan 1) Sps. Alviar obtained a P250k loan from Prudential Bank and as a security, they
executed a REM over their parcels of land in San Juan. The REM contained a "blanket
clause/dragnet clause" (see below in the decision)
(loan 2) Don Alviar executed a PN for P2,640,000 in favor of Prudential Bank secured by a
"hold-out" on the mortgagor's (Alviar's) foreign currency savings account with Prudential Bank
and Alviar's passbook is to be surrendered to Prudential Bank until the amount secured by the
holdout is settled.
(loan 3) Another PN for P545,000 was executed by Don Alviar, this time in behalf of DONALCO
trading (the spouses are the Chairman and the VP of the company), in favor of Prudential Bank.
This was secured by "Clean Phase out of TOD CA 3923: meaning that the temporary overdraft
incurred by DONALCO trading is to be converted into an ordinary loan. Prudential bank
approved the straight loan. Securities were deed of assignment on 2 PNs executed by Bancom
Realty Corp….and chattel mortgage on various heavy and transpo equipment
Alviars paid Prudential Bank P2M to be applied to the obligations of Alviars (as GB Alviar Realty
and Development Inc) and for the release of the REM for P450k (cf P250k at the start) which
covered their 2 San Juan lots. Payment was acknowledged and Prudential Bank released the
mortgage over the 2 properties. STILL, PRUDENTIAL BANK MOVED FOR EXTRAJUDICIAL
FORECLOSURE OF THE MORTGAGE ON THE PROPERTY, arguing that the Alviars had the
total obligation of P1,608,256.68 covering 3 PNs (the first loan + another loan + 3rd loan).
Alviars filed for DAMAGES + prayer for issuance of writ of preliminary injunction: claimed to
have paid principal loan secured by the 2 San Juan properties by payment of P2M
Vs. Prudential Bank: Payment of P2M was for the obligations of GB ALVIAR REALTY & DEV'T
CORP under a separate loan secured by a separate mortgage (and not by the spouses!
themselves)
TC: proceed with foreclosure; MFR: reverse - even awarded damages in favor of Alviars. The
REM only covers the 1st loan and not the subsequent loans.
The “blanket mortgage clause” relied upon by Prudential Bank applies only to future loans
obtained by the mortgagors, and not by parties other than the said mortgagors, such as
Donalco Trading, Inc., for which respondents merely signed as officers thereof.
CA: Affirmed: while a continuing loan or credit accommodation based on only one security or
mortgage is a common practice in financial and commercial institutions, such agreement must
be clear and unequivocal. In the instant case, the parties executed different promissory
notes agreeing to a particular security for each loan. Thus, the appellate court ruled that the
extrajudicial foreclosure sale of the property for the three loans is improper.
-However, it found that the spouses has not paid under the 1st obligation as the P2M payment
was for the obligation of the GB Alviar Realty and Development Inc and not in their personal
capacity
WON The "Blanket mortgage clause" or the "dragnet mortgage clause" expressly covers not
only the 1st loan but also the 2 subsequent loans? And if it is valid?
-Court held that the 3rd loan was clearly not covered by the "blanket mortgage clause" because
the said loan was undertaken by the spouses in behalf of DONALCO and not in their personal
capacity. No piercing of corporate veil as no evidence of evasion and fraud was shown.
“blanket mortgage clause/dragnet clause”:
-one which is specifically phrased to subsume all debts of past or future origins.
-should be carefully scrutinized and strictly construed
-Mortgages of this character enable the parties to provide continuous dealings, the nature or
extent of which may not be known or anticipated at the time, and they avoid the expense and
inconvenience of executing a new security on each new transaction
-operates as a convenience and accommodation to the borrowers as it makes available
additional funds without their having to execute additional security documents, thereby saving
time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera.
-mortgages given to secure future advancements are valid and legal contracts, and the
amounts named as consideration in said contracts do not limit the amount for which the
mortgage may stand as security if from the four corners of the instrument the intent to secure
future and other indebtedness can be gathered.
9|Cha’s banking notes
In this case:
That for and in consideration of certain loans, overdraft and other credit accommodations
obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred
to, irrespective of number, as DEBTOR, and to secure the payment of the same and those
that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred
Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee
may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears
in the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and
convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land
which are described in the list inserted on the back of this document, and/or appended hereto,
together with all the buildings and improvements now existing or which may hereafter be erected
or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free
from all liens and incumbrances. . . .
SC: ALL OTHER LOANS INCLUDED! Parties intended the real estate mortgage to secure not
only the P250,000.00 loan from the petitioner, but also future credit facilities and
advancements that may be obtained by the respondents. The terms of the above provision
being clear and unambiguous, there is neither need nor excuse to construe it otherwise.
The problem: Would the "blanket Mortgage clause/dragnet clause" apply when the subsequent
loans are covered by separate securities?
2 SCHOOLS OF THOUGHT:
1. Dragnet clause covers ALL OTHER DEBTS, EVEN IF THE OTHER DEBT IS
SECURED BY ANOTHER MORTGAGE
1. Dragnet clause would not secure a note that is otherwise secured as to its entirety.
Would only cover the deficiency after exhausting the security specified therein. (so pag may
natira pang obligation, yun ung under ng dragnet clause
SC: 2nd school of thought!
RELIANCE ON THE SECURITY TEST: when the mortgagor takes another loan for which
another security was given it could not be inferred that such loan was made in reliance solely on
the original security with the “dragnet clause,” but rather, on the new security given
Ratio: the “dragnet clause” in the first security instrument constituted a continuing offer by the
borrower to secure further loans under the security of the first security instrument, and that when
the lender accepted a different security he did not accept the offer
*Where deeds absolute in form were executed to secure any and all kinds of indebtedness that
might subsequently become due, a balance due on a note, after exhausting the special security
given for the payment of such note, was in the absence of a special agreement to the contrary,
within the protection of the mortgage, notwithstanding the giving of the special security.This is
recognition that while the “dragnet clause” subsists, the security specifically executed for
subsequent loans must first be exhausted before the mortgaged property can be resorted to.
*any ambiguity in a contract whose terms are susceptible of different interpretations must be
read against the party who drafted it, Prudential Bank.
*BUT PRUDENTIAL BANK could still subject the properties to foreclosure proceedings for the
unpaid P250k, which both TC and CA found to have not yet been paid. If there are deficiencies
for the second loan, could also apply the proceeds as to the second loan.
Qualification to the validity of the AIO clause: Dragnet Clause
Even if there is a Dragnet Clause in REM which might have secured future obligations, when the
future obligations are secured separately,
GR: mortgagee cannot foreclose the REM to satisfy the unpaid subsequent obligations. Exhaust
first the specified collateral for the loan, not the property under the Dragnet clause!
X: unless there's an explicit stipulation to the contrary!
Justice Tinga, who loves to cite American jurisprudence, is saying that dragnet clause is used in
mortgages to allow….he is actually describing a Mortgage Trust Indenture (the Philippine
Equivalent)!
CUYCO VS. CUYCO
F: Petitioners obtained a P1.5M loan from respondents, secured by REM over their Cubao
property.
REM provides:
PROVIDED HOWEVER, that should the MORTGAGOR duly pay or cause to be paid unto the
MORTGAGEE or his heirs and assigns, the said indebtedness of ONE MILLION FIVE
HUNDRED THOUSAND PESOS (1,500,000.00), Philippine Currency, together with the agreed
interest thereon, within the agreed term of one year on a monthly basis then this MORTGAGE
shall be discharged, and rendered of no force and effect, otherwise it shall subsist and be
subject to foreclosure in the manner and form provided by law.
-Subsequently, petitioners obtained additional loans from the respondents in the aggregate
amount of P1,250,000.
-Petitioners only paid P291,700 but defaulted as to the rest.
-Respondents filed a complaint for foreclosure of mortgage, alleging that the loans (all of them)
were secured by the REM and as of August 31, 1997, the debt amounted to P6,967,241.14 (with
interest of 18% mo)
Vs. Petitioners: REM only covers P1.5M loan, no agreement that the 18% interest was to be
compounded mo as it was per annum!
RTC: For respondents
CA: REM was expressly intended to cover only the original P1.5M loan and the subsequent
P150k and P500k loans, not the P150k loan, the P200k loan and P250k loan. 12% interest
imposed by TC also proper
WON the 12% interest rate imposed by TC Proper
YES. As was held in Eastern shipping lines and in the law. Interest on judicial awards until paid.
WON all five additional loans were intended to be secured by the real estate mortgage
NO.
(eto ang na-gets ko…ung P1.5M loan lang ang kasama)
GR: a mortgage liability is usually limited to the amount mentioned in the contract.
X: However, the amounts named as consideration in a contract of mortgage do not limit the
amount for which the mortgage may stand as security if from the four corners of the instrument
the intent to secure future and other indebtedness can be gathered. This stipulation is valid
and binding between the parties and is known in American Jurisprudence as the “blanket
mortgage clause,” also known as a “dragnet clause.”
A “dragnet clause” operates as a convenience and accommodation to the borrowers as it
makes available additional funds without their having to execute additional security documents,
thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et
cetera.
While a real estate mortgage may exceptionally secure future loans or advancements, these
future debts must be sufficiently described in the mortgage contract. An obligation is not
secured by a mortgage unless it comes fairly within the terms of the mortgage contract.
HOWEVER, it is clear from a perusal of the real estate mortgage that there is no stipulation
that the mortgaged realty shall also secure future loans and advancements. Thus, what
applies is the general rule above stated.
What the parties could have done in order to bind the realty for the additional loans was
• to execute a new real estate mortgage or
• to amend the old mortgage conformably with the form prescribed by the law.
Failing to do so, the realty cannot be bound by such additional loans, which may be recovered
by the respondents in an ordinary action for collection of sums of money.
WON the amount of obligation should include interest?
YES. Rule 68.2 provides so.
No dragnet clause involved here!
Vintola vs. IBAA
F: Puca shells case: Vintola spouses who bought Puca shells executed a trust receipt
agreement with IBAA. When spouses were unable to sell the sea shell products, they offered to
surrender the goods to IBAA instead. IBAA refused to accept the products.
-IBAA filed a crim case for estafa againste Vintola. Dismissed when Vintola SPs consigned the
Puca shells to the court.
-IBAA filed another case, this time a civil case for recovery of the amount under the Trust
Receipt Agreement. Vintola spouses argued that IBAA is alredy barred: No reservation + res
judicata
H: For IBAA
Letter of credit/trust receipt agreement: 2 features
Loan feature + security feature
10 | C h a ’ s b a n k i n g n o t e s
Trust receipt is a security agreement where the bank acquires a right over the proceeds, not
over the property.
_IBAA, by the surrender of the sea shells, can still recover based on BOC of the loan contract,
not the trust receipt agreement.
SC made some troubling pronouncements. If you look at your SCRA version, on page 730, 1st
two paragraph, last sentence: distinction between loan feature and security feature: It conveys
that the trust receipt IS NOT AN ACCESSORY TO THE LOAN TRANSACTION WHEN IN FACT
IT IS! It conveys the perception that it is separate and distinct but in reality it is connected with
one another. A trust receipt is in the same position as a pledge and mortgage, thus, a security,
which cannot exist if there is no principal obligation
*the surrender of the goods extinguishes the Criminal action, but NOT THE CIVIL ACTION!
People vs. Nitafan
-Trust receipt agreement over plastic products. Nitafan assailed the Trust Receipts Law under 2
arguments:
H: No violation of consti right against compelling to pay for nonpayment of debts:
It already serves as protection of public interest.
No need for malice. It is mala prohibitum thus not an element of the crime.
-punishment is a valid exercise of police power.
Dissenting opinion of CJ which proposes criminalization of trust receipt transaction. Took out
penalty for trust receipt violations… (clarify mamaya)
Read seriously the different provisions and decisions, SC confused concepts of trust receipts
transactions
e.g. in Vintola, court mentioned that Vintola sps hold the property at their own risk - but the bank
own it, not the entrustee!
Trust in Civil code: trustor has the legal title, there's a trustee, and a beneficiary. But in a trust
receipt arrangement: entrustor has legal title, no passing of title to the entrustee, entrustee
would just either sell the goods and deliver the proceeds of the sale to the entruster or just return
it if failed to sell it. The buyer from the entrustee is free from the security interest of the entrustee
over the good. The terminology in the trust receipts law is different from the concepts of Trust in
the Civil Code so the SC might have just been confused...
(j) Set-off/Netting
Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other. (1195)
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor. (1196)
*Banker's Lien: right to set off the deposit of its own borrower. Recognized in case of Dullas vs.
PNB (P73 of book)
-it is security in a sense that the bank has protection against the depositor's obligation with it if
the depositor has an account with it. As a result, there is netting of the two accounts
-legal compensation elements: See A1279.
This refers to the concept of compensation in the Civil Code. This is a mode of extinguishment
of obligations usually used in a hold-out. To be able to use this in a conventional manner, all
requisites of legal compensation must exist.
The ISDA Master Agreement is a good example where set-off or netting is used. This has been
upheld in our jurisdiction.
(k) Comfort Letter (a.k.a. Letter of awareness, keepwell agreement)
-not really a security interest but Sir placed it under Section 41 because there would be an
"unsecured loans"
Comfort letters are usually sent by a parent company for a subsidiary to the would-be lender
bank that it will maintain fiscal integrity and/or controlling interest in the subsidiary.
The loan secured by a comfort letter is an unsecured, clean loan. This is not a guarantee but
rather more of a moral obligation imposed by parent company unto itself to ensure that
subsidiary will not default.
Why issue a comfort letter (and not a straight forward guarantee)?
1. parent company may be prohibited to issue guarantees under contract (Articles of
incorporation)
-there would be an issue of WON extension of guarantee is ultra vires or intra vires
-WON the approval of the guarantee needs formalities (refer to Corpo Code)
2. comfort letters do not affect credit standing of parent company since it is not required to be
footnoted in statement of assets and liabilities
3. company policy may prohibit the issuance of guarantees
These letters may not be enforced in Philippine courts. But in case subsidiary defaults and
parent does not help out, reputation of letter-issuer is affected. Thus, parent company usually
make good their moral duties.
-but it really depends on how the letter writer writes the letter. If strongly worded, it may give rise
to a COA.
SECTION 41. Unsecured Loans or Other Credit Accommodations. —
The Monetary Board
is hereby authorized
to issue such regulations as it may deem necessary
with respect to unsecured loans or
other credit accommodations that may be granted by banks.
*maybe you would find some comfort if the issuer of the comfort letter is the parent company of
a big international financial group
Pactum commisorium is not allowed under RP Laws. If you have a multiple security agreement
(chattel mortgage, REM, pledge, assignment) for the same principal obligation, ALWAYS
REMEMBER THAT FORECLOSURE OF THE PLEDGE SHOULD BE DONE LAST (As there's a
prohibition to undergo other remedies under Article 2115)
-Sir was saying something about pledge of shares of stock and the argument that the situs is not
Philippines but sir said that even if it be argued that situs not in RP, RP laws would still apply…
basta sorry I don't know eh...
1. No deficiency claim in a pledge
Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not
the proceeds of the sale are equal to the amount of the principal obligation, interest and
11 | C h a ’ s b a n k i n g n o t e s
expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not
be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither
shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the
contrary.
In pledge, if there's a deficiency…
GR: Creditor cannot claim deficiency once foreclosure obtained
X: if stipulated
1. Deficiency claim in a chattel mortgage; exception
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:
...
(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. (1454-A-a)
Review for Article 1484
General Rule: Creditor shall always be entitled to collect the deficiency judgement. (Ablaza v.
Ignacio, ‘58).
State Investment House, Inc. v. CA (93)
When the proceeds of the sale are insufficient to cover the debts in an extra-judicial foreclosure
of chattel mortgage, the mortgagee is entitled to claim the deficiency from the debtor.
Ratio: mortgages as accessory contracts serve only as securities and not for the satisfaction of
the principal obligation
Prescriptive Period: Ten (10) years under Art, 1142 of the Civil Code. (DBP v. Tomeldan, ‘80).
• Exception: If the property was sold in installments, the mortgagee can no
longer take any action against the purchaser to recover any unpaid balance of the price. Any
agreement to the contrary is void. (Art. 1484, Civil Code, aka the Recto Law)
O. Recto Law
• The Recto law, which is now reflected in Articles 1484-1485 of the Civil
Code, which provides that 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:
• Exact fulfillment of the obligation, should the vendee fail to pay (specific
performance);
• Cancel the sale, should the vendee's failure to pay cover two or more
installments (Note that this is not the same as rescission because here, the vendor gets back
the object of the sale and retains the installments paid. However, this is not available in the
absence of stipulation in the contract.);
• Foreclose the chattel mortgage on the thing sold, if one has been
constituted, should the vendee's failure to pay cover 2 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 contract is void.
• The principal object of this amendment was 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 the 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.
Pacific Commercial Co. v. Dela Rama
These remedies are alternative, not cumulative.
Filipinas Investement v. Vitug (69)
When the creditor can no longer recover from the maker of the note with chattel mortgage
because the deficiency is covered by the Recto Law, after the foreclosure of the mortgage, said
creditor can still recover balance from the endorse who endorsed “with recourse”.
Cruz v. Filipinas Investment (68)
C sold to D a car payable on installments. The car was given as security by way of chattel
mortgage to secure payment. In addition, the debtor put up a real estate mortgage as further
security for the payment of the debt. D did not pay 2 or more installments and so C foreclosed
the chattel mortgage. The proceeds therefrom were insufficient and so C wanted to get a
deficiency judgment and satisfy it by foreclosing on the real estate mortgage.
The established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel
bars further recovery (whether by judicial or extra-judicial foreclosure) by the vendor, of any
balance on the purchaser’s outstanding obligation not so satisfied by the public sale. To allow
further recovery by the foreclosure of the real estate mortgage is contrary to public policy.
Northern Motors v. Sapinoso (70)
Northern Motors sold a car to Sapinoso on installments. A chattel mortgage was executed on
the car sold. When S failed to pay 2 or more installments, NM sought to foreclose the chattel
mortgage and asked the court for a writ of replevin. Meantime, S made several payments while
the replevin suit was pending. The lower court ruled that NM, by bringing the suit, was barred
from accepting any further payments from S and ordered NM to reimburse the amount collected.
The court a quo erred in concluding that the legal effect of the filing of the action for replevin was
to bar NM from accepting further payments on the promissory note. That the ultimate objective
of the action was for the foreclosure of the chattel mortgage is of no moment, for it is the fact of
foreclosure “and” actual sale at public auction of the mortgaged chattel that bars further recovery
by the vendor of any balance on the buyer’s outstanding obligation not satisfied by the sale.
Pascual v. Universal Motors (74)
When the seller imposes a double security by a chattel mortgage of the thing sold on
installments and another mortgage on another property of the buyer, such is contrary to the
public policy sought to be protected by the Recto Law, and the foreclosure of the chattel
mortgage on the object of the sale bars recovery on any deficiency.
Ridad v. Filipinas Investment (83)
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. The corporation elected to
foreclose its mortgage upon default by the plaintiffs 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.
Bicol Savings and Loan Asso. v. Guinhawa (90)
The prohibition under the Recto Law against recovery does not apply to foreclosure of chattel
mortgage constituted to secure a loan and not originating from a sales transaction.
Differentiating Pledge and Chattel Mortgage
Pledge CM
In pledge, the pledgor cannot be made GR: Action for deficiency is allowed.
answerable for deficiency after foreclosure (Chattel Mortgage Law, Garrido v.
since the principal obligation is Tuason)
extinguished. Thus, foreclosure of pledge Exception: Article 1484(3), Civil Code/
must be your last remedy. Recto Law.
Possible Solution: Subject pledge to foreign
law.
GARRIDO V. TUASON (1968)
F: Pila Tuason executed a CM over her car for the sum of P1k which she owed to Jose Garrido.
As she was unable to pay, Jose Garrido commenced a case for the foreclosure of the CM +
atty's fees and costs (note: not for collection of the outstanding obligation!)
12 | C h a ’ s b a n k i n g n o t e s
TC: pay P1k + interests + P100 + costs (even if Garrido prayed for foreclosure!)
-writ of execution issued, car of Tuason was sold at a public auction for P550 with Garrido as the
highest bidder
-as there was still P450 left unsatisfied + P165 allegedly spend to carry out writ of execution and
P1,290.58 as aggregate outstanding balance due under decision, Garrido filed motions (for alias
writ of execution) which were both denied.
-Garrido commenced a civil case vs. Pila Tuason, and now with her husband, for the recovery of
the alleged balance in the earlier case. MTD filed by Tuason. TC for TUASON,
CFI: Affirmed dismissal of civil case in pursuance to Article 2115 of Civil Code:
Article 2115 provides:
". . . The sale of the thing pledged shall extinguish the principal obligation, whether or not the
proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in
a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled
to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary."
WON Garrido could still claim the deficiency?
NO, but based on res judicata, not because there was already foreclosure of the CM.
*Article 2115 of the Civil Code does not apply to Chattel Mortgage. Article 2115 is inconsistent
with the provisions of the Chattel Mortgage Law, and that, accordingly, the chattel mortgage
creditor may maintain an action for the deficiency.
-TC must have applied 2115 based on Article 2141 of CC which provides that provisions on
pledge shall be applicable to chattel mortgages "insofar as they are not in conflict with the
Chattel Mortgage Law". But as it does conflict, it should not be applied!
HOW CONFLICT? DI ko rin alam eh. Wehe. Eto sabi sa footnote sa case:
The last part of the second paragraph of Section 14 of Act No. 1508, provides:
SECTION 14. Sale of property at public
". . . 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 mortgages, shall be paid to the mortgagor or person holding
under him on demand."
Pero hellurh, this contemplates a situation where there is excess in the proceeds of the sale,
and not when there's a deficiency. So how does this conflict?
TC might have acted under the impression that the first case was for the foreclosure of a chattel
mortgage. But the first case was an ordinary money judgment so no previous ruling on
foreclosure
...(okay eto pagkagets ko a, since di pa naman judicially ordered ang foreclosure, pede pa
magforeclosure on other properties to cover the deficiency of the money judgment. In this case,
Garrido prayed for foreclosure and not payment but since the MTC ordered payment instead, no
judicial order of foreclosure)
SC: Municipal court should have NOT DENIED plaintiff's motion for issuance of alias writ of
execution
-but since instead of filing an appeal to the denial of his motion, the decision of the MC have
been final and executory and thus binding and res judicata on the Civil Action he later filed.
NOTE: Why did CM arise? May sale ba or may utang lang? If may sale, A1484 would apply!
There's no explicit statement in the Chattel Mortgage law which provides that the creditor could
recover deficiency. SC interpreted it and declared that there's such right WITHOUT
EXPLAINING WHY… Sir said that in previous cases, the ruling was different but he didn't assign
to us the said cases because it was not assigned to him when he was a student...
MAGNA FINANCIAL SERVICES GROUP VS. COLARINA
F: Colorina bought on installment from Magna Financial Services a Suzuki Multicab. He Is this a circumvention of pactum commisorium?
executed a PN for the balance of P229,284 and executed an integrated PN and deed of CM YES. Precisely, the mortgage is set aside. NO mortgage to speak of in the first place as it's
over the Multicab as security. substituted with another contractual arrangement. But valid as it is under the freedom of the
-Colorina failed to pay the monthly amortization, with accumulating unpaid balance of P131,607. parties to contract.
Colorina still failed to pay inspite of demands so MAGNA filed a COMPLAINT FOR
FORECLOSURE of CHATTEL MORTGAGE w/ REPLEVIN 1. Effect of "stay order" on enforcement of security
-bond was filed by MAGNA, writ of replevin was issued In Petition for Rehabilitation, the Court may issue a stay order which works as a standstill order
TC: Colarina pay the P131,607 plus penalty + atty's fees + costs. In case of nonpayment, prohibiting creditors to enforce their securities.
multicab shall be sold at public auction -court needs to see if the petition is sufficient in form and substance
RTC: affrim "Cram down" clause
CA: complaint was for foreclosure of the chattel mortgage so wrong to order Colorina to pay the
balance due 1. Foreclosure of Real Estate Mortgage
Sir's book:
What is the true nature of a foreclosure of chattel mortgage under Article 1484(3) REM may be foreclosed Judicially or extrajudicially:
YEY! Eto na ung sinasabi ni ma'am Chit!
BACHRACH MOTOR CO. VS. MILLAN: “Undoubtedly the principal object of the above Judicially Extrajudicially
amendment (referring to Act 4122 amending Art. 1454, Civil Code of 1889) was to remedy the
abuses committed in connection with the foreclosure of chattel mortgages. This amendment R68, Rules of Civ Pro Act 3135
prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low
price and then bringing the suit against the mortgagor for a deficiency judgment. The almost No right of redemption, only an Right of redemption
invariable result of this procedure was that the mortgagor found himself minus the property and equity of redemption (right of GR: 1 yr (individual/natural person) from
still owing practically the full amount of his original indebtedness.” mortgagor to extinguish the registration of certificate of sale
-HERE: MAGNA PRAYED BOTH FOR PAYMENT OF THE OBLIGATION AND mortgage and retain ownership of X: 3 months max for Juridical Persons
FORECLOSURE OF THE CHATTEL. However, by praying for the foreclosure of the chattel, the property by paying the mortgage
Magna renounced whatever claim it may have under the PN. debt w/n period of not less than 90d
-Art 1484(3) PROHIBITS OTHER ACTION TO RECOVER ANY UNPAID BALANCE OF THE nor more than 120d from entry of
PURCHASE PRICE AFTER FORECLOSURE. In other words, in all proceedings for the final and executory judgment)
foreclosure of chattel mortgages executed on chattels which have been sold on the installment
plan, the mortgagee is limited to the property included in the mortgage. **If the mortgagee = bank - follow Section 47
-NATURE OF CONTRACT OF CHATTEL MORTGAGE: conditional sale of personal property *if mortgagee=bank >>> there's always right of redemption, regardless if judicial or extrajudicial
given as security for the payment of a debt, or the performance of some other obligation ---w/n 1 year counted from the date of registrationof the certificate of sale in the Registry of
specified therein, the condition being that the sale shall be VOID UPON THE SELLER PAYING Property (Huerta vs. CA)
OR PERFORMING THE OBLIGATION SPECIFIED. …but period shortened under GBL if JURIDICAL PERSON: 3 months from extrajudicial
-if condition performed: mortgage and sale immediately become void, mortgagee divested of title foreclosure
-if nonpayment: foreclosure one of the remedies under A1484 …foreign banks may not benefit from the 2nd paragraph of Section 47 since it may not be able
…may either be judicial or extrajudicial to resort to extrajudicial foreclosure and therefore, will be unable to benefit from the 2nd
*** Since the petitioner has undeniably elected a remedy of foreclosure under Article 1484(3) of paragraph of A67
the Civil Code, it is bound by its election and thus may not be allowed to change what it has
opted for nor to ask for more. On this point, the Court of Appeals correctly set aside the trial SECTION 47. Foreclosure of Real Estate Mortgage. —
court’s decision and instead rendered a judgment of foreclosure as prayed for by the petitioner. In the event of foreclosure,
whether judicially or extrajudicially,
WON there has been an actual foreclosure of the vehicle of any mortgage on real estate which is security for any loan or other credit accommodation
Not yet, but since the vehicle is with Magna already and Magna consistently avowed that it granted,
elects the remedy of foreclosure, CA correctly directed the foreclosure of the vehicle. the mortgagor or debtor whose real property has been sold for the full or partial payment of his
SC: A contract of chattel mortgage is the nature of a conditional sale of personality. WITHOUT obligation shall have the right within one year after the sale of the real estate, to redeem
EXPLAINING WHY IT WAS SO EVEN AFTER SAYING IT WAS INACCURATE, IN CERRA V. the property
RODRIGUEZ. SIR: The characterization of CM as conditional sale has been abandoned since by paying the amount due under the mortgage deed, with interest thereon at the rate
the enactment of Civil Code (A2141 of NCC). specified in the mortgage, and all the costs and expenses incurred by the bank or institution
from the sale and custody of said property less the income derived therefrom. (RIGHT TO
(pause)………."Did you notice that my pauses are getting longer and longer?…" (pause)… REDEEM PROPERTY W/N 1 YEAR FROM DATE OF REGISTRATION OF THE CERTIFICATE
OF SALE IN THE REGISTRY OF PROPERTY)
1. Dacion en pago with repurchase (as an alternative to foreclosure of mortgage) However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial
This set-up is used to do away with foreclosure proceeding foreclosure shall have the right to enter upon and take possession of such property immediately
Dacion en Pago: mode of extinguishing an obligation whereby the debtor alienates in favor of after the date of the confirmation of the auction sale and administer the same in accordance with
the creditor property for the satisfaction of monetary debt; extinguish up to amount of property law. (RIGHT OF THE PURCHASER TO ENTER PROPERTY AFTER SALE - HUERTA VS. CA)
unless w/ contrary stipulation; A special form of payment because 1 element of payment is Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted
missing: IDENTITY pursuant to this provision shall be given due course only upon the filing by the petitioner of a
-result is the same, in the sense that the mortgagor ends up with the property but no foreclosure bond in an amount fixed by the court conditioned that he will pay all the damages which the
proceeding… bank may suffer by the enjoining or the restraint of the foreclosure proceeding.
13 | C h a ’ s b a n k i n g n o t e s

Notwithstanding Act 3135,
juridical persons whose property is being sold pursuant to an extrajudicial foreclosure,
shall have the right to redeem the property in accordance with this provision
until, but not after, the registration of the certificate of foreclosure sale with the applicable
Register of Deeds
which in no case shall be more than three (3) months after foreclosure,
whichever is earlier.
Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall
retain
their redemption rights until their expiration. (78a)
RA NO. 133
Sec. 1. Any provision of law to the contrary notwithstanding,
private real property may be mortgaged for a period not exceeding five years,
renewable for another five,
in favor of any individual, corporation, or association,
but the mortgagee or his successor in interest,
if disqualified to acquire or hold lands of the public domain in the Philippines,
shall not bid or take part in any sale of such real property as a consequence of such mortgage.
Sir: foreign banks can be mortgagees but cannot acquire the property in a foreclosure sale…
only entitled to proceeds of the sale
Note however that RA 133 specifies judicial foreclosure, not extrajudicial foreclosure
(okay, I can't find it anywhere in RA 133…wala namang nakaspecify kung judicial or extrajudicial
basta as a consequence of such mortgage)
See page 156…
REGISTER OF DEEDS VS. CHINA BANKING CORPORATION
Facts: Pangilinan and Chua were charged and convicted of qualified theft for P275k from China
Banking Corporation. In furtherance of the judgment, Pangilinan executed in favor of China
Banking Corporation a public instrument entitled DEED OF TRANSFER whereby he ceded and
transferred to CBC a parcel of land located in Manila.
-When CBC presented the document to the Registrar of Deeds, Registrar denied it because
CBC was alien-owned and as such, barred from acquiring lands in the Philippines
-CBC submitted matter to the Land Registration Commission for Resolution.
LRC: unregistrable
HELD: CBC cannot register the property in their name
-Section 25, RA 337 par © and (d) ARE NOT APPLICABLE TO ALIEN BANKS!
ON PAR ©:
"Sec. 25. Any commercial bank may purchase, hold, and convey real estate for the following
purposes:
(c)Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of
its dealings;
-the "debts" referred to 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
-"CIVIL LIABILITY" arising from a criminal offense WAS NOT A DEBT RESULTING FROM A
LOAN OR A SIMILAR TRANSACTION HAD BETWEEN TWO PARTIES IN THE ORDINARY
COURSE OF BANKING BUSINESS
ON PAR (D)
"Sec. 25. Any commercial bank may purchase, hold, and convey real estate for the following
purposes:
(d) Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held
by it and such as it shall purchase to secure debts due to it.
14 | C h a ’ s banking notes
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."
-the deed of transfer ≠ sale made by virtue of judgment, decree, mortgage, or trust deed held by
CBC
-real property in question was not purchased by CBC to secure debts due it
-debts: refer only to such debts as may become payable to appellant bank as a result of a
banking transaction.
ON Argument that consti prohibition should be liberally construed to be limited to PERMANENT
ACQUISITION OF REAL ESTATE BY ALIENS
the consti prohibition is ABSOLUTE IN TERMS. Smith Bell & Co Case not applicable because
what was allowed to be registered there was a 50-year LEASE which does not involve transfer
of dominion over the land
This is the case when SYCIP lost (SYCIP's dad was one of the founders of China Bank)
SECTION 25 = SEC 52 of the NEW LAW
SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. —
Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey
real
property under the following circumstances:
52.1. Such as shall be mortgaged to it in good faith by way of security for debts;
52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course
of
its dealings; or
52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds
held
by it and such as it shall purchase to secure debts due it.
Any real property acquired or held under the circumstances enumerated in the above paragraph
shall be disposed of by the bank within a period of five (5) years or as may be prescribed by the
Monetary Board: Provided, however, That the bank may, after said period, continue to hold the
property
for its own use, subject to the limitations of the preceding Section. (25a)
See sir's annotation of the section! "1st paragraph of my annotation… it took me hours to put up
this paragraph"
El Hobar Filipino: Bank made some effort in GF to sell the property w/n 5 years. So substantial
compliance with Section 52.
Now there are online sales of the ROPA!
PAREDES VS. CA
Facts: MICC obtained a loan from Banco Filipino Savings and Mortgage Bank and executed
REM over 21 parcels of land, including 2 parcels of land in Pque which MICC sold though
unregistered.
-since MICC defaulted in their obligation, Banco Filipino filed PETITION FOR THE
EXTRAJUDICIAL FORECLOSURE of MICC's Mortgage (question: if extrajudicial, bakit may
petition?).
-Auction Sale: BF declared the highest bidder. Certificate of Sale issued in favor of BF.
-NO REDEMPTION W/N REGLEMENTARY PERIOD so BF filed a petition for issuance of writ of
possession of foreclosed properties which was granted. Notice to vacate served on spouses
who bought 2 lands from MICC. Spouses (petitioners) fiiled petition before CA - dismissed for
lack of merit.
1. WON spouses have superior right over BF (alleging Buyers in GF)
NO. Sale occurred AFTER MORTGAGE in favor of BF registered. A real right or lien in favor of
BF had already been established, subsisting over the properties until the discharge of the
principal obligation, WHOEVER POSSESSOR OF THE LAND MAY BE.
1. WON Spouses have right to redeem
YES. But right already prescribed.
-as successors-in-interest of MICC, they have right to redeem 1 year FROM THE DATE OF
REGISTRATION OF THE CERTIFICATE OF SALE W/ THE REGISTRY OF DEEDS. That is,
from July 29, 1985 (thus, UNTIL JULY 29, 1986)
But since they failed to redeem within said period, right prescribed. Ownership of the subject
properties was thus consolidated in favor of BF
1. WON there was a binding AGREEMENT FOR REPURCHASE
NO.
(apparently there were negotiations entered by the Spouses with BF. However, the
correspondence failed to show that the parties agreed to the valuation of the properties and that
any of the parties agreed to the redemption on a fixed price)
Court held that the correspondence between the parties reveals absence of DEFINITE OFFER
AND ABSOLUTE ACCEPTANCE OF THE DEFINITE OFFER.
1. WON house should have been excluded from the auction sale
NO. Article 448, NCC does not apply
-The houses purchased by the spouses from MICC are improvements on the properties
subjected to the REM, thus covered by the REM as improvements are deemed part of real
property
1. WON writ of possession could still be enforced after 8 years from promulgation
YES. Right of applicant/subsequent purchaser to request for the issuance of a writ of possession
of land NEVER PRESCRIBES
If you register your REM and have it annotated to the back of your title, subsequent buyers of
the land are bound by the REM
BANCO FILIPINO SAVINGS AND MORTGAGE BANK VS. CA
Facts: Santiago Memorial Park obtained a loan with BF and executed a REM over a parcel of
lot. Because of default, BF foreclosed REM and certificate of sale was issued in favor of BF.
-Santiago manifested its interest to exercise its right to redemption and offered as payment
P700k (loan was for P500k). Deputy liquidator gave Santiago until end of March 1992 to
negotiate payment. Santiago remitted P50k to manifest willingness to redeem property. Santiago
later offered P1M for the property. Senior VP demanded later P5,830,000 as purchase price of
property.
-Santiago filed a complaint for redemption and specific performance with RTC vs. BF
-BF Filed MTD: no redemption effected w/n 1 year from date of registration.
*RTC: dismissed redemption complaint
• NO DEFINITE REDEMPTION (offer was not coupled with tender of the
price)
• Complaint did not state that Santiago tendered correct redemption price w/n
redemption period
*CA: reversed TC: sustained complaint for redemption
a. Complaint alleged that as eary as August 6, 1991 (6 months before the
expiration of the statutory period for redemption), Santiago exerted earnest efforts to effect
redemption
a. Santiago did deposit the price which they believed was the agreed
redemption price, with the belief that BF was negotiating in GF
a. Granted that Santiago is barred, as the parties entered into a new contract
extending period w/n which to purchase property, Santiago could still purchase property
---Santiago tendered payment and consigned amount of P1,300,987.96 in accordance with CA
deci
HELD: for BF. NO COA for redemption. Regardless if Santiago was diligent in asserting its
willingness to pay, REDEMPTION W/N THE PERIOD ALLOWED BY LAW IS NOT A MATTER
OF INTENT BUT A QUESTION OF PAYMENT OR VALID TENDER OF FULL REDEMPTION
PRICE W/N SAID PERIOD.
15 | C h a ’ s banking notes
*Banco Filipino v. CA (2005): The right of redemption must be exercised within the specified
time limit, which is one (1) year from date of registration of certificate of sale. In case of
disagreement over the redemption price, the redemptioner may preserve his right of redemption
through judicial action which in every case must be filed within the same one (1) year.
Note: Redemption amount as provided in Section 47 of GBL is different from that in Rules of
Court. This is to insure that the bank will not incur losses.
*Provisions of GBL are juxtaposed with ROC provisions.
If non bank Bank
Redemption price: foreclosure sale Redemption price: mortgage deed + interest
e.g. loan P1M, REM, foreclosed, sold for only P500k
What the mortgagor would do to redeem the property is to give you back
P500k:: if non-bank
P1M+ interests :: if bank
RURAL BANKING OF CALINOG VS. CA
Facts: To pay the redemption price for the mortgaged property, the owner of the subject property
obtained another loan with Rural Banking of Calinog. The mortgagor died, thus, the spouses
who were successors of interest of the mortgagor, paid the bank to satisfy the loan with Rural
Banking of Calinog (and alleged they paid the whole obligation). However, Rural Bank of
Calinog initiated foreclosure proceedings for the said property, claiming the loan was unpaid.
Even after the spouses demanded the accounting of the accounts, the bank still proceeded with
the foreclosure sale.
-Spouses filed complaint for nullification of the sale. MTD filed by Rural Bank, arguing that since
the mortgagor has already died, the payments made by the spouses were irrelevant as they
were not parties to the mortgage.
RTC: for bank
CA: For the spouses. They had a COA and irrelevant if they were not parties to the mortgage as
they were successors-in-interest
HELD: for the spouses!
-the spouses had COA: spouses sufficiently alleged that they made payments to discharge the
obligation of Carmen Cerbo under the mortgage and that the bank failed to make an accounting
of the payments made even after demand of the spouses and that if accounting was indeed
made, it would show that the spouses has already discharged of the obligation with the Rural
Bank. Whether these allegations entitle private respondents to the reliefs prayed for is a
question which can best be resolved after trial on the merits at which each party can present
evidence to prove their respective allegations and defenses.
-BANK ALREADY FILED ANSWER ADMITTING THAT RESPONDENT GREGORIO CERBANA
MADE DEPOSITS AS INITIAL PAYMENT OF REDEMPTION PRICE AND THAT GREGORIO
PAID A TOTAL OF P101K, therefore acknowledging that it was Gregorio who was making
payments on the loan obligation, even referred to Gregorio as the REDEMPTIONER of the
foreclosed property.
-ON RELEVANCE OF THE FACT THAT SPOUSES WERE NOT PARTIES TO THE
MORTGAGE CONTRACT: SPOUSES' COA MAY BE DIFFERENT FROM THAT OF CARMEN.
While the death of Carmen Cerbo certainly extinguished whatever cause of action she had
against petitioner, private respondents’ cause of action, based on the allegations in the
complaint, was not thereby similarly extinguished. Indeed, assuming the allegations of the
complaint to be true, private respondents, having paid the redemption price, have the right to
demand an accounting, to be refunded for whatever excess payments they made, and even to
redeem the property. Correlatively, petitioner, having accepted payment from private
respondents, has the obligation to account for such payment, to return the excess, if any, and to
allow redemption.
This case is more of a civpro case!
BUKIDNON DOCTOR'S HOSPITAL VS. METROBANK
Facts: Bukidnon Doctor's Hospital obtained a P25M loan from MBTC for the construction of its
hospital. It also constituted a REM over the lands over which the hospital would be built as a
security. As the Bukidnon Doctor's defaulted, MBTC foreclosed the REM and then was able to
buy it. No redemption made by Bukidnon Doctors so MBTC consolidated ownership over the
properties.
---however, it was apparent that before the end of the redemption period, Bukidnon Doctor's and
MBTC had a lease agreement so that the operation of the hospital erected on the lands
mortgaged would not be disrupted.
…but after the consolidation of the ownership over the properties, MBTC asked Bukidnon
Doctors to vacate the property. Bukidnon Doctors refused, invoking the lease agreement
-MBTC filed EX PARTE MOTION FOR WRIT OF POSSESSION w/ RTC
RTC: granted
WON MBTC ENTITLED TO WRIT OF POSSESSION AS A MATTER OF RIGHT DESPITE THE
LEASE AGREEMENT BETWEEN ITSELF AND THE FORMER MORTGAGOR-SELLER?
NO
where a lease agreement, whether express or implied, is subsequently entered into by the
mortgagor and the mortgagee after the expiration of the redemption period and the consolidation
of title in the name of the latter, a case for ejectment or unlawful detainer, not a motion for a writ
of possession, is the proper remedy in order to evict from the questioned premises a mortgagor-
turned-lessee. The rationale for this rule is that a new relationship between the parties has been
created. What applies is no longer the law on extrajudicial foreclosure, but the law on lease. And
when an issue arises, as in the case at bar, regarding the right of the lessee to continue
occupying the leased premises, the rights of the parties must be heard and resolved in a case
for ejectment or unlawful detainer under Rule 70 of the Rules of Court.
Bukidnon Doctors v. MetroBank: In extrajudicial foreclosure, a writ of possession shall be issued
as a matter of course upon proper motion after expiration of redemption period without the
mortgagor exercising his right of redemption.
1. Other Tax Matters
(AS THIS WAS NOT ASSIGNED AND SIR WANTED TO DISCUSS IT, NO PRIOR NOTES.
PLEASE BARE WITH ME)
Other Tax Matters
A. Applicable Taxes
1. Income Tax
2. DST (.5% for loan, .2% for mortgage)
3. Gross Receipt Tax
Omnibus Agreement: a contract similar to a syndicated loan which includes volumes of
agreements
Omnibus Agreement is a tax avoidance scheme since only the higher rate of DST is paid (ie,
that of loan). Since guarantee is not subject to DST, it makes no sense to include the same to
the agreement since it only raises the base for computation of DST.
Problem: Pari Passu Representation violation in view of notarization of mortgage.
Solution: There must be waiver of preference re notarization of mortgage agreement. Also,
include a provision that the notarization does not apply to the loan.
FCDU Tax
Transaction with Tax Status
Resident 10% Final Tax
Non-residents, OBU & local commercial banks including foreign Exempt
16 | C h a ’ s banking notes
bank branches
If the bank lends money, the interest is subject to gross receipts tax (normally 5%) but the same
amount is includable as part of the gross income of the bank, the net taxable portion of which is
taxed by income tax (30% beginning 2009).
DST also imposed on certain bank transactions:
-loan agreements and PNs: .5% of the amount in the transaction
-pledges, mortgages, trust receipts: .2% of the amount involved in the transaction
-but if combine loan+security (omnibus agreement): .5% (higher between the two)
-if assignment: P15.00 (tax certificate)
FCDUs are taxed differently.
The income of FCDUs
from foreign currency transactions: 10% final witholding tax (should be with residence: include
local KB, local branches of Foreign banks, other fcdus, obus)
It used to be that this onshore 10% tax is imposed in lieu of the other taxes. Now the law is not
very clear because the "In lieu" of provision was deleted in the NLRC. Intent before was to
encourage foreign banks to invest in the Philippines (thus mas konting tax imposed on them).
If FCDU derive income from non-foreign currency transaction: regular corporate income tax rate
(10%)
-if the counterparty is a nonresident: income derived by that nonresident is not taxable here;
similarly, the income by FCDU is not taxed.
SO favorite customer of a FCDU is a nonresident, as there is no tax!
Originating bank structure, the basic…is tax minimizing structure
Tax minimizing structure: tax avoidance scheme (not tax evasion)
Omnibus Agreement: combine loan with security agreement
Mondragon Leisure and Resorts Corporation vs. CA
Parties entered into a
Originating bank structure
=fronting bank structure
-idea is the borrower would look for a bank that is exempt from Philippine income tax
Either under
*tax treaty
*NIRC
- SEC 32: Financial institutions getting …from their government
(a) Income Derived by Foreign Government. - Income derived from investments in the
Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in
banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled,
or enjoying refinancing from foreign governments, and (iii) international or regional financial
institutions established by foreign governments.
Originating Bank Structure
This is otherwise known as fronting bank structure. It takes advantage of tax exemption status of
foreign lenders. It is a form of tax avoidance.
In this structure, a foreign bank acts as creditor on record while domestic bank participates
silently.
 This involves the transfer of credit risks in a true sale transaction to transform the receivables
into asset-backed securities.

Due Diligence:
Two Types:
1. Prospectus: undertaken by underwriter in offer of securities
2. Securities: undertaken by buyer in insuring that property to be acquired is worth-buying
Defense of due diligence in insuring omission or non-disclosure of material facts is but a
mitigating circumstance. The SRC only recognizes knowledge defense.

Certain Other Matters

1. AMLA (RA 9160)
2.Securities Regulation Code
The Code is for consumer protection.
The SEC no longer issues “license to sell”, rather it declares securities as defective to protect
buyers.

Derivative Transactions Redherring: review of preliminary prospecturs

This is a contract for differences. The income is derived from the difference between agreed
settlement price and actual market price on the agreed settlement date. GR: Every security must be registered.
Exception:
Derivative: financial asset the price of which is derived from value of other financial assets 1. exempt securities
ISDA: International Swaps and Derivatives Association 2. exempt transactions
3. offshore offering of securities
Types:
1. Option Contract (ii) is the system of ownership and rights in relation to property other than land sufficiently
a. Call Option: right, not obligation, of buyer to exercise option to buy PN within a specified developed to encourage lending on the security of such property?
period
b. Put Option: right, not obligation, of seller to exercise option to sell PN within a specified period In the philippine, there are two ways of securing a loan with personal property. This may be
done either by a chattel mortgage or through a pledge.
2. Forward Transaction Chattel Mortgage
Illustration: Article 2140 of the Civil Code provides:
Co. A will buy US$1M 6mths from now at PhP40=US$1 "Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage
Register as a security for the performance of an obligation. If the movable, instead of being
ForEx Rate in 6mths Situation recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel
mortgage."
PhP50=US$1 In the money There are two principles applicable to chattel mortgages which often create problems for
creditors: (1) a chattel mortgage cannot be executed over future property or property not yet in
PhP30=US$1 Out of the money; but in the market existence at the time the chattel mortgage is executed; and (2) a chattel mortgage may not be
executed to secure future obligations.
PhP40=US$1 At the money; exercise forward given assured amount In the case of a real estate mortgage, any improvements introduced on the land after the
execution of the mortgage are automatically included in the mortgage, unless they had been
expressly excluded. However, Section 7 of Act. No. 1508, otherwise known as the Chattel
3. Currency Swap
Mortgage Law, prohibits a chattel mortgage over future property:
It is the simultaneous buying and selling of currencies involving spot (near leg) and forward (far
"A chattel mortgage shall be deemed to cover only the property described therein and not like or
leg) rates.
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."
A bank cannot engage in derivative transactions without necessary BSP license.
Decisions of the Supreme Court, however, have carved out exceptions to this rule. The Court
reasoned that the intention behind the enactment of the Chattel Mortgage Law was to promote
Onapal v. CA: In ISDA, there is netting off of agreements which may give rise to gambling
business and trade in the philippine, and that it could not have been the intention to apply that
issues. In case there is but pretended delivery of goods involved in the transactions, the Civil
prohibition to retail stores open to the public, such as drug, grocery and dry goods stores whose
Code provision prohibiting gambling is violated.
stocks-in-trade are constantly sold and substituted with new stock. The Supreme Court held in
one case:
FPIC v. CA: Cherry picking is not allowed in Philippine jurisdiction. The powers granted to the
"A stipulation in the mortgage, extending its scope and effect to after acquired property, is valid
conservator, enormous and extensive as they are, cannot extend to the post facto repudiation of
and binding... where the after acquired property is in renewal of, or in substitution for goods on
perfected transactions. Otherwise, they would infringe upon non-impairment of contracts clause
hand when the mortgage was executed, or is purchased with the proceeds of the sale of such
in Constitution.
goods etc. 11 C.J., p.436)
Present practice in the Philippine financial community has extended the exception to the rule
Securitization: See Securitization Act of 2004.
against a mortgage of future chattels to inventories of raw materials, goods in process and
17 | C h a ’ s banking notes
finished goods. Many lawyers believe that inventories are continually being consumed and
subsequently replaced and are of the same nature as stock-in-trade; thus they claim that
inventories qualify for this exception. To extend the exception much further, however, would be
to tread on uncharted and possibly dangerous ground.
For future obligations, a real estate mortgage may secure not only a specific credit
accommodation but also all other present and future obligations of a debtor in favor of a creditor.
Thus, the Philippine Supreme Court has upheld the validity of a stipulation in a real estate
mortgage that the mortgage would secure a specific loan as well as "such other loans or other
advances already obtained or still to be obtained by the mortgagors as makers."
However, this does not apply to chattel mortgages. The Supreme Court has adhered (although
not uniformly) to the rule that a chattel mortgage may not secure future obligations. The reason
cited for this rule is the fact that Section 5 of the Chattel Mortgage Law requires the parties
involved to execute a so-called affidavit of good faith, in which both parties state:
"We severally swear that the foregoing 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 not one entered into for the purpose of fraud."
In Belgian Catholic Missionaries v. Magallanes Press, the Philippine Supreme Court struck down
a chattel mortgage that secured an obligation that had not yet been contracted by the mortgagor
at the time of the mortgage's execution; the Court explained:
"Where the statute provides that the parties to a chattel mortgage must make oath that the debt
is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a
valid mortgage cannot be made to secure a debt to be thereafter contracted."
In a subsequent case, however, the Supreme Court held that this ruling would not apply had
there been an express stipulation in the mortgage that it would secure future obligations as well.
These conflicting decisions appeared to have been resolved, at least temporarily when the
Supreme Court in a later case categorically stated:
"This deed of chattel mortgage is void because it provides that the security stated herein is for
the payment of any and all obligations herein before contracted and which may hereafter be
contracted by the Mortgagor in favor of the Mortgagee."
However, the Philippine Supreme Court appeared to weaken its position in this ruling by citing
as its support part of the Belgian Catholic Missionaries decision, namely 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."
In an even later case the Supreme Court held that a chattel mortgage could not secure future
advances but only those obligations that were expressly specified in the mortgage, namely
"[P=40,000] including the interest thereon, the cost of collection and other obligations owing by
the Debtor-Mortgagor to the mortgagee, whether direct or indirect, principal or secondary, as
appears in the accounts, books and records of the mortgagee.
In Philippine National Bank v. Court of Appeals, although the Court could have simply reasoned
that future advances could not have been secured by the mortgage because they were future
obligations, the Court chose not to. Instead, the Court implied that certain future obligations,
such as costs of collection and certain other obligations, could be secured by the chattel
mortgage provided they were embraced within the scope of the mortgage. The Court stated:
"Applying the principle of ejusdem generis, the term 'other obligations' must be limited to such as
are the same nature as interest and costs of collection. The term cannot be enlarged to include
future additional advances to debtor-mortgagor. . ."
The extent to which future obligations may be secured by a chattel mortgage is thus not yet well
settled. Previous decisions of the Philippine Supreme Court suggest that provided that the
chattel mortgage expressly includes within its coverage certain well-defined future obligations,
then the mortgage would be upheld.
Pledge
As for creation of pledge, personal or movable property may also be given as security by way of
pledge. A pledge is a contract whereby the debtor delivers to the creditor or to a third person by
common agreement a movable(or a document that evidences an incorporeal right) for the
purpose of securing the fulfillment of a principal obligation.
In addition to the delivery of the thing pledged to the creditor to a third person, it is necessary
that a description of the thing pledged and the date of the pledge should appear in a public
instrument. On the basis of this rule, a deed of pledge, in order to be valid against a third person,
18 | C h a ’ s banking notes
should be acknowledged before a notary public. There is no requirement, however, for the
pledge to be registered or recorded in any registry.
Incorporeal rights, which are evidenced by negotiable instruments, bills of lading, shares of
stock, bonds, warehouse receipts and similar documents, may also be pledged. In these cases,
the instrument proving the right pledged must be delivered to the creditor and, if negotiable,
must be endorsed.
The difficulties confronting the lender in case shares of stock are pledged to secure a loan is that
of ascertaining the value of the shares especially after a default has occurred, unless the shares
are listed in the exchange, in which case the market value thereof may easily be determined.
C2. Secured financing
(a) What mechanisms for taking of security over assets of a corporate borrower are available to
financiers in this economy (for example mortgages over land; fixed and/or floating charges over
personal property; legal and/or equitable mortgages; debentures; pledges; liens, etc.)?
In the main, there are six main classes of security arrangements available to secure the
payment and performance of loans and other credit accommodations. They are the following:
i. guarantee - where a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so;
ii. suretyships - where a person binds himself solidarily with the principal debtor;
iii. real estate mortgage - a contract whereby the debtor secures to the creditor the fulfillment of
a principal obligation, specially subjecting to such security immovable property or real rights over
immovable property in case the principal obligation is not complied with at the time stipulated.
The documents in which the mortgage appears must be recorded in the appropriate Registry of
Property, and if the instrument is not recorded, the mortgage is nevertheless binding between
the parties.
iv) chattel mortgages - a contract by virtue of which personal property is recorded in the Chattel
Mortgage Register as security for the performance of an obligation; and
v) pledges - a contract by virtue of which the debtor delivers to the creditor or to a third person a
movable or document evidencing incorporeal rights for the purpose of securing the fulfillment of
a principal obligation with the understanding that when the obligation is fulfilled the thing
delivered shall be returned with all its fruits and accessions.
(b) In practice, which of these types of security are most commonly employed by financiers?
In practice, what is most commonly employed type of security by financiers are real estate
mortgages, chattel mortgages, and suretyships.
(c) Is there a system of registration in this economy for any of these types of security taken by
financiers?
For guarantees, suretyships, and pledges, in order for the security agreement to be valid against
third parties, it should be acknowledged before a notary public. There's no requirement for the
guarantee or pledge agreement to be registered or recorded in any registry.
As for Real Estate Mortgages, in order to create a valid mortgage over land, it is necessary to
record the mortgage document in the Registry of Property located where the land is situated.
However, if the mortgage is not recorded, it is nevertheless binding between the parties to the
mortgage.
For Chattel Mortgages, personal property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation.
(d) To what extent are priorities between competing securities regulated?
The provisions on Concurrence and Preference of Credits in the Civil Code shall regulate this.
C3. Enforcement of securities:
(a) When a corporate borrower is in financial difficulties and a secured debt has become due,
would it be usual or customary for a secured lender and/or the corporate borrower to attempt to
negotiate a suitable arrangement for repayment and/or refinancing before the secured lender
invokes legal enforcement methods?
Yes. Usually the corporate borrower shall exert efforts to extend the credit facilitates given to
them by their creditors in order that their loans will not be considered as past due. Creditors are
amenable to this and are also open to the possibility of entering into a workout for as long as
they feel that the corporate borrower will not file for insolvency, suspension of payments, or will
dispose of their assets in fraud of their creditors. Once they feel that their security is threatened,
then they will not hesitate to seek legal remedy in enforcing such securities.
(b) What mechanisms are available to security holders to enforce their securities under the legal
system of this economy (For example, power to take possession of the property, power to
appoint a receiver, power to foreclose on a mortgage, power to sell the secured property, power
to wind up the corporate borrower)?
For Real Estate Mortgages, upon default in the principal obligation that it secures, it may be
foreclosed either judicially or extrajudicially. In foreclosure proceedings, the property given by
way of security is sold at public auctions; the proceeds of the sale are then used to pay or settle
the obligations secured by the mortgage. If the proceeds of sale are not sufficient to cover the
secured obligations, the creditor has a right of action against the debtor for the deficiency and
may file a complaint is court against the debtor for the shortfall.
The creditor may not, however, appropriate for himself the mortgaged property given by way of
security without going through foreclosure proceedings. The reason is because of Art. 2088 of
the Civil Code which states that "the [creditor] cannot appropriate to himself the things given by
way of pledge or mortgage, or otherwise dispose of them." A stipulation such as this is known as
a pactum commisorium
The rationale behind this prohibition is that forfeiture of property given as security has
traditionally not been allowed because it was considered to be contrary to morals and public
policy. Although a debtor, instead of paying for its obligation in cash, can transfer to his creditor
property to satisfy the obligation, a debtor may not grant previous authorization to the creditor to
appropriate the property mortgaged or pledged as the latter's own payment of the debt. Thus, a
stipulation in a mortgage that, in case of default of payment, the mortgaged property would be
considered full payment "without further action in court" is held to be null and void as a pactum
commisorium.
A Real Estate Mortgage may be foreclosed judicially or extrajudicially. It is foreclosed judicially if
the mortgagee files a complaint in court for foreclosure of the mortgage pursuant to the Rules of
Court. A real estate mortgage may be foreclosed extrajudicially if the real estate mortgage
grants a power of attorney to the creditor allowing it to do so. Because of the expense,
inconvenience and length of time that a judicial proceeding for the foreclosure of a mortgage
would ental, almost all mortgages contain a clause authorizing extrajudicial foreclosure of the
mortgage. Practically all defaulted mortgages are now foreclosed extrajudicially.
As with a real estate mortgage, a chattel mortgage may also be foreclosed judicially or
extrajudicially. However, as with a real estate mortgage, practically all chattel mortgages are
foreclosed extrajudicially because of the time and expense that a judicial proceeding would
require. Similar to a real estate mortgage, any provision in the contract granting the creditor the
right to appropriate the thing mortgaged upon debtor default is null and void as a pactum
commisorium.
As for pledges, if the debtor defaults in its obligation, the creditor may foreclose the pledge by
having the thing sold at a public auction by a notary public. The debtor and the owner of the
thing pledged must be given prior notice of the sale. If at the first sale the thing is not sold, a
second one with the same formalities must be held; and, if at the second auction there is no
sale, the creditor may appropriate the thing pledged. In this case the creditor must give an
acquittance for its entire claim.
At the public auction, both the pledgor and owner may bid, and they will have first claim if they
offer the same terms as the highest bidder. The creditor may also bid, but its offer will not be
valid if it is the only bidder. All bids at the public auction must be for cash, and, if the creditor
accepts any other bid, it will be deemed to have received cash. After the auction, the pledge
must promptly advise the pledgor of the results. Any provision in a deed of pledge granting the
creditor the right to appropriate as its own the thing pledged increase of default is null and void
as a pactum commisorium.
Upon foreclosure of either a real estate or chattel mortgage, the creditor may bring an action in
court against the debtor for any deficiency in case the proceeds of the foreclosure sale are not
19 | C h a ’ s b a n k i n g n o t e s
sufficient to cover the secured obligations. In the case of a pledge, however, the sale of the thing
pledged at a foreclosure sale extinguishes the principal obligation that it secures, whether or not
the proceeds of the sale are equal to the amount of the principal obligation, interest and
expenses in a proper case. If the price of the sale is more than the amount, the debtor is not
entitled to the excess, unless it is otherwise agreed. Likewise, if the price of the sale is less, the
creditor is not entitled to recover the deficiency, unless there is a stipulation to the contrary.
The creditor, however, is not obliged to foreclose a pledge. It may choose instead to sue in court
on the principal obligation rather than foreclosure. If the creditor prevails in the court action, it
may then have the pledged property sold at an execution sale. If the proceeds of the execution
sale are not sufficient to cover the secured obligations, the creditor may then recover the
deficiency by levying upon other assets of the debtor.
The fact that the creditor is granted possession of the thing pledged may provide a creditor with
a greater degree of security than a chattel mortgage. However, many creditors dislike pledges
because it is practically impossible to recover any pledge deficiency.
An attempt can be made to combine both a chattel mortgage and a pledge by having a chattel
mortgage registered in the chattel mortgage register while also delivering possession of the
mortgaged chattel to the creditor. Although this would appear to grant the creditor the best
features of both a chattel mortgage and a pledge, most lawyers in the philippine would be
unwilling to express the opinion that such an arrangement would not be construed as a pledge.
A creditor may still be unable to recover any deficiency in case of foreclosure.
For an antichresis, a contract of antichresis is self-executing and need not await the occurrence
of an event of default under the principal obligation. Thus, there is no requirement of foreclosure
since the creditor in possession of the debtor's property merely harvests the fruits and applies
them in payment of the debtor's obligation.
(c) Do these methods include that a secured creditor may 'self-enforce' the security (ie, without
the need for an order of a court or the consent of a regulatory authority)?
See answer in C3(b).
(d) In practice, which method(s) of enforcement are most commonly employed by security
holders?
See answer in C3(b).
(e) Briefly describe the process involved in these method(s).
See answer in C3(b).
Pasted from <http://www.insolvencyasia.com/insolvency_law_regimes/philippine/section_c.html>
1. Other Tax Matters
1. Applicable Taxes
1. Income Tax
1. DST
BIR RR 9-94, Section 8: If the loan agreement and security device are evidenced by 1
agreement (omnibus agreement), pay only the higher DST
e.g. 1 borrower entered into the ff transactions (I'm not sure if this is accurate…should find the
applicable DST rates):
Transaction DST to be paid
*200M Loan agreement 300T
*100M Loan agreement 150T
*50M Loan Agreement 75T

*REM securing the 200M and 100M loan 600,010
*CM securing the 200M & 100M loan 600,010
*guarantee securing the 50M loan 0 and under any and all agreements in connection with the project
*but if there's an omnibus agreement, pay P700,010 or P675,010
From Sir's lecture the other meeting:
If the bank lends money, the interest is subject to gross receipts tax (normally 5%) but the same
amount is includable as part of the gross income of the bank, the net taxable portion of which is
taxed by income tax (30% beginning 2009).
DST also imposed on certain bank transactions:
-loan agreements and PNs: .5% of the amount in the transaction
-pledges, mortgages, trust receipts: .2% of the amount involved in the transaction
-but if combine loan+security (omnibus agreement): .5% (higher between the two)
-if assignment: P15.00 (tax certificate)
1. Gross Receipts Tax
1. Taxation of FCDUs and OBUs
RA 9294
GR: All income derived from transactions with NONRESIDENTS are EXEMPT from all taxes
X: interest income from foreign currency loans with RESIDENTS: subject to 10% final tax rate
From Sir's lecture the other meeting:
FCDUs are taxed differently.
The income of FCDUs
from foreign currency transactions: 10% final witholding tax (should be with residence: include
local KB, local branches of Foreign banks, other fcdus, obus)
It used to be that this onshore 10% tax is imposed in lieu of the other taxes. Now the law is not
very clear because the "In lieu" of provision was deleted in the NLRC. Intent before was to
encourage foreign banks to invest in the Philippines (thus mas konting tax imposed on them).
If FCDU derive income from non-foreign currency transaction: regular corporate income tax rate
(10%)
-if the counterparty is a nonresident: income derived by that nonresident is not taxable here;
similarly, the income by FCDU is not taxed.
SO favorite customer of a FCDU is a nonresident, as there is no tax!
1. Tax Minimizing Structures
1. Omnibus Agreement
*An omnibus loan agreement is a loan agreement with the mortgage agreement already
included as one of the provisions
*should also include a waiver (if mortgage is REM) of the credit preferences in NCC as a loan
agreement with pari passu provision requires that the loan agreement should not be notarized.
However, REM is required to be notarized. To comply with the latter requirement, the creditor in
the loan agreement should waive the preference of credit provision in the NCC and specify that
the notarization is only for the purpose of the loan agreement
*An omnibus agreement is a tax minimizing structure because for executing transactions, DST is
required to be paid for each transaction. However, as the omnibus agreement combines two
transactions, only 1 DST is required to be paid (BIR RR 9-94, Section 8 requires the higher rate
be paid)
Mondragon Leisure and Resorts Corp. v. CA
F: Mondragon International Philippines, Inc. (MIPI), Mondragon Securities Corporation (MSC)
and Mondragon Leisure and Resorts Corporation (MLRC) entered a lease agreement with
CLARK DEVELOPMENT CORPORATION (CDC) for the development of Mimosa Leisure
Estate.
20 | C h a ’ s b a n k i n g n o t e s
-Omnibus agreement in this case composed of:
*loan agreement for US$20M
*Pledge of US$20M worth of MIPI shares of stocks
*assignment, transfer and delivery of all rights, titles and interest in the pledged shares
*assignment of leasehold rights over the project and all the rights, title, interests and benefits to
***the case does not really show how an omnibus agreement is a tax minimizing scheme but
gives an example of an omnibus agreement
1. "Originating bank" structure (a.k.a. "Fronting Strcuture")
(from Sharry's Notes)
This is otherwise known as fronting bank structure. It takes advantage of tax exemption status of
foreign lenders. It is a form of tax avoidance.
In this structure, a foreign bank acts as creditor on record while domestic bank participates
silently.
From Reviewer:
In this structure, a fronting entity/bank which enjoys TAX-EXEMPTION or a LOWER TAX RATE
under prevailing tax laws "FRONTS" for what would otherwise be direct lenders to a borrower.
The fronting bank (F) lends dollars/money to borrower (B), a local company, w/o need of
witholding taxes on interest payments because of the tax-exemption or tax treaty overrides
(lower taxes).
F is actually a "FRONT", and thereby turns around and executes a participation agreement
w/local banks FCDUs, in effect making these local bank FCDUs "silent participants".
Another variation involves the booking of the "front" (like IFC) of an "A" loan in its books, and
another "B" loan, participated in by local banks for which the "front" acts as such.
From Sir's lecture last time:
Originating bank structure
=fronting bank structure
-idea is the borrower would look for a bank that is exempt from Philippine income tax
Either under
*tax treaty
*NIRC
- SEC 32: Financial institutions getting …from their government
(a) Income Derived by Foreign Government. - Income derived from investments in the
Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in
banks in the Philippines by
(i) foreign governments,
(ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments,
and
(iii) international or regional financial institutions established by foreign governments.
*Feeling ni Cha ganito un…
Bank doesn't want to pay tax when it lends money (interest income tax and other income taxes
from its transactions). (Check TAX 1 FOR WHO ARE EXEMPT FROM PAYING INCOME
TAXES!). So they would search for other banks who are EXEMPT from paying taxes.
1. Project Financing
Reviewer on Project Financing:
Project Financing is the financing of an economic asset capable of generating enough revenues
to cover operation costs and debt servicing for a duration of time longer than the life of such
asset. It is most often undertaken in projects involving electricity and power generation,
transportation infrastructures and the like.
What usually happens is that a sponsor undertakes to cover the initial financing of the project,
lenders are resorted to cover the deficiency, a SPECIAL PROJECT VEHICLE (SPV) is -without recourse financing
established (which is usually a joint venture or limited partnership) to undertake the building of -There must be a guaranteed taker/purchaser of the output of the project
the infrastructure, the SPV enters into a loan agreement with the lenders backed by securities: -e.g. MRT >>riding public
mortgage over the assets of the SPV and pledge of equity of sponsors…. (hay, basta on page Power plant >> NPC
10) -lenders look to revenues of the project as the main soure of the payment (hence, it is important
that the project is earning money)
SIR in lecture
Relates to infrastructure projects you see around 1. BOT and similar arrangements
e.g. MRT, power plants, skyway… -there are several
Field List transfer: the arrangement in MRT
You have a project, its economic life more or less is more than 25 years (must exceed the term Rehabilititate-Operate-Transfer: rehabilitate
of the loan). It is anticipated by the lenders that the project would earn revenues because the Rehabilitate-Own:
lenders would look at the revenues…
-it is a without recourse transaction so the lenders usually need an offtaker *Unsolicited Proposal
If the project does not earn revenues, the lenders would not get paid. So it is essential for the e.g. Megaworld Proposal
project to have an offtaker (entity that's going to buy the public project?) -develop hectares of land in Global City
e.g. in powerplant project e.g. Terminal 3
OFFTAKER: NPC (WON NPC uses the electricity generated by the power plant, NPC has to
pay) BOT Law
In MRT
Offtaker: DOTC (even if nobody rides the train, DOTC would still pay the periodic lease 1. Derivative Transactions
payments) 1. Concept
Financial asset derived from another financial asset
Sponsors of the project i.e. option on treasury bill
-it would establish a special purpose company CALL OPTION: option to buy
PUT OPTION: option to sell
SPONSORS >>>establish>>> SPECIAL PURPOSE COMPANY (SPV) >>> Sponsors would -the option is called a derivative
provide an EQUITY which would fund the project (but it's not sufficient) so there would be *buyer: one who wants the option
lenders that would put money in the company seller/writer: one giving the option
LENDERS: mainly banks and multilateral development banks such as ADB, US EXIM Bank or *American Option: exercise option before the strike date (any time during the option period)
Japan EXIM Bank… -more flexible but higher premium
>>>The project company would mortgage to the lenders (trustee designated by the lenders) the *European Option: exercise option on the strike date (end of the option)
property/equipment/facilities -stricter but lower premium
>>>there would be REM, CM, pledge of shares (pledged by the sponsors in favor of the lenders *Bermudan Option: Exercise option on any date
not because the shares are very valuable on the standpoint of the lenders…but for the lenders
to be able to take over the project company just in case the sponsors would not be able to pay DERIVATIVE CONTRACT
the loan -contract for the differences
>>>to make sure that the revenues are all delivered and remitted to the lenders, there's the -concerned with the differences between the price on strike date and price on trade date
TRUST RETENTION ACCOUNT/AGREEMENT wherein all revenues from the project would be i.e. forward foreign exchange contract
remitted TRADE DATE: P57 = $1
e.g. all payments from NPC are remitted to the trust account managed by the trustees of the After 3 months (strike date): P60 = $1
lenders. If for instance there's a need to pay the employees of the project company, a request -the buyer is said to be "in the money" because ha has a gain of P3/$1
would be made to the trustee of the account to release (disburse) money from the account
(the diagram drawn by sir "looks like a waterfall" so it is called cash waterfall account) BUT IF DURING THE STRIKE DATE…
>>>the issue is WON the company could be owned by foreigners (as usually, foreigners provide P56 = $1
the funds) -buyer is "out of money" because he loses P1/$1. Hence, he shall forego the option and will buy
-SC ruling said that (implicitly) yes, because the actual operation is nationalized, not the facilities the dollars elsewhee.
- para ngang may ganito na pinabasa on MRT
*CURRENCY SWAP
Operation Maintenance Agreement -simultaneous purchase and sale of currency involving the same counter party
-usually lenders require technicians to run the facility to make sure that it would earn revenues
Inter-Creditor Agreement From reviewer:
-lenders agree among themselves how to synchronize their activities in case there's a default DERIVATIVE
-a financial instrument, the value of which is dependent upon the price of one or more other
OMNIBUS AGREEMENT assets, such as commodities, foreign currencies, etc.
-contain all these agreements!!! -rephrase: they are financial assets which derive their value from other financial assets such as:
(1) equity, securities
(2) fixed-income securities
1. Mechanism (3) foreign currency and
21 | C h a ’ s b a n k i n g notes
(4) commodities
-aka Contracts for differences: difference between agreed future price and actual price 2 Derivatives In the Philippines
1. Equity related securities
DERIVATIVE TRANSACTION 1. Exchange for Debt Securities
-one that involves derivatives
-purpose: manage risks of exposure/investment to the underlying financial assets it represents All other transactions outside the exchange are called OTC (over the counter):
-it can either be OPTIONS OR FORWARDS
1. OPTIONS IN US
*CALL OPTION: the buyer is given the right (not obligation) to purchase an asset at a specified 1. New York Future Exchange
price on or before a specified date 1. New York Cotton Exchange
*PUT OPTION: the seller/rider is given the right (not the obligation) to sell an asset for a 1. CSCE (Coffee Sugar and Cocoa Exchange)
specified price on or before a specified date -commodities Exchange
1. FORWARD
-involves the OBLIGATION to either buy or sell an asset at a specified price on or before a In Exchange: you have remedy: clearing agency makes sure that the buyer is able to pay and
specified date the seller is able to deliver
Illustration:
Co. A will buy US$1M 6mths from now at PhP40=US$1 Exchange Traded Derivatives
-governed by agreements in prescribed forms
ForEx Rate in 6mths Situation -OTC derivatives: there's an organization that took initiative to provide uniform documentation
(International Swaps and Dealers Association -ISDA) - see below
PhP50=US$1 In the money
CROSS-CURRENCY SWAP
PhP30=US$1 Out of the money; but in the market (refer to diagram on page 48 of the reviewer)
PhP40=US$1 At the money; exercise forward given assured amount 1. BSP Licensing Requirements
Section X602 (BSP Circular)
common examples of Derivative Transactions: -the license will enable the licensee to engage in currency forwards and currency swap
*currency swap
*forward contract 2 Types of License:
*call option a. Regular Derivative license: any bank, NBQB, affiliate
*put option a. Expanded Derivative License: only Commercial and universal banks can
apply
From Sharry: This is a contract for differences. The income is derived from the difference
between agreed settlement price and actual market price on the agreed settlement date. BSP Circ. No. 102-95
Section 2. General Authority
On CURRENCY SWAP: -any
-It is the simultaneous buying and selling of currencies involving spot (near leg) and forward (far *BANK
leg) rates. *NBQB
*And or its subsidiaries/affiliates
***A bank cannot engage in derivative transactions without necessary BSP license. …may engage in financial derivatives activities upon prior approval of the BSP
-a bank may engage in derivative activities BOTH in its RBU and FCDU/expanded FCDU
Example ni sir from lecture
FORWARD: buy currency from the future BSP Circ. No 297-01
e.g. you're a borrower, you earn an interest rate every 6 months at $1. You want to lock the a. for expanded derivatives authority
interest rate. Let's assume that the Exchange rate is $1=P50 SCOPE: ONLY UBs and KBs
-you enter into a forward contract, you buy $1 which is equivalent to P50. -what may be done after acquiring license: may
…6 months from now: *trade
Supposing exchange rate is *Sell
*deal
$1.00=P60 You made the right decision! In the money: you would exercise your *take positions in currency swap
option! (you anticipate a gain) *forward of any tenor as well as all other derivatives for their own account or on behalf of
customers
$1.00= P50 Out of the money: the market price 6 months from now is lower than b. For regular derivatives authority
the agreed price under the forward agreement - you would not SCOPE: other Financial institutions (Fis) supervised by the BSP pede
exercise your option to buy (you would just lose the premium you -what may be done after acquiring license: may
paid). You would buy somewhere else not under forward contract *sell derivative products to its customers PROVIDED
>FI shall hedge such derivatives
$1.00=P55 At the money >the risk being hedged is already existing with the FI itself
c. No license derivatives
22 | C h a ’ s banking notes
SCOPE: UB and KB w/ no license I: WON the TRADING CONTRACT is VALID
-what may be done: HELD: VALID IN ITSELF BUT TRANSATION CARRIED OUT TO IMPLEMETN IT VOID
*trade
*sell Commodity Fixtures Contract
*deal -specie of securities
*take positions for their own account or in behalf of customers in currency swaps and -agreement to buy or sell a specified quantity and grade of a commodity at a future sale at a
*forwards w/ tenor of one year or less price established at the floor of exchange
*sell other derivative products of licensed entities to its customers PROVIDED
>customer currently has a risk w/ the bank it wishes to hedge Terms of Contract signed by Chua
d. For engaging in derivative transactions as end-users -Onapal will act as broker and will directly transmit the order of customers (includes Chua) to its
SCOPE: Banks, NBQB, Other BSP supervised FI principal Frankwell Enterprises in HK. The later will then place the order to Tokyo Exchange.
-no license needed as they are purely end-users -however, in this case, there was no evidence that the orders and the money were transmitted to
Frankwell.
BSP Circ 594
-latest Circular on derivative transactions *the trading contract IS VALID IN ITSELF because it complies with the RULE AND
REGULATIONS ON COMMODITY FUTURES TRADING
*if banks does hedging, no need for license but other than that, needs special license *BUT the transaction which was carried out to implement the contract DEVIATED from the true
*corporates (corporations): not governed by BSP, it would depend on the articles of import of the agreement
incorporations on WON they could enter into derivative transactions (or else, transaction is ultra >no actual delivery to Frankwell
vires) >final settlement is made by payment of the differences of prices
---in other jurisdictions, corporates does not do ultra vires transactions: they could do anything!
But sir thinks it's better to regulate the activities of the corporates…because it sounds good… -the dealings became mere speculative contracts in which parties merely GAMBLE in the rise
ultra vires…:) ) and fall of prices WHICH IS ILLEGAL
As such, the trading contract became in the nature of a GAMBLING CONTRACT WHICH IS
NULL AND VOID.
1. ISDA Master Agreements
1992 ISDA MASTER AGREEMENT Onapal v. CA: In ISDA, there is netting off of agreements which may give rise to gambling
(international swap dealer's association) issues. In case there is but pretended delivery of goods involved in the transactions, the Civil
-standardize documentation Code provision prohibiting gambling is violated.
-cannot modify terms of agreement
-have to use schedule to change the agreement SIR: There's a section that pending the issuance of SEC of rules of trading of securities of
-one of the most carefully drafted agreement futures, trading is suspended. However, in the document called HISTORY OF BACKGROUND
-has 7 pages long of lists of Derivative Agreements of SEC, what is suspended is public trading of commodity future transactions
Onapal happened when commodities trading was still allowed. The problem in this case is that
Cross-out netting even if the contract was valid, its implementation was such that there was no delivery of the
-you have a master agreement which you want to amend: you can't just cross it out. The master commodity, in violation of ART 2018, NCC
agreement stays as is, you have to make a schedule to the master agreement whch reflect the The issue now is WON cross-currency swapping after this, or contracts about currencies, is
amendment comprehended in ART 2018. In other words, is ForEx securities? Share of stocks? NO, NO…But
is it goods?
SCHEDULE Look at A1636: Goods defined. It excludes money and legal tender in the Philippines. It is
-contains the terms agreed upon by the parties implied to include foreign exchange. If that is the case, then is Forex supposed to be
-actual transactions evidenced by confirmation contemplated under Art 2018? SIR says no, because introductory paragraph of A1636 states
-contains a serial agreement clause (any and all transactions are considered as one agreement) that the definition of goods undr that article is for the title of sales, not under the title of aleatory
>>>gross out netting provision satisfies the delivery requirement to render a future contract valid contracts. SO A2018 does not contemplate forex.

If there's a default on the part of 1 party, all of these transactions are netted such that only 1
number emerges. First Philippine International Bank v. CA
Single agreement: all the agreements treated as a single transaction F: First Philippine International Bank went insolvent
(then sir discusses cherry picking) - See below H: Cherry picking (liquidator picks out the contracts not favorable to the insolvent bank) is not
allowed. The conservator is not allowed to disregard contracts unfavorable to the insolvent bank.
Onapal Philippines Commodities, Inc. v. CA -power of conservator is not unilateral...
F: Onapal is a registered and licensed commodity futures broker.
Susan Chua was invited by Diaz, Account Exec. Of Onapal, to invest in the commodity futures SECTION 70, insolvency law
trading by depositing P500k -prohibits the sale, transfer, etc. of the assets of the insolvent 1 month prior to filing for
Chua signed a Tradig Contract and other documents w/o being aware of the risks involved insolvency
Chua was asked to deposit again P300k. She wanted to withdraw her money but DIAZ wouldn't -does not apply to banks and insurance companies because they have their own set of
allow her insolvency rules
Chua instituted the present action to recover her money

23 | C h a ’ s banking notes
FPIC v. CA: Cherry picking is not allowed in Philippine jurisdiction. The powers granted to the
conservator, enormous and extensive as they are, cannot extend to the post facto repudiation of
perfected transactions. Otherwise, they would infringe upon non-impairment of contracts clause
in Constitution.
SIR:
-because of the single transactions clause, there's no cherry picking because there would only
be one cherry to pick
+page 177 of sir's book
1. Securitization
1. Concept
-means by which the seller/originator discounts receivables to the buyer on a true sale basis
-absolute transfer: creditors of the seller cannot reach the assets
-without recourse transaction
-buyer must be a Special Purpose Entity (special purpose corporation or special purpose trust)
>>the SPE repackages the receivables in the asset pool and issues a security known as ABS
(Asset Bracket Security)
(See part B)
-receivables transformed into securities
DIFFERENTIATED FROM AN SPV:
SPV: involves bad debts
Securitization: performing receivables (credit card receivables, PLDT)
1. Asset-backed securities
>>ABS is sold to investors who look to revenues collected from the asset pool
>>there is overcollateralization in this situation
BSP Circ. 185
-Originating bank cannot use its own trust department to issue ABS, has to do it through another
bank
1. Securitization Act of 2004 (RA 9267)
SECTION 3. Definition of Terms. - For purpose of this Act, the term:
(a) "Securitization" means the process by which assets are sold on a without recourse basis by
the Seller to a Special Purpose Entity (SPE) and the issuance of asset-backed securities (ABS)
by the SPE which depend, for their payment, on the cash flow from the assets so sold and in
accordance with the Plan.
(b) Asset-backed securities (ABS)" refer to the certificates issued by an SPE, the repayment of
which shall be derived from the cash flow of the assets in accordance with the Plan.
(c) "Assets", whether used alone or in the term "Asset-backed securities," refer to loans or
receivables or other similar financial assets with an expected cash payment stream. The term
"Assets" shall include, but shall not be limited to, receivables, mortgage loans and other debt
instruments: Provided, That receivables that are to arise in the future and other receivables of
similar nature shall be subject to approval by the Securities and Exchange Commission (SEC) or
the Bangko Sentral ng Pilipinas (BSP), as the case may be: Provided, further, That the term
"Assets" shall exclude receivables from future expectation of revenues by government, national
or local, arising from royalties, fees or imposts.
(d) "Asset Pool" means the group of identified, homogeneous assets underlying the ABS.
(e) "Commission" refers to the Securities and Exchange Commission (SEC).
(f) "Credit Enhancement" means any legally enforceable scheme intended to improve the
marketability of the ABS and increase the probability that the holders of the ABS receive
payment of amounts due them under the ABS in accordance with the Plan.
24 | C h a ’ s banking notes
(g) "Originator" means the person or entity which was the original obligee of the Assets, such as
financial institution that grants a loan or a corporation in the books of which the Assets were
created in accordance with the Plan.
(h) "Plan" means the plan for securitizations as approved by the Commission
(i) "Secondary Mortgage Institution (SMI)" means an entity created for the purpose of enhancing
a secondary market for residential mortgages and housing-related ABS.
(j) "Seller" means the person or entity which conveys to the SPE the Assets forming the Asset
Pool in accordance with the Plan. In most instances, the Seller may itself be the Originator.
(k) "Servicer" refers to the entity designated by the SPE to collect and record payments received
on the assets, to remit such collections to the SPE, and perform such other services as may be
specifically required by the SPE, excluding asset management or administration.
(l) "Special Purpose Entity (SPE)" means either a Special Purpose Corporation (SPC) or a
Special Purpose Trust (SPT).
(m) "Special Purpose Corporation (SPC)" refers to a juridical person created in accordance with
the Corporation Code of the Philippine solely for the purpose of securitization and to which the
Seller makes a true and absolute sale of assets.
(n) "Special Purpose Trust (SPT)" means a trust administered by an entity duly licensed to
perform trust functions under the General Banking Law, and created solely for the purpose of
securities and to which the Seller makes a true and absolute sale of assets
SIR: even if securitization act passed 2004, not much securitization transaction under the act
-quite recently, because of the subPrime prices, securitization acquired bad reputation
-SP Entity (SPE), which can be an SPC or SP trust, will be the one to issue the asset-backed
securities (ABS)
ABS: receivables that were acquired by the SPE
--it's source or repayment would come from the obligors of the receivables
--the holders of ABS are looking to the payments from the obligors, in a sense, it's a limited
recourse
HOW DONE: Collateralization
e.g. Issue is P1M, the pool of receivables supporting it is 1%,
SELLER of the receivables = originator = Globe, Smart, PLDT…
Servicer = can also be the originator
SPT: trust department can act as one. A mere account w/n trust department (there can be
several SPTs in one trust department)
SPC: corporation that is formed and established for the purpose of that single securitization
transaction
--more cumbersome: should have board of directors, meet reporting requirements of SEC…etc.
----HOWEVER, if you use an SPT, it would be easier than SPC!
-but why is it that there's not much securitization transactions: a bank that want to enter a
securitization transaction CANNOT USE ITS OWN TRUST DEPARTMENT! The SPT must be
independent from the ORIGINATOR!
-sir says this should be reversed as the trust department of a bank is separate and distinct from
the bank's operations!
-what entity in the Philippines expect lots of receivables? BANKS!!!
WON a bank can purchase ABS? BSP issued Circ 468 that states that bank can acquire ABS
(to that effect, there's underlying securities mentioned but sir said that it's the same as ABS)
e.g. share of LGUs on the tobacco taxes were securitized (but there's a provision in the new act
which prohibits securitization of tax revenues. Sir says the example is not covered by the
prohibition because it is not revenue flow, it is not liquid yet…)
1. Due Diligence
Due diligence team in a lawfirm: examines an entity…
2 types:
1. Prospectus
Due Diligence
-derived from securities act where there's astatement to the effect that securities to be sold to
the public must be registered with SEC and there must be a prospectus accompanying
statement and the facts mentioned therein must be accurate in all material respect, no
omissions which would make any statement in it misleading. In that act, it was a defense on the
part of the issuer that it has exercised DUE DILIGENCE in making the RS in the prospectus.
That defense is supported by the issuer's employing a DUE DILIGENCE TEAM.
~so balik sa DUE DILIGENCE TEAM: inspects the documents of the company, transactions, etc.
to make sure that all material information about the company is correct…
Under SRC, due diligence is no longer a defense. The KNOWLEDGE DEFENSE is the only
defense left: the issuer or underwriter might escape liability if proves that purchaser had
knowledge of the fact incorrectly stated. DUE DILIGENCE may be mitigating circumstance in
admin case before SEC but not defense.
1. Acquisition Due Diligence
e.g. Philamlife is being sold by AIG, there are several lawyers and underwriters…Nyek, moot
because transaction was aborted
1. Certain Financial Products/Exoteric Structures (not EXOTIC!!!)
1. Trade Account/Brokering
e.g.
SMC has several dealers…SMC delivers products to SMC, Dealers would not pay all at once
SMC could mandate a bank to look for investors that would buy the receivables
-bank acting for several investors, investors would enter agreement with the bank to look for
investments
When SMC sells receivables to a bank representing several investors, the bank merely gives
PARTICIPATION PARTICIPATES/CONFIRMATION SALE to the investors, this way the bank
receives commission (Manila Type of Trade Brokering)
1. Credit-Linked Notes/Deposits
E.g. Foreign bank buys RP bonds? For $1M
-but foreign bank worries about credit-worthiness of RP (no-election news…) so it wants to get
rid of the transaction with RP. SO bank issues CLN to a local bank, local bank gives $1M to
foreign bank in exchange of CLN. The agreement is that the CLN would carry a higher interest
than the credit rate… then I'm lost…
Cash settlement: foreign bank would sell its holdings of RP bonds to market (and probably for a
lesser price). The proceeds of the sale would then be paid to the local bank
Physical settlement: the RP bond is delivered to the local bank; this is better because the RP
bond is the most prime (nonrisk item) in the Philippines. If worse comes to worst, the local bank
would still be paid in Pesos.
1. Certain Other Matters
1. Anti-Money Laundering Act
Financial Action Task Force (FATF): a task force organized by developed countries which
identified noncooperative countries (Philippines was formerly included in it, together with Nauru
and Russia)
-if the Philippines did not comply with it w/n the deadline, there's a sanction! (money -
remittances to the Philippines would be cross checked, meaning delay in the receipt of
remittances in the Philippines)
-however, 1st AMLA was not compliant in certain aspects.
AMLC: authorized to freeze assets but this power taken out from it, should petition CA for
freezing of assets (but this is problematic because a mole in the SC could easily inform the
money-launderer of the attempt to freeze the latter's assets, and thus the account would be
w/drawn) - The 2nd AMLA was inferior from the 1st one but it became compliant because the
one who checked it wined and dined with Congressmen!
On cases when there's no need for freezing order from CA:
*Hi-jacking
25 | C h a ’ s banking notes
*Drug trafficking
(as if the first thing that the violators would do is to deposit the proceeds of their illegal acts in
the banks!)
-there's also suggestion that lawyers be whistle-blowers: BUT THIS WOULD NOT DO
BECAUSE OF THE CONFIDENTIALITY AGREEMENT BETWEEN LAWYERS AND CLIENTS
-there are many recommendations of the FATF: but only few are taken
-among the recommendation is to amend the bank secrecy law…
-threshhold amount lowered…if you transact with covered institutions and the amount of the
transaction is above the threshold, the bank is obligated to file a CTR…but even if lower than the
threshold and the bank would be suspicious, the bank could still file a "suspicious transaction
report" (CHA: I don't know why it's CTR when it stands for suspicious transactions report…)
1. Securities Regulation Code
-statute in Securities law, among which are:
*Truth in lending act
*GBL provs: truth in borrowing act
*SRC: truth in securities act
-persons who want to sell securities need to comply with the requirements of registration by SEC
Exceptions:
1. Exempt securities: when sold to the public, no need to register it (example, gov't
securities issued to the public…)
1. Securities sold in transactions classified as exempt in SEC: e.g. Private placement
---just file with SEC a notice/form of exception w/n 10d from date of sale
1. Offshore offering: not covered by SEC because SEC would not have jurisdiction over
sale of securities outside the Philippines
*SEC could come up with a list of exempt securities and transactions
*some of the list are discussed in Sir's book…which is unfortunately out of stock… hehe.
-Any public offering of securities is prohibited unless the securities are registered w/ SEC and
SEC has declared effective the Registration Statement
PRIVATE PLACEMENT: sale to not more than 19 nonqualified buyers (qualified buyers are the
banks, financial institutions)
PUBLIC OFFERING: random or indiscriminate offering to the public (any member of qualified
buyers)
Qualified buyers: they can fend for themselves
***To avoid regulation by the SEC:
OFFSHORE OFFERING: a contract is signed abroad and payments are made through FCDU
INSIDER TRADING: when you are in possession of information not known to the public, you're
not supposed to trade with that shares until the public was made aware of the information (only
after disclosure can an insider trade)
-insider trading rules meant to remedy the asymmetry in information to make the insider and
non-insider pari passu in terms of information
-INSIDER: given, you have access to non-public information from an insider (insider becomes
the Tipper, you become a Tippee)
-insiders mandated to disgorge "short-swing profit" (if you were able to detect transactions in
which the insider has made money, then the net gain must be disgorged by the insider) -
turnover the profit to the company
Tender-offer
-if you intend to acquire at least 35% of the outstanding capital stock of a public company, e.g.
listed company, whether alone or in concert with other persons, you need to make a tender-offer
to the remaining shareholders who might be left out (because 67% is control).
In a case, the SC has ruled that the 35% can be direct or indirect shareholding
Continuing disclosure requirements
-for corporations
FINALS: Oct 17
-from security devices til end (focus on the principles, not on ready-made answers!)

26 | C h a ’ s banking notes