Hizon Notes - Special Commercial Laws
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Transcript of Hizon Notes - Special Commercial Laws
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8/12/2019 Hizon Notes - Special Commercial Laws
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NOTES ON SPECIAL COMMERCIAL LAWSKenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho ivil 1UNIVERSITY OF SANTO TOM
UNIVERSITY OF SANTO TOMAS
Faculty of Civil Law
A.Y. 2012-2013
First Semester
SPECIAL COMMERCIAL LAWS
LETTERS OF CREDIT
Definition
Q: What are letters of credit?
A: Any arrangement however named of described, whereby a
bank acting upon the request of its client or in its own behalf,
agrees to pay another, against a stipulated documentsprovided that the terms of the credit are complied with.
Q: What is the duration of LC?
A:
1. Upon the period fixed by the parties; or2. If none is fixed:
a. 6 months from its date if used in the Philippines;b. 12 months if used abroad
Governing law
Q: What laws govern commercial transactions?
A: In the absence of any particular provision in the Code of
Commerce, commercial transaction shall be governed by
usage and customs genereally observed.
Letter of credit as an independent contract
Q: Is a letter of credit an accessory contract?
A: Letters of credit are in effect an absolute undertaking to
pay the money advanced or the amount for which credit isgiven on the faith of the instrument. They are primary
obligations and not accessory contracts.
NOTE: A letter of credit by itself does not come into
operation without a contract supporting it. It is not a contract
that can stand on its own, it needs a supporting contract. In a
commercial letter of credit it is a sale; in standby letter of
credit, it is a non-sale transaction.
Q: Describe the liability of the bank which issued the letter
of credit.
A: It is neither a surety nor a guarantor. The liability of the
issuing bank is primary and solidary. It is also not entitled to
the benefit of excussion.
Q: What is the purpose of the letters of credit?
A: To ensure certainty of payment. The seller is assured of
payment because the bank intervenes and makes the
commitment to pay. This addresses problems arising from thesellers refusal to part with his goods before being paid and
the buyers refusal to part with his money before acquiring
the goods, thus, facilitating commercial transactions.
NOTE: The issuing bank should pay the beneficiary upon the
latters submission of the stipulated documents and
compliance with the terms of the credit even though there is
a pending issue on whether or not the main contract
underlying the letter of credit has been paid or fulfilled o
not.
Q: What are the 2 kinds of letters of credit?
A:
COMMERCIAL STANDBY
Involves contracts of sale Involves non-sale
transactions
Payable only upon
presentation by the seller-
beneficiary of documents
that show he has performed
his contract
Payable upon certification by
the beneficiary of the
applicants non-performance
of the agreement.
Q: What are the other kinds of letters of credit?
A:
1. Irrevocable letter of credit A letter of crediwherein the terms and the undertakings of the
issuing bank cannot be amended or altered or
revoked without the consent of the beneficiary
2. Revocable letter of credit can be amendedaltered or revoked even without the consent of the
beneficiary
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NOTES ON SPECIAL COMMERCIAL LAWSKenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho ivil 26UNIVERSITY OF SANTO TOM
3. Confirmed letter of credit - the liability of theconfirming bank is primary
4. Non-confirmed letter of creditIrrevocable letter of credit
Q: Is irrevocable letter of credit and confirmed letter of
credit synonymous?
A: An irrevocable letter of credit is not synonymous with a
confirmed letter of credit. In an irrevocable letter of credit,
the issuing bank may not, without the consent of the
beneficiary and the applicant, revoke its undertaking under
the letter, whereas, in a confirmed letter of credit, the
correspondent bank gives an absolute assurance to the
beneficiary that it will undertake the issuing banks obligation
as its own according to the terms and condition of the credit.
IRREVOCABLE LETTER OF
CREDIT
CONFIRMED LETTER OF
CREDIT
The issuing bank may not,
without the consent of thebeneficiary and the
applicant, revoke its
undertaking under the letter
The correspondent bank
gives an absolute assuranceto the beneficiary that it will
undertake the issuing banks
obligation as its own
according to the terms and
conditions of the credit
Q: Can the irrevocable nature of letter of credit be changed?
A: The terms of an irrevocable letter of credit cannot be
changed without the consent of the parties, particularly the
beneficiary thereof (Philippine Virginia Tobacco
Administration v. De Los Angeles, 164 SCRA 543, 1988).
Q: Can a court order the release to the applicant the
proceeds of an irrevocable letter of credit without the
consent of the beneficiary?
A: No, such order violates the irrevocable nature of the letter
of credit. The terms of an irrevocable letter of credit cannot
be changed without the consent of the parties, particularly
the beneficiary thereof.
Parties to a letter of credit
Q: Who are the parties to the letter of credit?
A:
1. Applicant2. Beneficiary3. Issuing bank
Q: Who is the applicant?
A: He may be a buyer, importer or obligor. The person who
procures the opening of letter of credit and who agrees to
reimburse the issuing bank any and all amount should be paid
under the letter of credit once the issuing bank is compelled
to pay because the beneficiary is able to submit the
document stipulated.
He agrees to pay the bank that issued the letter of credit. The
applicant has no obligation to reimburse the issuing bank if
the latter pays without the stipulated amounts duly paid
under the letter of credit.
Q: Who is the beneficiary?
A: The one entitled to payment from the issuing bank upon
his submission of the document stipulated and compliance
with the terms of the credit.
Q: What is the effect of the failure of the beneficiary to
fulfill his obligation under the main contract?
A: It does not negate his right to payment from the issuing
bank as long as he is able to submit the required documents
and comply with the terms of the credit, without prejudice tohis liability against the account party under the law on
contract and damages
Q: Who is the issuing bank?
A: The one that undertakes to pay the beneficiary upon
submission of the beneficiary of these stipulated documents
and compliance with the terms of the credit.
Q: Enumerate the other parties.
A:
Advising or
Notifying bank
Not liable to pay the beneficiary; it does no
have any contractual relations with the
beneficiary. Its only obligation is to determine
the apparent authenticity of the letter of credit
to check if at first glance that the same is
genuine or valid:
a. If valid, the advising/notifying banknotifies the beneficiary of the letter o
credit; transmit the letter of credit in
favor of the beneficiary so that the
beneficiary can cause shipment of the
equipment
Paying bank An agent of the issuing bank for the purpose ofmaking payment to the beneficiary.
He can also be the advising bank
Confirming bank It lends credence to a letter of credit issued by a
lesser known bank as if it is the one who issued
the letter of credit.
Its obligation is similar to an issuing bank. Thus
beneficiary may tender documents to the
confirming bank and collect payment
Negotiating
bank
The bank in the city of the beneficiary which
buys or discounts the drafts contemplated by
the LC, if such draft is to be drawn on the
opening bank not in the city of the beneficiary
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NOTES ON SPECIAL COMMERCIAL LAWSKenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho ivil 27UNIVERSITY OF SANTO TOM
Correspondent
bank of issuing
bank
If the account party is in the Philippines and the
beneficiary is abroad, the beneficiary will be
notified and consequently will be paid through
the correspondent bank
Q: Describe the duty of the advising bank?
A: It determines the apparent authenticity of the letter of
credit and notifies the beneficiary of the letter of credit.
He does not guarantee the genuineness or due execution of
the letter of credit. It is not liable for damages even if it turns
out to be spurious provided the spurious character is not
apparent on the face of the instrument.
Q: Does the advising bank have the obligation to pay the
beneficiary?
A:
GR: No
XPN: When the advising bank is also the confirming orpaying bank
Three distinct relationships arising from a letter of credit
Q: Explain the three (3) distinct but intertwined contract
relationships that are indispensable in a letter of credit
transaction.
1. Between the applicant/buyer/importer and thebeneficiary/seller/exporterThe applicant/ buyer/
importer is the one who procures the letter of credit
while the beneficiary/seller/exporter is the one who incompliance with the contract of sale ships the goods to
the buyer and delivers the documents of title and draft
to the issuing bank to recover payment for the goods.
Their relationship is governed by the contract of sale.
2. Between the issuing bank and thebeneficiary/seller/exporterThe issuing bank is the one
that issues the letter of credit and undertakes to pay the
seller upon receipt of the draft and proper documents of
title. On the other hand, the beneficiary/seller/exporter
surrenders document of title to the bank in compliance
with the terms of the LC. Their relationship is governed
by the terms of the LC.
3. Between the issuing bank and theapplicant/buyer/importer The applicant/buyer/
importer obliges himself to reimburse the issuing bank
upon receipt of the documents of title. Their relationship
is governed by the terms of the application for the
issuance of the letter of credit by the bank.
NOTE: These relationships while interrelated are distinct and
separate from each other.
Q: When is the bank entitled to reimbursement?
A: Once the issuing bank shall have paid the beneficiary afte
the latters compliance with the terms of the LC. Presentment
for acceptance to the customer/applicant is not a condition
sine qua non for reimbursement.
Q: Is presentment a condition prior to reimbursement?
A: Presentment for acceptance to the customer or applicant
of the drafts drawn by the beneficiary is not a condition sine
qua non for reimbursement (Prudential Bank & Trust Co. v
IAC, 216 SCRA 257, 1992)
Q: What is the consequence of payment upon an expired
LC?
A: An issuing bank which paid the beneficiary of an expired
letter of credit can recover the payment from the applicant
which obtained the goods from the beneficiary to prevent
unjust enrichment.
Q: Should the marginal deposit made by the customer, inpossession of the bank be first deducted from the principal
indebtedness before computing the interest?
A: Yes, since it is supposed to be returned upon compliance
with his obligation. Indeed, it would be onerous to compute
interest and other charges on the face value of the letter o
credit which the issuing bank issued, without first crediting o
setting off the marginal deposit which the importer paid to it
Requiring the importer to pay the interest on the entire letter
of credit without deducting first his marginal deposit would
be a clear case of unjust enrichment by the bank.
NOTE: The applicant has the right to have the margina
deposit deducted from the principal obligation under the
letter of credit and to have the interest computed only on the
balance and not on the face value thereof.
Doctrine of Independence
Q: What is the doctrine of independence?
A: Under this doctrine, the obligation of the issuing bank to
pay the beneficiary does not depend on the fulfillment or
non-fulfillment of the contract supporting the letter of credit
If it is a commercial letter of credit, the obligation if theissuing bank to pay the beneficiary is not affected by any
breach of contract by the seller to the buyer because the
contract between the issuing bank and beneficiary is separate
and distinct from the contract between the seller and the
buyer.
Q: Does the issuing bank have the obligation to determine
whether or not the main contract has been fulfilled or not?
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NOTES ON SPECIAL COMMERCIAL LAWSKenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho ivil 28UNIVERSITY OF SANTO TOM
A: No. The issuing bank is liable to pay the beneficiary upon
the latters submission of the stipulated documents and
compliance with the terms of the credit regardless of any
breach of contract by the beneficiary to the applicant of the
letter of credit.
The SC held that banks deals with documents, they dont deal
with goods. The issuing bank has no obligation to check the
object, the quantity or quality of the goods. The bank needs
not to verify or go beyond the four corners of the document.
The issuing bank will determine the documents to be
submitted, where the stipulated documents tendered
faithfully. If the documents were submitted, the issuing pays
the seller.
Q: What is the exception to the doctrine of independence?
A: Fraud exception principle
Fraud exception Principle
Q: What is the Fraud exception principle?
A: The beneficiary may be enjoined from collecting on the
letter of credit if the following elements are present:
a. There is fraud on the part of the beneficiaryb. Fraud must be in relation to the independent
purpose or character of the credit
c. Unless the beneficiary is restrained, the applicantshall suffer grave and irreparable injury.
NOTE: To be an exception, the fraud must NOT be in relation
to the performance of the main contract but in relation to the
independent purpose or character of the credit.
Q: What is the remedy for a fraudulent abuse?
A:Injunction.
Doctrine of Strict Compliance
Q: How should commercial transaction involving letter of
credit be complied?
A: Commercial transaction involving letters of credit are
governed by the rule on strict compliance.
Q: What is the so-called doctrine of strict compliance?
A: The documents that the beneficiary should submit to the
issuing bank or confirming bank must strictly conform to the
documents stipulated. If there is discrepancy, the issuing
bank is not liable to pay. If it pays, it pays at its own risk and
cannot obtain reimbursement from the applicant.
It matters not that the submission of the documents are
unfair, unjust or inequitable, the point is, it requires that the
document stipulated must be the document to be submitted
otherwise, the issuing bank is not liable or the beneficiary is
not entitled to payment.
TRUST RECEIPT
Definition
Q: What is a trust receipt transaction?
A: It is any transaction between the entruster and entrustee
whereby the entruster who owns or holds absolute title or
security interests over certain specified goods, documents or
instrument, releases the same to the possession of entrustee
upon the latters execution of a TR agreement.
It is a transaction wherein the entrustee binds himself to hold
the designated goods in trust for the entruster and, in case of
default, to sell such goods, documents or instrument with the
obligation to turn over to the entruster the proceeds to theextent of the amount owing to it or to turn over the goods
documents or instrument itself if not sold.
NOTE: To be in the nature of a trust receipt, the entruster
should have financed the acquisition or importation of the
goods. The funds should have been delivered before or
simultaneously with delivery of the goods.
Q: What is a trust receipt (TR)?
A: It is the written or printed document signed by the
entrustee in favor of the entruster containing terms and
conditions substantially complying with the provisions of PD
115.
Q: What is the consequence where the execution of the
trust receipt agreement was made only after the goods
covered by it had been purchased by and delivered to the
entrustee and the latter as a consequence acquired
ownership over the goods?
A: In such case, the transaction does not involve a trust
receipt but a simple loan even though the parties
denominated the transaction as one of trust receipt
(Colinares v. CA, 339 SCRA 609, 2000; Consolidated Bank andTrust Corp., v. CA, 356 SCRA 671, 2001.)
Parties to a trust receipt agreement
Q: Who are the parties to a trust receipt agreement?
A:
1. Entruster2. Entrustee
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NOTES ON SPECIAL COMMERCIAL LAWSKenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho ivil 29UNIVERSITY OF SANTO TOM
Q: Who is an entruster?
A: A lender, financer or creditor. Person holding title over the
goods documents or instruments (GDI) subject of a trust
receipt transaction; releases possession of the goods upon
execution of trust receipt.
Q: Who is an entrustee?
A: A borrower, buyer, importer or debtor. Person to whom
the goods are delivered for sale or processing in trust, with
the obligation to return the proceeds of sale of the goods or
the goods themselves to the entruster
LCs and TRs, not negotiable instruments
Q: Are letters of credit and trust receipt considered as
negotiable instruments?
A: No, but drafts in connection with the former are
negotiable instruments (Lee v. CA 375 SCRA 579, 2002).
2 features of a trust receipt agreement
a. Loan featureb. Security feature
Q: Discuss the dual features of a trust receipt agreement.
A: A trust receipt has a loan and security features. The
entruster (bank) extends loan to the entrustee (importer and
retail dealers) to finance the importation of goods or
instruments in favor of the entrustee who may not be able to
obtain credit except thru utilization of the merchandise
imported or purchased.
The security feature is in the covering trust receipt which
secures the indebtedness.
Effect of failure on the part of entrustee to comply with its
obligations
Q: What is the effect of payment of the loan or delivery of
the sale proceeds equivalent to the full amount?
A: It extinguishes both criminal and civil liabilities of the
entrustee.
Section 13.Penalty clause.The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or instruments covered by a
trust receipt to the extent of the amount owing to the entruster or as
appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred and fifteen, paragraph one (b)
of Act Numbered Three thousand eight hundred and fifteen, as amended,
otherwise known as the Revised Penal Code. If the violation or offense is
committed by a corporation, partnership, association or other juridical
entities, the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising
from the criminal offense.
P.D 115 is not violative of the constitutional provision
against imprisonment for the non-payment of debt
Q: Is PD 115 violative of the constitutional provision against
imprisonment for the non-payment of debt?
A: No because what is sought to be penalized is not the non-payment of debt but the dishonesty and abuse of confidence
in the handling of money or goods to the prejudice of
another. It punishes the act not as an offense against
property but against public order (People v. Nitafan, 207
SCRA 726, 1992).
NOTE: The penal sanction covers:
1. Criminal liability2. Civil liability
Estafa
Q: What is the effect of the failure of the entrustee to
deliver the proceeds of the sale of the goods or instruments
subject to the trust receipt or return the goods?
A: It will constitute estafa.
Q: May the civil action for the collection of the loan be
instituted independently of the criminal action?
A: Yes.
Q: What is the effect of the acquittal of the entrustee in the
criminal case as a result of the surrender or consignation ofthe goods?
A: The acquittal of the entrustee in the criminal case as a
result of the surrender or consignation of the goods is not a
bar to the filing of a separate civil action to enforce payment
of the loan(Vintola v. Insular Bank of Asia and America, 150
SCRA 140, 1987).
Q: What is the effect of compromise of estafa case arising
from trust receipt transaction, after the case has been filed
in court?
A: Compromise of estafa case arising from trust receipt
transaction, after the case has been filed in court does not
amount to novation and does not erase the criminal liability
of the accused (Ong v. CA, 124 SCRA 578, 1983).
Penalty in case of corporation
Q: What if the entrustee is a corporation?
A: In such case, the law makes the officers or employees o
other persons responsible for the offense liable to suffer the
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NOTES ON SPECIAL COMMERCIAL LAWSKenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho ivil 30UNIVERSITY OF SANTO TOM
penalty of imprisonment. The criminal liability falls on the
human agent responsible for the violation of the Trust
Receipt Law.
A person who admits being the agent of the entrustee
corporation is a person responsible for the offense if he is the
signatory of the trust receipts and if he cannot explain why he
is not responsible for the failure to turn over the proceeds of
the sale or account for the goods covered by the trust receipt.
Q: Why are the officers, employees, etc. of a corporation
responsible for the offense?
A: It is because they are vested with the authority and
responsibility to devise means necessary to ensure
compliance with the law, and if they fail to do so, are held
criminally accountable. Yet, a corporation may be charged
and prosecuted for a crime if the imposable penalty is fine
(Ching v. Sec. of Justice, 481 SCRA 609, 2006)
Q: Is the person signing the trust receipt for the corporation
solidarily liable with the entrustee-corporation for the civilliability arising from the criminal offense?
A: No. He may however be personally liable if he bound
himself to pay the debt of the corporation under a separate
contract of surety or guarantee (Ong v. CA, 401 SCRA 649,
2003).
Q: Can we file a criminal case against the corporation?
A: It depends, if the penalty is imprisonment, we cannot file a
criminal case, but if the penalty is a fine or forfeiture or
revocation of the corporationsfranchise, then we can.
Civil obligation remains as long as loan is not paid
Q: What is the effect of non-payment of the loan?
A: The civil obligation still remains.
Q: What is the effect of the loss of the goods subject of the
trust receipt?
A: Loss of the goods subject of the trust receipt, regardless of
the cause does not extinguish the civil liability of the
entrustee.
Q: What is the effect of return of goods?
A: If the loan is not yet paid, the return of the goods may
extinguish the criminal liability but not the civil liability of the
entrustee unless the goods are sold and the proceeds thereof
applied in full payment of the loan.
Penal sanction applies to goods intended for sale only
Q: When does the penal sanction under the trust receipts
law apply?
A: Jurisprudence provides that the penal sanction does not
apply in case the goods are not intended for sale or resale as
when they are for actual use.
Cases where no criminal liability despite execution of
TR agreement
1. Compliance with the terms of the trust receipt eitherby:
a. payment,b. return of the proceeds orc. return of the goods.
2. The transaction is not a trust receipt within thecontemplation of the trust receipts law
3. Surrender of the goods to the entruster4. Non-delivery of the goods to entrustee5. Compromise agreement before the filing of the
criminal information for violation of the TR law6. Cancellation of the trust and taking possession by
the entruster
NOTE: Mere repossession of the goods wil
extinguish criminal liability.
7. Loss of the goods due to force majeure8. Consignment
Entrustee, owner of the articles subject of the TR
Q: Who is the owner of the articles subject of the TR?
A: The entrustee. A trust receipt has two features, the loan
and security features. The loan is brought about by the fact
that the entruster financed the importation or purchase of
the goods under TR. Until and unless this loan is paid, the
obligation to pay subsists. If the entrustee is made to appea
as the owner, it was but an artificial expedient, more of lega
fiction than fact, for if it were really so, it could dispose of the
goods in any manner that it wants, which it cannot do. To
consider the entrustee as the true owner from the inception
of the transaction would be to disregard the loan feature
thereof. (Rosario Textile Mills Corp. v. Home Bankers Savings
and Trust Company, 2005)
Q: Can the entrustee mortgage or pledge the articles in
trust?
A: The articles covered by the trust receipts are owned by the
entruster and they were only held by the entrustee in trust
While it was allowed to sell the items, the entrustee had no
opportunity to dispose of them or any part thereof or their
proceeds through conditional sale, pledge or any other
means. Accordingly, the entrustee has neither ownership
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NOTES ON SPECIAL COMMERCIAL LAWSKenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho ivil 31UNIVERSITY OF SANTO TOM
free disposal nor the authority to freely dispose of the
articles. Hence, the entrustee could not have subjected them
to a chattel mortgage (DBP v. Prudential Bank, 475 SCRA 623,
2005).
NOTE: The entrustee cannot mortgage the goods because
one of the requisites of a valid mortgage is that the
mortgagor must be the absolute owner of the property
mortgaged or must have free disposal thereof. Entrustee is
not the absolute owner of the goods nor has the free disposal
thereof.
Receipt of bank of sum of money without reference to trust
receipt obligation
Q: What is the effect of the receipt of the bank of a sum of
money without reference to the trust receipt obligation to
which the same pertains?
A: It does not obligate the bank to apply the money received
against the trust receipt obligation.
Q: Does it have the effect of compensation?
A: No since compensation is not proper when one of the
debts consist in civil liability when one of the debts consists in
civil liability arising from a criminal offense (Metropolitan
Bank and Trust Company v. Tonda, 338 SCRA 254, 2000).
Rights of the entruster
Q: What are the right of an entuster?
A:
1. To be entitled to the proceeds of the sale of thegoods under trust receipt to the extent of the
amount owing to him or to return the goods in case
of non-sale
2. To cancel the trust and take possession of the goodsor of the proceeds realized therefrom at any time
upon default by the entrustee
3. To sell the goods with at least 5-day notice to theentrustee and apply the proceeds in payment of the
obligation. Entrustee is liable to pay deficiency, if
any.
Validity of the security interest as against creditors of theentrustee/innocent purchasers for value
Q: As between the entruster and the creditors of the
entrustee, who has a better right over the goods?
A: The entruster. His security interest in goods, documents,
or instruments pursuant to the written terms of a trust
receipt shall be valid as against all creditors of the entrustee
for the duration of the trust receipt agreement.
Q: Who can defeat the rights of the entruster over the
goods?
A: A purchaser in good faith. He acquires goods, documents
or instruments free from the entruster's security interest.
Goods covered by TR not subject to levy
Q: Are the goods covered by a trust receipt subject to levy?
A:
GR: No, the law warrants the validity of entrusters security
interest as against creditors of the trust receipt agreement
during the duration of the trust receipt agreement.
XPN: When the properties are in the hands of an innocent
purchaser for value and in good faith (Prudential Bank v
NLRC, 251 SCRA 421, 1995).
Obligations or liability of the entrustee
Q: What are the obligations and liabilitites of the entrustee?A:
1. To hold good, documents and instruments (GDI) intrust for the entruster and to dispose of them strictly
in accordance with the terms of TR;
2. To receive the proceeds of the sale for the entrusterand to turn over the same to the entruster to the
extent of amount owing to the entruster;
3. To insure GDI against loss from fire, theft, pilferageor other casualties.
4. To keep GDI or the proceeds thereof, whether inmoney or whatever form, separate and capable of
identification as property of the entruster;
5. To return GDI to the entruster in case they could notbe sold or upon demand of the entruster; and
6. To observe all other conditions of the trust receipts(Sec. 9, P.D. 115)
Order for application of proceeds
Q: What is the order in the application of proceeds of
the TR transactions?
A:
1. Expenses of the sale2. Expenses derived from storing the goods3. Principal obligation
Q: Is the entrustee liable for the deficiency?
A: Yes, but any excess shall likewise belong to him.
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NOTES ON SPECIAL COMMERCIAL LAWSKenneth and King C. Hizon (3A)_____________________________________________________________________________________________________________
Facultad de Derecho ivil 32UNIVERSITY OF SANTO TOM
Liability for loss of goods, documents or instruments
Q: Who shall bear the loss of goods which are the subject of
TR?
A: The entrustee. Loss of goods, documents or instruments
which are the subject of a TR, pending their disposition,
irrespective of whether or not it was due to the fault or
negligence of the entrustee, shall not extinguish his obligation
to the entruster for the value thereof. (Sec. 10, P.D. 115)
NOTE: The principle of res perit dominowill not apply against
the entruster
Remedies
Q: What are the remedies available to the entruster?
A:
1. File a criminal action for estafa in case of failure ofthe entrustee to deliver the proceeds of the sale of
the goods under the trust receipt up to the extent ofhis obligation to the entruster.
NOTE: The civil action may be instituted:
a. In the criminal actionb. Separately filed independently of the criminal actionCRIMINAL ACTION CIVIL ACTION
Based on ex-delicto Based on ex-contracto
2. Cancel the trust and take possession of the goods atany time upon default of the entrustee
3. After the repossession, the entruster may sell thegoods upon at least 5-day notice to the entrustee
and apply the proceeds in payment of the obligation.
The entrustee is liable for deficiency or entitled to
excess, if any.
4. If a surety secures the obligation of the entrustee inaddition to the trust receipt, the law does not
obligate the entruster to cancel the trust or take
possession of the goods. He can proceed against the
surety. The options belong to the entruster.
Q: In the event of default, is it mandatory or compulsory for
the entruster to cancel the trust and take possession of thegoods to be able to enforce his rights?
A: No, the law uses the word may in granting to the
entruster the right to cancel the trust and take possession of
the goods. Thus, he has the discretion to avail itself of such
right to sue or seek alternative actions, such as third party
claim or a separate civil action which it deems bets to protect
its right, at any time upon default or failure of the entrustee
to comply with any of the terms and conditions of the
agreement (South City Homes, Inc. v. BA Finance Corporation,
371 SCRA 603, 2001).
CHATTEL MORTGAGE
Q: What is a chattel mortgage?
A: An accessory contract whereby a personal property is
recorded in the Chattel Mortgage Register to secure the
performance of a principal obligation.
NOTE: The concept of a chattel mortgage as a conditional sale
under the old chattel mortgage law has been supplanted by
the definition of chattel mortgage under Art 2140 of the Civi
Code. It is now an accessory contract, no longer a conditiona
sale.
CHARACTERISTICS OF CHATTEL MORTGAGE
1. An accessory contract because it is for the purpose ofsecuring the performance of a principal obligation;
2. A formal contract because of its enforceabilityregistration in the Chattel Mortgage Register is
indispensable;
3. A unilateral contract because it produces onlyobligations on the part of the creditor to free the thing
from encumbrance on the fulfillment of the obligation.
NOTE: The extinguishment of the accessory contract does not
extinguish the principal contract; the extinguishment of the
principal contract extinguishes the accessory contract.
ESSENTIAL REQUISITES
Q: What are the essential requisites for a valid chatte
mortgage?
A:
1. Constituted to secure fulfillment of the principaobligation
2. Mortgagor is the absolute owner of the property3. Mortgagor has free disposal of the property, in the
absence thereof, that he be legally authorized for
such purpose4. That it involves a personal property. (Sec. 2085,NCC)
FORMAL REQUISITES
Q: What are the formal requisites for a valid chatte
mortgage?
A:
1. Affidavit of good faith
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2. Registration with the Chattel Mortgage Registry3. If necessary, additional registration with the proper
government agency
Affidavit of Good Faith
Q: What is an affidavit of good faith?
A: A certificate included in the chattel mortgage contract
executed by both mortgagor and mortgagee stating that:
1. The obligation is valid, just and subsisting; and2. It is not one entered into for purposes of fraud.
Q: What is the effect of absence of affidavit of good faith?
A: It does not affect the validity of the chattel mortgage but
the same will be unenforceable against third persons.
Q: What is the status of an unrecorded CM?
A: The mortgage is valid and binding between the parties.Registration is necessary only for the purpose of binding third
person.
NOTE: In an action for collection, the non-registration of the
chattel mortgage which ordinarily does not bind third persons
is not critical. The rule is different when the remedy resorted
to is foreclosure.
Q: What is the effect if the mortgage is not registered?
A:It is nevertheless binding between the parties.
Q: What is the period within which the registration should
be made?
A: The law does not provide any specific time. Yet, the law is
substantially and sufficiently complied with:
a. where the registration is made by the mortgageebefore the mortgagor has complied with his principal
obligation and;
b. no right of innocent third persons Is prejudiced.Q: What is the effect of registration?
A: It creates real rightit is an effective and binding notice tothe other creditors of its existence and creates a real right or
lien which follows the chattel wherever it goes.
The registration gives the mortgagee symbolical possession.
The efficacy of the act of recording a chattel mortgage
consists in the fact that it operates as a constructive notice of
the existence of the contract.
Dual Registration rule
Q: Explain the Dual registration rule?
A: The property must be registered:
a. Place where the mortgagor residesb. In the place where the property is situated
XPN:
a. If the mortgagor resides in the same place where theproperty is located; or
b. If the amount of the loan is more than P500,000.00,registration should be made in the city or
municipality where the property is situated (P.D
1159, Sec. 113 & 114)
RULES:
Private motor
vehicle
Land Transportation Office (LTO)
Public motor
vehicle
Land Transportation Franchise &
Regulatory Board (LTFRB)Vessels Maritime Industry Authority (MARINA)
Aircrafts Civil Aviation Authority of the
Philippines (CAAP)
Chattel mortgage vs. Pledge
Q: Distinguish chattel mortgage from pledge.
A:
CHATTEL MORTGAGE PLEDGE
DeliveryDelivery is not necessary Delivery is necessary
Registration
Registration in the Chattel
Mortgage register is
necessary for its
enforceability
Registration in the Registry
Property is not necessary.
Security
Cannot secure future
obligations
Can secure future obligations
Law governing the sale
Procedure for the sale of the
thing given as security is
governed by Sec. 14, Act No.
1508
Art. 2112, NCC
Excess
If the property is foreclosed,
the excess goes to the debtor
If the property is sold, the
debtor is not entitled to the
excess unless otherwise
agreed.
Recovery of deficiency
The creditor is entitled to
recover the deficiency from
the debtor except if the
The creditor is not entitled to
recover the deficiency
notwithstanding any
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chattel mortgage is a security
for the purchase of property
in installments
stipulation to the contrary.
Possession
Possession remains with the
debtor
Possession is vested in the
creditor
Contract
Formal contract Real contract
Recording in a public instrument
Must be recorded in a public
instrument to bind third
persons
Must be in a public
instrument containing
description of the thing
pledged and the date thereof
to bind third persons
SUBJECT MATTER OF CHATTEL MORTGAGE
Q: What is the subject matter of chattel mortgage?
A: It must always be personal or movable property.
Q: What are the properties mortgageable under the law?
A:
1. Shares of stock in a corporation- If the owner of theshares is not domiciled in the same province where the
corporation is domiciled, the registration must be made
in both provinces.
2. An interest in business, for its personal proper capable ofappropriation;
3. Machinery treated by the parties as personal propertysubsequently installed on leased land;4. Vessels but it is essential that the mortgage is recordedin the office of the MARINA (Maritime Industry
Authority) to be effective as to third persons. It is not
necessary that it be recorded in the office of the register
of deeds;
5. Motor vehicles-which must be registered with the LandTransportation Commission (LTO) and with respect to
vehicles used for public services, it must also be
approved by the Public Service Commission (LTFRB);
6. House of mixed materials;7. House intended to be demolished for what are really
mortgaged in this case are the materials thereof;
8. House built on rented land since it did not form part ofthe land;
It is settled that an object placed on land by one who had
only a temporary right to it does not become
immobilized by attachment;
9. A house of strong materials- as long as the parties to thecontract so agree and no innocent third party will be
prejudiced thereby.
Q: What is the effect if a chattel mortgage is constituted on
machinery permanently attached on the ground?
A: It is to be considered as personal property and the chatte
mortgage constituted thereon is null and void, regardless of
who owns the land. However, the chattel mortgage is binding
on the contracting parties but cannot prejudice innocent
third parties (Makati Leasing and Finance Corp. v. Wearever
Textile Mills, Inc. 122 SCRA 296, 1983).
In accordance with Art. 2125 of the Civil Code, an
unregistered chattel mortgage is valid and binding between
the parties because registration is necessary only for the
purpose of binding third persons (Filipinas Marble Corp. v
IAC, 142 SCRA 180, 1986).
Q: What is the appropriate remedy to unbolt the machinery
preparatory to the extra-judicial foreclosure?
A:
1. Action for replevin preparatory to extra-judiciaforeclosure
2. Simply, judicially forecloseMortgagee vs. Innocent purchaser for value
In one case, the court held that chattel mortgage over a
house is valid between the contracting parties even
though it is a real property. Since it is a valid mortgage
the mortgagee can foreclose in case of default.
But, even if he has foreclosed the chattel mortgage, i
does not bind the judgment creditor of D because it
does not affect innocent 3rd parties. That conclusion
will not change even if the mortgagee sold the house to
a 3rd party, an innocent purchaser for value.
That innocent purchaser for value has a right inferio
compared to the rights of the judgment creditors of D
for the simple reason that the innocent purchaser fo
value simply steps into the shoes of the origina
mortgagee and acquires only whatever rights, title, o
interest that the mortgagee originally had over the
house and subject to the same limitations.
If the right of the right of the original mortgagee is
enforceable only against the mortgagor, the right of theinnocent purchaser for value, the assignee of the
original mortgagee is also valid and enforceable only
against the mortgagor. But, that does not prejudice o
affect innocent 3rd parties, like judgment creditors o
the mortgagor.
After-Acquired Property
Q: Can the CM cover afteracquired properties?
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A:
GR: No, because Section 7 of Act 1508 provides: A chattel
mortgage shall be deemed to cover only the property
described therein and not like or substituted property
thereafter acquired by the mortgagor and placed in the same
depository as the property originally mortgage.
XPN: Where the afteracquired property is in renewal of, or in
substitution for, goods on hand when the mortgage was
executed, or is purchased with the proceeds of the sale of
such goods.
NOTE: While pledge, real estate mortgage, or anti-chresis
may secure after-incurred obligations so long as these future
debts are accurately described, a chattel mortgage can only
cover obligations existing at the time the mortgage is
constituted.
Although the promise expressed in the chattel mortgage to
include debts that are yet to be contracted can be a bindingcommitment that can be compelled upon, the security itself,
however, does not come into existence or arise until after a
chattel mortgage agreement covering the newly contracted
debt is executed either by:
a. concluding a fresh chattel mortgage orb. by amending the old contract conformably with the
form prescribed by the Chattel Mortgage Law
Q: Does the law require a minute and specific description of
every chattel mortgage in the deed of mortgage?
A:No, it only requires that the description of the mortgaged
property be such as to enable the parties to the mortgage orany other person to identify the same after a reasonable
investigation and inquiry.
After-Incurred Obligation
Q: Can the CM cover afterincurred obligations?
A: No, the affidavit of good faith in a CM makes it obvious
that the debt referred to in the law is current, not an
obligation that is yet merely contemplated. (Acme Shoe v. CA,
G.R. No. 103576, Aug. 22, 1996)
Q: What then is the consequence of a CM covering
afterincurred obligations?
A: A promise expressed in a CM to include debts that are yet
to be contracted can be a binding commitment that can be
compelled upon. The security itself, however, does not come
into existence or arise until after a CM agreement covering
newly contracted debt is executed either by concluding a
fresh CM or by amending the old contract conformably with
the form prescribed by the CM law. The remedy of
foreclosure can only cover the debts extant at the time o
constitution and during the life of the CM sought to be
foreclosed.
Dragnet clause
Q: What is a dragnet clause?
A: It is a clause which operates as a convenience and
accommodation to the barrowers as it makes available
additional funds without their having to execute additiona
security documents, thereby saving time, travel, loan closing
costs, costs of extra legal services, recording fees etc.
It subsumes all debts of past or future origin.
Q: How do you construe such clause?
A: It must be carefully scrutinized and strictly construed
particularly where the mortgage contract is one of adhesion.
NOTE: A mortgage given to secure future advancements is acontinuing security and is not discharged by the repayment o
the amount named in the mortgage, until the full amount of
the advancements is paid. It permitted the mortgagor to take
the money as it is needed and thus avoid the necessity o
paying interest until the necessity for its use actually arises.
Remedies available in case of simple loan
Q: What does the word default cover?
A:
1. non-payment2. violation of the terms of the agreement
Q: What is the effect of stipulation prohibiting the
mortgagor from exercising acts of ownership?
A: Such agreement is void. Since the mortgagor remains the
owner of the chattel, he can sell it even if the chatte
mortgage agreement prohibits the mortgagor from selling the
chattel without the consent of the mortgagee.
The sale, however, is without prejudice to:
a. his criminal prosecution under the permanentprovisions of the RPC
b. the sale can be considered as violation of the termsof the chattel mortgage
Q: What are the remedies in case of default?
A:
1. action for collection2. foreclosure
NOTE: There is no rescission in case of simple loan.
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Q: What is the nature of these remedies?
A: They are alternative remedies. The election of one bars the
other remedies.
NOTE: The mere filing of the collection case bars the
foreclosure, regardless of the venue (whether here or
abroad).
Foreclosure
Q: What is foreclosure?
A: It is the remedy available to the mortgagee by which he
subjects the mortgaged property to the satisfaction of the
obligation to secure which the mortgage was given through
the sale of the property at public auction and the application
of the proceeds thereof to the payment of his claim.
Q: State the essence of a contract of mortgage?
A: The essence of a contract of mortgage indebtedness is that
a property has been identified or set apart from the mass of
the property of the debtor-mortgagor as security for the
payment of money or the fulfillment of an obligation to
answer the amount of indebtedness in case of default of
payment.
Q: What are the kinds of foreclosure?
A:
1. judicial foreclosure2. extra-judicial foreclosure
Judicial foreclosure
Q: What is judicial foreclosure?
A: By bringing an action for that purpose in the RTC of the
province or city where the real property or any part therof
lies.
The proceeds of the sale shall be applied to the payment of
the:
a. Costs of the sale;b. Amount due to the mortgagee;c. Claims of persons holding subsequent
mortgages in the order of their priority; and
d. Balance if any shall be paid to the mortgagor.Extra-judicial foreclosure
Q: What is Extra-judicial foreclosure?
A: A mortgage may be foreclosed extra judicially where there
is inserted in the contract, a clause giving the mortgagee the
power, upon default of the debtor, to foreclose the mortgage
by an extrajudicial sale of the mortgaged property.
Q: What is the remedy if the mortgagee cannot obtain
possession of mortgaged property?
A: If a mortgagee cannot obtain possession of a mortgaged
property for its sale on foreclosure, the mortgagee cannot
take the property by force but must institute the appropriate
action in the court.
a. He must bring a civil action for replevin either torecover such possession as preliminary step on the
extra-judicial foreclosure of the chattel mortgage or
b. judicial foreclosure.NOTE: Foreclosure can be:
1. public sale2. private sale, if stipulated by the parties
Two-bidder Rule
Q: What is the so-called Two-bidder rule?
A: There must be at least 2 participating bidders for the
auction sale to be valid.
Q: Does the two-bidder rule apply to chattel mortgage?
A: No, it only applies to pledge.
Twin Periods Rule
Q: What is the twin periods rule?
A:In case of the equity of redemption, the mortgagor has the
right to prevent the sale by paying the debt within 30 days
from default. So it is a grace period that the law affords in
favor of the mortgagor. Within the 30 days grace period there
must be a Notice of salegiven to the mortgagor.
Also, there must be a 10-day notice to the mortgagor prior to
the sale.
Claim of deficiency
Q: Can the mortgagee claim in case of deficiency?
A:
GR: Yes, mortgagee is entitled to recover deficiency.
XPNS:
1. Contrary stipulation2. Transactions covered by Recto Law (Art. 1484, NCC)
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3. In accommodation mortgages, the accommodationmortgagor is liable only to the extent of the value of
the mortgaged property;
4. Due to death of mortgagor.Q: In case of pledge, is a stipulation to recover deficiency
valid?
A: No, it is void.
Q: Does the claim for deficiency prescribe?
A: A mortgage action prescribes in 10 years from the time the
right of action accrues, that is, from the time the mortgagor
defaults in the payment of his obligation to the mortgagee
and not from the date of the execution of the mortgage
contract.
Accommodation mortgagor
Q: Who is an accommodation party?
A: He is a person who has signed the instrument as maker,
drawer, acceptor, or indoser without receiving value therefor,
and for the purpose of lending his name to some other
persons. He is liable on the instrument notwithstanding that
such holder at the time of taking the instrument knew such
person to be only an accommodation party. The
accommodation party has right, after paying the holder, to
obtain reimbursement from the party accommodated since
the relation between them is in effect that of principal and
surety, the accommodation party being the surety.
NOTE: Ordinarily, the debtor is also the mortgagor, but it is
also possible that a 3rd party may constitute a mortgage in
favor of the mortgagor. This arrangement is valid even if the
accommodating party does not receive anything.
Q: What is the extent of the liability of the accommodation
mortgagor?
A: His liability is limited only to the value of the property he
secured for another.
Death of mortgagor
Q: What is the remedy in case of death of the mortgagor?
A:
1. File a money claim against the estate (whether realproperty or personal property). If the mortgagee
chose this remedy, he is deemed to have abandoned
the mortgage and he lost priority.
2. To foreclose the mortgage by ordinary action incourt and recover any deficiency against the estate
in administration; and,
3. To foreclose without action at any time within theperiod allowed by the statute of limitations
Transactions covered by Recto Law
(Articles 1484 & 1485 of the civil code Civil Code)
ART. 1484. In a contract of sale of personal property the price of which is
payable in installments, the vendor may exercise any of the following
remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to
pay;
(2) Cancel the sale, should the vendee's failure to pay cover two
or more installments;
(3) Foreclose the chattel mortgage on the thing sold if one has
been constituted, should the vendee's failure to pay cover two or
more installments. In this case, he shall have no further action
against the purchaser to recover any unpaid balance of the price
Any agreement to the contrary shall be void.
Q: When does the Recto Law apply?
A:
1. Sale of personal property, the price of which ispayable in two or more installments
2. Contracts purporting to be leases of personaproperty with option to buy (Art. 1485, NCC)
Q: What are the requisites for the sale to be covered under
the Recto Law?
A:
1. Sale of personal property2. Payable in installments3. CM constituted over the same property
Q: Under the Recto Law, what are the remedies of theunpaid seller?
A:
1. Exact fulfillment of the obligation, should the vendeefail to pay (action for specific performance)
2. Cancel the sale, should the vendees failure to paycover two or more installments (rescission); or
3. Foreclose the chattel mortgage on the thing soldshould the vendees failure to pay cover 2 or more
installments.
Q: Can the unpaid seller avail of all remedies?
A:No, the remedies are alternative.
The three remedies under this article, available to the vendo
who has sold personal property on the installment plan, are
alternative, not cumulative. In other words, if the vendor has
elected to avail himself of any of the remedies, he is deemed
to have renounced the others (Tolentino, Vol.V).
Q: What is the reason for this rule?
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A: According to Sen. Tolentino, in case the vendor
elects to foreclose the mortgage, if one has been given
on the property, he is not obliged to return to the
purchaser the amount of the installment already paid
should there be an agreement to that effect, and it is
not unconscionable.
NOTE: In all proceedings for the foreclosure of chattelmortgages, executed on the chattels, which have been
sold on the installment plan, the mortgagee is limited to
the property only in the mortgage.
Thus, the principal object of Article 1484 was to remedy
the abuses committed in connection with the
foreclosure of chattel mortgages. This prevents
mortgagees from seizing the engaged property, buying
it at foreclosure for a low price and then bringing suit
against the mortgagor for the deficiency judgment. The
almost invariable result of this procedure was that themortgagor found himself minus the property and still
owing practically the full amount of the original
indebtedness.
NOTE: According to Dean Divina, the reason for this rule is to
encourage the mortgagee/creditor to make a reasonable
bid. If he bids at a low price, the company will record on its
book of accounts the deficiency as a loss. To prevent this
situation, the mortgagee will bid at a reasonable amount.
Art. 1484 not applicable in case mortgagee is not the vendor
Q: Does Article 1484 apply as against a mortgagee who is
not the venodor of the chattel mortgaged?
A: Art. 1484 of the NCC does not apply as against a
mortgagee who is not the vendor of the chattel mortgaged.
Thus, a suit for replevin is not equivalent to an exercise of the
remedy of foreclosure under Art. 1484 of the NCC. Hence, a
vendor-mortgagee is not barred from making a claim for
specific performance against the buyer-mortgagor, by the
mere fact that the former was already able to secure a writ of
replevin.
Rescission
NOTE: In rescission, there should be mutual restitution
except in case of stipulation of forfeiture of prior payments.
Replevin
Q: What is replevin?
A: It is the appropriate action to recover possession
preliminary to the extra-judicial foreclosure of a chatte
mortgage.
Q: Who can institute replevin suit?
A: It is not only the owner but also a person entitled to the
possession of the property can institute a replevin suit.
Q: In case of recovery of property through replevinpreparatory to foreclosure, is it a bar to avail of other
remedies?
A: Recovery of property through a replevin case preparatory
to foreclosure will not bar the other remedies if there was no
actual foreclosure. If sellermortgagee opts to file an action
for specific performance, he shall be deemed to have waived
his right as a mortgagee but may still levy on the mortgaged
property (on execution).
REPLEVIN
VOUNTARY INVOLUNTARYNot akin to foreclosure
Ex: surrender of the property
Not a bar to avail of other
remedies
XPN: if possession is in view
of dacion en pago
Akin to foreclosure; a bar to
other remedies which are
alternative
Q: Is the mortgagees letter informing the mortgagor of his
intent to foreclose is already considered a foreclosure of the
chattel?
A: No. A mere offer by the mortgagor to surrender the
chattel, not accepted by the mortgagee, does not preclude
the mortgagee from bringing suit to recover the balance o
the purchase price.
Q: Is mere demand sufficient to foreclose the object?
A: A mere demad to surrender the object which is not heeded
by the mortgagor will not amount to foreclosure, but the
repossession thereof by the vendor-mortgagee would have
the effect of foreclosure (Borbon II v. Servicewide Specialist,258 SCRA 634, 1996).
Q: Is a mortgagee of a personal property sold on
installments, after taking possession of the property, legally
obligated to foreclose the chattel mortgage and sell it at
public auction?
A: Having opted to foreclose the chattel mortgage, GAMI can
no longer cancel the sale. The three remedies of the vendor
in case the vendee defaults, in a contract of sale of persona
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property the price of which is payable in installment under
Article 1484 of the Civil Code, are alternative and cannot be
exercised simultaneously or cumulatively by the vendor-
creditor (Esguerra v. CA, 1989).
Q: What are included in the term debt which are
extinguished under the Recto Law?
A:
1. Principal2. Interest3. Cost of collection
Q: Who bears the necessary expenses incurred in the
prosecution by the mortgagee of the action for replevin to
regain possession of the chattel?
A:It is the mortgagor who bears such expenses.
Q: What does recoverable expense include?
A: It includes expenses properly incurred in affecting seizureof the chattel and reasonable attorneys fees in prosecuting
the action for replevin (Agustin v. CA, 271 SCRA 463, 1997).
NOTE: The cost of repossession which is brought by the
unjustified refusal of the mortgagor can still be recovered and
is not deemed extinguished.
Additional security
Q: What is the effect of the foreclosure as regards the
personal property which are not subject of the sale but are
given as additional security?
A: Under Art. 1484 of the NCC, the vendor of personal
property sold on installment who chooses the remedy of
foreclosure of the chattel mortgage is limited to the
foreclosure of the items sold only and not to the other items
not subject of the sale although also given as additional
securitty. The foreclosure of the latter is null and void (Ridad
v. Filipinas Investment and Finance Corporation, 120 SCRA
246, 1983).
All other additional securities are barred once the mortgagee
chose to foreclose. This also bars him from going against the
surety or guarantor.
Ridad v. Filipinas Investment and Finance Corporation
Having chosen to foreclose the chattel mortgage, and
bought the purchased vehicles at the public auction as
the highest bidder, it submitted itself to the
consequences of the law as specifically mentioned, by
which it is deemed to have renounced any and all rights
which it might otherwise have under the promissory
note and the chattel mortgage as well as the payment
of the unpaid balance.
Under the law, should the vendor choose to foreclose
the mortgage, he has to content himself with the
proceeds of the sale at the public auction of the chattel
which were sold on installment and mortgaged to him
and having chosen the remedy of foreclosure, he
cannot nor should he be allowed to insist on the sale ofthe house and lot of the vendees, for to do so would be
equivalent to obtaining a writ of execution against them
concerning other properties which are separate and
distinct from those which were sold on installment. This
would indeed be contrary to public policy and the very
spirit and purpose of the law, limiting the vendor's right
to foreclose the chattel mortgage only on the thing
sold.
IMPORTANT: SIMPLE LOAN v. RECTO LAW
SIMPLE LOAN RECTO LAW
Taking of property through replevin
The taking of possession by
replevin is not equivalent to
foreclosure
The taking of possession by
replevin is tantamount to
foreclosure which bars the
action for specific
performance
Remedies
1. Foreclosure2. Action for specific
performance
1. Action for specificperformance;
2. Cancellation orescission; or
3. Foreclose thechattel mortgage on
the thing sold
Suggested remedy
Foreclose! Dont even think
about it because you have a
lien in such case
Weigh the options
Recovery of deficiency
You can recover for
deficiency. And the right to
recover deficiency may be
enforced against any one of
the solidary co-debtors, ifany, and is not limited to the
mortgagor for the reason
that the chattel mortgage is
just a security, not a mode of
payment.
Precludes the mortgagee to
recover the deficiency
Effect of election of action for collection
Election of action for
collection is a bar to the
other remedy
If it is a transaction falling
under the Recto Law, its only
when the mortgagee actually
forecloses or elects the
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remedy of foreclosure that
he is subject to the rule that
he cannot recover any
unpaid claims.
So if he files an action for
collection and obtained
judgment then he can levy
any and all properties of the
mortgagor until the debt is
paid or satisfied.
NOTE: In case of transactions under the Recto Law, it is only
when there has been a foreclosure of the chattel mortgage
that the vendee-mortgagor would be permitted to escape
from deficiency liability. Hence, if the case is one for specific
performance, even when this action is selected after the
vendee has refused to surrender the mortgaged property to
permit n extra-judicial foreclosure, the property may still be
levied on execution.
Equity of redemption
Q: Is there a right of redemption in case of personal
properties?
A: None.
Q: When is equity of redemption may be exercised?
A: Equity of redemption may be exercised by the mortgagor
after his default in the performance of his obligation but
before the sale of the mortgaged property or confirmation of
sale.
Q: When is the right of redemption available?
A: The SC said that there are only 3 cases where there is a
right of redemption. And they do not involve personal
property. They only pertain to real property. There are only 3:
1. Extrajudicial foreclosure of Real Estate Mortgageunder Act 3135
2. Execution sale of a real property under the Rule 39of Rules of Court
3. Judicial foreclosure of a real estate mortgage, if themortgagee is a bank or a credit institution
NOTE: So the mortgagee cannot foreclose right away after
default. He has to give the mortgagor 30 days grace period.
That is what you call equity of redemption. The right of the
mortgagor to prevent the sale by paying the debt within 30
days from default. It is only when he failed the debt that
there can be actual foreclosure of chattel mortgage.
BANKING LAWS:
GENERAL BANKING ACT
BANK
Q: What are banks?
A:Entities engaged in the lending of funds obtained through
deposits from public.
Elements
Q: What are the elements determinative of a bank?
A:
1. Must be authorized by law;2. Accepts fund, in the form of a deposit, from the
public; and (there are at least 20 despositors)
3. Lends money to the public.NOTE: The fourth element under the old code, habituality
has been deleted.
Q: Is a transaction involving purchase of receivables
considered as banking transaction?
A: If it is a transaction not involving a loan but purchase
of receivables at a discount, it is well within the purview
of "investing, reinvesting or trading in securities" which an
investment company is authorized to perform and does not
constitute a violation of the General Banking Act.
This transaction is known as a deposit substitute.
NOTE: What is prohibited by law is for investment companies
to lend funds obtained from the public through receipts of
deposit, which is a function of banking institutions. But here
the funds supposedly "lent" to petitioners have not been
shown to have been obtained from the public by way of
deposits, hence, the inapplicability of banking laws (Baas v
Asia Pacific Finance Corp., 2000).
Paluwagan
Q: Describe the concept ofpaluwagan?
A: Even if there are more than 20 members, such is not
considered as banks: the funds are not obtained in the form
of deposits. It is for savings among its members.
Deposit-taking activity
Q: What is a deposit-taking activity?
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A: The funds given to the bank gives rise to a creditor-debtor
relationship. The ownership of the funds is thus transferred
to the banks and the latter are free to use the funds as it
pleases.
Deposit substitutes
Q: What are deposit substitutes?
A: It is an alternative form of obtaining funds from the public,
other than deposits, through the issuance, endorsement, or
acceptance of debt instruments, for the borrower's own
account, for the purpose of relending or purchasing of
receivables and other obligations. These instruments may
include, but need not be limited to, bankers acceptances,
promissory notes, participations, certificates of assignment
and similar instruments with recourse, and repurchase
agreements.
Quasi-banks
Q: What are quasi-banks?
A: These are entities engaged in the borrowing of funds
through the issuance, endorsement or assignment with
recourse or acceptance of deposit substitutes for purposes of
re-lending or purchasing of receivables and other obligations.
NOTE: Quasi-banks are also under BSP. They have to secure a
license from the BSP.
Banks vs. Quasi-Banks
BANKS QUASI-BANKS
Obtains funds from the
public in the form of deposit
Refer to entities engaged in
the borrowing of funds
through the issuance,
endorsement or assignment
with recourse or acceptance
of deposit substitutes for
purposes of relending or
purchasing of receivables and
other obligations
Deposits are insured with
PDIC
Not insured with PDIC
There is creditor-debtor
relationship
No creditor-debtor
relationshipMust secure from the Bangko Sentral ng Pilipinas (BSP)
Quo Warranto proceedings
Q: What is the appropriate proceeding to question a
corporation who performs functions of a bank without the
license from BSP?
A: Any corporation who does these functions and activities
without a corresponding license or approval from the SEC can
be ousted by way of quo warranto proceedings (Republic of
the Philippines v. Security Credit and Acceptance Corp, et al.
1967).
Classification of Banks
1. Universal banks can exercise the powers of aninvestment house and invest in nonallied enterprises
and have the highest capitalization requirement.
Capital: 4.950 billion
2. Commercial banks Ordinary banks governed by the GBLwhich have a lower capitalization requirement than
universal banks and can neither exercise the powers of
an investment house nor invest in nonallied enterprises.
Capital: 2.4 billion
3. Thrift banksThese are:a) Savings and mortgage banks;
b) Stock savings and loan associations;c) Private development banks, which are primarily
governed by the Thrift Banks Act (R.A. 7906).
4. Rural banks5. Cooperative banks6. Islamic banks7. Other classification of banks as determined by the
Monetary Board of the Bangko Sentral ng Pilipinas.
Bank power and liabilities
Universalbank a.
Powers of a commercial bankb. Power of an investment housec. Power to invest in the equities o
allied enterprises
d. Power to invest in the equities onon-allied enterprises
Commercial
bank
a. General power incident to acorporation
b. All such powers as may benecessary to carry on the business
of commercial banking such as
(ADD EBC):
1. Accepting drafts and issuing LCs2. Discounting and negotiating
promissory notes, drafts, bills
of exchange, and othe
evidence of indebtedness
3. Accepting or creating demanddeposits
4. Receiving other types odeposit and deposit substitute
5. Buying and selling foreignexchange and gold or silve
bullion
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6. Acquiring marketable bondsand other debt securities and
extending credit
c. Power to invest in the equities ofallied enterprises
NOTE: Whatever a commercial bank can do, a universal bank
can also perform
Allied and non-allied transactions
Q: What do you mean by to invest in equity?
A: It means to be a stockholder of another corporation
Q: What are allied or related undertakings?
A: Any undertaking which is about money such as:
a. Foreign exchangeb. Leasingc. Investment companyd. Insurance companye. Warehousing
NOTE: An example of non-allied undertaking is cargo
operations.
Q: What are the kinds of underwriting agreements?
A:
FIRM COMMITMENT BEST EFFORTS
Those which are considered
as sold
underwriter does not
guarantee that it will sell the
entire
The underwriter purchases
outright the securities and
then resells the same
The underwriter merely sells
for commission
Banking and incidental powers
Q: What are the other services that a bank may offer?
A:
1. receive in custody funds, documents, and othervaluable objects
2. act as financial agent and buy and sell for theaccount securities
3. make collections and payments for the account ofothers
4. perform such other services not incompatible withbanking business and;
5. upon prior approval of the BSP, act as manageradviser of investment management accounts
6. rent out safety deposit boxRenting out of deposit box
Q: Is a safety deposit box a form of deposit or lease?
A: The contract for the use of a safe deposit box should be
governed by the law on lease.
Under the old banking law, a safety deposit box is a specia
deposit. However, the new General Banking Law, while
retaining the renting of safe deposit box as one of the
services that the bank may render, deleted reference to
depository function.
Sia v. Court of appeals
Justice Edgardo Paras was of the opinion that the contract fo
the use of safety deposit box is governed by the law on lease
The Supreme Court did not agree with him and said that
contract for the use of safety deposit box is a special kind o
deposit. In other words the bank must exercise the due
diligence required of depository in safekeeping or preserving
of the object inside the safety deposit box.
The basis for this is that under the Old General Banking Act, it
provided that in renting out safety deposit boxes the bank
shall act as a depositary. Because the law itself provides for
this SC concluded that the contract for the use of safety
deposit box is governed by deposits.
New Law retains the authority of the Bank to rent out safety
deposit box but silent on being a depositary.
Power to acquire real properties
Q: Can the bank acquire real property in settlement of a civi
liability arising from a crime?
A: Generally, no.
XPNS: It can only acquire real property when:
a. it is needed for business (Business)b. as shall be conveyed to it in satisfaction of debts
previously contracted in the course of its
dealings (Dacion en pago)
c. as shall be mortgaged to it in good faith by wayof security of debts (foreclosure)
d. as it shall purchase at sales under judgments,decrees, mortgages, or trust deeds (executionsale to satisfy judgment)
NOTE: Any property acquired under b-d should be disposed
of within 5 years from the acquisition because the bank is not
a realty company.
Q: Can banks acquire ownership of real property by virtue of
the deed of transfer executed by its former employee in
satisfaction of a civil liability arising from the crimina
offense?
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A: Abank cannot acquire ownership of real property by virtue
of the deed of transfer executed by its former employee in
satisfaction of a civil liability arising from the criminal offense
since debts referred to in the law are only those resulting
from previous loans and similar transactions made or entered
into by a bank in the ordinary course of its business.
Diligence required of banks
Q: What is the degree of diligence required of banks in
handling deposits?
A: Extraordinary diligence. The appropriate standard of
diligence must be very high, if not the highest, degree of
diligence; highest degree of care (PCI Bank vs. CA, 350 SCRA
446, PBCom vs. CA, 2001)
Q: Does the bank need to exercise extraordinary diligence
in all commercial transactions?
A: No, the degree of diligence required of banks, is more thanthat of a good father of the family where the fiduciary nature
of their relationship with their depositors is concerned, that
is, depositary of deposits. But the same higher degree of
diligence is not expected to be exerted by banks in
commercial transactions that do not involve their fiduciary
relationship with their depositors, such as sale and issuance
of foreign exchange demand draft. (Reyes v. CA, 2001)
Q: In what transactions this highest degree of care or
diligence is applied?
A: This applies only to cases where banks are acting in their
fiduciary capacity, that is, as depository of the deposits of
their depositors. (Reyes v. CA, G.R. No. 118492, 2001)
NOTE: The General Banking Law of 2000 requires banks the
highest degree of standards of integrity and performance.
Hence, a bank is under obligation to treat the accounts of its
depositors with meticulous care (Philippine Savings Bank v.
Chowking Food Corporation, 2008).
Q: What is the effect when the teller gave the passbook to a
wrong person?
A: If the teller gives the passbook to the wrong person, theywould be clothing that person presumptive ownership of the
passbook, facilitating unauthorized withdrawals by that
person. For failing to return the passbook to authorized
representative of the depositor, the bank presumptively
failed to observe such high degree of diligence in
safeguarding the passbook and insuring its return to the party
authorized to receive the same. The banks liability, however,
is mitigated by the depositors contributory negligence in
allowing a withdrawal slip signed by authorized signatories to
fall into the hands of an impostor. (Consolidated Bank and
Trust Corporation vs. CA, 2003).
Q: Did a bank exercise the diligence required when the
pretermination of the account is allowed despite
discrepancies in the signature and photograph of the person
claiming to be the depositor and failure to surrender the
original certificate of time deposit?
A: No. The bank is negligent because the depositor did not
present the certificate of deposit
Q: Is the bank liable when an employee encashed a check
without the requisite of endorsement?
A: Yes. The fiduciary nature of the relationship between the
bank and the depositors must always be of paramount
concern. (Philippine Savings Bank vs. Chowking, 2008).
NOTE: In a checking transaction, the drawee bank has the
duty to verify the genuineness of the signature of the drawer
and to pay the checks strictly in accordance with the drawersinstructionsto the named payee in the check. Otherwise
the drawee will be violating the instructions of the drawer
and it shall be liable for the amount charged to the drawers
account. The drawee bank had the responsibility to ascertain
the regularity of the endorsements, and the genuineness of
the signatures on the checks before accepting them fo
deposit. Thus, banks are minded to treat their customers
accounts with utmost care, confidence, and dishonesty (PNB
v. Rodriguez, et al., 566 SCRA 513, 2008).
Nature of bank funds and bank deposits
Q: What law governs bank deposits?
A: The law on loans. Creditor and debtor relationship is
created between the Bank and the depositors.
Q: What is the nature of a bank deposit?
A:All kinds of bank deposits are loan. The bank can make use
as its own the money deposited. Said amount is not being
held in trust for the depositor nor is it being kept for
safekeeping.
Bank not a trustee
Q: Is a bank a trustee?
A: No, the fiduciary nature of a bank-depositor relationship
does not convert the contract between the bank and its
depositors from a simple loan to trust agreement. Failure by
the bank to pay the depositor is failure to pay a simple loan
and not a breach of trust.
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Mandamus will not lie
Q: In the enforcement of obligations concerning deposit, will
the remedy of mandamus lie?
A: No, because all kinds of deposit are loans. Thus, the
relationship being contractual in nature, mandamus cannot
be availed of because mandamus will not lie to enforce the
performance of contractual obligations.
Q: After procuring a checking account, the depositor issued
several checks. He was surprised to learn later that they had
been dishonored for insufficient funds. Investigation
disclosed that deposits made by the depositor were not
credited to its account. Is the bank liable for damages?
A: Yes, the depositor expects the bank to treat his account
with utmost fidelity, whether such account consist only of a
few hundred pesos or of millions. The bank must record every
single transaction accurately, down to the last centavo, and
as promptly as possible. This has to be done if the account isto reflect at any given time the amount of money the
depositor can dispose of as he sees fit, confident that the
bank will deliver it as and to whomever he directs. A blunder
on the part of the bank, such as the dishonor of the check
without good reason, can cause the depositor not a little
embarrassment if not also financial loss and perhaps even
civil and criminal litigation.
Stipulation of interest
NOTE: Circular 905 suspended the Usury Law, but it has
not been repealed.
Circular 905 lifted the ceiling on the interest rate. The
bank and its depositors are therefore free to stipulate
on the rate of interest for loans. Nev