1 Banking Law I I. General Concepts

BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 1

BANKING LAW I

I. GENERAL CONCEPTS campaign undertaken by the corporation, the same had managed to induce the public to open 59,463 savings deposit accounts. A. CONCEPT OF BANKING ISSUE a. Definition: Banks shall refer to entities engaged in the lending of Whether the corporation is engaged in banking funds obtained in the form of deposits (Sec. 3.1, GBL)

RULING b. Elements: YES. It is clear that these transactions partake of the nature of banking, as i. Engaged in lending of funds the term is used in Section 2 of the General Banking Act. Indeed, a bank ii. Obtained in the form of deposits has been defined as: iii. From the public, which shall mean 20 or more persons ... a moneyed institute [Talmage vs. Pell 7 N.Y. (3 Seld. ) 328, 347, (Sec. 8.2, GBL) 348] founded to facilitate the borrowing, lending and safe-keeping

of money (Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243, REPUBLIC v SECURITY CREDIT AND ACCEPTANCE CORPORATION, 19 255 U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills of SCRA 58 (1967) exchange, and credits (State vs. Cornings Sav. Bank, 115 N.W. 937,

139 Iowa 338). (Banks & Banking, by Zellmann Vol. 1, p. 46). DOCTRINE: A bank is a moneyed institute founded to facilitate the borrowing, lending and safekeeping of money and to deal in notes, bills of Moreover, it has been held that: exchange and credits. An investment company, which lends out the money An investment company which loans out the money of its customers, of its customers, collects the interest and charges a commission to both collects the interest and charges a commission to both lender and borrower, lender and borrower, is a bank. is a bank. (Western Investment Banking Co. vs. Murray, 56 P. 728, 730, FACTS 731; 6 Ariz 215.) This is a quo warranto proceeding, initiated by the Solicitor General, to ... any person engaged in the business carried on by banks of dissolve the Security and Acceptance Corporation for allegedly engaging in deposit, of discount, or of circulation is doing a banking business, banking operations without the authority required therefor by the General although but one of these functions is exercised. (MacLaren vs. Banking Act (Republic Act No. 337). State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas. 826; 9 C.J.S. 30.) Security Credit and Acceptance Corporation is a duly registered corporation with the SEC. It’s articles of incorporation authorize it to o engage primarily Accordingly, defendant-corporation has violated the law by engaging in in financing agricultural, commercial and industrial projects, and banking without securing the administrative authority required in Republic secondarily, in buying and selling stocks and bonds of any corporation. Act No. 337.

The Superintend of Banks of the Central Bank of the Philippines thru its legal That the illegal transactions thus undertaken by defendant corporation counsel rendered an opinion that Security Credit and Acceptance warrant its dissolution is apparent from the fact that the foregoing misuser Corporation is a banking institution within the purview of Republic Act No. of the corporate funds and franchise affects the essence of its business, that 337. Central Bank advised the corporation to comply with the requirements it is willful and has been repeated 59,463 times, and that its continuance of the General Banking Act. inflicts injury upon the public, owing to the number of persons affected thereby. Notwithstanding, the corporation, as well as the members of its Board of Directors and the officers of the corporation, continued performing the CENTRAL BANK v MORFE, 20 SCRA 507 (1967) functions and activities which had been declared to constitute illegal banking operations; the corporation established 74 branches in principal cities and DOCTRINE: The law requiring compliance with certain requirements before towns throughout the Philippines; that through a systematic and vigorous anybody can engage in banking obviously seeks to protect the public against actual, as well as potential, injury.

FACTS expressly denied the right to vote or be voted for, their privileges and First Mutual Savings and Loan Organization (Organization) is a registered benefits being limited to those, which the BoT may in its discretion, non-stock corporation, whose main purpose is “to encourage x x x and determine from time to time. Thus, the membership of the “participating implement savings and thrift among its members, and to extend financial members” is purely nominal in nature. This situation is fraught, precisely, assistance in the form of loans” to them. with the very dangers or evils, which RA 337 seeks to forestall, by exacting compliance with the requirements of said Act, before the transactions in In 1962, the Central Bank Legal Department rendered an opinion finding the question could be undertaken. Organization as a banking institution, falling within the purview of the Central Bank Act. Hence, it applied for a search warrant with the Municipal BANAS v ASIA PACIFIC FINANCE CORPORATION, 343 SCRA 527 Court of Manila against the Organization, alleging that it was engaged in (2000) illegal banking activities, “by receiving deposits of money for deposit, disbursement, safekeeping or otherwise or transacts the business of a DOCTRINE: An investment company refers to any issuer, which is or holds savings and mortgage bank and/or building and loan association x x x itself out as being engaged or proposes to engage primarily in the business without having first complied with the provisions of RA 337. of investing, reinvesting or trading in securities. What is prohibited by law is for investment companies to lend funds obtained from the public through Judge Cancino issued the warrant applied for there being “good and receipts of deposit, which is a function of banking institutions. sufficient reasons to believe” that the Organization has under its control the articles/items subject of the offense complained of. On the same day, the FACTS Organization commenced an action with the CFI of Manila against the Teodoro Banas issued a Promissory Note (P.N.), amounting to 390k payable Municipal Court, the sheriff, the Manila Police Department and the Central in installments, in favor of C. G. Dizon Construction. Later, Dizon Bank to annul the search warrant on the ground that it was issued with Construction endorsed the P.N to Asia Pacific Finance Corporation, an GADLEJ. After due hearing, Judge Morfe (CFI Manila) issued an order in investment house. As security for the endorsement, Dizon Construction favor of the Organization. made a Chattel Mortgage over 3 heavy equipment units. As additional security, Cenen Dizon, president of Dizon Construction, executed a Accordingly, the Bank moved for reconsideration but was denied and Continuing Undertaking, bounding himself to pay the obligation jointly and commenced the present action. severally.

ISSUE At first, Dizon Construction complied with the installments. However, it Whether the Organization is a banking institution within the purview of the defaulted in its payment of the remaining installments. Asia Pacific sued Central Bank Act Banas and Dizon Construction for payment of the P.N.. Banas and Dizon Construction argue that the transaction was never intended to be legal but a RULING subterfuge to conceal the loan of 390k with usurious interest. They both YES. The records suggested clearly that the transactions objected to by the claim that Asia Pacific proposed the scheme with them involved because Central Bank constitute the general pattern of the business of the Asia Pacific could not engage in banking business. Organization. Indeed, the main purpose thereof, according to its By-Laws, is “to extend financial assistance, in the form of loans, to its members, with RTC ruled in favor of Asia Pacific. CA affirmed the decision. funds deposited by them. ISSUE It is true that such funds are referred to as their “savings” and that the Whether the transaction violated banking laws, hence null and void depositors thereof are designated as “members,” but, even a cursory examination of said documents will readily show that anybody can be a RULING depositor and thus be “participating member.” In other words, the NO, it did not violate banking laws. Organization is open to the public for deposit accounts, and the funds so raised may be lent by the Organization. An investment company refers to any issuer which is or holds itself out as being engaged or proposes to engage primarily in the business of investing, Moreover, the power to dispose of said funds is placed under the exclusive reinvesting or trading in securities. securities include commercial papers authority of the “founding members,” and “participating members” are evidencing indebtedness of any person, financial or non-financial entity,

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 3 irrespective of maturity, issued, endorsed, sold, transferred or in any manner conveyed to another with or without recourse, such as promissory The determination of whether a person or entity is performing notes. The transaction between the two was a purchase of receivables at a banking or quasi-banking functions without Bangko Sentral discount and not a loan. Such act is within the purview of the functions of an authority shall be decided by the Monetary Board. To resolve such investment company. issue, the Monetary Board may, through the appropriate supervising and examining department of the Bangko Sentral, Moreover, Sec 2 of the General Banking Act provides, examine, inspect or investigate the books and records of such person or entity. Upon issuance of this authority, such person or Sec. 2. Only entities duly authorized by the Monetary Board of the entity may commence to engage in banking operations or quasi- Central Bank may engage in the lending of funds obtained from the banking functions and shall continue to do so unless such authority public through the receipt of deposits of any kind, and all entities is sooner surrendered, revoked, suspended or annulled by the regularly conducting such operations shall be considered as banking institutions and shall be subject to the provisions of this Act, of the Bangko Sentral in accordance with this Act or other special laws Central Bank Act, and of other pertinent laws (Sec. 6, Par. 1-2, GBL)

What is prohibited by law is for investment companies to lend funds C. BANKS DISTINGUISHED FROM OTHER FINANCIAL obtained from public through receipts of deposit. However, the funds INSTITUTIONS obtained by Asia Pacific have not been shown to have been obtained from a. Investment Houses: Sec. 2-3, PD 129 the public through deposits. Thus, no banking laws were violated. Section 2. Scope. Any enterprise, which engages in the underwriting of securities of other corporations, shall be Upon further inspection of the 3 documents (Promissory Note / Chattel considered an "Investment House" and shall be subject to the Mortgage / Continuing Undertaking) , the documents failed to prove the provisions of this Decree and of other pertinent laws. theory that the transaction was a loan. Petitioners are still liable for the unpaid balance of the P.N. Nothing in this Decree shall be understood to preclude other enterprises from engaging in the mere buying and selling of B. BANKING DISTINGUISHED FROM QUASI-BANKING short-term securities of other persons or enterprises. a. Elements of Quasi-Banking: "Quasi-Banks" shall refer to entities engaged in the borrowing of funds through the issuance, Section 3. Definitions. For the purpose of this Decree, unless the endorsement or assignment with recourse or acceptance of context otherwise indicates, the following definition of terms are deposit substitutes as defined in Section 95 of Republic Act No. hereby adopted: 7653 (hereafter the "New Central Bank Act") for purposes of (a) "Underwriting" is the act or process of guaranteeing the relending or purchasing of receivables and other obligations distribution and sale of securities of any kind issued by (Sec. 4, Par. 3, GBL) another corporation. i. Borrowing of funds for borrower’s own account ii. From 20 or more lenders at any one time (b) "Securities" are written evidences of ownership, interest, iii. Through issuance, endorsement or assignment with recourse or participation, in an enterprise, or written evidences of of acceptance of deposit substitutes (Sec. 95, NCBA) indebtedness of a person or enterprise. It includes, but is iv. For purposes of relending or purchasing of receivables and not limited to the instruments enumerated in Section 2 of other obligations the Securities Act (Commonwealth Act No. 83, as amended).

b. Requirement of Separate License: No person or entity shall b. Financing Companies: "Financing companies," hereinafter engage in banking operations or quasi-banking functions without called companies, are corporations, or partnerships, except those authority from the Bangko Sentral: Provided, however, That an regulated by the Central Bank of the Philippines, the Insurance entity authorized by the Bangko Sentral to perform universal or Commissioner and the Cooperatives Administration Office, which commercial banking functions shall likewise have the authority to are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or engage in quasi-banking functions. agricultural enterprises, either by discounting or factoring

commercial papers on accounts receivable, or by buying and g. Pawnshops: "Pawnshop" shall refer to a person or entity selling contracts, leases, chattel mortgages, or other evidences of engaged in the business of lending money on personal property indebtedness, or by leasing of motor vehicles, heavy equipment delivered as security for loans and shall be synonymous, and may and industrial machinery, business and office machine and be used interchangeably, with pawnbroker or pawnbrokerage equipment, appliances and other movable property (Sec. 3(a), (Sec. 3, PD 114) RA 5980, as amended by RA 8556) FIRST PLANTERS PAWNSHOP, INC. v CIR, 560 SCRA 606 (2008) c. Investment Companies: "Investment Company" means any issuer which is or holds itself out as being engaged primarily, or DOCTRINE: A pawnshop's business and operations are governed by proposes to engage primarily, in the business of investing, Presidential Decree (P.D.) No. 114 or the Pawnshop Regulation Act and reinvesting, or trading in securities(Sec. 4, RA 2629) Central Bank Circular No. 374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114 defines pawnshop as “a person or entity engaged d. Non-Stock Savings and Loans Associations: Non-stock in the business of lending money on personal property delivered as security savings and loan association shall mean a non-stock, non-profit for loans and shall be synonymous, and may be used interchangeably, with corporation engaged in the business of accumulating the savings pawnbroker or pawn brokerage.” of its members and using such accumulations for loans to members to service the needs of households by providing long That pawnshops are to be treated as non-bank financial intermediaries is term financing for home building and development and for further bolstered by the fact that pawnshops are under the regulatory personal finance (Sec. 3, RA 8367) supervision of the Bangko Sentral ng Pilipinas and covered by its Manual of Regulations for Non-Bank Financial Institutions. e. Cooperatives: A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily FACTS joined together to achieve a lawful common social or economic In a Pre-Assessment Notice, petitioner was informed by the BIR that it has end, making equitable contributions to the capital required and an existing tax deficiency on its VAT and DST liabilities for the year accepting a fair share of the risks and benefits of the undertaking 2000. The deficiency assessment was at P541,102.79 for VAT in accordance with universally accepted cooperative principles and P23,646.33 for DST. Petitioner protested the assessment for lack of (Art. 3, RA 6938) legal and factual bases. Petitioner subsequently received a Formal

Assessment Notice, directing payment of VAT deficiency in the amount A cooperative bank is one organized by the majority shares of of P541,102.79 and DST deficiency in the amount of P24,747.13, inclusive which is owned and controlled by cooperatives primarily to of surcharge and interest. Petitioner filed another protest but was denied. provide financial and credit services to cooperatives. The term Petitioner then filed a petition for review with the Court of Tax Appeals "cooperative bank" shall include cooperative rural banks (Art. (CTA) but it was denied. Petitioner later sought reconsideration from the 100, RA 6983) CTA En Banc but was still denied thus this case.

f. Insurance Companies: The term "doing an insurance business" First Planters Pawnshop, Inc. (petitioner) contests the deficiency value- or "transacting an insurance business", within the meaning of this added and documentary stamp taxes imposed upon it by the Bureau of Code, shall include (a) making or proposing to make, as insurer, Internal Revenue (BIR) for the year 2000. The core of petitioner's argument any insurance contract; (b) making or proposing to make, as is that it is not a lending investor within the purview of Section 108(A) of surety, any contract of suretyship as a vocation and not as the National Internal Revenue Code (NIRC), as amended, and therefore not merely incidental to any other legitimate business or activity of subject to value-added tax (VAT). Petitioner also contends that a pawn the surety; (c) doing any kind of business, including a ticket is not subject to documentary stamp tax (DST) because it is not proof reinsurance business, specifically recognized as constituting the of the pledge transaction, and even assuming that it is so, still, it is not doing of an insurance business within the meaning of this Code; subject to tax since a documentary stamp tax is levied on the document (d) doing or proposing to do any business in substance issued and not on the transaction. equivalent to any of the foregoing in a manner designed to evade

the provisions of this Code (Sec. 2, PD 612)

ISSUE petitioner is not liable for VAT during these tax years. But with the full Whether Petitioner is liable for the assessed VAT and DST deficiency implementation of the VAT system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable for 10% VAT for said tax RULING year. And beginning 2004 up to the present, by virtue of R.A. No. 9238, The tax liability shall be based on the tax treatment of pawnshops. The petitioner is no longer liable for VAT but it is subject to percentage tax on Court has ruled that they shall be treated as non-bank financial gross receipts from 0% to 5 %, as the case may be. intermediaries and reasons as follows: Regarding the liability on DST, the court ruled that petitioner is liable for R.A. No. 337, as amended, or the General Banking Act characterizes the said tax. The Court has settled this issue in Michel J. Lhuillier Pawnshop, terms banking institution and bank as synonymous and interchangeable and Inc. v. Commissioner of Internal Revenue, in which it was ruled that the specifically include commercial banks, savings bank, mortgage banks, subject of DST is not limited to the document alone. Pledge, which is an development banks, rural banks, stock savings and loan associations, and exercise of a privilege to transfer obligations, rights or properties incident branches and agencies in the Philippines of foreign banks. R.A. No. 8791 or thereto, is also subject to DST. the General Banking Law of 2000, meanwhile, provided that banks shall refer to entities engaged in the lending of funds obtained in the form of In the instant case, there is no law specifically and expressly exempting deposits. R.A. No. 8791 also included cooperative banks, Islamic banks and pledges entered into by pawnshops from the payment of DST. Section 199 other banks as determined by the Monetary Board of of the NIRC enumerated certain documents, which are not subject to stamp the Bangko Sentral ng Pilipinas in the classification of banks. tax; but a pawnshop ticket is not one of them. Hence, petitioner’s nebulous claim that it is not subject to DST is without merit. Financial intermediaries, on the other hand, are defined as “persons or entities whose principal functions include the lending, investing or D. NATURE OF BANKING BUSINESS placement of funds or evidences of indebtedness or equity deposited with The State recognizes the vital role of banks in providing an them, acquired by them, or otherwise coursed through them, either for their environment conducive to the sustained development of the national own account or for the account of others.” economy and the fiduciary nature of banking that requires high standards of integrity and performance. In furtherance thereof, the It need not be elaborated that pawnshops are non-banks/banking State shall promote and maintain a stable and efficient banking and institutions. Moreover, the nature of their business activities partakes that financial system that is globally competitive, dynamic and responsive of a financial intermediary in that its principal function is lending. to the demands of a developing economy (Sec. 2, GBL)

A pawnshop's business and operations are governed by Presidential Decree a. Vital Role in Economy (P.D.) No. 114 or the Pawnshop Regulation Act and Central Bank Circular No. 374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114 SIMEX INTERNATIONAL (MANILA) INC. v CA, 183 SCRA 360 (1992) defines pawnshop as “a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be DOCTRINE: As a business affected with public interest and because of the synonymous, and may be used interchangeably, with pawnbroker or pawn nature of its functions, the bank is under obligation to treat the accounts of brokerage.” its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. That pawnshops are to be treated as non-bank financial intermediaries is further bolstered by the fact that pawnshops are under the regulatory FACTS supervision of theBangko Sentral ng Pilipinas and covered by its Manual of Simex was a food exporter that drew stock in the Philippines then sold it Regulations for Non-Bank Financial Institutions. The Manual includes abroad. It deposited 100k in Traders Royal Bank , raising the balance to pawnshops in the list of non-bank financial intermediaries, P190,380.74, then later issued checks that were suddenly dishonored – California Manufacturing and others issued demand letters for the Coming now to the issue at hand - Since petitioner is a non-bank financial dishonored check. Simex’s credit line was canceled because of the intermediary, it is subject to 10% VAT for the tax years 1996 to dishonored check – Traders bank said the deposit of 100k was not credited, 2002; however, with the levy, assessment and collection of VAT from non- the error was rectified but Simex filed a case against the bank and bank financial intermediaries being specifically deferred by law,[34] then demanded reparation for gross and wanton negligence: not met – complaint

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 6 for 1m moral and 500k exemplary damages + 25% atty. fees and costs – conservatorship was maintained. CFI: moral and exemplary damages not called for, but nominal damages 20k plus 5k atty. fees – affirmed by CA Later on, PBP filed an action for damages against CB and MB. The suit prayed for the lifting of the conservatorship and payment of damages ISSUE allegedly suffered by PBP due to the malicious and untimely declaration of Was there Gross negligence in not crediting the deposit? conservatorship. It also prayed for a preliminary injunction /TRO against the RULING conservatorship. RTC granted the injunction. YES. Banking system: indispensable institution in modern world; plays vital ISSUE role in economic life of every civilized nation. – Trusted and active associate Whether the conservatorship was proper – depositor expects bank to treat account with utmost fidelity, must record each transaction accurately – Fiduciary nature of relationship – Traders was HELD remiss in duty – 20k moral damages, 50k exemplary (by way of example or YES. It must be stressed in this connection that the banking business is correction for the public good) properly subject to reasonable regulation under the police power of the state because of its nature and relation to the fiscal affairs of the people and the Subject to Reasonable Regulation by the State revenues of the state. 55 Banks are affected with public interest because CENTRAL BANK OF THE PHILIPPINES v CA, 208 SCRA 652 (1992) they receive funds from the general public in the form of deposits. Due to the nature of their transactions and functions, a fiduciary relationship is DOCTRINE: It is the Government’s responsibility to see to it that the created between the banking institutions and their depositors. Therefore, financial interests of those who deal with banks and banking institutions, as banks are under the obligation to treat with meticulous care and utmost depositors or otherwise, are protected—this task is delegated to the Central fidelity the accounts of those who have reposed their trust and confidence in Bank, which is authorized to administer monetary, banking and credit them. system in the Philippines. It is then Government's responsibility to see to it that the financial interests FACTS of those who deal with banks and banking institutions, as depositors or During the regular examination of the Producers Bank of the Philippines, otherwise, are protected. In this country, that task is delegated to the Central Bank examiners stumbled upon some highly questionable loans Central Bank which, pursuant to its Charter, 57 is authorized to administer which had been extended by the PBP management to several entities. Upon the monetary, banking and credit system of the Philippines. Under both the further examination, it was discovered that these loans, totalling 1973 and 1987 Constitutions, the Central Bank is tasked with providing approximately P300 million, were "fictitious" as they were extended, without policy direction in the areas of money, banking and credit; corollarily, it shall collateral, to certain interests related to PBP owners themselves. Said loans have supervision over the operations of banks. 58 Under its charter, the CB were deemed to be anomalous particularly because the total paid-in capital is further authorized to take the necessary steps against any banking of PBP at that time was only P 140.544 million. This means that the entire institution if its continued operation would cause prejudice to its depositors, paid-in capital of the bank, together with some P160 million of depositors' creditors and the general public as well. This power has been expressly money, was utilized by PBP management to fund these unsecured loans. recognized by this Court. In Philippine Veterans Bank Employees Union- NUBE vs. Philippine Veterans Bank, 59 this Court held that: Several blind items about a family-owned bank in Binondo which granted . . . Unless adequate and determined efforts are taken by the fictitious loans to its stockholders appeared in major newspapers. These government against distressed and mismanaged banks, public faith news items triggered a bank-run in PBP which resulted in continuous over- in the banking system is certain to deteriorate to the prejudice of drawings on the bank's demand deposit account with the Central Bank. the national economy itself, not to mention the losses suffered by the bank depositors, creditors, and stockholders, who all deserve The Monetary Board (MB), pursuant to its authority under Section 28-A of the protection of the government. The government cannot simply R.A. No. 265 and by virtue of MB Board Resolution No. 164, placed PBP cross its arms while the assets of a bank are being depleted through under conservatorship. mismanagement or irregularities. It is the duty of the Central Bank in such an event to step in and salvage the remaining resources of The Monetary Board gave PBP several opportunities to submit a viable the bank so that they may not continue to be dissipated or rehabilitation plan in order to salvage the bank and lift the conservatorship. plundered by those entrusted with their management. PBP failed to respond to the notices of the Monetary Board, hence the

Strikes and Lockouts or loss of employment status or payment by the locking-out employer of The banking industry is hereby declared as indispensable to the national backwages, damages and other affirmative relief, even criminal prosecution interest and, not withstanding the provisions of any law to the contrary, any against either or both of them. strike or lockout involving banks, if unsettled after seven (7) calendar days shall be reported by the Bangko Sentral to the Secretary of Labor who may The foregoing notwithstanding, the President of the Philippines shall not be assume jurisdiction over the dispute or decide it or certify the same to the precluded from determining the industries that, in his opinion, are National Labor Relations Commission for compulsory arbitration. However, indispensable to the national interest, and from intervening at any time and the President of the Philippines may at any time intervene and assume assuming jurisdiction over any such labor dispute in order to settle or jurisdiction over such labor dispute in order to settle or terminate the same terminate the same (Art. 263 (g), Labor Code) (Sec. 22, GBL) b. Fiduciary Nature of Banking Business When, in his opinion, there exists a labor dispute causing or likely to cause a i. Degree of Diligence Required strike or lockout in an industry indispensable to the national interest, the Secretary of Labor and Employment may assume jurisdiction over the SIMEX INTERNATIONAL (MANILA) INC. v CA, 183 SCRA 360 (1992) dispute and decide it or certify the same to the Commission for compulsory arbitration. Such assumption or certification shall have the effect of DOCTRINE: As a business affected with public interest and because of the automatically enjoining the intended or impending strike or lockout as nature of its functions, the bank is under obligation to treat the accounts of specified in the assumption or certification order. If one has already taken its depositors with meticulous care, always having in mind the fiduciary place at the time of assumption or certification, all striking or locked out nature of their relationship. employees shall immediately return-to-work and the employer shall immediately resume operations and readmit all workers under the same FACTS terms and conditions prevailing before the strike or lockout. The Secretary Simex was a food exporter that drew stock in the Philippines then sold it of Labor and Employment or the Commission may seek the assistance of abroad. It deposited 100k in Traders Royal Bank , raising the balance to law enforcement agencies to ensure compliance with this provision as well P190,380.74, then later issued checks that were suddenly dishonored – as with such orders as he may issue to enforce the same. California Manufacturing and others issued demand letters for the dishonored check. Simex’s credit line was canceled because of the In line with the national concern for and the highest respect accorded to the dishonored check – Traders bank said the deposit of 100k was not credited, right of patients to life and health, strikes and lockouts in hospitals, clinics the error was rectified but Simex filed a case against the bank and and similar medical institutions shall, to every extent possible, be avoided, demanded reparation for gross and wanton negligence: not met – complaint and all serious efforts, not only by labor and management but government for 1m moral and 500k exemplary damages + 25% atty. fees and costs – as well, be exhausted to substantially minimize, if not prevent, their adverse CFI: moral and exemplary damages not called for, but nominal damages effects on such life and health, through the exercise, however legitimate, by 20k plus 5k atty. fees – affirmed by CA labor of its right to strike and by management to lockout. In labor disputes adversely affecting the continued operation of such hospitals, clinics or ISSUE medical institutions, it shall be the duty of the striking union or locking-out Was there Gross negligence in not crediting the deposit? employer to provide and maintain an effective skeletal workforce of medical and other health personnel, whose movement and services shall be RULING unhampered and unrestricted, as are necessary to insure the proper and YES. Banking system: indispensable institution in modern world; plays vital adequate protection of the life and health of its patients, most especially role in economic life of every civilized nation. – Trusted and active associate emergency cases, for the duration of the strike or lockout. In such cases, – depositor expects bank to treat account with utmost fidelity, must record therefore, the Secretary of Labor and Employment may immediately each transaction accurately – Fiduciary nature of relationship – Traders was assume, within twenty four (24) hours from knowledge of the occurrence of remiss in duty – 20k moral damages, 50k exemplary (by way of example or such a strike or lockout, jurisdiction over the same or certify it to the correction for the public good) Commission for compulsory arbitration. For this purpose, the contending parties are strictly enjoined to comply with such orders, prohibitions and/or injunctions as are issued by the Secretary of Labor and Employment or the Commission, under pain of immediate disciplinary action, including dismissal

BANK OF THE PHILIPPINE ISLANDS v IAC, 206 SCRA 408 (1992) 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 DOCTRINE: The is no merit in the argument that a bank should not be the account is to reflect at any given time the amount of money the considered negligent, much less held liable for damages on account of the depositor can dispose of as he sees fit, confident that the bank will deliver it inadvertence of its bank employees for Article 1173 of the Civil Code only as and to whomever he directs. A blunder on the part of the bank, such as requires it to exercise the diligence of a good father of the family. the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and While the bank’s negligence may not have been attended with malice and criminal litigation." bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation to the depositors for which they are entitled to reasonable moral The bank is not expected to be infallible but it must bear the blame for not damages. discovering the mistake of its teller despite the established procedure requiring the papers and bank books to pass through a battery of bank FACTS personnel whose duty it is to check and countercheck them for possible The spouses Arthur and Vivienne Canlas opened a joint account in CBTC errors. Apparently, the officials and employees tasked to do that did not Q.C. with an initial deposit of P2,250. Before that, Arthur Canlas had an perform their duties with due care, as may be gathered from the testimony existing separate personal checking account there. of the bank's lone witness, Antonio Enciso, who casually declared that "the approving officer does not have to see the account numbers and all those When they opened this account, the "new accounts" teller of the bank pulled things. Those are very petty things for the approving manager to look into." out from the bank's files the old signature card of Arthur Canlas for use as I Unfortunately, it was a "petty thing," like the incorrect account number that D and reference. By mistake, she placed the old personal account number of the bank teller wrote on the initial deposit slip for the newly-opened joint Arthur Canlas on the deposit slip for the new joint checking account of the current account of the Canlas spouses, that sparked this half-a-million-peso spouses so that the initial deposit of P2,250 for the joint checking account damage suit against the bank. was miscredited to Arthur's personal account. The spouses subsequently deposited other amounts in their joint account. While the bank's negligence may not have been attended with malice and bad faith, nevertheless, it caused serious anxiety, embarrassment and When Vivienne Canlas issued a check for Pl,639.89 in April 1977 and humiliation to the private respondents for which they are entitled to recover another check for P1,160.00 on June 1, 1977, one of the checks was reasonable moral damages. dishonored by the bank for insufficient funds and a penalty of P20 was deducted from the account in both instances. Thereafter, the spouses filed a ii. When Utmost Diligence Required case for damages agaisnt the bank for serious anxiety, embarrassment and 1. In dealing with Accounts of Depositors humiliation by reason of the dishonor of the checks. The RTC and the IAC found that the bank had been seriously negligent and awarded damages to PHILIPPINE BANKING CORPORATION v CA, 419 SCRA 487 (2004) the spouses Canlas. DOCTRINE: Sec. 2 of RA 8791 (GBL) expressly imposes a fiduciary duty on ISSUE the banks when it declares that the State recognizes the “fiduciary nature of Whether the mistake of the teller can be considered as serious negligence banking that requires high standards of integrity and performance.” entitling the spouses Canlas to an award of damages. The fiduciary relationship means that the bank’s obligation to observe high RULING standards of integrity and performance is deemed written into every deposit YES. There is no merit in CBTC's argument that it was only required to agreement between a bank and its depositor. exercise the diligence of a good father of family. The fiduciary nature of the relationship between a bank and its depositors and the extent of diligence FACTS expected of it in handling the accounts entrusted to its care is a great Florencio Pagsaligan, a close friend and officer of the bank, persuaded responsibility. Leonilo Marcos to deposit money with Philippine Banking Corporation (BANK). Marcos yielded and made a time deposit with the Bank on two "In every case, the depositor expects the bank to treat his account with the occasions. utmost fidelity, whether such account consists only of a few hundred pesos

Later, Marcos wanted to withdraw from the Bank to buy material for his produce the original copies of the promissory note and ledges, it failed to construction business. However, the bank convinced him to keep his time treat Marcos’s account with meticulous care. deposit and instead, open several domestic letters of credit. Trusting the bank and Pagsaligan, he again yielded. Marcos executed 3 Trust Receipt Whether it was Pagsaligan who caused such fictitious loan agreement, it will Agreements totaling 851k. He deposited 30% of the amount of Trust not excuse the bank from its obligation to return the correct amount to Agreement as marginal deposit. He believed that the remaining 70% would Marcos. As stated before, a bank is liable for the wrongful acts of its officers be credited from his time deposit and accumulated interest. done in the interest of the bank or in their dealings as bank representatives but not for acts outside the scope of their authority. However, the bank did not offset his time deposit due to an alleged promissory note amount to 500k. The Bank demanded for the balance of the BANK OF THE PHILIPPINE ISLANDS v CASA MONTESSORI Trust Agreement from him. Due to failure to pay, several penalties and INTERNATIONALE, 430 SCRA 261 (2004) interest accumulated against Marcos. Marcos now files a complaint against the Bank. DOCTRINE: Since the banking business is impressed with public interest, of paramount importance thereto is the trust and confidence of the public in In their defense, the bank argues that the complaint was only an attempt to general, the highest degree of diligence is expected and high standards of avoid liability under several trust receipt agreements that were subject of a integrity and performance are even required of it. criminal complaint. FACTS CASA Montessori International (CASA for brevity) opened a current account The RTC ruled in favor of Marcos. The CA modified the decision only by with defendant BPI, with CASA’s President Ms. Ma. Carina C. Lebron as one reducing the damages. of its authorized signatories.

ISSUE In 1991, after conducting an investigation, plaintiff discovered that nine (9) Whether the Bank is liable for damages of its checks had been encashed by a certain Sonny D. Santos since 1990 in the total amount of P782,000.00 RULING YES, the bank is liable. It turned out that ‘Sonny D. Santos’ with account at BPI’s Greenbelt Branch [was] a fictitious name used by third party defendant Leonardo T. Yabut The bank is liable on the ground of offsetting Marcos’s time deposit with a who worked as external auditor of CASA. Third party defendant voluntarily fictitious promissory note. The Bank failed to present the original copy of the admitted that he forged the signature of Ms. Lebron and encashed the note. They only presented machine copies of the duplicate. But these copies checks. "The PNP Crime Laboratory conducted an examination of the nine have no evidentiary value, contradicting the Best Evidence Rule. (9) checks and concluded that the handwritings thereon compared to the standard signature of Ms. Lebron were not written by the latter Sec 2 of the General Banking law of 2000 expressly imposes the fiduciary duty of on banks. The fiduciary nature of banking requires high standards of On March 4, 1991, respondent filed the herein Complaint for Collection with integrity and performance. Although the GBL only took effect in 2000, Damages against defendant bank praying that the latter be ordered to jurisprudence has already imposed the same high standard of diligence from reinstate the amount of P782,500.007 in the current and savings accounts of banks at the time the Bank transacted with Marcos. This fiduciary the plaintiff with interest at 6% per annum. relationship means that the bank’s obligation to observe high standards of integrity is deemed written into every deposit agreement between a bank CA apportioned the loss between BPI and CASA. The appellate court took and its depositor. into account CASA’s contributory negligence that resulted in the undetected forgery. It then ordered Leonardo T. Yabut to reimburse BPI half the total The business of banking is imbued with public interest. The stability of amount claimed; and CASA, the other half. It also disallowed attorney’s fees banks largely depends on the confidence of the people in the honesty and and moral and exemplary damages. efficiency of banks. As its depositor, Marcos had the right to expect the bank was accurately recording his transactions. He also had a right to withdraw ISSUE the amount in his time deposit upon maturity. Due to the bank’s failure to Were any of the parties negligent and therefore precluded from setting up forgery as a defense? Whether BPI is liable?

RULING with IBAA (later merged with PCI) and cleared by CB – proceeds BPI is solely liable. (skipped the Negotiable Instruments part- it was never reached CIR – Ford forced to make 2nd payment to CIR which established that there was indeed a forgery) xxx Having established the was received – check was a crossed check for ‘payee’s account only’ forgery of the drawer’s signature, BPI -- the drawee -- erred in making – Ford wrote separate demand letters to the banks - both banks payments by virtue thereof. The forged signatures are wholly inoperative, refused to pay – NBI discovered that Godofredo Rivera, General and CASA -- the drawer whose authorized signatures do not appear on the Ledger Accountant of Ford recalled the check, supposedly because negotiable instruments -- cannot be held liable thereon. Neither is the latter there was a computation error – Rivera instructed PCI Bank to precluded from setting up forgery as a real defense. replace the check with 2 manager’s checks – syndicate members deposited MCs with Pacific Banking Corp. – Rivera could not be We have repeatedly emphasized that, since the banking business is found, “fugitive from justice” – impressed with public interest, of paramount importance thereto is - TC: Both banks liable, IBAA (PCI) should reimburse Citi – CA: the trust and confidence of the public in general. Consequently, the only IBAA (PCI) liable highest degree of diligence is expected, and high standards of integrity and performance are even required, of it. By the nature of - Action #2: Ford drew Citibank checks in 1978 (P5.851m) and its functions, a bank is "under obligation to treat the accounts of its 1979 (P6.311m) payable to CIR for percentage taxes – both crossed depositors with meticulous care, always having in mind the fiduciary checks - never reached CIR – though receipts were issued, nature of their relationship.” considered by BIR as “fake and spurious” – Ford paid BIR again – Godofredo Rivera (the legend returns) as Ledger Accountant BPI contends that it has a signature verification procedure, in which checks prepared the check - delivered it to Remberto Castro, pro-manager are honored only when the signatures therein are verified to be the same of PCIB San Andres – Castro and Dulay, an assistant manager of the with or similar to the specimen signatures on the signature cards. Meralco Branch of PCI, opened a account in the name of a fictitious Nonetheless, it still failed to detect the eight instances of forgery. Its “Reynaldo Reyes” – deposited a worthless Bank of America check in negligence consisted in the omission of that degree of diligence required78 of the same amount as the Ford check – replaced the worthless check a bank. It cannot now feign ignorance, for very early on we have already with the Ford check for clearing – Reynaldo Reyes account was ruled that a bank is "bound to know the signatures of its customers; credited with amount – same procedure with 2nd check – Castro and if it pays a forged check, it must be considered as making the then distributed checks drawn from Reynaldo Reyes account to payment out of its own funds, and cannot ordinarily charge the other conspirators – RTC held Citibank liable, absolved PCI – CA: amount so paid to the account of the depositor whose name was affirmed forged."79 In fact, BPI was the same bank involved when we issued this ruling seventy years ago. ISSUE Were the banks negligent? 2. In Selection and Supervision of Employees RULING PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK v CA, 350 YES. The direct perpetrators are fugitives – present parties must bear the SCRA 446 (2001) burden of loss – although employees of Ford initiated the transactions, their actions are not the proximate cause of encashing the checks – BoD of ford DOCTRINE: Banks are expected to exercise the highest degree of diligence did not confirm Rivera’s recall of the check – PCI neglected to verify in the selection and supervision of their employees. By the very nature of authority of Rivera – crossed check is a warning that it should be deposited their work, the degree of responsibility, care and trustworthiness expected only in CIR’s account – PCI liable for 4.7m check – although no conscious of their employees and officials is far greater than those of ordinary clerks participation, PCI is responsible frauds perpetrated by its officers – Citibank and employees. should have scrutinized the checks: no clearing stamps, no initials – both banks negligent in selection and supervision of their employees for 2nd and FACTS 3rd check – equally liable for the loss – by very nature of banking business, Ford Philippines instituted actions against Citibank (drawee bank) and PCI degree of responsibility, care and trustworthiness of bank employees is far Bank (collecting bank) – greater than those of ordinary clerks and employees – banks are expected - Action #1: Ford drew and issued a Citibank check for P4.7m in to exercise the highest degree of diligence in the selection and supervision 1977 in favor of the CIR for manufacturer’s sales tax – deposited of employees.

3. To be Mortgagees in Good Faith “Banks, indeed, should exercise more care and prudence in dealing CRUZ v BANCOM FINANCE CORPORATION, 379 SCRA 490 (2002) even with registered lands, than private individuals, for their business is one affected with public interest, keeping in trust money DOCTRINE: Mortgagee-banks, unlike private individuals, are expected to belonging to their depositors, which they should guard against loss exercise greater care and prudence in their dealings, including those by not committing any act of negligence which amounts to lack of involving registered lands. A banking institution is expected to exercise due good faith by which they would be denied the protective mantle of diligence before entering into a mortgage contract. The ascertainment of the the land registration statute, Act [No.] 496, extended only to status or condition of a property offered to it as security for a loan must be purchasers for value and in good faith, as well as to mortgagees of a standard and indispensable part of its operations. the same character and description.” (Citations omitted)

FACTS Recently, in Adriano v. Pangilinan, we said that the due diligence required of Edilberto Cruz and Simplicio Cruz offered to sell their parcel of land to banks extended even to persons regularly engaged in the business of Norma Sulit. In order to facilitate the sale, the Cruz’s executed a deed of lending money secured by real estate mortgages. sale in favor of Candelaria Sanchez, but no consideration was paid. On the same day Candelaria Sanchez conveyed the land to Norma Sulit. Unknown The evidence before us indicates that respondent bank was not a mortgagee to the plaintiffs, Norma managed to obtain a loan from Bancom secured by in good faith. First, at the time the property was mortgaged to it, it failed to a mortgage over the land now titled in her name. conduct an ocular inspection. Judicial notice is taken of the standard practice for banks before they approve a loan: to send representatives to the Norma defaulted on her obligations to the plaintiffs and later on also premises of the land offered as collateral and to investigate the ownership defaulted on her payments with Bancom. The land was foreclosed and thereof. As correctly observed by the RTC, respondent, before constituting auctioned, Bancom was the highest bidder. the mortgage over the subject property, should have taken into consideration the following questions: Cruz then filed for reconveyance of the land. While Bancom claimed priority “1) Was the price of P150,000.00 for a 33.9 hectare agricultural right over Cruz, alleging it was a mortgagee in good faith. parcel of land not too cheap even in 1978?

ISSUE “2) Why did Candelaria Sanchez sell the property at the same price Whether Bancom is a mortgagee in good faith of P150,000.00 to Norma Sulit on the same date, June 21, 1978 when she supposedly acquired it from the plaintiffs? HELD NO. As a general rule, every person dealing with registered land may safely “3) Being agricultural land, didn’t it occur to the intervenors that rely on the correctness of the certificate of title and is no longer required to there would be tenants to be compensated or who might pose as look behind the certificate in order to determine the actual owner. obstacles to the mortgagee’s exercise of acts of dominion?

Respondent, however, is not an ordinary mortgagee; it is a mortgagee- “4) In an area as big as that property, [why] did they not verify if bank. As such, unlike private individuals, it is expected to exercise greater there were squatters? care and prudence in its dealings, including those involving registered lands. A banking institution is expected to exercise due diligence before entering “5) What benefits or prospects thereof could the ultimate owner into a mortgage contract. The ascertainment of the status or condition of a expect out of the property? property offered to it as security for a loan must be a standard and indispensable part of its operations. “Verily, the foregoing circumstances should have been looked into, for if either or both companies did, they could have discovered that In Rural Bank of Compostela v. CA, we held that a bank that failed to possession of the land was neither with Candelaria nor with observe due diligence was not a mortgagee in good faith. In the words of Norma.”[43] the ponencia: “x x x [T]he rule that persons dealing with registered lands can rely Respondent was clearly wanting in the observance of the necessary solely on the certificate of title does not apply to banks. precautions to ascertain the flaws in the title of Sulit and to examine the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 12 condition of the property she sought to mortgage.[44] It should not have ISSUE simply relied on the face of the Certificate of Title to the property, as its Whether there was Breach of contract in this case ancillary function of investing funds required a greater degree of diligence.[45] Considering the substantial loan involved at the time, it RULING should have exercised more caution. NO. In this case, the parties agreed on a P3 million credit line. This sum was completely released to petitioners who subsequently applied10 for an OMENGAN v PHILIPPINE NATIONAL BANK, 512 SCRA 305 (2007) increase in their credit line. This was conditionally approved by PNBís credit committee. For all intents and purposes, petitioners sought an additional DOCTRINE: A mortgagee can rely on what appears on the certificate of title loan. presented by the mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title. The condition attached to the increase in credit line requiring petitioners to This rule is strictly applied to banking institutions. acquire the conformity of Edgarís sisters was never acknowledged and accepted by petitioners. Thus, as to the additional loan, no meeting of the Banks should exercise more care and prudence in dealing even with minds actually occurred and no breach of contract could be attributed to registered lands, than private individuals, as their business is one affected PNB. There was no perfected contract over the increase in credit line. with public interest. Thus, the rule that persons dealing with registered lands can rely solely on the certificate of title does NOT apply to banks. The business of a bank is one affected with public interest, for which reason the bank should guard against loss due to negligence or bad faith. In approving the loan of an applicant, the bank concerns itself with proper FACTS information regarding its debtors. Any investigation previously conducted on The PNB approved the Omengan's application for a revolving credit line of the property offered by petitioners as collateral did not preclude PNB from P3 million. The loan was secured by two residential lots in the name of considering new information on the same property as security for a Edgar Omengan. The first P2.5 million was released on three separate subsequent loan. The credit and property investigation for the original loan dates. The release of the final half million was, however, withheld by of P3 million did not oblige PNB to grant and release any additional loan. At Montalvo because of a letter allegedly sent by Edgarís sisters, praying that the time the original P3 million credit line was approved, the title to the the last half million not be realeased since: property appeared to pertain exclusively to petitioners. By the time the application for an increase was considered, however, PNB already had "the property mortgaged, while in the name of Edgar Omengan, is reason to suspect petitionersí claim of exclusive ownership. owned in co-ownership by all the children of the late Roberto and Elnora Omengan. The lawyer who drafted the document registering Banks, indeed, should exercise more care and prudence in dealing even with the subject property under Edgarís name can attest to this fact. We registered lands, than private individuals, as their business is one affected had a prior understanding with Edgar in allowing him to make use of with public interest. Thus, this Court clarified that the rule that persons the property as collateral, but he refuses to comply with such dealing with registered lands can rely solely on the certificate of title does arrangement. Hence, this letter." not apply to banks.

Nevertheless, the half million was released. 4. In the custody of documents; Integrity of Records, Security of Premises Subsequently, the Omengans applied for an increase in credit line from 3 to 5 mil. This was approved subject to the condition that Edgarís sisters gave HEIRS OF EDUARDO MANLAPAT v CA, 459 SCRA412 (2005) their conformity. But petitioners failed to secure the consent of Edgarís sisters; hence, PNB put on hold the release of the additional P2 million. Still, DOCTRINE: A mortgagee-bank has no right to deliver to any stranger any Edgar Omengan demanded the release of the P2 million. He claimed that property entrusted to it other than those contractually and legally entitled to the condition for its release was not part of his credit line agreement with its possession. The act of a bank of allowing complete strangers to take PNB because it was added without his consent. PNB denied his request. possession of the owner’s duplicate certificate even if the purpose is merely for photocopying constitutes manifest negligence which would hold it liable Thus the present complaint for breach of contract and damages. for damages under Article 1170 and other relevant provisions of the Civil Code.

FACTS Lot 2204 was originally in possession of Jose Alvarez (Eduardo’s The issuance of the two TCT was valid. The Cruz’s heirs presented to the RD grandfather). Eduardo Manalapat, Alvarez’s successor-in-interest, sold a the original owners duplicate of the OCT. aside from that, they presented portion of it to Ricardo Cruz executing a Kasulatan and Sinumpaang the Kasulatan and Sinumpaang Salaysay where Manalapat acknowledge the Salaysay to document it. In 1976, the lot became registered only under the sale in favor of Cruz. The manner of obtaining the OCT did not invalidate the name of Eduardo Manalapat pursuant to a free patent. The sale of TCT. Manalapat and Cruz was forgotten, as Cruz did not even know an OCT was already issued to Manalapat. The bank is liable for damages. A mortgagee-bank has no right to deliver to any stranger any property entrusted to it other than to those contractually Leon Banaag, as atty-in-fact of Eduardo, executed a mortgage with Rural and legally entitled to its possession. Though they rightfully acknowledged Bank of San Pascual for 100k with Lot 2204 as collateral. Banaag deposited the ownership of Cruz’s heirs, the bank lent the original OCT w/o prior the owner’s duplicate OCT with the bank. investigation and did not even notified Manalapat’s heirs of the transaction. The bank should not have lent the certificate even only for the purpose of However, when the Cruz’s heirs learned of such sale, they wanted to secure photocopying it. Such act constitutes manifest negligence on the part of the the OCT for presentation to the Register of Deeds and for issuance of a bank, which would necessarily hold it liable for damages under Art 1170 and separate OCT. They urged to obtain the OCT from Manalapat’s heirs but other relevant provisions of the Civil Code. Thus, the bank is liable for 50k were denied. Then, they went to the Rural Bank to photocopy the owner’s as nominal damages to Manalapat’s heirs. duplicate OCT deposited with the bank. The Rural bank’s Manager, Jose Salazar, allowed them to borrow the OCT for photocopying. Ultimately, the heirs secured a TCT for a portion of the Lot. iii. Applicability to Commercial Transactions Outside of Core Banking Functions When Banaag went to the Rural bank to tender payment of the mortgage, he learned of the actions of the Cruz’s heirs that led to the subdivision of the REYES v CA, 363 SCRA 51 (2001) lot and the issuance of two separate titles. DOCTRINE: The same higher degree of diligence is NOT expected to be 3 cases were filed with the trial court, all involving the issuance of the TCT. exerted by banks in commercial transactions that do not involve their RTC ruled in favor of Manalapat. CA reversed and ruled in favor of Cruz and fiduciary relationship with their depositors. Rural Bank. FACTS ISSUE In view of the 20th Asian Racing Conference then scheduled to be held in 1. Whether the cancellation of the OCT and the splitting into two September, 1988 in Sydney, Australia, the Philippine Racing Club, Inc. separate titles may be accorded legal recognition. (PRCI, for brevity) sent four (4) delegates to the said conference. Petitioner 2. Whether the bank is liable for letting the mortgaged document be Gregorio H. Reyes, as vice-president for finance, racing manager, treasurer, borrowed by 3rd persons. and director of PRCI, sent Godofredo Reyes, the club's chief cashier, to the respondent bank to apply for a foreign exchange demand draft in Australian RULING dollars. YES, the two separate titles are valid. Godofredo went to respondent bank's Buendia Branch in Makati City to The heirs of Cruz have sufficiently proven their claim of ownership over a apply for a demand draft in the amount One Thousand Six Hundred Ten portion of Lot 2204. The fact that the Oct was not registered with their Australian Dollars (AU$1,610.00) payable to the order of the 20th Asian name is immaterial. Registration is not a requirement for validity of contract Racing Conference Secretariat of Sydney, Australia. between parties. The principal purpose of registration is merely to notify other persons that a transaction involving the property has been entered Godofredo asked if there could be a way for respondent bank to into. The issuance of the OCT in favor of Manalapat does not disregard the accommodate PRCI's urgent need to remit Australian dollars to Sydney. fact that the Cruz owned a portion of the land. The principle of Yasis of respondent bank then informed Godofredo of a roundabout way of indefeasibility of a Torrens title does not apply where fraud attended the effecting the requested remittance to Sydney thus: the respondent bank issuance of the title. would draw a demand draft against Westpac Bank in Sydney, Australia

(Westpac-Sydney for brevity) and have the latter reimburse itself from the In Philippine Bank of Commerce v. Court of Appeals15 upholding a U.S. dollar account of the respondent in Westpac Bank in New York, U.S.A. long standing doctrine, we ruled that the degree of diligence (Westpac-New York for brevity). This arrangement has been customarily required of banks, is more than that of a good father of a resorted to since the 1960's and the procedure has proven to be problem- family where the fiduciary nature of their relationship with their free. PRCI and the petitioner Gregorio H. Reyes, acting through Godofredo, depositors is concerned. In other words banks are duty bound to agreed to this arrangement or approach in order to effect the urgent treat the deposit accounts of their depositors with the highest transfer of Australian dollars payable to the Secretariat of the 20th Asian degree of care. But the said ruling applies only to cases where banks Racing Conference. act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. But the same higher degree of diligence Petitioners later went to Austraila to attend the said racing conference. is not expected to be exerted by banks in commercial transactions Geofredo, together with other delegates, went to the Hotel Regent Sydney that do not involve their fiduciary relationship with their depositors. to register only to find out that their demand draft was dishonored. Shortly after, his wife followed and met the same fate. They were greatly iv. Applicability to Government Financial Institutions inconvenienced and embarassed of the incident. Although things eventually went well, damage was already done. GSIS v SANTIAGO, 414 SCRA 563 (2003) Due diligence required of banks extend even to persons, or institutions As soon as the demand draft was dishonored, the respondent bank, thinking regularly engaged in the business of lending money secured by real estate that the problem was with the reimbursement and without any idea that it mortgages, such as government financial institutions. These are likewise was due to miscommunication, re-confirmed the authority of Westpac-New expected to exercise greater care and prudence in its dealings, including York to debit its dollar account for the purpose of reimbursing Westpac- those involving registered land. Sydney.Respondent bank also sent two (2) more cable messages to Westpac-New York inquiring why the demand draft was not honored. v. Applicability to those Engaged in Lending Money Secured by Real Estate Mortgages It was later found out that the source of the problem was Westpac-Sydney’s decoding error. (“7” was encoded as “1” in the SWIFT message) ADRIANO v PANGILINAN, 373 SCRA 544 (2002) While it is true that a person dealing with registered lands need not go They sued the respondent bank for damages for the said incident. beyond the certificate of title, it is likewise a well-settled rule that a purchaser or mortgagee cannot close his eyes to facts which should put a ISSUE reasonable man on his guard, and then claim that he acted in good faith Whether the respondent bank is liable for damages under the belief that there was no defect in the title of the vendor or mortgagor. RULING NO. There is no basis to hold the respondent bank liable for damages for vi. Liability for Negligence the reason that it exerted every effort for the subject foreign exchange 1. Applicable Rules on Determination of Negligence demand draft to be honored. It was in fact due to erroneous decoding on the part of Westpac-Sydney of the Bank's SWIFT message which led to the PHILIPPINE BANK OF COMMERCE v CA, 269 SCRA 695 (1997) problem. DOCTRINE: Negligence is the omission to do something which a reasonable Also, The peitioners were briefed by a representative of the respondent bank man, guided by those considerations which ordinarily regulate the conduct regarding the porcedure thus they are estopped from the denying the said of human affairs, would do, or the doing of something which a prudent and procedure. reasonable man would do. The seventy-eight (78)-year-old, yet still relevant, case of Picart v. Smith, provides the test by which to determine The petitioners contend that due to the fiduciary nature of the relationship the existence of negligence in a particular case which may be stated as between the respondent bank and its clients, the respondent should have follows: Did the defendant in doing the alleged negligent act use that exercised a higher degree of diligence than that expected of an ordinary reasonable care and caution which an ordinarily prudent person prudent person in the handling of its affairs as in the case at bar. would have used in the same situation? If not, then he is guilty of negligence. The law here in effect adopts the standard supposed to be

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 15 supplied by the imaginary conduct of the discreet paterfamilias of the the Solidbank passbook. Roman law. The existence of negligence in a given case is not determined by reference to the personal judgment of the actor in the situation before At the bank, Calapre gave the passbook to the teller and went out to do him. The law considers what would be reckless, blameworthy, or negligent another errand. When Calapre returned and asked for the passbook, the in the man of ordinary intelligence and prudence and determines liability by teller told (redundant teller-told) him that somebody got the passbook. that. Calapre reported the incident to Macaraya.

FACTS Later on, it was discovered that an unauthorized withdrawal of P300,000.00 RMC had account in P; RMC gave funds to secretary to deposit in P!instead was made using the lost passbook. LC Diaz demanded from Solidbank the of doing so, secretary deposited funds in name of her husband!modus return of the money. Solidbank solidly refused prompting LC Diaz to file a operandi: wrote the name of husband and his account number on original recovery suit. RTC absolved Solidbank based on the rules on savings deposit slip, then, on duplicate slip, left name blank but filled in husband’s account which gives presumption that the holder of the passbook is the account number!when teller asked why, she said it was because the 2nd slip owner. CA held Solidbank liable based on negligence and culpa aquiliana. would only be for personal records! when teller approved slip, she’d fill in RMC under the name then change the account number!R filed action for ISSUE recovery against P. Whether Solidbank is liable for the loss

ISSUE HELD YES. The contract between the bank and its depositor is governed by the RULING provisions of the Civil Code on simple loan.[17] Article 1980 of the Civil 1. Negligence = omission to do something that a reasonable man would do! Code expressly provides that “x x x savings x x x deposits of money in here, teller negligent in stamping slips w/o asking for name to be put on the banks and similar institutions shall be governed by the provisions duplicate!bank also negligent in not exercising proper supervision over the concerning simple loan.” There is a debtor-creditor relationship between teller (since they didn’t know until they conducted an investigation that the the bank and its depositor. The bank is the debtor and the depositor is the teller was doing that) creditor. The depositor lends the bank money and the bank agrees to pay 2. The negligence of the bank was the proximate cause!since even if the the depositor on demand. The savings deposit agreement between the secretary filled out the slip wrong, she would never have gotten away with it bank and the depositor is the contract that determines the rights and had the slips not been approved by the teller obligations of the parties. 3. Bank also liable under “last clear chance” 4. But, since RMC contributorily negligent, damages reduced The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (“RA 8791”),[18] which took CONSOLIDATED BANK AND TRUST CORPORATION v CA, 410 SCRA effect on 13 June 2000, declares that the State recognizes the “fiduciary 562 (2003) nature of banking that requires high standards of integrity and performance.”[19] This new provision in the general banking law, DOCTRINE: In culpa contractual (negligence), once the plaintiff proves a introduced in 2000, is a statutory affirmation of Supreme Court decisions, breach of contract, there is a presumption that the defendant was at fault or starting with the 1990 case of Simex International v. Court of Appeals,[20] negligent. The Doctrine of Last Clear Chance is inapplicable in culpa holding that “the bank is under obligation to treat the accounts of its contractual because neither the contributory negligence of one party (bank) depositors with meticulous care, always having in mind the fiduciary nature nor its last chance to avoid the loss would exonerate the other party of their relationship.”[21] (depositor) from liability. Such contributory negligence or last chance merely serves to reduce the recovery of damages by the plaintiff but does This fiduciary relationship means that the bank’s obligation to observe “high NOT exculpate the depositor from his breach of contract. standards of integrity and performance” is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of FACTS banking requires banks to assume a degree of diligence higher than that of LC Diaz, an accounting firm, through its cashier Macaraya, filled up a a good father of a family. Article 1172 of the Civil Code states that the deposit slip and a savings deposit slip. Macaraya instructed the messenger, degree of diligence required of an obligor is that prescribed by law or Calapre to deposit the money with Solidbank. Macaraya also gave Calapre contract, and absent such stipulation then the diligence of a good father of a

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 16 family.[22] Section 2 of RA 8791 prescribes the statutory diligence required Upon inquiry, the Bank of America acknowledged that it was due to an error from banks – that banks must observe “high standards of integrity and and that for some reason, the check had been encoded with the wrong performance” in servicing their depositors. Although RA 8791 took effect account number. almost nine years after the unauthorized withdrawal of the P300,000 from L.C. Diaz’s savings account, jurisprudence[23] at the time of the withdrawal Months after, Araneta issued 2 checks for $500 and $150 payable to cash already imposed on banks the same high standard of diligence required and drawn against Bank of America. When these checks were presented for under RA No. 8791. payment, they were again dishonored due to a closed account.

However, the fiduciary nature of a bank-depositor relationship does not The check of $500 was actually paid by the Bank of America to First National convert the contract between the bank and its depositors from a simple loan City Bank. However, Bank of America claimed that such had been to a trust agreement, whether express or implied. Failure by the bank to inadvertently made and returned the check to First National City Bank, with pay the depositor is failure to pay a simple loan, and not a breach of the request that the amount be credited to Bank of America. In turn, First trust.[24] The law simply imposes on the bank a higher standard of integrity National City Bank informed the depositor (Saldana) about the check’s and performance in complying with its obligations under the contract of return. However, before Saldana even replied, Bank of America recalled the simple loan, beyond those required of non-bank debtors under a similar check and honored it. contract of simple loan. Because of these incidents, Araneta, through counsel, sent a letter to the The fiduciary nature of banking does not convert a simple loan into a trust Bank of America demanding damages in the sum of $20,000. Although it agreement because banks do not accept deposits to enrich depositors but to admitted its responsibility for the inconvenience, the bank claimed that the earn money for themselves. The law allows banks to offer the lowest damages sought were excessive and instead offered to ay $2,000. possible interest rate to depositors while charging the highest possible interest rate on their own borrowers. The interest spread or differential Thus, in 1962, Araneta filed a complaint against the Bank of America for the belongs to the bank and not to the depositors who are not cestui que trust recovery of (1) actual damages, (2) moral damages, (3) temperate of banks. If depositors are cestui que trust of banks, then the interest damages, (4) exemplary damages, and (5) attorney’s fees for an aggregate spread or income belongs to the depositors, a situation that Congress total of $120,000. certainly did not intend in enacting Section 2 of RA 8791. The trial court awarded all the damages prayed for, but the Court of Appeals 2. Award of Actual, Moral, Compensatory or Temperate eliminated the award of compensatory and temperate damages, and Damages reduced the amount of moral damages, exemplary damages, and attorney’s fees. ARANETA v BANK OF AMERICA, 40 SCRA 144 (1970) ISSUE DOCTRINE: The financial credit of a businessman is a prized and valuable Whether temperate and moral damages should be awarded to Araneta asset, it being a significant part of the foundation of his business. Any adverse reflection thereon constitutes some material loss to him. In the US, RULING temperate damages are allowed. There were cases where from the nature of TEMPERATE DAMAGES: YES. The financial credit of a businessman is a the case, definite proof of pecuniary loss cannot be offered, although the prized and valuable asset, it being a significant part of the foundation of his court is convinced that there has been such loss. business. Any adverse reflection thereon constitutes some material loss to him. The incidents obviously affected the credit of Araneta with Saldana and FACTS with any other person who would come to know about the refusal of the Leopoldo Araneta, a local merchant, issued a check for $500 payable to cash defendant to honor said checks. and drawn against Bank of America (San Francisco branch). At that time, he had a credit balance of $523.81 in his account. Unfortunately, when it was It cannot hardly be possible that a customer’s check can be wrongfully received by the bank a day after, it was dishonored due to a closed account. refused payment without some impeachment of his credit, which must in fact be an actual injury x x x.

In the US, temperate damages are allowed. There were cases where from the nature of the case, definite proof of pecuniary loss cannot be offered, RTC dismissed the complaint. However, CA reversed the decision, making although the court is convinced that there has been such loss. For instance, Prudential Bank liable for damages. injury to one’s commercial credit or to the goodwill of the business firm is often hard to show with certainty in terms of money. ISSUE Whether Prudential bank is liable for damages MORAL DAMAGES: YES. Under Art. 2217 of the Civil Code, “besmirched reputation” is a ground upon which moral damages can be claimed, but the RULING Court of Appeals did take this element into consideration. Quoting from its YES, the bank is liable. decision, “ x x x the damages to his reputation as an established and well- known international trader entitled him to recover moral damages x x x his It is the bank’s fault for misposting the initial check to another account and wounded feelings and the mental anguish suffered by him cause his blood delayed the posting of the same to the Leticia’s account. Although the pressure to rise beyond normal limits, x x x” mistake was not attended with malice and bad faith, there is still clear proof of lack of supervision or due care and caution expected of a bank. PRUDENTIAL BANK v CA, 328 SCRA 264 (2000) The relationship between a bank and depositor is fiduciary in nature. The DOCTRINE: The bank’s negligence was the result of a lack of due care and extent of diligence expected from the bank is with utmost fidelity. As a caution required of managers and employees of a firm engaged in so business affected with public interest and due to its nature, a bank is under sensitive and demanding business as banking. While the bank’s negligence obligation to treat the account of its depositors with meticulous care. It does may not have been attended with malice and bad faith, nevertheless, it not matter whether the account consists of only a few hundred pesos or of caused serious anxiety, embarrassment, and humiliation. Hence, the millions of pesos. offended party is entitled to recover reasonable moral damages. In this case, even if there was no malice, the fact still remain that Leticia The law allows the grant of exemplary damages by way of example for the experienced serious anxiety, embarrassment and humiliation. Thus, she is public good. The public relies on the banks’ sworn profession of diligence entitled to recover damages; 100k for moral, 20k for exemplary 30k for and meticulousness in giving irreproachable service. This meticulousness atty’s fees. must be maintained at all times by the banking sector.

FACTS CITYTRUST BANKING CORPORATION v VILLANUEVA, 361 SCRA 446 Leticia Tupasi-Valenzula opened a Savings Account and Current Account (2001) with Prudential Bank. Initially, she deposited a check amounting to 35k on June 1, 1988. DOCTRINE: Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral As payment for purchasing jewelry, Leticia issued a check amounting to shock, social humiliation, and similar injury. Although incapable of pecuniary 11.5k in favor of Belen Legaspi. Belen then endorsed the check to Philip computation, moral damages may be recovered if they are the proximate Lhuillier. When Philip deposited the check in his account, the check was result of the defendant’s wrongful act or omission. dishonored due to insufficient funds. Leticia was surprised to learn of the dishonor of the check. She inquired with Prudential Bank, showing her Requisites for the award of moral damages: passbook indicating she had sufficient funds. However, Albert Angeles Reyes 1. There must be an injury, whether physical, mental, or psychological, (OIC of her account) ignored the passbook, stating that the bank ledger was clearly sustained by the claimant the best proof that she did not have enough funds. 2. There must be a culpable act or omission factually established 3. The wrongful act or omission of the defendant is the proximate However, it was found out that the 35k check initially deposited by Leticia cause of the injury sustained by the claimant was credited only on June 24, 1988, or after 23 days. The 11k check was 4. The award of damages is predicated on any of the cases stated in redeposited and properly cleared only on June 27, 1988. Leticia filed a Art. 2219 of the Civil Code complaint against Prudential Bank due to the incident for causing embarrassment and humiliation. Art. 2219: Moral damages may be recovered in the following and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 18 analogous cases: After the incident, Respondent demanded that he be paid indemnity for the 1. A criminal offense resulting in physical injuries; alleged losses and damage suffered by him as a result of the repeated 2. Quasi-delicts causing physical injuries; dishonour of his well-funded check. The bank apologized but refused to pay 3. Seduction, abduction, rape, or other lascivious acts; such indemnity, so respondent filed a complaint against the bank claiming 4. Adultery or concubinage; P240,000 actual damages, P2M as moral damages and P500,000 for 5. Illegal or arbitrary detention or arrest; exemplary damages, attorney’s fees, litigation expenses and costs of the 6. Illegal search; suit. 7. Libel, slander or any other form of defamation; 8. Malicious prosecution; RTC did not grant any damages. CA partly reversed and granted a smaller 9. Acts mentioned in Article 309; amount as damages thus this case. 10. Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35. ISSUE Whether Villanueva is entitled to damages The parents of the female seduced, abducted, raped, or abused, referred to in No. 3 of this article, may also recover moral damages. RULING NO. The issue whether respondent suffered actual or compensatory The spouse, descendants, ascendants, and brothers and sisters may bring damages in the form of loss of profits is factual. Bothe CA and the RTC have the action mentioned in No. 9 of this article, in the order named. ascertained that Villanueva was unable to prove his demand for compensatory damages arising from loss. His evidence thereon was found FACTS inadequate, uncorroborated, speculative, hearsay and not the best Sometime in February, 1984, the respondent opened a savings and a evidence. Basic is the jurisprudential rule principle that in determining actual current account with the petitioner bank. On May 21, 1986, respondent ran damages, the court cannot rely on mere assertions, speculations, out of checks so he requested a new checkbook from one of the respondent conjectures or guesswork but must depend on competent proof and on the bank’s customer service representative. He then filled up a checkbook best obtainable evidence of the actual amount of the loss. Actual damages requisition slip with the obligatory particulars, except for his current account cannot be presumed but must be duly proved with reasonable certainty. number which he could not remember. Respondent expressed his predicament and the representative assured that the bank shall look into It may be true that Villanueva may have suffered some form of the bank’s account records. Villanueva was thus later on issued a new inconvenience and discomfort as a result of the dishonour of his check. checkbook. However, the same could not have been so grave or intolerable as he attempts to portray or impress upon the Court. Furthermore, the alleged On June 17, 1986, Respondent Villanueva issued a P50,000 check payable embarrassment or inconvenience caused to Villanueva as a result of the to the order of Kingly Commodities Traders and Multi Resources, Inc. incident was timely and adequately contained, corrected, mitigated, if not (hereafter Kingly) Respondent had sufficient funds in his account by the entirely eradicated. Villanueva, thus, failed to support his claim for time the Kingly representative deposited his check. Despite this, the check damages. Also, respondent is not entitled to Attorney’s fees because there was dishonoured for insufficient funds. Respondent notified the bank was no presence of bad faith. regarding the matter and the bank representative told him that they will look into the matter and instructed the former to advise Kingly to redeposit The SC did not see it fit to discuss whose negligence was the proximate the check. The representative assured Villanueva that the check would be cause of the respondent’s injury because, in the first place, he did not honoured after the sufficiency of the funds was ascertained. The check was sustain any compensable injury. then re-deposited but was again dishonoured. Due to this, Villanueva prayed to Kingly Commodities to give him until 5:30pm that same day to make (RTC, however, touched on this matter. RTC pointed out that Villanueva was good his check. Respondent went to the bank to personally inquire on the the proximate cause, amongst others, for failure to state his account matter. It was found out that respondent was issued a check under another number. The bank may have been negligent but its negligence was only “Isagani Villanueva” with a different middle initial. Upon knowing this fact, contributory.) the bank branch manager issued a managers check which the respondent was able to give before the above-said deadline.

3. Reliance on Judgment of Other Banks accepted or approved by the Commission unless accompanied by a favorable recommendation of the METROBANK v CABLIZO, 510 SCRA 259 (2006) appropriate government agency to the effect that such It owes the highest degree of fidelity to its client and should not therefore articles or amendment is in accordance with law. lightly rely on the judgment of other banks on occasions where its clients’ (Corporation Code, BP 68) money were involved, no matter how small or substantial the amount at stake. Section 46. Adoption of by-laws. - Every corporation formed under this Code must, within one (1) month after receipt of 4. Recovery Against Erring Employee official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by- PACIFIC BANKING CORPORATION v CA, 173 SCRA 102 (1989) laws for its government not inconsistent with this Code. For the Article 2181 of the Civil Code merely gives the employer the right to adoption of by-laws by the corporation the affirmative vote of the reimbursement from the employee for what is paid to the offended party. It stockholders representing at least a majority of the outstanding does NOT make recovery from the employee a mandatory requirement. A capital stock, or of at least a majority of the members in case of right to relief shall be recognized only when the party concerned asserts it non-stock corporations, shall be necessary. The by-laws shall be through a proper pleading filed in court. signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the E. AUTHORITY TO OPERATE inspection of the stockholders or members during office hours. A a. Incorporation copy thereof, duly certified to by a majority of the directors or Section 17. Grounds when articles of incorporation or trustees countersigned by the secretary of the corporation, shall amendment may be rejected or disapproved. - The Securities and be filed with the Securities and Exchange Commission which shall Exchange Commission may reject the articles of incorporation or be attached to the original articles of incorporation. disapprove any amendment thereto if the same is not in compliance with the requirements of this Code: Provided, That Notwithstanding the provisions of the preceding paragraph, by- the Commission shall give the incorporators a reasonable time laws may be adopted and filed prior to incorporation; in such within which to correct or modify the objectionable portions of case, such by-laws shall be approved and signed by all the the articles or amendment. The following are grounds for such incorporators and submitted to the Securities and Exchange rejection or disapproval: Commission, together with the articles of incorporation. 1. That the articles of incorporation or any amendment thereto is not substantially in accordance with the form In all cases, by-laws shall be effective only upon the issuance by prescribed herein; the Securities and Exchange Commission of a certification that 2. That the purpose or purposes of the corporation are the by-laws are not inconsistent with this Code. patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; The Securities and Exchange Commission shall not accept 3. That the Treasurer's Affidavit concerning the amount of for filing the by-laws or any amendment thereto of any capital stock subscribed and/or paid is false; bank, banking institution, building and loan association, 4. That the percentage of ownership of the capital stock to trust company, insurance company, public utility, be owned by citizens of the Philippines has not been educational institution or other special corporations complied with as required by existing laws or the governed by special laws, unless accompanied by a Constitution. certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance No articles of incorporation or amendment to articles of with law. (Corporation Code, BP 68) incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust Section 14. The Securities and Exchange Commission shall not companies and other financial intermediaries, insurance register the articles of incorporation of any bank, or any companies, public utilities, educational institutions, and amendment thereto, unless accompanied by a certificate of other corporations governed by special laws shall be authority issued by the Monetary Board, under its seal. Such

certificate shall not be issued unless the Monetary Board is word or words "bank", "banking", "banker", "quasi-bank", satisfied from the evidence submitted to it: "quasi- banking", "quasi-banker", "savings and loan 14.1 That all requirements of existing laws and regulations to association", "trust corporation", "trust company" or words of engage in the business for which the applicant is similar import or transact in any manner the business of any proposed to be incorporated have been complied with; such bank, corporation or association (Sec. 64, GBL). 14.2. That the public interest and economic conditions, both general and local, justify the authorization; and iv. Change in Name 14.3. That the amount of capital, the financing, organization, direction and administration, as well as the integrity and v. Sanctions for Operating Without Authority: Persons or entities responsibility of the organizers and administrators found to be performing banking or quasi-banking functions reasonably assure the safety of deposits and the public without authority from the Bangko Sentral shall be subject to interest. appropriate sanctions under the New Central Bank Act and other applicable laws (Sec. 6, Par. 5, GBL). The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless Unless otherwise herein provided, the violation of any of the accompanied by a certificate of authority from the Bangko provisions of this Act shall be subject to Sections 34, 35, 36 Sentral (GBL). and 37 of the New Central Bank Act. If the offender is a director or officer of a bank, quasi-bank or trust entity, the b. Operation: Monetary Board may also suspend or remove such director or i. Authority Required: No person or entity shall engage in banking officer. If the violation is committed by a corporation, such operations or quasi-banking functions without authority from corporation may be dissolved by quo warranto proceedings the Bangko Sentral: Provided, however, That an entity instituted by the Solicitor General (Sec. 66, GBL). authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority REPUBLIC v SECURITY CREDIT AND ACCEPTANCE CORPORATION, 19 to engage in quasi-banking functions (Sec. 6, Par. 1, GBL) SCRA 58 (1967)

ii. MB Determination: The determination of whether a person or DOCTRINE: A corporation, which misused its corporate funds and franchise entity is performing banking or quasi-banking functions without by engaging in illegal banking, may be dissolved. Its acts were willful, were Bangko Sentral authority shall be decided by the Monetary repeated 59,643 times and the continuance of its illegal operations causes Board. To resolve such issue, the Monetary Board may, through public injury owing to the number of persons affected thereby. A writ of quo the appropriate supervising and examining department of the warranto for its dissolution is proper. Bangko Sentral, examine, inspect or investigate the books and records of such person or entity. Upon issuance of this FACTS authority, such person or entity may commence to engage in This is a quo warranto proceeding, initiated by the Solicitor General, to banking operations or quasi-banking functions and shall dissolve the Security and Acceptance Corporation for allegedly engaging in continue to do so unless such authority is sooner surrendered, banking operations without the authority required therefor by the General revoked, suspended or annulled by the Bangko Sentral in Banking Act (Republic Act No. 337). accordance with this Act or other special laws (Sec. 6, Par. 2, GBL) Security Credit and Acceptance Corporation is a duly registered corporation with the SEC. It’s articles of incorporation authorize it to o engage primarily iii. Unauthorized Advertisement/Business Representation: No in financing agricultural, commercial and industrial projects, and person, association, or corporation unless duly authorized to secondarily, in buying and selling stocks and bonds of any corporation. engage in the business of a bank, quasi-bank, trust entity, or savings and loan association as defined in this Act, or other The Superintend of Banks of the Central Bank of the Philippines thru its legal banking laws, shall advertise or hold itself out as being counsel rendered an opinion that Security Credit and Acceptance engaged in the business of such bank, quasi-bank, trust entity, Corporation is a banking institution within the purview of Republic Act No. or association, or use in connection with its business title, the 337. Central Bank advised the corporation to comply with the requirements

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 21 of the General Banking Act. 348] founded to facilitate the borrowing, lending and safe-keeping of money (Smith vs. Kansas City Title & Trust Co., 41 S. Ct. 243, Notwithstanding, the corporation, as well as the members of its Board of 255 U.S. 180, 210, 65 L. Ed. 577) and to deal, in notes, bills of Directors and the officers of the corporation, continued performing the exchange, and credits (State vs. Cornings Sav. Bank, 115 N.W. 937, functions and activities which had been declared to constitute illegal banking 139 Iowa 338). (Banks & Banking, by Zellmann Vol. 1, p. 46). operations; the corporation established 74 branches in principal cities and towns throughout the Philippines; that through a systematic and vigorous Moreover, it has been held that: campaign undertaken by the corporation, the same had managed to induce An investment company which loans out the money of its customers, the public to open 59,463 savings deposit accounts. collects the interest and charges a commission to both lender and borrower, is a bank. (Western Investment Banking Co. vs. Murray, 56 P. 728, 730, ISSUE 731; 6 Ariz 215.) Whether the corporation is engaged in banking ... any person engaged in the business carried on by banks of deposit, of discount, or of circulation is doing a banking business, RULING although but one of these functions is exercised. (MacLaren vs. YES. It is clear that these transactions partake of the nature of banking, as State, 124 N.W. 667, 141 Wis. 577, 135 Am. S.R. 55, 18 Ann. Cas. the term is used in Section 2 of the General Banking Act. Indeed, a bank 826; 9 C.J.S. 30.) has been defined as: ... a moneyed institute [Talmage vs. Pell 7 N.Y. (3 Seld. ) 328, 347, Accordingly, defendant-corporation has violated the law by engaging in banking without securing the administrative authority required in Republic savings and mortgage bank and/or building and loan association x x x Act No. 337. without having first complied with the provisions of RA 337.

That the illegal transactions thus undertaken by defendant corporation Judge Cancino issued the warrant applied for there being “good and warrant its dissolution is apparent from the fact that the foregoing sufficient reasons to believe” that the Organization has under its control the misuser of the corporate funds and franchise affects the essence of its articles/items subject of the offense complained of. On the same day, the business, that it is willful and has been repeated 59,463 times, and that Organization commenced an action with the CFI of Manila against the its continuance inflicts injury upon the public, owing to the number of Municipal Court, the sheriff, the Manila Police Department and the Central persons affected thereby. Bank to annul the search warrant on the ground that it was issued with GADLEJ. After due hearing, Judge Morfe (CFI Manila) issued an order in CENTRAL BANK v MORFE, 20 SCRA 507 (1967) favor of the Organization.

DOCTRINE: The law requiring compliance with certain requirements before Accordingly, the Bank moved for reconsideration but was denied and anybody can engage in banking obviously seeks to protect the public against commenced the present action. actual, as well as potential, injury. ISSUE FACTS Whether the Organization is a banking institution within the purview of the First Mutual Savings and Loan Organization (Organization) is a registered Central Bank Act non-stock corporation, whose main purpose is “to encourage x x x and implement savings and thrift among its members, and to extend financial RULING assistance in the form of loans” to them. YES. The records suggested clearly that the transactions objected to by the Central Bank constitute the general pattern of the business of the In 1962, the Central Bank Legal Department rendered an opinion finding the Organization. Indeed, the main purpose thereof, according to its By-Laws, is Organization as a banking institution, falling within the purview of the “to extend financial assistance, in the form of loans, to its members, with Central Bank Act. Hence, it applied for a search warrant with the Municipal funds deposited by them. Court of Manila against the Organization, alleging that it was engaged in illegal banking activities, “by receiving deposits of money for deposit, It is true that such funds are referred to as their “savings” and that the disbursement, safekeeping or otherwise or transacts the business of a depositors thereof are designated as “members,” but, even a cursory examination of said documents will readily show that anybody can be a

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 22 depositor and thus be “participating member.” In other words, the pertinent laws and regulations of the Securities and Exchange Organization is open to the public for deposit accounts, and the funds so Commission (SEC): Provided, That if the IH functions are raised may be lent by the Organization. performed directly by the UB, such functions shall be undertaken by a separate and distinct department or other similar unit in the Moreover, the power to dispose of said funds is placed under the exclusive UB: Provided, further, That a UB cannot perform such functions authority of the “founding members,” and “participating members” are both directly and indirectly through a subsidiary. expressly denied the right to vote or be voted for, their privileges and benefits being limited to those, which the BoT may in its discretion, i. Commercial Banks (KB) Powers determine from time to time. Thus, the membership of the “participating Sec. 29, GBL: A commercial bank shall have, in addition to members” is purely nominal in nature. This situation is fraught, precisely, the general powers incident to corporations, all such powers with the very dangers or evils, which RA 337 seeks to forestall, by exacting as may be necessary to carry on the business of commercial compliance with the requirements of said Act, before the transactions in banking such as accepting drafts and issuing letters of credit; question could be undertaken. discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating demand deposits; receiving other types of deposits and II. CLASSIFICATION OF BANKS deposit substitutes; buying and selling foreign exchange and gold or silver bullion; acquiring marketable bonds and other A. Universal Banks (UB): Sec. 3.2 (a), GBL debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include (a) Governing Law: General Banking Law the determination of bonds and other debt securities eligible

for investment, the maturities and aggregate amount of such (b) Powers investment. Sec. 23, GBL: A universal bank shall have the authority to

exercise, in addition to the powers authorized for a commercial Sec. X101 (b)(2), MRB bank in Section 29, the powers of an investment house as In addition to the general powers incident to corporations and provided in existing laws and the power to invest in non-allied those provided in other laws, a KB shall have the authority to enterprises as provided in this Act. exercise all such powers as may be necessary to carry on the

business of commercial banking, such as accepting drafts and Sec. X101 (b)(1), MRB and BSP Circular No. 271, Series of issuing letters of credit; discounting and negotiating 2001 promissory notes, drafts, bills of exchange, and other A UB shall have the authority to exercise, in addition to the evidences of debt; accepting or creating demand deposits; powers and services authorized for a KB as enumerated in Item receiving other types of deposits and deposit substitutes; “b(2)” and those provided by other laws, the following: buying and selling foreign exchange and gold or silver bullion;

acquiring marketable bonds and other debt securities; and (a) The powers of an investment house (IH) as provided extending credit, subject to such rules as the Monetary Board under existing laws; may promulgate. These rules may include the determination (b) The power to invest in non-allied enterprises; of bonds and other debt securities eligible for investment, the (c) The power to own up to one hundred percent (100%) of maturities and aggregate amount of such investment. the equity in a TB, an RB, a financial allied enterprise, or

a non- financial allied enterprise; and It may also exercise or perform any or all of the following: (d) In case of publicly-listed UBs, the power to own up to (a) Invest in the equities of allied enterprises as provided one hundred percent (100%) of the voting stock of only in Sections 31 and 32 of R.A. No. 8791; one (1) other UB or KB. (b) Purchase, hold and convey real estate as specified

under Sections 51 and 52 of R.A. No. 8791; A UB may perform the functions of an IH either directly or (c) Receive in custody funds, documents and valuable indirectly through a subsidiary IH; in either case, the underwriting objects; of equity securities and securities dealing shall be subject to (d) Act as financial agent and buy and sell, by order of and

for the account of their customers, shares, evidences of participation in the form of debt or equity financing or indebtedness and all types of securities; through the extension of financial or technical advice or (e) Make collections and payments for the account of service; others and perform such other services for their 9. Undertake or contract for researches, studies and customers as are not incompatible with banking surveys on such matters as business and economic business; conditions of various countries, the structure of (f) Upon prior approval of the Monetary Board, act as financial markets, the institutional arrangements for managing agent, adviser, consultant or administrator of mobilizing investments;10. Acquire, own, hold, lease or investment management/ advisory/ consultancy obtain an interest in real and/or personal property as accounts; may be necessary or appropriate to carry on its (g) Rent out safety deposit boxes; and objectives and purposes; (h) Engage in quasi-banking functions. 10. Design pension, profit-sharing and other employee benefits plans; and ii. Investment House powers 11. Such other activities or business ventures as are Sec. 7, Investment Houses Law directly or indirectly related to the dealing in securities In addition to the powers granted to corporations in general, and other commercial papers, unless otherwise an Investment House is authorized to do the following: governed or prohibited by special laws, in which case 1. Arrange to distribute on a guaranteed basis securities the special law shall apply. of other corporations and of the Government or its instrumentalities; Nothing in this section shall preclude other enterprises not 2. Participate in a syndicate undertaking to purchase and covered by this Decree from engaging in the activities listed sell, distribute or arrange to distribute on a guaranteed under subsections (3) to (11) of this section, except as may basis securities of other corporations and of the otherwise be governed by special laws. Government or its instrumentalities; 3. Arrange to distribute or participate in a syndicate SEC Omnibus Rules and Regulations for Investment undertaking to purchase and sell on a best-efforts basis Houses and Universal Banks Registered as Underwriter securities of other corporations and of the Government of Securities or its instrumentalities; “Investment House” is any enterprise, which primarily 4. Participate as soliciting dealer or selling group member engages, whether regularly or on an isolated basis, in the in tender offers, block sales, or exchange offering or underwriting of securities of another person or enterprise, securities; deal in options, rights or warrants relating to including securities of the Government or its instrumentalities. securities and such other powers which a dealer may exercise under the Securities Act (Act No. 83, as “Underwriting of Securities” is the act or process of amended); guaranteeing by an Investment House duly licensed under PD 5. Promote, sponsor, or otherwise assist and implement 129 or a Universal Bank registered as an Underwriter of ventures, projects and programs that contribute to the Securities with the Commission, the distribution and sale of economy's development; securities issued by another person or enterprise, including 6. Act as financial consultant, investment adviser, or securities of the Government or its instrumentalities. The broker; distribution and sale may be on a public or private placement 7. Act as porfolio manager, and/or financial agent, but not basis: Provided, that nothing shall prevent an Investment as trustee of a trust fund or trust property as provided House or Universal Bank registered as Underwriter of for in Chapter VII of Republic Act No. 337, as Securities from entering into a contract with another entity to amended; further distribute securities that it has underwritten. 8. Encourage companies to go public, and initiate and/or promote, whenever warranted, the formation, merger, 1. Definition/Function of Investment House consolidation, reorganization, or recapitalization of Sec. 3, Investment Houses Law productive enterprises, by providing assistance or For the purpose of this Decree, unless the context

otherwise indicates, the following definition of terms are B. Commercial Banks (KB): Sec. 3.2 (b), GBL hereby adopted: (a) Governing Law: General Banking Law

(a) "Underwriting" is the act or process of guaranteeing (b) Powers the distribution and sale of securities of any kind Sec. 101 (b)(2), MRB and BSP Circular No. 271, Series of issued by another corporation. 2001 In addition to the general powers incident to corporations and (b) "Securities" are written evidences of ownership, those provided in other laws, a KB shall have the authority to interest, or participation, in an enterprise, or written exercise all such powers as may be necessary to carry on the evidences of indebtedness of a person or enterprise. business of commercial banking, such as accepting drafts and It includes, but is not limited to the instruments issuing letters of credit; discounting and negotiating promissory enumerated in Section 2 of the Securities Act notes, drafts, bills of exchange, and other evidences of debt; (Commonwealth Act No. 83, as amended). accepting or creating demand deposits; receiving other types of deposits and deposit substitutes; buying and selling foreign Sec. 2 (a), IRR of Investment Houses Law exchange and gold or silver bullion; acquiring marketable bonds “Investment House” is any enterprise, which primarily and other debt securities; and extending credit, subject to such engages, whether regularly or on an isolated basis, in rules as the Monetary Board may promulgate. These rules may the underwriting of securities of another person or include the determination of bonds and other debt securities enterprise, including securities of the Government or its eligible for investment, the maturities and aggregate amount of instrumentalities. such investment.

2. Limitations on UB’s exercise of investment house It may also exercise or perform any or all of the following: powers (a) Invest in the equities of allied enterprises as provided in Sec. X101 (b)(1), MRB Sections 31 and 32 of R.A. No. 8791; …in either case, the underwriting of equity securities and (b) Purchase, hold and convey real estate as specified under securities dealing shall be subject to pertinent laws and Sections 51 and 52 of R.A. No. 8791; regulations of the Securities and Exchange Commission (c) Receive in custody funds, documents and valuable (SEC): Provided, That if the IH functions are performed objects; directly by the UB, such functions shall be undertaken (d) Act as financial agent and buy and sell, by order of and for by a separate and distinct department or other similar the account of their customers, shares, evidences of unit in the UB: Provided, further, That a UB cannot indebtedness and all types of securities; perform such functions both directly and indirectly (e) Make collections and payments for the account of others through a subsidiary. and perform such other services for their customers as are not incompatible with banking business; iii. To invest in equity of non-allied enterprises (f) Upon prior approval of the Monetary Board, act as Sec. 27, GBL: The equity investment of a universal bank, or managing agent, adviser, consultant or administrator of of its wholly or majority-owned subsidiaries, in a single non- investment management/ advisory/ consultancy accounts; allied enterprise shall not exceed thirty-five percent (35%) of (g) Rent out safety deposit boxes; and the total equity in that enterprise nor shall it exceed thirty-five (h) Engage in quasi-banking functions. percent (35%) of the voting stock in that enterprise. i. KB Powers Sec. 1381, MRB: Only UBs may invest in the equity of an Sec. 29, GBL: A commercial bank shall have, in addition to enterprise engaged in non-allied or non-related activities. the general powers incident to corporations, all such powers as may be necessary to carry on the business of commercial banking such as accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; accepting or creating

demand deposits; receiving other types of deposits and bank in another corporation engaged primarily in real estate deposit substitutes; buying and selling foreign exchange and shall be considered as part of the bank's total investment in gold or silver bullion; acquiring marketable bonds and other real estate, unless otherwise provided by the Monetary Board. debt securities; and extending credit, subject to such rules as the Monetary Board may promulgate. These rules may include Sec. 52, GBL: Notwithstanding the limitations of the the determination of bonds and other debt securities eligible preceding Section, a bank may acquire, hold or convey real for investment, the maturities and aggregate amount of such property under the following circumstances: investment. 52.1. Such as shall be mortgaged to it in good faith by way of security for debts; 1. Accepting drafts 52.2. Such as shall be conveyed to it in satisfaction of debts 2. Issuing letters of credit (L/Cs) previously contracted in the course of its dealings, or 3. Discounting and negotiating promissory notes (PNs), 52.3. Such as it shall purchase at sales under judgments, drafts, bills of exchange, and other evidences of debt decrees, mortgages, or trust deeds held by it and such as it 4. Accepting or creating demand deposits shall purchase to secure debts due it. 5. Receiving other types of deposits and deposit substitutes 6. Buying and selling foreign exchange and gold or silver Any real property acquired or held under the circumstances bullion enumerated in the above paragraph shall be disposed of by 7. Acquiring marketable bonds and other debt securities the bank within a period of five (5) years or as may be 8. Extending credit prescribed by the Monetary Board: Provided, however, That the bank may, after said period, continue to hold the property ii. Engage in quasi-banking functions for its own use, subject to the limitations of the preceding Sec. 6, par. 1, GBL: No person or entity shall engage in Section. banking operations or quasi-banking functions without authority from the Bangko Sentral: Provided, however, That v. Other services an entity authorized by the Bangko Sentral to perform Sec. 53, GBL: In addition to the operations specifically universal or commercial banking functions shall likewise have authorized in this Act, a bank may perform the following the authority to engage in quasi-banking functions. services: 53.1. Receive in custody funds, documents and valuable iii. To invest in equity of allied enterprises objects; Sec. 31, GBL: A commercial bank may own up to one 53.2. Act as financial agent and buy and sell, by order of hundred percent (100%) of the equity of a thrift bank or a and for the account of their customers, shares, evidences of rural bank. Where the equity investment of a commercial bank indebtedness and all types of securities; is in other financial allied enterprises, including another 53.3. Make collections and payments for the account of commercial bank, such investment shall remain a minority others and perform such other services for their customers holding in that enterprise. as are not incompatible with banking business; 53.4 Upon prior approval of the Monetary Board, act as Sec. 32, GBL: A commercial bank may own up to one managing agent, adviser, consultant or administrator of hundred percent (100%) of the equity in a non-financial allied investment management/advisory/consultancy accounts; enterprise. and 53.5. Rent out safety deposit boxes. iv. To purchase, hold and convey real estate Sec. 51, GBL: Any bank may acquire real estate as shall be The bank shall perform the services permitted under necessary for its own use in the conduct of its business: Subsections 53.1, 53.2,53.3 and 53.4 as depositary or as an Provided, however, That the total investment in such real agent. Accordingly, it shall keep the funds, securities and estate and improvements thereof including bank equipment, other effects which it receives duly separate from the bank's shall not exceed fifty percent (50%) of combined capital own assets and liabilities: The Monetary Board may regulate accounts: Provided, further, That the equity investment of a the operations authorized by this Section in order to ensure

that such operations do not endanger the interests of the organization, ownership and capital requirements, powers, depositors and other creditors of the bank. In case a bank or supervision and general conduct of business of Islamic banks shall quasi-bark notifies the Bangko Sentral or publicly announces be governed by special laws. The provisions of this Act, however, a bank holiday, or in any manner suspends the payment of insofar as they are not in conflict with the provisions of the Thrift its deposit liabilities continuously for more than thirty (30) Banks Act, the Rural Banks Act, and the Cooperative Code shall days, the Monetary Board may summarily and without need likewise apply to thrift banks, rural banks, and cooperative banks, for prior hearing close such banking institution and place it respectively. However, for purposes of prescribing the minimum under receivership of the Philippine Deposit Insurance ratio which the net worth of a thrift bank must bear to its total risk Corporation. assets, the provisions of Section 33 of this Act shall govern.

1. Receive in custody funds, documents and valuable i. Organization, ownership, capital requirements, powers, objects supervision, and general conduct of business 2. Act as financial agent and buy and sell, by order of and ii. Net worth to risk assets ratio for the account of customers, shares, evidences of Sec. 71, par. 3: …However, for purposes of prescribing the indebtedness and all types of securities minimum ratio which the net worth of a thrift bank must bear 3. Make collections and payments for the account of others to its total risk assets, the provisions of Section 33 of this Act and perform such other services for their customers as shall govern. are not incompatible with banking business 4. Upon prior MB approval, act as managing agent, Sec. 33, GBL: A bank other than a universal or commercial adviser, consultant or administrator of investment and bank cannot accept or create demand deposits except upon management/advisory/consultancy accounts prior approval of, and subject to such conditions and rules as 5. Rent out safety deposit boxes may be prescribed by the Monetary Board.

vi. To issue guarantees iii. Other matters—GBL suppletory application Sec. 74, General Banking Act: No bank or banking institution shall enter, directly or indirectly, into any contract (b) Declaration of Policy of guaranty or suretyship, or shall guarantee the interest or Sec. 2, Thrift Banks Act principal of any obligation of any person, co-partnership, It is hereby declared the policy of the State to: association, corporation or other entity. The provisions of this a. Recognize the indispensable role of the private sector, to section shall, however, not be held to apply to the borrowing encourage private enterprise, and to provide incentives to of money by any such bank or institution through the needed investments; rediscounting of its receivables, or otherwise, as may be (b) Promote economic development pursuant to the permitted by law, nor to the granting or guaranteeing of socioeconomic program of the government, to expand acceptance credits in the ordinary course of its business. Nor industrial and agricultural growth, to encourage the shall the provisions of this section apply to the certification of establishment of more private thrift banks in order to checks or to transactions involving the release of documents meet the needs for capital, personal and investment credit attached to items received for collection, nor to any other or medium- and long-term loans for Filipino transaction, which may properly be regarded as common entrepreneurs; usage and accepted banking practice. (c) Encourage and assist the establishment of thrift bank system which will promote agriculture and industry and at C. Thrift Banks (TB): Sec. 3.2 (c), GBL the same time place within easy reach of the people the (a) Governing Law medium-and long-term credit facilities at reasonable cost; Sec. 71, par. 1 and 3, GBL: The organization, the ownership and (d) Encourage industry, frugality and the accumulation of capital requirements, powers, supervision and general conduct of savings among the public, and the members and business of thrift banks, rural banks and cooperative banks shall stockholders of thrift banks; and be governed by the provisions of the Thrift Banks Act, the Rural (e) Regulate and supervise the activities of thrift banks in Banks Act, and the Cooperative Code, respectively. The order to place their operations on a sound, stable and

efficient basis and to curtail or prevent acts or practices, guidelines as may be established by the Monetary Board; which are prejudicial to the public interest. (f) Rediscount paper with the Philippine National Bank, the Land Bank of the Philippines, the Development Bank of the (c) Definition/Purpose: Sec. 3.2 (c), GBL Philippines, and other government-owned or -controlled Sec. 3 (a), Thrift Banks Act corporations. Said institutions shall specify the nature of "Thrift banks" shall include savings and mortgage banks, private paper deemed acceptable for rediscount, as well as development banks, and stock savings and loans associations rediscounting rate to be charged by any of these organized under existing laws, and any banking corporation that institutions; and may be organized for the following purposes: (g) Issue mortgage and chattel mortgage certificates, buy and (1) Accumulating the savings of depositors and investing sell them for its own account or for the account of others, or them, together with capital loans secured by bonds, accept and receive them in payment or as amortization of its mortgages in real estate and insured improvements loan. thereon, chattel mortgage, bonds and other forms of security or in loans for personal or household finance, Such mortgage and chattel mortgage certificates shall be whether secured or unsecured, or in financing for issued exclusively in national currency and exclusively for homebuilding and home development; in readily the financing of equipment loans, mortgage loans for the marketable and debt securities; in commercial papers and acquisition of machinery and other fixed installations, accounts receivables, drafts, bills of exchange, conservation, enlargement or improvement of productive acceptances or notes arising out of commercial properties and real estate mortgage loans for: (1) the transactions; and in such other investments and loans construction, acquisition, expansion or improvement of rural which the Monetary Board may determine as necessary in and urban properties; (2) the refinancing of similar loans the furtherance of national economic objectives; and mortgages; and (3) such other purposes as may be (2) Providing short-term working capital, medium- and long- authorized by the Monetary Board. term financing, to businesses engaged in agriculture, services, industry and housing; and A thrift bank shall coordinate the amounts and maturities of (3) Providing diversified financial and allied services for its its certificates with those of its loans, so as to ensure chosen market and constituencies specially for small and adequate cash receipts for the payment of principal and medium enterprises and individuals. interest at the time they become due. The bank shall accept its own certificates at least at the actual price of issue, in (d) Powers any prepayment of loans which mortgage or chattel Sec. 10, Thrift Banks Act mortgage debtors may wish to make: Provided, That the In addition to powers granted it by this Act and existing laws, any date of maturity of the certificates is not later than the date thrift bank may: on which the payment would otherwise become due, in the (a) Accept savings and time deposits; absence of the aforesaid prepayment; (b) Open current or checking accounts: Provided, That the thrift bank has net assets of at least Twenty million pesos (h) Purchase, hold and convey real estate under the same (P20,000,000) subject to such guidelines as may be conditions as those governing commercial banks as specified established by the Monetary Board; and shall be allowed to under Section 25 of Republic Act No. 337; directly clear its demand deposit operations with the Bangko (i) Engage in quasi-banking and money market operations; Sentral and the Philippine Clearing House Corporation; (j) Open domestic letters of credit; (c) Act as correspondent for other financial institutions; (k) Extend credit facilities to private and government (d) Act as collection agent for government entities, including but employees: Provided, That in the case of a borrower who is not limited to, the Bureau of Internal Revenue, Social a permanent employee or wage earner, the treasurer, Security System, and the Bureau of Customs; cashier or paymaster of the office employing him is (e) Act as official depository of national agencies and of authorized, notwithstanding the provisions of any existing municipal, city or provincial funds in the municipality, city or law, rules and regulations to the contrary, to make province where the thrift bank is located, subject to such deductions from his salary, wage or income pursuant to the

terms of his loan, to remit deductions to the thrift bank With prior approval of the Monetary Board, and subject to concerned, and collect such reasonable fee for his services; such guidelines as may be established by it, TBs may also (l) Extend credit against the security of jewelry, precious stones perform the following services: and articles of similar nature, subject to such rules and (l) Open current or checking accounts; regulations as the Monetary Board may prescribe; and (m) Engage in trust, quasi-banking functions and money market (m) Offer other banking services as provided in Section 72 of operations; Republic Act No. 337 and Republic Act No. 6426, as (n) Act as collection agent for government entities, including but amended. not limited to, the Bureau of Internal Revenue (BIR), Social Security System (SSS) and the Bureau of Customs (BOC); Thrift banks may perform the services under subsections (o) Act as official depository of national agencies and of (b), (d), (e), (g) and (i) only upon prior approval of the municipal, city or provincial funds in the municipality, city or Monetary Board. province where the TB is located; (p) Issue mortgage and chattel mortgage certificates, buy and Nothing in this Section shall be construed as precluding a sell them for its own account or for the account of others, or thrift bank from performing, with prior approval of the accept and receive them in payment or as amortization of its Monetary Board, commercial banking services, or from loan; and operating under an expanded banking authority, nor from (q) Invest in the equity of allied undertakings. exercising, whenever applicable and not inconsistent with the provisions of this Act and Bangko Sentral regulations, D. Rural Banks (RB): Sec. 3.2 (d), GBL and such other powers incident to a corporation. (a) Governing Law Sec. 71, par. 1 and 3, GBL: The organization, the ownership and Sec. 101 (b)(3), MRB and BSP Circular No. 271, Series of capital requirements, powers, supervision and general conduct of 2001 business of thrift banks, rural banks and cooperative banks shall In addition to the powers provided in other laws, a TB may be governed by the provisions of the Thrift Banks Act, the Rural perform any or all of the following services: Banks Act, and the Cooperative Code, respectively. The (a) Grant loans, whether secured or unsecured; organization, ownership and capital requirements, powers, (b) Invest in readily marketable bonds and other debt supervision and general conduct of business of Islamic banks shall securities, commercial papers and accounts receivable, be governed by special laws. The provisions of this Act, however, drafts, bills of exchange, acceptances or notes arising out of insofar as they are not in conflict with the provisions of the Thrift commercial transactions; Banks Act, the Rural Banks Act, and the Cooperative Code shall (c) Issue domestic letters of credit; likewise apply to thrift banks, rural banks, and cooperative banks, (d) Extend credit facilities to private and government respectively. However, for purposes of prescribing the minimum employees; ratio which the net worth of a thrift bank must bear to its total risk (e) Extend credit against the security of jewelry, precious stones assets, the provisions of Section 33 of this Act shall govern. and articles of similar nature, subject to such rules and regulations as the Monetary Board may prescribe; i. Organization, ownership, capital requirements, powers, (f) Accept savings and time deposits; supervision, and general conduct of business (g) Rediscount paper with the Land Bank of the Philippines ii. Other matters—GBL of suppletory application (LBP), Development Bank of the Philippines (DBP), and other government-owned or-controlled corporations; (b) Declaration of Policy (h) Accept foreign currency deposits as provided under R.A. No. Sec. 2, Rural Banks Act: The State hereby recognizes the need 6426, as amended; to promote comprehensive rural development with the end in view (i) Act as correspondent for other financial institutions; of attaining acquitable distribution of opportunities, income and (j) Purchase, hold and convey real estate as specified under wealth; a sustained increase in the amount of goods and services Sections 51 and 52 of R.A. No. 8791; and produced by the nation of the benefit of the people; and in (k) Offer other banking services as provided in Section 53 of expanding productivity as a key raising the quality of life for all, R.A. No. 8791. especially the underprivileged.

(a) Extend loans and advances primarily for the purpose of Towards these ends, the State hereby encourages and assists in meeting the normal credit needs of farmers, fishermen the establishment of rural banking system designed to make or farm families as well as cooperatives, merchants, needed credit available and readily accessible in the rural areas on private and public employees; reasonable terms (b) Accept savings and time deposits; (c) Act as correspondent of other financial institutions; (c) Powers (d) Rediscount paper with the LBP, DBP or any other bank, Sec. 12, Rural Banks Act: In addition to the operations including its branches and agencies. Said banks shall especially authorized in this Act, any rural bank may: specify the nature of paper deemed acceptable for • Accept saving and time deposit; rediscount, as well as the rediscount rate to be charged • Open current or checking accounts, provided the rural by any of these banks; bank has net assets of at least Five million (e) Act as collection agent; (P5,000,000) subject to such guidelines as may be (f) Offer other banking services as provided in Section 53 established by the Monetary Board: of R.A. No. 8791. • Act as correspondent for other financial institutions; With prior approval of the Monetary Board, an RB may • Act as a collection agent; perform any or all of the following services: • Act as official depositary of municipal, city or provincial (g) Accept current or checking accounts: Provided, That funds in the municipality, city or province where it is such RB has net assets of at least P5 million; located, subject to such guidelines as may be (h) Accept NOW accounts; established by the Monetary Board; (i) Act as trustee over estates or properties of farmers and • Rediscount paper with the Philippine National Bank, the merchants; Land Bank of the Philippines, the Development Bank of (j) Act as official depository of municipal, city or provincial the Philippines, or any other banking institution, funds in the municipality, city or province where it is including its branches and agencies. Said institution located; shall specify the nature of paper deemed acceptable for (k) Sell domestic drafts; and rediscount, as well as the rediscount rate to be charged (l) Invest in allied undertakings. by any of these institutions; • Offer other banking service as provided in Section 72 of E. Cooperative Banks (Coop Banks): Sec. 3.2 (e), GBL Republic Act No. 337, as amended, and (a) Governing Law • Extend financial assistance to public and private Sec. 71, par. 1 and 3, GBL: The organization, the ownership and employees in accordance with the provisions of Section capital requirements, powers, supervision and general conduct of 5 of Republic Act No. 3779, as amended. business of thrift banks, rural banks and cooperative banks shall be governed by the provisions of the Thrift Banks Act, the Rural With written permission of the Monetary Board of the Central Banks Act, and the Cooperative Code, respectively. The bank, any rural bank may act as trustee over estates or properties organization, ownership and capital requirements, powers, of farmer and merchants. supervision and general conduct of business of Islamic banks shall be governed by special laws. The provisions of this Act, however, Nothing in this section shall be construed as precluding a rural insofar as they are not in conflict with the provisions of the Thrift bank from performing, with prior approval of the Monetary Board, Banks Act, the Rural Banks Act, and the Cooperative Code shall all the services authorized and mortgage banks, of for commercial likewise apply to thrift banks, rural banks, and cooperative banks, banks, under an expanded banking authority as provided in respectively. However, for purposes of prescribing the minimum Section 21-B of the same Act ratio which the net worth of a thrift bank must bear to its total risk assets, the provisions of Section 33 of this Act shall govern. Sec. 101 (b)(4), MRB and BSP Circular No. 271, Series of 2001 Art. 99, Cooperative Code: (1) The provisions of this Chapter In addition to the powers provided in other laws, an RB may shall primarily govern cooperative banks registered under this perform any or all of the following services: Code and the other provisions of this Code shall apply to them

only insofar as they are not inconsistent with the provisions Authority: Provided, That the performance of any banking contained in this Chapter. function shall be subject to prior approval by the Central Bank of the Philippines. (2) Cooperatives duly established and registered under the provisions of this Code may organize among themselves a (d) Powers: same as RB cooperative bank, which shall likewise be considered a cooperative Sec. 101 (b)(5), MRB and BSP Circular No. 271, Series of registerable under the provision of this Code subject to the 2001 requirements of and requisite authorization from the Central Bank. A Coop Bank shall be organized primarily to provide financial and credit services to cooperatives and may perform any or all of the i. Organization, ownership, capital requirements, powers, services offered by RBs. supervision, and general conduct of business ii. Other matters—GBL of suppletory application F. Islamic Banks (IB): Sec. 3.2 (f), GBL (a) Governing Law Sec. 71, par. 2, GBL: …The organization, ownership and capital (b) Declaration of Policy requirements, powers, supervision and general conduct of Art. 2, Cooperative Code: business of Islamic banks shall be governed by special laws.

(c) Definitions/Functions i. Organization, ownership, capital requirements, powers, Art. 100, Cooperative Code supervision and general conduct of business A cooperative bank is one organized by the majority shares of which is owned and controlled by cooperatives primarily to provide (b) Purpose financial and credit services to cooperatives. The term Sec. 3, Islamic Bank Charter: The primary purpose of the "cooperative bank" shall include cooperative rural banks. Islamic Bank shall be to promote and accelerate the socioeconomic development of the Autonomous Region by performing A cooperative bank may perform the following functions: banking, financing and investment operations and to establish and (1) To carry on banking and credit services for the participate in agricultural, commercial and industrial ventures cooperatives; based on the Islamic concept of banking. (2) To receive financial aid or loans from the Government and the Central Bank of the Philippines for and in behalf of the All business dealings and activities of the Islamic Bank shall be cooperative banks and primary cooperatives and their subject to the basic principles and rulings of Islamic Shari'a within federations engaged in business and to supervise the the purview of the aforementioned declared policy. Any zakat or lending and collection of loans; "ithe" paid by the Islamic Bank on behalf of its shareholders and (3) To mobilize savings of its members for the benefit of the depositors shall be its obligation to appropriate said zakat fund cooperative movement; and to disburse it in legitimate channels to be ascertained first by (4) To act as a balancing medium for the surplus funds of the Shari'a Advisory Council. cooperatives and their federations; (5) To discount bills and promissory notes issued and drawn by (c) Powers cooperatives; Sec. 6, Islamic Bank Charter: The Al-Amanah Islamic (6) To issue negotiable instruments to facilitate the activities of Investment Bank of the Philippines, upon its organization, shall be cooperatives; a body corporate and shall have the power: (7) To issue debentures subject to the approval of and under (1) To prescribe its bylaws and its operating policies; conditions and guarantees to be prescribed by the (2) To adopt, alter and use a corporate seal; Government; (3) To make contracts, to sue and be sued; (8) To borrow money from banks and other financial (4) To borrow money; to own real or personal property and institutions within the limit to be prescribed by the Central introduce improvements thereon, and to sell, mortgage or Bank; and otherwise dispose of the same; (9) To carry out all other functions as may be prescribed by the (5) To employ such officers and personnel, preferably from the

qualified Muslim sector, as may be necessary to carry government-owned or controlled corporations, particularly Islamic banking business; those doing business in the autonomous region; (6) To establish such branches and agencies in provinces and (9) To issue investment participation certificates, muquaradah cities in the Philippines, particularly where Muslims are (non-interest-bearing bonds), debentures, collaterals predominantly located, and such correspondent offices in and/or the renewal or refinancing of the same, with the other areas in the country or abroad as may be necessary approval of the Monetary Board of the Central Bank of the to carry on its Islamic banking business, subject to the Philippines, to be used by the Bank in its financing provisions of Section 2 hereof; operations for projects that will promote the economic (7) To perform the following banking services: development primarily of the Autonomous Region; (a) Open current or checking accounts; (10) To carry out financing and joint investment (b) Open savings accounts for safekeeping or custody with operations by way of mudarabah partnership, musharaka no participation in profit and losses except unless joint venture or by decreasing participation, murabaha otherwise authorized by the account holders to be purchasing for others on a cost-plus financing invested; arrangement, and to invest funds directly in various (c) Accept investment account placements and invest the projects or through the use of funds whose owners desire same for a term with the Islamic Bank's funds in to invest jointly with other resources available to the Islamically permissible transactions on participation Islamic Bank on a joint mudarabah basis; basis; (11) To invest in equities of the following allied (d) Accept foreign currency deposits from banks, undertakings: companies, organizations and individuals, including (a) Warehousing companies; foreign governments; (b) Leasing companies; (e) Buy and sell foreign exchange; (c) Storage companies; (f) Act as correspondent of banks and institutions to (d) Safe deposit box companies; handle remittances or any fund transfers; (e) Companies engaged in the management of mutual (g) Accept drafts and issue letters of credit or letters of funds but not in the mutual funds themselves; and guarantee, negotiate notes and bills of exchange and (f) Such other similar activities as the Monetary Board of other evidence of indebtedness under the universally the Central Bank of the Philippines has declared or accepted Islamic financial instruments; may declare as appropriate from time to time, subject (h) Act as collection agent insofar as the payment orders, to existing limitations imposed by law; bills of exchange or other commercial documents are (12) To exercise the powers granted under this Charter exclusive of riba or interest prohibitions; and such incidental powers as may be necessary to carry (i) Provide financing with or without collateral by way of on its business, and to exercise further the general powers leasing, sale and leaseback, or cost plus profit sales mentioned in the Corporation Law and the General Banking arrangement; Act, insofar as they are not inconsistent or incompatible (j) Handle storage operations for goods or commodity with the provisions of this Charter. financing secured by warehouse receipts presented to the Bank; Sec. 101 (b)(6), MRB and BSP Circular No. 271, Series of (k) Issue shares for the account of institutions and 2001 companies assisted by the Bank in meeting In addition to the general powers incident to corporations and subscription calls or augmenting their capital and/or those provided in other laws, as well as in Circular No. 105 fund requirements as may be allowed by law; (Appendix 44), insofar as they are not inconsistent or incompatible (l) Undertake various investments in all transactions with the provisions of R.A. No. 6848, an IB may perform any or all allowed by Islamic Shari'a in such a way that shall not of the following services: permit the haram (forbidden), nor forbid the halal (permissible); (a) Open savings accounts for safekeeping or custody with no (8) To act as an official government depository, or its participation in profit and losses except unless otherwise branches, subdivisions and instrumentalities and of authorized by the account holders to be invested;

(b) Accept investment account placements and invest the same i. Warehousing companies; for a term with the IB’s funds in Islamically permissible ii. Leasing companies; transactions on participation basis; iii. Storage companies; (c) Accept foreign currency deposits from banks, companies, iv. Companies engaged in the management of mutual organizations and individuals, including foreign funds but not in the mutual funds themselves; and governments; v. Such other similar activities as the Monetary Board (d) Buy and sell foreign exchange; has declared or may declare as appropriate from (e) Act as correspondent of banks and institutions to handle time to time, subject to existing limitations imposed remittances or any fund transfers; by law. (f) Accept drafts and issue letters of credit or letters of guarantee, negotiate notes and bills of exchange and other G. Other Classification of Banks: Sec. 3.2 (g), GBL evidence of indebtedness under the universally accepted Islamic financial instruments; (a) Land Bank of the Philippines (g) Act as collection agent in so far as the payment orders, bills Code of Agrarian Reform of the Philippines of exchange or other commercial documents are exclusive Section 74. Creation - To finance the acquisition by the Government of of riba or interest prohibitions; landed estates for division and resale to small landholders, as well as the (h) Provide financing with or without collateral by way of purchase of the landholding by the agricultural lessee from the landowner, leasing, sale and leaseback, or cost plus profit sales there is hereby established a body corporate to be known as the "Land Bank arrangement; of the Philippines", hereinafter called the "Bank", which shall have its (i) Handle storage operations for goods or commodity principal place of business in Manila. The legal existence of the Bank shall be financing secured by warehouse receipts presented to the for a period of fifty years counting from the date of the approval hereof. The bank; Bank shall be subject to such rules and regulations as the Central Bank may (j) Issue shares for the account of institutions and companies from time to time promulgate. assisted by the bank in meeting subscription calls or augmenting their capital and/or fund requirements as may Section 75. Powers in General - To carry out this main purpose, the Bank be allowed by law; shall have the power: (k) Undertake various investments in all transactions allowed (1) To prescribe, repeal, and alter its own by laws, to determine its by the Islamic Shari’a in such a way that shall not permit operating policies, and to issue such rules and regulations as may the haram (forbidden), nor forbid the halal (permissible); be necessary to achieve the main purpose for the creation of the (l) Act as an official government depository, or its branches, Bank; subdivisions and instrumentalities and of government- (2) To adopt, alter and use a corporate seal; owned or -controlled corporations, particularly those doing (3) To acquire and own real and personal property and to sell, mortgage business in the autonomous region; or otherwise dispose of the same; (m) Issue investment participation certificates, muquaradah (4) To sue and be sued, make contracts, and borrow money from both (non-interest- bearing bonds), debentures, collaterals and/ local and foreign sources. Such loans shall be subject to approval by or the renewal and refinancing of the same, with the the President of the Philippines and shall be fully guaranteed by the approval of the Monetary Board to be used by the IB in its Government of the Philippines; financing operations for projects that will promote the (5) Upon recommendation of the Committee on Investments, to hold, economic development primarily of the Autonomous own, purchase, acquire, sell or otherwise invest, or reinvest in Region; stocks, bonds or other securities capable of giving the Bank a (n) Carry out financing and joint investment operations by way reasonably assured income sufficient to support its financing of mudarabh purchasing for others on a cost-plus financing activities and give its private stockholders a fair return on their arrangement, and invest funds directly in various projects holdings: Provided, however, That pending the organization of the or through the use of funds whose owners desire to invest Committee on Investments, the Bank may exercise the powers jointly with other resources available to the IB on a joint herein provided without the recommendation of said Committee on mudarabh basis; and Investments: Provided, further, That in case of the dissolution of the (o) Invest in equities of the following allied undertakings: Land Bank all unsold public lands transferred to it which may be

allocated to the Government of the Philippines in the course of amount equivalent to the difference between the Bank's earnings available liquidation of the business of the Bank shall revert to the for dividends and that necessary to pay the guaranteed rate shall be paid by Department of Agriculture and Natural Resources; and the Bank out of its own assets but the Government shall, on the same day (6) To provide, free of charge, investment counselling and technical that the Bank makes such payment, reimburse the latter in full, for which services to landowners whose lands have been acquired by the Land purpose such amounts as may be necessary to enable the Government to Bank. For this purpose, the Land Bank may contract the services of make such reimbursements are hereby appropriated out of any moneys in private consultants. the National Treasury not otherwise appropriated. The Bank shall give sufficient notice to the Budget Commissioner and the President of the Section 76. Issuance of Bonds - The Land Bank shall, upon Philippines in the event that it is not able to pay the guaranteed rate of recommendation by the Board of Trustees and approval of the Monetary return on any fiscal period. The guaranteed rate of return on these shares Board of the Central Bank, issue bonds, debentures and other evidences of shall not preclude the holders thereof from participating at a percentage indebtedness at such terms, rates and conditions as the Bank may higher than six per centum should the earnings of the Bank for the determine up to an aggregate amount not exceeding, at any one time, five corresponding fiscal period exceed the guaranteed rate of return. The Board times its unimpaired capital and surplus. Such bonds and other obligations of Trustees shall declare and distribute dividends within three months after shall be secured by the assets of the Bank and shall be fully tax exempt the close of each fiscal year at the guaranteed rate unless a higher rate of both as to principal and income. Said income shall be paid to the bondholder return in justified by the Bank's earnings after making reasonable allowance every six (6) months from the date of issue. These bonds and other for administration, contingencies and growth, in which case dividends shall obligations shall be fully negotiable and unconditionally guaranteed by the be declared and distributed at a higher rate. The capital gains derived from Government of the Republic of the Philippines and shall be redeemable at the sale or transfer of such shares and all income derived therefrom in the the option of the Bank at or prior to maturity, which in no case shall exceed form of dividends shall be fully exempt from taxes. twenty-five years. These negotiable instruments of indebtedness shall be mortgageable in accordance with established banking procedures and Section 78. Special Guaranty Fund - In the event that the Bank shall be practices to government institutions not to exceed sixty per centum of their unable to pay the bonds, debentures, and other obligations issued by it, a face value to enable the holders of such bonds to make use of them in fixed amount thereof shall be paid from a special guaranty fund to be set up investments in productive enterprises. They shall also be accepted as by the Government, to guarantee the obligation of the Land Bank, and payments for reparation equipment and materials. established in accordance with this Section, and thereupon, to the extent of the amounts so paid, the Government of the Republic of the Philippines shall The Board of Trustees shall have the power to prescribe rules and succeed to all the rights of the holders of such bonds, debentures or other regulations for the registration of the bonds issued by the Bank at the obligations: Provided, however, That for the next four years after the request of the holders thereof. establishment of the Bank, the payment to the special guaranty fund should not exceed one million pesos per year, after which period, the Government Section 77. Issuance of Preferred Shares of Stock to Finance Acquisition of shall pay into the guaranty fund the sum of five hundred thousand pesos Landed Estates - The Land Bank shall issue, from time to time, preferred each year until the cumulative total of such guaranty fund is no less than shares of stock in such quantities not exceeding six hundred million pesos twenty percent of the outstanding net obligation of the Land Bank at the worth of preferred shares as may be necessary to pay the owners of landed end of any single calendar year. estates in accordance with Sections eighty and eighty-one of this Code. The amount of shares that the Bank may issue shall not exceed the aggregate The guaranty fund shall be administered by the Central Bank of the amount need to pay for acquired estates in the proportions prescribed in Philippines in the manner most consistent with its charter. For the purpose said Section eighty of this Code. The Board of Trustees shall include as a of such fund, there shall be appropriated annually the sum of one million necessary part of the by-laws that it shall issue under Section seventy-five pesos out of any moneys in the National Treasury not otherwise of this Code, such formula as it deems adequate for determining the net appropriated, until the total amount of twenty million pesos shall have been asset value of its holdings as a guide and basis for the issuance of preferred attained. shares. The shares of stock issued under the authority of this provision shall be guaranteed a rate of return of six per centum per annum. In the event Section 79. Receiving Payments and Time Deposits - The Bank, under the that the earnings of the Bank for any single fiscal year are not sufficient to supervision of the Monetary Board and subject to the provisions of the enable the Bank, after making reasonable allowance for administration, General Banking Act, shall receive savings and time deposits from the small contingencies and growth, to declare dividends at the guaranteed rate, the landholders in whose favor public lands or landed estates acquired by the

Land Authority have been sold and, for this purpose, establish, and maintain amounts as is necessary to cover the losses which shall include among other branches and offices in such areas as may be necessary to service such things loss of earnings occasioned by the limitation of the resale cost herein deposits. The Monetary Board shall supervise and authorize the Bank to provided such that said amount together with the administrative expenses receive savings and time deposits from the public in areas where facilities mentioned in Section ninety hereof shall not exceed in the aggregate the for such a service do not exist or cannot be adequately provided by other equivalent of two and one-half per centum of its assets limited therein. deposit institutions. Section 82. Government Shares - All shares of stock in the Bank Section 80. Making Payment to Owners of Landed Estates - The Land bank subscribed or owned by the Government shall not be entitled to participate shall make payments in the form herein prescribed to the owners of land in the income earned by the Bank from its investments and other acquired by the Land Authority for division and resale under this Code. Such operations, whether in the form of cash or stock dividends or otherwise. payment shall be made in the following manner: ten per centum in cash and Amounts expended for the administration of the Bank shall not be deemed the remaining balance in six percent, tax-free, redeemable bonds issued by as a participation of the Government in income. the Bank in accordance with Section seventy-six, unless the landowner desires to be paid in shares of stock issued by the Land Bank in accordance Section 83. Preferred Shares - All preferred shares of stock issued under with Section seventy-seven in an amount not exceeding thirty per centum of Section seventy-seven of this Code shall be entitled to the income earned by the purchase price. the Bank on its investments and other operations and shall have a limited right to elect annually one member of the Board of Trustees and one In the event there is an existing lien on encumbrance on the land in favor of member of the Committee on Investments: Provided, That the holders of any Government institution at the time of acquisition by the Land Bank, the such preferred shares of stock shall not bring derivative suits against the bonds and/or shares, in that order, shall be accepted as substitute Bank. Such preferred shares shall be fully transferable: Provided, further, collaterals to secure the indebtedness. That upon the liquidation of the Bank, the redemption of such preferred shares shall be given priority and shall be guaranteed at par value. The profits accruing from payment shall be exempt from the tax on capital gains. Section 84. Voting of Shares - The voting power of all the shares of stock of the Land Bank owned or controlled by the Government shall be vested in Section 81. Capital - The authorized capital stock of the Bank shall be one the President of the Philippines or in such person or persons as he may from billion five hundred million pesos divided into ninety million shares with a time to time designate. par value of ten pesos each, which shall be fully subscribed by the Government and sixty million preferred shares with a par value of ten pesos Section 85. Use of Bonds - The bonds issued by the Land Bank may be each which shall be issued in accordance with the provisions of Sections used by the holder thereof and shall be accepted in the amount of their face seventy-seven and eighty-three of this Code. Of the total capital subscribed value as any of the following: by the Government, two hundred million pesos shall be paid by the (1) Payment for agricultural lands or other real properties purchased Government within one year from the approval of this Code, and one from the Government; hundred million pesos every year thereafter for two years for which purpose (2) Payment for the purchase of shares of stock of all or substantially all the amount of two hundred million pesos is hereby appropriated upon the of the assets of the following Government owned or controlled effectivity of this Code, and one hundred million pesos every year for the corporations: The National Development Company; Cebu Portland next two years thereafter, out of the funds in the National Treasury not Cement Company; National Shipyards and Steel Corporation; Manila otherwise appropriated for the purpose: Provided, That if there are not Gas Corporation; and the Manila Hotel Company. enough funds in the National Treasury for the appropriation herein made, the Secretary of Finance, with the approval of the President of the Upon offer by the bondholder, the corporation owned or controlled by Philippines, shall issue bonds or other evidence of indebtedness to be the Government shall, through its Board of Directors, negotiate with negotiated either locally or abroad in such amount as may be necessary to such bondholder with respect to the price and other terms and cover any deficiency in the amount above-appropriated but not exceeding conditions of the sale. In case there are various bondholders making four hundred million pesos, the proceeds of which are hereby appropriated: the offer, the one willing to purchase under terms and conditions Provided, further, That the bonds to be issued locally shall not be supported most favorable to the corporation shall be preferred. If no price is by the Central Bank: Provided, finally, That there is automatically acceptable to the corporation, the same shall be determined by a appropriated out of the unappropriated funds in the National Treasury such Committee of Appraisers composed of three members, one to be

appointed by the corporation, another by the bondholder making the and supervision of the business of the Bank in all matters which are not by highest or only offer, and the third by the two members so chosen. this Code or by the by-laws of the Bank specifically reserved to be done by The expenses of appraisal shall be borne equally by the corporation the Board of Trustees. He shall be assisted by an Executive Vice-Chairman and the successful purchaser. and one or more vice-chairman who shall be chosen and may be removed by the Board of Trustees. The salaries of the Vice-Chairmen shall be fixed by Should the Government offer for sale to the public any or all of the the Board of Trustees with the approval of the President of the Philippines. shares of stock or the assets of any of the Government owned or controlled corporations enumerated herein, the bidder who offers to Section 88. Qualifications of Members - No person shall be appointed pay in bonds of the Land Bank shall be preferred provided that the Chairman or member of the Board unless he is a man of accepted integrity, various bids be equal in every respect except in the medium of probity, training and experience in the field of banking and finance, at least payment. thirty-five years of age and possessed of demonstrated administrative skill and ability. (3) Surety or performance bonds in all cases where the Government may require or accept real property as bonds; and Section 89. Committee on Investments - There shall be a Committee on (4) Payment for, reparations goods. Investments composed of three members; the member of the Board of Trustees elected by the holders of preferred shares as Chairman, one Section 86. Board of Trustees - The affairs and business of the Bank shall member to be appointed by the President of the Philippines from among the be directed, its powers exercised and its property managed and preserved government members of the Board of Trustees, and another member to be by a Board of Trustees. Such Board shall be composed of one Chairman and selected by the holders of preferred shares under Section eighty-three of four members, one of whom shall be the head of the Land Authority who this Code. The Committee on Investments shall recommend to the Board of shall be an ex-officio member of such Board and another to be elected by Trustees the corporations or entities from which the Land Bank shall the holders of preferred shares. The Chairman and two members of the purchase shares of stock. Board of Trustees shall serve on full-time basis with the Bank. With the exception of the head of the Land Authority and the member elected by the The Land Bank shall not invest in any corporation, partnership or company holders of preferred shares, the Chairman and all members of the Board wherein any member of the Board of Trustees or of the Committee on shall be appointed by the President with the consent of the Commission on Investments or his spouse, direct descendant or ascendant has substantial Appointments for a term of seven years, except that the first Chairman and pecuniary interest or has participation in the management or control of the members to be appointed under this Code shall serve for a period of three, enterprise except with the unanimous vote of the members of the Board of five and seven years, such terms to be specified in their respective Trustees and of the Committee on Investments, excluding the member appointments. Thereafter the Chairman and members, with the exception of interested, in a joint meeting held for that purpose where full and fair the ex-officio member, appointed after such initial appointment shall serve information of the extent of such interest or participation has been for a term of seven years including any Chairman or member who is adequately disclosed in writing and recorded in the minutes of the meeting: appointed in place of one who resigns or is removed or otherwise vacates Provided, That such interested member shall not in any manner participate his position before the expiration of his seven-year term. The Chairman and in the deliberations and shall refrain from exerting any pressure or influence the two full-time members of the Board shall act as the heads of such whatever on any official or member of the Bank whose functions bear on or operating departments as may be set up by the Board under the authority relate to the investment of the funds of the Bank in the enterprise: granted by Section eighty-seven of this Code. The Chairman shall have Provided, further, That the total investment in any single corporation, authority, exerciseable at his discretion, to determine from time to time the partnership, company, or association shall not exceed five per centum of the organizational divisions to be headed by each member serving full time and total investible funds. to make the corresponding shifts in designations pursuant thereto. The compensation of the Chairman and the members of the Board of Trustees Section 90. Personnel; Cost of Administration - The Administrative serving full time shall be twenty-four thousand and eighteen thousand expenses of the Bank during any single fiscal year shall not in any case pesos, respectively. The other members of the Board shall receive a per exceed two and one-half per centum of its total assets. The Board of diem of one hundred pesos for each session of the Board that they attend. Trustees shall provide for an organization and staff of officers and employees necessary to carry out the functions of the Bank, fix their Section 87. The Chairman and Vice-Chairman - The Chairman of the Board compensation, and appoint and remove such officers and employees for shall be the chief executive officer of the Bank. He shall have direct control cause. The Bank officers and employees shall be subject to the rules and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 36 regulations issued by the Civil Service Commission but shall not fall under (3) Any act or performance tending to prejudice or impair the the Wage and Position Classification Office. The Board of Trustees shall substantial rights of the stockholders. recommend to the Civil Service Commission rules and regulations for the recruitment, appointment, compensation, administration, conduct, Conviction of the Chairman or a member for a crime carrying with it a promotion and removal of all Bank officers and employees under a strict penalty greater than arresto mayor shall cause the removal of such merit system and prepare and conduct examinations under the supervision Chairman or member without the necessity of Presidential action. of said Commission. The Chairman or member may, in any of the above cases, be civilly liable Section 91. Legal counsel - The Secretary of Justice shall be ex-officio legal for any damage that may have been suffered by the stockholders. adviser of the Bank. Any provision of law to the contrary notwithstanding, the Land Bank shall have its own Legal Department, the chief and members Section 96. Transfer of Claims and Liabilities - The assets of the former of which shall be appointed by the Board of Trustees. The composition, Land Tenure Administration and the National Resettlement and budget and operating expenses of the Office of the Legal Counsel and the Rehabilitation Administration in the form of claims and receivables arising salaries and traveling expenses of its officers and employees shall be fixed from the sale or transfer of private and public lands, agricultural equipment, by the Board of Trustees and paid by the Bank. machinery, tools and work animals, but excluding advances made for subsistence, to small landholders shall, after an exhaustive evaluation to Section 92. Auditor - The Auditor General shall be the ex-officio auditor of determine their true asset value, be irrevocably transferred to the Bank the Bank and shall appoint a representative, who shall be the auditor in under such arrangements as the Land Authority and the Bank shall agree charge of the auditing office of the Bank. The Auditor General shall, upon upon. Thereafter, the Bank shall have authority and jurisdiction to the recommendation of the auditor of the Bank, appoint or remove the administer the claims, to collect and make adjustments on the same and, personnel of the auditing office. The compensation, budget and operating generally, to do all other acts properly pertaining to the administration of expenses of the auditing office and the salaries and traveling expenses of claims held by a financial institution. The Land Authority, upon request of the officers and employees thereof shall be fixed by the Board of Trustees the Bank, shall assist the latter in the collection of such claims. The Land and paid by the Bank notwithstanding any provision of law to the contrary. Authority shall be entitled to collect from the Bank no more than the actual cost of such collection services as it may extend. The claims transferred Section 93. Report on Condition of Bank - The representative of the Auditor under this Section shall not be considered as part of the Government's General shall make a quarterly report on the condition of the Bank to the subscription to the capital of the Bank. President of the Philippines, to the Senate through its President, to the House of Representatives through its Speaker, to the Secretary of Finance, Section 97. Regulation - The Bank shall not be subject to the laws, rules to the Auditor General and to the Board of Trustees of the Bank. The report and regulations governing banks and other financial institutions of whatever shall contain, among other things, a statement of the resources and type except with respect to the receipt of savings and time deposits in liabilities including earnings and expenses, the amount of capital stock, accordance with Section seventy-nine of this Code, in which case the legal surplus, reserve and profits, as well as losses, bad debts, and suspended reserve and other requirements prescribed by the Central Bank for such and overdue paper carried in the books as assets of the Bank, and a deposits shall apply. The Bank shall be operated as an autonomous body plantilla of the Bank. and shall be under the supervision of the Central Bank.

Section 94. Auditing Rules and Regulations - The Auditor General shall, Section 98. Tax Exemption - The operations, as well as holdings, with respect to the Bank, formulate improved and progressive auditing rules equipment, property, income and earnings of the Bank from whatever and regulations designed to expedite the operations of the Bank and sources shall be fully exempt from taxation. prevent the occurrence of delays and bottlenecks in its work. Section 99. Organization of Bank - The Bank shall be organized within one Section 95. Removal of Members - The President of the Philippines may, at year from the date that this Code takes effect. any time, remove the Chairman or any member of the Board appointed by him if the interest of the Bank so requires, for any of the following causes: Section 100. Penalty for Violation of the Provisions of this Chapter - Any (1) Mismanagement, grave abuse of discretion, infidelity in the conduct trustee, officer, employee or agent of the Bank who violates or permits the of fiduciary relations, or gross neglect in the performance of duties; violation of any of the provisions of this Chapter, or any person aiding or (2) Dishonesty, corruption, or any act involving moral turpitude; and abetting the violations of any of the provisions of this Chapter, shall be

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 37 punished by a fine not to exceed ten thousand pesos or by imprisonment of Banking Act; and not more than five years, or both such fine and imprisonment at the (g) To adopt, amend, or charge its By-laws; to adopt, alter and use a discretion of the Court. seal; to make contracts; to sue and be sued; and to exercise the general powers of a corporation mentioned in the Corporation Code (b) Development Bank of the Philippines of the Philippines, and of a thrift bank under the General Banking Revised Charter of DBP Act, insofar as such powers are not inconsistent or incompatible with Sec. 2. Name, Purpose and Domicile. The Development Bank of the the provisions of this Charter. Philippines, hereinafter called the Bank, operating under the provisions of Republic Act No. 85, as amended, shall henceforth operate under the Unless otherwise provided in this Charter, the exercise of the above- provisions of this 1986 Revised Charter. The Bank shall be a body corporate mentioned powers on banking shall be subject to applicable law, as well as and shall exist for a period of fifty years. regulations promulgated by the Central Bank of the Philippines.

The primary purpose of the Bank shall be to provide banking services Sec. 4. Loans and other Investments. Loans and other investments of the principally to service the medium and long term needs of agricultural and Bank shall be subject to the same limits and ceilings applicable to thrift industrial enterprises, particularly in the country-side and preferably for banks under existing provisions of law and regulations promulgated by the small and medium scale enterprises; Provided, however, that the pursuit of Monetary Board, including but not limited to prescribed limits and ceilings; these objectives shall be undertaken within the context of a financially Provided, that loans and investments existing as of the date of the viable and stable banking institutions; Provided, further that the Bank shall effectivity of this Charter and which loans and investments would exceed continue to be classified as a development Bank, Provided, finally, that the prescribed limits as a result of the implementation of its rehabilitation unless otherwise provided herein, the Bank may perform all other functions program, as well as those investment authorized under Section 6 hereof of a thrift bank. which are in excess of the prescribed limits shall be reduced within five years in accordance with such program of reduction as may be approved by The Bank's principal office and place of business shall be in the National the Monetary Board. The period of reduction may be extended up to another Capital Region, also known as Metro Manila. It may open and maintain five years by the President of the Philippines upon recommendation by the branches, agencies or other offices at such places in the Philippines as its Monetary Board. Board of Directors may deem advisable, with the prior approval of the Monetary Board of the Central Bank of the Philippines. Sec. 5. Issuance of Bonds. The Bank may issue all kinds of bonds, debentures, and securities, and/or the renewal or refunding thereof Sec. 3. Corporate Powers. The Development Bank of the Philippines shall (hereinafter called "Bonds"), within and/or outside the Philippines, at such have the power. terms, rates, and conditions as the Board of Directors of the Bank may (a) To accept such deposits as are allowed thrift banks under existing determine, subject to compliance with the provisions of applicable law, and law and Central Bank regulations, including but not limited to rules and regulations promulgated by the Monetary Board. demand, savings, and time deposits. (b) To grant loans for the establishment, development or expression of The Bank shall provide for appropriate reserves for the redemption or any agricultural or industrial enterprise; retirement of the bonds. These bonds and other obligations shall be (c) To accept and manage trust funds and properties and carry on the redeemable at the option of the Bank at or before maturity and in such business of a trust corporation; manner as may be stipulated therein and shall bear such rate of interest as (d) To act as official government depository with authority to maintain may be fixed by the Bank. deposits of the government, its subdivisions, branches, and instrumentalities, and of government-owned or controlled Such obligations shall be secured by the assets of the Bank, including the corporations, subject to such rules and regulations as the Monetary stocks, bonds, debentures, and other securities purchased or held by it Board may prescribe; under the provisions of this Charter. These bonds and debentures may be (e) To acquire, assign, or otherwise dispose of marketable securities long-term, medium, or short-term, with fixed interest rate or floating and other debt instruments which are essential to the effective interest rate. conduct of its general banking activities; (f) To enter into such contracts of guaranty on suretyship as are Sec. 6. Private Development Banks, Other Thrift Banks and Rural Banks. generally allowed domestic banking institutions under the General The Bank may assist private development banks and other privately owned

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 38 banks in the thrift bank category, as well as rural banks, through general credit accommodations including but not limited to conduit lending and Except for the Chairman and the Vice Chairman of the Board, no officer or rediscounting operations, and extension of technical and managerial employee of the Bank may be appointed as a member of the Board of assistance; Provided, That the Bank may likewise make equity investments Directors of the Bank; nor shall any director, officer, or employee of any in private development banks and other private owned banks in the thrift other bank be eligible as a member of the Board of Directors of the Bank. bank category, as well as rural banks, if such investment is in connection with the privatization of certain branches of the Bank; Provided, further, Unless otherwise set by the Board and approved by the President of the That the extent of such equity investment may, with the prior approval of Philippines, members of the Board shall be paid a per diem of one thousand the Monetary Board, exceed the ceilings prescribed in Section 4 hereof; and, pesos for each meeting of the Board of Directors actually attended: Provided, finally, That after five years from effectivity of this Charter, any Provided, that the total amount of per diems for every single months shall equity investment shall not exceed thirty (30%) per cent of the equity in not exceed the sum of Five Thousand Pesos. any such bank nor shall its total equity investments exceed the prescribed aggregate ceiling on such investments. Sec. 9. Powers and Duties of the Board of Directors. The Board of Directors shall have, among others, the following duties, powers and authority: Sec. 7. Authorized Capital Stock Par value. The capital stock of the Bank (a) To formulate policies necessary to carry out effectively the shall be Five Billion Pesos to be divided into Fifty Million common shares provisions of this Charter and to prescribe, amend, and repeal by- with par value of P100 per share. These are available for subscription by the laws, rules and regulations for the effective operation of the Bank, National Government. Upon the effectivity of this Charter, the National and the manner in which the general business of the Bank may be Government shall subscribe to Twenty-Five Million common shares of stock conducted and the powers granted by law to the Bank exercised; worth Two Billion Five Hundred Million which shall be deemed paid for by the (b) To approve loans, to fix rates of interest on loans and to prescribe Government with the net asset values of the Bank remaining after the such terms and conditions for loans and credits as may be deemed transfer of assets and liabilities as provided in Section 30 hereof. necessary, consistent with the provisions of this Charter; Provided, that the Board may delegate the authority to approve loans to such Sec. 8. Board of Directors Composition Tenure Per Diems. The affairs and officers as may be deemed necessary; business of the Bank shall be directed and its properties managed and (c) To adopt an annual budget for the effective operation and preserved and its corporate powers exercised, unless otherwise provided in administration of the Bank; this Charter, by a Board of Directors consisting of nine members, to be (d) To create and establish a "Provident Fund" which shall consist of appointed by the President of the Philippines. The term of office of the contributions, made both by the Bank and its officers or employees, Chairman, Vice-Chairman, and the members of the Board of Directors shall to a common fund for the payment of benefits to such officers or be for a period of one year or until such time as their successors are employees, or their heirs, under such terms and conditions as the appointed. Board of Directors may fix; (e) To compromise or release, in whole or in part, any claim or settled The Chairman and the Vice Chairman of the Board shall be appointed by the liability to the Bank regardless of the amount involved, under such President of the Philippines. The Vice Chairman of the Board shall assist the terms and conditions it may impose to protect the interests of the Chairman and act in his stead in case of absence or incapacity. In case of Bank. This authority to compromise shall extend to claims against incapacity or absence of both the chairman and vice-chairman, the Board of the Bank; and Directors shall designate a temporary chairman from among its members. (f) To appoint, promote or remove officers from the rank of Vice President or its equivalent, and other more senior officer positions, No person shall be elected director of the Bank unless he is a natural-born excluding the Chairman and the Vice Chairman. citizen of the Philippines, not less than thirty-five years of age, of good moral character and has attained proficiency, expertise and recognized Sec. 10. Chairman and Chief Executive Officer. The Chairman shall be the competence in one or more of the following: banking, finance, economics, Chief Executive Officer of the Bank and, as such, shall, on behalf of the law, agriculture, business management, public utility or government Board, have the direction and control of the business affairs and properties administration. of the Bank in all matters which are not by this Charter or by the By-Laws of the Bank specifically reserved to be done by the Board or other officers of At least four of the members of the Board shall come from the private the Bank. For this purpose, he shall, among other powers and duties, sector. execute, carry out, and administer the policies, measures, orders, and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 39 resolutions approved by the Board; direct and supervise the operation and enforcement of court writs and processes in cases involving the Bank. The administration of the Bank; and exercise such other powers and perform special sheriff of the Bank shall make a report to the proper court after any such other functions or duties as may be directed or assigned to him by law action taken by him, which shall treat such action as if it were an act of its or by the Board from time to time. own sheriffs in all respects.

Particularly, he shall have the power and duty: Sec. 13. Other Officers and Employments. The Board of Directors shall (a) To sign and execute all contracts concluded by the Bank and enter provided for an organization and staff of officers and employees of the Bank into all necessary obligations required or permitted by this Charter, and upon recommendation of the Chairman of the Board, fix their upon proper authorization by the Board; and sign all notes, remunerations and other emoluments. securities certificates, and other major documents of the Bank; No Officer or employee of the Bank subject to Civil Service Law shall be (b) To exercise, as Chief Executive Officer of the Bank, the powers of dismissed except as provided by law. control and supervision over decisions and actions of subordinate officers and all other powers that may be granted by the Board; Sec. 14. Exemption from Attachment. The provisions of any law to the (c) To report to the Board the main facts concerning the operations of contrary notwithstanding, securities on loans and/or other accommodation the Bank and to recommend changes in policies which he may deem granted by the Bank or its predecessors-in-interest shall not be subject to advisable; attachment, execution or any other court process, nor shall they be included (d) To submit an annual report to the President of the Philippines on the in the property of insolvent persons or institutions, unless all debts and result of the operations of the Bank; obligations of the debtor to the Bank and its predecessors-in-interest have (e) To recommend to the Board the appointment, promotion, or been previously paid, including accrued interest, penalties, collection removal of all officers of the Bank, with the rank of at least vice- expenses, and other charges, subject to the provisions of paragraph (e) of president or its equivalent; Section 9 of this Charter. (f) To appoint, promote or remove employees and officers below the rank of vice-president or its equivalent; Provided, that promotions, Sec. 15. Officer to Conduct Sale. In case of sale of mortgaged properties transfers, assignments or reassignments of officers and personnel of under the provisions of existing laws or of this Charter, such sale shall be the Bank are personnel actions deemed made in the interest of the conducted under the direction of the sheriff of the Province or any special service and not disciplinary, any provision of the Civil Service Law to sheriff of the Bank, or of a municipal judge or notary public of the City or contrary notwithstanding; and Municipality where the sale is to be made, who shall be entitled to collect (g) As required by circumstances, to delegate any of his powers, duties the fees provided for in the Rules of the Court with respect to sale of or functions to any officer or director of the Bank, with the approval properties under execution. of the Board. Sec. 16. Right of Redemption. Any mortgagor of the Bank whose real Sec. 11. Vice Chairman and Chief Operating Officer. The Vice Chairman property has been extrajudicially sold at public auction shall, within one (1) shall be the Chief Operating Officer of the Bank and shall assume and year counted from the date of registration of the certificate of sale, have the exercise such specific duties and responsibilities as may be delegated to him right to redeem the real property by paying to the Bank all of the latter's by the Chairman. claims against him, as determined by the Bank.

Sec. 12. Legal Matters and Cases. The Bank shall have its own Legal The Bank may take possession of the foreclosed property during the Department, the head of which shall be appointed by the Board of Directors redemption period. When the Bank takes possession during such period, it of the Bank upon recommendation of the Chairman. shall be entitled to the fruits of the property with no obligation to account for them, the same being considered compensation for the interest that In appropriate cases, the Bank may avail also of the legal services of any would otherwise accrue on the account. Neither shall the Bank be obliged to government legal office authorized to render such services to government- post a bond for the purpose of such possession. owned or controlled corporations. Sec. 17. Inhibition from Board Meeting of Member with Personal Interest. The Bank may, upon the recommendation of its Chief Legal Counsel, Whenever any member attending a meeting of the Board of Directors has a deputize any member of its legal staff to act as special sheriff in foreclosure direct personal interest in the discussion or resolution of any given matter, cases, in the sale or attachment of the debtor's properties and in the or any of his relatives within the second civil degree or consanguinity or

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 40 second civil degree of affinity has such an interest, said member shall not Sec. 21. Examination of the Bank. The Bank shall be subject to supervision participate in the discussion or resolution of the matter and must retire from and examination by the appropriate department of the Central Bank of the the meeting during the deliberation thereon. The minutes of the meeting, Philippines. which shall note the subject matter, when resolve, the fact that a member had a personal interest in it, and the withdrawal of the member concerned, Sec. 22. Prohibition on Officers and Employees of the Bank. Except as may be made available to the public. required by law, or upon order of a court of competent jurisdiction, or the express order of the President of the Philippines or written permission of the For this purpose, the member of the Board shall, at the beginning of their client, no officer or employee of the Bank shall reveal to, nor allow to be respective terms, disclose to the board any and all interests they may have examined, inquired or looked into, by any third person, government official, in any corporation, partnership. or association and shall, thereafter, bureau or office any information relative to details of individual accounts or disclosed to the Board, any charges thereto. specific banking transactions: Provided, that in respect to deposits or whatever nature, the provisions of existing law shall apply. Sec. 18. Prohibition on Persons with Personal Interest. No member of the Board, officer, attorney, agent, or employee of the Bank shall in any This prohibition shall not apply to the exchange of confidential credit manner, directly participate in the deliberation upon or the determination of information among government financial institutions or among banks, in any question affecting his direct personal interest or the personal interests accordance with established banking practices or as may be allowed by law. of his relatives within the second civil degree of consanguinity or second civil degree of affinity, or of any corporation, partnership, or association in which Sec. 23. Exaction of Fee, Commission, Gift or Charge. No authorized fee, he has a direct interest. Any person violating the provisions of this section commission, gift, or charge of any kind shall be exacted, demanded, or paid, shall be summarily removed from office and shall upon conviction be for obtaining loans from the Bank, and any officer, employee, or agent of punished with a not less than one thousand pesos nor more than ten the Bank found guilty of exacting, demanding, or receiving any fee services thousand pesos or with imprisonment of not less than one year nor more in obtaining a loan, shall be punished by a fine of not less than one than five years, or by both fine and imprisonment at the discretion of the thousand nor more than twenty thousand pesos, imprisonment for not less court. than one year nor more than ten years, and perpetual disqualification from public office. Sec. 19. Borrowing by Directors, Officer and Employees Restriction and Limitation. No director or officer or employees of the Bank or any Sec. 24. Penal Provisions of General Banking Act. The penal provisions of corporation, partnership, or company wherein any member of the Board of Section 87-A of the General Banking Act shall be applicable to officers, Directors, officer or employee, and/or their respective immediate family is a employees and borrowers of the Bank. controlling shareholder, or wherein he is a director or officer shall, either directly or indirectly, for himself or as representative or agent of others, Sec. 25. General Penal Provisions. Any officer or employee of the Bank who borrow any of the deposits of funds from the bank, nor shall he become a violates, or permits any of the officers, employees or agents of said Banks guarantor, or in any manner be an obligator for money borrowed from the or any other person to violate, any of the provision of this Chapter not bank or loaned by it: Provided, That this prohibition on loans to directors, specifically punished in the preceding section and any person violating any officers and employees shall not include loans allowed in the form of fringe provision of this Charter or aiding and abetting the violation thereof, shall be benefits granted in accordance with rules and regulations as may be punished with a fine not less than one thousand nor more than ten thousand prescribed by the Monetary Board of the Central Bank. pesos and with imprisonment not less than one year nor more than five years. Sec. 20. Rules and Regulations on Conflict of Interest. The foregoing provisions notwithstanding and in addition thereto, the Board of Directors is Sec. 26. Other Liability of Guilty Officer or Employee. Any member of the hereby authorized to issue rules and regulations for the purposes of Board of Directors or officer or employee of the Bank who willfully violates determining and resolving conflict of interest questions, which rules shall, in any of the provisions of this Charter shall in, addition to the criminal and particular, include the requirement on all officers and employees of the Bank administrative liability resulting from such act, be held liable for any loss or to disclose any shareholdings they, or their relatives within the second civil injury suffered by the Bank as a result of such violation. degree of consanguinity or second civil degree of affinity, may have in any corporation, partnership, or company in excess of 2% of the equity of said Sec. 27. Liability of Directors, Officers or Partners of Offending Corporation corporation, partnership, or company. or Partnership. If the violation of the provisions of this Charter is committed

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 41 by a corporation or partnership, the directors, officers or partners hereof such orders, rules and regulations as may be necessary to implement the who participated in the violation shall be criminally liable for such violation. provisions of this Charter including those relative to the financial aspects, if any, and to the reorganization of the Bank as hereinabove authorized which Sec. 28. Applicability of Banking Laws. The provisions of Republic Act No. will involve the determination and adoption of (1) the new internal structure 265, as amended, and Republic Act No. 337, as amended, insofar as of the Bank as reorganized down to the divisional section or lowest applicable and not in conflict with any provision of this Charter, shall apply organizational levels, including such appropriate units as may be needed to to the Bank. handle caretaking activities such as the disposition of certain assets and the collection of certain accounts; (2) a new staffing pattern including TRANSITORY PROVISIONS appropriate salary rates, and (3) the initial operating budget. Sec. 29. Preparatory Work. Upon the effectivity of this Charter, the Board of Directors and management of the Bank shall undertake the appropriate In the implementation of the reorganization of the Bank, as authorized steps to establish its current financial condition for the purpose of under the preceding section, qualified personnel of the Bank may be determining its net asset values and the book value of shares thereof. The appointed to appropriate positions in the new staffing pattern thereof and shares of stock held by the Government of the Philippines in the Bank are those not so appointed are deemed separated from the service. No deemed cancelled and exchange for common voting shares of the Bank. preferential or priority rights shall be given to or enjoyed by any officer or personnel of the Bank for appointment to any position in the new staffing Sec. 30. Transfer of Assets and Liabilities of the Development Bank of the pattern nor shall any officer or personnel be considered as having prior or Philippines. The Bank shall transfer to the National Government such of its vested rights with respect to retention in the Bank or in any position as may assets and liabilities as may be necessary to rehabilitate the bank and to have been created in its new staffing pattern, even if he should be the start its operations under the Revised Charter on a viable basis, as incumbent of a similar position thereon. determined by the appropriate authorities, such assets to include but need not be limited to its acquired assets and non-performing accounts and such Pending the completion of the personnel actions above provided and the liabilities to include real as well as contingent liabilities. The National issuance of the appropriate implementing orders, all present remaining Government is hereby authorized to accept the same under terms and incumbents of position in the Bank shall continue to exercise their usual conditions as may be mutually acceptable to the Bank and the National functions, duties and responsibilities. Government. Sec. 34. Separation Benefits. All those who shall retire from the service or Sec. 31. Maintenance, Care and Preservation of Assets Transferred to the are separated therefrom on account of the reorganization of the Bank under National Government. The Bank is hereby authorized to enter into an the provisions of this Charter shall be entitled to all gratuities and benefits agreement with the National Government as transferee of assets from the provided for under existing laws and/or supplementary retirement plans Bank as hereinabove provided, either as an interim arrangement or adopted by and effective in the Bank: Provided, that any separation benefits otherwise and under such terms and conditions as may be necessary to and incentives which may be granted by the Bank subsequent to June 1, preserve and/or to maintain and/or to dispose of such assets transferred to 1986, which may be in addition to those provided under existing laws and the National Government. previous retirement programs of the Bank prior to the said date, for those personnel referred to in this section shall be funded by the National Sec. 32. Authority to Reorganize. In view of the new scope of operations of Government; Provided, further, that, any supplementary retirement plan the Bank, a reorganization of the Bank and a reduction in force are hereby adopted by the Bank after the effectivity of this Chapter shall require the authorized to achieve simplicity and economy in operations, including prior approval of the Minister of Finance. adopting a new staffing pattern to suit the reduced operations envisioned. The formulation of the program of reorganization shall be completed within Sec. 35. Banking Operations under 1986 Revised Charter, Government six months after the approval of this Charter, and the full implementation of Laws. The banking operations of the Bank shall be governed by the the reorganization program within thirty months thereafter. provisions of the 1986 Revised Charter beginning on January 2, 1987 on such subsequent date as may be determined by the President of the Sec. 33. Implementing Details; Organization and Staffing of the Bank. Upon Philippines upon the recommendation of the Minister of Finance. the effectivity of this Charter, the Board of Directors of the Bank shall be constituted and its Chairman appointed. The Chairman is hereby authorized, subject to the approval of the Board of Directors as appropriate, to issue

(c) Philippine Veterans Bank the sale of such bonds and/or certificates of indebtedness are to be used in Philippine Veterans Bank Act its lending operations for the industrial and agricultural development of the country. Section 1. Name Domicile and place of business. There is hereby created a bank to be known as the Philippine Veterans Bank, which shall be commonly The Board of Directors shall determine the interest rates, maturities, and called the Veterans Bank. Its principal domicile and place of business shall other requirements of said obligations; be in the City of Manila but branches or agencies may be established in the provinces and cities as the Board of Directors may decide. (h) To contract any obligation, or enter into any agreement essential to the proper management of its corporate powers and to carry out its aims and CORPORATE POWERS purposes;

Section 2. Corporate powers and duties. The said Veterans Bank shall be a (i) To appoint and dismiss its officers and employees; body corporate and shall have the power: (j) To grant loans to cooperative associations to facilitate production, the (a) To prescribe is by-laws; marketing of crops, and the acquisition of essential commodities: Provided, That preference should be given to such cooperative associations which are (b) To adopt and use a seal; owned or controlled by the veterans, their widows, orphans or compulsory heirs; (c) To sue and be sued; (k) To grant loans to government employees and employees of government- (d) To carry on a trust business is accordance with the provisions of laws owned or controlled corporations, and to employees of private corporations governing trust corporations; or entities for the purpose of enabling said employee to buy shares of stocks in corporations or industries engaged in the development and/or expansion (e) To grant long-term loans and advances preferably to veterans, their of agriculture and industries: Provided, That the yearly amortization of such widows, orphans or compulsory heirs against security and real estate and/or loans shall not exceed ten per cent (10%) of the total annual salaries and other acceptable assets including backpay certificates issued by the National wages of the employees: Provided, further, That such loan shall be payable Treasurer pursuant to Republic Act No. 304 and Republic Act No. 897 at the in full within a period of not exceeding five years and that preference be discretion of the Board of Directors for the establishment, rehabilitation or given to employees who are veterans; expansion of agriculture, industrial, and other productive enterprises: Provided, That the aggregate of such loans shall not exceed the sum total of (l) To exercise the powers granted in this Act and such incidental owners as the paid-up capital and unimpaired surplus, long-term indebtedness and may be necessary to carry on and engage in the business of general thirty per cent of the total deposits: Provided, further, That notarial services banking; in connection with loan applications of not more than one thousand pesos (P1,000.00) shall be furnished by the Bank free of charge and in case where (m) To exercise the general powers mentioned in the Corporation Law and the Veterans Bank has no lawyers, notarial services shall be performed by the General Banking Act, insofar as they are not inconsistent or the justice of the peace and other government notaries public, free of incompatible with the provisions of this Act. charge; Section 3. Authorized capital stock Par value. (f) To invest in stocks other than shares of stock in mining companies, government guaranteed bonds, and secured collaterals having maturities of (a) The capital stock of the Veterans shall be one hundred million pesos not more than thirty (30) years: Provided, That the priorities in the grant of (P100,000,000.00) divided into five hundred ten thousand (510,000) loans for secured collaterals having maturities of not more than thirty years common shares and four hundred ninety thousand (490,000) preferred shall be in accordance with the rules and regulations established by the shares with a par value of one hundred (P100.00) pesos each. Central Bank; (b) At least fifty-one per cent (51%) of the capital stock of the Veterans (g) With the approval of the President of the Philippines, to issue bonds and Bank shall be divided into common shares which shall be fully subscribed by other certificates of indebtedness against its credits secured by real estate the government of the Republic of the Philippines for and in behalf of the but not in excess of ninety per cent of the value thereof. The proceeds from veterans, their widows, orphans or compulsory heirs as defined and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 43 determined under Section 4, subsection (e) of this Act, and shall be initially Section 4. Determination of veterans entitled to benefit from this Act. paid from the Veterans Trust Fund provided for in Section 2, subsection (d) of Republic Act Numbered Seventeen hundred and eighty-nine as amended, (a) The term "veteran or veterans" shall include any person or persons who and from or out of earnings, dividends, or profits from the operations of the served in the regularly constituted air, land, or naval services or arms, or in Veterans Bank; and for the payment of said subscription, all the available such non-regularly organized military units in the Philippines during World cash deposits with the Philippine National Bank and/or any other banks to War II, and whose services with such units are duly recognized by the the credit of the Veterans Trust Fund shall be transferred immediately to the Republic of the Philippines or by the Government of the United States: Veterans Bank: Provided, That after the approval of this Act and Provided, That for the purposes of this Act, the term "veteran or veterans" notwithstanding the provisions of any existing law and/or executive orders, also include the widow, orphan or a compulsory heir of a deceased veteran, rules and regulations to the contrary, every and all additional cash as determined by existing laws; payments on account of the said Veterans' Trust Fund shall be remitted and paid directly and exclusively to the said Veterans' Bank to be applied as (b) The term "organized or acknowledged veterans organizations" as used in additional paid-up payments of the aforesaid common shares subscription: this Act shall mean a veterans organization duly recognized or Provided, further, That nothing shall be transferred to, or received by, the acknowledged as such by the Philippine Veterans Administration which shall said Veterans' Bank representing any portion of the proceeds of the keep an official roster of such veterans organizations; aforesaid Veterans' Trust Fund except cash payments only of the peso equivalent thereof at the prevailing rate of exchange: And provided, finally, (c) On the basis of the acknowledged or duly established official records and That within five years from the organization of the Bank all shares of stock data from the Treasury of the Philippines and any other record or evidence equivalent to fifty-one per cent subscription of the capital stock held by the admissible under the rules of evidence, such as the records of the Philippine government of the Republic of the Philippines for and in behalf of the Veterans Administration and of the Armed Forces of the Philippines, the veterans, their widows, orphans or compulsory heirs shall be transferred to Philippine Veterans Administration shall determine immediately after the and in the name of the veterans who shall thereafter vote said common approval of this Act, who and how many are the veterans of the Philippines shares. The shares shall be divided equally among the veterans at the rate of World War II and their widows, orphans or compulsory heirs as of one share of one hundred pesos for each veteran or fraction thereof. The determined by existing laws who are entitled to the benefits of this Act. The balance of about forty-nine (49%) per cent shall be divided into preferred decision of the Philippine Veterans Administration on the matter shall be shares which shall be opened for subscription by any recognized veteran, final, unless appeal for review, within fifteen days from notice thereof, is widow, orphans or compulsory heirs of said veteran at the rate of one (1) made to the President of the Philippines or to the Supreme Court whose preferred share per veteran: Provided, That in case of failure of any decision shall be final. The appeal shall be perfected in the same manner as particular veteran to subscribe for any preferred share of stock so offered to in other proceedings and it may be prosecuted by the interested party or by him as herein provided, within thirty (30) days from the date of receipt of the head of any acknowledged veterans organization; notice, said share of stock shall be available for subscription to other veterans in accordance with such rules or regulations as may be (d) The reckoning day for determining the status and number of such promulgated by the Board of Directors. Any share of stock corresponding to veterans, their widows, orphans or compulsory heirs shall be the date of the capital stock subscribed and paid by the Republic of the Philippines in approval of this Act; the manner aforementioned, shall be issued in the name of the Republic of (e) The share of each beneficiary, war veteran or widow, orphan or the Philippines, in trust for the benefit of veterans, their widows, orphans or compulsory heir of a deceased veteran, in the distribution of the benefits compulsory heirs as determined in this Act, and any share of stock accruing to the Republic of the Philippines, will be equal regardless of rank subscribed and paid by individual veteran shall be issued in the name of the and services rendered: Provided, That in the case of orphan or orphans of a individual veteran, his widow, orphan or compulsory heir. The sale or deceased veteran, they shall be counted as one unit only and the share of transfer of a share or stock of a veteran, widow, orphan or compulsory heir all of them regardless of their number will be the same or equal to that of a of a veteran to a party not a veteran, widow, orphan or compulsory heir of a surviving war veteran or surviving widow; veteran shall not be allowed under any circumstances. Any share may be sold or transferred to the Bank which shall issue the same to the (f) Notice of the decision of the Philippine Veterans Administration on the stockholders who are veterans, their widows, orphans or compulsory heirs: question of who are entitled to participate in the benefits accruing to the Provided, That no veterans, widow, orphan or compulsory heir shall be Veterans Trust Fund shall immediately be served on the interested parties, issued a total of more than twenty shares. either directly on thru the organization to which they belong in writing and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 44 by registered mail. In addition, the Philippine Veterans Administration shall (d) Generally, to make advances or discount paper for agricultural, publish for three consecutive weeks a notice in two newspapers of general manufacturing, industrial or commercial purposes: Provided, That loans, circulation in the Philippines to the effect that the Philippine Veterans discounts, or advances made under this section shall have maturities of not Administration has already completed its work of determining the number exceeding one year, renewable from year to year, in the discretion of the and the identity of those entitled to participate in the trust fund and advising Board of Directors: any party interested who has not received yet the notice of the decision served upon him that he may verify his inclusion or exclusion from the (e) The aggregate amount of loans for any single industry shall at no time official register in the Philippine Veterans Administration. This Office shall exceed twenty per cent of the Banks lending capacity; keep a complete list and official register of those included and excluded from the enjoyment of the benefit, which list shall be available for inspection The total liabilities to the bank of any person, or of any company, during office hours. The official registry book shall constitute an irrevocable corporation, or firm for money borrowed, including in the liabilities of the public record, certified true copies of which may be released by the company or firm, the liabilities of the several members thereof, shall at no custodian of records for official purpose only. time exceed fifteen per centum of the unimpaired capital and surplus of the Bank. But the discount of bills of exchange drawn in good faith against BANKING OPERATION IN GENERAL actually existing values owned by the person negotiating the same shall not be considered as money borrowed, and in addition to the fifteen per centum Section 5. Loans, investigation and liabilities. The Veterans Bank is hereby of the unimpaired capital and surplus of the Bank, hereinbefore provided authorized: for, the total liabilities of any borrower, may amount to a further fifteen per centum of the unimpaired capital and surplus of the Bank provided such (a) To grant loans for the establishment, rehabilitation, expansion or additional liabilities are secured by shipping documents, warehouse receipts development of any agricultural, commercial or industrial enterprise, or or other similar documents transferring or securing title covering readily personal service including public utilities, under such rules and regulations marketable, nonperishable stocks, when such staples are fully covered by as may be prescribed by the Board of Directors and that preference be given insurance and when such staples have a market value equal to at least one to applicants who are veterans; hundred twenty-five per centum of such additional liabilities.

(b) To make loans on, or to discount notes and/or receipts secured by, The Bank shall not make any loan upon the security of the stock of any harvested and stored crops: Provided, That no loans on the security of such other corporation if the aggregate market value of all such stocks as harvested and stored crops shall exceed eighty per cent of the market value collateral exceeds an amount equal to ten per centum of the unimpaired thereof on the date of the loans: Provided, further, That the crops so capital stock and surplus of the Bank. The term "loan" whenever used in this mortgaged shall be insured by the mortgagor for the benefit of the Veterans Act shall include overdrafts and the limitations contained in this section shall Bank for their entire market value at the discretion of the Board of apply to any loan of any kind whenever secured wholly or party by real Directors: Provided, furthermore, That if owing to any circumstances the estate mortgage. value of the crops given as security shall diminish, the mortgagor shall furnish the Veterans Bank with additional security or refund such part of the BOARD OF DIRECTORS COMPOSITION AND ORGANIZATION loan as the Bank may deem necessary: Provided, finally, That such loans shall be granted for a period of not to exceed one year, subject to Section 6. Qualifications and per diems of the Board of Directors. extension, in the discretion of the Board of Directors; (a) Within the first five years from the organization of the Veterans Bank or (c) To make loans to agriculturists in installments, on standing crops of the until the transfer of the common shares of its capital stock to the veterans natural products of the Philippines such as palay, copra, sugar, tobacco, as provided in Section three of this Act, the affairs and business of the corn, abaca and maguey, of not exceeding seventy per centum of the Veterans Bank shall be directed and its property managed, controlled and estimated value of such crops: Provided, however, That before granting preserved, unless otherwise provided in this Act, by a Board of Directors such loans, the Veterans Bank may require additional security in the nature consisting of eleven (11) members to be composed of three ex-officio of mortgage on landed estate duly registered in the name of the debtor, or members to wit: the Philippine Veterans Administrator, the President of the chattel mortgage including those upon livestock, machineries and Veterans Federation of the Philippines, and the Secretary of National agricultural implements or personal bonds with sufficient surety or sureties Defense, and the remaining members who shall be veterans of good satisfactory to the bank; standing with formal business training and/or experience in banking and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 45 finance, shall, upon the recommendation of the Supreme Council of the THE EXECUTIVE OFFICERS Veterans Federation of the Philippines, be appointed by the President of the Philippines with the consent of the Commission on Appointments. The Section 8. President and Vice-Presidents Appointment and removal Supreme Council of the Veterans Federation of the Philippines shall submit Salaries. The chief executive of the Bank shall be the President who shall be to the President of the Philippines a list of sixteen veterans from which list chosen by the Board of Directors and, during the first five years of the President shall choose eight who shall hold office for one year and until Transition already mentioned, with the advice and consent of the President their successors are duly appointed and qualified. After the transfer of the of the Philippines. He shall be assisted by an Executive Vice-President and common shares of the capital stock of the Veterans Bank to the veterans as such number of Vice-Presidents who shall be elected and may be removed provided for in Section three of this Act, the members of the Board of by the Board of Directors. The President and the Executive Vice-President Directors shall be elected annually by the stockholders in the manner shall possess practical experience in banking or finance as executives for at prescribed by the Corporation Law: Provided, That no director, officer, or least five years. The salaries of the President and the Executive Vice- employee of any bank shall be eligible as member of the Board of Directors President shall be fixed by the Board of Directors but, in no case, shall it be of the Veterans Bank: Provided, further, That no member of the Supreme more than thirty thousand (P30,000.00) pesos and twenty-five thousand Council of the Veterans Federation of the Philippines who participated in the (P25,000.00) pesos yearly, respectively. election of a member of the Board of Directors other than the Federation President who is an ex officio member can be appointed to the Board unless THE PRESIDENT POWERS AND DUTIES he first resigns as a member of the Supreme Council. The members of the Board shall receive a per diem allowance of fifty pesos (P50.00) for every Section 9. Duties and powers of the President. The President of the Bank meeting of the Board actually attended by them. shall among others, execute and administer the policies, measures, orders, and resolutions approved by the Board of Directors, and direct and (b) The Board of Directors, shall upon a majority vote of all its members, supervise the operation and administration of the Bank. elect its Chairman, Vice-Chairman, and Secretary which Secretary may or may not be a member of the Board, at such a time and place as shall be Particularly, he shall have the power and duty: provided for in its By-Laws. Pending the election of its Chairman, the President of the Veterans Bank shall preside over the Board of Directors. (a) To make loans on commercial paper for such period of time not to exceed four months, in sums not exceeding ten thousand pesos POWER AND AUTHORITY OF THE BOARD OF DIRECTORS (P10,000.00) to anyone person, company, corporations, or firm, but he is required to submit a report on such loans to the Board of Directors at its Section 7. The Board of Directors shall succeeding session: Provided, That the total amount of such loans shall not exceed five (5%) per cent of the paid-up capital and surplus; (a) Formulate policies necessary to carry out effectively the provisions of this Act and adopt such By-Laws rules and regulations for the effective (b) To make, with the advice and consent of the Board of Directors, all operation of the Bank in conformity with this Act and other existing laws; contracts on behalf of the said Bank and to enter into all necessary obligations that this Act requires or permits: (b) Determine the organization of the Bank by creating the necessary departments or offices as are essential for the efficient operation of the (c) To report weekly to the Board of Directors the main facts concerning the Bank; operations of the Bank during the preceding week and to suggest changes in rates of discount of interest, exchange, or policy which to him may seem (c) Subject to prior approval of the Monetary Board, establish branches or best; agencies in other countries; and, (d) To exercise such other powers and perform such other duties as may be (d) That during the first five years of transition; mentioned in Section three directed by the Board of Directors from time to time. (a) of this Act, with the authorization of the proper Department Secretary first had, the Board of Directors may appoint as agents of the Bank the LEGAL DEPARTMENT provincial or municipal treasurers, who shall receive such additional compensation as the Board may determine. Section 10. Legal Counsel. The Veterans Bank shall have its own legal department, the chief and members of which shall be appointed by the Board of Directors.

AUDITING DEPARTMENT Section 14. Inspection by Department of Supervision and Examination of the Central Bank. The Veterans Bank shall be subject to inspection by the Section 11. Bank Auditor Reports. The Veterans Bank shall have its own Department of Supervision and Examination of the Central Bank in auditing department, the chief of which shall be appointed by the Board of accordance with Republic Act Numbered Two hundred sixty-five and Directors from among recognized veterans of good standing who are Republic Act Numbered Three hundred thirty-seven. certified public accountants and with actual experience in the work of a comptroller. The auditor may not be removed except for cause and neither Section 15. Prohibition against owing stock in or incurring indebtedness to may his salary be reduced during his term of office. All other employees of the Bank. The Secretary of Finance. the Governor of the Central Bank, all the auditing department shall be appointed by the auditor with the advice other members of the Monetary Board, and the Chief of the Auditing and consent of the Board of Directors. Unless otherwise prescribed by the Department of the Veterans Bank are hereby prohibited from owing stock in Board of Directors, the auditor of the Veterans Bank shall have the rank and the Veterans Bank, or from becoming indebted to said Bank, directly or pay of a Vice-President and shall receive a salary of eighteen thousand indirectly. pesos (P18,000.00) per annum. The auditor, with the approval of the Board of Directors, shall fix the salaries of the employees of the auditing PROHIBITED LOANS department. Section 16. Loans to officers, directors, and employees; restriction and The auditor shall make an annual report of the condition of the Bank to the limitation. The Veterans Bank shall not directly or indirectly, grant loans to Board of Directors, to the President of the Veterans Federation of the any director, officer, employee, or agent of the Bank, and no loans shall be Philippines, and to the Administrator of the Philippine Veterans granted to a corporation, partnership, or company wherein any member of Administration. The report shall contain among other things a statement of the Board of Directors is a shareholder, agent or employee in any matter, the resources and liabilities, including earnings and expenses, the amount of except by the unanimous vote of the members of the Board present, capital stock, dividends paid, surplus reserved, and undivided profits, as well excluding the member interested: Provided, That the total liabilities to the as the losses, bad debts and suspend and overdue papers carried in the Bank of any corporation wherein any member of the Board of Directors of Bank's assets as of the day in which the statements are compiled. the Veterans Bank is a shareholder, agent or employee in any manner, shall at no time exceed five (5%) per centum of the surplus and paid-up capital APPOINTMENTS, REMOVAL AND SALARIES OF THE OTHER OFFICERS of the Bank. AND EMPLOYEES OF THE VETERANS ACQUISITION AND DISPOSAL OF REAL ESTATE Section 12. Appointments, removal and salaries of other officers and employees. All other officers and employees of the Bank shall be appointed Section 17. The Veterans Bank is hereby authorized to purchase and own and removed by the Board of Directors upon recommendation of the such real estate as may be necessary for the purpose of carrying on its President of the Bank: Provided, however, That all other circumstances business. It is also authorized to hold such real estate as it may find being equal, preference shall be given to veterans, or their widows, orphans necessary to acquire in the collection of debts due to the said Bank or to its or compulsory heirs in the appointment of said personnel. Said officers and branches, but real estate acquired in the collection of debts shall be sold by employees shall have duties and compensation which shall be fixed by the the Bank within five (5) years after the date of its acquisition. President with the approval of the Board of Directors. REDEMPTION OF MORTGAGED PROPERTY Section 13. Fidelity bond of officers and employees. The Board of Directors may require any officer and employees of the Bank and its branches, before Section 18. Right of redemption of property foreclosed. The mortgagor entering upon the performance of their duties, to furnish a fidelity bond for shall have the right, within one year after the sale of the real estate as a the benefit of the Bank, in the form and amount prescribed by the Board of result of the foreclosure of a mortgage, to redeem the property by paying Directors. For this purpose, and for this purpose only, all officers and the amount fixed by the court in the order of execution, with interest employees of whom a bond, is required shall be deemed public officers and thereon at the rate specified in the mortgaged, and all the costs and other employees, respectively, and the provisions of the Public Bonding Law, judicial expenses incurred by the Bank by reason of the execution and sale, Chapter Fifteen of the Administrative Code and related legislations are and for the custody of said property. hereby made applicable to them. Section 19. Right to demand additional securities; disposal of same Advanced maturity of credits Right to collect deficiency. If, from any cause

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 47 whatsoever, any of the securities specified for the loans provided for in this (a) Twenty (20%) per cent of such net profit shall accrue to the reserve Act or accepted by said Bank as security for loans or discounts should account: Provided, That should the accumulated reserves equal to or in decline or depreciate in market value in part or as a whole, or upon non- excess of the authorized capital of the Bank, the twenty per cent herein performance of any promise made to secure the loan or discount, or bill of authorized to be accumulated shall be distributed under the subsection exchange, notes, and checks, the said Bank may demand additional immediately following: securities or may forthwith declare any such obligation due and payable and upon three days' notice, demand, sell, assign, transfer, and deliver the (b) From the remaining eighty (80%) per cent of the net profit shall be whole of said securities or any part thereof, or any substitute therefor, or deducted the guaranteed earning of the preferred shares of stock owned by any addition thereto, or any other securities given unto or left in the individual veterans, their widows, orphans or compulsory heirs: Provided, possession of, or hereafter given unto or left in the possession of the said That the share in the net profits corresponding to the Republic of the Bank for safekeeping or otherwise, at any broker's board or at public or Philippines shall first be applied in payment of its capital stock subscription, private sale, at the option of said Bank, and at such sale, if public, the said until said shares shall have been fully paid. Thereafter, twenty per centum Bank may itself purchase the whole or any part of the property sold, free of the net profits after deducting the guaranteed earnings of the preferred from any right of redemption on the part of the mortgagor or pledgor. In shares shall be paid in cash to the Board of Trustees as hereinafter provided case of sale for any cause, after deducting all costs, or expenses of any kind in Section 23 hereof for disposition and shall be available for 'grants-in-aid' for collection, sale or delivery, the said Bank may apply the residue of the to veterans, their widows, orphans, or compulsory heirs, for educational, proceeds of the sale so made, to pay the said Bank, as its President shall social, charitable, and rehabilitation purposes, to organization doing service deem proper whether then due or not due, making proper rebate for for the cause of the veterans, and for such other purposes beneficial to the interest or liabilities not then due, returning the overplus, if any, to the veterans. mortgagor or pledgor, who shall remain liable to and pay to said Bank any deficiency arising upon such sale or sales. The remaining profits shall be paid as dividends on common shares held by the individual veterans as provided in Section three of this Act. Section 20. Action to collect balance of indebtedness. If the proceeds of the sale of securities held as collateral for loans by said Bank do not cover the Section 23. Board of Trustees of World War II. There is hereby created a full amount of the loan, together with the interest and other charges Board of Trustees for the veterans of World War II to be known as "The thereon, the Bank may proceed against the debtor for the difference, but Board of Trustees of the Veterans of World War II", consisting of eleven (11) any amount exceeding the full indebtedness to the Bank shall be paid to the members to be selected from among the veterans of World War II by the debtor. Supreme Council of the Veterans Federation of the Philippines organized pursuant to Republic Act Numbered Twenty-six hundred and forty. PROHIBITED REMUNERATION The Board of Trustees shall be organized within ninety (90) days after the Section 21. Prohibition against charging fees in securing loans Penalties for approval of this Act. Immediately after its organization the members of the violation. No fee, charge or commission in any form shall be exacted, Board of Trustees shall elect from among themselves a Chairman and a demanded, or paid, for obtaining loans, directly or indirectly, by any Vice-Chairman. The members of the Board of Trustees shall serve without director, officer, employee, or agent of the Veterans Bank. Any director, compensation other than actual and necessary expenses incurred either in officer, employee or agent so exacting, demanding or receiving any fee for attendance upon meetings of the Board or upon other official business his service or for the use of his influence in obtaining a loan shall be authorized by resolution thereof, but a vote of the majority of all the punished as hereinafter provided for, for the violation of this Act. members shall be necessary to authorize the disposal of the funds held by the Board. NET PROFIT The Board shall appoint a secretary and such necessary other officials and Section 22. Allocation of net Profits. At the close of each calendar year, the employees and fix their compensations. Bank shall determine the net result of its operations, in the calculation of which, adequate allowances shall be made for probable losses, and the net profit arrived thereat shall be distributed as follows:

LEGAL EXISTENCE certification by the Monetary Board pursuant to Section ten of Republic Act Numbered Three hundred thirty-seven. Section 24. Term of legal existence. The legal existence of the Bank under this Act shall be for a period of fifty (50) years, from and after the date of The by-laws, duly certified by the Monetary Board as aforesaid, shall be the approval of this Act. signed by the stockholders voting for them and shall be kept in the principal office of the Bank, subject to the inspection of the stockholders during office Section 25. Prohibition against the use of the word "Veterans" Penalty for hours, and a copy thereof, duly certified by a majority of the directors and violation. All banks other than the Veterans Bank, and such other banks now countersigned by the Bank secretary, shall be filed and registered with the licensed to do business in the Philippines whose names already include the Securities and Exchange Commissioner. word "veterans" are prohibited from using the word "veterans" as a portion of their names or titles. Any party violating this provision shall be subject to An Act of Rehabilitate the PVB a fine of not less than one hundred (P100.00) pesos for each day during Section 1. Declaration of Policy. – In order to give meaning and realization which said violation is committed or repeated. to the constitutional mandate to provide immediate and adequate care, benefits and other forms of assistance to war veterans and veterans of PENALTIES military campaigns, their surviving spouses and orphans, it is hereby declared the policy of the Government to provide the necessary mechanisms Section 26. Penalties for violation of the provisions of this Act. Any to rehabilitate the Philippine Veterans Bank, hereinafter known as the director, officer, employee, or agent of the Bank who violates or permits the Veterans Bank, a bank owned by the Filipino veterans of World War II and violation of any of the provisions of this Act, or any person aiding or deeply imbued and impressed with public interest. abetting the violation of any provision of this Act, shall be punished by a fine not exceeding ten thousand (P10,000.00) pesos or imprisonment of not Section 2. Settlement of Liabilities. – The National Government deposit of more than five (5) years, or both, in the discretion of the court. One billion four hundred eighty-nine million pesos (P1,489,000,000.00) with the Veterans Bank is hereby restructured into a seven-year promissory note VETERANS BANK A GOVERNMENT DEPOSITORY of the said bank, carrying an interest rate of four percent (4%) per annum effective on the date of actual operation: Provided, That only the interest Section 27. Veterans Bank authorized to receive deposit of government shall be paid in the first three (3) years: Provided, further, That repayment funds as a Government Depository. The Secretary of Finance, the National of the principal shall be divided into four (4) equal amortizations: Provided, Treasurer and his authorized representatives, city and municipal treasurers finally, that the said promissory note shall be exempted from the reserve as well as official custodians of public funds or those belonging to equipment rule of commercial banks.1awphi1© government-owned or controlled corporations are hereby authorized if they so desire to make and actually maintain deposits of any government or The accrued interests due to the National Government deposits up to and corporate funds with the Veterans Bank, which is hereby declared to be a during the time of the Veterans Bank's closure in 1985 and the tax liabilities government depository. incurred by the Veterans Bank also up to and during the time of the Veterans Bank's closure are hereby condoned and extinguished. GENERAL PROVISIONS The obligations of the Veterans Bank with the Central Bank of the Section 28. Articles of incorporation. This Act, upon its approval, shall be Philippines and the Philippine Deposit Insurance Corporation are hereby deemed and accepted to all legal intents and purposes as the statutory restructured in the same manner governing National Government deposits articles of incorporation or Charter of the Philippine Veterans' Bank; and provided in the first paragraph of this section. that, notwithstanding the provisions of any existing law to the contrary, said Bank shall be deemed registered and duly authorized to do business and With respect to deposits of local government units and other private operate as a commercial bank as of the date of approval of this Act. deposits with the Veterans Bank, the terms and conditions for the retention or withdrawal thereof shall be negotiated individually but may carry more Section 29. By-laws. Within one month after the approval of this Act, the favorable terms in favor of the Veterans Bank. by-laws of the Philippine Veterans' Bank for its organizational, functional and operational government and procedures shall be adopted by the Section 3. Operations and Changes in the Capital Structure of the Veterans affirmative vote of the stockholders representing a majority of all the Bank and other Amendments. – The operations and changes in the capital subscribed capital stock entitled to vote, whether paid or unpaid, subject to

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 49 structure of the Veterans Bank, as well as other amendments to its articles (c) Exercise management oversight and liaison with Central Bank officers for of incorporation and bylaws as prescribed under Republic Act No. 3518, shall a period which shall not exceed three (3) months reckoned from the date of be in accordance with the Corporation Code, the General Banking Act, and approval by the Monetary Board to reopen the Veterans Bank; and other related laws.1awphi1© (d) Submit to the Monetary Board of the Central Bank other Section 4. Repeal of Amendatory Presidential Decrees. – Presidential recommendations for the successful reopening and operations of the Decree Nos. 236, 1637, 919 and 1906 which are inconsistent with this Act Veterans Bank. are hereby repealed, thus restoring the full force and legal effect of Republic Act No. 3518. Section 8. Transitory Provisions. – Without requiring new capital infusion either from the Government or from outside investigators, the Filipino Section 5. Reopening of the Veterans Bank and Its Branches. – Pursuant to veterans of World War II who are real owners-stockholders of the Veterans and within ninety (90) days from the effectivity of this Act, the Central Bank Bank shall cause the said bank to have at least Seven hundred fifty million is hereby authorized to reopen within the period of three (3) years from the pesos (P750,000,000.00) in total unimpaired capital accounts prior to date of the reopening of the head office with no branch licensing cost to the reopening pursuant to this Act as a commercial bank. said bank. It is hereby provided that the Board of Trustees of the Veterans of World Section 6. Veterans Bank as a Government Depository. – The Secretary of War II (BTVWW II) created under Republic Act No. 3518 is hereby Finance, the National Treasurer and his authorized representatives, city and designated as trustee of all issued but undelivered shares of stock. municipal treasurers, as well as custodians of public funds or those belonging to government-owned or controlled corporations, are hereby (d) Philippine National Bank authorized if they so desire to make and actually maintain deposits, of any Revised Charter of PNB government of corporate funds with the Veterans Bank, which is hereby SEC.2. Name; Place of Business; Branches; Agencies and Other Offices- The declared to be a government depository. Philippine National Bank (hereinafter referred to as the "Bank"), a bank created under Act No. 2612, as amended, and operating under the Section 7. Rehabilitation Committee. – To facilitate the implementation of provisions of Presidential Decree No. 694, as amended, shall henceforth the provisions of this Act, there is hereby created a rehabilitation committee operate under the provisions of this 1986 Revised Charter. which shall have a term of three (3) months from the date of the approval of this Act composed of the following: the Executive Secretary, as Chairman, The Bank's principal office and place of business shall be in the National and the Administrator of the Philippine Veterans Affairs Office, the President Capital Region, also known as Metro Manila. It may open and maintain other of the Veterans Foundation of the Philippines, a representative from the branches, agencies or other offices at such places in the Philippines or executive board of the Veterans Federation of the Philippines and a abroad as its Board of Directors may deem advisable, with the prior representative from the Board of Trustees of the Veterans of World War II approval of the Monetary Board of the Central Bank of the Philippines. or their respective representatives, as members. SEC. 3. Corporate Powers and Purposes- The Bank shall be a body Specifically, the committee shall: corporate and shall have the following powers and purposes:

(a) Prepare, finance and submit a viable rehabilitation plan to the Monetary (a) To perform commercial banking, as well as expanded Board of the Central Bank; commercial banking functions; and, within the context of a financially viable and stable baking institution, to provide banking (b) Select and organize an initial manning force headed by a management services for the development of agriculture and small and medium team to be composed of competent, experienced and professional managers scale commercial and industrial enterprises particularly in the in the who must possess all qualifications and none of the disqualifications countryside, as provided in Section 4; to provide banking services to provided under Central Bank rules and regulations. The management team the National Government, other government entities and local shall be staffed by a trained work force: Provided, That preference shall be governments; and to engage in international banking activities, given to the veterans and their dependents, other qualifications being equal; particularly in the promotion of exports;

b) To accept foreign deposits and operate a foreign currency deposit unit as established under Republic Act No. 6426, as amended;

(c) To accept and administer trusts and to carry on a general trust The Board of Directors shall have authority to convert such number of business; unissued common voting shares into preferred non-voting shares to be issued for sale or subscription, with such features, terms, and restrictions as (d) To act as official government depository with authority to it may determine. maintain deposits of the government, its branches, subdivisions and instrumentalities, and of government owned or controlled The issue and offering for sale of additional shares to private investors corporations, subject to the provisions of Section 6 hereof and such which will result in more than one-third of the common voting shares being rules and regulations as the Monetary Board may prescribe; and eligible for acquisition by such investors shall require prior approval of the President of the Philippines; provided, that, where the sale of shares will (e) To adopt, amend or change its By-laws; to adopt, alter and use result in a majority ownership by the private sector, the prior approval of a seal, to make contracts; to sue and be sued; and to exercise the the President shall also be required. general powers of a corporation as provided in the Corporation Code of the Philippines and the powers of a bank of its category under the SEC. 6. Change in Ownership of the Majority of the Voting Equity of the General Banking Act. Bank. -- When the ownership of the majority of the issued common voting shares passes to private investors, the stockholders shall cause the adoption The exercise of the above-mentioned powers on banking shall be subject to and registration with the Securities and Exchange Commission of the applicable law, as well as regulations promulgated by the Central Bank of appropriate Articles of Incorporation and revised by-laws within three (3) the Philippines. months from such transfer of ownership. Upon the issuance of the certificate of incorporation under the provisions of the Corporation Code, this Charter SEC. 4. Granting of Loans; Exposure Ceilings and Limits on Equity shall cease to have force and effect, and shall be deemed repealed. Any Investments. -- In the exercise of its lending authority, the Bank shall give special privileges granted to the Bank such as the authority to act as official preference to loans for agricultural and small-and medium-scale commercial government depository, or restrictions imposed upon the Bank, shall be and industrial enterprises, particularly in the countryside. withdrawn, and the Bank shall thereafter be considered a privately organized bank subject to the laws and regulations generally applicable to Unless otherwise provided in this Charter, loans and other credit private banks. The Bank shall likewise cease to be a government owned or accommodations granted by the Bank shall be subject to the appropriate controlled corporation subject to the coverage of service-wide agencies such applicable loan limits to any single borrower as provided for under Republic as the Commission on Audit and the Civil Service Commission. Act No. 337, as amended. The fact of the change of the nature of the Bank from a government-owned The aggregate amount of loans, guarantees and contingent accounts, to and controlled financial institution to a privately-owned entity shall be given Government agencies and entities including government owned and publicity. controlled corporations shall at no time exceed the deposits and book value of the shareholdings of the Government, including government agencies and SEC. 7. National Government Subscription. -- Upon the effectivity of this entities, government owned or controlled corporations plus twenty percent Charter, the National Government shall subscribe to Twenty-Five Million (20%) of such total. common shares of stock worth Two Billion Five Hundred Million Pesos which shall be deemed paid for by the Government with the net asset values of The authority of the Bank to invest in equities of allied undertakings, the Bank remaining after the transfer of assets and liabilities as provided in financial or non-financial, as well as in non-allied undertakings, shall be Section 29 hereof. governed by the provisions of Republic Act No. 337, as amended. SEC. 8. Who may Vote Government-Owned Stock. -- The voting rights of all SEC. 5. Authorized Capital Stock; Par Value; Sale of Shares. -- The the stock of the Bank owned and controlled by the National Government authorized capital stock of the Bank shall be Ten Billion Pesos to be divided shall be vested in the President of the Philippines, or in such person or into One Hundred Million common shares with par value of P100 per share persons as the President may from time to time designate. which are available for subscription by the National Government. The common shares may be offered for sale to or subscription by private; SEC. 9. Board of Directors; Composition; Tenure; Per Diems. -- The affairs investors; Provided, That, the investment of private investors shall be and business of the Bank shall be directed and its properties managed and subject to the applicable provisions of the General Banking Act. preserved and its corporate powers exercised, unless otherwise provided in

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 51 this Charter, by a Board of Directors consisting of nine members, duly SEC. 11. Powers of the Board of Directors. -- The Board of Directors shall elected as herein provided for a term of one year or until their successors have, among others, the following duties, powers and authority: are duly elected and qualified. (a) To formulate policies necessary to carry out effectively the The Chairman of the Board shall be appointed by the President of the provisions of this Charter; Philippines from among members of the Board: Provided, That the position of Chairman of the Board and President of the Bank shall not be held by the (b) To adopt, amend or change the by-laws as well as such rules same person. and regulations as may be necessary for the effective operation of the Bank, in conformity with this Charter and existing laws; The Chairman shall preside at meetings of the Board and of the stockholders. (c) To prescribe such terms and conditions to govern the granting of loans and credits, consistent with the provisions of this Charter; The President of the Bank shall be vice-chairman of the Board and, as such shall assist the chairman and act in his stead in case of absence or (d) To adopt an annual budget for the effective operation and incapacity. In case of incapacity or absence of both the chairman and vice- administration of the Bank; chairman, the Board of Directors shall designate a temporary chairman from among its members. (e) To create, establish and operate a "Self-Insurance System" in order to effect possible damage or loss of cash-in-transit that the Unless otherwise set by the Board and approved by the President of the Bank may suffer on account of cash and check remittances to its Philippines, members of the Board shall be paid a per diem of one thousand branches and agencies and vice-versa, as well as those that may pesos for each meeting of the Board of Directors actually attended: arise from irregular encashment or negotiation of checks, drafts, Provided, That the total amount of per diems for every single month shall telegraphic transfers and similar instruments, or losses arising from not exceed the sum of Five Thousand Pesos. other forms of fraud;

SEC. 10. Election and Qualification of Members of the Board of Directors. -- (f) To create and establish a Provident Fund which shall consist of Annually on the first Tuesday after the first Monday in March, the contributions made both by the Bank and its officers or employees stockholders shall meet to elect the members of the Board of Directors for to a common fund for the payment of benefits to such officer or the current year. Each stockholder or proxy will be entitled to as many votes employee or his heirs under such terms and conditions as the Board as he may have shares of stock registered in his name on the thirty-first of of Directors may fix; January last preceding and held by him at the time of the election multiplied by the number of directors to be elected. In the election of the members of (g) To compromise or release, in whole or in part, any claim, the Board, stockholders shall have the right of cumulative voting as liability, or demand for or against the Bank, regardless of the recognized by law. amount involved, under such terms and conditions as it may impose to protect the interests of the Bank No person shall be elected director of the Bank unless he is a natural-born citizen of the Philippines, not less than thirty-five years of age, of good (h) To determine the procedure and requirements for the acquisition moral character and has attained proficiency, expertise and recognized of properties necessary for the business of the Bank and competence in one or more of the following: banking, finance, economics, law, agriculture, business management, public utility or government (i) To dispose of properties of the Bank, whether used in the administration. conduct of its business or acquired as a result of its banking operations, by public bidding or private negotiations as provided in At least four of the elective members of the Board shall not concurrently Sec. 21 of this Charter. hold appointive or elective positions in the National Government, any government-owned or controlled corporation, or in any local government. The Board shall meet as frequently as necessary and the presence of five members shall constitute a quorum. No director, officer on employee of any other bank shall be eligible as a member of the Board of Directors of the Bank. SEC. 12. President of the Bank. - The Chief Executive Officer of the Bank shall be the President who shall be elected by the Board of Directors from

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 52 among themselves with the advise and consent of the President of the SEC. 14. Bank Auditor. -- The Commission on Audit shall be ex-officio Philippines. No person shall be appointed President of the Bank unless he is auditor of the Bank and shall designate a representative to the Bank. at least forty years of age, of good moral character and reputation, with at least ten years previous experience in banking, and has a reputed SEC. 15. Other Officers and Employees. - The Board of Directors shall proficiency, expertise and recognized competence in banking or financial provide for an organization and staff of officers and employees of the Bank management. and upon recommendation of the President of the Bank, fix their remunerations and other emoluments. The President of the Bank shall, among other powers and duties, execute and administer the policies, measures, order and resolutions approved by No officer or employee of the Bank subject to the Civil Service Law shall be the Board of Directors, and direct and supervise the operations and dismissed or suspended except as provided by law. administration of the Bank. Particularly, he shall have the power and duty: SEC. 16. Examination of the Bank. -- The Bank shall be subject to (a) To execute all contracts and to enter into all authorized supervision and examination by the appropriate department of the Central transactions in behalf of the Bank; Bank of the Philippines.

(b) To exercise, as Chief Executive Officer, the power of supervision SEC. 17. Inhibition from Board Meeting of Member with Personal Interest. -- and control over decisions or actions of subordinate officers and all Whenever any member attending a meeting of the Board of Directors has a other powers that may be granted by the Board. persona interest directly or indirectly, in the discussion or resolution of any given matter, said member shall not participate in the discussion or (c) To recommend to the Board the appointment, promotion, or resolution of the matter and must retire from the meeting during the removal of all officers of the Bank with the rank of at least Vice deliberation thereon. The minutes of the meeting which shall not the subject President or its equivalent; matter, when resolved, the fact that a member had a personal interest in it, and the withdrawal of the members concerned, may be made available to (d) To appoint, promote or remove employees and officers below the public. the rank of Vice President; SEC. 18. Prohibition on Officers and Employees of the Bank. -- Excepts as (e) To transfer, assign or reassign officers and personnel of the required by law, or upon order of a court of competent jurisdiction, or Bank in the interest of the service; express order of the President of the Philippines or writ of permission of the client, no officer or employee of the Bank shall reveal to, nor allow, to be (f) To report periodically to the Board of Directors on the operations examined, inquired or looked into by any relative to details of individual of the Bank; accounts or specific banking transactions: Provided, that in respect to deposits of whatever nature, the provisions of existing laws shall apply. (g) To submit annually a report on the result of the operations of the Bank to the President of the Philippines and to private This prohibition shall not apply to the exchange of confidential credit shareholders in the Bank, if any; and information among government financial institutions or among banks, in accordance with established banking practices or as may be allowed by law. (h) To delegate any of his powers, duties or functions to unto any official of the Bank, with the approval of the Board of Directors. SEC. 19. Borrowings by Directors, Officers and Employees - Restrictions and Limitations. -- No director of officer or employee of the Bank or any SEC. 13. Legal Matters and Cases. -- The Bank shall have its own Legal corporation, partnership, or company wherein any member of the Board of Department, the head of which shall be appointed by the Board of Directors Directors, officer or employee, and/or their respective relatives within the of the Bank upon recommendation of the President of the Bank. second degree of consanguinity or affinity, is a director, officer, or controlling shareholder, shall either directly or indirectly, for himself or as The Bank may, subject to court approval, deputize any member of its legal representative or agent of others, borrow any of the deposits of funds from staff to act as Special Sheriff in the enforcement of court writs and the Bank, nor shall he become a guarantor, indorser, or surety for loans processes in cases involving the Bank. from the Bank to others, or in any manner be an obligor for money borrowed from the Bank or loaned by it: Provided, That this provision on

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 53 loans to directors, officers and employees shall not include loans allowed in used for the declaration of Dividends corresponding to the shares of the the form of fringe benefits granted in accordance with rules and regulations Government and the private stockholders. Dividends may either be in the as may be prescribed by the Monetary Board of the Central Bank. form of cash or stock as the Board of Directors shall determine.

The Bank shall not grant, directly or indirectly, any loans or credit SEC. 24. Payment of Cash Dividends Corresponding to Government-Owned accommodations to the head or to any officer or personnel directly Shares. -- Cash Dividends corresponding to the shares of the National exercising supervisory or regulatory authority over the activities of the Bank Government shall first be set aside and used for the purpose of retiring the such as those of the Central Bank of the Philippines or of the Commission on government securities which may have been issued by the Minister of Audit. Finance for additional Government subscriptions to the unissued shares of the capital stock of the Bank prior to the effectivity of this Charter. SEC. 20. Prohibited Interest or Fees with Reference to Obtaining Loans. -- Thereafter, cash dividends corresponding to the Government-owned shares No Director, officer or employee of the Bank shall, except as provided in the shall be paid unto the Treasury of the Philippines to become part of the preceding Section, directly or indirectly, have any pecuniary interest in any general funds. loan from the Bank. Neither shall he charge, exact, demand or receive any fee, charge or commission in any form for his service or the use of his SEC. 25. Term of Legal Existence. -- The legal existence of the Bank shall influence in obtaining a loan. Any violation of this Section shall be punished be for a period of fifty years, counted from the date the Bank operates as hereinafter provided in Section 27 of this Charter. under the provisions of this Charter.

SEC. 21. Disposal of Real Estate and Other Properties in the Collection of SEC. 26. Applicability of Banking Laws. - The provisions of Republic Acts No. Debts. -- Real and other properties acquired by the Bank in the collection of 265, as amended, and No. 337, as amended, insofar as applicable and not debts, receivables or investments by way of foreclosure or other means in conflict with any provisions of this Charter shall apply to the Bank. shall be sold or otherwise disposed of in accordance with the policies and guidelines adopted by the Board of Directors within five years after date of SEC. 27. Penalties for Violation of the Provisions of this Charter. -- Any their acquisition. director, officer or employee of the Bank who violates or knowingly permits the violation and any person aiding or abetting any violations of any of the SEC. 22. Rights of Redemption of Foreclosed Property - Right of Possession provisions of this Charter, shall be punished by a fine not to exceed ten During Redemption Period. - Within one year from the registration of the thousand pesos or by imprisonment or not more than five years or both foreclosure sale of real property, the mortgagor shall have the right to such fine and imprisonment. redeem the property by paying the principal, interests, charges, commissions and all claims of whatever nature of the Bank outstanding and TRANSITORY PROVISIONS due as of the date of the sale including all the costs and other expenses incurred by reason of the foreclosure sale and custody of the property, as SEC. 28. Preparatory Work. -- Upon the effectivity of this Executive Order, well as charges and accrued interest. the Board of Directors and management of the Bank shall undertake the appropriate steps to establish its current financial condition for the purpose The Bank may take possession of the foreclosed property during the of determining its net asset values and the book value of shares thereof. redemption period. When the Bank takes possession during such period, it shall be entitled to the fruits of the property with no obligation to account All shares of stock held by the Government of the Philippines in the Bank for them, the same being considered compensation for the interest that are deemed cancelled and exchanged for Twenty Five Million common would otherwise accrue on the account. Neither shall the Bank be obliged to shares of stock subscribed and paid-in by the Government, pursuant to post a bond for the purpose of such possession. Section 7 hereof.

SEC. 23. Allocation of Current Net Profits. -- At the close of the calendar The ratio of the shareholdings of the Government of the Philippines to the year, the Bank shall determine the net results of its operations in the shareholdings of the private shareholders before the effectivity of this calculation of which adequate allowances shall be made for probable losses. Charter shall be maintained. Of the net profits arrived at, at least fifty percent (50%) shall be set aside and accumulated in the earned surplus account. The remaining current net Private shareholders of the Bank, including holders of Common "A" shares, profits may after an examination of the financial condition of the Bank be shall exchange their shares for such number of shares of stock of the Bank computed on the basis of the ratio of the common shares held by the

Government immediately prior to the effectivity of this Charter to the new implement the provisions of this Charter, including those relative to the shares of stock subscribed and paid-in by the Government pursuant to financial aspects, if any, and to the reorganization of the Bank as Section 7 hereof. hereinabove authorized under Section 33 which will involve the determination and adoption of (1) the new internal structure of the Bank as SEC. 29. Transfer of Assets and Liabilities of the Philippine National Bank. -- reorganized down to the divisional, section or lowest organizational levels, The Bank shall transfer to the National Government such of its assets and including such appropriate units as may be needed to handle caretaking liabilities as may be necessary to rehabilitate the Bank and to start its activities such the disposition of certain assets and the collection of certain operations under the Revised Charter on a viable basis, as determined by accounts; (2) a new staffing pattern including appropriate salary rates; and the appropriate authorities, such assets to include but not necessarily be (3) the initial operating budget. limited to its acquired assets and non-performing accounts, and such liabilities to include real as well as contingent liabilities. The National In the implementation of the reorganization of the Bank as authorized under Government is hereby authorized to accept the same under terms and Section 33, and in appointments to appropriate positions in the new staffing conditions as may be mutually acceptable to the Bank and the National pattern of the Bank, no personnel of the Bank shall have vested rights to Government. any position in the new staffing pattern or to be otherwise retained in the Bank even if he should be the incumbent of the same or similar position in SEC. 31. Banking Operations under the 1986 Revised Charters; Governing the new staffing pattern. Laws. -- The Banking operations of the Bank shall be governed by the provisions of this Charter beginning on January 1, 1987, or on such SEC. 35. Recall of External Personnel in the Bank. -- Effective on the date subsequent date as may be determine by the President of the Philippines the Bank commences to operate in accordance with this Charter, all upon the recommendation of the Minister of Finance. representatives and/or personnel of other government offices, Commission and government corporations assigned to or on detail with the bank are SEC. 32. Loans and Other Investments, and Liabilities is Excess of considered recalled to their respective offices and/or units. New Prescribed Limits. -- Loans and other investments as well as liabilities designations to the Bank shall be made by the respective government existing as of the date of the effectivity of this Revised Charter which as a offices or Commissions conformably with the mandate of law and the result of the assets and liabilities transfer under Section 29 hereof will requirements of the Bank. exceed the limits prescribed under the provisions of this Act, the General Banking Act or Central Bank regulations shall not be subject to such SEC. 36. Separation Benefits. -- All those who are separated from the Bank prescribed limits but shall be reduced within a period of two years unless a as a result of its reorganization in pursuance of Section 33 hereof shall be longer period is prescribed by the Monetary Board, and once reduced, shall entitled to all gratuities and benefits provided for under existing laws and/or not be increased beyond the prescribed limits. supplementary retirement plans adopted by and effective in the Bank.

SEC. 33. Authority to Reorganize. -- In view of reduced operations SEC. 37. No legal action or suit brought by or on behalf of any aggrieved contemplated under this Charter in pursuance of the national policy officer or personnel of the Bank in connection with any matter treated in expressed in the "whereas" clauses hereof, a reorganization of the Bank and these Transitory Provisions shall be received in any court unless the verified a reduction in force are hereby authorized to achieve greater efficiency and complaint shows on its face that the cause has first been submitted to, and economy in operations, including the adoption. The program or adversely resolved by, the Civil Service Commission. reorganization shall begin immediately after the approval of this Order, and shall be completed within six months and shall be fully implemented within PNB v. Velasco, 564 SCRA 512 (2008) eighteen months thereafter. H. Foreign Banks SEC. 34. Implementing Details; Organization and Staffing of the Bank. -- (a) Entry of Foreign Banks Upon the effectivity of this Charter, the incumbent Board of Directors and i. Modes of Entry President of the Bank shall continue in office unless or until replaced by the 1. By acquiring, purchasing or owning up to 60% of the President of the Philippines, provided that the provisions of Section 10 of voting stock of an existing domestic bank this Charter shall be observed. The President of the Bank is hereby 2. By investing in up to 60% of a new banking subsidiary authorized, subject to the approval of the Board of Directors as appropriate, incorporated under the laws of the Philippines to issue such orders, rules and regulations as may be necessary to 3. By establishing branches with full banking authority

Sec. 2, Foreign Banks Liberalization Act In the exercise of this authority, the Monetary Board shall The Monetary Board may authorize foreign banks to operate in adopt such measures as may be necessary to: (i) ensure that the Philippine banking system through any of the following at all times the control of seventy percent (70%) of the modes of entry: (i) by acquiring, purchasing or owning up to resources or assets of the entire banking system is held by sixty percent (60%) of the voting stock of an existing bank; domestic banks which are at least majority-owned by (ii) by investing in up to sixty percent (60%) of the voting Filipinos; (ii) prevent a dominant market position by one bank stock of a new banking subsidiary incorporated under the laws or the concentration of economic power in one or more of the Philippines; or (iii) by establishing branches with full financial institutions, or in corporations, participations, banking authority: Provided, That a foreign bank may avail partnerships, groups or individuals with related interests; and itself of only one (1) mode of entry: Provided, further, That a (iii) secure the listing in the Philippine Stock Exchange of the foreign bank or a Philippine corporation may own up to a sixty shares of stocks of banking corporations established under percent (60%) of the voting stock of only one (1) domestic Section 2(i) and (ii) of this Act: Provided, That said banking bank or new banking subsidiary. corporations shall establish stock option plans for their officers and employees as the resources or assets of these ii. Subject to MB Approval, Guidelines corporations may allow in the best business judgment of their Sec. 2, Foreign Banks Liberalization Act respective boards of directors, pursuant to the Corporation The Monetary Board may authorize foreign banks to operate in Code of the Philippines. the Philippine banking system through any of the following modes of entry: (i) by acquiring, purchasing or owning up to To qualify to establish a branch or a subsidiary, the foreign sixty percent (60%) of the voting stock of an existing bank; bank applicant must be widely-owned and publicly-listed in its (ii) by investing in up to sixty percent (60%) of the voting country of origin, unless the foreign bank applicant is owned stock of a new banking subsidiary incorporated under the laws by the government of its country of origin. of the Philippines; or (iii) by establishing branches with full banking authority: Provided, That a foreign bank may avail iii. Limitation on Availment of Mode of Entry itself of only one (1) mode of entry: Provided, further, That a Sec. 2, Foreign Banks Liberalization Act foreign bank or a Philippine corporation may own up to a sixty The Monetary Board may authorize foreign banks to operate in percent (60%) of the voting stock of only one (1) domestic the Philippine banking system through any of the following bank or new banking subsidiary. modes of entry: (i) by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank; Sec. 3, Foreign Banks Liberalization Act (ii) by investing in up to sixty percent (60%) of the voting In approving entry applications of foreign banks, the Monetary stock of a new banking subsidiary incorporated under the laws Board shall: (i) ensure geographic representation and of the Philippines; or (iii) by establishing branches with full complementation; (ii) consider strategic trade and investment banking authority: Provided, That a foreign bank may avail relationships between the Philippines and the country of itself of only one (1) mode of entry: Provided, further, That a incorporation of the foreign bank; (iii) study the demonstrated foreign bank or a Philippine corporation may own up to a sixty capacity, global reputation for financial innovations and percent (60%) of the voting stock of only one (1) domestic stability in a competitive environment of the applicant; (iv) bank or new banking subsidiary. see to it that reciprocity rights are enjoyed by Philippine banks in the applicant's country; and (v) consider willingness to fully Subsec. X121.10, MRB share their technology. chan robles virtual law library a. As a general rule, a foreign bank which has been authorized to operate in the Philippines through any one of the allowable Only those among the top one hundred fifty (150) foreign modes of entry may change to another mode by giving up the banks in the world or the top five (5) banks in their country of first mode it availed of. origin as of the date of application shall be allowed entry in accordance with Section 2 (ii) and (iii) hereof. b. A foreign bank which pursuant to Items “a” and “b” of Subsec. X121.1, has established or acquired a banking subsidiary may sell its stockholdings therein and may apply for

authority to establish a branch subject to the provisions of v. Equal Treatment Subsec. X121.9c and to the following conditions: Sec. 73, par. 4, GBL: Any right, privilege or incentive granted to a foreign bank under this Section shall be equally (i) That the disposition/sale of its stockholdings in the enjoyed by and extended under the same conditions to banks subsidiary is done within five (5) years from June 5, organized under the laws of the Republic of the Philippines. 1994; (ii) That the foreign bank qualifies under the provisions Sec. 8, Foreign Banks Liberalization Act of Subsec. X121.2b; and Foreign banks authorized to operate under Section 2 of this (iii) That the limit of ten (10) foreign banks establishing Act, shall perform the same functions, enjoy the same branches as a mode of entry has not yet been privileges, and be subject to the same limitations imposed reached. upon a Philippine bank of the same category. These limits include, among others, the single borrower's limit and capital c. Foreign banks with existing branches in the Philippines, as to risk asset ratio as well as the capitalization required for well as those that may be allowed to establish branches under expanded commercial banking activities under the General R.A. No. 7721, may incorporate under Philippine laws, in Banking Act and other related laws of the Philippines. which case said foreign banks may own up to sixty percent (60%) of the voting stock of the new bank. The basis for computing the ratio shall be the capital of the foreign bank branch in the Philippines.

iv. Limitation of Foreign Penetration The foreign banks shall guarantee the observance of the rights Sec. 73, par. 3, GBL: In the exercise of the authority, the of their employees under the Constitution. Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of seventy percent (70%) Any right, privilege or incentive granted to foreign banks or of the resources or assets of the entire banking system is held their subsidiaries or affiliates under this Act, shall be equally by banks which are at least majority-owned by Filipinos. enjoyed by and extended under the same conditions to Philippine banks. Philippine corporations whose shares of Sec. 3, par. 3, Foreign Banks Liberalization Act stocks are listed in the Philippine Stock Exchange or are of In the exercise of this authority, the Monetary Board shall long standing for at least ten (10) years shall have the right to adopt such measures as may be necessary to: (i) ensure that acquire, purchase or own up to sixty percent (60%) of the at all times the control of seventy percent (70%) of the voting stock of a domestic bank. resources or assets of the entire banking system is held by domestic banks which are at least majority-owned by (b) Rules on Acquisition of Voting Stock in Existing Domestic Filipinos; (ii) prevent a dominant market position by one bank Bank or the concentration of economic power in one or more i. Extent of Acquisition financial institutions, or in corporations, participations, Sec. 2, Foreign Banks Liberalization Act partnerships, groups or individuals with related interests; and The Monetary Board may authorize foreign banks to operate in (iii) secure the listing in the Philippine Stock Exchange of the the Philippine banking system through any of the following shares of stocks of banking corporations established under modes of entry: (i) by acquiring, purchasing or owning up to Section 2(i) and (ii) of this Act: Provided, That said banking sixty percent (60%) of the voting stock of an existing bank; corporations shall establish stock option plans for their officers (ii) by investing in up to sixty percent (60%) of the voting and employees as the resources or assets of these stock of a new banking subsidiary incorporated under the laws corporations may allow in the best business judgment of their of the Philippines; or (iii) by establishing branches with full respective boards of directors, pursuant to the Corporation banking authority: Provided, That a foreign bank may avail Code of the Philippines. itself of only one (1) mode of entry: Provided, further, That a foreign bank or a Philippine corporation may own up to a sixty percent (60%) of the voting stock of only one (1) domestic bank or new banking subsidiary.

ii. Further acquisition of voting stock imply a continuity of commercial dealings or arrangements, Sec. 73, par. 1, GBL: Within seven (7) years from the and contemplate to that extent the performance of acts or effectivity of this act and subject to guidelines issued pursuant works, or the exercise of some of the functions normally to the Foreign Banks Liberalization Act, the Monetary Board incident to, and in progressive prosecution of, commercial gain may authorize a foreign bank to acquire up to one hundred or of the purpose and object of the business organization: percent (100%) of the voting stock of only one (1) bank Provided, however, That the phrase "doing business: shall not organized under the laws of the Republic of the Philippines. be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do Sec. 73, par. 2, GBL: Within the same period, the Monetary business, and/or the exercise of rights as such investor; nor Board may authorize any foreign bank, which prior to the having a nominee director or officer to represent its interests effectivity of this Act availed itself of the privilege to acquire in such corporation; nor appointing a representative or up to sixty percent (60%) of the voting stock of a bank under distributor domiciled in the Philippines which transacts the Foreign Banks Liberalization Act and the Thrift Banks Act, business in its own name and for its own account; to further acquire voting shares such bank to the extent necessary for it to own one hundred percent (100%) of the (c) Rules on Acquisition of Voting Stock in New Domestic Bank voting stock thereof. i. Extent of Acquisition Sec. 2, Foreign Banks Liberalization Act iii. Listing in PSE The Monetary Board may authorize foreign banks to operate in Sec. 3, par. 3, Foreign Banks Liberalization Act the Philippine banking system through any of the following In the exercise of this authority, the Monetary Board shall modes of entry: (i) by acquiring, purchasing or owning up to adopt such measures as may be necessary to: (i) ensure that sixty percent (60%) of the voting stock of an existing bank; at all times the control of seventy percent (70%) of the (ii) by investing in up to sixty percent (60%) of the voting resources or assets of the entire banking system is held by stock of a new banking subsidiary incorporated under the laws domestic banks which are at least majority-owned by of the Philippines; or (iii) by establishing branches with full Filipinos; (ii) prevent a dominant market position by one bank banking authority: Provided, That a foreign bank may avail or the concentration of economic power in one or more itself of only one (1) mode of entry: Provided, further, That a financial institutions, or in corporations, participations, foreign bank or a Philippine corporation may own up to a sixty partnerships, groups or individuals with related interests; and percent (60%) of the voting stock of only one (1) domestic (iii) secure the listing in the Philippine Stock Exchange of the bank or new banking subsidiary. shares of stocks of banking corporations established under Section 2(i) and (ii) of this Act: Provided, That said banking ii. Qualifications corporations shall establish stock option plans for their officers Sec. 3, par. 2, Foreign Banks Liberalization Act and employees as the resources or assets of these Only those among the top one hundred fifty (150) foreign corporations may allow in the best business judgment of their banks in the world or the top five (5) banks in their country of respective boards of directors, pursuant to the Corporation origin as of the date of application shall be allowed entry in Code of the Philippines. accordance with Section 2 (ii) and (iii) hereof.

iv. License to Do Business Sec. 3, par. 4, Foreign Banks Liberalization Act Sec. 3(d), Foreign Investments Act of 1991 To qualify to establish a branch or a subsidiary, the foreign The praise "doing business" shall include soliciting orders, bank applicant must be widely-owned and publicly-listed in its service contracts, opening offices, whether called "liaison" country of origin, unless the foreign bank applicant is owned offices or branches; appointing representatives or distributors by the government of its country of origin. domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred Sec. 4(i), Foreign Banks Liberalization Act eighty (180) days or more; participating in the management, For Locally Incorporated Subsidiaries. — The minimum capital supervision or control of any domestic business, firm, entity or required for locally incorporated subsidiaries of foreign banks corporation in the Philippines; and any other act or acts that

shall be equal to that prescribed by the Monetary Board for (d) Rules on Establishing Branches domestic banks of the same category. i. Governing Laws 1. Creation, formation, organization or dissolution of iii. Listing in PSE corporations; fixing of relations, liabilities, Sec. 3, par. 3, Foreign Banks Liberalization Act responsibilities, or duties of stockholders, members, In the exercise of this authority, the Monetary Board shall directors or officers of corporations to each other and adopt such measures as may be necessary to: (i) ensure that the corporation at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by Sec. 77, GBL: In all matters not specifically covered by domestic banks which are at least majority-owned by special provisions applicable only to a foreign bank or its Filipinos; (ii) prevent a dominant market position by one bank branches and other offices in the Philippines any foreign or the concentration of economic power in one or more bank licensed to do business in the Philippines shall be financial institutions, or in corporations, participations, bound by the provisions of this Act, all other laws, rules partnerships, groups or individuals with related interests; and and regulations applicable to banks organized under the (iii) secure the listing in the Philippine Stock Exchange of the laws of the Philippines of the same class, except those shares of stocks of banking corporations established under that provide for the creation, formation, organization or Section 2(i) and (ii) of this Act: Provided, That said banking dissolution of corporations or for the fixing of the corporations shall establish stock option plans for their officers relations, liabilities, responsibilities, or duties of and employees as the resources or assets of these stockholders, members, directors or officers of corporations may allow in the best business judgment of their corporations to each other or to the corporation. respective boards of directors, pursuant to the Corporation Code of the Philippines. 2. Entry into the Philippines through establishment of branches iv. License to Do Business Sec. 72, par. 1, GBL: The entry of foreign banks in the Sec. 3(d), Foreign Investments Act of 1991 Philippines through the establishment of branches shall The praise "doing business" shall include soliciting orders, be governed by the provisions of the Foreign Banks service contracts, opening offices, whether called "liaison" Liberalization Act. offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay 3. Conduct of offshore banking business in the country for a period or periods totalling one hundred Sec. 72, par. 2, GBL: The conduct of offshore banking eighty (180) days or more; participating in the management, business in the Philippines shall be governed by the supervision or control of any domestic business, firm, entity or provisions of the Presidential Decree No. 1034, corporation in the Philippines; and any other act or acts that otherwise known as the "Offshore Banking System imply a continuity of commercial dealings or arrangements, Decree." and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally 4. All other matters incident to, and in progressive prosecution of, commercial gain Sec. 77, GBL: In all matters not specifically covered by or of the purpose and object of the business organization: special provisions applicable only to a foreign bank or its Provided, however, That the phrase "doing business: shall not branches and other offices in the Philippines any foreign be deemed to include mere investment as a shareholder by a bank licensed to do business in the Philippines shall be foreign entity in domestic corporations duly registered to do bound by the provisions of this Act, all other laws, rules business, and/or the exercise of rights as such investor; nor and regulations applicable to banks organized under the having a nominee director or officer to represent its interests laws of the Philippines of the same class, except those in such corporation; nor appointing a representative or that provide for the creation, formation, organization or distributor domiciled in the Philippines which transacts dissolution of corporations or for the fixing of the business in its own name and for its own account; relations, liabilities, responsibilities, or duties of

stockholders, members, directors or officers of Philippine currency: Provided, finally, That the Monetary Board corporations to each other or to the corporation. shall monitor the effective use of the "net due to" funds.Whenever there results "net due from head office" ii. Qualifications outside the Philippines, this shall be deducted from the capital Sec. 3, par. 2, Foreign Banks Liberalization Act accounts for purposes of determining the required capital Only those among the top one hundred fifty (150) foreign ratios. banks in the world or the top five (5) banks in their country of origin as of the date of application shall be allowed entry in iii. Time limitation on entry accordance with Section 2 (ii) and (iii) hereof. Sec. 6, Foreign Banks Liberalization Act Foreign banks shall be allowed entry under Section 2 (iii) Sec. 3, par. 4, Foreign Banks Liberalization Act within five (5) years from the effectivity of this Act. During To qualify to establish a branch or a subsidiary, the foreign this period, six (6) new foreign banks shall be allowed entry bank applicant must be widely-owned and publicly-listed in its under Section 2(iii) upon the approval of the Monetary country of origin, unless the foreign bank applicant is owned Board. An additional four (4) foreign banks may be allowed by the government of its country of origin. entry on recommendation of the Monetary Board, subject to compliance with Sections 2, 3, 4, and 5 of this Act, upon Sec. 4(ii), Foreign Banks Liberalization Act approval of the President as the national interest may require. Foreign banks seeking entry pursuant to Section 2 (iii) of this Act shall permanently assign capital of not less than the U.S. iv. Treatment of Multiple Branches dollar equivalent of Two hundred ten million pesos Sec. 74, GBL: In the case of a foreign bank which has more (P210,000,000.00) at the exchange rate on the date of the than one (1) branch in the Philippines, all such branches shall effectivity of this Act, as ascertained by the Monetary Board. be treated as one (1) unit for the purpose of this Act, and all The permanently assigned capital shall be inwardly remitted references to the Philippine branches of foreign banks shall be and converted into Philippine currency. The foreign bank shall held to refer to such units. be entitled to three (3) branches. chan robles virtual law library. Citibank, N.A. v. Sabeniano, 514 SCRA 441 (2007) FACTS The foreign bank may open three (3) additional branches in Sabeniano was a client of Citibank, where she had several deposits and locations designated by the Monetary Board by inwardly market placements, as well as outstanding loans with an aggregate amount remitting and converting into Philippine currency as of P1.92M. However, when she failed to repay these, Citibank used her permanently assigned capital, the U.S. dollar equivalent of deposits and money market placements to off-set and liquidate her Thirty-five million pesos (P35,000,000.00) per additional outstanding loans, a large amount coming from Citibank-Geneva. branch at the exchange rate on the date of the effectivity of

this Act, as ascertained by the Monetary Board. The total Sabeniano denied having any outstanding loans with Citibank and number of branches for each new foreign bank entrant shall demanded that she recover her deposits and money market placements. not exceed six (6). She instituted a complaint for "Accounting, Sum of Money and Damages" For purposes of meeting the prescribed capital ratios, the term against Citibank with RTC of Makati, which declared the setoff illegal, null "capital" shall include permanently assigned capital plus "net and void and that Sabeniano is still indebted to Citibank (P1.07M). due to head office, branches and subsidiaries and offices outside the Philippines" in the ratio prescribed by law or as ISSUE may be prescribed by the Monetary Board: Provided, That in Whether it was proper for Citibank to offset Sabeniano's outstanding loan all cases, the permanently assigned capital and fifteen percent balance with her dollar deposits in Citibank-Geneva (15%) of "net due to" required to comply with prescribed capital ratios shall be inwardly remitted and converted to RULING Philippine currency: Provided, further, That amounts invested NO. Without the Declaration of Pledge, petitioner Citibank had no authority in productive enterprises or utilized by Philippine companies to demand the remittance of respondent’s dollar accounts with Citibank- for export activities, shall not be subject to conversion into Geneva and to apply them to her outstanding loans. It cannot effect legal

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 60 compensation under Article 1278 of the Civil Code since, petitioner Citibank Section 25 of the United States Federal Reserve Act states that – itself admitted that Citibank-Geneva is a distinct and separate entity. As for Every national banking association operating foreign branches shall the dollar accounts, respondent was the creditor and Citibank-Geneva is the conduct the accounts of each foreign branch independently of the debtor; and as for the outstanding loans, petitioner Citibank was the accounts of other foreign branches established by it and of its home creditor and respondent was the debtor. The parties in these transactions office, and shall at the end of each fiscal period transfer to its were evidently not the principal creditor of each other. general ledger the profit or loss accrued at each branch as a It is true that the afore-quoted Section 20 of the General Banking Law of separate item. 2000 expressly states that the bank and its branches shall be treated as one unit. It should be pointed out, however, that the said provision applies to a v. Head Office Guarantee universal9 or commercial bank, duly established and organized as a Sec. 75, GBL: In order to provide effective protection of the Philippine corporation in accordance with Section 8 of the same statute,11 interests of the depositors and other creditors of Philippine and authorized to establish branches within or outside the Philippines. branches of a foreign bank, the head office of such branches The General Banking Law of 2000, however, does not make the same shall fully guarantee the prompt payment of all liabilities of its categorical statement as regards to foreign banks and their branches in the Philippine branch. (69) Residents and citizens of the Philippines. What Section 74 of the said law provides is that in case of a Philippines who are creditors of a branch in the Philippines of a foreign bank with several branches in the country, all such branches shall be foreign bank shall have preferential rights to the assets of treated as one unit. As to the relations between the local branches of a such branch in accordance with the existing laws. foreign bank and its head office, Section 75 of the General Banking Law of 2000 and Section 5 of the Foreign Banks Liberalization Law provide for a Sec. 5, Foreign Banks Liberalization Act "Home Office Guarantee," in which the head office of the foreign bank shall The head office of foreign bank branches shall guarantee guarantee prompt payment of all liabilities of its Philippine branches. While prompt payment of all liabilities of its Philippine branches. the Home Office Guarantee is in accord with the principle that these local branches, together with its head office, constitute but one legal entity, it does not necessarily support the view that said principle is true and vi. License to Do Business applicable in all circumstances. Sec. 133, Corporation Code No foreign corporation transacting business in the Philippines The Home Office Guarantee is included in Philippine statutes clearly for the without a license, or its successors or assigns, shall be protection of the interests of the depositors and other creditors of the local permitted to maintain or intervene in any action, suit or branches of a foreign bank. Since the head office of the bank is located in proceeding in any court or administrative agency of the another country or state, such a guarantee is necessary so as to bring the Philippines; but such corporation may be sued or proceeded head office within Philippine jurisdiction, and to hold the same answerable against before Philippine courts or administrative tribunals on for the liabilities of its Philippine branches. Hence, the principle of the any valid cause of action recognized under Philippine laws. singular identity of that the local branches and the head office of a foreign bank are more often invoked by the clients in order to establish the Hang Lung Bank, Ltd. v. Saulog, 201 SCRA 137 (1991) accountability of the head office for the liabilities of its local branches. It is FACTS under such attendant circumstances in which the American authorities and Hang Lung Bank, Ltd., which was not doing business in the Philippines, jurisprudence presented by petitioners in their Motion for Partial entered into a guarantee agreement with Cordova Chin San in Hongkong Reconsideration were rendered. whereby the latter agreed to pay on demand all sums of money which may Now the question that remains to be answered is whether the foreign bank be due the bank from Worlder Enterprises to the extent of HK $250,000. can use the principle for a reverse purpose, in order to extend the liability of Worlder Defaulted, HLB sued for collection, and the HK Supreme Court a client to the foreign bank’s Philippine branch to its head office, as well as rendered judgment against Cordova and Worlder. to its branches in other countries. Thus, if a client obtains a loan from the foreign bank’s Philippine branch, does it absolutely and automatically make HLB then filed a case for enforcement and recognition of the HK judgment, the client a debtor, not just of the Philippine branch, but also of the head since Cordova was a Philippine resident. Cordova Chin San filed a motion to office and all other branches of the foreign bank around the world? This dismiss on the basis of lack of capacity to sue, grounded on Section 14 of Court rules in the negative. the General Banking Act: "No foreign bank or banking corporation formed,

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 61 organized or existing under any laws other than those of the Republic of the proceedings against the bank and of notices affecting the bank Philippines, shall be permitted to transact business in the Philippines, or may be made, and to file with the Securities and Exchange maintain by itself any suit for the recovery of any debt, claims or demands Commission a duly authenticated nomination of such agent. In whatsoever until after it shall have obtained, upon order of the Monetary the absence of the agent or head or should there be no person Board, a license for that purpose." authorized by the bank upon whom service of summons, processes and all legal notices may be made, service of The motion to dismiss was granted. Hence, this petition for certiorari. summons, processes and legal notices may be made upon the Bangko Sentral Deputy Governor In-Charge of the supervising ISSUE and examining departments and such service shall be as Can HLB, a foreign bank not doing business in the Philippines, sue in the effective as if made upon the bank or its duly authorized agent Philippines without a license? or head. In case of service for the bank upon the Bangko Sentral Deputy Governor In-charge of the supervising and RULING examining departments, the said deputy Governor shill YES, they can. The court looked at both Section 69 of the Old Corporation register and transmit by mail to the president or the secretary Law and Section 133 of the Corp Code which says "No foreign corporation of the bank at its head or principal office a copy, duly certified transacting business in the Philippines without a license, or its successors or by him, of the summons, process, or notice. The sending of assigns, shall be permitted to maintain or intervene in any action, suit or such copy of the summons, process, or notice shall be a proceeding in any court or administrative agency of the Philippines." The necessary part of the services and shall complete the service. provision in the General Banking Act and the corporation Code mean the The registry receipt of mailing shall be prima facie evidence of same thing: it is not the lack of the prescribed license (to do business in the the transmission of the summons, process or notice. All costs Philippines) but doing business without license, which bars a foreign necessarily incurred by the said Deputy Governor for the corporation from access to our courts. making and mailing and sending of a copy of the summons, process, or notice to the president or the secretary of the bank Thusly, like any corporation, a bank not doing business in the Philippines at its head or principal office shall be paid in advance by the need not possess a SEC license to sue before our courts. party at whose instance the service is made.

Since petitioner foreign banking corporation was not doing business in the Sec. 12, Rule 14, Rules of CivPro: When the defendant is a Philippines, it may not be denied the privilege of pursuing its claims against foreign private juridical entity which has transacted business private respondent for a contract which was entered into and consummated in the Philippines, service may be made on its resident agent outside the Philippines. Otherwise we will be hampering the growth and designated in accordance with law for that purpose, or, if development of business relations between Filipino citizens and foreign there be no such agent, on the government official designated nationals. Worse, we will be allowing the law to serve as a protective shield by law to that effect, or on any of its officers or agents within for unscrupulous Filipino citizens who have business relationships abroad. the Philippines.

vii. Summons and Legal Processes viii. Revocation of License Sec. 76, GBL: Summons and legal process served upon the Sec. 78, GBL: The Monetary Board may revoke the license to Philippine agent or head of any foreign bank designated to transact business in the Philippines of, any foreign bank, if it accept service thereof shall give jurisdiction to the courts over finds that the foreign bank is insolvent or in imminent danger such bank, and service of notices on such agent or head shall thereof or that its continuance in business will involve be as binding upon the bank which he represents as if made probable loss to those transacting business with it. After the upon the bank itself. Should the authority of such agent or revocation of its license, it shall be unlawful for any such head to accept service of summons and legal processes for the foreign banks to transact business in the Philippines unless its bank or notice to it be revoked, or should such agent or head license is renewed or reissued. After the revocation of such become mentally incompetent or otherwise unable to accept license, the Bangko Sentral shall take the necessary action to service while exercising such authority, it shall be the duty of protect the creditors of such foreign bank and the public. The the bank to name and designate promptly another agent or provisions of the New Central Bank Act on sanctions and head upon whom service of summons and processes in legal penalties shall likewise be applicable.

(e) Offshore Banking Units (OBUs) 5. "Resident" shall mean — Sec. 1(a), Offshore Banking System Decree a. an individual citizen of the Philippines residing therein; or "Offshore Banking" shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds b. an individual who is not a citizen of the Philippines but is permanently from external sources and the utilization of such funds as provided residing therein; or in this Decree. c. a corporation or other juridical person organized under the laws of the Sec. 1(b), Offshore Banking System Decree Philippines; or "Offshore Banking Unit" shall mean a branch, subsidiary or affiliate d. a branch, subsidiary, affiliate, extension office or any other unit of of a foreign banking corporation which is duly authorized by the corporations or juridical persons which are organized under the laws of any Central Bank of the Philippines to transact offshore banking country and operating in the Philippines. business in the Philippines. 6. "Non-resident" shall mean an individual, corporation or other juridical Chapter 1, Part 3, BSP Circular No. 1389 person not included in the above definition of "resident". SECTION 45. Definition of Terms. — As used in this Chapter, the 7. "Foreign currency deposit unit" or "FCDU" shall refer to that unit of a local following terms shall have the meaning indicated unless the context clearly bank or of a local branch of a foreign bank authorized by the Central Bank indicates otherwise: to engage in foreign currency-denominated transactions, pursuant to the 1. "Offshore Banking" shall refer to the conduct of banking transactions in provisions of R.A. 6426, as amended. "Local bank" shall refer to a thrift foreign currencies involving the receipt of funds principally from external bank or a commercial bank organized under the laws of the Republic of the sources and, as allowed in this Circular, from internal sources and utilization Philippines. "Local branch of a foreign bank" shall refer to a branch of a of such funds, as provided herein. foreign bank doing business in the Philippines, pursuant to the provisions of R.A. No. 337, as amended. 2. "Offshore Banking Unit" or "OBU" shall refer to a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the 8. "Acceptable foreign exchange" comprise those foreign currencies which Central Bank of the Philippines to transact offshore banking business in the are acceptable to and exchangeable at the Central Bank and which form Philippines. part of the international reserves of the country. 3. "Net office funds" shall refer to the net credit balance of the "Due to Head SECTION 46. Approvals Required. — A foreign bank may operate an Office (HO)/Branches/Parent Company Account" after deducting the "Due offshore banking unit (OBU) in the Philippines, after issuance to it of a from HO/Branches/Parent Company Account", as shown in the following Certificate of Authority to operate by the Monetary Board and registration computation: with the Securities and Exchange Commission. Due to HO/Branches/Parent Company SECTION 47. Criteria for Selection. — The following factors shall serve Remittances/Advances/Deposits to OBU by as basis for the issuance of certificate of authority to operate an offshore HO/Branches/Parent Company xxxxx banking unit: (1) liquidity and solvency positions; (2) networth and resources base; (3) managerial and international banking expertise of Unremitted earnings of OBU xxxxx applicant bank (4) contribution to the Philippine economy; and (5) other Total $xxxxx relevant factors, such as participation in the equity of local commercial banks and appropriate geographic representations. Less: Due from HO/Branches/Parent Company Remittances/Advances/ Deposits of OBU with its SECTION 48. Pre-Operation Requirements. — Upon advice from the HO/Branches/Parent Company xxxxx Central Bank, a qualified bank shall submit a sworn undertaking of its head office, or parent company, through any of its duly authorized officers, Net Office Funds $xxxxx supported by an appropriate resolution of its board of directors, to the effect that it shall: 4. "Deposits" shall refer to funds in foreign currencies which are accepted and held by an OBU in the regular course of business, with the obligation to 1. on demand, provide the necessary currencies to cover liquidity needs that return an equivalent amount to the owner thereof, with or without interest. may arise or other shortfall that its OBU may incur.

2. manage the operations of its OBU soundly and with prudence. Bank approval. 3. train continually a specific number of Filipinos in international banking SECTION 52. Transactions with Residents which are not Banks. — An and foreign exchange trading with a view to reducing the number of OBU may engage in the following transactions with residents which are not expatriates; banks: 4. provide and maintain in its offshore banking unit at all times net office 1. Deal in foreign currency instruments. funds in the minimum amount of US$1 million. 2. Extend foreign currency loans and advances, subject to existing 5. start operations of its OBU within one hundred eighty (180) days from regulations on foreign borrowings. receipt of its certificate of authority to operate such unit. 3. Open letters of credit (L/Cs) for importations of resident-borrowers 6. comply with applicable local laws relating to labor and employment. provided such importations shall be funded by a Central Bank-approved OBU foreign currency loan to the resident borrower involved. 7. submit before start of operations, other documents as may be required by the Central Bank such as certification or similar documents showing that 4. Negotiate inward (export) Letters of Credit (L/Cs) and handle other it is duly authorized by the proper Government entity of its country to export transactions (including documents against acceptance [D/A] and engage in offshore banking business in the Philippines. documents against payments ([D/P] and open account arrangements [O/A]) coursed thru their worldwide network of branches and correspondents SECTION 49. Annual Fee. — Upon issuance of a certificate of authority to subject to the following conditions: operate an OBU in the Philippines, and yearly thereafter, the authorized bank shall pay the Central Bank a fee of not less than US$20,000.00. a. OBUs shall bring in foreign exchange sourced outside of the Trade Facility which shall be sold to the domestic banking system; and SECTION 50. Transactions with Non-Residents and/or with OBUs. — An OBU may freely engage in all normal banking transactions with non- b. OBUs' share in the total export L/C negotiation business shall be limited residents and/or with other OBUs, involving any currency other than the to ½ of the growth (incremental) element in the country's total annual Philippine peso. export. This limit shall be observed yearly until this equals 10 percent of total exports. Exports not covered by L/Cs, i.e., done thru documents SECTION 51. Transactions with Foreign Currency Deposit Units against acceptance/open account arrangements shall be considered subject (FCDUs). — Subject to Central Bank regulations, an OBU may engage in to this overall limit; the following transactions with local banks incorporated or registered in the Philippines as FCDU(s) in any currency other than the Philippine peso: 5. Provide full foreign exchange service for all foreign currency non-trade remittances and trade remittances resulting from or related to their own 1. Accept time, demand and call deposits or issue negotiable certificates of negotiations of export L/Cs. time deposits. 6. Render financial, advisory and related services. 2. Borrow with maturities not exceeding 360 days. 7. Refinance trust receipts without prior Central Bank approval arising from 3. Deposit. import transactions of Philippine residents in U.S. dollars or in other 4. Extend loans and advances. acceptable foreign currencies. The refinancing shall be evidenced by bankers acceptances. 5. Deal in foreign currency instruments. SECTION 53. Peso Deposits. — OBUs may open and maintain peso 6. Discount bills, acceptances, and negotiable certificates of deposits. deposit accounts with domestic agent banks exclusively for the following 7. Engage in foreign exchange trading. purposes: 8. Engage in such other transactions as are authorized under this section 1. To meet administrative and other operating expenses, such as salaries, between OBUs and resident banks authorized to accept foreign currency rentals and the like. deposits under the provisions of R.A. No. 6426, as amended. Interbank 2. To pay the peso equivalent of foreign exchange sold by beneficiaries of short-term transactions of not exceeding 360 days such as credit lines of inward remittances of Filipino overseas workers or of Filipino or Philippine banks with correspondent banks, interbank call loans and multinational companies, coursed through the OBUs' correspondent banks interbank loans for general liquidity purposes shall not require prior Central abroad.

3. To pay to the designated beneficiaries in the Philippines the peso i. Qualification equivalent of foreign exchange inward remittances other than remittances Sec. 2, Offshore Banking System Decree related to trade. Subject to such regulatory guidelines as the Monetary Board may prescribe, only banks which are organized under any law 4. To pay the peso equivalent of foreign exchange sold by beneficiaries of other than those of the Republic of the Philippines their export L/Cs negotiated with the OBUs. branches, subsidiaries or affiliates, shall be qualified to The peso deposit accounts shall be funded exclusively by inward remittances operate offshore banking units in the Philippines. However, of foreign exchange eligible to form part of the Philippine international local branches of foreign banks already authorized to accept reserves. foreign currency deposits under the provisions of R.A. No. 6426 may opt to apply for authority to operate an offshore OBUs may also sell inward remittances of foreign exchange for pesos to the banking unit under the provisions of this Decree: Provided, Central Bank through the Treasury Department, for credit to the demand that, upon their receipt of a corresponding certificate of deposit account of the designated commercial bank for account of the OBU. authority to operate as an offshore banking unit, the license to SECTION 54. Financial Assistance to Officers/Employees. — OBUs transact business under the provisions of R.A. No. 6426 shall may extend financial assistance (real estate, car, personal loans, etc.) in be deemed automatically withdrawn. local or foreign currency to their Filipino officers and employees as part of their fringe benefit program. ii. Certificate of Authority to Operate Sec. 3, Offshore Banking System Decree They may likewise grant foreign currency loans to their expatriate officers The Monetary Board of the Central Bank of the Philippines is without need of Central Bank approval. hereby authorized to issue certificates of authority to operate SECTION 55. Secrecy of Deposits. — The provisions of R.A. No. 6426 offshore banking units: Provided, however, that, in issuing (Foreign Currency Deposit Act), as amended, shall apply to deposits in such certificates, the Monetary Board shall take into OBUs; Provided, however, that numbered deposit accounts shall not be consideration the applicant's liquidity and solvency position, used. networth and resources, management, international banking expertise, contribution to the Philippine economy, and other SECTION 56. Exemption from Certain Laws. — The provisions of Act No. relevant factors such as participation in equity of local 2655 (Usury Law) as amended, R.A. No. 529 (Uniform Currency Law) as commercial banks and appropriate geographic representation. amended, and R.A. No. 3591 (Deposit Insurance Law) as amended, shall not apply to transactions and/or deposits in OBUs in the Philippines. The Central Bank of the Philippines is hereby authorized to collect a fee of not less than US$ 20,000.00 upon issuing any SECTION 57. Accounting and Reporting. — OBUs shall maintain an certificate of authority to operate and annually thereafter on accounting system in accordance with guidelines prescribed by the Central the anniversary date of such certificate. Bank. Periodically or as required, existing reports shall continue to be submitted in the prescribed forms to the Central Bank. iii. Head Office Guarantee Sec. 4, Offshore Banking System Decree SECTION 58. Supervision. — The operations and activities of offshore No application to operate as an offshore banking unit under banking units shall be conducted under the supervision of the Central Bank the provisions of this Decree shall be considered unless the of the Philippines. applicant shall have first submitted to the Central Bank of the SECTION 59. Taxes, Customs Duties. — Transactions of OBUs in the Philippines a sworn undertaking of its head office or parent or Philippines shall be subject to such taxes as are prescribed in Presidential holding company, duly supported by an appropriate resolution Decree No. 1034, as implemented by regulations of the Bureau of Internal of its board of directors, that, among other things: (a) it will, Revenue. on demand, provide the necessary specified currencies to cover liquidity needs that may arise or other shortfall that is SECTION 60. Revocation/Suspension. — The Monetary Board, by the offshore banking unit may incur; (b) the operations of its recommendation of the Governor, may revoke or suspend the authority of offshore banking unit shall be managed soundly and with an Offshore Banking Unit to operate in the Philippines for violation of P. D. prudence; (c) it will train and continually educate a specific No. 1034 or these regulations. number of Filipinos in international banking and foreign exchange trading with a view to reducing the number of

expatriates; (d) it will provide and maintain in its offshore When Serrano presented the TD certificates for encashment to Overseas banking unit net office funds in the minimum amount of US$ Bank of Manila, none was honored by said bank. 1,000,000.00 and (e) it will start operations of its offshore banking unit within 180 days from receipt of its certificate of Serrano alleged that the Central Bank failed to strictly supervise the acts of authority to operate such unit. Overseas Bank of Manila and protect the interests of its depositors by virtue of the constructive trust created when Central Bank required the bank to iv. Effects of Certain Laws increase its collaterals for its overdrafts and emergency loans, said Sec. 8, Offshore Banking System Decree collaterals allegedly acquired through the use of depositors money. The provisions of Act No. 2566 (Usury Law), Republic Act No. 529, as amended (Uniform Currency Law), and Republic Act Hence, Serrano prayed for Central Bank’s solidary liability with Overseas No. 3591, as amended (Deposit Insurance Law), shall not Bank of Manila to him for the P350,000 TDs made, among others. apply to transactions and/or deposits in offshore banking units in the Philippines: Provided, however, that the provisions of ISSUE R.A. No. 1405 (Secrecy of Bank Deposits Law) shall apply to Whether Central Bank should be held solidarily liable deposits in offshore banking units. RULING NO. Serrano’s claims of mandamus and prohibition are not proper as there III. DEPOSIT FUNCTION is no shown clear abuse of discretion by the Central Bank in its exercise of supervision over the bank. If there was, the proper party to invoke in this A. Nature of Deposit case was Overseas Bank of Manila, not the Central Bank. a. Deposits as Simple Loans Furthermore, both parties overlooked one fundamental principle in the ART. 1953, NCC: A person who receives a loan of money or any other nature of bank deposits when Serrano claimed that there should be created fungible thing acquires the ownership thereof, and is bound to pay to a constructive trust in his favor when Overseas Bank of Manila increased its the creditor an equal amount of the same kind and quality. collaterals in favor of Central Bank for its overdrafts and emergency loans, ART. 1980, NCC: Fixed, savings, and current deposits of money in since these collaterals were acquired by the use of depositors’ money. banks and similar institutions shall be governed by the provisions concerning simple loan. Bank deposits are in the nature of irregular deposits. They are really loans because they earn interest. All kinds of bank deposits, whether fixed, SERRANO v. CENTRAL BANK, 96 SCRA 96 (1980) savings, or current are to be treated as loans and are to be covered by the DOCTRINE: Bank deposits are in the nature of irregular deposits. They are law on loans. Current and savings deposits are loans to a bank because it really loans because they earn interest. All kinds of bank deposits, whether can use the same. Serrano, in making TDs that earn interests with the bank, fixed, savings, or current are to be treated as loans and are to be covered was in reality its creditor. Failure of the bank to honor the TD is failure to by the law on loans. Current and savings deposits are loans to a bank pay its obligation as debtor and not a breach of trust arising from a because it can use the same. depositary’s failure to return the subject matter of the deposit.

FACTS Manuel Serrano made a time deposit (TD) for 1 year with 6% interest of b. Bank as Debtor P150,000 with the Overseas Bank of Manila, while Concepcion Maneja made i. Deposit is voluntary agreement; “Know Your Customer” a similar deposit for 1 year with 6.5% interest of P200,000 with the same standards bank. SEC. X262.1, MRB: All banking institutions are required to set When Concepcion Maneja married Felixberto Serrano (presumably the a minimum of three (3) specimen signatures to be brother of Manuel Serrano), she assigned and conveyed to Manuel her TD of simultaneously required from each of their depositors and to P200,000. update the specimen signatures of their depositors every five (5) years or sooner, at the discretion of the bank. Banks may,

at their option, require their depositors to submit ID photos out that when private respondent David invested his money on nine. and together with the specimen signatures. savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple loan or mutuum and not a contract of deposit. ii. Ownership of money deposited Thus, Article 1980 of the New Civil Code provides that: Article 1980. Fixed, savings, and current deposits of-money in banks GUINGONA, JR. v. CITY FISCAL OF MANILA, 128 SCRA 577 (1984) and similar institutions shall be governed by the provisions DOCTRINE: The relationship between the depositor and the bank is that of concerning simple loan. creditor and debtor. Consequently, the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can Hence, the relationship between the private respondent and the Nation make use of the amount deposited for its banking operations, such as to Savings and Loan Association is that of creditor and debtor; consequently, pay interests on deposits and to pay withdrawals. the ownership of the amount deposited was transmitted to the Bank upon the perfection of the contract and it can make use of the amount deposited FACTS for its banking operations, such as to pay interests on deposits and to pay From March 20, 1979 to March, 1981, David invested with the Nation withdrawals. While the Bank has the obligation to return the amount Savings and Loan Association, (hereinafter called NSLA) the sum of deposited, it has, however, no obligation to return or deliver the same P1,145,546.20 on nine deposits, P13,531.94 on savings account deposits money that was deposited. And, the failure of the Bank to return the (jointly with his sister, Denise Kuhne), US$10,000.00 on time deposit, amount deposited will not constitute estafa through misappropriation US$15,000.00 under a receipt and guarantee of payment and US$50,000.00 punishable under Article 315, par. l(b) of the Revised Penal Code, but it will under a receipt dated June 8, 1980 (au jointly with Denise Kuhne), that only give rise to civil liability over which the public respondents have no- David was induced into making the aforestated investments by Robert jurisdiction. Marshall an Australian national who was allegedly a close associate of petitioner Guingona Jr., then NSLA President, petitioner Martin, then NSLA BPI FAMILY BANK v. FRANCO, 538 SCRA 184 (2007) Executive Vice-President of NSLA and petitioner Santos, then NSLA General Manager; that on March 21, 1981 N LA was placed under receivership by DOCTRINE: Money bears no earmarks of peculiar ownership. Its primary the Central Bank, so that David filed claims therewith for his investments function is to pass from hand to hand as a medium of exchange, without and those of his sister; that on July 22, 1981 David received a report from other evidence of its title. Money, which passed through various transactions the Central Bank that only P305,821.92 of those investments were entered in the general course of banking business, even if of traceable origin, bears in the records of NSLA; that, therefore, the respondents in I.S. No. 81- no earmarks of peculiar ownership. 31938 misappropriated the balance of the investments, at the same time FACTS violating Central Bank Circular No. 364 and related Central Bank regulations In 1989, Tevesteco Arrastre-Stevedoring Co. (Tevesteco) opened a savings on foreign exchange transactions; that after demands, petitioner Guingona and current account with BPI-FB. Soon thereafter, First Metro Investment Jr. paid only P200,000.00, thereby reducing the amounts misappropriated to Corporation (FMIC) opened a time deposit account with the same branch of P959,078.14 and US$75,000.00. BPI-FB with a deposit of P100M to mature 1 year after. Subsequently,

Franco opened savings (P500K), current (P500K) and time deposit (P1M) Guingona, Martin and Santos were charged with estafa before the City Fiscal accounts with BPI-FB. The funding of Franco’s checks was part of the P80M of Manila. The herein petitioners (Guingona et al) contend that the Fiscal debited by BPI-FB from FMIC’s TD account and credited to Tevesteco’s has no authority to conduct a preliminary investigation and to prosecute current account pursuant to an Authority to Debit signed by FMIC’s officers. them because the acts alleged by David was only civil in nature and not This, however, was found to be forged, as declared by Antonio Ong, one of criminal. the alleged signatories.

ISSUE Although Tevesteco already made some withdrawals from the P80M credited Whether the charges against Guingona (estafa and violation of CB Circular to its account, BPI-FB debited Franco’s savings and current accounts for the No. 364 and related regulations regarding foreign exchange transactions) is amounts remaining therein. His accounts were also garnished pursuant to within the jurisdiction of the City Fiscal? an Order of Attachment issued by the RTC Makati. Due to this, his checks

drawn against the current account were dishonored (stamped with “Account RULING under garnishment”). However, when Franco issued the checks, neither was Fiscal has no jurisdiction over the subject matter. It must be pointed he furnished a Notice of Garnishment nor impleaded in the case instituted

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 67 by BPI-FB to recover the amount. It was only about a year after that he was multi-million peso scam Franco was allegedly involved in. To grant that right impleaded in the case. Thus, he filed a Motion to Discharge Attachment, would open floodgates of public distrust in the banking industry. which was granted. But this cannot be complied since the amount had already been debited due to the forgery. iii. Payment to proper party-depositor As to his savings account, it appears that he agreed to an arrangement where P400K from his savings account was temporarily transferred to FULTON IRON WORKS CO. v. CHINA BANKING CORP., 55 PHIL. 208 Quiaoit’s savings account, subject to immediate return upon issuance of a (1930) certificate of deposit which Quiaoit needed for his Taiwan visa application. DOCTRINE: A depositor is presumed to be the owner of funds standing in his name in a bank deposit, and where a bank is not chargeable with notice FMIC filed a complaint against BPI-FB to recover the P80M debited from its that the money deposited therein is the property of another person, it is account, infra, where BPI-FB was found liable to FMIC due to its failure to justified in paying out the money to the depositor, or upon his order, and in exercise the degree of diligence required of banks in treating the accounts of so doing cannot be held liable to any other person as the true owner. its depositors with meticulous care. FACTS Franco filed a suit against BPI-FB to cease freezing his accounts and to Fulton Iron Works Co. (Fulton) sold to Binalbagan Estate Inc.(Binalbagan) release the deposits therein. The lower court ruled in favor of Franco, which machinery for a sugar mill. As payment, Binalbagan executed 3 notes the CA affirmed with modification. amounting to 80,000 dollars.

ISSUE The notes were never paid at maturity because Binalbagan suspended Who has a better right to the deposits in Franco’s account—Franco or BPI- payments in favor of its other creditor. As a result, Fulton employed the FB? services of a law firm, which S. C. Schwarzkopf was a member then, for the collection of the payment. The firm was subsequently dissolved and HELD Schwarzkopf was alone in handling the case. He opened a personal account BPI-FB. The deposit in Franco’s accounts consists of money, which is (ACCOUNT 1) in China Banking Corp and deposited a modest amount. generic and fungible. The quality of being fungible depends upon the possibility of the property, because of its nature or the will of the parties, Later on, Binalbagan Estate’s financial condition began to improve. It being substituted by others of the same kind, not having a distinct executed a check amounting to 10,000 to Schwarzkopf as part payment of individuality. the original transaction. Schwarzkopf deposited the check in a new account (ACCOUNT 2) in China Bank. But was subsequently withdrawn and used for It bears emphasizing that money bears no earmarks of peculiar ownership, individual purposes. Binalbagan again executed a check amounting to and this characteristic is manifest in the case which involves money in a 61,000 and delivered it to Schwarzkopf in favor of Fultan. He deposited it in banking transaction gone awry. It primary function is to pass from hand to a new account again in China Bank entitled “Schwarzkopf, Atty-in-fact, hand as a medium of exchange, without other evidence of its title. Money, Fulton Iron Works” (ACCOUNT 3). which passed through various transactions in the general course of banking business,, even if traceable origin, is no exception. When Schwarzkopf’s ACCOUNT 2 was overdrawn, he transferred the money There is no doubt that BPI-FB owns the deposited money in the accounts of from ACCOUNT 2 to settle the discrepancy. Ultimately, he remitted only Franco, but not as a legal consequence of its unauthorized transfer of FMIC’s 30,000 to Fulton. deposits to Tevesteco’s account. BPI-FB conveniently forgets that the deposit of money in banks is governed by the NCC provision on simple loan Fulton now argues that the both Schwarzkopf and China bank is liable for or mutuum. As there is a creditor-debtor relationship between a depositor the amount misappropriated. (Schwarzkopf was already convicted of estafa and a bank, BPI-FB ultimately acquired ownership of Franco’s deposits, but in a criminal case and made civilly liable, so this case is simply against such ownership is coupled with a corresponding obligation to pay him an China Bank.) equal amount on demand. ISSUE Whether the bank is liable for the amount misappropriated by Schwarzkopf. BPI-FB does not have the right to unilaterally freeze the accounts of Franco based on its mere suspicion that the funds therein were proceeds of the

RULING Party. The Bank is only liable for compensating the overdraft of ACCOUNT 2 In the meantime, a case for the settlement of Velasco's estate was filed with ACCOUNT 3. But the Bank is not liable for the whole amount of wherein the whole balance in the joint account of Velasco and Lim was misappropriation by Schwarzkopf specifically for withdrawals in ACCOUNT 2. claimed as part of Velasco's estate. The intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under the joint Bank accounts and commercial papers can have earmarks. And earmarks account. give notice that the money/credit rightfully belongs to some other person then the one having control of the account. ACCOUNT 3 clearly indicates In 1980, CBTC merged with BPI. that the account was for his client Fulton, as indicated in the name. Thus, the bank cannot offset the overdraft of the personal account of Schwarzkopf In 1987, BPI filed a complaint against Lim and Eastern demanding payment from the Account in favor of Fulton. For this transaction, the Bank is liable. of the promissory note for P73,000.00. Lim and Eastern, in turn, filed a However, the bank cannot be held liable for the money drawn by counterclaim against BPI for the return of the balance in the disputed Schwarzkopf from Account 2 for individual purposes. There was no proof account subject of the Holdout Agreement. The Court of Appeals rendered a that the bank had any knowledge of the misappropriation of the money, as decision stating: there was no indication the account was also for Fulton. Thus, there was no duty for the bank to intervene especially from the first few deposits. 1) On the claim: It was the duty of BPI to debit the account of the defendants under the promissory note to set off the loan even though the The specialized function of bank is to serve as a place of deposit for money, same has no fixed maturity. to keep it safely while on deposit, and to pay it out, upon demand to the person who effected the deposit or upon his order. A bank is not a guardian 2) On the counterclaim: The settlement of Velasco's estate had nothing to of trust funds deposited with it in the sense that it must see to their proper do with the claim of the defendants for the return of the balance of their application nor is it its business to pry into the uses to which moneys on account with BPI as they were not privy to that case, and that the deposit in its vault are being put; and so long as it serves its function and defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, BPI pays the money out in good faith to the person who deposited it, or upon should have protected the defendants' interest in the case when the said his order, without knowledge or notice that it is in fact assisting in the account was claimed by Velasco's estate. It then ordered BPI to pay misappropriation of the fund, the bank will be protected. defendants the amount of representing the outstanding balance in the bank account of defendants. Thus, the mere act of a bank in entering a trust fund to the personal account of the fiduciary, knowing it to be a trust fund, will not make the ISSUES bank liable in case of the subsequent misappropriation of the money by the 1) Whether BPI was duty-bound to debit the account of the defendants to fiduciary set off the loan because of the Holdout Agreement, and 2) Whether the counterclaim for the amount in the joint account can be BPI v. CA, 232 SCRA 302 (1994) awarded despite the same being given to the heirs of Velasco already.

DOCTRINE: A bank is under no duty or obligation to make the application. RULING To apply the deposit to the payment of the loan is a privilege, a right to set- 1) NO. It is clear from the Holdout Agreement that BPI had every right to off which the bank has the option to exercise. demand that Eastern and Lim settle their liability under the promissory note. FACTS It cannot be compelled to retain and apply the deposit in Lim and Velasco's Benigno Lim had 2 accounts at CBTC (BPI's predecessor): One jointly with joint account to the payment of the note. What the agreement conferred on Eastern Plywood Corporation, of which he was an officer, and another joint CBTC was a power, not a duty. Generally, a bank is under no duty or checking account with Mariano Velasco. Subsequently, Velasco died in April obligation to make the application. To apply the deposit to the payment of a 1977. loan is a privilege, a right of set-off which the bank has the option to exercise. In August 1977, Eastply and Lim obtained a loan from CBTC for P73,000 evidenced by a promissory note and secured by a Holdout Agreement giving 2) YES. In Serrano vs. Central Bank of the Philippines it was held that bank CBTC the power to take funds from the joint account with Velasco (approx deposits are in the nature of irregular deposits; they are really loans P331,000) and apply the same as payment for the loan. because they earn interest. The relationship then between a depositor and a

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 69 bank is one of creditor and debtor. The deposit under the questioned time deposits. In the judgment rendered in that case on December 13, 1972 account was an ordinary bank deposit; hence, it was payable on demand of the Fidelity Savings Bank was ordered to pay the Elizes spouses the sum of the depositor. P50,584 plus accumulated interest.

BPI cannot be relieved of its duty to pay Eastern simply because it already In another case, assigned to Branch XXX of the Court of First Instance of allowed the heirs of Velasco to withdraw the whole balance of the account. Manila, the spouses Augusta A. Padilla and Adelaida Padilla secured on April The petitioner should not have allowed such withdrawal because it had 14, 1972 a judgment against the Fidelity Savings Bank for the sums of admitted in the Holdout Agreement the unceertain ownership of the money P80,000 as the balance of their time deposits, plus interests, P70,000 as deposited in the account. moral and exemplary damages and P9,600 as attorney's fees (Civil Case No. 84200 where the action was filed on September 6, 1971). Moreover, the order of the court in the intestate case merely authorized the heirs of Velasco to withdraw the account. BPI was not specifically ordered to The Central Bank appealed to SC by certiorari. It contends that the final release the account to the said heirs; hence, it was under no judicial judgments secured by the Elizes and Padilla spouses do not enjoy any compulsion to do so. The authorization given to the heirs of Velasco cannot preference because (a) they were rendered after the Fidelity Savings Bank be construed as a final determination or adjudication that the account was declared insolvent and (b) under the charter of the Central Bank and belonged to Velasco. We have ruled that when the ownership of a particular the General Banking Law, no final judgment can be validly obtained against property is disputed, the determination by a probate court of whether that an insolvent bank. property is included in the estate of a deceased is merely provisional in character and cannot be the subject of execution. The lower court, in justifying the award for damages to the spouses, reasoned out that, because such actions are not suspended, judgments Because the ownership of the deposit remained undetermined, BPI, as the against insolvent banks could be considered as preferred credits under debtor with respect thereto, had no right to pay to persons other than those article 2244(14)(b) of the Civil Code. It further noted that, in contrast with in whose favor the obligation was constituted or whose right or authority to the Central Act, section 18 of the Insolvency Law provides that upon the receive payment is indisputable. The payment of the money deposited with issuance by the court of an order declaring a person insolvent "all civil BPI that will extinguish its obligation to the creditor-depositor is payment to proceedings against the said insolvent shall be stayed." the person of the creditor or to one authorized by him or by the law to receive it. Payment made by the debtor to the wrong party does not On the other hand, the Central Bank argues that after the Monetary Board extinguish the obligation as to the creditor who is without fault or has declared that a bank is insolvent and has ordered it to cease operations, negligence, even if the debtor acted in utmost good faith and by mistake as the Board becomes the trustee of its assets "for the equal benefit of all the to the person of the creditor, or through error induced by fraud of a third creditors, including the depositors". The Central Bank cites the ruling that person. The payment then by BPI to the heirs of Velasco, even if done in "the assets of an insolvent banking institution are held in trust for the equal good faith, did not extinguish its obligation to the true depositor, Eastern. benefit of all creditors, and after its insolvency, one cannot obtain an advantage or a preference over another by an attachment, execution or otherwise" iv. Whether or not preferred credits ISSUE CENTRAL BANK v. MORFE, 63 SCRA 114 (1975) 1) Whether deposits are deemed as preferred credits and if not, 2) may FACTS they be elevated to the level of preferred credits by acquiring a court Monetary Board found the Fidelity Savings Bank to be insolvent. The Board judgment? directed the Superintendent of Banks to take charge of its assets, forbade it to do business and instructed the Central Bank Legal Counsel to take legal RULING actions. NO to both. It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are not true deposits. They are Prior to the institution of the liquidation proceeding but after the declaration considered simple loans and, as such, are not preferred credits. of insolvency, or, specifically, the spouses Job Elizes and Marcela P. Elizes filed a complaint in the Court of First Instance of Manila against the Fidelity Evidently, one purpose in prohibiting the insolvent bank from doing business Savings Bank for the recovery of the sum of P50, 584 as the balance of their is to prevent some depositors from having an undue or fraudulent

GULLAS v. PNB, 62 PHIL. 519 (1935) That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by some depositors could be maintained and judgments DOCTRINE: A bank has the right of set off of the deposit in its hands for would be rendered for the payment of their deposits and then such the payment of any indebtedness to it on the part of the depositor. judgments would be considered preferred credits under article 2244 (14) (b) of the Civil Code. FACTS (Version 1) The treasurer of the US for the US Veterans Bureau issued a treasurer A contrary rule or practice would be productive of injustice, mischief and warrant in the amount of $361, which was indorsed by Paulino Gullas and confusion. To recognize such judgments as entitled to priority would mean Pedro Lopez, payable to Francisco Bacos. PNB encashed the warrant, but that depositors in insolvent banks, after learning that the bank is insolvent was dishonored by the Insular Treasurer. Gullas had $509 in his bank as shown by the fact that it can no longer pay withdrawals or that it has account, which was sequestered by the bank. At the time the notice of closed its doors or has been enjoined by the Monetary Board from doing dishonor was sent, he was still in Manila and did not receive the notice. Due business, would rush to the courts to secure judgments for the payment of to such event, he was not able to pay the fees for his insurance for their deposits. insufficient balance, and he was greatly humiliated by such event.

ISSUE In such an eventuality, the courts would be swamped with suits of that Whether PNB has the right to apply Gullas’s deposit against his debt to the character. Some of the judgments would be default judgments. Depositors bank armed with such judgments would pester the liquidation court with claims for preference on the basis of article 2244(14)(b). Less alert depositors RULING would be prejudiced. That inequitable situation could not have been NO. According to the NCC, compensation shall take place upon the contemplated by the framers of section 29. existence of two persons being a creditor and debtor to each other. Gullas,

being a depositor of the bank, is considered a creditor of the bank and the The general principle of equity that the assets of an insolvent are to be bank being the debtor. Under the Negotiable Instruments Law, when a distributed ratably among general creditors applies with full force to the check has been dishonored, a general indorser becomes liable to the distribution of the assets of a bank. A general depositor of a bank is merely amount of the check upon the knowledge of the dishonor. Gullas, being a a general creditor, and, as such, is not entitled to any preference or priority general indorser, became a debtor to the bank for the dishonor of the check, over other general creditors upon knowledge of the dishonor, and the bank becomes the creditor.

Compensation should have taken place, except that Gullas DID NOT have Considering that the deposits in question, in their inception, were knowledge of the dishonor. Such action became prejudicial to Gullas, and he not preferred credits, it does not seem logical and just that they may therefore claim from the bank any damages sustained by him from should be raised to the category of preferred credits simply because such event. However, since no actual damages was proved, nominal the depositors, taking advantage of the long interval between the damages in the amount of $250 is awarded to him. declaration of insolvency and the filing of the petition for judicial assistance and supervision, were able to secure judgments for the payment of their time deposits. FACTS (Version 2) • Attorney Paulino Gullas has a current account with PNB. The circumstance that the Fidelity Savings Bank, having stopped operations • On August 2, 1933, the Treasurer of the United States for the United since February 19, 1969, was forbidden to do business (and that ban would States Veterans Bureau issued a Warrant in the amount of $361, include the payment of time deposits) implies that suits for the payment of payable to the order of Francisco Sabectoria Bacos. Paulino Gullas and such deposits were prohibited. What was directly prohibited should not be Pedro Lopez signed as endorsers of this check. encompassed indirectly. • The warrant was cashed by PNB but the Insular Treasurer dishonored the warrant. At that time the outstanding balance of Gullas on the books of the bank was P509. Against this balance Gullas had issued certain cheeks which could not be paid when the money was sequestered. • On August 20, 1933, Gullas left his Cebu residence for Manila.

• When PNB learned of the dishonor of the warrant, it sent notices by 2. Gullas is entitled to nominal damages. mail to Atty. Gullas. However, the notices could not be delivered to • PNB did not enforce the remedy properly. Gullas because he was in Manila. In its letter dated Aug. 21, 1933, o PNB made use of the money in Gullas’ account to make PNB informed Gullas and Lopez that the United States Treasury good for the treasury warrant even prior to the mailing of warrant No. 20175 in the name of Francisco Sabectoria Bacos for the notice of dishonor and without waiting for any action by $361 or P722, the payment for which had been received has been Gullas. returned by its Manila office with the notation that the payment of his o It has been held that a depositor who has funds sufficient to check has been stopped by the Insular Treasurer. PNB stated that meet payment of a check drawn by him in favor of a third because of this, it applied the outstanding balances in their current party, has a right of action against the bank for its refusal to accounts (Gullas - P509). pay such a check in the absence of notice to him that the • When Gullas returned to Cebu on August 31, 1933, he received the bank has applied the funds so deposited in extinguishment notice of dishonor and he immediately paid the unpaid balance of the of past due claims held against him. United States Treasury warrant. o As to an indorser, notice should actually have been given • Because of this incident, (1) checks that Gullas issued, including one him in order that he might protect his interests. for his insurance, were not paid because of lack of funds standing to his credit in the bank; (2) periodicals in the vicinity gave prominence • PNB’s action was prejudicial to Gullas. to the news to the great mortification of Gullas. o PNB is not primarily liable for the alleged libelous articles • CFI: PNB should return the sum of P5098 to Gullas, with legal interest against Gullas. The same same remark could be made and costs. Gullas is entitled to damages in the amount of P10K more relative to the loss of business which Gullas claims but which or less. could not be traced definitely to this occurrence. Also Gullas had been reimbursed. ISSUES o On the other hand, it was not agreeable for one to draw (1) WON PNB has the right to apply a deposit to the debt of depositor to the checks in all good faith, then, leave for Manila, and on bank return find that those checks had not been cashed because (2) What amount of damages, if any, should be awarded to Gullas of the action taken by the bank. o Gullas should be awarded nominal damages worth P250 RULING because of the premature action of the bank against which 1. PNB has the right to apply the deposit. Gullas had no means of protection. • Art. 1195 Civil Code provides that compensation shall take place when two persons are reciprocally creditor and debtor of each other. It has REPUBLIC v. CA, 65 SCRA 186 (1975) been held that the relation existing between a depositor and a bank is that of creditor and debtor. DOCTRINE: Since the relation between a depositor and a bank is that of a • Sec. 66 Negotiable Instruments Law provides that the general creditor and debtor, the depositor has the right to apply his deposits/credit indorser of negotiable instrument engages that if he be dishonored with the bank against the loans he had obtained from his deposits. and the necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the holder. It has been held that notice of FACTS dishonor is in order to charge all indorser and that the right of action Shortly after the liberation of the Philippines in 1945, all the assets against him does not accrue until the notice is given. belonging to the enemy government, were confiscated by the Government of the United States. The assets located in the Philippines were • As a general rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness to it on the part of a subsequently turned over to the Philippines by agreement between the two depositor. Governments. Among these assets are 20 promissory notes secured by a chattel mortgage executed by Cuaycong in favor of the Bank of Taiwan. • [In Louisiana, a bank has no right, without an order from or special assent of the depositor to retain out of his deposit an amount sufficient to meet his indebtedness. This rule is based on the theory of Based on the Ballyntine schedule, the money value of these promissory confidential contracts arising from irregular deposits, e. g., the deposit notes adds up to P4,986, and, including the stipulated interest accumulated of money with a banker.] up to September 30, 1961, the total indebtedness amounts to P14,654.17.

The Republic then filed suit against Cuaycong to recover the value of the 20 drawn by the Court of Appeals as to the existence and extent of such promissory notes executed by Cuaycong in favour of the Bank of Taiwan. deposit cannot be flawed. The fact is clear that all the proceeds derived from the sale or confiscation of the sugar stocks belonging to the planters in Based on the findings of the trial court which were adopted by the Court of Negros Occidental were retained as deposits by the Bank of Taiwan and Appeals, it would appear that during the Japanese occupation of Negros made part of the "Farmers Rehabilitation Fund." Planters like Cuaycong were Occidental, the military administration commandeered all available stocks of allowed to borrow money from the Fund but only to the extent of their sugar in that province, including those belonging to Cuaycong; that no deposits with the Bank of Taiwan or, as the military directive adverted to record of the precise amount of sugar taken from Cuaycong has survived states, "Within the limit of the proceeds of sugar sale of each planter." The the war but Cuaycong claimed that the same was valued at P10,242.60; and conclusion is logical and inevitable that the sums covered by the promissory that Cuaycong's stocks of sugar were mortgaged at the time with the notes drawn by Cuaycong were well within the size of his then existing Philippine National Bank (the PNB, at the beginning of the Japanese deposit. occupation, was taken over by the Bank of Taiwan) to guarantee payment of And since the relation between a depositor in a bank and the bank is a likewise undetermined amount of crop loan(s) granted prior to the that of creditor and debtor, 3 Cuaycong has every right to apply his outbreak of the war. credit with the Bank of Taiwan against the loans he had obtained from his deposit. All the elements necessary for a set-off are present, and the stocks of sugar belonging to Cuaycong were sold by the Victories under the law then obtaining, 4 compensation takes place ipso jure from the Planters' Association, acting as agent for the Bank of Taiwan, to the Mitsui day all the necessary requisites concur, without need of any conscious intent Bussan Kaisha of Japan. The proceeds of this sale were, in effect, retained on the part of the parties. by the Bank of Taiwan to constitute a deposit of Cuaycong and made part of the so-called "Farmers Rehabilitation Fund" mentioned in the military Moreover, the Court is satisfied with the explanation proffered by directive. The Fund allowed the planters to borrow money therefrom, Cuaycong that, under the abnormal conditions then prevailing, the against their respective deposits, in order to finance new plantings of sugar only way by which he could utilize the proceeds from the sale of the cane and cotton in their haciendas. The twenty promissory notes subject of stocks of sugar seized from him was for him to make use of the loans the present action by the Government were executed by Cuaycong between made available by the very agency that arbitrarily retained the said April 16, 1943 and March 25, 1944 under the above-mentioned financing proceeds. In ultimate effect, it was as though Cuaycong had merely scheme. withdrawn his deposits with the Bank of Taiwan.

Upon the foregoing facts, the Court of Appeals held, among others, that (a) BPI v. CA, 512 SCRA 620 (2007) the right of action of the Government against Cuaycong has already DOCTRINE: A bank generally has the right of set-off over the deposits prescribed, and (b) Cuaycong's indebtedness to the Bank of Taiwan may be therein for the payment of any withdrawals on the part of a depositor—the considered set off against the proceeds of the sale of his sugar retained by right of a collecting bank to debit a client’s account for the value of a the same bank. The Government disputes these rulings. dishonored check that has previously been credited has fairly been

established by jurisprudence. ISSUE Whether the government may still collect on the promissory notes against FACTS Cuaycong Julio Templonuevo demanded from BPI payment of P267,000 (approx.) representing the aggregate amount of 3 checks, payable to him, but RULING: NO. deposited with Annabelle Salazar’s BPI account without his knowledge and 1. On the matter of prescription, the SC held that the statute of limitations corresponding indorsement. does not operate against the Government as to bar it from collecting the sums owing to the Bank of Taiwan during the last war for, in recovering Accepting Templonuevo’s claim as a valid one, BPI froze the account of AA these loans, the Government is merely acting "in the exercise of its Salazar Construction and Engineering Services (ASCES), instead of sovereign functions to protect the interests of the State over a public Annabelle Salazar’s, where the checks were deposited, as this was already property." closed due to insufficiency of funds. 2. The Court of Appeals is correct in allowing a set-off of Cuaycong's indebtedness to the Bank of Taiwan against his money-deposit with the Salazar was advised to settle this with Templonuevo, but no settlement was same bank. No record of Cuaycong's deposit is available but the inference arrived at. Hence, BPI decided to debit the amount of P267,000 (approx.)

Bank deposits are in the nature of irregular deposits—they are really loans Hence, Salazar instituted an action against BPI for the recovery of the sum because they earn interest. All kinds of bank deposits are to be treated as of P267,000. The RTC rendered a decision in favor of Salazar, which the CA loans and are to be covered by the law on loans. Mandamus does NOT lie to affirmed on the ground that Salazar and Templonuevo had previously enforce the performance of contractual obligations. agreed that the checks payable to JRT Construction and Trading actually belonged to Salazar and would be deposited to her account, with Templonuevo acquiescing to the arrangement. c. Bank’s Duty of Utmost Care

ISSUE SEC. 2, GBL: The State recognizes the vital role of banks in Whether it was proper for BPI to withdraw unilaterally from the depositor’s providing an environment conducive to the sustained development account the amount it had previously paid upon certain unendorsed order of the national economy and the fiduciary nature of banking that instruments deposited by the depositor to another account that she closed requires high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient HELD banking and financial system that is globally competitive, dynamic NO. Although as the collecting bank, BPI had the right to debit Salazar’s and responsive to the demands of a developing economy. account for the value of the checks it previously credited in her favor, it was improper for it to do so. It is of no moment that the account debited by BPI CONSOLIDATED BANK AND TRUST COMPANY v. CA, 410 SCRA 562 was different from the original account to which the proceeds of the check (2003) were credited because both admittedly belonged to Salazar, the former DOCTRINE: The fiduciary relationship means that the bank’s obligation to being the account of the sole proprietorship which had no separate and observe “high standards of integrity and performance” is deemed written distinct personality form her, and that the latter being her personal account. into every deposit agreement between a bank and its depositors. It requires banks to assume a degree of diligence higher than that of a good father of a As business affected with public interest, and because of the nature of their family. functions, banks are under obligation to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature FACTS of their relationship. In this regard, BPI was clearly remiss in its duty to (Similar with the earlier case where the messenger left the passbook in the Salazar as its depositor. bank)

Despite the obvious lack of indorsement on the checks, BPI permitted the ISSUE encashment of these checks three times on 3 separate occasions. This Who should bear the loss, Consolidated Bank or L.C. Diaz? negates BPI’s contention that it merely made a mistake in crediting the value of the checks to Salazar’s account and instead bolsters the conclusion RULING of the CA that BPI recognized Salazar’s claim of ownership of checks and Both will share in the losses- 60% to Consolidated Bank, 40% to L.C. Diaz. acted deliberately in paying the same, contrary to ordinary banking policy The Bank was made liable because of its duty to its depositors. and practice. This fiduciary relationship means that the bank’s obligation to observe “high Although the Court ordered the return of the amount of the checks to standards of integrity and performance” is deemed written into every Templonuevo, it affirmed CA’s award of damages to Salazar. This would deposit agreement between a bank and its depositor. The fiduciary nature of have been avoided had BPI adhered to the standard of diligence expected of banking requires banks to assume a degree of diligence higher than that of one engaged in the banking business. A depositor has the right to recover a good father of a family. reasonable moral damages even if the bank’s negligence may not have been attended with malice or bad faith, if the former suffered mental anguish, The fiduciary nature of banking does not convert a simple loan into a trust serious anxiety, embarrassment, and humiliation. agreement because banks do not accept deposits to enrich depositors but to earn money for themselves. The law allows banks to offer the lowest possible interest rate to depositors while charging the highest possible

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 74 interest rate on their own borrowers. The interest spread or differential however, That a check which has been cleared and credited to the belongs to the bank and not to the depositors who are not cestui que trust account of the creditor shall be equivalent to a delivery to the of banks. If depositors are cestui que trust of banks, then the interest creditor of cash in an amount equal to the amount credited to his spread or income belongs to the depositors, a situation that Congress account. certainly did not intend in enacting Section 2 of RA 8791. SEC. X201, MRB: Banks may accept or create demand deposits

subject to withdrawal by check. Solidbank’s tellers must exercise a high degree of diligence in insuring that they return the passbook only to the depositor or his authorized A UB/KB may accept or create demand deposits subject to representative. The tellers know, or should know, that the rules on savings withdrawal by check, without prior authority from the BSP. account provide that any person in possession of the passbook is presumptively its owner. If the tellers give the passbook to the wrong A TB/RB/Coop Bank may accept or create demand deposits upon person, they would be clothing that person presumptive ownership of the prior authority of the BSP. passbook, facilitating unauthorized withdrawals by that person. For failing SEC. X202, MRB: The following regulations shall govern temporary to return the passbook to Calapre, the authorized representative of L.C. over-drawings and drawings against uncollected deposits (DAUDs). Diaz, Solidbank and Teller No. 6 presumptively failed to observe such high degree of diligence in safeguarding the passbook, and in insuring its return a. Temporary over-drawings. Temporary over-drawings against to the party authorized to receive the same. current account shall not be allowed, unless caused by normal bank charges and other fees incidental to handling such In culpa contractual, once the plaintiff proves a breach of contract, there is accounts. Banks which violate these regulations shall be subject a presumption that the defendant was at fault or negligent. The burden is to a fine of one-tenth of one percent (1/10 of 1%) per day of on the defendant to prove that he was not at fault or negligent. In contrast, violation, computed on the basis of the amount of overdrawing in culpa aquiliana the plaintiff has the burden of proving that the defendant or fines in amounts as may be determined by the Monetary was negligent. In the present case, L.C. Diaz has established that Solidbank Board, but not to exceed P30,000 a day for each violation, breached its contractual obligation to return the passbook only to the whichever is lower. authorized representative of L.C. Diaz. There is thus a presumption that Solidbank was at fault and its teller was negligent in not returning the Technical over-drawings arising from “force posting” in-clearing passbook to Calapre. The burden was on Solidbank to prove that there was checks shall be debited by banks under “Returned Checks and no negligence on its part or its employees. Other Cash Items Not in Process of Collection” which is part of “Other Assets” in the Statement of Condition. Items to be lodged under this account shall consist only of in-clearing checks B. Kinds of Deposit which may result in “technical overdrawn” accounts and shall be a. Demand Deposits immediately reversed the following day.

SEC. 58, NCBA: For purposes of this Act, the term "demand The checks lodged under “Returned Checks, etc.” shall either be deposits" means all those liabilities of the Bangko Sentral and of returned or honored the following day before clearing. The items other banks, which are denominated in Philippine currency and are to be used as cover for the honored checks should only consist subject to payment in legal tender upon demand by the presentation of any of the following: of checks. (1) Cash SEC. 59, NCBA: Only banks duly authorized to do so may accept (2) Cashier’s, Manager’s or Certified Checks funds or create liabilities payable in pesos upon demand by the (3) Bank Drafts presentation of checks, and such operations shall be subject to the (4) Postal Money Orders control of the Monetary Board in accordance with the powers (5) Treasury Warrants granted it with respect thereto under this Act. (6) Duly funded “On us” Checks (7) Fund transfers/credit memos within the same bank SEC. 60, NCBA: Checks representing demand deposits do not have representing proceeds of loans granted under existing legal tender power and their acceptance in the payment of debts, regulations. both public and private, is at the option of the creditor: Provided,

Peso demand deposit accounts maintained by foreign integrated Metro Manila area served by the PCHC and the BSP correspondent banks with commercial banks shall not be Regional Clearing Centers (RCCs). (The settlement of interbank subject to the above-mentioned regulations: Provided, That: transactions vis-à-vis covering reserve requirement/deficiency of (a) The maintenance of non-resident correspondent bank’s peso banks’ DDA is shown in Appendix 39.) checking accounts and overdrawings therefrom are covered by (a) AM Returned COCI Clearing - The AM returned COCI clearing in reciprocal arrangement; the integrated Metro Manila local exchange shall be conducted from (b) Temporary overdrawings are covered within fifteen (15) 7:30 AM to 10:00 AM on the banking day immediately following the days from the date overdrawings are incurred; and original date of presentation of the COCI to PCHC. (c) Such accounts are credited only through foreign exchange inward remittance. The AM returned COCI clearing window for local exchanges in the BSP RCCs shall be conducted from 8:00 AM to 9:30 AM on the b. Drawings against uncollected deposits. DAUDs shall be banking day immediately following the original date of presentation prohibited except when the drawings are made against of the COCI to the RCC. uncollected deposits representing

manager’s/cashier’s/treasurer’s checks, treasury warrants, Returned COCI in the AM clearing windows shall be given value on postal money orders and duly funded “on us” checks, which the same date as the date of original presentation of the COCI to may be permitted at the discretion of each bank. PCHC and RCC. The amount of debits and credits on the date of SEC. X203, MRB: To complement the provisions of Batas Pambansa original presentation shall be reversed to the extent of the amount Blg. 22, (An Act Penalizing the Making or Drawing and Issuance of a Check of credits and debits arising from the returned COCI. The process Without Sufficient Funds or Credit), the following regulations shall govern: restores the balances of the demand deposits of banks with the BSP a. The drawee bank shall stamp, write or print on a dishonored check to their position prior to the settlement of the clearing results or on a paper attached thereto the date the check is presented for affected by the COCI later returned due to insufficient funds or payment and the reason for the refusal to pay the same to the holder credit. thereof. b. Where the reason for the dishonor of a check is stamped, written or (b) PM Returned COCI Clearing - The PM returned COCI clearing printed on a paper attached to the checks, the drawee bank shall window shall coincide with the afternoon regular clearing. Other indicate the pertinent details, such as the names of the drawer, the dishonored COCI not returned in the morning clearing session shall payee and the drawee bank, the date and amount of the check, the be presented by the drawee bank to the negotiating bank in the check number and the date of dishonor. afternoon regular clearing. Such returned COCI shall be given value c. The drawee bank shall use only the remark or notation “Drawn on the date the returned COCI was presented to PCHC for the Against Insufficient Funds”, “No Funds”, or “Insufficient Funds” integrated Metro Manila area and to BSP RCCs. stamped, written, or printed on, or attached to the check dishonored or returned byreason of insufficiency of funds or credit. Return of Dishonored COCI - A COCI dishonored by reason of d. Notwithstanding receipt of an order to stop payment, the drawee insufficiency of funds or credit shall be returned by the drawee bank bank shall likewise stamp, write, or print on, or attach to the check to the negotiating bank not later than the next clearing for returned any of the remarks or notations mentioned in Item “c” hereof COCI. indicating that there were no sufficient funds in or credit with such bank for the payment in full of such check, if such be the fact. The (2) For Out-of-town Exchanges bank shall also indicate receipt of a stop payment order. For out-of-town exchanges, a COCI so dishonored shall be returned e. A check and other clearing item (COCI) dishonored by reason of by the drawee bank to the negotiating bank within the period insufficiency of funds or credit shall be returned by the drawee bank specified in the clearing Circular Letters issued by BSP. to the negotiating bank not later than the next clearing for returned COCI. (3) COCI not coursed through the Clearing System A COCI dishonored by reason of insufficiency of funds or credit (1) For Local Exchanges which was not coursed through the clearing system shall be There shall be two (2) separate clearing windows for COCIs returned returned by the drawee bank to the holder or the negotiating bank, due to insufficient funds or credit in the local exchanges in the as the case may be, not later than the business day following the

date the COCI is presented for payment with the drawee bank. by Ong and Ma. Theresa David, Senior Manager of FMIC, BPI FB transferred P80 million from FMIC’s current account to the savings account of Tevesteco The negotiating bank shall, in turn, return a COCI dishonored by Arrastre – Stevedoring, Inc. reason of insufficiency of funds or credit to the holder not later than the business day following its receipt of the dishonored COCI from FMIC denied having authorized the transfer of its funds to Tevesteco, the drawee bank. claiming that the signatures of Ong and David were falsified. To recover immediately its deposit, FMIC, on September 12, 1989, issued BPI FB check SEC. X204, MRB: The following officers and employees of banks are no. 129077 for P86,057,646.72 payable to itself and drawn on its deposit prohibited from maintaining demand deposits or current accounts with with BPI FB SFDM branch. But upon presentation for payment on September the banking office in which they are assigned: 13, 1989, BPI FB dishonored the check as it was "drawn against insufficient a. All officers; funds" (DAIF). b. Employees of the bank’s cash department/cash units; and c. Other employees who have direct and immediate FMIC filed with the RTC a civil case against BPI FB. RTC ruled in favor of responsibility in the handling of transactions and/or records FMIC, ordering BPI to pay P80M + interest at legal rate. CA modified pertaining to demand deposits or current accounts. amount to P65M + interest at 17%

The above-mentioned prohibition shall include the spouses and ISSUE relatives within the second degree of consanguinity and affinity of the Is it a Time Deposit or interest-bearing current account? officers and employees covered by the prohibition, and the business interests of such officers and employees, their spouses and relatives HELD within the second degree of consanguinity and affinity, in single Time Deposit. The parties did not intend the deposit to be treated as a proprietorships, or partnerships or corporations in which such officers demand deposit but rather as an interest-earning time deposit not and employees, individually or as a group, own or control at least a withdrawable any time. Both agreed that the deposit of P100 million was majority of the capital of the partnership or the outstanding non-withdrawable for one year upon payment in advance of the subscribed capital stock (voting and non-voting) of the corporation. 17% per annum interest.

BPI FAMILY SAVINGS BANK v. FIRST METRO INVESTMENT CORP, Ordinarily, a time deposit is defined as "one the payment of which cannot 429 SCRA 30 (2004) legally be required within such a specified number of days." In contrast, demand deposits are "all those liabilities of the Bangko Sentral and of DOCTRINE: Demand Deposits are “all those liabilities of the Bangko Sentral other banks which are denominated in Philippine currency and are subject and of other banks which are denominated in the Philippine currecncy and to payment in legal tender upon demand by the presentation of are subject to payment in legal tender upon demand by the presentation of (depositor’s) checks."4 While it may be true that barely one month and depositor’s checks. Under CB Circular No. 22 (Series of 1994), “demand seven days from the date of deposit, respondent FMIC demanded the deposits shall not be subject to any interest rate ceiling.” This, in effect, is withdrawal of P86,057,646.72 through the issuance of a check payable to an open authority to pay interest on demand deposits, such interest not itself, the same was made as a result of the fraudulent and unauthorized being subject to any rate ceiling. transfer by petitioner BPI FB of its P80 million deposit to Tevesteco’s savings FACTS account. Certainly, such was a normal reaction of respondent as a depositor FMIC, through its Executive Vice President Antonio Ong, opened a current to petitioner’s failure in its fiduciary duty to treat its account with the account and deposited a METROBANK check P100 million with BPI Family highest degree of care. Under this circumstance, the withdrawal of deposit Bank* (BPI FB). BPI FB, guaranteed the payment of P14,667,687.01 by respondent FMIC before the one-year maturity date did not change the representing 17% per annum interest of P100 million deposited by FMIC. nature of its time deposit to one of demand deposit. The latter, in turn, assured BPI FB that it will maintain its deposit of P100 million for a period of one year on condition that the interest of 17% per i. For UB and KB annum is paid in advance. Subsequently, BPI FB paid FMIC 17% interest or SEC. 33, GBL: A bank other than a universal or commercial P14,667,687.01 upon clearance of the latter’s check deposit. bank cannot accept or create demand deposits except upon

However, on August 29, 1989, on the basis of an Authority to Debit signed

prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board. d. Applicant bank shall institute and maintain the following minimum safeguards: ii. For TB (1) All deposit solicitors shall be initially bonded for at least SEC. 10 (B), THRIFT BANKS ACT: Open current or checking P1,000 subject to the increase thereof to approximate their accounts: Provided, That the thrift bank has net assets of at daily collections; least Twenty million pesos (P20,000,000) subject to such (2) Deposit solicitors shall be provided with proper identification guidelines as may be established by the Monetary Board; and cards with photograph and signature of each respective shall be allowed to directly clear its demand deposit operations solicitor, certified to by the appropriate officer of the bank. Said with the Bangko Sentral and the Philippine Clearing House identification cards shall be worn by each solicitor at all times at Corporation; the upper breast of his outer garment when soliciting deposits; (3) Adequate insurance coverage for funds in transit iii. For RB/Coop Bank (representing deposits collected outside banking premises) shall SEC. 12 (B), RURAL BANKS ACT: In addition to the operations be secured by applicant bank from insurance companies not especially authorized in this Act, any rural bank may: included in the list of companies blacklisted by the Insurance Commissioner; x x x (4) Deposit slips shall be in booklet form, pre-numbered, Open current or checking accounts, provided the rural bank has intriplicate copies and in three (3) colors - the original to be net assets of at least Five million (P5,000,000) subject to such issued to the depositor, the second copy to be used for posting guidelines as may be established by the Monetary Board; reference, and the third copy to be retained in the booklet; (5) All collections shall be turned over to the cashier at the end iv. For Islamic Banks of each day accompanied by a Collection Summary Report to be SEC. 6, PAR. 7 (A), ISLAMIC BANK CHARTER: To perform accomplished in duplicate which shall contain the following the following banks services: minimum information: (a) Date of the report x x x (b) Names and addresses of the depositors (c) Deposit slip numbers Open current or checking accounts; (d) Amounts of deposit b. Savings Deposits (e) Savings account and passbook numbers (f) Name and signature of solicitor rendering the report SEC. X213, MRB: Banks may be authorized by the BSP to solicit (6) Depositors shall always be required to accomplish a and accept deposits outside their bank premises, subject to the Signature Card when opening an account, which card shall be following conditions: used always as reference in checking the

genuineness/authenticity of signatures affixed on withdrawal a. The financial condition of the bank applying for authority to solicit slips or authorizations for withdrawal; and collect savings deposits outside its bank premises is sound and (7) Deposits/withdrawals shall be recorded by the bookkeeper the operations and the quality of the management thereof could or any ledger clerk, except any bank solicitor, in the depositor’s reasonably assure the safety of the funds which may be entrusted to ledger cards and passbooks on the same day that such its deposit collectors and/or solicitors; deposits/withdrawals are accepted. Passbooks shall be returned

to the depositors not later than the following business day; b. The proposed area where applicant bank intends to solicit shall be (8) At the end of each month, depositors shall be advised in clearly defined; writing of the balances of their deposits with the bank, the

advise slips of which shall never be handcarried by the solicitors c. Solicitation of deposits shall only be confined within a locality themselves; and where there are no other banks in operation, or where it can be (9) Places of assignments of bank solicitors shall be rotated at clearly established that the deposit potentials of the said locality are least quarterly. still untapped; and

SEC. X214, MRB: Banks are prohibited from issuing/accepting withdrawal slips or any other similar instruments designed to effect A depositor of a savings deposit-FSD is required to keep the money with the withdrawals of savings deposits without requiring the depositors bank for at least thirty (30) days in order to yield a higher interest rate. concerned to present their passbooks and accomplishing the Otherwise, the deposit earns interest pertaining only to a regular savings necessary withdrawal slips, except for banks authorized by the BSP deposit. The same feature is present in a time deposit. A depositor is to adopt the no passbook withdrawal system: Provided, That banks allowed to withdraw his time deposit even before its maturity subject to which are already adopting the no passbook withdrawal system shall bank charges on its pre-termination and the depositor loses his entitlement be given six (6) months from effectivity of this Manual of to earn the interest rate corresponding to the time deposit. Instead, he Regulations (MOR) to seek approval from the BSP. earns interest pertaining only to a regular savings deposit. (Question) Sino superhero mahilig mag promise?) In both cases, the deposit may be withdrawn anytime but the depositor gets to earn a lower rate of interest. The provisions of Sec. X202b shall also apply to withdrawals from The only difference lies on the evidence of deposit, a savings deposit-FSD is savings deposits. evidenced by a passbook, while a time deposit is evidenced by a certificate INTERNATIONAL EXCHANGE BANK v. CIR, 520 SCRA 688 (2007) of time deposit." In order for a depositor to earn the agreed higher interest rate in a SA-FSD, the amount of deposit must be maintained for a fixed DOCTRINE: A Fixed Savings Deposit (FSD), like a time deposit, provides for period. Thus, SA-FSD is a deposit account with a fixed term. Withdrawal a higher interest rate when the deposit is not withdrawn within the required before the expiration of said fixed term results in the reduction of the fixed period, otherwise, it earns interest pertaining to a regular savings interest rate. Having a fixed term and reduction of interest rate in case of deposit. pre-termination are essentially the features of a time deposit. Ultimately, FACTS the Bank’s SA-FSD and time deposit are substantially the same International Exchange Bank served a Letter of Authority by the Commissioner of Internal Revenue, directing the examination of the bank’s It bears emphasis that DST is levied on the exercise by persons of certain book of accounts and other account records. The CIR found that it was liable privileges conferred by law for the creation, revision, or termination of for tax deficiencies, mostly Documentary Stamp Tax (DST). The Bank specific legal relationships through the execution of specific instruments. It protested the assessment, arguing that there is no law imposing DST on is an excise upon the privilege, opportunity or facility offered at exchanges Savings Account-Fixed Savings Deposit. for the transaction of the business.

CTA Division decided that the bank was not liable for the whole assessment While tax avoidance schemes and arrangements are not prohibited, tax laws but still liable for the DST. CTA En Banc affirmed. cannot be circumvented in order to evade payment of just taxes. (Answer: eh di si Peksman!)To claim that time deposits evidenced by passbooks ISSUE should not be subject to DST is a clear evasion of the rule on equality and Whether a Savings Account-Fixed Savings Deposit evidenced by a passbook uniformity in taxation that requires the imposition of DST on documents is subject to Documentary Stamp Tax evidencing transactions of the same kind, in this particular case, on all RULING certificates of deposits drawing interest. YES, it is subject to DST. Section 180 of the Tax Code provides DST shall be imposed on In addition, further amendments to Section 180 includes provisions with the “…certificates of deposits drawing interest, or orders for the payment purpose to eliminate precisely the scheme used by banks of issuing of any sum of money otherwise than at sight or on demand…” a passbook passbooks to "cloak" its time deposits as regular savings deposits. representing an interest earning deposit account issued by a bank qualifies as a certificate of deposit drawing interest. CHINA BANKING CORP. v. CIR, 602 SCRA 316 (2009) A certificate of deposit is a written acknowledgment by a bank or banker of A document to be deemed a certificate of deposit requires no specific form the receipt of a sum of money on deposit which the bank or banker as long as there is some written memorandum that the bank accepted a promises to pay to the depositor, to the order of the depositor, or to some deposit of a sum of money from a depositor. What is important and other person or his order, whereby the relation of debtor and creditor controlling is the nature or meaning conveyed by the passbook and not the between the bank and the depositor is created. particular label or nomenclature attached to it, inasmuch as substance, not form, is paramount.

c. Negotiable Order of Withdrawal (NOW) Accounts The provision of Sec. X202 shall also apply for withdrawals on NOW accounts. SEC. X223, MRB: Negotiable Order of Withdrawal (NOW) accounts

are interest-bearing deposit accounts that combine the payable on PEOPLE v. REYES, 454 SCRA 635 (2005) demand feature of checks and investment feature of savings accounts. DOCTRINE: NOW Accounts are defined as interest-bearing deposit accounts that combine the payable on demand feature of checks and the investment A UB/KB may offer NOW accounts without prior authority of the feature of savings accounts. Monetary Board. FACTS A TB/RB/Coop Bank may accept NOW accounts upon prior approval Aloma Reyes and her daughter Tricha (at large) were convicted for ESTAFA. of the Monetary Board. Private complainant Jules Alabastro bases his complaint on one subject SEC. X224, MRB: The following rules shall be observed in servicing check (for P280,000); each time a check issued by the Reyes's (a total of 5 NOW accounts: or 6) bounced, he would return it, and it would be replaced by them with a. Prior to or simultaneous with the opening of a NOW account, cash, except this last one, which they refused to replace with cash. the bank shall inform the depositor of its terms and conditions. b. The bank shall be responsible for the proper identification of Complainant claims that the transactions between himself and the Reyes's its depositors; it shall require, among other things, two (2) involved the rediscounting of checks. Defendant claims that she issued the specimen signatures and such other pertinent information. instruments as payment for loans she obtained from Alabastro with respect c. Deposits shall be covered by deposit slips in duplicate duly to her and her daughter's softdrinks business, which eventually went under. validated and initialed by the teller receiving the deposit. A copy of the deposit slip shall be furnished the depositor. She allegedly issued 16 instruments, one for P6k and the rest for P13k, to d. NOW accounts shall be kept and maintained separately from pay for the (232k) obligation. These would come from a NOW (Negotiable the regular savings deposits. Order of Withdrawal) Account, described as "a savings account where the e. Blank NOW forms shall be pre-numbered and shall be drawer may issue instrument payable only to a specific payee. A NOW check controlled as in the case of unissued blank checks. cannot be issued payable to “BEARER.” Hence, it cannot be further f. A bank statement shall be sent to each depositor at the end negotiated. of each month for confirmation of balances. g. Banks must use the form prescribed by present rules for On appeal to the SC, she raises the following issues: 1) whether the nature NOW accounts. of a NOW instrument is a "check" within the meaning of Art. 315 of the Revised Penal Code, since the NOW check is drawn against the savings, not Nothing herein shall be construed as precluding a TB, RB or Coop the current account, of appellant, and it is payable only to a specific person Bank from applying for authority to accept both demand deposits or the “payee” and is not valid when made payable to “bearer” or to and NOW accounts. “cash.and 2) whether her and her daughter's liability should be merely civil, since the check was issued in payment of a pre-existing obligation. SEC. X225, MRB: The order of withdrawal form shall have a size of three (3) inches by seven (7) inches, and shall be printed on ISSUE security/check paper. It shall contain as a minimum the features of 1) Whether the nature of a NOW instrument is a "check" within the meaning the proforma order of withdrawal shown in Appendix 11. of Art. 315 of the Revised Penal Code, and 2) Whether the Reyes's liability should be merely civil, since the check was SEC. X226, MRB: Any NOW which may be deposited with a bank issued in payment of a pre-existing obligation. other than the drawee bank may be cleared through the PCHC in Manila and the Regional Clearing Units in regional clearing centers RULING designated by the BSP in accordance with the clearing procedures. 1) NO. Section X223 of the Manual of Regulations for Banks defines Nothing in this Section shall prevent direct settlement between the Negotiable Order of Withdrawal (NOW) Accounts as "interest-bearing parties concerned. deposit accounts that combine the payable on demand feature of checks and the investment feature of savings accounts."

The fact that a NOW check shall be payable only to a specific person, and not valid when made payable to “BEARER” or to “CASH” or when indorsed However, on August 29, 1989, on the basis of an Authority to Debit signed by the payee to another person, is inconsequential. The same restriction is by Ong and Ma. Theresa David, Senior Manager of FMIC, BPI FB transferred produced when a check is crossed: only the payee named in the check may P80 million from FMIC’s current account to the savings account of Tevesteco deposit it in his bank account. If a third person accepts a cross check and Arrastre – Stevedoring, Inc. pays cash for its value despite the warning of the crossing, he cannot be considered in good faith and thus not a holder in due course. The purpose of FMIC denied having authorized the transfer of its funds to Tevesteco, the crossing is to ensure that the check will be encashed by the rightful claiming that the signatures of Ong and David were falsified. To recover payee only. Yet, despite the restriction on the negotiability of cross checks, immediately its deposit, FMIC, on September 12, 1989, issued BPI FB check we held that they are negotiable instruments. no. 129077 for P86,057,646.72 payable to itself and drawn on its deposit with BPI FB SFDM branch. But upon presentation for payment on September 2) YES. Conviction Reversed. A careful examination of the records 13, 1989, BPI FB dishonored the check as it was "drawn against insufficient establishes that appellant issued him the subject check in payment of a pre- funds" (DAIF). existing obligation. It puzzles the Court that after the NOW check dated August 31, 1997 bounced on September 3, 1997 for the reason “ACCOUNT FMIC filed with the RTC a civil case against BPI FB. RTC ruled in favor of CLOSED,” private complainant would still discount appellant’s checks in FMIC, ordering BPI to pay P80M + interest at legal rate. CA modified succession. It baffles us more that private complainant would discount a amount to P65M + interest at 17% P280,000.00-check in February 1998 despite knowledge of the closure of appellant’s NOW Account. ISSUE Is it a Time Deposit or interest-bearing current account? In the case at bar, private complainant knew that appellant did not only have insufficient funds; he knew her NOW Account was closed at the time HELD he allegedly discounted the subject check. There is no estafa through Time Deposit. The parties did not intend the deposit to be treated as a bouncing checks when it is shown that private complainant knew that the demand deposit but rather as an interest-earning time deposit not drawer did not have sufficient funds in the bank at the time the check was withdrawable any time. Both agreed that the deposit of P100 million was issued to him. Such knowledge negates the element of deceit and non-withdrawable for one year upon payment in advance of the constitutes a defense in estafa through bouncing checks. 17% per annum interest.

Ordinarily, a time deposit is defined as "one the payment of which cannot d. Time Deposits legally be required within such a specified number of days." In contrast, demand deposits are "all those liabilities of the Bangko Sentral and of SEC. X231, MRB: Time deposits shall be issued for a specific period other banks which are denominated in Philippine currency and are subject of term. to payment in legal tender upon demand by the presentation of BPI FAMILY SAVINGS BANK v. FIRST METRO INVESTMENT CORP., (depositor’s) checks."4 While it may be true that barely one month and 429 SCRA 30 (2004) seven days from the date of deposit, respondent FMIC demanded the withdrawal of P86,057,646.72 through the issuance of a check payable to DOCTRINE: A Time Deposit is defined as “one the payment of which cannot itself, the same was made as a result of the fraudulent and unauthorized legally be required within such a specified number of days. transfer by petitioner BPI FB of its P80 million deposit to Tevesteco’s savings FACTS account. Certainly, such was a normal reaction of respondent as a depositor FMIC, through its Executive Vice President Antonio Ong, opened a current to petitioner’s failure in its fiduciary duty to treat its account with the account and deposited a METROBANK check P100 million with BPI Family highest degree of care. Under this circumstance, the withdrawal of deposit Bank* (BPI FB). BPI FB, guaranteed the payment of P14,667,687.01 by respondent FMIC before the one-year maturity date did not change the representing 17% per annum interest of P100 million deposited by FMIC. nature of its time deposit to one of demand deposit. The latter, in turn, assured BPI FB that it will maintain its deposit of P100 million for a period of one year on condition that the interest of 17% per annum is paid in advance. Subsequently, BPI FB paid FMIC 17% interest or P14,667,687.01 upon clearance of the latter’s check deposit.

INTERNATIONAL EXCHANGE BANK v. CIR, 520 SCRA 688 (2007) rate in a SA-FSD, the amount of deposit must be maintained for a fixed period. Thus, SA-FSD is a deposit account with a fixed term. Withdrawal DOCTRINE: Having a fixed term and the reduction of interest rate in case before the expiration of said fixed term results in the reduction of the of pre-termination are essential features of a time deposit. interest rate. Having a fixed term and reduction of interest rate in case of FACTS pre-termination are essentially the features of a time deposit. Ultimately, International Exchange Bank served a Letter of Authority by the the Bank’s SA-FSD and time deposit are substantially the same Commissioner of Internal Revenue, directing the examination of the bank’s book of accounts and other account records. The CIR found that it was liable It bears emphasis that DST is levied on the exercise by persons of certain for tax deficiencies, mostly Documentary Stamp Tax (DST). The Bank privileges conferred by law for the creation, revision, or termination of protested the assessment, arguing that there is no law imposing DST on specific legal relationships through the execution of specific instruments. It Savings Account-Fixed Savings Deposit. is an excise upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. CTA Division decided that the bank was not liable for the whole assessment but still liable for the DST. CTA En Banc affirmed. While tax avoidance schemes and arrangements are not prohibited, tax laws cannot be circumvented in order to evade payment of just taxes. (Answer: ISSUE eh di si Peksman!)To claim that time deposits evidenced by passbooks Whether a Savings Account-Fixed Savings Deposit evidenced by a passbook should not be subject to DST is a clear evasion of the rule on equality and is subject to Documentary Stamp Tax uniformity in taxation that requires the imposition of DST on documents evidencing transactions of the same kind, in this particular case, on all RULING certificates of deposits drawing interest. YES, it is subject to DST. Section 180 of the Tax Code provides DST shall be imposed on In addition, further amendments to Section 180 includes provisions with the “…certificates of deposits drawing interest, or orders for the payment purpose to eliminate precisely the scheme used by banks of issuing of any sum of money otherwise than at sight or on demand…” a passbook passbooks to "cloak" its time deposits as regular savings deposits. representing an interest earning deposit account issued by a bank qualifies as a certificate of deposit drawing interest. e. Foreign Currency Deposits

A document to be deemed a certificate of deposit requires no specific form SEC. 2, FCDA: Any person, natural or juridical, may, in accordance as long as there is some written memorandum that the bank accepted a with the provisions of this Act, deposit with such Philippine banks in deposit of a sum of money from a depositor. What is important and good standing, as may, upon application, be designated by the controlling is the nature or meaning conveyed by the passbook and not the Central Bank for the purpose, foreign currencies which are particular label or nomenclature attached to it, inasmuch as substance, not acceptable as part of the international reserve, except those which form, is paramount. are required by the Central Bank to be surrendered in accordance with the provisions of Republic Act Numbered two hundred sixty-five A depositor of a savings deposit-FSD is required to keep the money with the (Now Rep. Act No. 7653). bank for at least thirty (30) days in order to yield a higher interest rate. SEC. 3, FCDA: The banks designated by the Central Bank under Otherwise, the deposit earns interest pertaining only to a regular savings Section two hereof shall have the authority: deposit. The same feature is present in a time deposit. A depositor is (1) To accept deposits and to accept foreign currencies in allowed to withdraw his time deposit even before its maturity subject to trust Provided, That numbered accounts for recording and bank charges on its pre-termination and the depositor loses his entitlement servicing of said deposits shall be allowed; to earn the interest rate corresponding to the time deposit. Instead, he (2) To issue certificates to evidence such deposits; earns interest pertaining only to a regular savings deposit. (Question) Sino (3) To discount said certificates; superhero mahilig mag promise?) In both cases, the deposit may be (4) To accept said deposits as collateral for loans subject to withdrawn anytime but the depositor gets to earn a lower rate of interest. such rules and regulations as may be promulgated by the The only difference lies on the evidence of deposit, a savings deposit-FSD is Central Bank from time to time; and evidenced by a passbook, while a time deposit is evidenced by a certificate (5) To pay interest in foreign currency on such deposits. of time deposit." In order for a depositor to earn the agreed higher interest

f. Money Market Placements recover the proceeds of her first money market placement. Allied filed a third party complaint against Metrobank and Santos. In turn, Metrobank ALLIED BANKING CORP. v. LIM SIO WAN, 549 SCRA 504 (2008) filed a fourth party complaint against FCC. FCC for its part filed a fifth party DOCTRINE: A Money Market is a market dealing in standardized short-term complaint against Producers Bank. Lim Sio Wan thereafter filed an amended credit instruments (involving large amounts) where lenders and borrowers complaint to include Metrobank as a party-defendant, along with Allied. do not deal directly with each other by through a middle man or dealer in MTC made Allied solely liable open market—in a money market transaction, the investor is a lender who loans his money to a borrower through a middleman or dealer. RTC modified the decision as follows: FACTS Allied Banking Corporation to pay sixty (60%) percent and defendant- appellee Metropolitan Bank and Trust Company forty (40%) of the amount Respondent Lim Sio Wan deposited with petitioner Allied Banking of P1,158,648.49 plus 12% interest per annum from March 16, 1984 until Corporation (Allied) at its Quintin Paredes Branch in Manila a money market fully paid. The moral damages, attorney's fees and costs of suit shall placement of PhP 1,152,597.35 for a term of 31 days to mature on likewise be paid in 60-40 ratio. December 15, 1983, ISSUES On December 5, 1983, a person claiming to be Lim Sio Wan called up Cristina So, an officer of Allied, and instructed the latter to pre-terminate 1) Kind of deposit present in the case (relevant to the banking) Lim Sio Wan's money market placement, to issue a manager's check 2) Who are liable? (Main issue of the case- not relevant to banking) representing the proceeds of the placement, and to give the check to one Deborah Dee Santos who would pick up the check. Lim Sio Wan described RULING the appearance of Santos so that So could easily identify her. (Relevant) Later, Santos arrived at the bank and signed the application form for a manager's check to be issued. The bank issued a Manager's Check for PhP 1) Money Market Placement. The Court discusses is as follows: 1,158,648.49, representing the proceeds of Lim Sio Wan's money market Thus, we have ruled in a line of cases that a bank deposit is in the nature of placement in the name of Lim Sio Wan, as payee. The check was cross- a simple loan or mutuum. More succinctly, in Citibank, N.A. (Formerly First checked "For Payee's Account Only" and given to Santos. National City Bank) v. Sabeniano, this Court ruled that a money market [43] Thereafter, the manager's check was deposited in the account of Filipinas placement is a simple loan or mutuum. Further, we defined a money Cement Corporation (FCC) at respondent Metropolitan Bank and Trust Co. market in Cebu International Finance Corporation v. Court of Appeals, as (Metrobank), with the forged signature of Lim Sio Wan as indorser. follows: the Allied check was deposited with Metrobank in the account of FCC as [A] money market is a market dealing in standardized short-term credit Producers Bank's payment of its obligation to FCC. instruments (involving large amounts) where lenders and borrowers do not deal directly with each other but through a middle man or dealer in open Metrobank stamped a guaranty on the check, which reads: "All prior market. In a money market transaction, the investor is a lender who loans endorsements and/or lack of endorsement guaranteed." his money to a borrower through a middleman or dealer. The check was sent to Allied through the PCHC. Upon the presentment of In the case at bar, the money market transaction between the petitioner the check, Allied funded the check even without checking the authenticity of and the private respondent is in the nature of a loan. Lim Sio Wan's purported indorsement. Thus, the amount on the face of the check was credited to the account of FCC and as a result Producers Bank’s Lim Sio Wan, as creditor of the bank for her money market placement, is obligation to the former was extinguished. entitled to payment upon her request, or upon maturity of the placement, or until the bank is released from its obligation as debtor. Until any such event, On December 14, 1983, upon the maturity date of the first money market the obligation of Allied to Lim Sio Wan remains unextinguished. placement, Lim Sio Wan went to Allied to withdraw it. She was then informed that the placement had been pre-terminated upon her instructions. Since there was no effective payment of Lim Sio Wan's money market Allied refused to pay Lim Sio Wan, claiming that the latter had authorized placement, the bank still has an obligation to pay her at six percent (6%) the pre-termination of the placement and its subsequent release to Santos interest from March 16, 1984 until the payment thereof. Consequently, Lim Sio Wan filed with the RTC a Complaint against Allied to

2) (Not important but will mention the summary of it anyway) Allied and (3) Women shall have equal rights to act as incorporators Metrobank liable in 60-40 ratio. Producer’s Bank shall reimburse the amount and enter into insurance contracts; and paid by both Allied and Metrobank. Allied Bank is liable as negligent drawee (4) Married women shall have rights equal to those of bank who issued the manager’s check to Santos. MetroBank is liable as the married men in applying for passport, secure visas and negligent collecting bank who certified the authenticity of the signatures. other travel documents, without need to secure the consent Producers bank liable because it was unjustly enriched the amount was paid of their spouses. to FCC, which extinguished the obligation of the former to the latter. In all other similar contractual relations, women shall enjoy equal

rights and shall have the capacity to act, which shall in every C. Capacity of Depositors respect be equal to those of men under similar circumstances. a. Minors c. Corporations SEC. 1, PD 734: Minors who are at least seven years of age, are able to read and write, have sufficient discretion, and are not SEC. 23, CORPORATION CODE: Unless otherwise provided in this otherwise disqualified by any other incapacity, are hereby vested Code, the corporate powers of all corporations formed under this with special capacity and power, in their own right and in their own Code shall be exercised, all business conducted and all property of names, to make savings or time deposits with and withdraw the such corporations controlled and held by the board of directors or same as well as receive interests thereon from banking institutions, trustees to be elected from among the holders of stocks, or where without the assistance of their parents or guardians, the provisions there is no stock, from among the members of the corporation, who of existing laws and regulations to the contrary notwithstanding. shall hold office for one (1) year until their successors are elected Parents may nevertheless deposit for their minor children and and qualified. guardians for their wards. Every director must own at least one (1) share of the capital stock SEC. 22, THRIFT BANKS ACT: Minors in their own rights and in of the corporation of which he is a director, which share shall stand their own names may make deposits and withdraw the same, and in his name on the books of the corporation. Any director who may receive dividends and interest: Provided, however, That, if any ceases to be the owner of at least one (1) share of the capital stock guardian shall give notice in writing to any thrift bank not to make of the corporation of which he is a director shall thereby cease to be payments of deposits, dividends, or interest to the minor of whom a director. Trustees of non-stock corporations must be members he is the guardian, then such payment shall be made only to the thereof. a majority of the directors or trustees of all corporations guardian. organized under this Code must be residents of the Philippines. b. Married Women SEC. 5, RA 7192: Women of legal age, regardless of civil status, d. Bank Officers and Employees shall have the capacity to act and enter into contracts which shall in SEC. X204, MRB: : The following officers and employees of banks every respect be equal to that of men under similar circumstances. are prohibited from maintaining demand deposits or current accounts with the banking office in which they are assigned: In all contractual situations where married men have the capacity to a. All officers; act, married women shall have equal rights. b. Employees of the bank’s cash department/cash units; and c. Other employees who have direct and immediate To this end: responsibility in the handling of transactions and/or records (1) Women shall have the capacity to borrow and obtain pertaining to demand deposits or current accounts. loans and execute security and credit arrangement under the same conditions as men; The above-mentioned prohibition shall include the spouses and (2) Women shall have equal access to all government and relatives within the second degree of consanguinity and affinity of private sector programs granting agricultural credit, loans the officers and employees covered by the prohibition, and the and non-material resources and shall enjoy equal treatment business interests of such officers and employees, their spouses and in agrarian reform and land resettlement programs; relatives within the second degree of consanguinity and affinity, in

single proprietorships, or partnerships or corporations in which such ART. 379, NCC: The employment of pen names or stage names officers and employees, individually or as a group, own or control at is permitted, provided it is done in good faith and there is no least a majority of the capital of the partnership or the outstanding injury to third persons. Pen names and stage names cannot be subscribed capital stock (voting and non-voting) of the corporation. usurped.

ART. 380, NCC: Except as provided in the preceding article, no D. OPENING OF DEPOSIT ACCOUNTS person shall use different names and surnames. 1. Know Your Customer Standards SUBSEC. X262.1, MRB: Specimen signatures, ID photos. All c. Exception: NUMBERED ACCOUNTS banking institutions are required to set a minimum of three (3) SEC. 9 (A), AMLA: Prevention of Money Laundering; Customer specimen signatures to be simultaneously required from each of Identification Requirements and Record Keeping. – their depositors and to update the specimen signatures of their (a) Customer Identification, - Covered institutions shall establish depositors every five (5) years or sooner, at the discretion of the and record the true identity of its clients based on official bank. Banks may, at their option, require their depositors to submit documents. They shall maintain a system of verifying the true ID photos together with the specimen signatures. identity of their clients and, in case of corporate clients, require a system of verifying their legal existence and organizational 2. Prohibitions structure, as well as the authority and identification of all a. Anonymous Accounts/Fictitious Names persons purporting to act on their behalf. SEC. 9 (A), AMLA: Prevention of Money Laundering; Customer Identification Requirements and Record Keeping. – The provisions of existing laws to the contrary notwithstanding, (a) Customer Identification, - Covered institutions shall establish anonymous accounts, accounts under fictitious names, and all and record the true identity of its clients based on official other similar accounts shall be absolutely prohibited. Peso and documents. They shall maintain a system of verifying the true foreign currency non-checking numbered accounts shall be identity of their clients and, in case of corporate clients, require allowed. The BSP may conduct annual testing solely limited to a system of verifying their legal existence and organizational the determination of the existence and true identity of the structure, as well as the authority and identification of all owners of such accounts. persons purporting to act on their behalf. SEC. 3 (1), FDCA: Authority of banks to accept foreign The provisions of existing laws to the contrary notwithstanding, currency deposits. – The banks designated by the Central Bank anonymous accounts, accounts under fictitious names, and all under Section two hereof shall have the authority: other similar accounts shall be absolutely prohibited. Peso and (1) To accept deposits and to accept foreign currencies in trust foreign currency non-checking numbered accounts shall be Provided, That numbered accounts for recording and servicing of allowed. The BSP may conduct annual testing solely limited to said deposits shall be allowed. the determination of the existence and true identity of the owners of such accounts. 3. Joint Accounts ART. 485, NCC: The share of the co-owners, in the benefits as well b. Pseudonyms as in the charges, shall be proportional to their respective interests. ART. 178, RPC: Using fictitious name and concealing true Any stipulation in a contract to the contrary shall be void. name. — The penalty of arresto mayor and a fine not to exceed 500 pesos shall be imposed upon any person who shall publicly The portions belonging to the co-owners in the co-ownership shall use a fictitious name for the purpose of concealing a crime, be presumed equal, unless the contrary is proved. evading the execution of a judgment or causing damage. ART. 1207, NCC: The concurrence of two or more creditors or of Any person who conceals his true name and other personal two or more debtors in one and the same obligation does not imply circumstances shall be punished by arresto menor or a fine not that each one of the former has a right to demand, or that each one to exceed 200 pesos. of the latter is bound to render, entire compliance with the prestation. There is a solidary liability only when the obligation

expressly so states, or when the law or the nature of the obligation RTC dismissed the case. CA affirmed. requires solidarity. ISSUE ART. 1208, NCC: If from the law, or the nature or the wording of Whether LDB is liable for damages suffered by Firestone, due to its allegedly the obligations to which the preceding article refers the contrary belated notice of non-payment of the subject withdrawal slip? does not appear, the credit or debt shall be presumed to be divided RULING into as many shares as there are creditors or debtors, the credits or NO. At the outset, we note that petitioner admits that the withdrawal slips debts being considered distinct from one another, subject to the in question were non-negotiable. Hence, the rules governing the giving of Rules of Court governing the multiplicity of suits. immediate notice of dishonor of negotiable instruments do not apply in this case. Petitioner itself concedes this point. Thus, respondent bank was under E. ADMINISTRATION OF DEPOSIT ACCOUNTS no obligation to give immediate notice that it would not make payment on 1. Deposit of Funds the subject withdrawal slips. Citibank should have known that withdrawal a. Delivery Required slips were not negotiable instruments. It could not expect these slips to be ART. 1934, NCC: An accepted promise to deliver something by treated as checks by other entities. Payment or notice of dishonor from way of commodatum or simple loan is binding upon parties, but respondent bank could not be expected immediately, in contrast to the the commodatum or simple loan itself shall not be perfected situation involving checks. until the delivery of the object of the contract. A bank is under obligation to treat the accounts of its depositors with b. Acceptability of Withdrawal Slips as Deposits meticulous care, whether such account consists only of a few hundred pesos Cases or of millions of pesos. The fact that the other withdrawal slips were Firestone Tire & Rubber Co. of the Phil. v CA honored and paid by respondent bank was no license for Citibank to DOCTRINE: A bank is under the obligation to treat the accounts of its presume that subsequent slips would be honored and paid immediately. By depositors with meticulous care, whether such account consists only of a doing so, it failed in its fiduciary duty to treat the accounts of its clients with few hundred pesos or millions of pesos. The fact that the other withdrawal the highest degree of care. slips were honored and paid by the other bank was no license for the bank to presume that subsequent slips would be honored and paid immediately. In the ordinary and usual course of banking operations, current account By doing so, it failed in its fiduciary duty to treat the accounts of its clients deposits are accepted by the bank on the basis of deposit slips prepared and with the highest degree of care. signed by the depositor, or the latter's agent or representative, who indicates therein the current account number to which the deposit is to be FACTS credited, the name of the depositor or current account holder, the date of Fojas-Arca is one of the client depositors of Luzon Development Bank (LDB). the deposit, and the amount of the deposit either in cash or in check. Fojas-Arca has an arrangement with LDB, where the latter authorized and allowed withdrawal of its funds through special deposit slips, which are The withdrawal slips deposited with petitioner's current account with supplied by LDB to Fojas-Arca. Citibank were not checks, as petitioner admits. Citibank was not bound to accept the withdrawal slips as a valid mode of deposit. But having In January to May 1978, Fojas-Arca purchased on credit from Firestone erroneously accepted them as such, Citibank — and petitioner as account- amounting to P4M. In payment, Fojas-Arca delivered to Firestone six (6) holder — must bear the risks attendant to the acceptance of these special withdrawal slips drawn upon defendant. These were deposited by instruments. Petitioner and Citibank could not now shift the risk and hold Firestone with its current account with Citibank. All of them were honored private respondent liable for their admitted mistake. and paid by LDB. Relying on the same arrangement, Firestone extended other purchases on credit to Fojas-Arca. c. Acceptability of Checks Without Indorsement of Payee Cases In December 1978, Firestone was informed by Citibank that several special PNB v Rodriguez withdrawal slips were dishonored for “NO ARRANGEMENT.” Citibank debited DOCTRINE: A bank that regularly processes checks that are neither the amount from Firestone’s account. Firestone then filed an action for payable to the customer nor duly indorsed by the payee is apparently damages against LDB alleging that it suffered pecuniary losses. grossly negligent in its operations.

In a checking transaction, the drawee bank has the duty to verify the duty to them as depositors. genuineness of the signature of the drawer and to pay the check strictly in accordance with the drawer’s instructions, i.e., to the named payee in the PNB argued that the spouses did not intend to give the checks to the check. invidual payees, only to PEMSLA, hence, the payees were fictitious, thus the checks became bearer instruments based on the Negotiable Instruments FACTS law. The checks could be negotiated with just delivery. Respondent spouses erlando and norma Rodriguez were clients of petitioner PNB, Cebu City. They maintained savings and demand/checking accounts. RTC rendered in favour of the spouses, CA reversed stating that the spouses The spouses were engaged in the informal lending business. They had a really intended the checks to go PEMSLA, not the payees, hence, the payees discounting arrangement with Philnabank Employees Savings and Loan were fictitious, thus converting the check into a bearer intrument, thus they Association (PEMSLA), an association of PNB employees. Naturally, PEMSLA did not require indorsement for negotiation. Spouses filed and Motion for was likewise a client of PNB. Reconsideration, and the CA reversed itself due to the argument of the spouses that the checks, on their face, were payable to order, hence, PNB PEMSLA regularly granted loans to its members, spouses Rodriguez would breached their contract of deposit. rediscount the postdated checks issued to members whenever the association was short of funds. As was customary, the spouses would ISSUE replace the postdated checks with their own checks issued in the name of Are the checks payable to order or to bearer? the members. HELD: Payable to order. It was PEMSLA’s policy not to approve applications for loans of members with outstanding debts. To subvert this policy, some PEMSLA officers As a rule, when the payee is fictitious or not intended to be the true devised a scheme to obtain additional loans despite their outstanding loan recipient of the proceeds, the check is considered as a bearer instrument accounts. They took out loans in the names of unknowing members, without based on Sections 8 and 9 of the NIL. The drawee bank is then absolved the knowledge or consent of the latter. The PEMSLA checks issued for these from liability and the drawer bears the loss. However, there is a commercial loans were then given to the Rodriguez spoues for rediscounting. The bad faith exception to the fictitious-payee rule. A showing of commercial bad officers carried this out by forging the indorsement of the named payees in faith on the part of the drawee bank, or any trasnferee of the check for that the checks. In return, the spouses issued their personal checks (Rodriguez matter, will work to strip it of this defense. checks) in the name of the members and delivered the checks to an officer of PEMSLA. The PEMSLA checks, on the other hand, were despited by the For the fictitious-payee rule to be available as a defense, PNB must show spouses to their account. that the makers did not intend for the named payees to be part of the transaction involving the checks. At most, the bank’s thesis shows that the Meanwhile, the Rodriguez checks were despotied directly by PEMSLA to its payees did not have knowledge of the existence of the checks. This lack of savings account without any indorsement from the named payees. This was knowledge on the part of the payees, however, was not tantamount to a an irregular procedure made possible through the treasurer of PEMSLA who lack of intention on the part of respondents-spouses that the payees would was also a bank teller in the PNB branch of Cebu. This because the usual not receive the checks’ proceeds. Considering that the respondents were practice for the two. transacting with PEMSLA and not the individual payees, it is understandable that they relied on the finformation given by the officers of PEMSLA that the For the period of November 1998 and February 1999, sixty-nine (69) payees would be receiving the checks. checks, in the amount of 2.345 million pesos were issued payable to 47 individual payees. PNB got wind of the scheme and closed the current Verily, the subject checks are presumed order instruments. PNB failed to account of PEMSLA which led the checks deposited by the Rodriguez from present sufficient evidence to defeat the claim of respondent spouses that PEMSLA into their account to bounce. the named payees were the intended recipients of the check proceeds. Thus PNB was remiss as the drawee bank The checks from the Rodriguezes to PEMSLA though were still debited from the account of the spouses, hence, they went to court to have PNB return 2. Withdrawal of Funds the money debited from their account stating that PNB credited the checks a. From Current Accounts to PEMSLA even if they were without indorsements, thus breaching their i. When funds insufficient

Cases insufficient to pay off the checks. This would lead to dishonoring of the Moran v CA checks. There is a presumption in law that the ordinary course of business DOCTRINE: A bank is under no obligation to make part payment on a (clearing and withdrawing) has ben followed. Where the spouses failed to check, up to only the amount of the drawer's funds, where the check is show that the checks underwent a different process of clearing, it is drawn for an amount larger than what the drawer has on deposit. Such a presumed that the acts of clearing underwent the same process. Also, there practice of paying checks in part has never existed. Upon partial payment, is no obligation with the bank to release amount in the savings account, the check holder could not be called upon to surrender the check, and the when the balance being collected is higher. They cannot partially honor a bank would be without a voucher affording a certain means of showing the check, being insufficient to pay the whole amount. Neither can they transfer payment. The rule is based on commercial convenience, and any rule that from the other savings account the balance to pay off the check, since would work such manifest inconvenience should not be recognized. A check authority is needed to be able to transfer such amount. The bank had no is intended not only to transfer a right to the amount named in it, but to obligation to settle the spouses account with Petrophil, but they still tried to serve the further purpose of affording evidence for the bank of the payment in order that they would not have stained relations with the spouses. of such amount when the check is taken up. Villanueva v Nite FACTS DOCTRINE: If a bank refuses to pay a check (notwithstanding the Spouses Moran are the owners of the Wack-Wack Petron Gasoline. They buy sufficiency of funds), the payee-holder cannot sue the bank—the payee fuel and other related products from Petrophil on a cash on delivery basis. should instead sue the drawer who might in turn sue the bank. Sec. 189 is They maintain three accounts with Citytrust, one current account allowed to sound law based on logic and established legal principles—no privity of have zero balance, and two savings account. One of the savings account contract exists between the drawee-bank and the payee. was allowed to have automatic transfer of funds whenever the current account was insufficient to pay withdrawals, and the other needs FACTS authorization to transfer funds. On December 12, 1983, Librada Moran Nite borrowed P409k from Villanueva secured by an Asian Bank check for issued a check for P50,576 payable to Petrophil. On the next day, she issued P325k dated February 8, 1994.The date was later changed to June 8, 1994 another check for 56,090, payable to the same corporation. On December with the consent and concurrence of Villanueva. The check was, however, 14, 1983, the checks were deposited to PNB, which presented both for dishonored due to a material alteration when Villanueva deposited the check clearing. On this day, the current account had zero balance, while the on due date. On August 24, 1994, Nite remitted P235k to petitioner as savings account covered by the automatic transfer only had P26,104.30, partial payment of the loan, through a representative, since she was out of both accounts being insufficient to pay the issued checks. (The other the country. The balance of P174k was now due on or before December 8, savings account, where authorization is needed only had P43,268.39.) On 1994. December 15, 1983, George Moran deposited some funds which were supposed to be used to pay the earlier transaction. However, Librada On August 30, 1994, however, petitioner filed an action for a sum of money informed George that Petrophil refused to deliver their orders, and that the and damages against Asian Bank for the full amount of the dishonored checks issued were dishonored due to insufficiency of funds. The branch check. The RTC ruled in his favor. Pursuant thereto, Asian Bank issued a manager tried to fix the problem by bringing a manager's check to be P325k check to Villanueva. When respondent later on went to Asian Bank to signed by the spouses to pay off the balance with Petrophil. The bank also withdraw money from her account, she was unable to do so because the tried to apologize to Petrophil, stating in the the letter that it committed trial court had ordered Asian Bank to pay petitioner the value of "operational error". 6 months later, the spouses demanded that the bank respondent’s ABC check. pay them P1M for moral damages, which the bank refused to pay. They filed a case, which the RTC dismissed, and affirmed by the CA. She went to the CA and filed a petition for annulment of judgment (Rule 47), which was granted on the ground of extrinsic fraud. The CA found that ISSUE 6 days after receipt of the partial payment of P235k and agreeing that the Whether the spouses had sufficient funds when the bank dishonored the balance of P174k shall be paid on or before December 8, 1994, Villanueva check filed his complaint against Asian Bank for the full amount of the dishonored check without impleading Nite. The apparent haste by which he filed his RULING complaint and his failure to implead Nite showed his intent to prevent her NO. When PNB presented the check for collection, the current account had from opposing his action. zero balance, while the savings account had P26,104.30, which is

Thus this petition for certiorari. with the bank. This check was issued to him by Willy Cheng from Tarlac and was duly entered into his bank record. ISSUE 1) Whether the CA was correct to annul judgment despite the fact that Upon advice and instructions by the bank that the check was already Nite was not a party to the original collection case; cleared, Tan withdrew P240,000 on the same day, and on the next day, he 2) Whether Villanueva could properly sue the bank for non payment of deposited P50,000 (account thereafter has approx. P108,000) because he the check in the first place. issued several checks amounting to approx. P75,000.

RULING Unfortunately, his suppliers and business partners went back to him alleging 1) YES. A petition for annulment of judgment can be properly filed by a that the checks he issued bounced for insufficiency of funds. Thereafter, he, person not a party to the case. In this case, there was no speedy or through his lawyer, informed the bank to take steps regarding the matter adequate remedy available to Marlyn Nite because she was not a party to for he has adequate funds to pay the amount of the checks issued. But the the collection proceedings. Extrinsic fraud existed in this case since such bank did not bother or offer any apology regarding the incident. Thus, Tan refers to acts committed by a party to keep the other away from the courts, instituted a complaint for damages against the bank. as where there is a false promise of a compromise. The RTC ruled in favor of Tan on the ground that he was not informed about In fact, the RTC had no jurisdiction in this case. The contract of loan was the debiting of the P101,000 from his existing balance and that the bank between Villanueva and Nite; as debtor, Nite was an indispensible party to merely allowed him to use the fund prior to clearing merely for the case, and any judgment rendered without impleading such a party is accommodation because it considered him as one of its valued clients. void. Hence, it held that the bank manager was negligent in handling the particular check account of Tan. On appeal, the CA affirmed the RTC’s 2) NO. Sec 185 of the Negotiable Instruments Law provides: "A check is a decision. bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange ISSUE payable on demand apply to a check." Furthermore, Sec. 189. provides: "A 1) Whether the bank, as collecting bank, has the right to debit the check of itself does not operate as an assignment of any part of the funds to account of Tan for a check deposit, which was dishonored by the the credit of the drawer with the bank, and the bank is not liable to the drawee bank holder, unless and until it accepts or certifies the check." 2) Whether the bank properly exercised its right to debit/setoff

If a bank refuses to pay a check (notwithstanding the sufficiency of funds), RULING the payee-holder cannot sue the bank. The payee should instead sue the 1. YES. A bank generally has the right to setoff over the deposits therein drawer who might in turn sue the bank. No privity of contract exists for the payment of any withdrawals on the part of the depositor. The between the drawee-bank and the payee. There was no such privity of right of a collecting bank to debit a client’s account for the value of a contract between Asian Bank and Villanueva. dishonored check that has previously been credited has fairly been established by jurisprudence. ii. Prior to clearing Cases 2. NO. The degree of diligence required of banks is more than that of a Associated Bank v Tan good father of a family where the fiduciary nature of their relationship DOCTRINE: Although a collecting bank has the right to debit a client’s with their depositors is concerned. By the nature of its functions, a bank account for the value of a dishonored check that has previously been is under obligation to treat the accounts of its depositors with credited, it should nevertheless exercise such right with the highest degree meticulous care. of diligence, as it is a business impressed with public interest. It is undisputed that purportedly as an act of accommodation to a FACTS valued client, the bank allowed the withdrawal of the face value of the Vicente Tan is a businessman and regular depositor-creditor of the deposited check prior to its clearing. That act certainly disregarded the Associated Bank. In 1990, he deposited a postdated UCPB check (P101,000) clearance requirement of the banking system. Such a practice is unusual, because a check is not legal tender or money, and its value can

properly be transferred to a depositor’s account only after the check has RULING been cleared by the drawee bank. YES. The crossing of one of the subject checks should have put TRB on guard; it was duty bound to ascertain the indorser’s title to the check. TRB Reasonable business practice and prudence dictates that the bank should have known the effects of a crossed check: (a) the check may not be should NOT have advised and authorized Tan’s withdrawal of P240,000 encashed but only deposited in the bank; (b) the check may be negotiated as this amount was over and above his outstanding cleared balance of only once to one who has an account with the bank; (c) the act of crossing around P197,000. the check serves as a warning to the holder that the heck has been issued for a definite purpose so that he must inquire if he has received the check When the bank came to know of the checks’ dishonor, it should have pursuant to that purpose. immediately and duly informed Tan of the debiting of his account. Notice was proper and ought to be expected. As a valued client, Tan deserved By encashing in favor of unknown persons checks which were on their face nothing less than an official notice of the precarious condition of his payable to the BIR. A government agency which can only act through its account. agents, TRB did so in at its peril and must suffer the consequences of the unauthorized endorsement. TRB cannot exculpate itself from liability by iii. When check crossed claiming that RPN was itself negligent. Cases Traders Royal Bank v Radio Philippine Network Inc. iv. In contrast with manager’s check DOCTRINE: The crossing of a check should put a bank on guard. It was Cases duty bound to ascertain the indorser’s title to the check or the nature of his Equitable PCI Bank v Ong possession. Its effects are that (a) the check may not be encashed but only DOCTRINE: A manager’s check is an order of the bank to pay, drawn upon deposited in the bank; (b) the check may be negotiated only once to one itself, committing in effect its total resources, integrity and honor behind its who has an account with a bank; and (c) the act of crossing the check issuance, and by its peculiar character and general use in commerce, a serves as a warning to the holder that the check has been issued for a manager’s check is regarded substantially to be as good as the money it definite purpose so that he must inquire if he has received the check represents. pursuant to that purpose, otherwise, he is not a holder in due course. FACTS FACTS Warliza Sarande deposited a check of 225k in her account at Philippine On April 1985, the BIR assessed Radio Philippines Network (RPN) for their Commercial International Bank (Davao City). She inquired about the status tax obligations for the taxable years 1978 to 1983. of the check and the bank said it has been cleared.

Mrs. Vera, RPN’s comptroller, purchased from Trader’s Royal Bank (TRB) Relying on the assurance of the clearance, she issued two checks. One of three manager’s checks to be used as payment for their tax liabilities. The those check was issued to Rowena Ong, amounting to 180k due to a checks issued were made payable to the order of BIR and one of the checks business transaction. On the same day, Ong claimed the check the amount was also crossed. Mrs. Vera personally received the checks and was of the check from PCI Bank. Instead of encashing it, Ong requested to supposed to deliver the same to BIR in payment of RPN’s tax liabilities. convert the proceeds into a manager’s check.

Shortly thereafter, RPN was assessed again by BIR for their tax liabilities for The next day, Ong deposited the check in her account in Equitable PCI Bank the years 1972-1978. As RPN learned the three manager’s checks never (Davao City). a few days later, she received a notice that PCI Bank has reached BIR and was supposedly deposited and withdrawn by three stopped the payment of her check on the ground of irregular issuance. unknown individuals in Security Bank (SB). Despite several demands to PCI Bank for the payment of the check, there was no positive result. Thus, Ong filed a case against PCI Bank. RPN sent letters to TRB and SB demanding that the amounts covered by the checks be reimbursed or credited to their account. The two banks refused. PCI Bank argues that it did nothing wrong because the account against which the check was drawn (Sarande) was already closed. The bank also ISSUE said that it gave notice to Sarande and Ong about the return of the check. Whether TRB is liable for the wrongful payment of a check made payable to BIR. The Trial Court ruled in favor of Ong. The Court of Appeals affirmed the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 90 decision. development of the national economy and the fiduciary nature of banking that requires high standards of integrity and performance. ISSUE In furtherance thereof, the State shall promote and maintain a 1. Whether Ong was not a holder in due course and whether there was stable and efficient banking and financial system that is globally a lack of consideration in issuing the manager’s check, ultimately competitive, dynamic and responsive to the demands of a absolving PCI from liability. developing economy. 2. Whether PCI Bank exercised the requisite degree of diligence required of it. In this case, PCI bank distinctly admitted that the check deposited by Sarande was inadvertently send by the PCI bank through the “local RULING clearing” when it should have been sent through “inter-regional” clearing (1) The argument of PCI Bank is out of synch because, by operation of law, check since the check was drawn in General Santos City. It also admitted it assumed the liabilities of an acceptor under the Negotiable Instruments the mistake in assuring Sarande that the check has been cleared upon her Law (NIL) inquiry, because they were not aware that it was inadvertently sent in the “local clearing”. Both uncontested admissions prove that PCI failed to A manager's check is an order of the bank to pay, drawn upon itself, exercise the highest degree of care required of it under the law. committing in effect its total resources, integrity and honor behind its issuance. By its peculiar character and general use in commerce, a *Non-banking issue: Summary Judgment manager's check is regarded substantially to be as good as the money it the summary judgment of the trial court is proper because the facts as represents. Said check stands on the same footing as a certified check. As pleaded appear uncontested, all that is required is a judgment of the court. stated in Sec 187 of the NIL, when the manager’s check is certified by the This is evident when PCI bank admitted it committed an error in clearing the bank on which it was drawn, the certification is equivalent to an check of Sarande. acceptance. *Non-banking issue: Award of Moral and Exemplary Damages. Jurisprudence adds that a manager's check is one drawn by the bank's The bank is liable for moral damages because Ong suffered embarrassment manager upon the bank itself. It is similar to a cashier's check both as to and humiliation arising from the dishonor of the check. The bank is also effect and use. A cashier's check is a check of the bank's cashier on his own liable for exemplary damages because of failure to guard against injury or another check. In effect, it is a bill of exchange drawn by the cashier of a attributable to negligence or bad faith, considering the banking system plays bank upon the bank itself, and accepted in advance by the act of its a vital role in the economic life. issuance. It is really the bank's own check and may be treated as a promissory note with the bank as a maker. The check becomes the primary b. From Savings Accounts obligation of the bank which issues it and constitutes its written promise to Cases pay upon demand. The mere issuance of it is considered an acceptance BPI v CA (2000) thereof. DOCTRINE: The requirement of presentation of the passbook when withdrawing an amount cannot be given mere lip service even though the By accepting the check issued by Sarande to Ong and issuing in turn a person making the withdrawal is authorized by the depositor to do so. manager’s check in exchange thereof, PCI Bank assumed the liabilities of an acceptor under the Negotiable Instruments Law. By operation of law under FACTS Section 62 of the NIL, the Bank admits the existence of the drawer, Private respondent deposited in Foreign Currency Deposit Unit (FCDU) genuineness of his signature, capacity to draw the instrument and the Savings Account which he maintained in petitioner bank's Buendia Avenue existence of the payee and his capacity to indorse. Thus, the argument that Extension Branch, Continental Bank Manager's Check payable to "cash" in Ong is not a holder in due course and failure of consideration for the the amount of $2,500.00 and duly endorsed by private respondent. It issuance of the Manager’s check is untenable. appears that the check belonged to a certain Henry who went to the office of private respondent and requested him to deposit the check in his dollar (2) NO, it did not exercise the standard of diligence required from it. account by way of accommodation and for the purpose of clearing the same. In Section 2 of the General Banking Law states that Private respondent acceded, and agreed to deliver to Chan a signed blank • SEC. 2. Declaration of Policy. – The State recognizes the vital role of withdrawal slip, with the understanding that as soon as the check is cleared, banks in providing an environment conducive to the sustained both of them would go to the bank to withdraw the amount of the check

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 91 upon private respondent's presentation to the bank of his passbook. Considering petitioner's clear admission that the withdrawal slip was a blank one except for private respondent's signature, the unavoidable conclusion is Using the blank withdrawal slip given by private respondent to Chan, one that the typewritten name of "Ruben C. Gayon, Jr." was intercalated and Ruben Gayon, Jr, petitioner’s employee was able to withdraw the amount of thereafter it was signed by Gayon or whoever was allowed by petitioner to $2,541.67 from FCDU Savings Account. Notably, the withdrawal slip shows withdraw the amount. that the amount was payable to” Ramon A. de Guzman and Agnes C. de Guzman” and was duly initialed by the branch assistant manager. The In allowing the withdrawal, petitioner likewise overlooked another rule that withdrawal was made even before the amount of the check was credited in is printed in the passbook. Thus: the account of the private respondent and without the presentation of the passbook of the respondent. 2. All deposits will be received as current funds and will be repaid in the same manner; provided, however, that deposits of drafts, checks, money Thereafter, petitioner bank received communication from the Wells Fargo orders, etc. will be accented as subject to collection only and credited to the Bank International of New York that the said check deposited by private account only upon receipt of the notice of final payment. xxx respondent was a counterfeit check because it was "not of the type or style of checks issued by Continental Bank International." In depositing the check in his name, private respondent did not become the outright owner of the amount stated therein. Under the Now the petitioner is asking the private respondent, through his son (who is above rule, by depositing the check with petitioner, private employed by the petitioner bank), to return the amount of 2,500. The respondent was, in a way, merely designating petitioner as the private respondent, in his letter to the petitioner, refused to do so stating collecting bank. This is in consonance with the rule that a negotiable that he is not primarily liable. Because of this, petitioner was constrained to instrument, such as a check, whether a manager's check or ordinary file a suit to collect the said balance. check, is not legal tender. As such, after receiving the deposit, under its own rules, petitioner shall credit the amount in private ISSUE respondent's account or infuse value thereon only after the drawee Whether petitioner was grossly negligent in allowing the withdrawal bank shall have paid the amount of the check or the check has been cleared for deposit. RULING YES. Petitioner anchors its argument on the fact that the respondent as an A bank is under obligation to treat the accounts of its depositors "with indorser guaranteed the validity of the check and the signatures therein and meticulous care, always having in mind the fiduciary nature of their that the private respondent signed a blank withdrawal slip bearing only 2 of relationship."27 As such, in dealing with its depositors, a bank should his signatures and payee de Guzmans therein. exercise its functions not only with the diligence of a good father of a family but it should do so with the highest degree of care. Petitioner herein failed To hold private respondent liable for the amount of the check he deposited to do this, and in fact, violated its own rules by allowing the withdrawal of by the strict application of the law and without considering the attending an amount that is definitely over and above the aggregate amount of circumstances in the case would result in an injustice and in the erosion of private respondent's dollar deposits that had yet to be cleared. In so doing, the public trust in the banking system petitioner assumed the risk of incurring a loss on account of a forged or counterfeit foreign check and hence, it should suffer the resulting damage. Under the rules issued by the petitioner in the private respondent’s passbook, to be able to withdraw from the savings account deposit under c. From Time Deposits the Philippine foreign currency deposit system, two requisites must be Cases presented to petitioner bank by the person withdrawing an amount: (a) a Far East Bank and Trust Company v Querimit duly filled-up withdrawal slip, and (b) the depositor's passbook. Moreover, DOCTRINE: A bank acts at its peril when it pays deposits evidenced by a the withdrawal slip contains a boxed warning that states: "This receipt must certificate of deposit, without its production and surrender after proper be signed and presented with the corresponding foreign currency savings indorsement. passbook by the depositor in person. Despite the fact that private respondent’s passbook was not presented at the time of the withdrawal, the FACTS petitioner still allowed the said withdrawal in violation of their rules. In 1986, Estrella Querimit opened a dollar saving account with FEBTC Harrison Plaza Branch. She was issued for certificates of deposit, each

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 92 representing $15,000.00 or a total of $60,000.00. The certificates were to In this case, the certificates of deposit were clearly marked payable to mature in 60 days, payable to bearer at 4.5% interest per annum. The "bearer," which means, to "[t]he person in possession of an instrument, certificates bore the word “accrued” which meant that if they were not document of title or security payable to bearer or indorsed in presented for encashment or pre-terminated, the money deposited with blank."Petitioner should not have paid respondent's husband or any third accrued interest would be rolled-over by the bank and annual interest would party without requiring the surrender of the certificates of deposit. accumulate automatically. Petitioner claims that it did not demand the surrender of the subject In 1993, after her husband died, Querimit went to FEBTC to withdraw her certificates of deposit since respondent's husband, Dominador Querimit, was deposit but she was told that her husband had withdrawn the money in one of the bank's senior managers. But even long after respondent's deposit. FEBTC produced documents showing that the deposits have been husband had allegedly been paid respondent's deposit and before his paid to Querimit’s husband. However Querimit insisted that she was or her retirement from service, the FEBTC never required him to deliver the husband have not been paid as evidenced by the Cerificates of Deposit certificates of deposit in question. Moreover, the accommodation given to which are still in her possession. She sent a demand letter but FEBTC respondent's husband was made in violation of the bank's policies and refused to pay. So she filed a collection suit. procedures.

RTC and CA both ruled for Querimit. Petitioner FEBTC thus failed to exercise that degree of diligence required by the nature of its business. Because the business of banks is impressed with ISSUE public interest, the degree of diligence required of banks is more than that Whether the subject certificates of deposit have already been paid? of a good father of the family or of an ordinary business firm. The fiduciary nature of their relationship with their depositors requires them to treat the RULING accounts of their clients with the highest degree of care. A bank is under NO. Petitioner bank failed to prove that it had already paid Estrella obligation to treat the accounts of its depositors with meticulous care Querimit, the bearer and lawful holder of the subject certificates of deposit. whether such accounts consist only of a few hundred pesos or of millions of The finding of the trial court on this point, as affirmed by the Court of pesos. Responsibility arising from negligence in the performance of every Appeals, is that petitioner did not pay either respondent Estrella or her kind of obligation is demandable. Petitioner failed to prove payment of the husband the amounts evidenced by the subject certificates of deposit. subject certificates of deposit issued to the respondent and, therefore, remains liable for the value of the dollar deposits indicated thereon with A certificate of deposit is defined as a written acknowledgment by a bank or accrued interest. banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to d. From Foreign Currency Deposits some other person or his order, whereby the relation of debtor and creditor SEC. 5, FCDA: Withdrawability and transferability of deposits. – between the bank and the depositor is created. The principles governing There shall be no restriction on the withdrawal by the depositor other types of bank deposits are applicable to certificates of deposit, as are of his deposit or on the transferability of the same abroad the rules governing promissory notes when they contain an unconditional except those arising from the contract between the depositor promise to pay a sum certain of money absolutely. The principle that and the bank. payment, in order to discharge a debt, must be made to someone authorized to receive it is applicable to the payment of certificates of e. If Deceased Depositor deposit. Thus, a bank will be protected in making payment to the holder of a i. Tax Clearance Required certificate indorsed by the payee, unless it has notice of the invalidity of the SEC. 97, NIRC: Payment of Tax Antecedent to the Transfer indorsement or the holder's want of title. A bank acts at its peril when it of Shares, Bonds or Rights. - There shall not be transferred pays deposits evidenced by a certificate of deposit, without its production to any new owner in the books of any corporation, sociedad and surrender after proper indorsement. As a rule, one who pleads payment anonima, partnership, business, or industry organized or has the burden of proving it. Even where the plaintiff must allege non- established in the Philippines any share, obligation, bond or payment, the general rule is that the burden rests on the defendant to right by way of gift inter vivos or mortis causa, legacy or prove payment, rather than on the plaintiff to prove payment. The debtor inheritance, unless a certification from the Commissioner that has the burden of showing with legal certainty that the obligation has been the taxes fixed in this Title and due thereon have been paid is discharged by payment. shown.

If a bank has knowledge of the death of a person, who RTC: upheld the validity of this agreement and granted the motion of Vitug maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said CA: held that the survivorship agreement constitutes a conveyance mortis deposit account, unless the Commissioner has certified that causa which “did not comply with the formalities of a valid will as prescribed the taxes imposed thereon by this Title have been paid: by Article 805 of the CC, and evne assuming that it was a mere donation Provided, however, That the administrator of the estate or inter vivos, it is a prohibited donation under the provisions of Article 133 of any one (1) of the heirs of the decedent may, upon the Civil Code authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said ISSUE certification. For this purpose, all withdrawal slips shall Whether the survivorship agreement is void (No) contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one HELD of the joint depositors and such statement shall be under The agreement didn’t modify the conjugal funds of the spouse. oath by the said depositors. Spouses are not prohibited by law to invest conjugal property, say by way of ii. Survivorship Agreements a joint and several bank account, or an “and/or” account. Cases Vitug v CA When the spouses Vitug opened the savings account, they merely put what DOCTRINE: Survivorship agreements are permitted by the Civil Code. The rightfully belonged to them in a money-making venture. They did not validity of the contract seems debatable by reason of its “survivor-take-all” dispose of it in favor of the other, which would have arguably been feature. But in reality, the contract imposed a mere obligation with a term sanctionable as a prohibited donation. And since the funds were conjugal, it being death. However, if it be shown that such an agreement is a mere cannot be said that one spouse could have pressured the other in placing his cloak to hide an inofficious donation, it may be assailed and annulled on or her deposits in the money pool. such ground. The agreement was in the nature of an aleatory contract. In reality what is FACTS involved here is a contract with a term the fulfillment of which depends on • On January 13, 1985, Romarico G. Vitug filed a motion asking for either the happening of an event which is (1) “uncertain,” (2) “which is to authority from the probate court to sell certain shares of stock and occur at an indeterminate time.” real properties belonging to the estate to cover allegedly his advances to the estate in the sum of P667,731.66, plus interests A survivorship agreement, the sale of a sweepstake ticket, a transaction which he claimed were personal funds. stipulating on the value of currency, and insurance have been held to fall • He claimed that the advances were spent for the payment of estate under the first category, while a contract for life annuity or pension under tax and other increments thereto. He withdrew the sums of Article 2021, et sequential, has been categorized under the second. In P518,834.27 and P90,749.99 from savings account No. 35342-038 either case, the element of risk is present, In the case at bar, the risk was of the Bank of America, Makati, Metro Manila. the death of one party and survivorship of the other. • Rowena Corona opposed the motion, on the ground that the funds withdrawn from savings account No. 35342-038 were conjugal Warning of the Court But although the survivorship agreement is per se not partnership properties and part of the estate. She also sought his contrary to law its operation or effect may be violative of the law. For ouster for failure to include the sums in question for inventory and instance, if it be shown in a given case that such agreement is a mere cloak for “concealment of funds belonging to the estate.” to hide and inofficious donation, to transfer property in fraud of creditors, or • Vitug insists that the said funds are his exclusive property having to defeat the legitime of a forced heir, it may be assailed and annulled upon acquired the same through a survivorship agreement executed with such grounds. No such vice has been imputed and established against the his late wife and the bank on June 19, 1970. The agreement agreement involved in this case provides at the instance of the death of himself or his wife, the amount in the account shall be the sole property of the survivor or survivors and shall be payable to and collectible or withdrawable by such survivor or survivors.

3. Booking of Deposits § X261.5 Booking of deposits after regular banking hours. Deposits, SEC. X261, MRB: Booking of Deposits and Withdrawals. The whether cash or non-cash, received after the close of the regular following regulations shall govern the booking of deposits and banking hours shall be treated as contingent accounts on the day of withdrawals of banks. receipt and shall be booked as deposits the following banking day.

§ X261.1 Clearing cut-off time. As a general rule, all deposits and § X261.6 Other records required. For record and control purposes, withdrawals during regular banking hours shall be credited or banks shall prepare a daily abstract of deposit transactions treated debited to deposit liability accounts on the date of receipt or as contingent accounts. payment thereof: Provided, however, That a bank may set a clearing cut-off time for its head office not earlier than two (2) hours § X261.7 Notice required. Banks shall post at a conspicuous place before the start of clearing at the BSP, and not earlier than three near each teller’s window a notice to depositors indicating their and one-half (3-1/2) hours before the start of clearing for all its selected clearing cut-off time and a statement to the effect that branches, agencies and extension offices doing business in the non-cash items deposited after said cut-off time shall be treated as Philippines, after which time, deposits received shall be booked as transactions for the next banking day. hereinafter provided: Provided, further, That banks which are located in areas where there are no BSP regional/clearing 4. Interest on Deposits arrangements may set a clearing cut-off time not earlier than two SEC. X242, MRB: Interest on Deposits/Deposit Substitutes. (2) hours before the start of their local clearing after which time, Demand, savings, NOW accounts, time deposits and deposit deposits received shall be booked likewise as hereinafter provided. substitutes shall not be subject to interest ceilings.

§ X261.2 Definitions. As used in this Section, the following terms § X242.1 Time of payment of interest on time deposits/deposit shall have the following meanings: substitutes. Interest or yield on time deposit/deposit substitute may a. Regular banking hours shall refer to the banking hours be paid at maturity or upon withdrawal or in advance: Provided, reported to the BSP pursuant to Sec. X156, including the however, That interest or yield paid in advance shall not exceed the extended banking hours reported for servicing deposits and interest for one (1) year. withdrawals; and b. Clearing cut-off time shall mean the bank’s closing time for § X242.2 Treatment of matured time deposits/deposit substitutes the acceptance of deposits in the form of checks, bills and a. A time deposit not withdrawn or renewed on its due date shall be other demand items for clearing on the day of their receipt. treated as a savings deposit and shall earn interest from maturity to the date of actual withdrawal or renewal at a rate applicable to § X261.3 Booking of cash deposits. Cash deposits received after the savings deposits. selected clearing cut-off time until the close of the regular banking hours shall be booked as deposits on the day of receipt. b. A deposit substitute instrument not withdrawn or renewed on its maturity date shall from said date become payable on demand and § X261.4 Booking of non-cash deposits. Deposits of checks including shall earn an interest or yield from maturity to actual withdrawal or “on us” checks, manager’s/cashier’s/ treasurer’s checks and demand renewal at a rate applicable to a deposit substitute with a maturity drafts, which are drawn against the depository bank and all its of fifteen (15) days. offices, as well as treasury warrants and postal money orders, received after the selected clearing cut-off time until the close of the Banks performing quasi-banking functions shall continue to consider regular banking hours, may, at the option of the bank, be booked as matured and unwithdrawn deposit substitutes as such and subject deposits on the day of receipt. to reserves.

Other non-cash deposits received after the selected clearing cut-off Cases time shall be treated as contingent accounts on the day of receipt Citibank, NA v Cabamongan and shall be booked as deposits the following banking day. DOCTRINE: In a loan or forbearance of money, the interest due should be that stipulated in writing and in the absence thereof, the rate shall be 12% per annum counted from the time of demand.

FACTS 5. Closing of Account On August 16, 1993, spouses Cabamongan opened a joint foreign currency time deposit for their sons Lito and Luis Jr. in the amount of $55,216.69 for Cases a term of 182 days at 2.5625% (from August 16, 1993 to February Far East Bank and Trust Company v Pacilan, Jr. 14,1994). On November 10, 1993, a person claiming to be Carmelita DOCTRINE: No malice or bad faith could be imputed on a bank for closing Cabamongan (the wife) pre-terminated the foreign currency account, for the account of a depositor for frequently drawing checks against insufficient which she presented a Bank of America card, passport, an ATM, and funds. Neither is there malice or bad faith, but only negligence, when the Mabuhay card. Yeye San Pedro processed the pre-termination. The person bank accepted a deposit made by the depositor the day following the closure executed a notarize release and waiver document for failure to surrender of his account. the original Certificate of Deposit. The release and waiver document was not notarized, but the money was released. The person left an ID card, for FACTS: Pacilan had a current account with FEBTC. He was in the practice of which San Pedro called the spouses residence. Upon calling, she was told issuing several postdated checks against the account. One day in March that the spouses was in the US, and that she couldn't have pre-terminated 1988, he issued a postdated check for P680. It was dishonored (on April 4) the account. On September 16, 1994, the spouses demanded that the for insufficiency of funds. The next day, he deposited P800. Subsequently, amount withdrawn be returned, plus interest, which the bank refused. The he called FEBTC to inquire about the dishonor and was informed that his spouses filed a complaint, where the RTC ruled in favor of them. The CA account was closed on the ground that it was "IMPROPERLY HANDLED". The affirmed but ruled that the interest of 12% should run only at the time of reason given by the bank was that on the evening of April 4, as a result of demand. his practice of issuing postdated checks, Pacilan's account had an overdraft of P428. Thus his account was closed. ISSUE Whether interest should be 2.5625%, 6%, or 12% He sued the bank for moral and exemplary damages. He claimed that the bank closure was unjustified. His account was closed on the evening of April RULING 4; but if FEBTC had followed normal banking procedure, it had until the 12%. The bank argues that the interest should be 2.5625%, or the interest close of April 5 to honor the check or return it. He claimed that the closure which was agreed upon. In arguendo that they were negligent, it should be of his account was done with undue haste. Further, the closure of his 6% since the funds did not constitute a loan. The facts show that the bank account has exposed him to criminal prosecution for BP22. He claimed that employees were negligent when they released the funds upon showing that he was a cashier of Prudential Bank just across the street, that the closure (1) failure to produce the original certificate of deposit, and in lieu of it, a of the account was patently malicious, and that it had caused him notarized release and waiver document; (2) there was discrepancy with the humiliation, wounded feelings, insurmountable worries and sleepless nights. signature; (3) the picture of the depositors did not match the person withdrawing the funds. However, the Court ruled that under Article 1980 of In response, the bank claimed that Pacilan had overdrawn his account close the Civil Code, bank deposits are considered as simple loan. The relationship to 200 times in the past 2 years. The bank's Rules and Regulations between a bank and a depositor are really a debtor-creditor relationship, Governing the Establishment and Operation of Regular Demand Deposits where deposits are treated as loan by the bank from its depositors. As ruled provide that ìthe Bank reserves the right to close an account if the depositor in Eastern Shipping Lines v CA, a loan should have an interest that is frequently draws checks against insufficient funds and/or uncollected stipulated, and in absence, should be 12% per annum from the time of depositsî and that ìthe Bank reserves the right at any time to return checks demand. of the depositor which are drawn against insufficient funds or for any reason.î They also alleged that Pacilan had used a signature different from ***Therefore, the interest would be 2.5625% per annum from August 16, the specimen on several occasions. 1993 to February 14, 1994, the same rate from February 14, 1994 to September 16, 1994, and 12% per annum from September 16, 1994 up to RTC and CA found for Pacilan. They found that according to the bank's rules, the present date of the case. any uncleared check could actually have been subjected to a P10 charge per check, and could actually have been sent back for clearing one more time. Further, in previous instances, FEBTC notified the respondent when he incurred an overdraft and he would then deposit sufficient funds the following day to cover the overdraft. Petitioner bank thus acted unjustifiably when it immediately closed the respondentís account on April 4 and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 96 deprived him of the opportunity to reclear his check or deposit sufficient otherwise, as prescribed by law. funds therefor the following day. It also caused him humiliation and tainted his credit standing. They found the bank liable for damages for violation of (2) Any evidence obtained in violation of this or the preceding section Art. 19 of the Civil Code. shall be inadmissible for any purpose in any proceeding.

ISSUE ART. III, SEC. 7 (CONSTITUTION): The right of the people to Whether the bank properly exercised their right to close Pacilan's account. information on matters of public concern shall be recognized. Access to official records, and to documents and papers pertaining to official acts, transactions, or decisions, as well as to government research RULING data used as basis for policy development, shall be afforded the YES. REVERSED. Petitioner bank has the right to close the account. The citizen, subject to such limitations as may be provided by law. Bank Rules also state that: "...the depositor is NOT ENTITLED, AS A MATTER OF RIGHT, TO OVERDRAW on this deposit and the bank reserves the right at ART. II, SEC. 28 (CONSTITUTION): Subject to reasonable any time to return checks of the depositor which are drawn against conditions prescribed by law, the State adopts and implements a insufficient funds or for any other reason." policy of full public disclosure of all its transactions involving public interest. There was no right of the petitioner that was violated. The fact that petitioner constantly overdrew his account and used signatures not on file Cases was sufficient ground to close the account; therefore, there was no bad REPUBLIC v. EUGENIO, 545 SCRA 384 (2008) faith. He had improperly handled his account hundreds of time. The DOCTRINE: There is a right to privacy governing bank accounts in the depositor is bound by the terms and conditions of the agreement with the Philippines, as expressed in Sec. 2, RA 1405 (Bank Secrecy Act of 1995). bank. Exceptions provided for in Sec. 2 (may be examined by any person, government official, bureau or office), are as follows: Neither the fact that petitioner bank accepted the deposit made by the • Upon written permission of the depositor respondent the day following the closure of his account constitutes bad faith • In cases of impeachment or malice on the part of petitioner bank. The same could be characterized • Examination of bank accounts is upon order of a competent court in as simple negligence by its personnel. Said act, by itself, is not constitutive cases of bribery or dereliction of duty of public officials of bad faith. No legal right was established nor bad faith proved by Pacilan. • Money deposited or invested is the subject matter of litigation Damnum Absque Injuria. FACTS F. SECRECY OF BANK DEPOSITS (This case stemmed from the case of Agan v PIATCO) After the promulgation of the Agan case, a series of investigation was 1. General Rules conducted by the Ombudsman, the Compliance and Investigation Staff, and a. Rationale Anti-Money Laundering Council (AMLC). AMLC issued a resolution ART. III, SEC. 2 (CONSTITUTION): The right of the people to be authorizing the Executive Director of AMLC to examine the bank accounts of secure in their persons, houses, papers, and effects against Pantaleon Alvarez, Cheng Yong,Wilfredo Trinidad, Alfredo Liongson and their unreasonable searches and seizures of whatever nature and for any related web accounts. Under the authority of such resolution, AMLC filed an purpose shall be inviolable, and no search warrant or warrant of arrest application to inquire into or examine the deposits or investments of shall issue except upon probable cause to be determined personally by Alvarez, Cheng Yong, Trinidad and Liongson with the Makati RTC, which the the judge after examination under oath or affirmation of the court granted. Months later, Special Prosecutor Dennis Villa-Ignacio complainant and the witnesses he may produce, and particularly requested AMLC to investigate the accounts of Alvarez, PIATCO and all describing the place to be searched and the persons or things to be accounts related to the annulled contract. AMLC issued another resolution, seized. authorizing the executive director to inquire into the bank accounts named in the letter. AMLC filed the same application, this time to the Manila RTC, ART. III, SEC. 3 (CONSTITUTION): (1) The privacy of which was raffled to Judge Antonio Eugenio Jr. The court likewise granted communication and correspondence shall be inviolable except upon such ex parte application. Alvarez filed an Urgent Motion to Stay of lawful order of the court, or when public safety or order requires Enforcement of Order, which the Manila RTC granted. The Republic filed a

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 97 motion for reconsideration which was granted. Alvarez then filed an Urgent b. Applicable Law Motion and Manifestation, stating that AMLC was about to implement the Cases Manila RTC bank inquiry even though he intends to appeal such order. The INTENGAN v. CA, 377 SCRA 63 (2002) Manila RTC refrained AMLC from implementing such order against Alvarez. DOCTRINE: Where the accounts in question are US dollar deposits, the Alvarez then filed an Urgent Ex Parte Motion for Clarification, alleging that applicable law is RA 6426 (FCDA), not RA 1405 (Bank Secrecy Law). Under AMLC likewise cannot implement such order against the others stated in the the applicable law, the only exception to the secrecy of foreign currency order. Manila RTC issued an order, stating that the ex parte application deposits is upon the written permission of the depositor. cannot be implemented in its totality (first of four rulings contested in this case). FACTS In 1993, Citibank filed a complaint for violation of Sec. 31, in relation to Lilia Cheng, wife of Cheng Yong filed a Petition for Certiorari, TRO and Sec. 144 of the Corporation Code against its 2 officers, Santos and Genuino. preliminary injunction against the orders of Makati and Manila RTC stating It was alleged in the affidavit executed by its VP Vic Lim that Santos and grave abuse of discretion that AMLA can only inquire to bank accounts after Genuino managed or caused existing bank clients/depositors to divert their the creation of the Anti-Money Laundering Act (AMLA), and not prior to its money from Citibank NA to products offered by other companies (Torrance promulgation. The CA issued a TRO, granting such petition (second of four Development Corporation and Global Pacific Corporation) that were yielding rulings contested in this case). higher interest rates. In return, Santos and Genuino derived substantial financial gains. It was also determined that the bank clients accommodated With relation to the Urgent Motion for Clarification, the Manila RTC issued an by Santos and Genuino include Intengan, Neri and Brawner, who have long order reiterated that bank inquiry order it issued cannot be implemented by standing accounts with Citibank NA in savings/dollar deposits and/or in trust the AMLC until the appeal (of Alvarez of the order granting the ex parte accounts and/or money placements. application) is finally resolved (third of four rulings contested in this case). The CA issued a writ of preliminary injunction with regard to the petition As evidence, Lim annexed bank records, including dollar deposits of filed by Lilia Cheng (last ruling contested in this case) Intengan, Neri and Brawner, to establish the deception practiced by Santos and Genuino. ISSUE Whether a bank inquiry order issued in accordance with section 10 AMLA In turn, Global Consumer Banking Group of Citibank’s VP/Business Manager may be stayed with injunction Reyes admitted to having authorized Lim to state the names of the clients involved and to attach said bank records.

RULING Intengan, Neri and Brawner filed their respective motions for the exclusion YES. There is a right to privacy governing bank accounts in the Philippines, and physical withdrawal of their bank records, which was initially dismissed expressed in RA 1405 known as Bank Secrecy Act of 1955. Section 2 of such by 2nd Asst. Provincial Prosecutor Ubana, Sr. However, Provincial Prosecutor law states that all deposits of whatever nature with banks or banking Castro directed the filing of informations against Rajkotwala, Ferguson, institutions in the Philippines including investments in bonds issued by the Reyes and Lim for alleged violation of the Bank Secrecy Law. On appeal Government of the Philippines, its political subdivisions and its before the DOJ, this was reversed. instrumentalities, are herby considered as of an absolutely confidential nature and may not be examined, inquired, or looked into by any person. ISSUE Although there may have been subsequent laws that would add to the Whether the Bank Secrecy Law, RA 1405 applies in this case exceptions, the Bank Secrecy Act remains as the general rule. HELD However, there are exceptions, such as (1) written permission of he NO. The accounts in question are US dollar deposits. Consequently, the depositors; (2) in cases of impeachment; (3) upon order of competent applicable law is RA 6426 known as the Foreign Currency Deposit Act of the courts in cases of bribery or dereliction of duty of public officials; (4) money Philippines, and not RA 1405 (Bank Secrecy Law). deposited is the subject matter of litigation. Subsequent laws adding to the exception are the Anti-Graft and Corrupt Practices Act, the Ombudsman Act, Under Sec. 8 of RA 6426, there is only a single exception to the secrecy of and the Anti-Money Laundering Act**. foreign currency deposits, that is, disclosure is allowed only upon the written permission of the depositor. Incidentally, the acts of the Citibank officials

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 98 complained of happened before the enactment of RA 9160, Anti-Money Estrada filed a Motion to Quash alleging that the documents were by R.A. Laundering Act of 2001. No. 1405 (The Secrecy of Bank Deposits Law). He further claimed that the specific identification of documents in the questioned subpoenas, including A case for violation of RA 6426 should have been the proper case brought details on dates and amounts, could only have been made possible by an against the bank’s officials. Lim and Reyes admitted that they had disclosed earlier illegal disclosure thereof by the EIB and the Philippine Deposit details of petitioners’ dollar deposits without the latter’s written permission. Insurance Corporation (PDIC). The disclosure being illegal, petitioner It does not matter if that such disclosure was necessary to establish the concluded, the prosecution in the case may not be allowed to make use of bank’s case against Santos and Genuino. Lim’s act of disclosing details of the information. petitioners’ bank records regarding their foreign currency deposits, with the authority of Reyes, would appear to belong to the species of criminal acts ISSUE punishable under special laws—malum prohibitum. Whether the “extremely-detailed” information contained in the Special Prosecution Panel’s requests for subpoena was obtained through a prior a. Applicability of Exclusionary Rule illegal disclosure of petitioner’s bank accounts, in violation of the “fruit of ART. III, SEC. 2 (CONSTITUTION): The right of the people to be the poisonous tree” doctrine secure in their persons, houses, papers, and effects against unreasonable searches and seizures of whatever nature and for any HELD purpose shall be inviolable, and no search warrant or warrant of arrest NO. The court first held that the bank documents were not covered by RA shall issue except upon probable cause to be determined personally by 1405, hence not fruits of illegal disclosure. the judge after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly Petitioner’s attempt to make the exclusionary rule applicable to the instant describing the place to be searched and the persons or things to be case fails. R.A. 1405, it bears noting, nowhere provides that an unlawful seized. examination of bank accounts shall render the evidence obtained therefrom inadmissible in evidence. Section 5 of R.A. 1405 only states that “[a]ny ART. III, SEC. 3 (CONSTITUTION): (1) The privacy of violation of this law will subject the offender upon conviction, to an communication and correspondence shall be inviolable except upon imprisonment of not more than five years or a fine of not more than twenty lawful order of the court, or when public safety or order requires thousand pesos or both, in the discretion of the court.” otherwise, as prescribed by law. Even assuming arguendo, however, that the exclusionary rule applies in (2) Any evidence obtained in violation of this or the preceding section principle to cases involving R.A. 1405, the Court finds no reason to apply shall be inadmissible for any purpose in any proceeding. the same in this particular case.

Cases Clearly, the “fruit of the poisonous tree” doctrine1[13] presupposes a violation EJERCITO v. SANDIGANBAYAN, 509 SCRA 190 (2006) of law. If there was no violation of R.A. 1405 in the instant case, then there DOCTRINE: RA 1405 nowhere provides that an unlawful examination of would be no “poisonous tree” to begin with, and, thus, no reason to apply bank accounts shall render the evidence obtained therefrom inadmissible in the doctrine. evidence. Sec. 5 only states that “any violation of this law will subject the offender upon conviction, to an imprisonment of not more than 5 years or The investigation conducted by the Ombudsman were legal as credited by fine of not more than P20,000 or both, in the discretion of the court.” the Sandiganbayan. The documents were released pursuant to a letter request sent to the officers of EIB and were not obtained through illegal FACTS means. This case arose from the plunder charges against former president Joseph Ejercito Estrada. The Special Prosecution Panel filed before the In fine, the subpoenas issued by the Ombudsman in this case were legal, Sandiganbayan a request for issuance of subpoenas directing the President hence, invocation of the “fruit of the poisonous tree” doctrine is misplaced. of Export and Industry Bank (EIB) or his/her authorized representative to produce a number of documents allegedly part of the Jose Velarde account. The Sandiganbayan granted the requests and subpoenas were issued.

2. Rules for Peso Deposits who controls it during his lifetime, after which the balance is payable to a a. Coverage prenominated beneficiary. It may be invested by the bank. SEC. 2, LAW ON SECRECY OF BANK DEPOSITS: All deposits of whatever nature with banks or banking institutions in the Philippines ISSUES: including investments in bonds issued by the Government of the 1) Whether a trust account is a deposit, and Philippines, its political subdivisions and its instrumentalities, are 2) Whether a plunder charge falls under the exceptions under Section 2 hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government RULING official, bureau or office, except upon written permission of the 1) YES, it is a deposit. The contention of the Sandiganbayan that trust depositor, or in cases of impeachment, or upon order of a competent accounts are not covered by the term “deposits,” as used in R.A. 1405, by court in cases of bribery or dereliction of duty of public officials, or in the mere fact that they do not entail a creditor-debtor relationship between cases where the money deposited or invested is the subject matter of the trustor and the bank, does not lie. If the money deposited under an the litigation. account may be used by banks for authorized loans to third persons, then such account, regardless of whether it creates a creditor-debtor relationship Cases between the depositor and the bank, falls under the category of accounts EJERCITO v. SANDIGANBAYAN, 509 SCRA 190 (2006) which the law precisely seeks to protect for the purpose of boosting the DOCTRINE: The term “deposits” used therein is to be understood broadly economic development of the country. and not limited only to accounts, which give rise to a creditor-debtor relationship between the depositor and the bank. If the money deposited 2) YES, it falls under the exceptions. The protection afforded by the law is under an account may be used by banks for authorized loans to third not absolute, there being recognized exceptions thereto, as above-quoted persons, then such accounts, regardless of whether it creates a creditor- Section 2 provides. Two exceptions apply here: (1) the examination of debtor relationship between the depositor and the bank, falls under the bank accounts is upon order of a competent court in cases of bribery or category of accounts which the law precisely seeks to protect for the dereliction of duty of public officials, and (2) the money deposited or purpose of boosting the economic development of the country. invested is the subject matter of the litigation.

FACTS Cases of unexplained wealth are similar to cases of bribery or dereliction of In the ombudsman case PP v. Estrada, the Sandiganbayan issued a duty and no reason is seen why these two classes of cases cannot be subpoena duces tecum for Trust Account no 858, a savings account, certain excepted from the rule making bank deposits confidential. The crime of specified documents, as well as all accounts pertaining to one "Jose bribery and the overt acts constitutive of plunder are crimes committed by Velarde". ERAP filed motions to quash alleging that the trust account which public officers, and in either case the noble idea that “a public office is a was allegedly his was a "deposit" within the meaning of sec. 2 of RA 1405, public trust and any person who enters upon its discharge does so with the and therefore protected; and that since he was charged with plunder, not full knowledge that his life, so far as relevant to his duty, is open to public bribery or dereliction of duty, his case does not fall under any of the scrutiny” applies with equal force. exceptions under sec.2. These motions to quash were denied. were denied. Thus this petition for certiorari. Plunder being thus analogous to bribery, the exception to R.A. 1405 applicable in cases of bribery must also apply to cases of plunder. "Section 2. 1 All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the b. Prohibitions Government of the Philippines, its political subdivisions and its SEC. 2, LAW ON SECRECY OF BANK DEPOSITS: All deposits of instrumentalities, are hereby considered as of an absolutely confidential whatever nature with banks or banking institutions in the Philippines nature and may not be examined, inquired or looked into by any person, including investments in bonds issued by the Government of the government official, bureau or office, except upon written permission of the Philippines, its political subdivisions and its instrumentalities, are depositor, or in cases of impeachment, or upon order of a competent court hereby considered as of an absolutely confidential nature and may not in cases of bribery or dereliction of duty of public officials, or in cases where be examined, inquired or looked into by any person, government the money deposited or invested is the subject matter of the litigation." official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent Note: Trust Account: a savings account deposited in the name of a trustee court in cases of bribery or dereliction of duty of public officials, or in

cases where the money deposited or invested is the subject matter of the bank, or in the maximum amount permitted by law, the litigation. whichever is lower, shall be required by the lending bank to waive the secrecy of his deposits of whatever nature SEC. 3, LAW ON SECRECY OF BANK DEPOSITS: It shall be in all banks in the Philippines. Any information obtained unlawful for any official or employee of a banking institution to from an examination of his deposits shall be held strictly disclose to any person other than those mentioned in Section two confidential and may be used by the examiners only in hereof any information concerning said deposits. connection with their supervisory and examination responsibility or by the Bangko Sentral in an appropriate SEC. 55.1 (B), GBL: No director, officer, employee, or agent of any legal action it has initiated involving the deposit account. bank shall, without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or SEC. X337, MRB: Waiver of Secrecy of Deposit properties in the custody of the bank belonging to private individuals, Any director, officer or stockholder who, together with corporations, or any other entity: Provided, That with respect to bank his related interest, contracts a loan or any form of deposits, the provisions of existing laws shall prevail; financial accommodation from: a. his bank; or SEC. 55.4, GBL: Consistent with the provisions of Republic Act No. b. from a bank 1405, otherwise known as the Banks Secrecy Law, no bank shall (1) which is a subsidiary of a bank holding company of employ casual or nonregular personnel or too lengthy probationary which both his bank and the lending bank are personnel in the conduct of its business involving bank deposits. subsidiaries; or

c. Exceptions (2) in which a controlling proportion of the shares is i. Under the Law on Secrecy of Bank Deposits owned by the same interest that owns a controlling SEC. 2, LAW ON SECRECY OF BANK DEPOSITS: All deposits of proportion of the shares of his bank, in excess of five whatever nature with banks or banking institutions in the percent (5%) of the capital and surplus of the bank, or Philippines including investments in bonds issued by the in the maximum amount permitted by law, whichever is Government of the Philippines, its political subdivisions and its lower, shall be required by the lending bank to waive the instrumentalities, are hereby considered as of an absolutely secrecy of his deposits of whatever nature in all banks in confidential nature and may not be examined, inquired or looked the Philippines. Any information obtained from an into by any person, government official, bureau or office, except examination of his deposits shall be held strictly upon written permission of the depositor, or in cases of confidential and may be used by the examiners only in impeachment, or upon order of a competent court in cases of connection with their supervisory and examination bribery or dereliction of duty of public officials, or in cases where responsibility or by the BSP in an appropriate legal the money deposited or invested is the subject matter of the action it has initiated involving the deposit account. litigation. b. For loans secured by hold-out or assignment of CTDs 1. Upon written permission of the depositor or inventor: SEC. X315 (F), MRB: Loans Secured by Certificates of a. DOSRI loans Time Deposit. The following rules shall govern the grant SEC. 26, NCBA: Bank Deposits and Investments. - of loans secured by holdout on and/or assignment of Any director, officer or stockholder who, together with CTDs issued by the lending bank, as well as its branches his related interest, contracts a loan or any form of or subsidiaries abroad: financial accommodation from: (1) his bank; or (2) from The loan documents shall include a waiver on the part of a bank (a) which is a subsidiary of a bank holding the depositor of his rights under existing law to the company of which both his bank and the lending bank confidentiality of his deposits. are subsidiaries or (b) in which a controlling proportion of the shares is owned by the same interest that owns a 2. In cases of impeachment controlling proportion of the shares of his bank, in 3. Upon the order of a competent court in cases of bribery or excess of five percent (5%) of the capital and surplus of dereliction of duty of public officials

4. In cases where the money deposited or invested is the subject 2 of the Bank Secrecy Law by providing an additional exception to the rule of litigation against the disclosure of bank deposits.

ii. Under the Anti-Graft and Corrupt Practices Act BANCO FILIPINO SAVINGS AND MORTGAGE BANK v. PURISIMA, 161 SEC. 8, RA 3019: Dismissal due to unexplained wealth. If in SCRA 576 (1988) accordance with the provisions of Republic Act Numbered One DOCTRINE: By enacting Sec. 8 of RA 3019, Congress intended to provide thousand three hundred seventy-nine, a public official has been an additional ground for the examination of bank deposits for without such found to have acquired during his incumbency, whether in his provision, the prosecutors would be hampered if not altogether frustrated in name or in the name of other persons, an amount of property the prosecution of those charged with having acquired unexplained wealth and/or money manifestly out of proportion to his salary and to his while in public office. other lawful income, that fact shall be a ground for dismissal or removal. Properties in the name of the spouse and unmarried FACTS children of such public official may be taken into consideration, The Tanodbayan issued a subpoenaduces tecum to the Banco Filipino when their acquisition through legitimate means cannot be Savings & Mortgage Bank, commanding its representative to appear at a satisfactorily shown. Bank deposits shall be taken into specified time at the Office of the Tanodbayan and furnish the latter with consideration in the enforcement of this section, notwithstanding duly certified copies of the records in all its branches and extension offices, any provision of law to the contrary. of the loans, savings and time deposits and other banking transactions, dating back to 1969, appearing in the names of Caturla, his wife, Purita Cases Caturla, their children — Manuel, Jr., Marilyn and Michael — and/or Pedro PNB v. GANCAYAO, 15 SCRA 91 (1965) Escuyos. DOCTRINE: Sec. 8 of RA 3019 directs in mandatory terms that bank deposits shall be taken into consideration in the enforcement of this section, Caturla moved to quash the subpoena duces tecum arguing that compliance notwithstanding any provision of law to the contrary. therewith would result in a violation of Sections 2 and 3 of the Law on Secrecy of Bank Deposits. Then Tanodbayan Vicente Ericta not only denied FACTS the motion for lack of merit, and directed compliance with Prosecutor Gancayao required PNB to produce the records of the bank the subpoena, but also expanded its scope through a second subpoena deposits of Jimenez, the former administrator of the Agricultural Credit and duces tecum, this time requiring production by Banco Filipino of the bank Cooperative Administration. Jimenez was under investigation for records in all its branches and extension offices, of Siargao Agro-Industrial unexplained wealth. PNB refused to produce the records of the bank Corporation, Pedro Escuyos or his wife, Emeterio Escuyos, Purita Caturla, deposits for fear of prosecution under RA 1405 (Bank Secrecy Law). Lucia Escuyos or her husband, Romeo Escuyos, Emerson Escuyos, Fraterno Gancayao on the other hand relied on the provisions of RA 3019 (Anti Graft Caturla, Amparo Montilla, Cesar Caturla, Manuel Caturla or his children, and Corrupt Practices Act), stating Manuel Jr., Marilyn and Michael, LTD Pub/Restaurant, and Jose Buo or his wife, Evelyn. Two other subpoena of substantially the same tenor as the Sec. 8. Dismissal due to unexplained wealth. – xx xx xx Bank second were released by the Tanodbayan's Office. The last required deposits shall be taken into consideration in the enforcement of this obedience under sanction of contempt. section, notwithstanding any provision of law to the contrary. The Banco Filipino Savings & Mortgage Bank, hereafter referred to simply as ISSUE BF Bank, took over from Caturla in the effort to nullify the subpoenae. It Whether RA 3019 prevails over RA 1405? filed a complaint for declaratory relief with the Court of First Instance of Manila, which was assigned by raffle to the sala of respondent Judge Fidel RULING Purisima. BF Bank prayed for a judicial declaration as to whether its YES. Anti Graft and Corrupt Practices Act prevails over the Bank Secrecy compliance with the subpoenae duces tecum would constitute an Law. The anti graft law directs in mandatory terms that bank deposits “shall infringement of the provisions of Sections 2 and 3 of R.A. No. 1405 in be taken into consideration in the enforcement of this section, relation to Section 8 of R.A. No. 3019. It also asked that pending final notwithstanding any provision of law to the contrary.” The only conclusion resolution of the question, the Tanodbayan be provisionally restrained from possible is that Section 8 of the Anti Graft Law is intended to amend Section exacting compliance with the subpoenae.

Respondent Judge Purisima issued an Order denying for lack of merit the fact shall be a ground for dismissal or removal. Properties in the application by BF Bank for a preliminary injunction and/or restraining order. name of the spouse and unmarried children of such public official It further argues that subpoenae in question are in the nature of "fishing may be taken into consideration, when their acquisition through expeditions" or "general warrants" since they authorize indiscriminate legitimate means cannot be satisfactorily shown. Bank deposits shall inquiry into bank records; that, assuming that such an inquiry is allowed as be taken into consideration in the enforcement of this section, regards public officials under investigation for a violation of the Anti-Graft & notwithstanding any prohibition of law to the contrary. Corrupt Practices Act, it is constitutionally impermissible with respect to private individuals or public officials not under investigation on a charge of The only conclusion possible is that section 8 of the Anti-Graft Law is violating said Act; and that while prosecution of offenses should not, as a intended to amend section 2 of Republic Act No. 1405 by providing an rule, be enjoined, there are recognized exceptions to the principle one of additional exception to the rule against the disclosure of bank desposits. which is here present, i.e. to avoid multiplicity of suits, similar subpoenae having been directed to other banks as well. The inquiry into illegally acquired property — or property NOT "legitimately acquired" — extends to cases where such property is ISSUE concealed by being held by or recorded in the name of other Whether the "Law on Secrecy of Bank Deposits" precludes production by persons. This proposition is made clear by R.A. No. 3019 which quite subpoena duces tecum of bank records of transactions by or in the names of categorically states that the term, "legitimately acquired property of the wife, children and friends of a special agent of the Bureau of Customs, a public officer or employee shall not include .. property unlawfully accused before the Tanodbayan of having allegedly acquired property acquired by the respondent, but its ownership is concealed by its manifestly out of proportion to his salary and other lawful income, in being recorded in the name of, or held by, respondent's spouse, violation of the "Anti-Graft and Corrupt Practices Act. ascendants, descendants, relatives or any other persons.

RULING To sustain the petitioner's theory, and restrict the inquiry only to property The provisions of R.A. No. 1405 subject of BF's declaratory action, read as held by or in the name of the government official or employee, or his spouse follows: and unmarried children is unwarranted in the light of the provisions of the Sec. 2. All deposits of whatever nature with banks or banking statutes in question, and would make available to persons in government institutions in the Philippines including investments in bonds issued who illegally acquire property an easy and fool-proof means of evading by the Government of the Philippines, its political subdivisions and investigation and prosecution; all they would have to do would be to simply its instrumentalities, are hereby considered as of an absolutely place the property in the possession or name of persons other than their confidential nature and may not be examined, inquired or looked spouse and unmarried children. This is an absurdity that we will not ascribe into by any person, government official, bureau or office, except to the lawmakers. upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the iii. Under the Ombudsman Act money deposited or invested is the subject matter of litigation. SEC. 15 (8), RA 6770: Powers, Functions and Duties. — The Office of the Ombudsman shall have the following powers, Sec. 3. It shall be unlawful for any official or employee of a banking functions and duties: institution to disclose to any person other than those mentioned in Administer oaths, issue subpoena and subpoena duces tecum, and Section two hereof any information concerning said deposits take testimony in any investigation or inquiry, including the power to examine and have access to bank accounts and records; The other provision involved in the declaratory action is Section 8 of R.A. No. 3019. It reads: Cases Sec. 8. Dismissal due to unexplained wealth. — If in accordance MARQUEZ v. DESIERTO, 359 SCRA 772 (1991) with the provisions of Republic Act Numbered One thousand three DOCTRINE: Before an in camera inspection by the Ombudsman may be hundred seventy-nine, a public official has been found to have allowed, there must be a pending case before a court of competent acquired during his incumbency, whether in his name or in the name jurisdiction. Further, the account must be clearly identified, the inspection of other persons, an amount of property and/or money manifestly limited to the subject matter of the pending case before the court of out of proportion to this salary and to his other lawful income, that competent jurisdiction. The bank personnel and the account holder must be

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 103 notified to be present during the inspection, and such inspection may cover reconsideration. only the account identified in the pending case. Grounds used by the lower court: No great or irreparable injury to restrain FACTS respondent The Ombudsman would have to file to the RTC for the indirect Petitioner is being held in indirect contempt for not allowing in camera contempt charge Petitioner failed to show prima facie evidence that the inspection of the accounts related to an investigation being done by the subject matter of the investigation is outside the jurisdiction of Respondent. Ombudsman relating to pay-offs for the PEA-AMARRI scandal. Petitioner hopes to nullify order for the in camera investigation and to hold her in Reconsideration was likewise denied. contempt. A motion to cite Petitioner in contempt was filed with the Office of the Petitioner is the branch manager of Union Bank, Julio Vargas Branch. She Ombudsman. Petitioner asserted that such was premature since there was a received an Order from the Respondent to produce several bank documents pending case in the lower court, but eventually she was held in contempt for inspection in camera relative to a pending investigation before Respondent (Ombudsman Desierto). ISSUE (Ombudsman act) whether petitioner may be cited for indirect contempt for Respondent’s case is the Fact Finding and Intelligence Bureau (FFIB) vs. her failure to produce the documents requested by the Ombudsman. And Amado Lagdameo – relative to the JVA between PEA and AMARI. The Order whether the order of the Ombudsman to have an in camera inspection of emphasized Respondent’s power to issue subpoena and subpoena duces the questioned account is allowed as an exception to the law on secrecy of tecum and contempt power under RA 6770 aka the Ombudsman Act of bank deposits (R. A. No. 1405). 1989. The Act is a later legislation to RA 1405 aka Secrecy of Bank Deposits law; hence amending some provisions of the latter. RULING NO, she may not be held in contempt or may the Ombudsman have an in • Order’s objective: to trail the managers checks purchased by Trivinio camera inspection. respondent in the pending case) Examination of the secrecy of bank deposits law (R. A. No. 1405) would Trivinio purchased 51 managers checks worth P272.1M from Traders Royal reveal the following exceptions: Bank, UN Ave. 11 of these checks, P70.6M, were deposited to an account 1. Where the depositor consents in writing; handled by Petitioner’s branch 2. Impeachment case; 3. By court order in bribery or dereliction of duty cases against public Though Union Bank’s lawyer told Petitioner to comply with the Order, she officials; had some difficulty making her ask for some time extensions. She said the 4. Deposit is subject of litigation; accounts cannot be easily identified and despite diligent efforts and from the 5. Sec. 8, R. A. No. 3019, in cases of unexplained wealth as held in the account numbers presented, she cannot identify these accounts since the case of PNB vs. Gancayco checks were issued in cash or bearer o Surmised that the account has been dormant since it is not covered by the new account number generated by The order of the Ombudsman to produce for in camera inspection the the Union Bank system o Hence, she has to verify from the Interbank subject accounts with the Union Bank of the Philippines, Julia Vargas records archives for the whereabouts of the account Branch, is based on a pending investigation at the Office of the Ombudsman against Amado Lagdameo, et. al. for violation of R. A. No. 3019, Sec. 3 (e) After two extensions, Respondent issued the controversial order and (g) relative to the Joint Venture Agreement between the Public Estates threatening to hold Petitioner in indirect contempt for causing Authority and AMARI. delays in the investigation. We rule that before an in camera inspection may be allowed, there Petitioner and Union Bank filed for declaratory relief in the RTC of must be a pending case before a court of competent jurisdiction. Makati to clarify their rights and duties, seeing complying with the Further, the account must be clearly identified, the inspection limited to the Order may conflict or violate the Secrecy of Bank Deposits law. subject matter of the pending case before the court of competent jurisdiction. The bank personnel and the account holder must be notified to Lower Court Denied the Petition, but Petitioner sought be present during the inspection, and such inspection may cover only the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 104 account identified in the pending case. percentage, kickbacks or any other form of pecuniary benefit from any person and/or entity in connection with any government In Union Bank of the Philippines v. Court of Appeals, we held that “Section 2 contract or project or by reason of the office or position of the of the Law on Secrecy of Bank Deposits, as amended, declares bank public officer concerned; deposits to be “absolutely confidential” except: 3) By the illegal or fraudulent conveyance or disposition of assets (1) In an examination made in the course of a special or general belonging to the National Government or any of its subdivisions, examination of a bank that is specifically authorized by the Monetary Board agencies or instrumentalities or government-owned or -controlled after being satisfied that there is reasonable ground to believe that a bank corporations and their subsidiaries; fraud or serious irregularity has been or is being committed and that it is necessary to look into the deposit to establish such fraud or irregularity, 4) By obtaining, receiving or accepting directly or indirectly any shares of stock, equity or any other form of interest or participation (2) In an examination made by an independent auditor hired by the including promise of future employment in any business enterprise bank to conduct its regular audit provided that the examination is or undertaking; for audit purposes only and the results thereof shall be for the exclusive use of the bank, 5) By establishing agricultural, industrial or commercial monopolies or other combinations and/or implementation of decrees and orders (3) Upon written permission of the depositor, intended to benefit particular persons or special interests; or

(4) In cases of impeachment, 6) By taking undue advantage of official position, authority, relationship, connection or influence to unjustly enrich himself or (5) Upon order of a competent court in cases of bribery or dereliction of themselves at the expense and to the damage and prejudice of the duty of public officials, or Filipino people and the Republic of the Philippines.

(6) In cases where the money deposited or invested is the subject matter of SEC. 4, RA 7080: Rule of Evidence - For purposes of the litigation” establishing the crime of plunder, it shall not be necessary to prove each and every criminal act done by the accused in furtherance of In the case at bar, there is yet no pending litigation before any court the scheme or conspiracy to amass, accumulate or acquire ill- of competent authority. What is existing is an investigation by the gotten wealth, it being sufficient to establish beyond reasonable office of the Ombudsman. In short, what the Office of the Ombudsman doubt a pattern of overt or criminal acts indicative of the overall would wish to do is to fish for additional evidence to formally charge Amado unlawful scheme or conspiracy. Lagdameo, et. al., with the Sandiganbayan. Clearly, there was no pending case in court, which would warrant the opening of the bank account for Cases inspection. EJERCITO v SANDIGANBAYAN, 509 SCRA 190 (2006) DOCTRINE: The plunder case under the Sandiganbayan necessarily iv. Under the Plunder Law involves an inquiry into the whereabouts of the amount purportedly SEC. 1 (D), RA 7080: Ill-gotten wealth means any asset, acquired illegally by Erap, and the subject matter of the litigation cannot be property, business enterprise or material possession of any person limited to bank accounts under his name alone, but must include those within the purview of Section Two (2) hereof, acquired by him accounts to which the money purportedly acquired illegally or a portion directly or indirectly through dummies, nominees, agents, thereof was alleged to have been transferred. A public office is a public subordinates and/or business associates by any combination or trust. series of the following means or similar schemes: FACTS 1) Through misappropriation, conversion, misuse, or malversation In the criminal case of People v. Estrada for plunder, the Special Prosecution of public funds or raids on the public treasury; Panel filed a request for issuance of Subpeona Duces Tecum for directing the President of Export and Industry Bank (EIB) to produce the following 2) By receiving, directly or indirectly, any commission, gift, share, documents from the following: (1) Trust Account 858 (2) Savings Account

0116-17345-9 (3) Urban Bank Manager’s Check. (4) Account of Jose "deposits." Moreover, it is clear from the immediately quoted provision that Velarde. The Sandiganbayan granted the requests and the subpoena were the law applies not only to money which is deposited but also to those which issued. are invested. This further shows that the law was not intended to apply only to "deposits" in the strict sense of the word. Otherwise, there would have Ejercito contested the issuance of the subpoenas. He opposed such motion been no need to add the phrase "or invested." on the ground of Bank Secrecy Laws (RA 1405). He filed a motion to quash and urgent motion to quash to such request for subpoena. Sandiganbayan, (2) Ejercito’s Account is excepted from the protection of RA 1405. however, denied all his motion to quash. The protection given by RA 1405 not absolute. Two exceptions apply (1) the examination of bank accounts is upon order of a competent court in cases of ISSUE bribery or dereliction of duty of public officials, and (2) the money deposited (1) W/N Ejercito’s Trust Account is covered by the term “deposit” as or invested is the subject matter of the litigation. used in RA 1405. (2) W/N Ejercito’s Trust Account is excepted from the protection of RA Cases of unexplained wealth are similar to cases of bribery or dereliction of 1405. duty and no reason is seen why these two classes of cases cannot be (3) the request for subpoena was obtained through a prior illegal excepted from the rule making bank deposits confidential. The policy as to disclosure of bank accounts, in violation of “fruit of the poisonous one cannot be different from the policy as to the other. This policy tree” doctrine. expresses the notion that a public office is a public trust and any person who enters upon its discharge does so with the full knowledge that his life, RULING so far as relevant to his duty, is open to public scrutiny. Thus, cases for (1) Ejercito’s Account is within the coverage of the term “deposit. plunder involve unexplained wealth. RA 1405 Bank Secrecy Law • SECTION 1. It is hereby declared to be the policy of the Government to Cases for plunder involve unexplained wealth, as provided in Section 2 of give encouragement to the people to deposit their money in banking the Plunder Law. institutions and to discourage private hoarding so that the same • Section 2 of R.A. No. 7080 - Definition of the Crime of Plunder; Penalties. may be properly utilized by banks in authorized loans to assist in the — Any public officer who, by himself or in connivance with members economic development of the country. (Underscoring supplied) of his family, relatives by affinity or consanguinity, business • SECTION 2. All deposits of whatever nature with banks or banking associates, subordinates or other persons, amasses, accumulates or institutions in the Philippines including investments in bonds issued acquires ill-gotten wealth through a combination or series of overt by the Government of the Philippines, its political subdivisions and or criminal acts its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked In addition, the crime of plunder is similar with bribery since it is one of the into by any person, government official, bureau or office, except acts for committing plunder. upon written permission of the depositor, or in cases of • Section 1(d) of RA 7080 impeachment, or upon order of a competent court in cases of • d) "Ill-gotten wealth" means any asset, property, business enterprise or bribery or dereliction of duty of public officials, or in cases where the material possession of any person within the purview of Section Two money deposited or invested is the subject matter of the litigation. (2) hereof, acquired by him directly or indirectly through dummies, nominees, agents, subordinates and or business associates by any If the money deposited under an account may be used by banks for combination or series of the following means or similar schemes. authorized loans to third persons, then such account, regardless of whether • 1) Through misappropriation, conversion, misuse, or malversation of it creates a creditor-debtor relationship between the depositor and the bank, public funds or raids on the public treasury; falls under the category of accounts which the law precisely seeks to • 2) By receiving, directly or indirectly, any commission, gift, share, protect. Trust Account No. 858 is, without doubt, one such account. The percentage, kickbacks or any other form of pecuniary benefit from Trust Agreement between Ejercito and Urban Bank provides that the trust any person and/or entity in connection with any government account covers "deposit, placement or investment of funds" by Urban Bank contract or project or by reason of the office or position of the public for and in behalf of petitioner. officer concerned

The phrase "of whatever nature" proscribes any restrictive interpretation of The crime of bribery and the overt acts constitutive of plunder are crimes

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 106 committed by public officers, and in either case the noble idea that "a public particular deposit or investment with any banking institution or office is a public trust and any person who enters upon its discharge does so non- bank financial institution upon order of any competent court in with the full knowledge that his life, so far as relevant to his duty, is open to cases of violation of this Act when it has been established that public scrutiny" applies with equal force. there is probable cause that the deposits or investments involved are in any way related to a money laundering offense: Provided, Plunder being thus analogous to bribery, the exception to R.A. 1405 That this provision shall not apply to deposits and investments applicable in cases of bribery must also apply to cases of plunder. made prior to the effectivity of this Act.

In addition, the money deposited in Ejercito’s Account is said to form part of Cases the subject matter of the plunder case. Making it again excluded from the REPUBLIC v. EUGENIO, 545 SCRA 384 (2008) protection of the Bank Secrecy Law. DOCTRINE: Even if bank inquiry order may be availed of without need of a pre-exisitng case under the AMLA, it does not follow that such order may be (3) The “fruit of the poisonous tree” doctrine is misplaced. availed of ex parte. He relies on Marquez v. Desierto, where the court held for an inspection of the bank account is allowed, there must be a pending case because of FACTS competent jurisdiction against Ejercito. Having no case filed during the (This case stemmed from the case of Agan v PIATCO) investigation of the Ombudsman, the information were illegally acquired. After the promulgation of the Agan case, a series of investigation was conducted by the Ombudsman, the Compliance and Investigation Staff, and However, R.A. 1405, it bears noting, nowhere provides that an unlawful Anti-Money Laundering Council (AMLC). AMLC issued a resolution examination of bank accounts shall render the evidence obtained therefrom authorizing the Executive Director of AMLC to examine the bank accounts of inadmissible in evidence. Section 5 of R.A. 1405 only states that "any Pantaleon Alvarez, Cheng Yong,Wilfredo Trinidad, Alfredo Liongson and their violation of this law will subject the offender upon conviction, to an related web accounts. Under the authority of such resolution, AMLC filed an imprisonment of not more than five years or a fine of not more than twenty application to inquire into or examine the deposits or investments of thousand pesos or both, in the discretion of the court." Alvarez, Cheng Yong, Trinidad and Liongson with the Makati RTC, which the court granted. Months later, Special Prosecutor Dennis Villa-Ignacio Even if the exclusionary rule applies to RA 1405, it is inapplicable to this requested AMLC to investigate the accounts of Alvarez, PIATCO and all case. accounts related to the annulled contract. AMLC issued another resolution, authorizing the executive director to inquire into the bank accounts named The "fruit of the poisonous tree" doctrine presupposes a violation of law. If in the letter. AMLC filed the same application, this time to the Manila RTC, there was no violation of R.A. 1405 in the instant case, then there would be which was raffled to Judge Antonio Eugenio Jr. The court likewise granted no "poisonous tree" to begin with, and, thus, no reason to apply the such ex parte application. Alvarez filed an Urgent Motion to Stay of doctrine. Enforcement of Order, which the Manila RTC granted. The Republic filed a motion for reconsideration which was granted. Alvarez then filed an Urgent Despite the Marquez v. Desierto, the examination of accounts by the Motion and Manifestation, stating that AMLC was about to implement the Ombudsman, conducted before a case was filed with a court of competent Manila RTC bank inquiry even though he intends to appeal such order. The jurisdiction, was lawful. For the Ombudsman issued the subpoenas bearing Manila RTC refrained AMLC from implementing such order against Alvarez. on the bank accounts of petitioner about four months before Marquez was Alvarez then filed an Urgent Ex Parte Motion for Clarification, alleging that promulgated on June 27, 2001. The doctrine in Marquez would have no AMLC likewise cannot implement such order against the others stated in the retroactive effect. In addition, the recent filing case for plunder empowers order. Manila RTC issued an order, stating that the ex parte application the Ombudsman to investigate such accounts. Thus, the subpoenas were cannot be implemented in its totality (first of four rulings contested in this legal and the invocation of the exclusionary doctrine is misplaced. case).

v. Under the AMLA Lilia Cheng, wife of Cheng Yong filed a Petition for Certiorari, TRO and SEC. 11, AMLA: Authority to Inquire into Bank Deposits. - preliminary injunction against the orders of Makati and Manila RTC stating Notwithstanding the provisions of Republic Act No. 1405, as grave abuse of discretion that AMLA can only inquire to bank accounts after amended; Republic Act No. 6426, as amended; Republic Act No. the creation of the Anti-Money Laundering Act (AMLA), and not prior to its 8791, and other laws, the AMLC may inquire into or examine any promulgation. The CA issued a TRO, granting such petition (second of four

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 107 rulings contested in this case). by an independent auditor hired by the bank to conduct its regular audit provided that the examination is for audit purposes only and the results With relation to the Urgent Motion for Clarification, the Manila RTC issued an thereof shall be for the exclusive use of the bank. order reiterated that bank inquiry order it issued cannot be implemented by the AMLC until the appeal (of Alvarez of the order granting the ex parte FACTS application) is finally resolved (third of four rulings contested in this case). Petitioner is being held in indirect contempt for not allowing in camera The CA issued a writ of preliminary injunction with regard to the petition inspection of the accounts related to an investigation being done by the filed by Lilia Cheng (last ruling contested in this case) Ombudsman relating to pay-offs for the PEA-AMARRI scandal. Petitioner hopes to nullify order for the in camera investigation and to hold her in ISSUE contempt. Whether a bank inquiry order issued in accordance with section 10 AMLA may be stayed with injunction Petitioner is the branch manager of Union Bank, Julio Vargas Branch. She received an Order from the Respondent to produce several bank documents RULING for inspection in camera relative to a pending investigation before YES. Under this section, the AMLC is authorized to inquire into a bank Respondent (Ombudsman Desierto). account upon establishing probable cause where the deposits are related to kidnapping for ransom, violation of the Dangerous Drugs Act, hijacking, Respondent’s case is the Fact Finding and Intelligence Bureau (FFIB) vs. destructive arson and murder. The exception does not dispense the Bank Amado Lagdameo – relative to the JVA between PEA and AMARI. The Order Secrecy Act to all deposits, except for cases related to the enumerations emphasized Respondent’s power to issue subpoena and subpoena duces above. (Take note that the application done by AMLC has no connection with tecum and contempt power under RA 6770 aka the Ombudsman Act of any of the following enumerations above) 1989. The Act is a later legislation to RA 1405 aka Secrecy of Bank Deposits law; hence amending some provisions of the latter. Since the application of AMLC has nothing to do with any of the provided enumerations under Section 11, it must prove that there is probable cause • Order’s objective: to trail the managers checks purchased by Trivinio with the case, in order to inquire into the bank accounts. Probable cause respondent in the pending case) may only be decided by the courts (Art III, Sec 2 of Constitution). Section 10 contains the application for ex parte, but it is connected to freezing of Trivinio purchased 51 managers checks worth P272.1M from Traders Royal accounts. This must be done ex parte, since notifying the accused my cause Bank, UN Ave. 11 of these checks, P70.6M, were deposited to an account him to disburse the account before the order freezing the account is issued. handled by Petitioner’s branch Section 11 does not contain the application for ex parte, for the fact that there is nothing wrong with the accused knowing that his accounts are being Though Union Bank’s lawyer told Petitioner to comply with the Order, she checked. It is immaterial for the accused to know that his accounts are had some difficulty making her ask for some time extensions. She said the being checked, since he cannot hide the bank records to prove that the accounts cannot be easily identified and despite diligent efforts and from the accounts are linked to the crime imputed against him. Hence, using the ex account numbers presented, she cannot identify these accounts since the parte application found in section 10 in inquiring into bank accounts (section checks were issued in cash or bearer o Surmised that the account has been 11) may be stayed with injunction. dormant since it is not covered by the new account number generated by the Union Bank system o Hence, she has to verify from the Interbank 1. Upon order of competent court records archives for the whereabouts of the account 2. BSP inquiry or examination After two extensions, Respondent issued the controversial order vi. Independent Auditor threatening to hold Petitioner in indirect contempt for causing DOJ OPINION NO. 243, SERIES OF 1957 delays in the investigation.

Cases Petitioner and Union Bank filed for declaratory relief in the RTC of MARQUEZ v. DESIERTO, 359 SCRA 772 (2001) Makati to clarify their rights and duties, seeing complying with the DOCTRINE: Sec. 2 of Bank Secrecy Law provides for exceptions to the Order may conflict or violate the Secrecy of Bank Deposits law. confidentiality rule of bank deposits, one of which is in an examination made

Lower Court Denied the Petition, but Petitioner sought (4) In cases of impeachment, reconsideration. (5) Upon order of a competent court in cases of bribery or dereliction of Grounds used by the lower court: No great or irreparable injury to restrain duty of public officials, or respondent The Ombudsman would have to file to the RTC for the indirect contempt charge Petitioner failed to show prima facie evidence that the (6) In cases where the money deposited or invested is the subject matter of subject matter of the investigation is outside the jurisdiction of Respondent. the litigation”

Reconsideration was likewise denied. In the case at bar, there is yet no pending litigation before any court of competent authority. What is existing is an investigation by the A motion to cite Petitioner in contempt was filed with the Office of the office of the Ombudsman. In short, what the Office of the Ombudsman Ombudsman. Petitioner asserted that such was premature since there was a would wish to do is to fish for additional evidence to formally charge Amado pending case in the lower court, but eventually she was held in contempt Lagdameo, et. al., with the Sandiganbayan. Clearly, there was no pending case in court, which would warrant the opening of the bank account for ISSUE inspection. Whether the order of the Ombudsman to have an in camera inspection of the questioned account is allowed as an exception to the law on secrecy of vii. Under the PDIC Charter bank deposits (R. A. No. 1405). SEC. 8, PAR. 8, PDIC CHARTER: The Corporation as a corporate body shall have the power To conduct examination of banks with RULING prior approval of the Monetary Board: Provided, That no NO, she may not be held in contempt or may the Ombudsman have an in examination can be conducted within twelve (12) months from the camera inspection. last examination date: Provided, however, That the Corporation may, in coordination with the Bangko Sentral, conduct a special We rule that before an in camera inspection may be allowed, there examination as the Board of Directors, by an affirmative vote of a must be a pending case before a court of competent jurisdiction. majority of all of its members, if there is a threatened or impending Further, the account must be clearly identified, the inspection limited to the closure of a bank; Provided, further, That, notwithstanding the subject matter of the pending case before the court of competent provisions of Republic Act No. 1405, as amended, Republic Act No. jurisdiction. The bank personnel and the account holder must be notified to 6426, as amended, Republic Act No. 8791, and other laws, the be present during the inspection, and such inspection may cover only the Corporation and/or the Bangko Sentral, may inquire into or account identified in the pending case. examine deposit accounts and all information related thereto in case there is a finding of unsafe or unsound banking practice; In Union Bank of the Philippines v. Court of Appeals, we held that “Section 2 Provided, finally, That to avoid overlapping of efforts, the of the Law on Secrecy of Bank Deposits, as amended, declares bank examination shall maximize the efficient use of the relevant deposits to be “absolutely confidential” except: reports, information, and findings of the Bangko Sentral, which it shall make available to the Corporation; (As amended by R.A. (1) In an examination made in the course of a special or general 9302, 12 August 2004, R.A. 9576,29 April 2009) examination of a bank that is specifically authorized by the Monetary Board after being satisfied that there is reasonable ground to believe that a bank viii. Under the Human Security Act fraud or serious irregularity has been or is being committed and that it is SEC. 27. Judicial Authorization Required to Examine Bank necessary to look into the deposit to establish such fraud or irregularity, Deposits, Accounts, and Records. â€“ The provisions of Republic Act No. 1405 as amended, to the contrary notwithstanding, the (2) In an examination made by an independent auditor hired by the justices of the Court of Appeals designated as a special court to bank to conduct its regular audit provided that the examination is handle anti-terrorism cases after satisfying themselves of the for audit purposes only and the results thereof shall be for the existence of probable cause in a hearing called for that purpose exclusive use of the bank, that (1) a person charged with or suspected of the crime of terrorism or conspiracy to commit terrorism, (2) of a judicially (3) Upon written permission of the depositor, declared and outlawed terrorist organization, association, or group

of persons, and (3) of a member of such judicially declared and and records have been examined, frozen, sequestered and seized outlawed organization, association, or group of persons, may by law enforcement authorities has the right to be informed of the authorize in writing any police or law enforcement officer and the acts done by the law enforcement authorities in the premises or to members of his/her team duly authorized in writing by the anti- challenge, if he or she intends to do so, the legality of the terrorism council to: (a) examine, or cause the examination of, the interference. The written order of the authorizing division of the deposits, placements, trust accounts, assets and records in a bank Court of Appeals designated to handle cases involving terrorism or financial institution; and (b) gather or cause the gathering of shall specify: (a) the identity of the said: (1) person charged with any relevant information about such deposits, placements, trust or suspected of the crime of terrorism or conspiracy to commit accounts, assets, and records from a bank or financial institution. terrorism, (2) judicially declared and outlawed terrorist the bank or financial institution concerned shall not refuse to allow organization, association, or group of persons, and (3) member of such examination or to provide the desired information, when so such judicially declared and outlawed organization, association, or ordered by and served with the written order of the Court of group of persons, as the case may be, whose deposits, placements, Appeals. trust accounts, assets, and records are to be examined or the information to be gathered; (b) the identity of the bank or financial SEC. 28. Application to Examine Bank Deposits, Accounts, and institution where such deposits, placements, trust accounts, assets, Records. â€“ The written order of the Court of Appeals authorizing and records are held and maintained; (c) the identity of the the examination of bank deposits, placements, trust accounts, persons who will conduct the said examination and the gathering of assets, and records: (1) of a person charged with or suspected of the desired information; and, (d) the length of time the the crime of terrorism or conspiracy to commit terrorism, (2) of authorization shall be carried out. any judicially declared and outlawed terrorist organization, association, or group of persons, or (3) of any member of such SEC. 30. Effective Period of Court Authorization to Examine and organization, association, or group of persons in a bank or financial Obtain Information on Bank Deposits, Accounts, and Records. â€“ institution, and the gathering of any relevant information about the The authorization issued or granted by the authorizing division of same from said bank or financial institution, shall only be granted the Court of Appeals to examine or cause the examination of and to by the authorizing division of the Court of Appeals upon an ex parte freeze bank deposits, placements, trust accounts, assets, and application to that effect of a police or of a law enforcement official records, or to gather information about the same, shall be effective who has been duly authorized in writing to file such ex parte for the length of time specified in the written order of the application by the Anti-Terrorism Council created in Section 53 of authorizing division of the Court of Appeals, which shall not exceed this Act to file such ex parte application, and upon examination a period of thirty (30) days from the date of receipt of the written under oath or affirmation of the applicant and the witnesses he order of the authorizing division of the Court of Appeals by the may produce to establish the facts that will justify the need and applicant police or law enforcement official. urgency of examining and freezing the bank deposits, placements, The authorizing division of the Court of Appeals may extend or trust accounts, assets, and records: (1) of the person charged with renew the said authorization for another period, which shall not or suspected of the crime of terrorism or conspiracy to commit exceed thirty (30) days renewable to another thirty (30) days from terrorism, (2) of a judicially declared and outlawed terrorist the expiration of the original period, provided that the authorizing organization, association or group of persons, or (3) of any division of the Court of Appeals is satisfied that such extension or member of such organization, association, or group of persons. renewal is in the public interest, and provided further that the application for extension or renewal, which must be filed by the SEC. 29. Classification and Contents of the Court Order Authorizing original applicant, has been duly authorized in writing by the Anti- the Examination of Bank Deposits, Accounts, and Records. â€“ The Terrorism Council. written order granted by the authorizing division of the Court of Appeals as well as its order, if any, to extend or renew the same, In case of death of the original applicant or in case he is physically the original ex parte application of the applicant, including his ex disabled to file the application for extension or renewal, the one parte application to extend or renew, if any, and the written next in rank to the original applicant among the members of the authorizations of the Anti Terrorism Council, shall be deemed and team named in the original written order of the authorizing division are hereby declared as classified information: Provided, That the of the Court of Appeals shall file the application for extension or person whose bank deposits, placements, trust accounts, assets, renewal: Provided, That, without prejudice to the liability of the

police or law enforcement personnel under Section 19 hereof, the institution where such deposits, placements, trust accounts, assets, applicant police or law enforcement official shall have thirty (30) and records are held and maintained; (c) the number of bank days after the termination of the period granted by the Court of deposits, placements, trust accounts, assets, and records Appeals as provided in the preceding paragraphs within which to discovered, examined, and frozen; (d) the outstanding balances of file the appropriate case before the Public Prosecutorâ€™s Office each of such deposits, placements, trust accounts, assets; (e) all for any violation of this Act. information, data, excerpts, summaries, notes, memoranda, working sheets, reports, documents, records examined and placed If no case is filed within the thirty (30)-day period, the applicant in the sealed envelope or sealed package deposited with the police or law enforcement official shall immediately notify in writing authorizing division of the Court of Appeals; (f) the date of the the person subject of the bank examination and freezing of bank original written authorization granted by the Anti-Terrorism Council deposits, placements, trust accounts, assets and records. The to the applicant to file the ex parte application to conduct the penalty of ten (10) years and one day to twelve (12) years of examination of the said bank deposits, placements, trust accounts, imprisonment shall be imposed upon the applicant police or law assets and records, as well as the date of any extension or renewal enforcement official who fails to notify in writing the person subject of the original written authorization granted by the authorizing of the bank examination and freezing of bank deposits, placements, division of the Court of Appeals; and (g) that the items enumerated trust accounts, assets and records. were all that were found in the bank or financial institution examined at the time of the completion of the examination. Any person, law enforcement official or judicial authority who violates his duty to notify in writing as defined above shall suffer The joint affidavit shall also certify under oath that no duplicates or the penalty of six (6) years and one day to eight (8) years of copies of the information, data, excerpts, summaries, notes, imprisonment. memoranda, working sheets, reports, and documents acquired from the examination of the bank deposits, placements, trust SEC. 31. Custody of Bank Data and Information Obtained after accounts, assets and records have been made, or, if made, that all Examination of Deposits, Placements, Trust Accounts, Assets and such duplicates and copies are placed in the sealed envelope or Records. â€“ All information, data, excerpts, summaries, notes, sealed package deposited with the authorizing division of the Court memoranda, working sheets, reports, and other documents of Appeals. obtained from the examination of the bank deposits, placements, trust accounts, assets and records of: (1) a person charged with or It shall be unlawful for any person, police officer or custodian of the suspected of the crime of terrorism or the crime of conspiracy to bank data and information obtained after examination of deposits, commit terrorism, (2) a judicially declared and outlawed terrorist placements, trust accounts, assets and records to copy, to remove, organization, association, or group of persons, or (3) a member of delete, expunge, incinerate, shred or destroy in any manner the any such organization, association, or group of persons shall, items enumerated above in whole or in part under any pretext within forty-eight (48) hours after the expiration of the period fixed whatsoever. in the written order of the authorizing division of the Court of Appeals or within forty-eight (48) hours after the expiration of the Any person who copies, removes, deletes, expunges incinerates, extension or renewal granted by the authorizing division of the shreds or destroys the items enumerated above shall suffer a Court of Appeals, be deposited with the authorizing division of the penalty of not less than six (6) years and one day to twelve (12) Court of Appeals in a sealed envelope or sealed package, as the years of imprisonment. case may be, and shall be accompanied by a joint affidavit of the applicant police or law enforcement official and the persons who SEC. 33. Disposition of Bank Materials. â€“ The sealed envelope or actually conducted the examination of said bank deposits, sealed package and the contents thereof, which are deposited with placements, trust accounts, assets and records. the authorizing division of the Court of Appeals, shall be deemed and are hereby declared classified information, and the sealed SEC. 32. Contents of Joint Affidavit. â€“ The joint affidavit shall envelope or sealed package shall not be opened and its contents state: (a) the identifying marks, numbers, or symbols of the shall not be divulged, revealed, read, or used as evidence unless deposits, placements, trust accounts, assets, and records authorized in a written order of the authorizing division of the Court examined; (b) the identity and address of the bank or financial of Appeals, which written order shall be granted only upon a

written application of the Department of Justice filed before the suffer the penalty of ten (10) years and one day to twelve (12) authorizing division of the Court of Appeals and only upon a years of imprisonment. showing that the Department of Justice has been duly authorized in writing by the Anti-Terrorism Council to file the application, with In addition to the liability attaching to the offender for the notice in writing to the party concerned not later than three (3) commission of any other offense, the penalty of ten (10) years and days before the scheduled opening, to open, reveal, divulge, and one day to twelve (12) years of imprisonment shall be imposed use the contents of the sealed envelope or sealed package as upon any police or law enforcement personnel, who maliciously evidence. obtained an authority from the Court of Appeals to examine the deposits, placements, trust accounts, assets, or records in a bank Any person, law enforcement official or judicial authority who or financial institution of: (1) a person charged with or suspected of violates his duty to notify in writing as defined above shall suffer the crime of terrorism or conspiracy to commit terrorism, (2) a the penalty of six (6) years and one day to eight (8) years of judicially declared and outlawed terrorist organization, association, imprisonment. or group of persons, or (3) a member of such organization, association, or group of persons: Provided, That notwithstanding SEC. 34. Application to Open Deposited Bank Materials. â€“ The Section 33 of this Act, the party aggrieved by such authorization written application, with notice in writing to the party concerned shall upon motion duly filed be allowed access to the sealed not later than three (3) days of the scheduled opening, to open the envelope or sealed package and the contents thereof as evidence sealed envelope or sealed package shall clearly state the purpose for the prosecution of any police or law enforcement personnel who and reason: (a) for opening the sealed envelope or sealed package; maliciously procured said authorization. (b) for revealing and disclosing its classified contents; and, (c) for using the classified information, data, excerpts, summaries, notes, SEC. 37. Penalty of Bank Officials and Employees Defying a Court memoranda, working sheets, reports, and documents as evidence. Authorization. â€“ An employee, official, or a member of the board of directors of a bank or financial institution, who refuses to allow SEC. 35. Evidentiary Value of Deposited Bank Materials. â€“ Any the examination of the deposits, placements, trust accounts, information, data, excerpts, summaries, notes, memoranda, work assets, and records of: (1) a person charged with or suspected of sheets, reports, or documents acquired from the examination of the crime of terrorism or the crime of conspiracy to commit the bank deposits, placements, trust accounts, assets and records terrorism, (2) a judicially declared and outlawed terrorist of: (1) a person charged or suspected of the crime of terrorism or organization, association, or group of persons, or (3) a member of the crime of conspiracy to commit terrorism, (2) a judicially such judicially declared and outlawed organization, association, or declared and outlawed terrorist organization, association, or group group of persons in said bank or financial institution, when duly of persons, or (3) a member of such organization, association, or served with the written order of the authorizing division of the group of persons, which have been secured in violation of the Court of Appeals, shall be guilty of an offense and shall suffer the provisions of this Act, shall absolutely not be admissible and usable penalty of ten (10) years and one day to twelve (12) years of as evidence against anybody in any judicial, quasi-judicial, imprisonment. legislative, or administrative investigation, inquiry, proceeding, or hearing. SEC. 38. Penalty for False or Untruthful Statement or Misrepresentation of Material Fact in Joint Affidavits. â€“ Any false SEC. 36. Penalty for Unauthorized or Malicious Examination of a or untruthful statement or misrepresentation of material fact in the Bank or a Financial Institution. â€“ Any person, police or law joint affidavits required respectively in Section 12 and Section 32 of enforcement personnel who examines the deposits, placements, this Act shall constitute a criminal offense and the affiants shall trust accounts, assets, or records in a bank or financial institution suffer individually the penalty of ten (10) years and one day to of: (1) a person charged with or suspected of the crime of twelve (12) years of imprisonment. terrorism or the crime of conspiracy to commit terrorism, (2) a judicially declared and outlawed terrorist organization, association, SEC. 39. Seizure and Sequestration. â€“ The deposits and their or group of persons, or (3) a member of such organization, outstanding balances, placements, trust accounts, assets, and association, or group of persons, without being authorized to do so records in any bank or financial institution, moneys, businesses, by the Court of Appeals, shall be guilty of an offense and shall transportation and communication equipment, supplies and other

implements, and property of whatever kind and nature belonging: arraignment or his case is dismissed before his arraignment by a (1) to any person suspected of or charged before a competent competent court, the seizure, sequestration and freezing of his Regional Trial Court for the crime of terrorism or the crime of bank deposits, placements, trust accounts, assets and records shall conspiracy to commit terrorism; (2) to a judicially declared and forthwith be deemed lifted by the investigating body or by the outlawed organization, association, or group of persons; or (3) to a competent court, as the case may be, and his bank deposits, member of such organization, association, or group of persons shall placements, trust accounts, assets and records shall be deemed be seized, sequestered, and frozen in order to prevent their use, released from such seizure, sequestration and freezing, and shall transfer, or conveyance for purposes that are inimical to the safety be restored to him without any delay by the bank or financial and security of the people or injurious to the interest of the State. institution concerned without any further action on his part. The filing of any appeal on motion for reconsideration shall not state The accused or a person suspected of may withdraw such sums as the release of said funds from seizure, sequestration and freezing. may be reasonably needed by the monthly needs of his family including the services of his or her counsel and his or her If the person charged with the crime of terrorism or conspiracy to familyâ€™s medical needs upon approval of the court. He or she commit terrorism is convicted by a final judgment of a competent may also use any of his property that is under seizure or trial court, his seized, sequestered and frozen bank deposits, sequestration or frozen because of his or her indictment as a placements, trust accounts, assets and records shall be terrorist upon permission of the court for any legitimate reason. automatically forfeited in favor of the government.

Any person who unjustifiably refuses to follow the order of the Upon his or her acquittal or the dismissal of the charges against proper division of the Court of Appeals to allow the person accused him or her, the amount of Five Hundred Thousand Pesos of the crime of terrorism or of the crime of conspiracy to commit (P500,000.00) a day for the period in which his properties, assets terrorism to withdraw such sums from sequestered or frozen or funds were seized shall be paid to him on the concept of deposits, placements, trust accounts, assets and records as may be liquidated damages. The amount shall be taken from the necessary for the regular sustenance of his or her family or to use appropriations of the police or law enforcement agency that caused any of his or her property that has been seized, sequestered or the filing of the enumerated charges against him or her. frozen for legitimate purposes while his or her case is pending shall suffer the penalty of ten (10) years and one day to twelve (12) SEC. 42. Penalty for Unjustified Refusal to Restore or Delay in years of imprisonment. Restoring Seized, Sequestered and Frozen Bank Deposits, Placements, Trust Accounts, Assets and Records. â€“ Any person SEC. 40. Nature of Seized, Sequestered and Frozen Bank Deposits, who unjustifiably refuses to restore or delays the restoration of Placements, Trust Accounts, Assets and Records. â€“ The seized, seized, sequestered and frozen bank deposits, placements, trust sequestered and frozen bank deposits, placements, trust accounts, accounts, assets and records of a person suspected of or charged assets and records belonging to a person suspected of or charged with the crime of terrorism or conspiracy to commit terrorism after with the crime of terrorism or conspiracy to commit terrorism shall such suspected person has been found innocent by the be deemed as property held in trust by the bank or financial investigating body or after the case against such charged person institution for such person and the government during the has been dismissed or after he is acquitted by a competent court pendency of the investigation of the person suspected of or during shall suffer the penalty of ten (10) years and one day to twelve the pendency of the trial of the person charged with any of the said (12) years of imprisonment. crimes, as the case may be and their use or disposition while the case is pending shall be subject to the approval of the court before SEC. 43. Penalty for the Loss, Misuse, Diversion or Dissipation of which the case or cases are pending. Seized, Sequestered and Frozen Bank Deposits, Placements, Trust Accounts, Assets and Records. â€“ Any person who is responsible SEC. 41. Disposition of the Seized, Sequestered and Frozen Bank for the loss, misuse, diversion, or dissipation of the whole or any Deposits, Placements, Trust Accounts, Assets and Record. â€“ If part of the seized, sequestered and frozen bank deposits, the person suspected of or charged with the crime of terrorism or placements, trust accounts, assets and records of a person conspiracy to commit terrorism is found, after his investigation, to suspected of or charged with the crime of terrorism or conspiracy be innocent by the investigating body, or is acquitted, after his

to commit terrorism shall suffer the penalty of ten (10) years and "(b) The amount and the date of the outstanding unclaimed one day to twelve (12) years of imprisonment. balance and whether the same is in money or in security, and if the latter, the nature of the same; ix. Under the NIRC SEC. 6 (F), NIRC: Authority of the Commissioner to inquire into "(c) The date when the person in whose favor the unclaimed Bank Deposit Accounts. - Notwithstanding any contrary provision of balance stands died, if known, or the date when he made his last Republic Act No. 1405 and other general or special laws, the deposit or withdrawal; and Commissioner is hereby authorized to inquire into the bank deposits of: "(d) The interest due on such unclaimed balance, if any, and the amount thereof. (1) a decedent to determine his gross estate; and "A copy of the above sworn statement shall be posted in a (2) any taxpayer who has filed an application for compromise of his conspicuous place in the premises of the bank, building and loan tax liability under Sec. 204 (A) (2) of this Code by reason of association, or trust corporation concerned for at least sixty days financial incapacity to pay his tax liability. from the date of filing thereof: Provided, That immediately before filing the above sworn statement, the bank, building and loan In case a taxpayer files an application to compromise the payment association, and trust corporation shall communicate with the of his tax liabilities on his claim that his financial position person in whose favor the unclaimed balance stands at his last demonstrates a clear inability to pay the tax assessed, his known place of residence or post office address. application shall not be considered unless and until he waives in writing his privilege under Republic Act No. 1405 or under other "It shall be the duty of the Treasurer of the Philippines to inform general or special laws, and such waiver shall constitute the the Solicitor General from time to time the existence of unclaimed authority of the Commissioner to inquire into the bank deposits of balances held by banks, building and loan associations, and trust the taxpayer. corporations.

1. Upon inquiry by the CIR for the purpose of determining the DOJ OPINION NO. 104, SERIES OF 1975 net estate of a deceased depositor 2. In case a taxpayer files an application to compromise his tax xi. Under the Rules of Court liabilities on the ground of financial incapacity (waiver 1. Garnishment required) SEC. 9 (C), RULE 39: Garnishment of debts and credits. - The officer may levy on debts due the judgment obligor and other credits, including bank deposits, financial interests, x. Under the Unclaimed Balances Law royalties, commissions and other personal property not SEC. 2, ACT NO. 3936: Immediately after the taking effect of this capable of manual delivery in the posssession or control of Act and within the month of January of every odd year, all banks, third parties. Levy shall be made by serving notice upon the building and loan associations, and trust corporations shall forward person owing such debts or having in his possession or control to the Treasurer of the Philippines a statement, under oath, of their such credits to which the judgment obligor is entitled. The respective managing officers, of all credits and deposits held by garnishment shall cover only such amount as will satisfy the them in favor of persons known to be dead, or who have not made judgment and all lawful fees. The garnishee shall make a further deposits or withdrawals during the preceding ten years or written report to the court within five (5) days from service of more, arranged in alphabetical order according to the names of the notice of garnishment stating whether or not the judgment creditors and depositors, and showing: obligor has sufficient funds or credits to satisfy the amount of the judgment. If not, the report shall state how much funds or "(a) The names and last known place of residence or post office credits the garnishee holds for the judgment obligor. The addresses of the persons in whose favor such unclaimed balances garnished amount in cash, or certified bank check issued in stand; the name of the judgment obligee, shall be delivered directly to the judgment obligee within ten (10) working days from

service of notice on said garnishing requiring such delivery, issued by it, so that the bank would hold the same intact and not allow any except the lawful fees which shall be paid directly to the court. withdrawal until further order. In the event there are two or more garnishees holding deposits or credits sufficient to satisfy the judgment, the It is clear from the discussion of the conference committee report of the 2 judgment obligor, if available, shall have the right to indicate houses of Congress that the prohibition against examination of or inquiry the garnishee or garnishees who shall be required to deliver into a bank deposit under RA 1405 does NOT preclude its being garnished to the amount due; otherwise, the choice shall be made by the insure satisfaction of a judgment. There is no real inquiry in this case, and if judgment obligee. The executing sheriff shall observe the the existence of the bank account is disclosed, the disclosure is purely same procedure under paragraph (a) with respect to delivery incidental to the execution process. of payment to the judgment obligee. 2. Preliminary Attachment Cases SEC. 10, RULE 57: Examination of party whose property is CHINA BANKING CORPORATION v. ORTEGA, 49 SCRA 356 (1973) attached and persons indebted to him or controlling his DOCTRINE: Garnishment of bank deposit judgment debtor is not violative property; delivery of property to sheriff. of RA 1405. The Court merely required the cashier of the bank to inform the court whether or not the defendant had a deposit in said bank only for Any person owing debts to the party whose property is purposes of the garnishment issued by it, so that the bank would hold the attached or having in his possession or under his control any same intact and not allow any withdrawal until further order. credit or other personal property belonging to such party, may be required to attend before the court in which the action is FACTS pending, or before a commissioner appointed by the court, In 1968, Acaban filed a complaint against Bautista Logging Co., Inc., B & B and be examine on oath respecting the same. The party Forest Development Corporation and Marino Bautista for the collection of whose property is attached may also be required to attend for sum of money. RTC declared the defendants in default for failure to file their the purpose of giving information respecting his property, and responsive pleadings within the reglementary period. may be examined on oath. The court may, after such examination, order personal property capable of manual To satisfy the judgment, Acaban sought the garnishment of the bank delivery belonging to him, in the possession of the person so deposit of B & B Forest Development Corporation with China Banking required to attend before the court, to be delivered to the Corporation. Accordingly, a notice of garnishment was issued and served on clerk of the court or sheriff on such terms as may be just, the bank’s cashier, Tan Kim Liong. having reference to any lien thereon or claim against the same, to await the judgment in the action. In reply, Tan Kim Liong invoked the provisions of the Bank Secrecy Law prohibiting the disclosure of any information relative to bank deposits. d. Penalty for Violation RTC, in denying Acaban’s motion to cite Tan Kim Liong in contempt, SEC. 5, LAW ON SECRECY OF BANK DEPOSITS: Any violation of nevertheless ordered the latter to inform the court whether or not there is a this law will subject offender upon conviction, to an imprisonment of deposit with China Banking Corporation of B & B Forest Development not more than five years or a fine of not more than twenty thousand Corporation, and if any, to hold the same intact and not to allow any pesos or both, in the discretion of the court. withdrawal until further orders. 3. Rules for Foreign Currency Deposits ISSUE a. Coverage Whether there was a violation of the provisions of the Bank Secrecy Law SEC. 8, FCDA: Secrecy of foreign currency deposits. – All foreign prohibiting the disclosure of any information relative to bank deposits currency deposits authorized under this Act, as amended by PD No. 1035, as well as foreign currency deposits authorized under PD No. HELD 1034, are hereby declared as and considered of an absolutely NO. The lower court did not order an examination of or inquiry into the confidential nature and, except upon the written permission of the deposit of B&B Forest Development Corporation. It merely required Tan Kim depositor, in no instance shall foreign currency deposits be examined, Liong to inform the court of the existence of B&B Forest Development inquired or looked into by any person, government official, bureau or Corporation’s deposit in said bank only for the purpose of the garnishment office whether judicial or administrative or legislative, or any other

entity whether public or private; Provided, however, That said foreign Deposit Act be made applicable to a foreign transient? currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government RULING agency or any administrative body whatsoever. (As amended by PD NO. If Karen's sad fate had happened to anybody's own kin, it would be No. 1035, and further amended by PD No. 1246, prom. Nov. 21, difficult for him to fathom how the incentive for foreign currency deposit 1977.) could be more important than his child's rights to said award of damages; in this case, the victim's claim for damages from this alien who had the gall to Cases wrong a child of tender years of a country where he is a mere visitor. This SALVACION v. CENTRAL BANK, 278 SCRA 27 (1997) further illustrates the flaw in the questioned provisions. DOCTRINE: Sec. 113 of CB Circular No. 960, which exempts from garnishment, attachment or any other order or process of any court, It is worth mentioning that R.A. No. 6426 was enacted in 1983 or at a time legislative body, government agency or any administrative body whatsoever when the country's economy was in a shambles; when foreign investments foreign currency deposits, is NOT applicable to a foreign transient, but only were minimal and presumably, this was the reason why said statute was to foreign lenders and investors to the development of the Foreign Currency enacted. But the realities of the present times show that the country has Deposit System and Offshore Banking System in the Philippines. recovered economically; and even if not, the questioned law still denies those entitled to due process of law for being unreasonable and oppressive. FACTS The intention of the questioned law may be good when enacted. The law On February 4, 1989, Greg Bartelli y Northcott, an American tourist, coaxed failed to anticipate the iniquitous effects producing outright injustice and and lured petitioner Karen Salvacion, then 12 years old to go with him to his inequality such as the case before us. apartment. Therein, Greg Bartelli detained Karen Salvacion for four days, or up to February 7, 1989 and was able to rape the child. Greg was eventually b. Prohibition apprehended but he escaped from detention. SEC. 8, FCDA: Secrecy of foreign currency deposits. – All foreign currency deposits authorized under this Act, as amended by PD No. The Deputy Sheriff of Makati served a Notice of Garnishment on China 1035, as well as foreign currency deposits authorized under PD No. Banking Corporation. In a letter dated March 13, 1989 to the Deputy Sheriff 1034, are hereby declared as and considered of an absolutely of Makati, China Banking Corporation invoked Republic Act No. 1405 as its confidential nature and, except upon the written permission of the answer to the notice of garnishment served on it. On March 15, 1989, depositor, in no instance shall foreign currency deposits be examined, Deputy Sheriff of Makati Armando de Guzman sent his reply to China inquired or looked into by any person, government official, bureau or Banking Corporation saying that the garnishment did not violate the secrecy office whether judicial or administrative or legislative, or any other of bank deposits since the disclosure is merely incidental to a garnishment entity whether public or private; Provided, however, That said foreign properly and legally made by virtue of a court order which has placed the currency deposits shall be exempt from attachment, garnishment, or subject deposits in custodia legis. In answer to this letter of the Deputy any other order or process of any court, legislative body, government Sheriff of Makati, China Banking Corporation, in a letter dated March 20, agency or any administrative body whatsoever. (As amended by PD 1989, invoked Section 113 of Central Bank Circular No. 960 to the effect No. 1035, and further amended by PD No. 1246, prom. Nov. 21, that the dollar deposits of defendant Greg Bartelli are exempt from 1977.) attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body, c. Exceptions whatsoever. i. Upon written consent of the depositor SEC. 8, FCDA: Secrecy of foreign currency deposits. – All foreign After hearing the case ex-parte, the court rendered judgment in favor of currency deposits authorized under this Act, as amended by PD No. petitioners on March 29, 1990. 1035, as well as foreign currency deposits authorized under PD No. But China Bank still refuses to garnish the foreign denominated deposits of 1034, are hereby declared as and considered of an absolutely Greg. confidential nature and, except upon the written permission of the depositor, in no instance shall foreign currency deposits be ISSUE examined, inquired or looked into by any person, government Should Section 113 of Central Bank Circular No. 960 and Section 8 of R.A. official, bureau or office whether judicial or administrative or 6426, as amended by P.D. 1246, otherwise known as the Foreign Currency legislative, or any other entity whether public or private; Provided,

however, That said foreign currency deposits shall be exempt from expressed by the words, is to alter the statute, to legislate and not to attachment, garnishment, or any other order or process of any interpret, and judicial legislation should be avoided.” court, legislative body, government agency or any administrative body whatsoever. (As amended by PD No. 1035, and further ISSUE amended by PD No. 1246, prom. Nov. 21, 1977.) Whether petitioner China Bank is correct in its submission that the Citibank dollar checks with both Jose Gotianuy and/or Mary Margaret Dee as payees, Cases deposited with China Bank, may not be looked into under the law on secrecy CHINA BANKING CORP. v. CA, 511 SCRA 110 (2006) of foreign currency deposits. As a corollary issue, sought to be resolved is DOCTRINE: The only exception to the secrecy of foreign currency deposits whether Jose Gotianuy may be considered a depositor who is entitled to is in the case of a written permission of the depositor. seek an inquiry over the said deposits.

FACTS RULING A Complaint for recovery of sums of money and annulment of sales of real As amended by Presidential Decree No. 1246, the law reads: properties and shares of stocks was filed by Jose "Joseph" Gotianuy against SEC. 8. Secrecy of Foreign Currency Deposits. – All foreign currency his son-in-law, George Dee, and his daughter, Mary Margaret Dee, before deposits authorized under this Act, as amended by Presidential Decree No. the RTC. 1035, as well as foreign currency deposits authorized under Presidential Decree No. 1034, are hereby declared as and considered of an absolutely Jose Gotianuy accused his daughter Mary Margaret Dee of stealing, among confidential nature and, except upon the written permission of the his other properties, US dollar deposits with Citibank N.A. amounting to not depositor, in no instance shall such foreign currency deposits be examined, less than P35,000,000.00 and US$864,000.00. Mary Margaret Dee received inquired or looked into by any person, government official, bureau or office these amounts from Citibank N.A. through checks which she allegedly whether judicial or administrative or legislative or any other entity whether deposited at China Banking Corporation (China Bank). He likewise accused public or private: Provided, however, that said foreign currency deposits his son-in-law, George Dee, husband of his daughter, Mary Margaret, of shall be exempt from attachment, garnishment, or any other order or transferring his real properties and shares of stock in George Dee's name process of any court, legislative body, government agency or any without any consideration. Jose Gotianuy, died during the pendency of the administrative body whatsoever. (As amended by PD No. 1035, and further case before the trial court.1 He was substituted by his daughter, Elizabeth amended by PD No. 1246, prom. Nov. 21, 1977) (Emphasis supplied.) Gotianuy Lo. The latter presented the US Dollar checks withdrawn by Mary Margaret Dee from his US dollar placement with Citibank Under the above provision, the law provides that all foreign currency deposits authorized under Republic Act No. 6426, as amended by Sec. 8, The lower court issued a subpoena ad testificandum requiring MS. ISABEL Presidential Decree No. 1246, Presidential Decree No. 1035, as well as YAP and CRISTOTA LABIOS of China Banking Corporation, Cebu Main foreign currency deposits authorized under Presidential Decree No. 1034 are Branch, corner Magallanes and D. Jakosalem Sts., Cebu City, to appear in considered absolutely confidential in nature and may not be inquired into. person and to testify with regards to Citibank Checks and other matters There is only one exception to the secrecy of foreign currency material and relevant to the issues of this case deposits, that is, disclosure is allowed upon the written permission of the depositor. The following facts are established: (1) Jose Gotianuy The petitioner moved for reconsideration and contends (amongst others) and Mary Margaret Dee are co-payees of various Citibank checks; (2) Mary that the absolute confidentiality under the law covers even the name of the Margaret Dee withdrew these checks from Citibank; (3) Mary Margaret Dee depositor and is beyond the compulsive process of the courts. admitted in her Answer to the Request for Admissions by the Adverse Party sent to her by Jose Gotianuy that she withdrew the funds from Citibank The CA ruled against the petitioner for the reason amongst others that. upon the instruction of her father Jose Gotianuy and that the funds belonged “The contention of petitioner that the [prescription] on absolute exclusively to the latter; (4) these checks were endorsed by Mary Margaret confidentiality under the law in question covers even the name of the Dee at the dorsal portion; and (5) Jose Gotianuy discovered that these depositor and is beyond the compulsive process of the courts is palpably checks were deposited with China Bank as shown by the stamp of China untenable as the law protects only the deposits itself but not the name of Bank at the dorsal side of the checks. the depositor. To uphold the theory of petitioner CBC is reading into the statute "something that is not within the manifest intention of the legislature Thus, with this, there is no issue as to the source of the funds as gathered from the statute itself, for to depart from the meaning

As the owner of the funds unlawfully taken and which are undisputably now iii. Under the PDIC Charter deposited with China Bank, Jose Gotianuy has the right to inquire into the SEC. 8, PAR. 8, PDIC CHARTER: The Corporation as a corporate said deposits. body shall have the power To conduct examination of banks with prior approval of the Monetary Board: Provided, That no A depositor, in cases of bank deposits, is one who pays money into the bank examination can be conducted within twelve (12) months from the in the usual course of business, to be placed to his credit and subject to his last examination date: Provided, however, That the Corporation check or the beneficiary of the funds held by the bank as trustee. may, in coordination with the Bangko Sentral, conduct a special examination as the Board of Directors, by an affirmative vote of a Furthermore, it is indubitable that the Citibank checks were drawn against majority of all of its members, if there is a threatened or impending the foreign currency account with Citibank, NA. The monies subject of said closure of a bank; Provided, further, That, notwithstanding the checks originally came from the late Jose Gotianuy, the owner of the provisions of Republic Act No. 1405, as amended, Republic Act No. account. Thus, he also has legal rights and interests in the CBC account 6426, as amended, Republic Act No. 8791, and other laws, the where said monies were deposited. More importantly, the Citibank checks Corporation and/or the Bangko Sentral, may inquire into or readily demonstrate that the late Jose Gotianuy is one of the payees of said examine deposit accounts and all information related thereto in checks. Being a co-payee thereof, then he or his estate can be considered case there is a finding of unsafe or unsound banking practice; as a co-depositor of said checks. Ergo, since the late Jose Gotianuy is a co- Provided, finally, That to avoid overlapping of efforts, the depositor of the CBC account, then his request for the assailed examination shall maximize the efficient use of the relevant subpoena is tantamount to an express permission of a depositor for reports, information, and findings of the Bangko Sentral, which it the disclosure of the name of the account holder. The April 16, 1999 shall make available to the Corporation; (As amended by R.A. Order perforce must be sustained. 9302, 12 August 2004, R.A. 9576,29 April 2009)

One more point. It must be remembered that in the complaint of Jose d. Penalty for Violation Gotianuy, he alleged that his US dollar deposits with Citibank were illegally SEC. 10, FCDA: Penal provisions. – Any willful violation of this Act or taken from him. On the other hand, China Bank employee Cristuta Labios any regulation duly promulgated by the Monetary Board pursuant testified that Mary Margaret Dee came to China Bank and deposited the hereto shall subject the offender upon conviction to an imprisonment money of Jose Gotianuy in Citibank US dollar checks to the dollar account of of not less than one year nor more than five years or a fine of not less her sister Adrienne Chu. This fortifies our conclusion that an inquiry into the than five thousand pesos nor more than twenty-five thousand pesos, said deposit at China Bank is justified. At the very least, Jose Gotianuy as or both such fine and imprisonment at the discretion of the court. the owner of these funds is entitled to a hearing on the whereabouts of these funds. 4. Rules for Deposits in Specific Banks and Financial Institutions ii. Under the AMLA a. Under the GBL 1. Upon order of a competent court SEC. 55.1 (B), GBL: No director, officer, employee, or agent of any 2. BSP inquiry or examination bank shall, without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or SEC. 11, AMLA: Authority to Inquire into Bank Deposits. - properties in the custody of the bank belonging to private individuals, Notwithstanding the provisions of Republic Act No. 1405, as corporations, or any other entity: Provided, That with respect to bank amended; Republic Act No. 6426, as amended; Republic Act No. deposits, the provisions of existing laws shall prevail; 8791, and other laws, the AMLC may inquire into or examine any particular deposit or investment with any banking institution or b. Islamic Banks non- bank financial institution upon order of any competent court in SEC. 33, ISLAMIC BANK CHARTER: Confidential Information. - cases of violation of this Act when it has been established that Banking transactions relating to all deposits of whatever nature are there is probable cause that the deposits or investments involved confidential and may not be examined, inquired or looked into by any are in any way related to a money laundering offense: Provided, person, government official, bureau or office except as provided in the That this provision shall not apply to deposits and investments preceding section, or upon written permission by the depositor, or in made prior to the effectivity of this Act. cases where the money deposited or the transaction concerned is the subject of a court order.

It shall be unlawful for any official or employee of the Islamic Bank or or dereliction of duty of public officials, or in cases where the money any person as may be designated by the Board of Director to examine deposited or invested is the subject matter of litigation. or audit the books of the Bank to disclose or reveal to any person any confidential information except under the circumstances mentioned in It shall be unlawful for any official or employee of an Association to the preceding paragraph. disclose to any person any information concerning said deposits, except in the cases mentioned in the preceding paragraph of this SEC. 45, ISLAMIC BANK CHARTER: Penalties for Violation. - Any section. Any official or employee of an Association who violates this director, officer, employee, auditor, or agent of the Islamic Bank who section shall be punished under Republic Act No. 1405, as amended. violates or permits the violation of any provision of this Act shall be punished by a fine not exceeding Ten thousand pesos (P10,000.00) or G. GARNISHMENT an imprisonment of not more than five (5) years, or both at the discretion of the court. 1. Procedure SEC. 9 (C), RULE 39 OF RULES OF COURT: Garnishment of debts and c. Rural Banks credits. - The officer may levy on debts due the judgment obligor and SEC. 26 (A) (2), RURAL BANKS ACT: Without prejudice to any other credits, including bank deposits, financial interests, royalties, prosecution under any law which may have been violated, a fine of not commissions and other personal property not capable of manual delivery more than Ten thousand pesos (P10,000), or imprisonment for not in the posssession or control of third parties. Levy shall be made by less than six (6) months but more than ten (10) years, or both, at the serving notice upon the person owing such debts or having in his discretion of the court, shall be imposed upon. possession or control such credits to which the judgment obligor is (a) Any officer, employee, or agent of a rural bank who shall: entitled. The garnishment shall cover only such amount as will satisfy (2) Without order of a court of competent jurisdiction, the judgment and all lawful fees. The garnishee shall make a written disclose any information relative to the funds or properties report to the court within five (5) days from service of the notice of in the custody of the bank belonging to private individuals, garnishment stating whether or not the judgment obligor has sufficient corporations, or any other entity; funds or credits to satisfy the amount of the judgment. If not, the report shall state how much funds or credits the garnishee holds for the d. Thrift Banks judgment obligor. The garnished amount in cash, or certified bank check SEC. 21 (A) (2), THRIFT BANKS ACT: Prohibited Acts. — Without issued in the name of the judgment obligee, shall be delivered directly prejudice to any prosecution under any law which may have been to the judgment obligee within ten (10) working days from service of violated, a fine of not more than Ten thousand pesos (P10,000) or notice on said garnishing requiring such delivery, except the lawful fees imprisonment for not less than six (6) months but not more than ten which shall be paid directly to the court. In the event there are two or (10) years, or both, at the discretion of the court, shall be imposed more garnishees holding deposits or credits sufficient to satisfy the upon: judgment, the judgment obligor, if available, shall have the right to (a) Any officer, employee, or agent of a thrift bank who shall: indicate the garnishee or garnishees who shall be required to deliver the (2) Without order of a court of competent jurisdiction, amount due; otherwise, the choice shall be made by the judgment disclose any information relative to the funds or properties obligee. The executing sheriff shall observe the same procedure under in the custody of the bank belonging to private individuals, paragraph (a) with respect to delivery of payment to the judgment corporations, or any other entity; obligee.

e. Non-Stock Savings and Loan Association 2. Exempt Deposits SEC. 6, REVISED NON-STOCK SAVINGS AND LOANS a. Foreign Currency Deposits ASSOCIATION ACT OF 1997: Prohibition against inquiry into or SEC. 8, FCDA: Secrecy of foreign currency deposits. – All foreign disclosure of deposits. — All deposits of whatever nature with an currency deposits authorized under this Act, as amended by PD No. Association in the Philippines are hereby considered as of an 1035, as well as foreign currency deposits authorized under PD No. absolutely confidential nature and may not be examined, inquired or 1034, are hereby declared as and considered of an absolutely looked into by any person, government official, bureau or office, confidential nature and, except upon the written permission of the except upon written permission of the depositor, or in cases of depositor, in no instance shall foreign currency deposits be examined, impeachment, or upon order of a competent court in cases of bribery inquired or looked into by any person, government official, bureau or

office whether judicial or administrative or legislative, or any other (i) So much of the salaries, wages, or earnings of the judgment entity whether public or private; Provided, however, That said foreign obligor of his personal services within the four months preceding the currency deposits shall be exempt from attachment, garnishment, or levy as are necessary for the support of his family; any other order or process of any court, legislative body, government agency or any administrative body whatsoever. (As amended by PD (j) Lettered gravestones; No. 1035, and further amended by PD No. 1246, prom. Nov. 21, 1977.) (k) Monies benefits, privileges, or annuities accruing or in any manner growing out of any life insurance; b. Under the Rules of Court SEC. 13, RULE 39 OF RULES OF COURT: Property exempt from (l) The right to receive legal support, or money or property obtained execution. as such support, or any pension or gratuity from the Government;

Except as otherwise expressly provided by law, the following property, (m) Properties specially exempt by law. and no other, shall be exempt from execution: But no article or species of property mentioned in his section shall be (a) The judgment obligor's family home as provided by law, or the exempt from executio issued upon a judgment recovered for its price homestead in which he resides, and land necessarily used in or upon a judgment of foreclosure of a mortgage thereon. connection therewith; 3. No violation of Law on Secrecy of Bank Deposits (b) Ordinary tools and implements personally used by him in hs trade, Cases employment, or livelihood; CHINA BANKING v. ORTEGA, 49 SCRA 356 (1973) The prohibition against examination of or inquiry into a bank deposit (c) Three horses, or three cows, or three carabaos, or other beasts of under Republic Act 1405 does not preclude its being garnished to insure burden such as the judgment obligor may select necessarily used by satisfaction of a judgment. Indeed there is no real inquiry in such a him in his ordinary occupation; case, and if the existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that it (d) His necessary clothing and articles for ordinary personal use, was ever within the intention of Congress to enable debtors to evade excluding jewelry; payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same (e) Household furniture and utensils necessary for housekeeping, and in a bank. used for that purpose by the judgment obligor and his family, such as the judgment obligor may select, of a value not exceeding one PCI BANK v. CA, 193 SCRA 452 (1991) hundred thousand pesos; It is clear from the discussion of the conference committee report on Senate Bill No. 351 and House Bill No. 3977, which later became (f) Provisions for individual or family use sufficient for four months; Republic Act 1405, that the prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being (g) The professional libraries and equipment of judges, lawyers, garnished to insure satisfaction of a judgment. Indeed there is no real physicians, pharmacists, dentists, engineers, surveyors, clergymen, inquiry in such a case, and if existence of the deposit is disclosed the teachers, and other professionals, not exceeding three hundred disclosure is purely incidental to the execution process. It is hard to thousand pesos in value; conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the (h) One fishing boat and accessories not exceeding the total value of Court, through the expedient of converting their assets into cash and one hundred thousand pesos owned by a fisherman and by the lawful depositing the same in a bank. use of which he earns his livelihood;

4. Liability for Release amount in check to the sheriff, the RCBC did not thereby make any Cases payment, for the law mandates that delivery of a check does not produce RCBC v. DE CASTRO. 168 SCRA 49 (1988) the effect of payment until it has been cashed. [Article 1249, Civil Code.] FACTS In connection with a civil case between Badoc Planters Inc(BADOC) vs. Moreover, by virtue of the order of garnishment, the same was placed in Philippine Virginia Tobacco Administration (PVTA) et al, an action for custodia legis and therefore, from that time on, RCBC was holding the funds recovery of unpaid tobacco deliveries, the Judge issued a partial order, subject to the orders of the court a quo. That the sheriff, upon delivery of directing PVTA to pay plaintiff BADOC. the check to him by RCBC encashed it and turned over the proceeds thereof to the plaintiff was no longer the concern of RCBC as the responsibility over BADOC filed a motion to for a writ of execution, which was granted on the the garnished funds passed to the court. Thus, no breach of trust or same day. The sheriff then issued a Notice of Garnishment addressed to dereliction of duty can be attributed to RCBC in delivering its depositor's RCBC asking if PVTA had any proterty in the possession RCBC. to which funds pursuant to a court order, which was merely in the exercise of its RCBC replied in the affirmative. PVTA was notified by RCBC of such notice. power of control over such funds.

Later on the Judge issued and order directing RCBC to ""to deliver in check The bank had no choice but to comply with the order demanding delivery of the amount garnished to the Sheriff and the Sheriff in turn is ordered to the garnished amount in check. The very tenor of the order called for cash the check and deliver the amount to BADOC". RCBC complied with the immediate compliance therewith. On the other hand, the bank cannot be order, the check was issued, delivered to the Sheriff, and subsequently held liable for the subsequent encashment of the check as this was upon encashed. order of the court in the exercise of its power of control over the funds placed in custodia legis by virtue of the garnishment. PVTA however filed an MR assailing the execution. The court granted the MR, invalidated the execution, and ordered RCBC and BADOC to jointly and H. DEPOSIT INSURANCE severally restore the account of PVTA. 1. Coverage ISSUE SEC. 5, PDIC CHARTER: The deposit liabilities of any bank or banking Whether RCBC is liable to restore the account of PVTA institution, which is engaged in the business of receiving deposits as herein defined on the effective date of this Act, or which thereafter may HELD engage in the business of receiving deposits, shall be insured with the NO. RCBC merely obeyed a mandatory directive from the respondent Judge, Corporation. (As amended by R.A. 6037, 04 August 1969; renumbered ordering it "to deliver in check the amount garnished to the Sheriff and the from Sec. 4 by R.A. 9302, 12 August 2004) Sheriff is in turn ordered to cash the check and deliver the amount to BADOC." SEC. 9, FCDA: Deposit insurance coverage. – The deposits under this Act shall be insured under the provisions of Republic Act No. 3591, as As to the allegation by PVTA that RCBC was negligent in prematurely amended (Philippine Deposit Insurance Corporation), as well as its releasing its funds. The court held that the contention by PVTA was without implementing rules and regulations: Provided, That insurance payment merit since RCBC was expressly ordered by the court to deliver and encash shall be in the same currency in which the insured deposits are the check. RCBC had already filed a reply to the Notice of Garnishment denominated. stating that it had in its custody funds belonging to the PVTA. Also, RCBC promptly notified PVTA of the existence of the Notice of Garnishment. 2. Amount Insured SEC. 4 (G), PDIC CHARTER: The term “insured deposit” means the It is important to stress, at this juncture, that there was nothing irregular in amount due to any bona fide depositor for legitimate deposits in an the delivery of the funds of PVTA by check to the sheriff, whose custody is insured bank net of any obligation of the depositor to the insured bank equivalent to the custody of the court, he being a court officer. The order of as of the date of closure, but not to exceed Five Hundred Thousand the court was composed of two parts, requiring: 1) RCBC to deliver in check Pesos (P500,000.00).2 Such net amount shall be determined according the amount garnished to the designated sheriff and 2) the sheriff in turn to to such regulations as the Board of Directors may prescribe. In cash the check and deliver the amount to the plaintiffs representative determining such amount due to any depositor, there shall be added and/or counsel on record. It must be noted that in delivering the garnished together all deposits in the bank maintained in the same right and

capacity for his benefit either in his own name or in the name of others. competent jurisdiction before paying such claim: Provided, further, That A joint account regardless of whether the conjunction "and," "or," failure to settle the claim, within six (6) months from the date of filing of "and/or" is used, shall be insured separately from any individually- claim for insured deposit, where such failure was due to grave abuse of owned deposit account: Provided, That (1) If the account is held jointly discretion, gross negligence, bad faith, or malice, shall, upon conviction, by two or more natural persons, or by two or more juridical persons or subject the directors, officers or employees of the Corporation entities, the maximum insured deposit shall be divided into as many responsible for the delay, to imprisonment from six (6) months to one equal shares as there are individuals, juridical persons or entities, unless (1) year: Provided, furthermore, That the period shall not apply if the a different sharing is stipulated in the document of deposit, and (2) if validity of the claim requires the resolution of issues of facts and or law the account is held by a juridical person or entity jointly with one or by another office, body or agency including the case mentioned in the more natural persons, the maximum insured deposit shall be presumed first proviso or by Corporation together with such other office, body or to belong entirely to such juridical person or entity: Provided, further, agency." That the aggregate of the interest of each co-owner over several joint accounts, whether owned by the same or different combinations of SEC. 10 (D), PDIC CHARTER: The Corporation, upon payment of any individuals, juridical persons or entities, shall likewise be subject to the depositor as provided for in subsection (c) of this Section3, shall be maximum insured deposit of Five Hundred Thousand Pesos subrogated to all rights of the depositor against the closed bank to the (P500,000.00): Provided, furthermore, That the provisions of any law to extent of such payment. Such subrogation shall include the right on the the contrary notwithstanding, no owner/holder of any negotiable part of the Corporation to receive the same dividends and payments certificate of deposit shall be recognized as a depositor entitled to the from the proceeds of the assets of such closed bank and recoveries on rights provided in this Act unless his name is registered as owner/holder account of stockholders’ liability as would have been payable to the thereof in the books of the issuing bank: Provided, finally, That, in case depositor on a claim for the insured deposits but, such depositor shall of a condition that threatens the monetary and financial stability of the retain his claim for any uninsured portion of his deposit. All payments by banking system that may have systemic consequences, as defined in the Corporation of insured deposits in closed banks partake of the section 17 hereof, as determined by the Monetary Board, the maximum nature of public funds, and as such, must be considered a preferred deposit insurance cover may be adjusted in such amount, for such a credit similar to taxes due to the National Government in the order of period, and/or for such deposit products, as may be determined by a preference under Article 2244 of the New Civil Code: Provided, further, unanimous vote of the Board of Directors in a meeting called for the That this preference shall be likewise effective upon liquidation purpose and chaired by the Secretary of Finance, subject to the proceedings already commenced and pending as of the approval of this approval of the President of the Philippines. (As amended by R.A. 9302, Act, where no distribution of assets has been made. (As amended by 12 August 2004; R.A. 9576, 2009) P.D. 1940, 27 June 1984; R.A. 7400, 13 April 1992; renumbered from Sec. 10(d) by R.A. 9302, 12 August 2004) 3. Rules on Payment SEC. 10 (B), PDIC CHARTER: REPEALED ALREADY. For purposes of 4. Liability of PDIC this Act an insured bank shall be deemed to have been closed on Cases account of insolvency when ordered closed by the Monetary Board of the PDIC v. CA Central Bank of the Philippines pursuant to Section 29 of R.A. 265, as FACTS amended. Rosa Aquero (and 8 others) invested in money market placements with the Premiere Financing Corporation (Premiere) in the sum of P10,000.00 each SEC. 10 (C), PDIC CHARTER: Whenever an insured bank shall have for which they were issued by the PFC corresponding promissory notes and been closed by the Monetary Board pursuant to Section 30 of R.A. 7653, checks. Their lawyer, on the same day, went to PFC to encash, but they payment of the insured deposits on such closed bank shall be made by were referred to Regent savings Bank (Regent). Instead of paying these, the Corporation as soon as possible either (1) by cash or (2) by making Regent, in an agreement with the lawyer, issued 13 Certificates of Time available to each depositor a transferred deposit in another insured bank Deposit (CTD), each stating that "that the same certifies that the bearer in an amount equal to insured deposit of such depositor: Provided, thereof has deposited with the RSB the sum of P10,000.00; that the however, That the Corporation, in its discretion, may require proof of certificate shall bear 14% interest per annum; that the certificate is claims to be filed before paying the insured deposits, and that in any INSURED up to P15,000.00 with the PDIC". case where the Corporation is not satisfied as to the viability of a claim for an insured deposit, it may require final determination of a court of Regent was not able to pay on maturity. In fact, the Central bank liquidated

Regent. When Aquero et al filed a claim with the PDIC, it was rejected since Philippines to be used as the National Assembly may direct. the check (125k) that Premiere had issued in consideration for the CTDs had bounced;and said check was not replaced by the Premiere, resulting in the "Banks", "building and loan associations" and "trust corporations", cancellation of the certificates as indebtedness or liabilities of Regent. within the meaning of this Act, shall refer to institutions defined under Section two, thirty-nine and fifty-six, respectively, of Republic Act Thus this collection case against PDIC. Numbered Three Hundred Thirty Seven, otherwise known as the General Banking Act, as amended, whether organized under special charters or ISSUES not. 1) Are the CTDs negotiable instrument, and does it matter? 2) Does the fact that the CTDs state that the same were insured by the 2. Report to Treasurer; Notice, Posting, Publication PDIC make PDIC liable? SEC. 2, UNCLAIMED BALANCES LAW: Immediately after the taking 3) Were the CTDs issued for consideration, and if not, what is the effect of this Act and within the month of January of every odd year, all consequence? banks, building and loan associations, and trust corporations shall forward to the Treasurer of the Philippines a statement, under oath, of HELD their respective managing officers, of all credits and deposits held by 1) It doesn't matter. Whether the CTDs in question are negotiable or not is them in favor of persons known to be dead, or who have not made immaterial in the present case. The Philippine Deposit Insurance further deposits or withdrawals during the preceding ten years or more, Corporation was created by law and, as such, is governed primarily by the arranged in alphabetical order according to the names of creditors and provisions of the special law creating it. The liability of the PDIC for insured depositors, and showing: deposits therefore is statutory and such liability rests upon the existence of deposits with the insured bank, not on the negotiability or non-negotiability "(a) The names and last known place of residence or post office of the certificates evidencing these deposits. addresses of the persons in whose favor such unclaimed balances stand;

2) NO. the deposit liability of PDIC is determined by the provisions of the "(b) The amount and the date of the outstanding unclaimed balance and law that created it, RA 3519, and statements in the certificates that the whether the same is in money or in security, and if the latter, the nature same are insured by PDIC are not binding upon the latter. of the same;

3) NO consideration. PDIC not liable. In order that a claim for deposit "(c) The date when the person in whose favor the unclaimed balance insurance with the PDIC may prosper, the law requires that a corresponding stands died, if known, or the date when he made his last deposit or deposit be placed in the insured bank. The problem is that Regent did not withdrawal; and receive anything in consideration for the CTDs it issued, since the check representing the vale of the CTDs (issued by Premiere) bounced; therefore "(d) The interest due on such unclaimed balance, if any, and the amount no deposit ever came into existence. Accordingly, there is nothing here for thereof. PDIC to insure. "A copy of the above sworn statement shall be posted in a conspicuous I. UNCLAIMED BALANCES place in the premises of the bank, building and loan association, or trust corporation concerned for at least sixty days from the date of filing 1. Definition thereof: Provided, That immediately before filing the above sworn SEC. 1, UNCLAIMED BALANCES LAW: "Unclaimed balances", within statement, the bank, building and loan association, and trust the meaning of this Act, shall include credits or deposits of money, corporation shall communicate with the person in whose favor the bullion, security or other evidence of indebtedness of any kind, and unclaimed balance stands at his last known place of residence or post interest thereon with banks, buildings and loan associations, and trust office address. corporations, as hereinafter defined, in favor of any person known to be dead or who has not made further deposits or withdrawals during the "It shall be the duty of the Treasurer of the Philippines to inform the preceding ten years or more. Such unclaimed balances, together with Solicitor General from time to time the existence of unclaimed balances the increase and proceeds thereof, shall be deposited with the Treasurer held by banks, building and loan associations, and trust corporations. of the Philippines to the credit of the Government of the Republic of the

Cases of unclaimed balances would only result in additional and unnecessary Republic v. CA, 345 SCRA 63 (2000) expense to the government. FACTS On December 28, 1988, a complaint for escheat filed by petitioner, Republic The court however issued an order that if petitioner fails to comply with the of the Philippines, with the Regional Trial Court of Davao City against publication of unclaimed balances as already ordered, the petition shall be several banks which had branches within the jurisdiction of the said court. dismissed.

The complaint alleged that pursuant to Act No. 3936 as amended by P.D. Petitioner filed with the Court of Appeals a petition for mandamus and 679, the respective managers of the defendant banks submitted to the certiorari, which was also dismissed. Treasurer of the Republic of the Philippines separate statements prepared under oath which listed all deposits and credits held by them in favor of ISSUE depositors or creditors either known to be dead, have not been heard from, (1) Whether or not respondent RTC judge committed grave abuse of or have not made depositors or withdrawals for ten years or more since discretion tantamount to lack of jurisdiction in ordering the publication of December 31, 1970. the list of unclaimed balances listed under annexes “A” to “P” of the complaint. The complaint prayed that after due notice to the defendant banks, and after hearing, judgment be rendered declaring that the deposits, credits and HELD unpaid balances in question be escheated to petitioner, commanding The petition is without merit. defendant banks to forthwith deposit the same with the Treasurer of the The publication of the list of unclaimed balances is intended to safeguard the Philippines. right of the depositors, their heirs and successors to due process. This was made clear by the lower court in its assailed Order, to wit: The lower court issued an order directing petitioner to show cause why the complaint should not be dismissed for failure to state a cause of action. Moreover, how would other persons who may have an interest in According to the order, the complaint contained no allegation that defendant any of the unclaimed balances know what this case is all about and banks have complied with two of the conditions in Section 2 of Act No. whether they have an interest in this case if the amended complaint 3936, compliance with the requirements being necessary for the complaint and list of unclaimed balances are not published? Such other to prosper persons may be heirs of the bank depositors named in the list of unclaimed balances. Petitioner submitted amended complaint prayed that judgment be rendered x x x ordering that the amount of P97,263.38, deposited with the defendant banks by depositors who are known to be dead or have not made further The fact that the government is in a tight financial situation is not a deposits or withdrawals during the preceding ten years or more be justification for this Court to dispense with the elementary rule of due escheated in favor of the Republic of the Philippines. process.

The trial court found the amendment sufficient and issued an order requiring As declared by the trial court in its Order dated August 1, 1989, the petitioner to publish a notice in the Mindanao Forum Standard once a week dismissal of the petition for escheat is without prejudice. In other words, for two consecutive weeks, containing the summons, notice to the public, the State can refile the said petition, notwithstanding the lapse of time. the amended petition incorporated in the summons and the list of unclaimed Prescription of action does not run against the government. balances. The notice was estimated to occupy 27 pages of the said newspaper at an estimated cost of P50,000.00. WHEREFORE, the petition is DENIED. The decision of the Court of Appeals dated August 14, 1990 is AFFIRMED. On July 11, 1989, petitioner submitted a manifestation to the lower court praying that the publication of the list of the unclaimed balances be SO ORDERED. dispensed with. Petitioner posited that under Section 3, Act No. 3936, only the following are required to be published: (1) summons to respondent 3. Escheat Proceedings banks; and (2) notice to all persons other than those named defendants SEC. 3, UNCLAIMED BALANCES LAW: Whenever the Solicitor General therein. Petitioner submitted that to require it to publish the names and list shall be informed of such unclaimed balances, he shall commence an

action or actions in the name of the People of the Republic of the full and complete jurisdiction in the Republic of the Philippines over the Philippines in the Court of First Instance of the province or city where said unclaimed balances and over the persons having or claiming any the bank, building and loan association or trust corporation is located, in interest in the said unclaimed balances, or any of them, and shall have which shall be joined as parties the bank, building and loan association full and complete jurisdiction to hear and determine the issues herein, or trust corporation and all such creditors or depositors. All or any of and render the appropriate judgment thereon. such creditors or depositors or banks, building and loan association or trust corporations may be included in one action. Service of process in 4. Effects of Compliance/Non-Compliance such action or actions shall be made by delivery of a copy of the SEC. 4, UNCLAIMED BALANCES LAW: If the president, cashier or complaint and summons to the president, cashier, or managing officer managing officer of the bank, building and loan association, or trust of each defendant bank, building and loan association or trust corporation neglects or refuses to make and file the sworn statement corporation and by publication of a copy of such summons in a required by this action, such bank, building and loan association, or newspaper of general circulation, either in English, in Filipino, or in a trust corporation shall pay to the Government the sum of five hundred local dialect, published in the locality where the bank, building and loan pesos a month for each month or fraction thereof during which such association or trust corporation is situated, if there be any, and in case default shall continue. there is none, in the City of Manila, at such time as the court may order. Upon the trial, the court must hear all parties who have appeared SEC. 5, UNCLAIMED BALANCES LAW: Any bank, building and loan therein, and if it be determined that such unclaimed balances in any association or trust corporation which shall make any deposit with the defendant bank, building and loan association or trust corporation are Treasurer of the Philippines in conformity with the provisions of this Act unclaimed as hereinbefore stated, then the court shall render judgment shall not thereafter be liable to any person for the same and any action in favor of the Government of the Republic of the Philippines, declaring which may be brought by any person against in any bank, building and that said unclaimed balances have escheated to the Government of the loan association, or trust corporation for unclaimed balances so Republic of the Philippines and commanding said bank, building and loan deposited with the Treasurer of the Philippines shall be defended by the association or trust corporation to forthwith deposit the same with the Solicitor General without cost to such bank, building and loan Treasurer of the Philippines to credit of the Government of the Republic association or trust corporation." of the Philippines to be used as the National Assembly may direct. J. ANTI-MONEY LAUNDERING ACT "At the time of issuing summons in the action above provided for, the clerk of court shall also issue a notice signed by him, giving the title and 1. Declared Policy number of said action, and referring to the complaint therein, and SEC. 2, AMLA: Declaration of Policy. - It is hereby declared the directed to all persons, other than those named as defendants therein, policy of the State to protect and preserve the integrity and claiming any interest in any unclaimed balance mentioned in said confidentiality of bank accounts and to ensure that the Philippines shall complaint, and requiring them to appear within sixty days after the not be used as a money laundering site for the proceeds of any unlawful publication or first publication, if there are several, of such summons, activity. Consistent with its foreign policy, the State shall extend and show cause, if they have any, why the unclaimed balances involved cooperation in transnational investigations and prosecutions of persons in said action should not be deposited with the Treasurer of the involved in money laundering activities wherever committed. Philippines as in this Act provided and notifying them that if they do not appear and show cause, the Government of the Republic of the 2. Covered Transactions Philippines will apply to the court for the relief demanded in the SEC. 3 (B), AMLA: "Covered transaction" is a single, series, or complaint. A copy of said notice shall be attached to, and published with combination of transactions involving a total amount in excess of Four the copy of, said summons required to be published as above, and at million Philippine pesos (Php4,000,000.00) or an equivalent amount in the end of the copy of such notice so published, there shall be a foreign currency based on the prevailing exchange rate within five (5) statement of the date of publication, or first publication, if there are consecutive banking days except those between a covered institution several, of said summons and notice. Any person interested may appear and a person who, at the time of the transaction was a properly in said action and become a party thereto. Upon the publication or the identified client and the amount is commensurate with the business or completion of the publication, if there are several, of the summons and financial capacity of the client; or those with an underlying legal or trade notice, and the service of the summons on the defendant banks, obligation, purpose, origin or economic justification. building and loan associations or trust corporations, the court shall have

It likewise refers to a single, series or combination or pattern of as the authority and identification of all persons purporting to act on unusually large and complex transactions in excess of Four million their behalf. Philippine pesos (Php4,000,000.00) especially cash deposits and investments having no credible purpose or origin, underlying trade The provisions of existing laws to the contrary notwithstanding, obligation or contract. anonymous accounts, accounts under fictitious names, and all other similar accounts shall be absolutely prohibited. Peso and foreign 3. Suspicious Transactions currency non-checking numbered accounts shall be allowed. The SEC. 3 (B-1), AMLA: SEC. 3 (B), AMLA: "Covered transaction" is a BSP may conduct annual testing solely limited to the determination single, series, or combination of transactions involving a total amount in of the existence and true identity of the owners of such accounts. excess of Four million Philippine pesos (Php4,000,000.00) or an equivalent amount in foreign currency based on the prevailing exchange 2. Record Keeping. -All records of all transactions of covered rate within five (5) consecutive banking days except those between a institutions shall be maintained and safely stored for five (5) years covered institution and a person who, at the time of the transaction was from the date of transactions. With respect to closed accounts, the a properly identified client and the amount is commensurate with the records on customer identification, account files and business business or financial capacity of the client; or those with an underlying correspondence, shall be preserved and safely stored for at least legal or trade obligation, purpose, origin or economic justification. five (5) years from the dates when they were closed.

4. Covered Institutions 3. Reporting of Covered Transactions. - Covered institutions shall SEC. 3 (A), AMLA: "Covered Institution" refers to: report to the AMLC all covered transactions within five (5) working 1. banks, non-banks, quasi-banks, trust entities, and all other days from occurrence thereof, unless the Supervising Authority institutions and their subsidiaries and affiliates supervised or concerned prescribes a longer period not exceeding ten (10) regulated by the Bangko Sentral ng Pilipinas (BSP); working days.

2. insurance companies and all other institutions supervised or When reporting covered transactions to the AMLC, covered institutions regulated by the Insurance Commission; and and their officers, employees, representatives, agents, advisors, consultants or associates shall not be deemed to have violated Republic 3. securities dealers, brokers, salesmen, investment houses and other Act No. 1405, as amended; Republic Act No. 6426, as amended; similar entities managing securities or rendering services as Republic Act No. 8791 and other similar laws, but are prohibited from investment agent, advisor, or consultant, (ii) mutual funds, close communicating, directly or indirectly, in any manner or by any means, and investment companies, common trust funds, pre-need to any person the fact that a covered transaction report was made, the companies and other similar entities, (iii) foreign exchange contents thereof, or any other information in relation thereto. In case of corporations, money changers, money payment, remittance, and violation thereof, the concerned officer, employee, representative, transfer companies and other similar entities, and (iv) other entities agent, advisor, consultant or associate of the covered institution, shall administering or otherwise dealing in currency, commodities or be criminally liable. However, no administrative, criminal or civil financial derivatives based thereon, valuable objects, cash proceedings, shall lie against any person for having made a covered substitutes and other similar monetary instruments or property transaction report in the regular performance of his duties and in good supervised or regulated by Securities and Exchange Commission. faith, whether or not such reporting results in any criminal prosecution under this Act or any other Philippine law. 5. Obligations of Covered Institutions SEC. 9, AMLA: Prevention of Money Laundering; Customer When reporting covered transactions to the AMLC, covered institutions Identification Requirements and Record Keeping. - and their officers, employees, representatives, agents, advisors, consultants or associates are prohibited from communicating, directly or 1. Customer Identification. - Covered institutions shall establish and indirectly, in any manner or by any means, to any person, entity, the record the true identity of its clients based on official documents. media, the fact that a covered transaction report was made, the They shall maintain a system of verifying the true identity of their contents thereof, or any other information in relation thereto. Neither clients and, in case of corporate clients, require a system of may such reporting be published or aired in any manner or form by the verifying their legal existence and organizational structure, as well mass media, electronic mail, or other similar devices. In case of

violation thereof, the concerned officer, employee, representative, f. Jueteng and Masiao punished as illegal gambling under Presidential agent, advisor, consultant or associate of the covered institution, or Decree No.1602; media shall be held criminally liable. g. Piracy on the high seas under the Revised Renal Code, as amended and Presidential Decree No.532; a. Customer Identification h. Qualified theft under Article 310 of the Revised Penal Code, as b. Record Keeping amended; (9) Swindling under Article 315 of the Revised Penal Code, c. Reporting of Covered and Suspicious Transactions to AMLC as amended; i. Smuggling under Republic Act Nos. 455 and 1937; 6. Money-Laundering Crime j. Violations under Republic Act No.8792, otherwise known as the SEC. 4, AMLA: Money Laundering Offense. - Money laundering is a Electronic Commerce Act of 2000; crime whereby the proceeds of an unlawful activity are transacted, k. Hijacking and other violations under Republic Act No.6235; destructive thereby making them appear to have originated from legitimate arson and murder, as defined under the Revised Penal Code, as sources. It is committed by the following: amended, including those perpetrated by terrorists against non- 1. Any person knowing that any monetary instrument or property combatant persons and similar targets; represents. involves, or relates to the proceeds of any unlawful l. Fraudulent practices and other violations under Republic Act No.8799. activity, transacts or attempts to transact said monetary instrument otherwise known as the Securities Regulation Code of 2000; or property. m. Felonies or offenses of a similar nature that are punishable under the 2. Any person-knowing that any monetary instrument or property penal laws of other countries. involves the proceeds of any unlawful activity, performs or fails to perform any act as a result of which he facilitates the offense of 8. Jurisdiction money laundering referred to in paragraph (a) above. SEC. 5, AMLA: Jurisdiction of Money Laundering Cases. - The 3. Any person knowing that any monetary instrument or property is regional trial courts shall have jurisdiction to try all cases on money required under this Act to be disclosed and filed with the Anti-Money laundering. Those committed by public officers arid private persons who Laundering Council (AMLC), fails to do so. are in conspiracy with such public officers shall be under the jurisdiction of the Sandiganbayan. a. Transacting or attempting to transact, with monetary instrument or property, knowing it represents, involves, or related to proceeds of 9. Prosecution any Unlawful Activity SEC. 6, AMLA: Prosecution of Money Laundering. – b. Facilitating money-laundering referred to in Item (a) above, by failing to perform an act 1. Any person may be charged with and convicted of both the offense c. Failing to disclose and file report with AMLC of any monetary of money laundering and the unlawful activity as herein defined. instrument or property as required under AMLA 2. Any proceeding relating to the unlawful activity shall be given precedence over the prosecution of any offense or violation under 7. Unlawful Activities this Act without prejudice to the freezing and other remedies SEC. 3 (i), AMLA: "Unlawful activity" refers to any act or omission or provided. series or combination thereof involving or having relation to the following: 10. Prohibition against Political Harassment a. Kidnapping for ransom under Article 267 of Act No.3815, otherwise SEC. 16, AMLA: Prohibitions Against Political Harassment. - This known as the Revised Penal Code, as amended; Act shall not be used for political prosecution or harassment or as an b. Sections 3,4,5,7,8 and 9 of Article Two of Republic Act No.6425, as instrument to hamper competition in trade and commerce. amended, otherwise known as the Dangerous Drugs Act of 1972; c. Section 3 paragraphs B,C,E,G,H and I of Republic Act No.3019, as No case for money laundering may be filed against and no assets shall amended; otherwise known as the Anti-Graft and Corrupt Practices be frozen, attached or forfeited to the prejudice of a candidate for an Act; electoral office during an election period. d. Plunder under Republic Act No.7080, as amended; e. Robbery and extortion under Articles 294,295,296,299,300,301 and 302 of the Revised Penal Code, as amended;

11. Penalties and Other Consequences the same or purposely fails to testify shall suffer the same penalties a. Penalties prescribed herein. SEC. 14, AMLA: Penal Provisions. - 4. Breach of Confidentiality. The punishment of imprisonment ranging 1. Penalties for the Crime of Money Laundering. The penalty of from three (3) to eight (8) years and a fine of not less than Five imprisonment ranging from seven (7) to fourteen (14) years and a hundred thousand Philippine pesos (Php 500,000.00) but not more fine of not less than Three million Philippine pesos (Php , than One million Philippine pesos (Php 1,000,000.00), shall be 3,000,000.00) but not more than twice the value of the monetary imposed on a person convicted for a violation under Section 9 (c). instrument or property involved in the offense, shall be imposed upon a person convicted under Section 4(a) of this Act. The penalty (i) Money Laundering of imprisonment from four (4) to seven (7) years and a fine of not (ii) Failure to Keep Records less than One million five hundred thousand Philippine pesos (Php (iii) Malicious Reporting 1,500,000.00) but not more than Three million Philippine pesos (Php (iv) Breach of Confidentiality 3,000,000.00), shall be imposed upon a person convicted under Section 4(b) of this Act. The penalty of imprisonment from six (6) b. Civil Forfeiture months to four (4) years or a fine of not less than One hundred SEC. 12, AMLA: Forfeiture Provisions. – thousand Philippine pesos (Php 100,000.00) but not more than Five hundred thousand Philippine pesos (Php 500,000.00), or both, shall 1. Civil Forfeiture. - When there is a covered transaction report made, be imposed on a person convicted under Section 4(c) of this Act. and the court has, in a petition filed for the purpose ordered seizure of any monetary instrument or property, in whole or in part, directly 2. Penalties for Failure to Keep Records. The penalty of imprisonment or indirectly, related to said report, the Revised Rules of Court on from six (6) months to one (1) year or a fine of not less than One civil forfeiture shall apply. hundred thousand Philippine pesos (Php100,000.00) but not more than Five hundred thousand Philippine pesos (Php500,000.00), or 2. Claim on Forfeited Assets. - Where the court has issued an order of both, shall be imposed on a person convicted under Section 9(b) of forfeiture of the monetary instrument or property in a criminal this Act. prosecution for any money laundering offense defined under Section 4 of this Act, the offender or any other person claiming an interest 3. Malicious Reporting. Any person who, with malice, or in bad faith, therein may apply, by verified petition, for a declaration that the report or files a completely unwarranted or false information relative same legitimately belongs to him and for segregation or exclusion of to money laundering transaction against any person shall be subject the monetary instrument or property corresponding thereto. The to a penalty of six (6) months to four (4) years imprisonment and a verified petition shall be filed with the court which rendered the fine of not less than One hundred thousand Philippine pesos (Php judgement of conviction and order of forfeiture, within fifteen (15) 100,000.00) but not more than Five hundred thousand Philippine days from the date of the order or forfeiture, in default of which the pesos (Php500,000.00), at the discretion of the court: Provided, said order shall become final and executory. This provision shall That the offender is not entitled to avail the benefits of the Probation apply in both civil and criminal forfeiture. Law. If the offender is a corporation, association, partnership or any juridical person, the penalty shall be imposed upon the responsible 3. Payment in Lieu of Forfeiture. - Where the court has issued an order officers, as the case may be, who participated in the commission of of forfeiture of the monetary instrument or property subject of a the crime or who shall have knowingly permitted or failed to prevent money laundering offense defined under Section 4, and said order its commission. If the offender is a juridical person, the court may cannot be enforced because any particular monetary instrument or suspend or revoke its license. If the offender is an alien, he shall, in property cannot, with due diligence, be located, or it has been addition to the penalties herein prescribed, be deported without substantially altered, destroyed, diminished in value or otherwise further proceedings after serving the penalties herein prescribed. If rendered worthless by any act or omission, directly or indirectly, the offender is a public official or employee, he shall, in addition to attributable to the offender, or it has been concealed, removed, the penalties prescribed herein, suffer perpetual or temporary converted or otherwise transferred to prevent the same from being absolute disqualification from office, as the case may be. Any public found or to avoid forfeiture thereof, or it is located outside the official or employee who is called upon to testify and refuses to do Philippines or has been placed or brought outside the jurisdiction of

the court, or it has been commingled with other monetary relating to an unlawful activity or to a money laundering offense are located. instruments or property belonging to either the offender himself or a Pasig City, where the account sought to be forfeited in this case is situated, third person or entity, thereby rendering the same difficult to is within the National Capital Judicial Region (NCJR). Clearly, the complaint identify or be segregated for purposes of forfeiture, the court may, for civil forfeiture of the account may be filed in any RTC of the NCJR. Since instead of enforcing the order of forfeiture of the monetary the RTC Manila is one of the RTCs of the NCJR, it was a proper venue of the instrument or property or part thereof or interest therein, Republic’s complaint for civil forfeiture of Glasgow’s account. accordingly order the convicted offender to pay an amount equal to the value of said monetary instrument or property. This provision (2) NO, it was sufficient in form and substance. shall apply in both civil and criminal forfeiture. In a motion to dismiss for failure to state a cause of action, the focus is on the sufficiency, not the veracity, of the material allegations. The Cases determination is confined to the four corners of the complaint and nowhere Republic v. Glasgow Credit and Collection Services, 542 SCRA 384 else. The test of the sufficiency of the facts alleged in the complaint is (2008) whether or not, admitting the facts alleged, the court could render a valid FACTS judgment upon the same in accordance with the prayer of the complaint. Republic filed a complaint for civil forfeiture of assets against the bank deposits of Glasgow in Citystate Savings Bank (CSB). This is pursuant to the Section 4, Title II of the Rule of Procedure in Cases of Civil Forfeiture Anti-Money Laundering Act (RA 9160). The court issued summons and provides: several alias summons. However, all the summons to Glasgow was left Sec. 4. Contents of the petition for civil forfeiture. - The petition for unserved as it could not be found at its last known address. civil forfeiture shall be verified and contain the following allegations: (a) The name and address of the respondent; Glasgow now files a motion to dismiss on the ground that the court has no (b) A description with reasonable particularity of the monetary jurisdiction over its person due to lack of summons served, the complaint instrument, property, or proceeds, and their location; and was premature and there was failure to prosecute by the Republic. The RTC (c) The acts or omissions prohibited by and the specific provisions of dismissed the case on the grounds of improper venue, insufficiency in form the Anti-Money Laundering Act, as amended, which are alleged to and substance and failure to prosecute. be the grounds relied upon for the forfeiture of the monetary instrument, property, or proceeds; and ISSUE (d) The reliefs prayed for. Whether the complaint for Civil Forfeiture was correctly dismissed on the grounds of (1) improper venue (2) insufficiency in form and substance and Here, the verified complaint of the Republic contained the following (3) failure to prosecute. allegations: (a) the name and address of the primary defendant therein, RULING Glasgow; (1) NO, the trial court was the proper venue. (b) a description of the proceeds of Glasgow’s unlawful activities The Rules of Procedure in Cases of Civil Forfeiture applies to this case. with particularity, as well as the location thereof, account no. CA- Sec. 3. Venue of cases cognizable by the regional trial court. – A 005-10-000121-5 in the amount of P21,301,430.28 maintained with petition for civil forfeiture shall be filed in any regional trial court of CSBI; the judicial region where the monetary instrument, property or (c) the acts prohibited by and the specific provisions of RA 9160, as proceeds representing, involving, or relating to an unlawful activity amended, constituting the grounds for the forfeiture of the said or to a money laundering offense are located; provided, however, proceeds. In particular, suspicious transaction reports showed that that where all or any portion of the monetary instrument, property Glasgow engaged in unlawful activities of estafa and violation of the or proceeds is located outside the Philippines, the petition may be Securities Regulation Code (under Section 3(i)(9) and (13), RA filed in the regional trial court in Manila or of the judicial region 9160, as amended); the proceeds of the unlawful activities were where any portion of the monetary instrument, property, or transacted and deposited with CSBI in account no. CA-005-10- proceeds is located, at the option of the petitioner. 000121-5 thereby making them appear to have originated from legitimate sources; as such, Glasgow engaged in money laundering The venue of civil forfeiture cases is any RTC of the judicial region where the (under Section 4, RA 9160, as amended); and the AMLC subjected monetary instrument, property or proceeds representing, involving, or the account to freeze order and

(d) the reliefs prayed for, namely, the issuance of a TRO or writ of regardless of the absence, pendency or outcome of a criminal prosecution preliminary injunction and the forfeiture of the account in favor of for the unlawful activity or for money laundering, an action for civil the government as well as other reliefs just and equitable under the forfeiture may be separately and independently prosecuted and resolved. premises. (3) NO, there was no failure to prosecute on the part of the Republic. The form and substance of the Republic’s complaint substantially conformed Immediately after the complaint was filed, the trial court ordered the with Section 4, Title II of the Rule of Procedure in Cases of Civil Forfeiture. process server to serve summons to Glasgow. The subpoena to Glasgow In relation thereto, Rule 12.2 of the Revised Implementing Rules and was, however, returned unserved as Glasgow "could no longer be found at Regulations of RA 9160 states the following: its given address" and had moved out of the building. Republic then filed a RULE 12 motion for issuance of alias summons and leave of court to serve summons Forfeiture Provisions by publication. The court archived the case for failure to cause service of xxx xxx xxx alias summons, still, the Republic motioned the case to be reinstated. Rule 12.2. When Civil Forfeiture May be Applied. – When there is a Meanwhile, the Republic continued to exert efforts to obtain information SUSPICIOUS TRANSACTION REPORT OR A COVERED TRANSACTION from other government agencies on the whereabouts or current status of REPORT DEEMED SUSPICIOUS AFTER INVESTIGATION BY THE respondent Glasgow. Its efforts, however, proved futile. The alias summons AMLC, and the court has, in a petition filed for the purpose, ordered was again unserved. It was then that Glasgow filed the motion to dismiss. the seizure of any monetary instrument or property, in whole or in part, directly or indirectly, related to said report, the Revised Rules Given these circumstances, how could the Republic be faulted for failure to of Court on civil forfeiture shall apply. prosecute the complaint for civil forfeiture? While there was admittedly a delay in the proceeding, it could not be entirely or primarily ascribed to the RA 9160, as amended, and its implementing rules and regulations lay down Republic. That Glasgow’s whereabouts could not be ascertained was not only two conditions when applying for civil forfeiture: beyond the Republic’s control, it was also attributable to Glasgow which left its principal office address without informing the Securities and Exchange (1) when there is a suspicious transaction report or a covered transaction Commission or any official regulatory body of its new address. Moreover, as report deemed suspicious after investigation by the AMLC (Anti-Money early as October 8, 2003, the Republic was already seeking leave of court to Laundering Council) serve summons by publication.

(2) the court has, in a petition filed for the purpose, ordered the seizure of ADDINTIONAL RULING: the service of summons may be made by any monetary instrument or property, in whole or in part, directly or publication in cases of civil forfeiture as they are proceedings in rem. The indirectly, related to said report. Rules of Procedure in Cases of Civil Forfeiture also allows summons by publication in cases where the whereabouts of the owner are unknown and Since account of Glasgow in CSB was (1) covered by several suspicious cannot be ascertained by diligent inquiry. transaction reports and (2) placed under the control of the trial court upon the issuance of the writ of preliminary injunction, the conditions provided in 12. Freezing of Accounts RA 9160 were satisfied. Hence, the Republic, represented by the AMCL, SEC. 10, AMLA: Authority to Freeze. - Upon determination that properly instituted the complaint for civil forfeiture. probable cause .exists that any deposit or similar account is in any way related to an unlawful activity, the AMLC may issue a freeze order, Whether or not there is truth in the allegation that account of Glasgow which shall be effective immediately, on the account for a period not contains the proceeds of unlawful activities is an evidentiary matter that exceeding fifteen (15) days. Notice to the depositor that his account has may be proven during trial. The complaint, however, did not even have to been frozen shall be issued simultaneously with the issuance of the show or allege that Glasgow had been implicated in a conviction for, or the freeze order. The depositor shall have seventy-two (72) hours upon commission of, the unlawful activities of estafa and violation of the receipt of the notice to explain why the freeze order should be lifted. Securities Regulation Code. The AMLC has seventy-two (72) hours to dispose of the depositor's explanation. If it fails to act within seventy-two (72) hours from receipt A criminal conviction for an unlawful activity is not a prerequisite for the of the depositor’s explanation, the freeze order shall automatically be institution of a civil forfeiture proceeding. Stated otherwise, a finding of guilt dissolved. The fifteen (15)-day freeze order of the AMLC may be for an unlawful activity is not an essential element of civil forfeiture. Thus, extended upon order of the court, provided that the fifteen (15)-day

period shall be tolled pending the court's decision to extend the period. The CA issued a writ of preliminary injunction with regard to the petition filed by Lilia Cheng (last ruling contested in this case) No court shall issue a temporary restraining order or writ of injunction against any freeze order issued by the AMLC except the Court of ISSUE Appeals or the Supreme Court. Whether a bank inquiry order issued in accordance with section 10 AMLA may be stayed with injunction Cases Republic v. Eugenio RULING FACTS YES . Under this section, the AMLC may file an application ex parte, with (This case stemmed from the case of Agan v PIATCO) the CA, and upon determination of probable cause, they may issue a freeze After the promulgation of the Agan case, a series of investigation was order effective immediately. This is to prevent funds that is related to any conducted by the Ombudsman, the Compliance and Investigation Staff, and money-laundering from being misused while the case is being tried. It is ex Anti-Money Laundering Council (AMLC). AMLC issued a resolution parte because the fact of freezing the account must be kept secret from the authorizing the Executive Director of AMLC to examine the bank accounts of owner, else the funds may just be moved elsewhere before the freeze order Pantaleon Alvarez, Cheng Yong,Wilfredo Trinidad, Alfredo Liongson and their may be issued. related web accounts. Under the authority of such resolution, AMLC filed an application to inquire into or examine the deposits or investments of Since the application of AMLC has nothing to do with any of the provided Alvarez, Cheng Yong, Trinidad and Liongson with the Makati RTC, which the enumerations under Section 11, it must prove that there is probable cause court granted. Months later, Special Prosecutor Dennis Villa-Ignacio with the case, in order to inquire into the bank accounts. Probable cause requested AMLC to investigate the accounts of Alvarez, PIATCO and all may only be decided by the courts (Art III, Sec 2 of Constitution). Section accounts related to the annulled contract. AMLC issued another resolution, 10 contains the application for ex parte, but it is connected to freezing of authorizing the executive director to inquire into the bank accounts named accounts. This must be done ex parte, since notifying the accused my cause in the letter. AMLC filed the same application, this time to the Manila RTC, him to disburse the account before the order freezing the account is issued. which was raffled to Judge Antonio Eugenio Jr. The court likewise granted Section 11 does not contain the application for ex parte, for the fact that such ex parte application. Alvarez filed an Urgent Motion to Stay of there is nothing wrong with the accused knowing that his accounts are being Enforcement of Order, which the Manila RTC granted. The Republic filed a checked. It is immaterial for the accused to know that his accounts are motion for reconsideration which was granted. Alvarez then filed an Urgent being checked, since he cannot hide the bank records to prove that the Motion and Manifestation, stating that AMLC was about to implement the accounts are linked to the crime imputed against him. Hence, using the ex Manila RTC bank inquiry even though he intends to appeal such order. The parte application found in section 10 in inquiring into bank accounts (section Manila RTC refrained AMLC from implementing such order against Alvarez. 11) may be stayed with injunction. Alvarez then filed an Urgent Ex Parte Motion for Clarification, alleging that AMLC likewise cannot implement such order against the others stated in the 13. Examination of Accounts order. Manila RTC issued an order, stating that the ex parte application SEC. 11, AMLA: Authority to Inquire into Bank Deposits. - cannot be implemented in its totality (first of four rulings contested in this Notwithstanding the provisions of Republic Act No. 1405, as amended; case). Republic Act No. 6426, as amended; Republic Act No. 8791, and other laws, the AMLC may inquire into or examine any particular deposit or Lilia Cheng, wife of Cheng Yong filed a Petition for Certiorari, TRO and investment with any banking institution or non- bank financial institution preliminary injunction against the orders of Makati and Manila RTC stating upon order of any competent court in cases of violation of this Act when grave abuse of discretion that AMLA can only inquire to bank accounts after it has been established that there is probable cause that the deposits or the creation of the Anti-Money Laundering Act (AMLA), and not prior to its investments involved are in any way related to a money laundering promulgation. The CA issued a TRO, granting such petition (second of four offense: Provided, That this provision shall not apply to deposits and rulings contested in this case). investments made prior to the effectivity of this Act.

With relation to the Urgent Motion for Clarification, the Manila RTC issued an 14. AMLC; Composition and Powers order reiterated that bank inquiry order it issued cannot be implemented by SEC. 7, AMLA: Creation of Anti-Money Laundering Council the AMLC until the appeal (of Alvarez of the order granting the ex parte (AMLC). – The Anti-Money Laundering Council is hereby created and application) is finally resolved (third of four rulings contested in this case). shall be composed of the Governor of the Bangko Sentral ng Pilipinas as

chairman, the Commissioner of the Insurance Commission and the 15. Mutual Assistance among States Chairman of the Securities and Exchange Commission as members. The SEC. 13, AMLA: Mutual Assistance among States. – AMLC shall act unanimously in the discharge of its functions as defined 1. Request for assistance from a Foreign State. - Where a foreign State hereunder: makes a request for assistance in the investigation or prosecution of a money laundering offense, the AMLC may execute the request or 1. to require and receive covered transaction reports from covered refuse to execute the same and inform the foreign State of any valid institutions; reason for not executing the request or for delaying the execution thereof. The principles of mutuality and reciprocity shall, for this 2. to issue orders addressed to the appropriate Supervising Authority purpose, be at all times recognized. or the covered institution to determine the true identity of the owner of any monetary instrument or property subject of a covered 2. Power of the AMLC to Act on a Request for Assistance from a transaction report or request for assistance from a foreign State, or Foreign State. - The AMLC may execute a request for assistance believed by the Council, on the basis of substantial evidence to be in from a foreign State by: (1) tracking down, freezing, restraining and whole or in part, wherever located, representing, involving. or seizing assets alleged to be proceeds of any unlawful activity under related to, directly or indirectly, in any manner or by any means. the the procedures laid down in this Act; (2) giving information needed proceeds of an unlawful activity; by the foreign State within the procedures laid down in this Act; and (3) applying for an order of forfeiture of any monetary instrument or 3. to institute civil forfeiture proceedings and all other remedial property in the court: Provided, That the court shall not issue such proceedings through the Office of the Solicitor General; an order unless the application is accompanied by an authenticated p copy of the order of a court in the requesting State ordering the 4. to cause the filing of complaints with the Department of Justice or forfeiture of said monetary instrument or property of a person who the Ombudsman for the prosecution of money laundering offenses; has been convicted of a money laundering offense in the requesting State, and a certification of an affidavit of a competent officer of the 5. to initiate investigations of covered transactions, money laundering requesting State stating that the conviction and the order of activities and other violations of this Act; forfeiture are final and then no further appeal lies in respect or either. 6. to freeze any monetary instrument or property alleged to be proceed of any unlawful activity; 3. Obtaining Assistance from Foreign States. -The AMLC may make a request to any foreign State for assistance in (1) tracking down, 7. to implement such measures as may be necessary and justified freezing, restraining and seizing assets alleged to be proceeds of under this Act to counteract money laundering; any unlawful activity; (2) obtaining information that it needs relating 8. to receive and take action in respect of, any request from foreign to any covered transaction, money laundering offense or any other states for assistance in their own anti-money laundering operations matter directly or indirectly, related thereto; (3) to the extent provided in this Act; allowed by the law of the Foreign State, applying with the proper court therein for an order to enter any premises belonging to or in 9. to develop educational programs on the pernicious effects of money the possession or control of, any or all of the persons named in said laundering, the methods and techniques used in money laundering, request, and/or search any or all such persons named therein the viable means of preventing money laundering and the effective and/or remove any document, material or object named in said ways of prosecuting and punishing offenders; and request: Provided, That the documents accompanying the request in support of the application have been duly authenticated in 10. to enlist the assistance of any branch, department, bureau, office, accordance with the applicable jaw or regulation of the foreign agency or instrumentality of the government, including government- State; and (4) applying for an order of forfeiture of any monetary owned and -controlled corporations, in undertaking any and all anti- instrument or property in the proper court in the foreign State: money laundering operations, which may include the use of its Provided, That the request is accompanied by an authenticated copy personnel, facilities and resources for the more resolute prevention, of the order of the regional trial court ordering the forfeiture of said detection and investigation of money laundering offenses and monetary instrument or property of a convicted offender and an prosecution of offenders. affidavit of the clerk of court stating that the conviction and the

order of forfeiture are final and that no further appeal lies in respect IV. LOAN FUNCTION of either. A. Basic Concepts 4. Limitations on Request for Mutual Assistance. – The AMLC may 1. Grant, Purpose and Requirement of Loans refuse to comply with any request for assistance where the action

sought by the request contravenes any provision of the Constitution a. Grant of Loans or the execution of a request is likely to prejudice the national SEC. 39, GBL: A bank shall grant loans and other credit interest of the Philippines unless therein is a treaty between the accommodations only in amounts and for the periods of time Philippines and the requesting State relating to the provision of essential for the effective completion of the operations to be assistance in relation to money laundering offenses. financed. Such grant of loans and other credit

accommodations shall be consistent with safe and sound 5. Requirements for Requests for Mutual Assistance from Foreign banking practices. States. - A request for mutual assistance from a foreign State must

(1) confirm that an investigation or prosecution is being conducted b. Purpose of Loans in respect of a money launderer named therein or that he has been SEC. 39, GBL: The purpose of all loans and other credit convicted of any money laundering offense; (2) state the grounds accommodations shall be stated in the application and in the on which any person is being investigated or prosecuted for money contract between the bank and the borrower. If the bank laundering or the details of his conviction; (3) gives sufficient finds that the proceeds of the loan or other credit particulars as to the identity of said person; (4) give particulars accommodation have been employed, without its approval, sufficient to identify any covered institution believed to have any for purposes other than those agreed upon with the bank, it information, document, material or object which may be of shall have the right to terminate the loan or other credit assistance to the investigation or prosecution; (5) ask from the accommodation and demand immediate repayment of the covered institution concerned any information, document, material obligation. or object which may be of assistance to the investigation or

prosecution; (6) specify the manner in which and to whom said c. Requirement of Loans information, document, material or object detained pursuant to said SEC. 40, GBL: Before granting a loan or other credit request, is to be produced; (7) give all the particulars necessary for accommodation, a bank must ascertain that the debtor is the issuance by the court in the requested State of the writs, orders capable of fulfilling his commitments to the bank. or processes needed by the requesting State; and (8) contain such

other information as may assist in the execution of the request. Toward this end, a bank may demand from its credit 6. Authentication of Documents. - For purposes of this Section, a applicants a statement of their assets and liabilities and of document is authenticated if the same is signed or certified by a their income and expenditures and such information as may judge, magistrate or equivalent officer in or of, the requesting State, be prescribed by law or by rules and regulations of the and authenticated by the oath or affirmation of a witness or sealed Monetary Board to enable the bank to properly evaluate the with an official or public seal of a minister, secretary of State, or credit application which includes the corresponding financial officer in or of, the government of the requesting State, or of the statements submitted for taxation purposes to the Bureau of person administering the government or a department of the Internal Revenue. Should such statements prove to be false requesting territory, protectorate or colony. The certificate of or incorrect in any material detail, the bank may terminate authentication may also be made by a secretary of the embassy or any loan or other credit accommodation granted on the legation, consul general, consul, vice consul, consular agent or any basis of said statements and shall have the right to demand officer in the foreign service of the Philippines stationed in the immediate repayment or liquidation of the obligation. foreign State in which the record is kept, and authenticated by the

seal of his office. In formulating rules and regulations under this Section, the

Monetary Board shall recognize the peculiar characteristics 7. Extradition. -The Philippines shall negotiate for the inclusion of of micro financing, such as cash flow-based lending to the money laundering offenses as herein defined among extraditable basic sectors that are not covered by traditional collateral. offenses in all future treaties.

Cases (3) Whether the respondent is entitled to damages? YES. United Coconut Planters Bank v Ramos, 415 SCRA 596 (2003) FACTS HELD UCPB granted a P2.8M loan to Zamboanga Development Corp. (ZDC) with (1) It bears stressing that the petitioner is a banking corporation, a financial VIvencio Ramos and the Spouses Teofilo Ramos, Sr. and Amelita Ramos as institution with power to issue its promissory notes intended to circulate as sureties. Teofilo Ramos Sr. was the Executive officer of Iglesia ni Kristo. money (known as bank notes); or to receive the money of others on general ZDC defaulted on its obligation. UCPB filed a collection suit and obtained a deposit, to form a joint fund that shall be used by the institution for its own favorable judgment. A writ of execution was issued for the enforcement of benefit, for one or more of the purposes of making temporary loans and the decision ordering Sheriff Villapana to levy and attach all the real and discounts, of dealing in notes, foreign and domestic bills of exchange, coin personal properties belonging to ZDC and the Ramoses to satisfy the bullion, credits, and the remission of money; or with both these powers, and judgment. with the privileges, in addition to these basic powers, of receiving special deposits, and making collection for the holders of negotiable paper, if the To help the Sheriff implement the writ, UCPB through its employees institution sees fit to engage in such business.[25] In funding these ascertained if defendants (ZDC et al) had any leviable real and personal businesses, the bank invests the money that it holds in trust of its property. UCPB produced a copy of a Tax Declaration covering a property in depositors. For this reason, we have held that the business of a bank is one Quezon City under the name of Teofilo C. Ramos, President and Chairman of affected with public interest, for which reason the bank should guard against Ramdustrial Corp. married to Rebecca E. Ramos. UCPB informed the Sheriff loss due to negligence or bad faith.[26] In approving the loan of an of the existence of such property and caused the annotation of a notice of applicant, the bank concerns itself with proper informations regarding its levy on the title thereof. debtors. The petitioner, as a bank and a financial institution engaged in the grant of loans, is expected to ascertain and verify the identities of the Meanwhile, Ramdustrial Corporation applied for a loan with UCPBusing the persons it transacts business with.[27] In this case, the petitioner knew that same property as collateral. Ramdustrial intended to use the proceeds of the the sureties to the loan granted to ZDC and the defendants in Civil Case No. loan as additional capital to participate in a bidding project. Teofilo C. 94-1822 were the Spouses Teofilo Ramos, Sr. and Amelita Ramos. The Ramos was informed that there was an annotation on said property, names of the Spouses Teofilo Ramos, Sr. and Amelita Ramos were specified because of which the bank had to hold in abeyance any action on its loan in the writ of execution issued by the trial court. application. Teofilo C. Ramos was of course surprised. He sent a letter to the Sheriff to have the annotation cancelled or else appropriate legal action will The petitioner has access to more facilities in confirming the identity of their be taken. judgment debtors. It should have acted more cautiously, especially since some uncertainty had been reported by the appraiser whom the petitioner The loan was eventually approved. Business was not good so Teofilo C. had tasked to make verifications. It appears that the petitioner treated the Ramos and Rebecca Ramos again applied for a loan with Planters Dev’t Bank uncertainty raised by appraiser Eduardo C. Reniva as a flimsy matter. It to pay their obligations with UCPB. Again they encountered problems with placed more importance on the information regarding the marketability and the approval of the loan due to the annotation on their property which until market value of the property, utterly disregarding the identity of the now has not been cancelled. Spouses Ramos again demanded UCPB to have registered owner thereof. the annotation cancelled. UCPB told the spouses to file a motion to cancel said annotation and UCPB promised that the will not oppose. The annotation (2) It must be underscored that the registered owner of the property which was eventually cancelled. Still spouses Ramos filed an action for damages was unlawfully levied by the petitioner is the respondent. As owner of the against UCPB. property, the respondent has the right to enjoy, encumber and dispose of his property without other limitations than those established by law. The ISSUES owner also has a right of action against the holder and possessor of the (1) Whether the petitioner acted negligently in causing the annotation of thing in order to recover it.[32] Necessarily, upon the annotation of the levy on the title of the respondent? YES. notice of levy on the TCT, his right to use, encumber and dispose of his property was diminished, if not negated. He could no longer mortgage the (2) Whether the respondent was the real party-in-interest as plaintiff to file same or use it as collateral for a loan. an action for damages against the petitioner considering that the loan applicant with UCPB and PDB was RAMDUSTRIAL CORPORATION? YES. Arising from his right of ownership over the said property is a cause of action against persons or parties who have disturbed his rights as an

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 134 owner.[33] As an owner, he is one who would be benefited or injured by the Banco De Oro-EPCI Inc v JAPRL Development Corporation, 551 SCRA judgment, or who is entitled to the avails of the suit[34] for an action for 342 (2008) damages against one who disturbed his right of ownership. FACTS JPRL obtained a P230M loan from Banco de Oro but soon after defaulted on Hence, regardless of the fact that the respondent was not the loan applicant its obligations. It was later discovered that the loan was obtained by JPRL by with the UCPB and PDB, as the registered owner of the property whose fraudulently bloating its sales revenue. Upon knowing of this fraud, BDO ownership had been unlawfully disturbed and limited by the unlawful demanded immediate payment of JPRL’s outstanding obligations. annotation of notice of levy on his TCT, the respondent had the legal standing to file the said action for damages. In both instances, the Banco de Oro tried to attach the properties of JPRL but was unsuccessful in respondent’s property was used as collateral of the loans applied for by all its attempt since no proper officer of JPRL could be found and served with Ramdustrial Corporation. Moreover, the respondent, together with his wife, summonses. was a surety of the aforesaid loans. Meanwhile, JPRL filed two applications for corporate rehabilitation. The first While it is true that the loss of business opportunities cannot be used as a was denied while the second was granted. By virtue of the granted reason for an action for damages arising from loss of business opportunities rehabilitation, all proceedings against JPRL. Banco de Oro appealed the caused by the negligent act of the petitioner, the respondent, as a case alleging that JPRL maliciously evaded the service of summonses to registered owner whose right of ownership had been disturbed and limited, prevent the court from acquiring jurisdiction. Furthermore, they employed clearly has the legal personality and cause of action to file an action for bad faith to delay proceedings by cunningly exploiting procedural damages. Not even the respondent’s failure to have the annotation technicalities to avoid payment of their obligation. cancelled immediately after he came to know of the said wrongful levy negates his cause of action. ISSUES Whether there was malice and bad faith on the part of JPRL by avoiding (3) For the award of moral damages to be granted, the following must exist: service of summons? Whether the court acquired jurisdiction even of the (1) there must be an injury clearly sustained by the claimant, whether summons were served only to administrative officers of JPRL and not to the physical, mental or psychological; officers enumerated in the Corp Code? (2) there must be a culpable act or omission factually established; (3) the wrongful act or omission of the defendant is the proximate cause HELD of the injury sustained by the claimant; and The Makati RTC may proceed to hear Civil Case No. 03-991 only against (4) the award for damages is predicated on any of the cases stated in Arollado if there is no ground to go after JAPRL and RFC (as will later be Article 2219 of the Civil Code.[35] discussed). A creditor can demand payment from the surety solidarily liable with the corporation seeking rehabilitation. In the case at bar, although the respondent was not the loan applicant and the business opportunities lost were those of Ramdustrial Corporation, all Respondents abused procedural technicalities (albeit unsuccessfully) for the four requisites were established. First, the respondent sustained injuries in sole purpose of preventing, or at least delaying, the collection of their that his physical health and cardio-vascular ailment were aggravated; his legitimate obligations. Their reprehensible scheme impeded the speedy fear that his one and only property would be foreclosed, hounded him dispensation of justice. More importantly, however, considering the amount endlessly; and his reputation as mortgagor had been tarnished. Second, involved, respondents utterly disregarded the significance of a stable and the annotation of notice of levy on the TCT of the private respondent was efficient banking system to the national economy. wrongful, arising as it did from the petitioner’s negligent act of allowing the levy without verifying the identity of its judgment debtor. Third, such Banks are entities engaged in the lending of funds obtained through wrongful levy was the proximate cause of the respondent’s misery. Fourth, deposits[45] from the public.[46] They borrow the public's excess money the award for damages is predicated on Article 2219 of the Civil Code, (i.e., deposits) and lend out the same.[47] Banks therefore redistribute particularly, number 10 thereof wealth in the economy by channeling idle savings to profitable investments.

Liable for Attorneys fees but no exemplary damages. Banks operate (and earn income) by extending credit facilities financed primarily by deposits from the public.[48] They plough back the bulk of said deposits into the economy in the form of loans.[49] Since banks deal with

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 135 the public's money, their viability depends largely on their ability to return cash flow-based lending to the basic sectors that are not covered by those deposits on demand. For this reason, banking is undeniably imbued traditional collateral. (emphasis supplied) with public interest. Consequently, much importance is given to sound lending practices and good corporate governance. Under this provision, banks have the right to annul any credit accommodation or loan, and demand the immediate payment thereof, from Protecting the integrity of the banking system has become, by large, the borrowers proven to be guilty of fraud. Petitioner would then be entitled to responsibility of banks. The role of the public, particularly individual the immediate payment of P194,493,388.98 and other appropriate borrowers, has not been emphasized. Nevertheless, we are not unaware of damages. the rampant and unscrupulous practice of obtaining loans without intending to pay the same. 2. Prohibited Transactions SEC. 55.1 (C): No director, officer, employee, or agent of any bank In this case, petitioner alleged that JAPRL fraudulently altered and falsified shall – its financial statements in order to obtain its credit facilities. Considering the amount of petitioner's exposure in JAPRL, justice and fairness dictate that (c) Accept gifts, fees, or commissions or any other form of the Makati RTC hear whether or not respondents indeed committed fraud in remuneration in connection with the approval of a loan or other securing the credit accomodation. credit accommodation from said bank;

A finding of fraud will change the whole picture. In this event, petitioner can SEC. 55.1 (D): Overvalue or aid in overvaluing any security for the use the finding of fraud to move for the dismissal of the rehabilitation case purpose of influencing in any way the actions of the bank or any in the Calamba RTC. bank;

The protective remedy of rehabilitation was never intended to be a refuge of SEC. 55.2: No borrower of a bank shall - a debtor guilty of fraud. (a) Fraudulently overvalue property offered as security for a loan or Meanwhile, the Makati RTC should proceed to hear Civil Case No. 03-991 other credit accommodation from the bank; against the three respondents guided by Section 40 of the General Banking Law which states: (b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a Section 40. Requirement for Grant of Loans or Other Credit loan or other credit accommodation or extending the period Accommodations. Before granting a loan or other credit accommodation, a thereof; bank must ascertain that the debtor is capable of fulfilling his commitments to the bank. (c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or Towards this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures (d) Offer any director, officer, employee or agent of a bank any gift, and such information as may be prescribed by law or by rules and fee, commission, or any other form of compensation in order to regulations of the Monetary Board to enable the bank to properly evaluate influence such persons into approving a loan or other credit the credit application which includes the corresponding financial statements accommodation application. submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the 3. MB Regulation bank may terminate any loan or credit accommodation granted on the basis a. Unsecured Loans of said statements and shall have the right to demand immediate SEC. 41, GBL: Unsecured Loans or Other Credit repayment or liquidation of the obligation. Accommodations. – The Monetary Board is hereby authorized to issue such regulations as it may deem In formulating the rules and regulations under this Section, the Monetary necessary with respect to unsecured loans or other credit Board shall recognize the peculiar characteristics of microfinancing, such as accommodations that may be granted by banks.

b. Other Security Requirements Monetary Board, unless the same are welt-secured and in SEC. 42, GBL: Other Security Requirements for Bank the process of collection shall be considered bad debts Credits. - The Monetary Board may, by regulation, prescribe within the meaning of this Section. further security requirements to which the various types of bank credits shall be subject, and, in accordance with the The Monetary Board may fix, by regulation or by order in a authority granted to it in Section 106 of the New Central specific case, the amount of reserves for bad debts or Bank Act, the Board may by regulation, reduce the doubtful accounts or other contingencies. maximum ratios established in Sections 36 and 37 of this Act, or, in special cases, increase the maximum ratios Writing off of loans, other credit accommodations, advances established therein. and other assets shall be subject to regulations issued by the Monetary Board. SEC. 106, NCBA: Required Security Against Bank Loans. — In order to promote liquidity and solvency of the banking 4. Development Assistance Incentives system, the Monetary Board may issue such regulations as it SEC. 46, GBL: Development Assistance Incentives. - The Bangko may deem necessary with respect to the maximum Sentral shall provide incentives to banks which, without government permissible maturities of the loans and investments which guarantee, extend loans to finance educational institutions the banks may make, and the kind and amount of security cooperatives, hospitals and other medical services, socialized or low- to be required against the various types of credit operations cost housing, local government units and other activities with social of the banks. content.

c. Terms and Conditions 5. Disclosure Requirements SEC. 43, GBL: Authority to Prescribe Terms and Conditions SEC. 2, RA 3765: Declaration of Policy. It is hereby declared to be of Loans and Other Credit Accommodations. - The Monetary the policy of the State to protect its citizens from a lack of Board, may, similarly in accordance with the authority awareness of the true cost of credit to the user by assuring a full granted to it in Section 106 of the New Central Bank Act, disclosure of such cost with a view of preventing the uninformed use and taking into account the requirements of the economy for of credit to the detriment of the national economy. the effective utilization of long-term funds, prescribe the maturities, as well as related terms and conditions for SEC. 4, RA 3765: Any creditor shall furnish to each person to various types of bank loans and other credit whom credit is extended, prior to the consummation of the accommodations. Any change by the Board in the maximum transaction, a clear statement in writing setting forth, to the extent maturities, as well as related terms and conditions for applicable and in accordance with rules and regulations prescribed various types of bank loans and other credit by the Board, the following information: accommodations. Any change by the Board in the maximum maturities shall apply only to loans and other (5) The cash price or delivered price of the property or service to credit accommodations made after the date of such action. be acquired;

d. Renewal or Extension (6) The amounts, if any, to be credited as down payment and/or SEC. 48, GBL: Renewal or Extension of Loans and Other trade-in; Credit Accommodations. – The Monetary Board may, by regulation, prescribe the conditions and limitations under (7) The difference between the amounts set forth under clauses which a bank may grant extensions or renewals of its loans (1) and (2); and other credit accommodations. (8) The charges, individually itemized, which are paid or to be e. Provisions for Losses and Write-Offs paid by such person in connection with the transaction but SEC. 49, GBL: Provisions for Losses and Write-Offs. - All which are not incident to the extension of credit; debts due to any bank on which interest is past due and unpaid for such period as may be determined by the (9) The total amount to be financed;

(10) The finance charge expressed in terms of pesos and Cases centavos; and New Sampaguita Builders Construction, Inc. v PNB, 435 SCRA 565 (2004) (11) The percentage that the finance bears to the total amount to FACTS be financed expressed as a simple annual rate on the NSBC obtained a loan with PNB in an aggregate amount of P8M, using or outstanding unpaid balance of the obligation. mortgaging the real estate properties registered in the name of its Pres. Mr. Dee as collateral. Spouses Dee were authorized to secure the loan and to SEC. 6, RA 3765: (a) Any creditor who in connection with any sign any document which may be required by PNB. Further, the spouses credit transaction fails to disclose to any person any information in shall act as sureties or co- obligors who shall be solidarily liable with NSBC violation of this Act or any regulation issued thereunder shall be for the payment of any of the obligations. liable to such person in the amount of P100 or in an amount equal to twice the finance charged required by such creditor in connection Upon request of PNB, the P8M loan was broken down into a revolving credit with such transaction, whichever is the greater, except that such line of P7.7M and an unadvised line of P0.3M for additional operating and liability shall not exceed P2,000 on any credit transaction. Action to working capital to mobilize its various construction projects. recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of The loan was secured by a first mortgage on several parcels of residential competent jurisdiction. In any action under this subsection in which land owned by the spouses Dee. It was further secured by the joint and any person is entitled to a recovery, the creditor shall be liable for several signatures of spouses Dee, who signed as accommodation- reasonable attorney's fees and court costs as determined by the mortgagors since all the collaterals were owned by them. court. NSBC also executed 3 promissory notes (PNs) as follows: 1) in the amount (b) Except as specified in subsection (a) of this section, nothing of P5M (issued on June 29, 1989 and to mature on: Oct. 27); 2) P2.7M with contained in this Act or any regulation contained in this Act or any due date on Dec.30; 3) in the amount of P300k (issued on Sept 6, 1989, regulation thereunder shall affect the validity or enforceability of any with due date on Jan. 4, 1990). NSBC also signed 2 Credit Agreements. contract or transactions. Then, spouses Dee also executed a Joint and Solidary Agreement (JSA) in favor of PNB. (c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fined by not less than P1,00 or Later on, NSBC failed to pay their obligations under the PNs. Mr. Dee asked more than P5,000 or imprisonment for not less than 6 months, nor for an extension for the payment of interests and the restructuring of its more than one year or both. loan. Petitioners tried to pay but there are still unpaid obligations.

(d) No punishment or penalty provided by this Act shall apply to the PNB accepted Mr. Dee’s proposal to remit to the bank post-dated checks Philippine Government or any agency or any political subdivision covering interests, penalties and part of the principals of his due account, thereof. provided however, that the total payment should be P4M++ which would cover the amount of P1M++ as principal, and P3M++ as interests and (e) A final judgment hereafter rendered in any criminal proceeding penalties! Mr. Dee reiterated his proposal for the settlement of NSBC’s past under this Act to the effect that a defendant has willfully violated due loan account (P7M++). Then, Mr. Dee tendered 4 post-dated checks this Act shall be prima facie evidence against such defendant in an aggregating to P1M++. However, 2 of those checks were dishonored and action or proceeding brought by any other party against such returned due to a ‘stop payment order’ from petitioners. defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the parties thereto. PNB demanded for NSBC to fulfill its obligation. But petitioners still failed to pay their loan obligations, so to make the story shorter, petitioners’ properties were extrajudicially foreclosed and sold at public auction (P10M++) to PNB. Petitioners failed to redeem the properties within 1 year. However, the proceeds of the sale were not sufficient to cover PNB’s total claim (12M++) and thus demanded from petitioners the deficiency of

P2M++ plus interest and other charges, until the amount was fully paid. B. Terms and Conditions Petitioners refused to pay the same. 1. Amortization SEC. 44, GBL: Amortization on Loans and Other Credit CA RULING: “The increases in the interest rates on NSBCI’s loan were also Accommodations. - The amortization schedule of bank loans and held to be authorized by law and the Monetary Board and -- like the other credit accommodations shall be adapted to the nature of the increases in penalty rates -- voluntarily and freely agreed upon by the operations to be financed. parties in the Credit Agreements they executed. Thus, these increases were binding upon petitioners. However, after considering that two to three of In case of loans and other credit accommodations with maturities of Petitioner NSBCI’s projects covered by the loan were affected by the more than five (5) years, provisions must be made for periodic economic slowdown in the areas near the military bases in the cities of amortization payments, but such payments must be made at least Angeles and Olongapo, the appellate court annulled and deleted the annually: Provided, however, That when the borrowed funds are to adjustment in penalty from 6 percent to 36 percent per annum. The be used for purposes which do not initially produce revenues attorney’s fees were also reduced by the appellate court from 10 percent to adequate for regular amortization payments therefrom, the bank 1 percent of the total indebtedness. Respondent was also declared to have may permit the initial amortization payment to be deferred until the unquestioned right to foreclose the Real Estate Mortgage. It was allowed such time as said revenues are sufficient for such purpose, but in no to recover any deficiency in the mortgage account not realized in the case shall the initial amortization date be later than five (5) years foreclosure sale, since petitioner- spouses had agreed to be solidarily liable from the date on which the loan or other credit accommodation is for all sums due and payable to respondent. Finally, the appellate court granted. concluded that the extrajudicial foreclosure proceedings and auction sale were valid” In case of loans and other credit accommodations to micro finance sectors, the schedule of loan amortization shall take into ISSUES consideration the projected cash flow of the borrower and adopt this 1. W/N the loan accounts were bloated accounts YES. into the terms and conditions formulated by banks. 2. W/N the foreclosure and the subsequent claim for deficiency are valid and proper NO. 2. Pre-Payment SEC. 45, GBL: Prepayment of Loans and Other Credit HELD Accommodations. – A borrower may at any time prior to the agreed 1. YES. Petitioner NSBC’s loan accounts with PNB appear to be bloated with maturity date prepay, in whole or in part, the unpaid balance of any some iniquitous imposition of interests, penalties, other charges and bank loan and other credit accommodation, subject to such attorney’s fees. The Court primarily held that the increases in interest are reasonable terms and conditions as may be agreed upon between baseless. the bank and its borrower.

The 3 PNs issued specified the interest rate to be charged: 19.5% in the 3. Interest first, and 21.5 in the second and third. However, a uniform clause therein ART. 1956, NCC: No interest shall be due unless it has been permitted PNB to increase the rate “within the limits allowed by law at any expressly stipulated in writing. time depending on whatever policy it may adopt in the future” without even giving prior notice to petitioners. a. No Ceiling Cases Petitioners’ accessory duty to pay interest did not give PNB unrestrained Bulos Jr v Yasuma, 527 SCRA 727 (2007) freedom to charge any rate other than that which was agreed upon. No FACTS interest shall be due, unless expressly stipulated in writing. The “unilateral The original loan obtained by the petitioner, together with Dr. Lim and Atty. determination and imposition” of increased rates is violative of the principle Tabalingcos, from the respondent amounted to P2,500,000.00 with 4% of mutuality of contracts. interest for three months, or from 11 October 1988 up to 10 January 1989, and in case of extension of the loan, the interest of 5% per month will be imposed. The obligation of the petitioner, Dr. Lim and Atty. Tabalingcos was joint and solidary. Petitioner failed to pay the loan by 10 January 1989; thus, from 11 October 1988 up to February 1989, the loan obligation,

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 139 including interest, reached a total amount of P2,700,000.00. Petitioner interest rate agreed upon by parties does not violate the Usury Law, as made a partial payment via a dacion en pago, amounting to P1,630,750.00, amended by P.D. 116. The Court has consistently held that for sometime which was deducted from the total loan obligation of P2,700,000.00 leaving now, usury has been legally non-inexistent and that interest can now be a balance of P1,069,000.00 as of 24 February 1989. By March 1989, the charged as lender and borrower may agree upon. balance of the loan began earninga 5% interest per month after all the parties agreed to an increase in the interest rate during the extended Petitioners also cannot find refuge in Medel. In this case, what this Court period. Taking into consideration the outstanding loan balance of declared as unconscionable was the imposition of a 66% interest rate per P1,069,000.00, plus interest, and minus a discount granted by respondent, annum. In the instant case, the interest rate is only 24% per annum, the amount still due respondent was determined by the parties to be agreed upon by both parties. By no means can it be considered P2,240,000.00. And to pay the remaining indebtedness, Atty. Tabalingcos unconscionable or excessive. issued a check covering the amount but it was dishonored, therefore, the indebtedness remains at P2,240,000.00. b. In the absence of stipulation SEC. X305.1, MRB: Rate of interest in the absence of ISSUE stipulation. The rate of interest for the loan or forbearance Whether or not the imposed interest (4% per month imposed originally by of any money, goods or credits and the rate allowed in the bank and the lowered rate of 21% p.a. imposed by the RTC) has legal judgments, in the absence of expressed contract as to such and factual basis. rate of interest, shall be twelve percent (12%) per annum.

RULING c. Escalation Clause, when allowable NO, the interest is highly unconscionable and inordinate. The agreed ART. 1308, NCC: The contract must bind both contracting interest rate of 4% per month or 48% per annum is unconscionable and parties; its validity or compliance cannot be left to the will of must be mitigated.Following established jurisprudence, the legal interest one of them. rate of 12% should apply, computed from the date of judicial demand, that is, 7 April 1990.The aforequoted paragraph 3 of the guidelines is also SEC. X305.2, MRB: Escalation clause; when allowable. appropriate herein, and a 12% interest per annum is imposed on petitioners Parties to an agreement pertaining to a loan or forbearance monetary liability to respondent. of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the Bacolor v Bangko Filipino Savings and Mortgage Bank, 515 SCRA 79 applicable maximum rate of interest is increased by the (2007) Monetary Board: Provided, That such stipulation shall be FACTS valid only if there is also a stipulation in the agreement that On February 11, 1982, spouses Zacarias and Catherine Bacolor, herein the rate of interest agreed upon shall be reduced in the petitioners, obtained a loan of P244,000.00 from Banco Filipino Savings and event that the applicable maximum rate of interest is Mortgage Bank, Dagupan City Branch, respondent. They executed a reduced by law or by the Monetary Board: Provided, further, promissory note providing that the amount shall be payable within a period That the adjustment in the rate of interest agreed upon shall of ten (10) years with a monthly amortization of P5,380.00 beginning March take effect on or after the effectivity of the increase or 11, 1982 and every 11th day of the month thereafter; that the interest rate decrease in the maximum rate of interest. shall be twenty-four percent (24%) per annum. From March 11, 1982 to July 10, 1991, petitioners paid respondent bank P412, 199.36. Thereafter, Cases they failed to pay the remaining balance of the loan. PNB v CA, 196 SCRA 536 (1991) FACTS ISSUE Ambrosio Padilla applied for and was granted a by PNB a credit line of Whether or not the interest of 24% p.a. imposed is legal? P1.8M, secured by a real estate mortgage, for a term of two years with 18% interest per annum. RULING In the present case, the term of the subject loan is for a period of 10 years. The Real Estate Mortgage Contract provided that: Considering that its maturity is more than 730 days, the interest rate is not subject to any ceiling following the above provision. Therefore, the 24% (k) INCREASE OF INTEREST RATE

The rate of interest charged on the obligation secured by this deposit substitutes and time deposits, on promissory notes mortgage as well as the interest on the amount which may have issued and time deposits received by such banks, of been advanced by the MORTGAGEE, in accordance with the P100,000 and over per transaction account, with maturities provisions hereof, shall be subject during the life of this contract to corresponding to the interest periods for which such MRRs such an increase within the rate allowed by law, as the Board of are being determined. Such rates and the composition of the Directors of the MORTGAGEE may prescribe for its debtors. sample commercial banks shall be reviewed and determined at the beginning of every calendar semester on the basis of August 10, 1984 the Bank unilaterally increased the interest rate from 18% the banks' combined levels of outstanding deposit to 32%. On September 12, 1984 the interest rate was again adjusted from substitutes and time deposits as of May 31 or November 30, 32% to 41%. On October 1984 it was again increased to 48%. as the case may be.

ISSUE The rate of interest on floating rate loans existing and Whether or not the increase of interest from 18% to 48% is valid. outstanding as of December 23, 1995 shall continue to be determined on the basis of the MRRs obtained in accordance RULING with the provisions of the rules existing as of January 1, NO. The interest is exorbitant and highly unconscionable. PNB’s successive 1989: Provided, however, That the parties to such existing increases of the interest rate on Ambrosio’s loan, over the latter’s protest, floating rate loan agreements are not precluded from were arbitrary as they violated an express provision of the Credit Agreement amending or modifying their loan agreements by adopting a that by its terms “may be amended only by an instrument in writing signed floating rate of interest determined on the basis of the TBR by the party to be bound as burdened by such amendment.” The increases or other market based reference rates. imposed by PNB also contravene ART. 1956 of the Civil Code which provides that “no interest shall be sue unless it has been expressly stipulated in Where the loan agreement provides for a floating interest writing.” rate, the interest period, which shall be such period of time for which the rate of interest is fixed, shall be such period as The debtor herein never agreed in writing to pay the interest increases fixed may be agreed upon by the parties. by the PNB beyond 24% p.a., hence, he is not bound to pay a higher rate than that. For the purpose of computing the MRRs, banks shall accomplish the report forms, RS Form 2D and Form 2E (BSP That an increase in the interest rate from 18% to 48% within a period of 5-17-34A). four months is excessive. Cases New Sampaguita Builders Construction Inc v PNB, 435 SCRA 565 Consolidated Bank and Trust Corp v CA, 356 SCRA 671 (2001) (2004)—supra FACTS Continental Cement Corp and Gregory Lim (Both as Respondents)obtained d. Floating rates of interest a Letter of Credit with Consolidated Bank and Trust Corp (CBTC). The Letter SEC. X305.3, MRB: Floating rates of interest. The rate of of Credit was used to purchase bunker fuel oil from Petrophil Corp. In interest on a floating rate loan during each interest period relation to the same transaction, a Trust Receipt was executed by shall be stated on the basis of Manila Reference Rates Continental Cement, with Lim as signatory. (MRRs), T- Bill Rates (TBRs) or other market based reference rates plus a margin as may be agreed upon by the CBTC file a complaint with the RTC, arguing that respondents failed to turn parties. over the goods covered by the Trust Receipt. In their defense, CCC content that the transaction was a simple loan and not a trust receipt. RTC The MRRs for various interest periods shall be determined dismissed the complaint by CBTC but granted the counterclaim by and announced by the BSP every week and shall be based respondents. CA revered the decision. (The disputed transaction had a on the weighted average of the interest rates paid during provision on interest) the immediately preceding week by the ten (10) commercial banks with the highest combined levels of outstanding

ISSUE ordered Equitable to pay moral/exemplary damages to respondents. The CA W/N the floating rate of interest imposed by CBTC is valid. dismissed the appeal of Equitable

RULING ISSUE NO. The trust agreement provides: W/N there was extraordinary deflation. I, WE jointly and severally agree to any increase or decrease in the interest rate which may occur after July 1, 1981, when the Central RULING Bank floated the interest rate, and to pay additionally the penalty of NO. Extraordinary inflation exists when there is an unusual decrease in the 1% per month until the amount/s or installment/s due and unpaid purchasing power of the currency and such decrease could not be under the trust receipt on the reverse side hereof is/are fully paid reasonably foreseen or manifestly beyond the contemplation of the parties at the time of the obligation. Extraordinary Deflation involves an inverse The stipulation is invalid, having no reference rate set by either by it or by situation. the Central Bank, essentially leaving the determination thereof to the CBTC. For Extraordinary inflation/deflation to affect an obligation, the following While it may be acceptable for banks to stipulate interest rates that are must be present. (1) official declaration by the BSP (2) obligation was depended upon prevailing market conditions, there should always be a contractual in nature (3) parties expressly agreed to consider the effects of reference rate upon which to peg such variable interest. An example of such extraordinary inflation/deflation. is given in Polotan v. CA – “if there occurs any change in the prevailing market rates, the new interest rate shall be the guiding rate. In this In the present case, BSP never declared a situation of extraordinary example, the basis of any increase / decrease is the market rates. In the inflation. In addition, the parties did not agree to recognize the effects of present case, there was no basis for any increase / decrease. extraordinary inflation. Thus, the rate should be pegged at the simply on exchange rate fixed by the BSP on the date of maturity. *The transaction is a simple loan. It is not a trust receipt as the goods was received before the trust receipt was executed. (Vic is gay) Thus, *the promissory notes are valid because despite being a contract of respondents were required to comply with their loan obligation. adhesion, there was no situation where the dominant party took advantage of the weakness of the other party. 4. Extraordinary Inflation/Deflation ART. 1250, NCC: In case an extraordinary inflation or deflation of *Escalation clauses in this case are void as Equitable as unbridled discretion the currency stipulated should supervene, the value of the currency in determining the rate when the notes are extended, not based by law or at the time of the establishment of the obligation shall be the basis by the Monetary Board. (Again, Vic is gay) Thus, the petitioners were of payment, unless there is an agreement to the contrary. required to comply with their obligation with 12% legal interest .

Cases 5. Restructuring EPCI Bank v Ng Sheung Ngor, 541 SCRA 223 (2007) SEC. X322, MRB: Restructured Loans; General Policy. Banks shall FACTS have full discretion in the restructuring of loans in order to provide Ng Sheung Ngor, Ken Appliance Division and Benjamin Go (Respondents) flexibility in arranging the repayment of such loans without filed an annulment/reformation case against Equitable PCI Bank and its impairing or endangering the lending bank’s financial interest, employees. They claim that the Equitable induced them to avail of its Peso- except in special cases approved by the Monetary Board such as Dollar credit facilities (evidenced by Promissory Notes) by offering low loans funded by foreign currency obligations. However, the interest rates. However, there were not aware that escalation clauses were restructuring of loans granted to DOSRI should be upon terms not also stipulated, thus allowing Equitable to increase interest rates w/o their less favorable to the bank than those offered to others. While consent. agreements on loan restructuring should be considered as management tools to maintain or improve the soundness of the RTC validated the transaction but invalidated the escalation clause. bank’s lending operations, these should be drawn mainly to assist Nevertheless, it took judicial notice of extraordinary deflation during the borrowers towards the settlement of their obligations, taking into intervening period and ordered to use 1996 Dollar Exchange Rate. It also account their capacity to pay.

C. Single Borrowers Limit 2. What is Included in Ceiling SEC. 35.3, GBL: The above prescribed ceilings shall include: 1. Ceilings SEC. 35.1, GBL: Except as the Monetary Board may otherwise (a) the direct liability of the maker or acceptor of paper prescribe for reasons of national interest, the total amount of loans, discounted with or sold to such bank and the liability of a credit accommodations and guarantees as may be defined by the general endorser, drawer or guarantor who obtains a loan or Monetary Board that may be extended by a bank to any person, other credit accommodation from or discounts paper with or partnership, association, corporation or other entity shall at no time sells papers to such bank; exceed twenty percent (20%) of the net worth of such bank. The basis for determining compliance with single borrower limit is the (b) in the case of an individual who owns or controls a majority total credit commitment of the bank to the borrower. interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; SEC. 35.2, GBL: Unless the Monetary Board prescribes otherwise, the total amount of loans, credit accommodations and guarantees (c) in the case of a corporation, all liabilities to such bank of all prescribed in the preceding paragraph may be increased by an subsidiaries in which such corporation owns or controls a additional ten percent (10%) of the net worth of such bank provided majority interest; and the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other (d) in the case of a partnership, association or other entity, the similar documents transferring or securing title covering readily liabilities of the members thereof to such bank. marketable, non-perishable goods which must be fully covered by insurance. SEC. 35.4, GBL: Even if a parent corporation, partnership, association, entity or an individual who owns or controls a majority SEC. 24, GBL: Equity Investments of a Universal Bank. – A interest in such entities has no liability to the bank, the Monetary universal bank may, subject to the conditions stated in the Board may prescribe the combination of the liabilities of subsidiary succeeding paragraph, invest in the equities of allied and non-allied corporations or members of the partnership, association, entity or enterprises as may be determined by the Monetary Board. Allied such individual under certain circumstances, including but not enterprises may either be financial or non-financial. limited to, any of the following situations: .

Except as the Monetary Board may otherwise prescribe: (e) the parent corporation, partnership, association, entity or individual guarantees the repayment of the liabilities; 24.1. The total investment in equities of allied and non-allied enterprises shall not exceed fifty percent (50%) of the net (f) the liabilities were incurred for the accommodation of the worth of the bank; and parent corporation or another subsidiary or of the partnership or association or entity or such individual; or 24.2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed twenty-five percent (g) the subsidiaries though separate entities operate merely as (25%) of the net worth of the bank. departments or divisions of a single entity.

As used in this Act, “net worth” shall mean the total of the SEC. 35.6, GBL: Loans and other credit accommodations, deposits unimpaired paid-in capital including paid-in surplus, retained maintained with, and usual guarantees by a bank to any other bank earnings and undivided profit, net of valuation reserves and other or non-bank entity, whether locally or abroad, shall be subject to adjustments as may be required by the Bangko Sentral. The the limits as herein prescribed. acquisition of such equity or equities is subject to the prior approval of the Monetary Board which shall promulgate appropriate SEC. 35.7, GBL: Certain types of contingent accounts of borrowers guidelines to govern such investments. . may be included among those subject to these prescribed limits as may be determined by the Monetary Board.

3. Exceptions Transitory provision. Outstanding credit commitments of a bank as SEC. 35.1, GBL: Except as the Monetary Board may otherwise of 2 May 2004 which are within the ceiling prescribed under the prescribe for reasons of national interest, the total amount of loans, regulations existing prior to said date but will exceed the limitations credit accommodations and guarantees as may be defined by the prescribed in this Section shall not be subject to penalty for a period Monetary Board that may be extended by a bank to any person, of one (1) year or until said credit commitments become past due or partnership, association, corporation or other entity shall at no time are extended, renewed or restructured whichever comes later: Said exceed twenty percent (20%) of the net worth of such bank. The credit commitments shall, however, be reported to the Bangko basis for determining compliance with single borrower limit is the Sentral within fifteen (15) banking days from 2 May 2004. total credit commitment of the bank to the borrower. D. DOSRI Accounts SEC. 17, RURAL BANKS ACT: Deposits of rural banks with SEC. 36, GBL: Restriction on Bank Exposure to Directors, Officers, government-owned or controlled financial institutions like the Land Stockholders and Their Related Interests. - No director or officer of any Bank of the Philippines, the Development Bank of the Philippines, bank shall, directly or indirectly, for himself or as the representative or and the Philippine National Bank are exempted from the Single agent of others, borrow from such bank nor shall he become a Borrower's Limit imposed by the General Banking Act. guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank In areas where there are no government banks, rural banks may except with the written approval of the majority of all the directors of deposit in private banks more than the amount prescribed by the the bank, excluding the director concerned: Provided, That such written Single Borrower's Limit, subject to Monetary Board regulations. approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved 4. Sanctions by the Bangko Sentral. The required approval shall be entered upon the SUBSEC. 303.5, MRB: Sanctions. Violations of the provisions of this records of the bank and a copy of such entry shall be transmitted Section shall be subject to the following: forthwith to the appropriate supervising and examining department of the Bangko Sentral. a. Monetary penalties - Fines of one- tenth of one percent (1/10 of 1%) of the excess over the ceiling but not to exceed P30,000.00 a Dealings of a bank with any of its directors, officers or stockholders and day for each SBL violation shall be assessed on the bank to be their related interests shall be upon terms not less favorable to the bank reckoned from the date the excess started up to the date when such than those offered to others. excess was eliminated: Provided, That a maximum fine of P500.00 a day for each violation shall be imposed against banks with total After due notice to the board of directors of the bank, the office of any resources of less than P50 million at the time of granting of bank director or officer who violates the provisions of this Section may loan/credit accommodation. be declared vacant and the director or officer shall be subject to the penal provisions of the New Central Bank Act. b. Other sanctions First Offense – Reprimand for the directors/officers who approved The Monetary Board may regulate the amount of loans, credit the credit availment which resulted in the excess with a warning accommodations and guarantees that may be extended, directly or that subsequent violations will be subject to more severe sanctions. indirectly, by a bank to its directors, officers, stockholders and their related interests, as well as investments of such bank in enterprises Subsequent offenses – owned or controlled by said directors, officers, stockholders and their (1) Fine of P1,000.00 for directors/ officers who approved the credit related interests. However, the outstanding loans, credit availment which resulted in the excess. accommodations and guarantees which a bank may extend to each of its stockholders, directors, or officers and their related interests, shall be (2) Suspension of the bank’s branching privileges and access to BSP limited to an amount equivalent to their respective unencumbered rediscounting facilities until the excess is eliminated. deposits and book value of their paid-in capital contribution in the bank: Provided, however, That loans, credit accommodations and guarantees (3) Other penalties as the Monetary Board may impose depending secured by assets considered as non-risk by the Monetary Board shall on the gravity of the offense. be excluded from such limit: Provided, further, That loans, credit

accommodations and advances to officers in the form of fringe benefits board of directors of a bank or who is directly or indirectly the granted in accordance with rules as may be prescribed by the Monetary registered or beneficial owner of more than ten percent (10%) of Board shall not be subject to the individual limit. any class of its equity security.

The Monetary Board shall define the term “related interests.” e. Related interest shall refer to any of the following: (1) Spouse or relative within the first degree of The limit on loans, credit accommodations and guarantees prescribed consanguinity or affinity, or relative by legal adoption, of a herein shall not apply to loans, credit accommodations and guarantees director, officer or stockholder of the bank; extended by a cooperative bank to its cooperative shareholders. (2) Partnership of which a director, officer, or stockholder of SEC. 26, NCBA: Any director, officer or stockholder who, together with a bank or his spouse or relative within the first degree of his related interest, contracts a loan or any form of financial consanguinity or affinity, or relative by legal adoption, is a accommodation from: (1) his bank; or (2) from a bank (a) which is a general partner; subsidiary of a bank holding company of which both his bank and the lending bank are subsidiaries or (b) in which a controlling proportion of (3) Co-owner with the director, officer, stockholder or his the shares is owned by the same interest that owns a controlling spouse or relative within the first degree of consanguinity or proportion of the shares of his bank, in excess of five percent (5%) of affinity, or relative by legal adoption, of the property or the capital and surplus of the bank, or in the maximum amount interest or right mortgaged, pledged or assigned to secure permitted by law, whichever is lower, shall be required by the lending the loans or other credit accommodations, except when the bank to waive the secrecy of his deposits of whatever nature in all banks mortgage, pledge or assignment covers only said co-owner’s in the Philippines. Any information obtained from an examination of his undivided interest; deposits shall be held strictly confidential and may be used by the examiners only in connection with their supervisory and examination (4) Corporation, association, or firm of which a director or responsibility or by the Bangko Sentral in an appropriate legal action it officer of the bank, or his spouse is also a director or officer has initiated involving the deposit account. of such corporation, association or firm, except (a) where the securities of such corporation, association or firm are 1. Coverage: Persons and Transactions Covered listed and traded in the big board or commercial and SEC. X326, MRB: General Policy. Dealings of a bank with any of its industrial board of domestic stock exchanges and less than DOSRI should be in the regular course of business and upon terms fifty percent (50%) of the voting stock thereof is owned by not less favorable to the bank than those offered to others. any one (1) person or by persons related to each other within the first degree of consanguinity or affinity; or (b) Definitions. For purposes of these regulations, the following where the director, officer or stockholder of the bank sits as definitions shall apply: a representative of the bank in the board of directors of such corporation: Provided, That the bank representative shall a. Directors shall refer to bank directors as defined in Subsec. not have any equity interest in the borrower corporation X141.1. except for the minimum shares required by law, rules and regulations, or by the by-laws of the corporation: Provided, b. Officers shall refer to bank officers as defined in Subsec. X142.1. further, That the borrowing corporation is not among those mentioned in Items “e(5)”, “e(6)”, “e(7)” and “e(8)” of this c. Stockholder shall refer to any stockholder of record in the books Section; of the bank, acting personally, or through an attorney-in-fact, or any other person duly authorized by him. Stockholder shall also (5) Corporation, association or firm of which any or a group refer to a juridical person such as corporation, association or firm. of directors, officers, stockholders of the lending bank and/or their spouses or relatives within the first degree of d. Substantial stockholder shall mean a person, or group of persons consanguinity or affinity, or relative by legal adoption, hold whether natural or juridical, owning such number of shares that will or own at least twenty percent (20%) of the subscribed allow such person or group to elect at least one (1) member of the

capital of such corporation, or of the equity of such association or firm; j. Total loan portfolio shall refer to the sum of all loan accounts outstanding, gross of valuation reserves, as reflected in the bank’s (6) Corporation, association or firm wholly or majority- consolidated statement of condition, excluding outstanding loans owned or controlled by any related entity or a group of financed by special/specific funds from the government financial related entities mentioned in Items “e(2)”, “e(4)” and “e(5)” institutions. of this Section. k. Secured loan, borrowing or other credit accommodation shall (7) Corporation, association or firm which owns or controls refer to any loan, or credit accommodation or portion thereof directly or indirectly whether singly or as part of a group of referred to in Sec. X327 which is secured by: related interest at least twenty percent (20%) of the (1) Real estate mortgage, chattel mortgage on tangible subscribed capital of a substantial stockholder of the lending assets, and pledge of jewelry, precious stones and other bank or which controls majority interest of the bank valuable articles; pursuant to Subsec. X303.1. (2) Assignment of intangible assets such as patents, (8) Corporation, association or firm in which the lending trademarks, trade names and copyrights; bank and/or its parent/ subsidiary holds or owns at least twenty percent (20%) of the subscribed capital of such (3) Unconditional payment guarantees such as standby corporation, or in the equity of such association or firm, or letters of credit and letter of indemnity issued by has an existing management contract or any similar banks/multilateral financial institutions; arrangement with the lending bank or its parent/subsidiary. (4) Assignment of, or hold-out on, deposits or deposit f. Subsidiary shall refer to a corporation or firm more than fifty substitutes maintained in the lending bank; percent (50%) of the outstanding voting stock of which is directly or indirectly owned, controlled or held with power to vote by its parent (5) Cash margin deposits; or assignment or pledge of corporation. government securities or readily marketable bonds and other high-grade debt securities and “blue-chip” stocks, g. Unencumbered deposits shall refer to savings, time and demand except those issued by the lending entity, or by its parent deposits, which are not subject to an assignment or hold-out company which owns more than fifty percent (50%) of its agreement or any other encumbrance. outstanding shares of stocks, subject to the additional provision that the issuer corporation has a net worth of at h. Book value of the paid-in capital contribution shall mean the least P1 billion and with annual net earnings during the proportional amount of the bank’s total capital accounts (net of such immediately preceding five (5) years; unbooked valuation reserves and other capital adjustments as may be required by the BSP) as the corresponding paid-in capital (6) Customer’s liability under import bills outstanding for not contribution of each of the bank’s directors, officers, stockholders more than thirty (30) days from date of original entry; and their related interests bear to the total paid-in capital of the bank: Provided, That as a basis for determining the individual ceiling (7) Sales contract receivables arising from sale of real referred to in Sec. X330, the corresponding book value of the shares property on credit where title to the property is retained by of stock of said directors, officers, stockholders and their related the bank; and interests which are the subject of pledge, assignment or any other encumbrance shall be deducted therefrom. (8) Customer’s liability-import bills under trust receipts outstanding for not more than thirty (30) days from date of i. Net worth shall mean the total of the unimpaired paid-in capital booking: Provided, That the booking under trust receipts including paid- in surplus, retained earnings and undivided profit, shall have been made not later than the thirty-first day from net of valuation reserves and other adjustments as may be required the date of original entry referred to in Item “(6)” above. by the BSP.

l. Unsecured loan, borrowing or other credit accommodation shall SEC. X328, MRB: Transactions Not Covered. The terms loans, other refer to any loan, or other credit accommodation or portion thereof credit accommodations and guarantees as used herein shall not referred in Sec. X327 which is not secured in accordance with Item refer to the following: “k” above. a. Advances against accrued compensation, or for the purpose of SEC. X327, MRB: Transactions Covered. The terms loans, other providing payment of authorized travel, legitimate expenses or other credit accommodations and guarantees as used herein shall refer to transactions for the account of the bank or for utilization of transactions of the bank which involve the grant of any loan, maternity and other leave credits; advance or other credit accommodation in any form whatsoever, whether renewal, extension or increase, and shall include: b. The increase in the amount of outstanding credit accommodations as a result of additional charges or advances made by the bank to a. Any advance by means of an incidental or temporary overdraft, protect its interest such as taxes, insurance, etc.; cash item, “vale”, etc.; c. The discount of bills of exchange drawn in good faith against b. Any advance of unearned salary or other unearned compensation actually existing values, and the discount of commercial or business for periods in excess of thirty (30) days; paper actually owned by the person negotiating the same, including, but not limited to, the acquisition by a domestic bank of export bills c. Any advance by means of DAUDs; from any of its DOSRI which are drawn in accordance with the terms and conditions of the covering letters of credit: Provided, That the d. Outstanding availments under an established credit line; transaction shall automatically be subject to the ceilings as herein provided once the DOSRI who is a party to the transaction becomes e. Drawings against an existing letter of credit; directly liable to the bank;

f. The acquisition of any note, draft, bill of exchange or other d. Transactions with a foreign bank which has stockholdings in the evidence of indebtedness upon which the bank’s directors, officers, local bank where the foreign bank acts as guarantor through the stockholders, and their related interests may be liable as makers, issuance of letters of credit or assignment of a deposit in a currency drawers, acceptors, endorsers, guarantors or sureties; eligible as part of the international reserves and held in a bank in the Philippines to secure other credit accommodations granted to g. Indirect lending such as loans or other credit accommodations another person or entity: Provided, That the foreign bank granted by another financial intermediary to said directors, officers, stockholder shall automatically be subject to the ceilings as herein stockholders, and their related interests from funds of the bank provided in the event that its contingent liability as guarantor invested in the other institution’s trust or other department when becomes a real liability; and there is a clear relationship between the transactions; e. Interbank call loan transactions. h. The increase of an existing indebtedness, as well as additional availments under a credit line or additional drawings against a letter SEC. X329, MRB: Direct or Indirect Borrowings of credit; Loans, other credit accommodations and guarantees to DOSRI shall be considered direct or indirect borrowings in accordance with the i. The sale of assets, such as shares of stock, on credit; and following criteria:

j. Any other transactions as a result of which the bank’s directors, a. Direct borrowing. If the director, officer or stockholder of the officers, stockholders and their related interests become obligated or lending bank is a party to any of the transactions enumerated in may become obligated to the lending bank, by any means Sec. X327 for himself, or as the representative or agent of others, whatsoever to pay money or its equivalent. or if he acts as a guarantor, endorser or surety for loans from the bank, or if the loan or other credit accommodation to another party is secured by a property interest or right of the director, officer or stockholder.

(6) Such other assets considered as non- risk by the Monetary b. Indirect Borrowing. If in any of the transactions in Sec. X327 the Board. borrower, guarantor, endorser or surety is a related interest as b. Loans, other credit accommodations and advances to officers in defined in Item “e”, Subsec. X326.1. the form of fringe benefits granted in accordance with existing regulations; and Other cases of direct/indirect borrowing shall be resolved on a case- to-case basis. c. Loans, other credit accommodations and guarantees extended by a Coop Bank to its cooperative shareholders. It shall be the responsibility of the bank concerned to ascertain whether the borrower, guarantor, endorser or surety is related or SEC. X331, MRB: Aggregate Ceiling; Ceiling on Unsecured Loans, connected with the bank or with any of the directors, officers or Other Credit Accommodations and Guarantees. Except with the prior stockholders of the bank in any of the capacities mentioned in Item approval of the Monetary Board, the total outstanding loans, other “e” of Subsec. X326.1. credit accommodations and guarantees to DOSRI shall not exceed fifteen percent (15%) of the total loan portfolio of the bank or 100% In determining indirect borrowings, as enumerated above, only of net worth whichever is lower: Provided, That in no case shall the those cases involving living relatives shall be considered. total unsecured loans, other credit accommodations and guarantees to said DOSRI exceed thirty percent (30%) of the aggregate ceiling 2. Ceilings: Individual and Aggregate Ceilings and Exclusions or the outstanding loans, other credit accommodations and SEC. X330, MRB: Individual Ceilings. The total outstanding loans, guarantees, whichever is lower. For the purpose of determining other credit accommodations and guarantees to each of the bank’s compliance with the ceiling on unsecured loans, other credit DOSRI shall be limited to an amount equivalent to their respective accommodations and guarantees, banks shall be allowed to average unencumbered deposits and book value of their paid-in capital their ceiling on unsecured loans, other credit accommodations and contribution in the bank: Provided, however, That unsecured loans, guarantees every quarter. other credit accommodations and guarantees to each of the bank’s DOSRI shall not exceed thirty percent (30%) of their respective total In evaluating requests for extension of loans in excess of the loans, other credit accommodations and guarantees. aggregate ceiling, the BSP shall consider the credit standing of the borrower, viability of the projects financed by such other credit Exclusions from individual ceiling. The following loans, other credit accommodations in relation to national objectives, collateral or accommodations and guarantees shall be excluded in determining security and other pertinent considerations. compliance with the individual ceiling. SEC. X332. MRB: Exclusions from Aggregate Ceiling. The following a. Loans, other credit accommodations and guarantees secured by loans, other credit accommodations and guarantees shall be assets considered as non-risk by the Monetary Board; excluded in determining compliance with the aggregate ceiling:

Assets considered as non-risk shall refer to the following: a. Credit accommodations or portions thereof to the extent secured (1) Cash; by assets considered as non-risk by the Monetary Board; (2) Debt securities issued by the BSP or the Philippine government; b. Credit accommodations to a corporate stockholder which meets (3) Deposits maintained in the lending bank and held in the all the following conditions: Philippines; (1) The corporation is a non-financial institution; (4) Debt securities issued by the U.S. government; (2) Its shares are listed and traded in the domestic stock (5) Debt securities issued by central governments, central exchanges; and banks of foreign countries and multilateral financial (3) No person or group of persons related within the first degree of institutions such as International Finance Corporation, Asian consanguinity or affinity holds/owns more than twenty percent Development Bank and World Bank, with the highest credit (20%) of the subscribed capital of the corporation. quality given by any two (2) internationally accepted rating agencies; and

c. Credit accommodations to government-owned or controlled participated in the board meeting and who approved such corporations, in cases where a director, officer or stockholder of the resolution failed to sign, the corporate secretary may issue a lending bank is a representative of the government in the borrowing certification to this effect indicating the reason for the failure corporation and does not hold any proprietary interest in such of the said director to sign the resolution. corporation: Provided, That other rules on loans to DOSRI, such as procedural and reportorial requirements under Sections X334 and e. Transmittal of copy of board approval; contents thereof. A copy of X335 are followed. the written approval of the board of directors, as herein required, shall be submitted to the appropriate supervising and examining d. Exclusions from individual ceiling mentioned under Items “(b)” department of the BSP within twenty (20) banking days from the and “(c)” of Subsec. X330.1. date of approval. The copy may be a duplicate of the original, or a reproduction copy showing clearly the signatures of the approving 3. Requirements: Procedural and Reportorial directors: Provided, That if a reproduction copy is to be submitted, it SEC. X334, MRB: Procedural Requirements. The following provisions shall contain on its face or reverse side a signed certification by the shall apply if the bank’s DOSRI are parties to, or act as secretary that it is a reproduction of the original written approval: representatives or agents of others in, any of the transactions Provided, further, That such written approval shall not be required enumerated under Sec. X327: for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the BSP. a. Approval of the board, when to obtain. Except with prior written approval of the majority of the directors, excluding the director SEC. X335, MRB: Reportorial Requirements. Each bank shall concerned, no loan, other credit accommodation and guarantee shall maintain a record of loans, other credit accommodations and be granted nor shall any of the transactions enumerated under Sec. guarantees covered by these regulations in a manner and form that X327 be entered into. will facilitate verification of such transactions by BSP examiners.

b. Approval by the board, how manifested. The approval shall be The appropriate supervising and examining department may require manifested in a resolution passed by the board of directors during a banks to furnish such data or information as may be necessary for meeting and made of record. purposes of implementing the provisions of the foregoing rules.

c. Determination of majority of the directors. The determination of 4. Sanctions the majority of the directors, excluding the director concerned, shall SEC. X336, MRB: Sanctions. Any violation of the provisions of the be based on the total number of directors of the bank as provided in foregoing rules shall be subject to any or all of the following its articles of incorporation and by-laws. sanctions:

d. Contents of the resolution. The resolution of the board of a. Restriction or prohibition on the bank from declaring dividends for directors shall contain the following information: non-compliance with the prescribed ceiling on DOSRI until the (1) Name of the director or officer concerned and his involvement outstanding loans and other credit accommodations have been as regards the credit accommodation, such as principal, reduced to within the herein prescribed ceilings; endorser, spouse of borrower, etc.; (2) Nature of the loan or other credit accommodation, purpose, b. After due notice to the board of directors of the bank, the office of amount, credit basis for such loan or other credit any bank director or officer who violates the provisions of this accommodation, security and appraisal thereof, maturity, Section may be declared vacant and the director or officer shall be interest rate, schedule of repayment and other terms of the subject to the penal provisions of the New Central Bank Act; loan or other credit accommodation; (3) Date of resolution; c. Application of (1) the borrowing director’s or officer’s share in the (4) Names of the directors who participated in the deliberations bank’s profit sharing program; and (2) the share of the director of the meeting; and voting for the approval of the loan or other credit accommodation, (5) Names in print and signatures of the directors approving the against the excess of such loan or other credit accommodation over resolution: Provided, That in instances where a director who any of the herein prescribed ceilings; and

borrower and in the case of unsecured loans and other credit d. For the duration of each violation, imposition of a fine of one- accommodations to an individual borrower, at least one (1) co- tenth of one percent (1/10 of 1%) of the excess over the ceilings maker, except when the principal borrower has the financial capacity per day but not to exceed P30,000 a day on the following: and a good track record of paying his obligations. (1) The lending bank; (2) The director, officer or stockholder whose borrowing exceeds his 2. Joint and Solidary Signature (JSS) individual ceiling; and ART. 2047, NCC: By guaranty a person, called the guarantor, binds (3) Each of the directors voting for the approval of the loan or other himself to the creditor to fulfill the obligation of the principal debtor credit accommodation in excess of any of the ceilings prescribed in case the latter should fail to do so. in Secs. X330 and X331. If a person binds himself solidarily with the principal debtor, the The penalty for exceeding the individual ceiling, aggregate ceiling provisions of Section 4, Chapter 3, Title I of this Book shall be and ceiling on unsecured loans shall be computed on the average observed. In such case the contract is called a suretyship. amount of loans in excess of said ceilings during the same week. Cases E. Collateral/Security PNB v CA, 198 SCRA 767 (1991) 1. Unsecured Loans PNB v. CA SEC. X319, MRB: General guidelines. Before granting a loan or other FACTS credit accommodation, a bank must ascertain that the borrowers, EE Depusoy Construction entered into a building contract with the Bureau of co-makers, endorsers, sureties and/or guarantors are financially Public Works for the construction of the GSIS Building. Requiring money for capable of fulfilling their commitments to the bank. For this purpose, such construction, Depusoy applied credit accommodation by PNB. As banks shall obtain adequate information on their credit standings security, Depusoy executed a Deed of Assignment in favor of PNB, assigning and financial capacities. all money to be received from GSIS. As additional security, Luzon Surety executed 2 surety bonds. Proof of financial capacity of borrower. In addition to the usual information sheet about the borrower, banks may require 2 years later, Depusoy defaulted in the building contract. As a result, GSIS submission of a statement of the borrower’s assets and liabilities. stopped payment. PNB now demands payment for the credit accommodation it extended to Depusoy. It filed a complaint in the courts. RTC granted Banks shall, however, require the following: PNB’s recourse against Depusoy but not with Luzon Surety. CA affirmed the a. A copy of the latest Income Tax Return (ITR) of the borrower and decision. Initially, SC dismissed the appeal of PNB due to lack of merit and his co-maker, if applicable, duly stamped as received by the Bureau pertaining to factual issues. This is the MR. of Internal Revenue (BIR); and ISSUE b. Except as otherwise provided in other regulations, if the borrower W/N Luzon Surety should be held solidarily liable with Depusoy. is engaged in business, a copy of the borrower’s latest financial statements as submitted for taxation purposes to the BIR. RULING NO. As based on the findings of both RTC and CA, Depusoy and Luzon Should the document(s) submitted prove to be spurious or incorrect Surety bound themselves jointly and severally to PNB on the ground of the in any material detail, the bank may terminate any loan or other Deed of Assignment only. Luzon Surety executed the bonds to guarantee credit accommodation granted on the basis of said document(s) and the faithful performance of Depusoy in his obligation under the Deed of shall have the right to demand immediate repayment or liquidation Assignment, NOT to guarantee the payment of loans of Depusoy to PNB. of the obligation. Moreover, the bank may seek redress from the Even Delfin Santiago, Manager of PNB, admitted that what was guaranteed court for any harm done by the borrower’s submission of spurious was the Deed of Assignment and not the loan. documents. As the language of the bonds is clear and explicit, there is no doubt to Signatories. Banks shall require that loans and other credit require an interpretation. Even if there is doubt, the issue should be accommodations be made under the signature of the principal resolved in favor of the surety based on Art 2055 – “guaranty is not

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 150 presumed, it must be expressed and cannot extend to more than what is longer connected with the corporation. They should have introduced a new stipulated therein”. Thus, the liability of the surety is measured by the terms surety for the new loan. of the contract and strictly limited by its terms. 3. Loans Secured by Chattels or Intangible Property Security Bank v Cuenca, 341 SCRA 781 (2000) a. Limits FACTS SEC. 38, GBL: Loans And Other Credit Accommodations on Sta Ines is a corporation engaged in logging operations. They were able to Security of Chattels and Intangible Properties. - Except as obtain a credit line from Security Bank expiring on November 1 1981 for an the Monetary Board may otherwise prescribe, loans and amount not exceeding P8.8M. Sta Ines executed a chattel mortgage over its other credit accommodations on security of chattels and machineries and equipments, while having Rodolfo Cuenca execute an intangible properties such as, but not limited to, patents, indemnity agreement, being solidary liable with Sta Ines. They availed of trademarks, trade names, and copyrights shall not exceed the credit line only on one instance, worth P6.1M. Four years after the seventy-five percent (75%) of the appraised value of the expiration, Cuenca resigned as President, and his shares of stock was sold security, an such loans and other credit accommodation may to Adolfo Angala through public auction. Sta Ines was able to obtain be made to the title-holder of the chattels and intangible additional loan, and restructured its previous credit line with the bank to properties or his assignees. accommodate the extra loan obtained, without informing Cuenca of such deal. Sta Ines defaulted and the bank demanded from both the corporation b. Types of Security and Cuenca. i. Chattel Mortgage ii. Pledge ISSUE iii. Hold-Out and/or Assignment Whether Cuenca is still liable to the bank 4. Loans Secured by Real Estate Mortgages (REMs) RULING a. Limits NO. When additional loan was given to Sta Ines that paved way for the SEC. 37, GBL: Loans and Other Credit Accommodations restructuring of the credit line, there had been a novation of agreements Against Real Estate. – Except as the Monetary Board may between the bank and the corporation, which removed the accessory otherwise prescribe, loans and other credit accommodations obligation of Cuenca as surety. There were also several inconsistencies against real estate shall not exceed seventy-five percent between both agreements that the two cannot coexist. Art 1296 states that, (75%) of the appraised value of the respective real estate "when principal obligation is extinguished in consequence of a novation, security, plus sixty percent (60%) of the appraised value of accessory obligation (in this case a surety agreement) may subsist only the insured improvements, and such loans may be made to insofar as they may benefit third persons who did not give their consent." the owner of the real estate or to his assignees. Also, Art 2079 which the CA relied on states that, "an extension granted to the debtor by the creditor without the consent of the guarantor extinguishes b. Mortgagee in Good Faith v Mortgagee in Bad Faith the guaranty." Cases Phil. National Coop Bank v Carandang-Villalon, 139 SCRA 570 ***A "joint and solidary signature" is a common practice of a bank where (1985) they require a major stockholder or corporate officer as an additional FACTS security for loans granted to the corporation for two reasons: the bank can Faustino Galvan was the owner of the parcel of land, being litigated in this go beyond the veil of separate corporate entity and go after the surety; case, when it was donated to his daughter, Aida Galvan. He was a lessee of second, it assures the bank that the loan will be used for the purpose Spouses Dionisio Galvan and Carmen Cabrera when he failed to pay rentals. agreed upon. The spouses sued him for the unpaid rentals where he lost the case. During execution, the spouses died, and the administrators Bengzon and Jimenez As Cuenca was not related to the bank at the time of the restructuring of continued the execution. A year after the finality of the case against her the credit line for which he was previously a surety, there is no reason to father, Aida mortgaged the property to the bank. The administrators failed include him again. There had been negligence on the part of the bank when to execute the judgement, thus they tried to rescind the donation, alleging he was still considered as a surety, as it failed to realize that Cuenca was no that it was done in fraud of creditors. The bank was not impleaded in this case. The administrators won in the CA level, which became final and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 151 executory. The property was sold at public auction to the administrators. harmonious system. It simply confirms a title already created and already The bank then foreclosed the property upon failure of Aida to pay the bank, vested, rendering it forever indefeasible. If one happened to obtain a where the bank was the highest bidder. However, it failed to register the certificate of title by mistake, to the prejudice of another, with or without property in its name, since the mortgagor was no longer the owner of the bad faith, the certificate of title should be cancelled. property. 2. YES. Cajes can still claim the property since constructive trust that ISSUE prescribes in ten years does not run on property held by in possession by Whether or not the bank is entitled to the protection accorded to "innocent the plaintiff. When a person claiming to be the owner has actual possession purchasers for value" of the property, an action to seek reconveyance does prescribe.

RULING 3. NO. DBP was not in good faith when it became a mortgagee on two YES. Where the Torrens Title of the land was in the name of the mortgagor grounds. First, the bank was told by the spouses that the property was in and later given as security for a bank loan, the subsequent declaration of possession of Cajes. Second, the bank's representative conducted an said title as null and void is not a ground for nullifying the mortgage rights investigation of the property when Cajes mortgaged the property with the of the bank, which acted in good faith. The claim cannot be justified that the bank. DBP was fully aware that a person, other than the registered owner bank, before accepting the mortgage, should have made an investigation of was in possession of the property. They disregarded such fact, and now they the title, as such claim would be unreasonable. cannot feign ignorance of Cajes's claim.

DBP v CA, 331 SCRA 267 (2000) Canlas v CA, 326 SCRA 425 (2000) FACTS FACTS Ulpiano Mumar was the original owner of the disputed land when it was sold Osmundo Canlas and Vicente Mañosca decided to venture into business and to Carlos Cajes. Cajes was issued a tax declaration for the property he to raise the capital needed. The former executed an SPA authorizing the bought. Unknown to them, Jose Alvarez was able to register a parcel of latter to mortgage two parcels of land in the name of himself and his wife land, which included the property sold to Cajes. Alvarez sold the land to Angelina. Spouses Beduya, which they were issued a TCT. The spouses mortgaged the property to DBP, for a loan which they were not able to pay. DBP foreclosed Subsequently, Canlas agreed to sell the said lands to Manosca for P850K, the property, and consolidated its ownership over the property. P500K of which was payable within one week, and the balance of P350K to serve as his investment. Canlas delivered the TCTs and Mañosca issued two Prior to the foreclosure, Cajes also applied for a loan with DBP, using the postdated checks in the amounts of P40K and P460K respectively, but it property sold to him. The property was inspected, and the loan was granted. turned out that the latter check was not sufficiently funded. Later on, However, it was discovered the property was really part of the land Mañosca was able to mortgage the same parcels of land for P100k to a mortgaged by the spouses for which they cancelled the loan. certain Atty Magno, with the help of impostors who misrepresented themselves as the spouses Canlas. After that, Mañosca was granted a loan A year after the foreclosure, they tried to re-appraise the property, and by the respondent Asian Savings Bank (ASB) in the amount of P500,000.00, found out that the property was occupied by the Cajes. DBP filed a suit for with the lands as security, and with the same impostors who again recovery of property. introduced themselves as the Canlas spouses. When the loan it extended was not paid, respondent bank extrajudicially foreclosed the mortgaged. ISSUES: (non-banking) 1. Whether DBP has a right over the property Before the auction could be held, (the real) Osmundo Canlas wrote a letter 2. Whether Cajes can still claim the property informing the respondent bank that the execution of subject mortgage over 3. Whether DBP was in good faith when the property was bought (banking the two parcels of land in question was without their authority, and issue) requested that steps be taken to annul the questioned mortgage. But Asian Savings Bank refused and proceeded with the scheduled auction sale. RULING: Consequently, Canlas instituted the present case for annulment of deed of 1. NO. Registration has never been a mode of acquiring ownership over real estate mortgage; the trial court issued an Order restraining the sheriff immovable property. The sole purpose of the creation of Land Registration from issuing the corresponding Certificate of Sheriff’s Sale. Mañosca was was to bring land titles of the Philippines under one comprehensive and declared in default.

The lower court annulled the mortgage. CA reversed, reinstating the d. “Dragnet Clause” or “Blanket Mortgage Clause” mortgage. Cases Union Bank v CA, 471 SCRA 751 (2005) ISSUE FACTS Whether the bank was a mortgagee in good faith DRossa Incorporated (DRI) mortgaged parcels of land in favor of Union Bank as security for the credit facility of Josephine Marine Trading HELD Corporation (JMTC). JMTC availed P3m from the credit line. It was increased NO. Reversed. Not even a single identification card was exhibited by the to 8.61m. Subsequently, Union Bank unilaterally increased the credit facility said impostors to show their true identity; and yet, the bank acted on their of JMTC to P27 million, from which JMTC availed P18.3M. Upon JMTC's representations simply on the basis of the residence certificates bearing failure to pay its obligation, Union Bank instituted foreclosure proceedings signatures which tended to match the signatures affixed on a previous deed on DRI's properties. Union bank was the highest bidder. of mortgage to a certain Atty. Magno, covering the same parcels of land in question. But the previous deed of mortgage did not bear the tax account DRI filed a complaint seeking to declare the public sale as null. It claimed number of the spouses, nor the Community Tax Certificate of Angelina that its liability is only P8.61 million which was the liability incurred by JMTC Canlas. But such fact notwithstanding, the bank did not require the under its first agreement with Union Bank. However, Union Bank alleged impostors to submit additional proof of their true identity. Under the that DRI was liable to JMTC's total outstanding obligations, regardless of doctrine of last clear chance, which is applicable here, the respondent bank whether it was incurred during or subsequent to the first agreement. The must suffer the resulting loss. Settled is the rule that a contract of mortgage Trial Court dismissed the complaint, the CA reversed. The CA said that the must be constituted only by the absolute owner on the property mortgaged; mortgage was pegged at 8.61M and thus DRI could not be made liable for a mortgage constituted by an impostor is void. more than this.

c. Acquisition of Property By Way of Satisfaction of Claims ISSUE SEC. 52, GBL: Acquisition of Real Estate by Way of What is the liability of DRI? Satisfaction of Claims. – Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey HELD real property under the following circumstances: DRI is liable to the full extent of JMTC's obligations, because the mortgage contained a dragnet clause. The pertinent provisions of the Real Estate 52.1. Such as shall be mortgaged to it in good faith by way Mortgage provide: "The obligations secured by this Mortgage (the Secured of security for debts; Obligations') are the following:...any and all instruments or documents issued upon the renewal, extension, amendment or novation of the Notes, 52.2. Such as shall be conveyed to it in satisfaction of debts the Agreement and this Mortgage, irrespective of whether such obligations previously contracted in the course of its dealings; or as renewed, extended, amended or novated are in the nature of new, separate or additional obligations" 52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it "A blanket mortgage clause, also known as a 'dragnet clause in American shall purchase to secure debts due it. jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are 'carefully scrutinized and strictly Any real property acquired or held under the circumstances construed. Mortgages of this character enable the parties to provide enumerated in the above paragraph shall be disposed of by continuous dealings, the nature or extent of which may not be known or the bank within a period of five (5) years or as may be anticipated at the time, and they avoid the expense and inconvenience of prescribed by the Monetary Board: Provided, however, That executing a new security on each new transaction. A 'dragnet clause the bank may, after said period, continue to hold the operates as a convenience and accommodation to the borrowers as it makes property for its own use, subject to the limitations of the available additional funds without their having to execute additional security preceding Section. documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. Indeed, it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in said

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 153 contracts do not limit the amount for which the mortgage may stand as sale shall not affect the rights of persons holding security if from the four corners of the instrument the intent to secure prior encumbrances upon the property or a part future and other indebtedness can be gathered." thereof, and when confirmed by an order of the court, also upon motion, it shall operate to divest 5. Foreclosure of REMs the rights in the property of all the parties to the a. Types of Foreclosure action and to vest their rights in the purchaser, i. Judicial subject to such rights of redemption as may be RULE 68, ROC allowed by law. Section 1. Complaint in action for foreclosure. In an action for the foreclosure of a mortgage or Upon the finality of the order of confirmation or other encumbrance upon real estate, the complaint upon the expiration of the period of redemption shall set forth the date and due execution of the when allowed by law, the purchaser at the auction mortgage; its assignments, if any; the names and sale or last redemptioner, if any, shall be entitled to residences of the mortgagor and the mortgagee; a the possession of the property unless a third party is description of the mortgaged property; a statement actually holding the same adversely to the judgment of the date of the note or other documentary obligor. The said purchaser or last redemptioner evidence of the obligation secured by the mortgage, may secure a writ of possession, upon motion, from the amount claimed to be unpaid thereon; and the the court which ordered the foreclosure. names and residences of all persons having or claiming an interest in the property subordinate in Sec. 4. Disposition of proceeds of sale. right to that of the holder of the mortgage, all of The amount realized from the foreclosure sale of the whom shall be made defendants in the action. mortgaged property shall, after deducting the costs of the sale, be paid to the person foreclosing the Sec. 2. Judgment on foreclosure for payment or mortgage, and when there shall be any balance or sale. residue, after paying off the mortgage debt due, the If upon the trial in such action the court shall find same shall be paid to junior encumbrancers in the the facts set forth in the complaint to be true, it order of their priority, to be ascertained by the shall ascertain the amount due to the plaintiff upon court, or if there be no such encumbrancers or there the mortgage debt or obligation, including interest be a balance or residue after payment to them, then and other charges as approved by the court, and to the mortgagor or his duly authorized agent, or to costs, and shall render judgment for the sum so the person entitled to it. found due and order that the same be paid to the court or to the judgment obligee within a period of Sec. 5. How sale to proceed in case the debt is not not less than ninety (90) days nor more than one all due. hundred twenty (120) days from the entry of If the debt for which the mortgage or encumbrance judgment, and that in default of such payment the was held is not all due as provided in the judgment, property shall be sold at public auction to satisfy the as soon as a sufficient portion of the property has judgment. been sold to pay the total amount and the costs due, the sale shall terminate; and afterwards, as often as Sec. 3. Sale of mortgaged property; effect. more becomes due for principal or interest and other When the defendant, after being directed to do so as valid charges, the court may, on motion, order more provided in the next preceding section, fails to pay to be sold. But if the property cannot be sold in the amount of the judgment within the period portions without prejudice to the parties, the whole specified therein, the court, upon motion, shall order shall be ordered to be sold in the first instance, and the property to be sold in the manner and under the the entire debt and costs shall be paid, if the provisions of Rule 39 and other regulations proceeds of the sale be sufficient therefor, there governing sales of real estate under execution. Such

being a rebate of interest where such rebate is estate mortgages under this Rule insofar as the proper. former are not inconsistent with or may serve to supplement the provisions of the latter. Sec. 6. Deficiency judgment. If upon the sale of any real property as provided in ii. Extra-Judicial the next preceding section there be a balance due to ACT NO. 3135, as amended the plaintiff after applying the proceeds of the sale, the court, upon motion, shall render judgment iii. Specific Rules for TB/RB/Coop Banks against the defendant for any such balance for SEC. 6, RURAL BANKS ACT: Loans or advances which, by the record of the case, he may be extended by rural banks organized and operated personally liable to the plaintiff, upon which under this Act shall be primarily for the purpose of execution may issue immediately if the balance is all meeting the normal credit needs of farmers, due at the time of the rendition of the judgment; fishermen or farm families owning or cultivating land otherwise, the plaintiff shall be entitled to execution dedicated to agricultural production as well as the at such time as the balance remaining becomes due normal credit needs of cooperatives and merchants. under the terms of the original contract, which time In the granting of loans, the rural bank shall give shall be stated in the judgment. preference to the application of farmers and merchants whose cash requirements are small. Sec. 7. Registration. A certified copy of the final order of the court Loans may be granted by rural banks on the security confirming the sale shall be registered in the registry of lands without Torrens Title where the owner of of deeds. If no right of redemption exists, the private property can show five (5) years or more of certificate of title in the name of the mortgagor shall peaceful, continuous and uninterrupted possession be cancelled, and a new one issued in the name of in concept of owner; or of portions of friar land the purchaser. estates or other lands administered by the Bureau of Lands that are covered by sales contracts and the Where a right of redemption exists, the certificate of purchasers have paid at least five (5) years title in the name of the mortgagor shall not be installment thereon, without the necessity of prior cancelled, but the certificate of sale and the order approval and consent by the Director of Lands, or of confirming the sale shall be registered and a brief portions of other estates under the administration of memorandum thereof made by the registrar of the Department of Agrarian Reform or other deeds upon the certificate of title. In the event the governmental agency which are likewise covered by property is redeemed, the deed of redemption shall sales contracts and the purchasers have paid at be registered with the registry of deeds, and a brief least five (5) years installment thereon, without the memorandum thereof shall be made by the registrar necessity of prior approval and consent of the of deeds on said certificate of title. Department of Agrarian Reform or corresponding governmental agency; or of homesteads or free If the property is not redeemed, the final deed of patent lands pending the issuance of titles but sale executed by the sheriff in favor of the purchaser already approved, the provisions of any law or at the foreclosure sale shall be registered with the regulations to the contrary notwithstanding: registry of deeds; whereupon the certificate of title Provided, That when the corresponding titles are in the name of the mortgagor shall be cancelled and issued, the same shall be delivered to the Register a new one issued in the name of the purchaser. of Deeds of the province where such lands are situated for the annotation of the encumbrance: Sec. 8. Applicability of other provisions. Provided, further, That in the case of lands pending The provisions of sections 31, 32 and 34 of Rule 39 homestead or free patent titles, copies of the notices shall be applicable to the judicial foreclosure of real for the presentation of the final proof shall also be

furnished the creditor rural bank and, if the secure their loans with the procedure corresponding borrower applicants fail to present the final proof to their share. within thirty (30) days from date of notice, the creditor rural bank may do so for then at their A rural bank shall be allowed to foreclosure lands expense: Provided, furthermore, That the applicant mortgaged to it; Provided, That said lands shall be for homestead or free patent has already made covered under Republic Act No. 6657. improvements on the land and the loan applied for is to be used for further development of the same or b. Right and Period of Redemption for other productive economic activities: Provided, SEC. 47 (1), GBL: Foreclosure of Real Estate Mortgage. - In finally, That the appraisal and verification of the the event of foreclosure, whether judicially or extra- status of a land is a full responsibility of the rural judicially, of any mortgage on real estate which is security bank and any loan granted on any land which shall for any loan or other credit accommodation granted, the be found later to be within the forest zone shall be mortgagor or debtor whose real property has been sold for for the sole account of the rural bank. the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to The foreclosure of mortgages covering loans granted redeem the property by paying the amount due under the by rural banks and executions of judgment thereon mortgage deed, with interest thereon at rate specified in the involving real properties levied upon by sheriff shall mortgage, and all the costs and expenses incurred by the be exempt from the publications in newspapers now bank or institution from the sale and custody of said required by law where the total amount of loan, property less the income derived therefrom. However, the excluding interests due and unpaid, does not exceed purchaser at the auction sale concerned whether in a judicial One Hundred thousand Pesos (P100,000) or such or extra-judicial foreclosure shall have the right to enter amount as the Monetary Board may prescribe as upon and take possession of such property immediately may be warranted by prevailing economic after the date of the confirmation of the auction sale and conditions. It shall be sufficient publication in such administer the same in accordance with law. Any petition in cases if the notices of foreclosure and execution of court to enjoin or restrain the conduct of foreclosure judgment are posted in the most conspicuous area proceedings instituted pursuant to this provision shall be of the municipal building, the municipal public given due course only upon the filing by the petitioner of a market, the rural bank, the barangay hall, and the bond in an amount fixed by the court conditioned that he barangay public market, if any, where the land will pay all the damages which the bank may suffer by the mortgaged is situated during the period of sixty (60) enjoining or the restraint of the foreclosure proceeding. days immediately preceding the public auction or execution of judgment. Proof of publication as (i) Exception required herein shall be accomplished by an affidavit SEC. 47 (2), GBL: Notwithstanding Act 3135, juridical of the sheriff or officer conducting the foreclosure persons whose property is being sold pursuant to an sale or execution of judgment and shall be attached extrajudicial foreclosure, shall have the right to redeem with the records of the case: Provided, That when a the property in accordance with this provision until, but homestead or free patent is foreclosed, the not after, the registration of the certificate of foreclosure homesteader or free patent holder, as well as his sale with the applicable Register of Deeds which in no heirs shall have the right to redeem the same within case shall be more than three (3) months after one (1) year from the date of foreclosure in the case foreclosure, whichever is earlier. Owners of property of land not covered by a Torrens Title or one (1) that has been sold in a foreclosure sale prior to the year from the date of the registration of the effectivity of this Act shall retain their redemption rights foreclosure in the case of land covered by a Torrens until their expiration. Title: Provided, finally, That in any case, borrowers, especially those who are mere tenants, need only to

(ii) Exercise of Right of Redemption third parties. Hence, it was ruled therein that under the circumstances, the Cases obligation of a court to issue a writ of possession in favor of the purchaser in Metrobank v Tan, 569 SCRA 814 (2009) a foreclosure of mortgage case ceases to be ministerial, because under Act FACTS 3135, the possession of the mortgaged property may be awarded to a Lamb Construction Consortium Corporation obtained a P5.5M loan from purchaser in the extrajudicial foreclosure "unless a third party is actually Metropolitan Bank & Trust Co. To secure the loan, respondent executed a holding the property adversely to the judgment debtor." Real Estate Mortgage involving six parcels of land. Lamb failed to pay the loan upon maturity hence petitioner filed a petition for the extra-judicial In Cometa v. IAC, where the properties in question were found to have been foreclosure of the said properties. During the auction sale MBTC emerged as sold at an unusually lower price than their true value, that is, properties the highest bidder with the bid amount of P6.7M. worth at least P500K were sold for only P57K, the court decided to withhold the issuance of the writ of possession on the ground that it could work During the period of redemption, MBTC filed a verified petition for issuance injustice because the petitioner might not be entitled to the same. of a writ of possession. It alleged that notwithstanding its demands, Lamb refused and failed to turn over actual possession of the foreclosed The general rule that mere inadequacy of price is not sufficient to set aside properties. The RTC denied the issuance of the writ on the ground that a foreclosure sale is based on the theory that the lesser the price the easier because MBTC had not yet deposited the surplus (1.4M) from the it will be for the owner to effect the redemption. The same thing cannot be foreclosure sale. The CA reversed and allowed the issuance of the writ, but said where the amount of the bid is in excess of the total mortgage debt. still ordered MBTC to pay the surplus. The reason is that in case the mortgagor decides to exercise his right of redemption. The redemption price should be equivalent to the amount of the MBTC appealed to the SC, arguing that in a petition for the issuance of a purchase price, plus 1% monthly interest up to the time of the redemption, writ of possession, it is improper to rule upon the surplus or excess of the plus assessments or taxes which the purchaser may have paid, and interest. purchase price because the only issue that must be resolved is the purchaser’s entitlement to the writ. If there is any surplus or excess, the Applying this to the present case would be highly iniquitous because that remedy of the respondent is to file an independent action for collection of would mean exacting payment at a price unjustifiably higher than the real surplus. amount of the mortgage obligation. Simply put, such a construction will undeniably be prejudicial to the substantive rights of private respondent and ISSUE it could even effectively prevent it from exercising the right of redemption. Whether or not the above statement is correct, and whether the writ of possession should be issued. HOWEVER, since the period to redeem has already lapsed, as in this case, the writ must be granted. HELD YES, the only issue to be resolved is the purchaser's entitlement to the writ. The failure of the mortgagee to deliver the surplus proceeds does not affect But for peculiar reasons, the writ of possession should NOT be a matter of the validity of the foreclosure sale. It gives rise to a cause of action for the right, but a matter of discretion. However, since the period to redeem has mortgagee to file an action to collect the surplus proceeds. An action to already lapsed, this point has become moot and the writ must now be collect the surplus proceeds is improper where there is a pending action for issued. As a general rule, the issuance of a writ of possession is ministerial. the nullification of the foreclosure proceedings. However, there are exceptions. (iii) Extension of Redemption Period In Sulit v. Court of Appeals we withheld the issuance of a writ of possession Cases because the mortgagee failed to deliver the surplus from the proceeds of Lazo v Republic Surety and Insurance Co, 31 SCRA 329 (1970) the foreclosure sale which is equivalent to approximately 40% of the total FACTS mortgage debt. Jose Robles obtained a loan (12k) from Philippine Bank of Commerce. Republic Surety & Insurance Co (Respondent) acted as the surety/co-debtor In Barican v. IAC, long before the mortgagee bank had sold the disputed for Robles with respect the loan obtained from the bank. On the other hand, property to the respondent therein, it was no longer the judgment debtor lazo spouses (petitioners) are the guarantors of Robles for the surety who was in possession but the petitioner spouses who had assumed the contract and, in connection therewith, petitioner spouses executed a Real mortgage, and that there was a pending civil case involving the rights of Estate Mortgage over their property in favor of Respondent.

Robles defaulted in the payment of the note covering the obligation with the Ibaan Rural Bank v CA, 321 SCRA 88 (1999) bank. It has been renewed several times until finally, the note was FACTS transferred by the bank to Republic Investment. Robles still defaulted in The spouses Reyes were owners of 3 lots covered by 3 TCTs. The spouses payment, hence, Respondent already paid the obligation. In turn, mortaged these lots to Ibaan Rural Bank, Inc. Respondent foreclosed extra-judicially the REM on July 1, 1958, respondent being the purchaser of the property. The sheriff cert. was issued on Aug. 2 The spouses Reyes, as sellers, and the spouses Tarnate (private 1958. After which, due to the insistence of the petitioners, they started respondents) entered into a Deed of Absolute Sale with Assumption of paying rent to respondent and they were able to secure an extension for the Mortgage of the lots. Respondents failed to pay the assumed loan so Ibaan redemption of the foreclosed property. Several more extension were sought Rural Bank foreclosed on the property extra-judicially. The provincial Sheriff and granted until 1963 where Jose Robles still reneged in his obligation to conducted a public auction of the lots and awarded the lots to the bank, the redeem the property. The title to the property was consolidated in the name sole bidder. The certificate of sale stated that the redemption period expires of Respondent via registration of the deed of absolute sale and sheriff’s cert. in 2 years from the registration of the sale. No notice of extrajudicial of sale on Mar. 28, 1963. foreclosure was given to the private respondents.

The Petitioner claims that the 1 year legal period of redemption should start Private respondents then tried to redeem the properties and tendered to run from Mar. 28, 1963. Since, they filed their action on December of the payment. However, the bank refused the redemption on the ground that it same year (1968), then their right to redeem has not prescribed. had consolidated its tiles over the lot. Respondents then filed a complaint asking the foreclosure to be held void because there was no notice and that ISSUE they were entitled to redeem the lots because they tendered payment for Whether the period of redemption already expired? redemption before the 2-year period for redemption expired. TC ruled in favour of the private respondents. RULING: No it did not expire. The court ruled that the parties had abandoned ISSUE entirely the concept of legal redemption in this case and converted it into Was there proper redemption despite the expiration of the 1 year right of one of conventional redemption, in which the only governing factor was the redemption? agreement between them. The registration of the certificate of sale on Was the 2-year redemption period unilaterally made by the sheriff valid March 28, 1963 was entirely unnecessary and irrelevant to the question of despite neither party agreeing to such? when the period of redemption agreed upon expired. The record shows that the last request for extension approved by the defendant is that contained HELD in the letter of Jose Robles dated May 30, 1960, at the bottom of which Yes, there was a proper redemption by the respondents. appears the handwrittten notation: "Ok for last extension one month. Please When petitioner received a copy of the certificate of sale registered at the attach note of Mr. Lazo," this last evidently referring to the latter's RD, it had actual and constructive knowledge of the certificate and its confirmatory letter of May 31, 1960, Consequently, the period to redeem contents. For two years it did not object to the two-year extension of the expired on June 30, 1960. redemption period. Thus it could be said that the petitioner consented to the two-year redemption period especially since It had time to object to it The plaintiffs' repeated requests for time within which to redeem, each with and did not. a definite date of expiration, generated binding contracts when approved by the defendant company. A contract, needles to say, has the force of law When circumstances imply a duty to speak on the part of a person for whom between the parties. In any event, the principle of estoppel would step in to an obligation is proposed, his silence can be construed as consent. By its prevent the plaintiffs from going back upon their own acts and silence and inaction, petitioner misled private respondent to believe that representations to the prejudice of the other party who relied upon them. they had two years within which to redeem the mortgage. After the lapose This is a principle of equity and natural justice, expressly adopted in our of two years, petitioner is esopped from asserting that the period for Civil Code and in Rule 31 of the Rules of Court. redemption was only one year and that the period had already lapsed.

Estoppel in pais arises when one, by his acts, representations or admissions, or by his own silence when he out to speak out, intentionally or though culpable negligence, induces another to believe certain facts to exist and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 158 such other rightfully relies and acts on such belief, so that he will be Defendants plead res judicata and prescription and set a counterclaim for prejudiced if the former is permitted to deny the existence of such facts. rentals plus attorney’s fees. Court dismissed the case and demanded plaintiffs to vacate the property and to pay 100 a month to the bank from The CA in affirming decision of the TC relied on Lazo vs Republic surety, march 30 1060 until property is vacated. Plaintiffs appealed to the CA, which stated that the one year period of redemption provided in act no. which the CA then certified to the SC on questions of law. 3135 is only directory and can be extended by agreement of the parties. This is not so in the instant case. There was no voluntary agreement. The ISSUE sheriff unilaterally and arbitrarily extended the period of redemption to two Whether or not the plaintiffs had a right to redeem the property still? years in the certificate of sale. The parties were not privy to the extension (whether or not the filing of a case to annul foreclosure suspends the period made by the sheriff. Nonetheless, as above discussed, the bank can not for redemption? after the lapse of two years insist that the redemption period was one year only. The rule on redemption is liberally interpreted in favor of the original HELD owner of the property. NO, it does not suspend the period. There is no statue or decision that supports the plaintiff’s contention that the period of one year to redeem land Such interpretation will be as loose as the morals of Alex as proven by his sold at a sheriff’s sale was suspended by the institution of an action to annul many homosexual advances on men. the foreclosure sale. Moreover, up to now, plaintiffs have not exercised the right to redemption. Indeed, although they have intimated their wish to (iv) Tolling of Redemption Period redeem the property in question, they have not deposited the amount Cases necessary therefore. Sumerariz v DBP, 21 SCRA 1374 (1967) FACTS As to res judicata, although not a party in the first case, the inclusion of the Plaintiffs Spouses Sumerariz constituted in favour of Rehabilitation Finance surety co as a defendant in the case at bar does not detract from the legal Corporation, now Development Bank of the Philippines, an REM on two identity of both cases because by buying the property subject matter of both parcels of land in San Andres Subdivision, Manila with TCTs in the couple’s cases from the bank, the sure co became merely the bank’s successor in name to guarantee a loan for 15K. Plaintiffs did not pay for the loan so DBP interest. Neither does the absence of the sheriff in the first case negate the foreclosed. After several postponements of the public auction on plaintiff’s identiy inasmuch as the sheriff was but a formal party in said previous case request, sale was set for march 29, 1955. Upon the behest of Juan and is virtually a party in the present case although not mentioned explicitly sumerariz, made the day before, the bank agreed to postpone the sale if as such therein. there was a token payment of at least 100 before 9am the next day. No such payment was made so the bank bought the property on march 29 for People’s Financing Corp v CA, 192 SCRA 34 (1990) 8k as the highest bidder. FACTS Kalmar Construction and Muning Exploration Co. purchased several pieces of Bank notified plaintiffs they had one year to redeem the property or note heavy equipment from J.P. Enterprises for the total amount of P787,000. later than march 29, 1956 upon down payment of P2806, the balance The buyer paid 30% (P237,000) of the price and 18 paid monthly payable in ten years at the rate of 166 per month. Instead of exercising instalments for the rest (P550,000). Additional charges were stated therein redemption, on march 26, 1956 plaintiffs filed a case against the bank and in cases where there is overdue instalments/amount. A promissory note and sheriff of manila to set aside the foreclosure sale on the ground that the a chattel mortgage were signed by the officers, including the respondents bank failed to comply with its agreement to postpone the auction sale herein, of Kalmar to secure the amount unpaid by the latter. On the same scheduled to be held on march 29, 1956. date, the seller assigned the promissory note and the chattel to People’s Financing Corporation. Respondent Manliguez and his wife executed a real In July 1956 the bank sold the property to Philippine Surety and Insurance estate mortgage on one of the parcel of land owned by them as additional Co. In 1958 the case of the Sumerariz was dismissed because the plaintiffs security for the existing obligation (re: promissory note). had not redeemed the property within the period prescribed by law therefore the bank has thereby become its absolute owner. The couple lost Thereafter, the petitioners caused the foreclosure of this mortgage for non- all the way to the SC hence the present case against the bank and the payment of the promissory note. Petitioner PFC was the highest bidder and Surety Co to annul the sale made to the latter by the bank and to be was registered accordingly. allowed to redeem the property in question.

The private respondents moved to annul the foreclosure and sure for including the buildings and improvements. Two transactions occurred damages. The lower court issued an injunction of the registration of Final thereafter: (1) UCPB sold all of its rights, interests and participation over Deed of Sale and ruled in favor of the complainants granting them 1) the properties to a certain Manuel Go (2) Manuel Go sold all the rights he P191,906.00 worth of additional charges to be returned by the petitioners acquired from the UCPB over the same lots on that very same day to private for not properly informing the private respondents of such charges, 2) right respondent GOLDEN STAR. Barely a month later, respondent NICOS to redeem the mortgaged property. suddenly executed a document entitled “Waiver of Right of Redemption” in favor of respondent GOLDEN STAR, which then filed a petition for the On the matter of right of redemption. The lower court ruled that the one- issuance of a writ of possession over the subject realties before the RTC. It year period of redemption has never commenced because the issuance of was granted. the Final Deed of Sale set for by the Sheriff was stopped by the trial court. On registered lands, the one-year period of redemption starts not from the Petitioner Solidbank filed an omnibus motion to annul the writ of possession date of the sale but from the date when the certificate of sale issued by the issued to GOLDEN STAR and to punish for contempt of court the persons sheriff is registered in the office of the register of deeds. who implemented the writ of possession with the use of force and intimidation. Petitioner interposed an appeal before the Intermediate ISSUE Appellate Court arguing inter alia that the properties were under custodia (Relevant to topic) Whether the right to redemption was properly granted? legis, hence the extra-judicial foreclosure and the writ of possession were null and void, and that the right of NICOS to redeem the auctioned RULING properties had been acquired by Solidbank. The Intermediate Appellate NO. The certificate of sale was duly registered by the petitioners in the Court found no merit to this appeal. Hence the petition for review, on the Office of the Register of Deeds of Mandaue City. From thereon, the one-year grounds that appellate court decided the case contrary to law and applicable redemption began. Since the private respondents did not exercise their right decisions of the SC. of redemption from the said time, the consequence is that ownership was legally consolidated in PFC, which had a right to the issuance of a new ISSUE certificate of title in its name. Whether the subject properties were under custodia legis by virtue of the prior annotation of a writ of attachment in petitioner’s favor at the time the The one-year period to redeem a mortgage of land covered by properties were extrajudicially foreclosed? Torrens Title is not stopped or suspended by any TRO issued by the courts. RULING YES. The disputed real properties were under custodia legis by virtue of a An experienced businessman cannot claim that he and his wife did not know valid attachment at the time the same were extrajudicially foreclosed by a of the “total finance charges” for he was one of the signatories to the third party mortgagee. The rule is well settled that when a writ of promissory note. attachment has been levied on real property or any interest therein belonging to the judgment debtor, the levy thus effected creates a lien Consolidated Bank v IAC, 150 SCRA 591 (1987) which nothing can destroy but its dissolution. (1) It follows that the writ of FACTS possession issued by the Malolos court in favour of respondent GOLDEN Originally, petitioned Solidbank loaned private respondent NICOS sums of STAR is null and void because it interfered with the jurisdiction of a co- money. NICOS failed to pay back the loan prompting Solidbank to file a ordinate and co-equal court. (2) The transactions on which respondent collection case. Pursuant to the writ of attachment issued by the Court and GOLDEN STAR’s right to a writ of possession are based are highly irregular upon petitioner’s posting of sufficient bond, the Sheriff of Manila levied and and questionable. The attempts to bring the disputed properties out of the attached the two real properties described by the foregoing order of petitioner’s reach inspite of the attachment, are plain and apparent. They attachment. Pursuant to the foregoing inscription and annotations, guards conspired to defeat petitioner’s lien on the attached properties and to deny were deputized by the Manila Sheriff to secure the premises of the two the latter its right of redemption. attached realties. In issuing the writ of possession, the Malolos court relied on copies of A year later, however, the attached properties which had been mortgaged documents submitted to it by GOLDEN STAR. It was thus led into the error by NICOS to the UCPB were extra-judicially foreclosed by the latter. As the of ruling that the petitioner’s attachment was not properly annotated. It highest bidder, a certificate of sale was issued to it over the subject realties

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 160 likewise follows that the petitioner (the attaching creditor) has acquired by operation of law the right of redemption over the foreclosed properties. Petitioner filed a "Motion to require Sheriff to Execute Certificate of Redemption". Respondent Judge issued the challenged order denying It has been held that “an attaching creditor may succeed to the incidental petitioner's motion requiring the Sheriff to execute a certificate of rights to which the debtor was entitled by reason of his ownership of the redemption. A motion for reconsideration was denied by respondent Judge. property, as for example, a right to redeem from a prior mortgage. The fact that respondent NICOS executed a waiver of right of redemption in favour of ISSUE respondent GOLDEN STAR is of no moment as by that time it had no more 1) Whether petitioner could have effected the redemption of the subject right which it may waive in favor of another. property within the 12-month period provided under the Rules; and (Relevant topic) (Relevant to topic starts here) GOLDEN STAR argues that even if the attachment in issue was duly 2) Whether petitioner's period to redeem is tolled by an action to quiet title registered and the petitioner has a right of redemption, the certificate of filed by a third-party claimant questioning the ownership of the property sale of the lands in question was registered on September 6, 1983. It claims sold on execution? that the period to redeem therefore lapsed on September 6, 1984 without the petitioner bank ever exercising any right to redemption. Well settled is RULING the rule that the pendency of an action tolls the term of the right of (1) It is petitioner's contention that it could not have exercised the right of redemption. In the case at bar, the petitioner commenced the instanct redemption before the lapse of the 12-month redemption period because its action by way of an omnibus motion before the Bulacan Court on November title at the time was clouded by the claim of a third party, Rosario Sandejas. 21, 2983 or barely two months after the certificate of sale was registered on The CA rejected this contention principally because under the established September 6, 1983, well within the one year period. factual circumstances, petitioner considered itself to be the owner of the subject property despite the alleged pending case for quieting of title. The CMS Stock Brokerage v CA, 275 SCRA 790 (1997) petitioner's reliance on the supposed cloud or uncertainty in its ownership FACTS for not effecting redemption within the 12-month redemption period is Petitioner, as judgment debtor, seeks to redeem two parcels of land sold on misplaced. execution none years earlier upon the contention that the pendency of an action involving the ownership thereof suspended the 12-month period of The real property sold on execution may be redeemed by the judgment redemption provided by the present Rules. debtor (CMS Stock Brokerage, Inc.) or his successors in interest, in the whole or any part of the property. The exercise of this right of redemption The deputy sheriff refused to execute a deed of redemption. Petitioner went by the judgment debtor is not conditioned upon ownership of the property to the RTC. Respondent Judge Buenaventura thereafter ruled against sold on execution but by virtue of a writ of execution directed against such petitioner on the ground that the right of redemption had long expired. judgment debtor. In instances when a piece of property is claimed by a third person, as in the case at hand When, however, property is levied upon and Dissatisfied with this ruling which sustained the deputy sheriff's action, sold, despite a claim by a third person who must vindicate then his claim in petitioner filed a petition for certiorari and mandamus, with a prayer for a a proper action, Section 29 determines who shall have a right of writ of preliminary injunction with respondent CA. The appellate court redemption. Clearly, the right of redemption is given to the judgment debtor dismissed the petition hence the instant petition for review on certiorari. and not to any third-party claimant.

The SC declared petitioner as the real owner of the subject parcel of land The judgment debt or obligation and not ownership is the main and not Rosario S. Sandejas who initiated the proceedings for "quieting of consideration in granting the judgment debtor the right to redeem. ownership of real property, injunction and damages". Petitioner filed a Petitioner's supposition that unquestioned ownership of the subject property notice to redeem and tendered the redemption money. Petitioner also paid is a requisite for its exercise of the right of redemption in this case has no an additional sum as Sheriff's Commission. Respondents Sheriffs informed legal basis. Petitioner could have effected its right of redemption had it petitioner that they cannot execute and issue the certificate of redemption wanted to within the 12-month redemption period provided under the Rules. because of the absence a court order directing them to do so, and they This is the law and ignorance thereof is no excuse for petitioner's failure to informed the latter that they accepted the tendered amounts for exercise such right. safekeeping.

(2) NO. As already pointed out, the issue of ownership insofar as provisions of sections four hundred and sixty-four to four petitioner’s right of redemption as judgement debtor is concerned, has no hundred and sixty-six, inclusive, of the Code of Civil bearing whatsoever, so as have the effect of tolling or interrupting the Procedure, in so far as these are not inconsistent with the running o running of the 12-month redemption period. If at all, as pointed provisions of this Act. out by respondent CA, the condition imposed after the execution sale relating to the pending action for quieting of title, may only benefit the SEC. 28, RULE 39 (ROC): Time and manner of, and third-party claimant, Rosario Sandejas, that is should her claim prosper, amounts payable on, successive redemptions; notice to be only then may the execution sale be declared null and void. But with respect given and filed. to petitioner's right of redemption as judgment debtor this condition is of no moment. The judgment obligor, or redemptioner, may redeem the property from the purchaser, at any time within one (1) (v) Payment of CGT and DST year from the date of the registration of the certificate of sale, by paying the purchaser the amount of his purchase, c. Redemption Price with one per centum per month interest thereon in addition, SEC. 47 (1), GBL: Foreclosure of Real Estate Mortgage. - In up to the time of redemption, together with the amount of the event of foreclosure, whether judicially or extra- any assessments or taxes which the purchaser may have judicially, of any mortgage on real estate which is security paid thereon after purchase, and interest on such last for any loan or other credit accommodation granted, the named amount at the same rate; and if the purchaser be mortgagor or debtor whose real property has been sold for also a creditor having a prior lien to that of the the full or partial payment of his obligation shall have the redemptioner, other than the judgment under which such right within one year after the sale of the real estate, to purchase was made, the amount of such other lien, with redeem the property by paying the amount due under the interest. Property so redeemed may again be redeemed mortgage deed, with interest thereon at rate specified in the within sixty (60) days after the last redemption upon mortgage, and all the costs and expenses incurred by the payment of the sum paid on the last redemption, with two bank or institution from the sale and custody of said per centum thereon in addition, and the amount of any property less the income derived therefrom. However, the assessments or taxes which the last redemptioner may have purchaser at the auction sale concerned whether in a judicial paid thereon after redemption by him, with interest on such or extra-judicial foreclosure shall have the right to enter last-named amount, and in addition, the amount of any liens upon and take possession of such property immediately held by said last redemptioner prior to his own, with after the date of the confirmation of the auction sale and interest. The property may be again, and as often as a administer the same in accordance with law. Any petition in redemptioner is so disposed, redeemed from any previous court to enjoin or restrain the conduct of foreclosure redemptioner within sixty (60) days after the last proceedings instituted pursuant to this provision shall be redemption, on paying the sum paid on the last previous given due course only upon the filing by the petitioner of a redemption, with two per centum thereon in addition, and bond in an amount fixed by the court conditioned that he the amounts of any assessments or taxes which the last will pay all the damages which the bank may suffer by the previous redemptioner paid after the redemption thereon, enjoining or the restraint of the foreclosure proceeding. with interest thereon, and the amount of any liens held by the last redemptioner prior to his own, with interest. SEC. 6, ACT NO. 3135: In all cases in which an Written notice of any redemption must be given to the extrajudicial sale is made under the special power officer who made the sale and a duplicate filed with the hereinbefore referred to, the debtor, his successors in registry of deeds of the place, and if any assessments or interest or any judicial creditor or judgment creditor of said taxes are paid by the redemptioner or if he has or acquires debtor, or any person having a lien on the property any lien other than that upon which the redemption was subsequent to the mortgage or deed of trust under which made, notice thereof must in like manner be given to the the property is sold, may redeem the same at any time officer and filed with the registry of deeds; if such notice be within the term of one year from and after the date of the not filed, the property may be redeemed without paying sale; and such redemption shall be governed by the such assessments, taxes, or liens.

Cases During the process of paying the 20% installment agreed upon, BMC Union Bank v CA, 359 SCRA 480 (2001) executed a Deed of Assignment to West Negros College, assigning to the FACTS latter the interests of BMC in the properties foreclosed, as well as the right Spouses Vincoy obtained a loan from Union Bank in the amount of P2M, to redeem them. West Negros demanded that the redemption price be which they secured with a mortgage over their residence. For failure to pay reduced for excessive interest charges. on its maturity date, Union Bank extrajudicially foreclosed the mortgage and it became the highest bidder in the scheduled auction for P3.29K. Thereafter, DBP Head Office REJECTED the compromise amount of P21.5M saying that the re-appraised value of the properties is P28.9M as of May Before the expiration of the redemption period, Spouses Vincoy, together 1991. with Gregorio sisters, filed a complaint for annulment of mortgage, alleging that the property had been constituted as a family home as early as 1989 West Negros College requested the issuance of the certificate of redemption and that the Gregorio sisters did not consent to the mortgage. after it had paid DBP P4.3M as 1% monthly interest. Its computation was based on Rule 39 of the RoC and Act 3135, while that of DBP's was based RTC declared that the constitution of the family home is void because its on its charter requiring payment of the amount owed as of the date of the actual value exceeded P300K and that the mortgage in favor of Union Bank foreclosure sale. Pursuant to this, DBP refused to hand over the TCTs of the valid. It also ordered Spouses Vincoy to pay their O/S balance to Union bank foreclosed properties. However, West Negros was vested with possession of in the amount of P4.8M. CA sustained the finding of RTC as to the issue of the properties. the family home, but found that the proper redemption price should be P3.29M, which is the purchase price at the foreclosure sale plus 1% monthly West Negros filed a petition with the RTC for the surrender of the TCTs (or interest pursuant to Rule 39 of the RoC. the issuance of new ones) alleging full payment of the redemption price under Rule 39 of RoC and Act No 3135--the amount of purchase with 1% ISSUE monthly interest + expenses at the sale. DBP, on the other hand, contends Whether the redemption price set by the Court of Appeals is proper that the proper redemption price is based on the total outstanding loan as of the date of the foreclosure sale, plus interests and expenses. RULING NO. Section 78 of GBL governs the determination of the redemption price of RTC ruled in favor of West Negros, which the CA sustained. the subject property. The Court has settled that the amount at which the foreclosed property is redeemable is the amount due under the mortgage ISSUE deed, or the O/S obligation of the mortgagor plus interests and expenses in What is the proper redemption price? accordance with Sec. 78, GBL. It was therefore erroneous for the CA to apply Rule 39 of the RoC in determining the redemption price in this case. RULING TOTAL OUTSTANDING BALANCE AS OF THE DATE OF FORECLOSURE DBP v West Negros College, 391 SCRA 330 (2002) SALE. It has long been settled that where real property is mortgaged to FACTS and foreclosed judicially or extrajudicially by DBP, the right of redemption Bacolod Medical Center (BMC) obtained a loan worth P2.4M from DBP, may only be exercised by paying all the amount owed on the date of the secured by a mortgage on 2 parcels of land, hospital building and medical sale, with interest on the total indebtedness at the rate agreed upon, unless equipment. the bidder has taken material possession of the property or unless it has been delivered to him, in which case, the proceeds of the property shall For failure to pay, DBP extrajudicially foreclosed the mortgage under Act No compensate the interest. This is applied whether the foreclosed property is 3135. At the public auction, DBP emerged as the highest bidder for P4.09M. sold to DBP or to another person at the public auction, provided that the The O/S balance of BMC with DBP as of the date of public auction amounted property was mortgaged to DBP. Where property is sold to persons other to P32.5M. than the mortgagee, the procedure is for DBP to return to the bidder the amount it received from him as a result of the auction sale with interest. Before the expiration of the redemption period, BMC and DBP Bacolod agreed to peg the redemption price at P21.5M, as a compromise settlement This rule is embodied in the charters of DBP and its predecessor agencies. of the O/S account--subject to approval of DBP Head Office. CA 459 (Agricultural and Industrial Bank) set the redemption price at the total indebtedness plus interest as of the date of the auction sale.

Several cases had settled that CA 459, NOT Rule 39 of RoC, is applicable in Pending the Petition, Spouses Samson filed an action for Annulment of EJ case of redemption of real estate mortgaged to DBP to secure a loan. As Foreclosure and/or Nullification of the Sale against Lenjul Realty, FEBTC, such, the redemption price to be paid by the mortgagor to DBP is all amount BPI, the clerk of court and the RD of Antipolo City. he owes on the date of the sale, with interest on the total indebtedness, and NOT merely the amount paid for by the purchaser in the public auction. Judge Rivera gave due course to the Petition for Issuance of Writ of Possession and denied the opposition. Pursuant to this, a Writ of Possession d. Possession was issued directing the sheriff to place Lenjul Realty in physical possession SEC. 47 (1), GBL: Foreclosure of Real Estate Mortgage. - In of the foreclosed properties. On the same date, the sheriff issued a Notice to the event of foreclosure, whether judicially or extra- Vacate to Rempson Corp (owned by Samson spouses). judicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the Spouses Samson then filed with the CA a SCA for Certiorari with mortgagor or debtor whose real property has been sold for Prohibition/Mandamus under Rule 65 to annul orders of Judge Rivera. the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to CA ruled that certiorari was improper and premature and that there was an redeem the property by paying the amount due under the adequate remedy available--to file a petition to set aside the foreclosure mortgage deed, with interest thereon at rate specified in the sale and to cancel the writ of possession. mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said ISSUE property less the income derived therefrom. However, the 1. Whether RTC committed GADLEJ in granting Petition for Issuance of purchaser at the auction sale concerned whether in a judicial Writ of Possession or extra-judicial foreclosure shall have the right to enter 2. Whether Petition for Certiorari was the proper remedy upon and take possession of such property immediately after the date of the confirmation of the auction sale and HELD administer the same in accordance with law. Any petition in 1. NO. The issuance of the Writ is explicitly authorized by Act No. 3135, court to enjoin or restrain the conduct of foreclosure which regulates the methods of effecting an EJ Foreclosure of Mortgage. proceedings instituted pursuant to this provision shall be Under Sec. 7 of Act No. 3135, the purchaser in a foreclosure sale may apply given due course only upon the filing by the petitioner of a for a writ of possession during the redemption period by filing for that bond in an amount fixed by the court conditioned that he purpose an ex parte motion under oath. Upon the filing of such motion and will pay all the damages which the bank may suffer by the the approval of the corresponding bond, the court is expressly directed to enjoining or the restraint of the foreclosure proceeding. issue the writ.

Cases The duty of the RTC to grant a writ of possession is ministerial. Such writ Samson v Rivera issues as a matter of course upon the filing of the proper motion and the FACTS approval of the corresponding bond. Spouses Samson obtained a loan amounting to P55M from Far East Bank, which they secured with 2 REMs covering 5 parcels of commercial property 2. NO. SCA for Certitorari could be availed of only if RTC acted with GADLEJ in Antipolo, Rizal. and if there is no appeal or any other plain, speedy and adequate remedy in the ordinary course of law. Due to their failure to pay, FEBTC filed an Application for Extra-Judicial Foreclosure of REM. FEBTC and Lenjul Realty were the 2 bidders in the 2nd There is grave abuse when the court acts in a capricious, whimsical, auction (1st auction was postponed because there was only 1 bidder then), arbitrary or despotic manner equivalent to acting with lack of jurisdiction. with the latter declared as the highest bidder in the amount of P80M. In this case, there was no GADLEJ since the RTC only issued the Writ in Thereafter, Lenjul Realty filed a Petition for the Issuance of a Writ of compliance with Act No. 3135. Possession, which the Spouses Samson opposed. Since there was no GADLEJ, Spouses Samson should have filed an ordinary appeal instead of a petition for certiorari.

e. Injunction and Bond Sec. 24.1, GBL: Except as the Monetary Board may otherwise SEC. 47 (1), GBL: Foreclosure of Real Estate Mortgage. - In prescribe, the total investment in equities of allied and non- the event of foreclosure, whether judicially or extra- allied enterprises shall not exceed fifty percent (50%) of the net judicially, of any mortgage on real estate which is security worth of the bank. for any loan or other credit accommodation granted, the (iii) Investment in equity of any one enterprise mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the Sec. 24.2, GBL: Except as the Monetary Board may otherwise right within one year after the sale of the real estate, to prescribe, the equity investment in any one enterprise, redeem the property by paying the amount due under the whether allied or non-allied, shall not exceed twenty-five mortgage deed, with interest thereon at rate specified in the percent (25%) of the net worth of the bank. mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said (iv) Definition of net worth property less the income derived therefrom. However, the Sec. 24, par. 3, GBL: As used in this Act, “net worth” shall purchaser at the auction sale concerned whether in a judicial mean the total of the unimpaired paid-in capital including paid- or extra-judicial foreclosure shall have the right to enter in surplus, retained earnings and undivided profit, net of upon and take possession of such property immediately valuation reserves and other adjustments as may be required by after the date of the confirmation of the auction sale and the Bangko Sentral. administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure (v) Do the foregoing limits apply to debt-to-equity proceedings instituted pursuant to this provision shall be conversions? given due course only upon the filing by the petitioner of a xSubsec. X116.3(i)., MRB: Equity investments. This refers to bond in an amount fixed by the court conditioned that he investments in capital stock of companies, firms or enterprises, will pay all the damages which the bank may suffer by the made for purposes of control, affiliation or other continuing enjoining or the restraint of the foreclosure proceeding. business advantage.

V. INVESTMENTS AND OTHER FUNCTIONS OF xSec. 52, GBL: Acquisition of Real Estate by Way of Satisfaction of Claims. – Notwithstanding the limitations of the preceding BANKS Section, a bank may acquire, hold or convey real property under the following circumstances: A. EQUITY INVESTMENTS 52.1. Such as shall be mortgaged to it in good faith by way 1. Limits on Equity Investments of UB of security for debts; a. In general 52.2. Such as shall be conveyed to it in satisfaction of debts Sec. 24, par. 1, GBL: A universal bank may, subject to the previously contracted in the course of its dealings; or conditions stated in the succeeding paragraph, invest in the 52.3. Such as it shall purchase at sales under judgments, equities of allied and non-allied enterprises as may be decrees, mortgages, or trust deeds held by it and such as it determined by the Monetary Board. Allied enterprises may shall purchase to secure debts due it. either be financial or non-financial. Any real property acquired or held under the circumstances (i) Prior approval of MB enumerated in the above paragraph shall be disposed of by the Sec. 24, par. 4, GBL: The acquisition of such equity or equities bank within a period of five (5) years or as may be prescribed is subject to the prior approval of the Monetary Board which by the Monetary Board: Provided, however, That the bank may, shall promulgate appropriate guidelines to govern such after said period, continue to hold the property for its own use, investments. subject to the limitations of the preceding Section. (ii) Total investment in equities of allied and non-allied (vi) Sanctions if without prior MB approval enterprises xSec. 385, MRB: Sanctions. The following sanctions shall be

imposed for equity investments made without prior Monetary primary purpose of which is to develop, promote and assist, thru Board approval: debt or equity financing or any other means, any small and medium-scale enterprise in the country. a. First Offense - If the investment is not allowable under existing regulations, divestment of the investment and X379.2 Equity investments of venture capital corporations. reprimand on officer/director who recommended/ approved Equity investment of a VCC in small and medium- scale the investment. enterprises shall be subject to the following conditions:

a. Equity financing by a VCC may be extended to a small and b. Subsequent Offense medium-scale enterprise engaged in an industry certified as On the Bank. If the investment is not allowable under desirable by the Department of Trade and Industry; and existing regulations, divestment of the investment. b. The total assets of the enterprises shall not exceed P4 million, including the VCC's equity investment. Should the On the Director/Officer. Fine of P20,000 for each investment to total assets of the small and medium-scale enterprise be imposed on the members of the board and the executive subsequently exceed the prescribed P4 million maximum, officers who recommended/approved the investment per the VCC equity investment therein made before the total investment and to be shouldered personally by the assets of the enterprise exceeded P4 million, may be officer/director: Provided, That if the subsequent offense is an maintained but shall not be increased. investment in a non-allied enterprise, the fine shall be P40,000. (iii) In non-financial allied enterprises b. In specific areas Sec. 26, GBL: Equity Investments of a Universal Bank in Non- (i) In financial allied enterprises Financial Allied Enterprises. – A universal bank may own up to Sec. 25, GBL: Equity Investments of a Universal Bank in one hundred percent (100%) of the equity in a non-financial Financial Allied Enterprises. - A universal bank can own up to allied enterprise. one hundred percent (100%) of the equity in a thrift bank, a xSec. X380, MRB: Non-Financial Allied Under- takings. A bank rural bank or a financial allied enterprise. may acquire up to 100% of the equity of a non-financial allied undertaking: Provided, That the equity investment of a TB/RB in any single enterprise shall remain less than fifty percent (50%) A publicly-listed universal or commercial bank may own up to of the voting shares in that enterprise: Provided, further, That one hundred percent (100%) of the voting stock of only one prior Monetary Board approval is required if the investment is in other universal or commercial bank. excess of forty percent (40%) of the total voting stock of such allied undertaking. (ii) In Venture Capital Corporations (VCCs) (iv) In non-allied enterprises xSec. X379, MRB: Investments in Venture Capital Corporations. The following rules and regulations shall implement Presidential Sec. 27, GBL: Equity Investments of a Universal Bank in Non- Decree No. 1688 entitled “Authorizing Banks to Invest in the Allied Enterprises. - The equity investment of a universal bank, Equity of Venture Capital Corporations to Assist Small and or of its wholly or majority-owned subsidiaries, in a single non- Medium- Scale Enterprises”. allied enterprise shall not exceed thirty-five percent (35%) of the total equity in that enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise. xSec. 1381, MRB: Investments in Non-Allied or Non-Related For purposes of this Section, a venture capital corporation (VCC) Undertakings. Only UBs may invest in the equity of an shall refer to an entity organized jointly by private banks, the enterprise engaged in non-allied or non-related activities. National Development Corporation and the Technology Livelihood and Resource Center and/or such other government 1381.2 Limits on investments in non- allied enterprises agency as may be authorized by the appropriate authority, the a. The equity investment of a UB, or of its wholly or majority-

owned subsidiaries, in a single non-allied enterprise shall not profitable; otherwise, the feasibility study on the proposed exceed thirty-five percent (35%) of the total equity in that subsidiary should show profits in the first two (2) years of enterprise nor shall it exceed thirty-five percent (35%) of operations. the voting stock in that enterprise. 2. Limits on Equity Investments of KB For the purpose of determining compliance with the ceiling a. In general prescribed in the preceding paragraph, (i) the equityinvestment of the bank; and (ii) the equity investment Sec. 30, par. 1, GBL: A commercial bank may, subject to the of the bank’s subsidiaries, shall be combined. conditions stated in the succeeding paragraphs, invest only in the equities of allied enterprises as may be determined by the b. In no case shall the total equity investments in a single non- Monetary Board. Allied enterprises may either be financial or allied enterprise of UBs, NBFIs performing QB functions and non-financial. their subsidiaries, whether or not the parent financial intermediaries have equity investments in the enterprise, (i) Prior approval of MB amount to fifty percent (50%) or more of the voting stock of that enterprise: Provided, however, That equity investments Sec. 30, par. 3, GBL: The acquisition of such equity or equities in excess of the ceilings prescribed herein as of April 1, 1980 is subject to the prior approval of the Monetary Board which may be maintained but may not be increased and if shall promulgate appropriate guidelines to govern such reduced, shall not be increased thereafter beyond the ceiling investment. prescribed herein. (ii) Total investment in equities of allied (financial or non- (v) In quasi-banks financial) enterprises Sec. 28, GBL: Equity Investments in Quasi-Banks. – To Sec. 30.1, GBL: The total investment in equities of allied promote competitive conditions in financial markets, the enterprises shall not exceed thirty-five percent (35%) of the net Monetary Board may further limit to forty percent (40%) equity worth of the bank. investments of universal banks in quasi-banks. This rule shall (iii) Investment in equity of any one enterprise also apply in the case of commercial banks. Sec. 30.2, GBL: The equity investment in any one enterprise (vi) In subsidiaries and affiliates abroad shall not exceed twenty-five percent (25%) of tile net worth of xSec. X382, MRB: Investments in Subsidiaries and Affiliates the bank. Abroad. The establishment or acquisition of subsidiaries or (iv) Definition of net worth affiliates abroad shall require prior approval of the BSP. Sec. 24, par. 3, GBL: As used in this Act, “net worth” shall X382.8 Investment of a bank subsidiary in a foreign subsidiary. mean the total of the unimpaired paid-in capital including paid- The following guidelines shall govern the investment in a foreign in surplus, retained earnings and undivided profit, net of subsidiary by a bank subsidiary: valuation reserves and other adjustments as may be required by a. The investment of a bank subsidiary in the equity of a the Bangko Sentral. subsidiary located abroad shall be subject to prior BSP approval; (v) Sanctions if without prior MB approval b. The bank subsidiary may invest in a subsidiary if it meets the xSec. 385, MRB: Sanctions. The following sanctions shall be following pre- qualification requirements: imposed for equity investments made without prior Monetary (1) It has complied with the minimum capital requirement of Board approval: the host country; a. First Offense - If the investment is not allowable under (2) It has booked the required valuation reserves and other existing regulations, divestment of the investment and capital adjustments, if any; and reprimand on officer/director who recommended/ approved the investment. (3) Its operations in the preceding three (3) years were

b. Subsequent Offense up to one hundred percent (100%) of the equity in a non- On the Bank. If the investment is not allowable under financial allied enterprise. existing regulations, divestment of the investment. (iv) In quasi-banks

Sec. 28, GBL: Equity Investments in Quasi-Banks. – To On the Director/Officer. Fine of P20,000 for each investment to promote competitive conditions in financial markets, the be imposed on the members of the board and the executive Monetary Board may further limit to forty percent (40%) equity officers who recommended/approved the investment per investments of universal banks in quasi-banks. This rule shall investment and to be shouldered personally by the also apply in the case of commercial banks. officer/director: Provided, That if the subsequent offense is an investment in a non-allied enterprise, the fine shall be P40,000. (v) In subsidiaries and affiliates abroad b. In specific areas xSec. X382, MRB: Equity Investments in Quasi-Banks. – To promote competitive conditions in financial markets, the (i) In financial allied enterprises Monetary Board may further limit to forty percent (40%) equity Sec. 31, GBL: Equity Investments of a Commercial Bank in investments of universal banks in quasi-banks. This rule shall Financial Allied Enterprises. - A commercial bank may own up to also apply in the case of commercial banks. one hundred percent (100%) of the equity of a thrift bank or a (vi) In subsidiaries and affiliates abroad rural bank. xSec. X382, MRB: Investments in Subsidiaries and Affiliates Abroad. The establishment or acquisition of subsidiaries or affiliates abroad shall require prior approval of the BSP. Where the equity investment of a commercial bank is in other financial allied enterprises, including another commercial bank, X382.8 Investment of a bank subsidiary in a foreign subsidiary. such investment shall remain a minority holding in that The following guidelines shall govern the investment in a foreign enterprise. subsidiary by a bank subsidiary: a. The investment of a bank subsidiary in the equity of a (ii) In VCCs subsidiary located abroad shall be subject to prior BSP approval; xSec. X379, MRB: Equity investments of venture capital b. The bank subsidiary may invest in a subsidiary if it meets the corporations. Equity investment of a VCC in small and medium- following pre- qualification requirements: scale enterprises shall be subject to the following conditions: (1) It has complied with the minimum capital requirement of a. Equity financing by a VCC may be extended to a small and the host country; medium-scale enterprise engaged in an industry certified as desirable by the Department of Trade and Industry; and (2) It has booked the required valuation reserves and other capital adjustments, if any; and b. The total assets of the enterprises shall not exceed P4 million, including the VCC's equity investment. Should the total (3) Its operations in the preceding three (3) years were assets of the small and medium-scale enterprise profitable; otherwise, the feasibility study on the proposed subsequently exceed the prescribed P4 million maximum, the subsidiary should show profits in the first two (2) years of VCC equity investment therein made before the total assets operations. of the enterprise exceeded P4 million, may be maintained but 3. Limits on Equity Investments of TB shall not be increased. Sec. 12, Thrift Banks Act: Investment in Allied Undertakings. — (iii) In non-financial allied enterprises Subject to such guidelines as may be established by the Monetary Sec. 32, GBL: Equity Investments of a Commercial Bank in Board, thrift banks may invest in equities of allied undertakings as Non-Financial Allied Enterprises. - A commercial bank may own hereinafter enumerated: Provided, That: (a) the total investments in equities shall not exceed twenty-five percent (25%) of the net worth of

the thrift bank; (b) the equity investment in any single enterprise shall (c) Fertilizer and agricultural chemical and pesticides be limited to fifteen percent (15%) of the net worth of the thrift bank; distribution; (c) the equity investment in any single enterprise shall remain a (d) Farm equipment distribution; minority holding in that enterprise; and (d) the equity investment in other banks shall be subject to the same provisions governing similar (e) Trucking and transportation of agricultural products; investments of commercial banks and shall be deducted from the investing bank's net worth for the purpose of computing of the (f) Marketing of agricultural products; prescribed ratio as provided in Section 9 hereof: Provided, further, That (g) Leasing; and equity investments shall not be permitted in non-related activities.Where the allied activity is a wholly- or majority-owned (h) Other undertakings as may be determined by the Monetary subsidiary of the thrift bank, the Bangko Sentral may subject it to Board. examination. 5. Limits on Equity Investments of Islamic Bank Investment in allied undertaking shall include institutions engaged in the Sec. 6(11), Islamic Bank Charter: Islamic Bank's Powers. - The following activities: Al-Amanah Islamic Investment Bank of the Philippines, upon its (a) Banking and financing; organization, shall be a body corporate and shall have the power: (b) Warehousing and other post-harvesting activities; To invest in equities of the following allied undertakings: (c) Fertilizer and agricultural chemical and pesticides (a) Warehousing companies; distribution; (b) Leasing companies; (d) Farm equipment distribution; (c) Storage companies; (e) Trucking and transportation of agricultural products; (d) Safe deposit box companies; (f) Marketing of agricultural products; (e) Companies engaged in the management of mutual funds but (g) Leasing; and not in the mutual funds themselves; and (h) Other undertakings as may be determined by the (f) Such other similar activities as the Monetary Board of the Monetary Board. Central Bank of the Philippines has declared or may declare as appropriate from time to time, subject to existing limitations 4. Limits on Equity Investments of RB imposed by law;

Sec. 13, Rural Banks Act: Subject to such guidelines as may be B. OTHER KB FUNCTIONS established by the Monetary Board, rural banks may invest in equities of allied undertakings as hereinafter enumerated: Provided, That: (a) the Sec. 29, GBL: Powers of a Commercial Bank. - A commercial bank shall total investment to equities shall not exceed twenty-five percent (25%) have, in addition to the general powers incident to corporations, all such of the net worth of the rural bank; (b) the equity investment in any powers as may be necessary to carry on the business of commercial banking single enterprise shall be limited to fifteen percent (15%) of the net such as accepting drafts and issuing letters of credit; discounting and worth of the rural bank; and (c) the equity investment of the rural bank negotiating promissory notes, drafts, bills of exchange, and other evidences in any single enterprise shall remain a minority holding in that of debt; accepting or creating demand deposits; receiving other types of enterprise: Provided, further, That equity investment shall not be deposits and deposit substitutes; buying and selling foreign exchange and permitted in non-related activities; gold or silver bullion; acquiring marketable bonds and other debt securities; and extending credit, subject to such rules as the Monetary Board may Allied undertakings shall include; promulgate. These rules may include the determination of bonds and other (a) Banks, financial institutions and non-bank financial debt securities eligible for investment, the maturities and aggregate amount intermediaries; of such investment. (b) Warehousing and other post-harvest facilities; 1. Non-Core/Quasi-Banking Functions

Sec. 4, GBL: The Bangko Sentral shall also have supervision over the another availment under the same letter of credit. However, the Bank of operations of and exercise regulatory powers over quasi-banks, trust Ayudhua informed the Bank of America that the letter of credit was entities and other financial institutions which under special laws are fraudulent. After investigation of the NBI, the officers of Inter-resin was subject to Bangko Sentral supervision. . charged with estafa but their cases were dismissed due to lack of prima facie evidence. For the purposes of this Act, “quasi-banks” shall refer to entities engaged in the borrowing of funds through the issuance, endorsement Now, Bank of America files a case against Inter-Resin for the recovery of or assignment with recourse or acceptance of deposit substitutes as 10M it issued under the fraudulent letter of credit. The TC ruled in favor of defined in Section 95 of Republic Act No. 7653 (hereafter the “New Inter-Resin, stating that the Bank of America lead Inter-Resin to believe the Central Bank Act”) for purposes of re-lending or purchasing of letter of credit was genuine. The CA affirmed the decision. receivables and other obligations. ISSUE Sec. 95, NCBA: The term "deposit substitutes" is defined as an alternative form of obtaining funds from the public, other than deposits, W/N the Bank of America is a mere advising/notifying bank or a confirming through the issuance, endorsement, or acceptance of debt instruments bank. for the borrower's own account, for the purpose ofrelending or RULING purchasing of receivables and other obligations. These instruments may include, but need not be limited to, bankers acceptances, promissory The Bank is only an advising bank, based on the provisions of the letter of notes, participations, certificates of assignment and similar instruments credit, the bank’s letter of advice and request for payment of advising fee. with recourse, and repurchase agreements. The Monetary Board shall The fact that the Bank asked Inter-Resin to submit documents and paid the determine what specific instruments shall be considered as deposit proceeds did not make it a confirming bank. the Bank’s letter clearly limited substitutes for the purposes of Section 94 of this Act: Provided, its obligation only to being an advising bank. however, That deposit substitutes of commercial, industrial and other non-financial companies for the limited purpose of financing their own As an advising/notifying bank, it did not incur any obligation other than just needs or the needs of their agents or dealers shall not be covered by the notifying Inter-Resin of the issuance of the letter of credit. The statement of provisions of Section 94 of this Act. one of the bank employees regarding the genuineness of the letter of credit did not have an effect of novating the position of the bank as an advising 2. Issuing L/Cs bank. in addition, the Bank is bound only to check the “apparent Sec. 105, NCBA: Margin Requirements Against Letters of Credit. authenticity” of the letter of credit, which it did. — The Monetary Board may at any time prescribe minimum cash Thus, the Bank of America can recover what it has paid to Inter-Resin, margins for the opening of letters of credit, and may relate the size of under the discounting agreement with the bank being a negotiating bank. the required margin to the nature of the transaction to be financed. With this agreement, the bank independently assumed the obligation under Cases the letter of credit, with right of recourse against the bank of Ayudha, Bank of America, NT & SA v. Court of Appeals, 228 SCRA 357 (1993) saving Inter-Resin the trouble of traveling to Thailand. FACTS Definition Bank of America received an irrevocable letter of credit purportedly issued A letter of credit is a financial device developed by merchants as a by Bank of Ayudhua to cover the sale of plastic ropes and agricultural files convenient and relatively safe mode of dealing with sales of goods to satisfy between General Chemicals Ltd of Thailand (Buyer) and Inter-Resin the seemingly irreconcilable interests of a seller, who refuses to part with Industrial Corporation of Philippines (Seller). Inter-Resin tried to have the his goods before he is paid, and a buyer, who wants to have control of the letter of credit confirmed. However, the Bank of America said that there was goods before paying. To break the impasse, the buyer may be required to no need for confirmation, as the letter of credit would not have been contract a bank to issue a letter of credit in favor of the seller so that, by transmitted if it were not genuine. virtue of the latter of credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon their presentment simultaneously Afterwards, Inter-Resin sought to make partial availment under the letter of with the tender of documents required by the letter of credit. The buyer and credit from Bank of America, its advising bank. Assured by the the seller agree on what documents are to be presented for payment, but “genuineness” of letter of credit, Bank of America, issued a Cashier’s check ordinarily they are documents of title evidencing or attesting to the amounting to 10M in favor of Inter-Resin. Again, Inter-Resin sought for

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 170 shipment of the goods to the buyer. are other principles, which, although part of lex mercatoria, are not dealt with the U.C.P. Once the credit is established, the seller ships the goods to the buyer and in the process secures the required shipping documents or documents of title. Transfield Philippines, Inc. v. Luzon Hydro Corporation, 443 SCRA 307 To get paid, the seller executes a draft and presents it together with the (2004) required documents to the issuing bank. The issuing bank redeems the draft FACTS and pays cash to the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains On 26 March 1997, petitioner and respondent Luzon Hydro Corporation possession of the documents upon paying the seller. The transaction is (hereinafter, LHC) entered into a Turnkey Contract whereby petitioner, as completed when the buyer reimburses the issuing bank and acquires the Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy documents entitling him to the goods. Under this arrangement, the seller (70)-Megawatt hydro-electric power station at the Bakun River in the gets paid only if he delivers the documents of title over the goods, while the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner buyer acquires said documents and control over the goods only after was given the sole responsibility for the design, construction, reimbursing the bank. commissioning, testing and completion of the Project. Parties To secure performance of petitioner’s obligation on or before the target completion date, or such time for completion as may be determined by the There would at least be three (3) parties: (a) the buyer, who procures the parties’ agreement, petitioner opened in favor of LHC two (2) standby letter of credit and obliges himself to reimburse the issuing bank upon letters of credit. receipts of the documents of title; (b) the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft and proper In the course of the construction of the project, petitioner sought various document of titles and to surrender the documents to the buyer upon EOT to complete the Project. The extensions were requested allegedly due reimbursement; and, (c) the seller, who in compliance with the contract of to several factors which prevented the completion of the Project on target sale ships the goods to the buyer and delivers the documents of title and date, such as force majeure occasioned by typhoon Zeb, barricades and draft to the issuing bank to recover payment. demonstrations. LHC denied the requests, however. This gave rise to a series of legal actions between the parties which culminated in the instant The number of the parties, not infrequently and almost invariably in petition. international trade practice, may be increased. Thus, the services of an advising (notifying) bank may be utilized to convey to the seller the ISSUE existence of the credit; or, of a confirming bank which will lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying Whether or not the beneficiary of an LOC can invoke the Independence bank, which undertakes to encash the drafts drawn by the exporter. Principle? Further, instead of going to the place of the issuing bank to claim payment, RULING the buyer may approach another bank, termed the negotiating bank, to have the draft discounted. YES. To say that the independence principle may only be invoked by the Governing Law issuing banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence Being a product of international commerce, the impact of this commercial doctrine works to the benefit of both the issuing bank and the beneficiary. instrument transcends national boundaries, and it is thus not uncommon to find a dearth of national law that can adequately provide for its governance. This country is no exception. Our own Code of Commerce basically Vintola v. Insular Bank of Asia and America, 150 SCRA 578 (1987) introduces only its concept under Articles 567-572, inclusive, thereof. It is FACTS no wonder then why great reliance has been placed on commercial usage and practice, which, in any case, can be justified by the universal The Vintola spouses were engaged in manufacturing finished products from acceptance of the autonomy of contract rules. The rules were later raw seashells. They applied for a Letter of Credit with IBAA, which developed into what is now known as the Uniform Customs and Practice for authorized IBAA to negotiate for the Vintolas account drafts drawn by a Documentary Credits ("U.C.P.") issued by the International Chamber of certain Stalin Tan who was their supplier of seashells. Stalin Tan delivered Commerce. It is by no means a complete text by itself, for, to be sure, there shells worth forty thousand. The Vintolas executed a Trust Receipt Agreement with IBAA Cebu agreeing to hold the goods in trust for IBAA and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 171 to turn over the proceeds in case of a sale. The Vintolas defaulted, hence, banks to sell to the Bangko Sentral or to other banks all or part of their IBAA demands from the Vintolas but they were not able to dispose of the surplus holdings of foreign exchange. Such transfers may be required shells and offered them to IBAA. IBAA refused and charged them with for all foreign currencies or for only certain of such currencies, according estafa. TC acquitted the Vintolas because the element of misappropriation to the decision of the Monetary Board. The transfers shall be made at was not present and that under the Trust Receipt, the remedy of IBAA is the rates established under the provisions of Section 74 of this Act. civil in nature not criminal. IBAA then filed a civil case but the TC dismissed The Monetary Board may, whenever warranted, determine the net it again, but later reconsidered, ordering the Vintolas to pay twenty-seven assets and net liabilities of banks and shall, in making such a thousand and attorney’s fees. determination, take into account the bank's networth, outstanding ISSUE liabilities, actual and contingent, or such other financial or performance ratios as may be appropriate under the circumstances. Any such (1) Does the delivery of the seashells first to IBAA, and upon IBAA’s determination of net assets and net liabilities shall be applied in all refusal, to the trial court extinguish the Vintolas’ liability? banks uniformly and without discrimination. (2) Does the previous acquittal bar the filing of the civil action since IBAA did not reserve the right to enforce civil liability? Sec. 77, NCBA: Requirement of Balanced Currency Position. — The Monetary Board may require the banks to maintain a balanced HELD position between their assets and liabilities in Philippine pesos or in any other currency or currencies in which they operate. The banks shall be Both NO. Delivery of the seashells did not extinguish Vintola’s liability and granted a reasonable period of time in which to adjust their currency the previous acquittal did not bar the filing of a civil action. positions to any such requirement. A letter of credit-trust receipt arrangement is endowed with its own The powers granted under this section shall be exercised only when distinctive features and characteristics. Under the agreed set up, the bank special circumstances make such action necessary, in the opinion of the extends a loan covered by the letter of credit, with the trust receipt as Monetary Board, and shall be applied to all banks alike and without security for the loan. discrimination. According to Samo. V. People: “a trust receipt is considered as a security Sec. 78, NCBA: Regulation of Non-spot Exchange Transactions. — transaction intended to aid in financing importers and retail dealers who do In order to restrain the banks from taking speculative positions with not have sufficient funds or resources to finance the importation or purchase respect to future fluctuations in foreign exchange rates, the Monetary of merchandise, and who may not be able to acquire credit except through Board may issue such regulations governing bank purchases and sales utilization, as collateral of the merchandise imported or purchased.” of non-spot exchange as it may consider necessary for said purpose. So IBAA never became the real owner of the goods, and was merely the Sec. 79, NCBA: Other Exchange Profits and Losses. — The banks holder of a security title for the advances made under the LC. The Vintolas shall bear the risks of non- compliance with the terms of the foreign own the shells and hold it at their own risk, the trust agreement did not exchange documents and instruments which they buy and sell, and shall make the IBAA an investor. IBAA remained a creditor and a lender. also bear any other typically commercial or banking risks, including Depositing of the goods with IBAA did not convert them to investors and exchange risks not assumed by the Bangko Sentral under the provisions extinguish the liability of the Vintolas. Even if they did not misappropriate or of the preceding section. misapply or convert the seashells, they are still liable ex contractu under the terms of the LC/Trust Receipt separately from the estafa, hence they were Sec. 80, NCBA: Information on Exchange Operations. — The banks properly sued despite the acquittal in the criminal case. shall report to the Bangko Sentral the volume and composition of their purchases and sales of gold and foreign exchange each day, and must furnish such additional information as the Bangko Sentral may request 3. Foreign Exchange Operations with reference to the movements in their accounts in foreign currencies.The Monetary Board may also require other persons and Sec. 76, NCBA: Foreign Exchange Holdings of the Banks. — In entities to report to it currently all transactions or operations in gold, in order that the Bangko Sentral may at all times have foreign exchange any shape or form, and in foreign exchange whether entered into or resources sufficient to enable it to maintain the international stability undertaken by them directly or through agents, or to submit such data and convertibility of the peso, or in order to promote the domestic as may be required on operations or activities giving rise to or in investment of bank resources, the Monetary Board may require the connection with or relating to a gold or foreign exchange transaction.

The Monetary Board shall prescribe the forms on which such 4. Financial Adviser declarations must be made. The accuracy of the declarations may be Sec. 53.4, GBL: Other Banking Services. – In addition to the operations verified by the Bangko Sentral by whatever inspection it may deem specifically authorized in this Act, a bank may perform the following necessary. services, upon prior approval of the Monetary Board, act as managing C. OTHER SERVICES agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts. 1. Custodian of Funds, Documents, Valuable Objects

Sec. 53.1, GBL: Other Banking Services. – In addition to the operations specifically authorized in this Act, a bank may perform the following 5. Renting Out Safety Deposit Boxes services, receive in custody funds, documents and valuable objects. Sec. 53.5, GBL: Other Banking Services. – In addition to the operations 2. Financial Agent specifically authorized in this Act, a bank may perform the following services, rent out safety deposit boxes. Sec. 53.2, GBL: Other Banking Services. – In addition to the operations specifically authorized in this Act, a bank may perform the following Cases services, act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all CA Agro-Industrial Development Corporation v. Court of Appeals, types of securities 219 SCRA (1993)

Cases FACTS

Panlilio v. Citibank, N.A., 539 SCRA 69 (2007) CA-Agro (through its President, Aguirre) and the spouses Pugao entered into an agreement whereby the former bought two parcels of land for P350K The Central Bank, through the Monetary Board, is empowered to conduct with a P75k downpayment. Among the terms were that the titles will be investigations and examine the records of savings and loan associations. If transferred to CA-Agro upon full payment and that the owner's copies of the any irregularity is discovered in the process, the Monetary Board may titles will be deposited in a safety deposit box in a bank. The same could be impose appropriate sanctions, such as suspending the offender from holding withdrawn upon the joint signatures of a representative of CA-Agro and the office or from being employed with the Central Bank, or placing the names Pugaos upon full payment of the purchase price. They then rented Safety of the offenders in a watchlist. Deposit Box No. 1448 of private respondent Security Bank and Trust The requirement of prior notice is also relaxed under Section 28 (c) of RA Company. For this purpose, both signed a contract of lease which contains 3779 as investigations or examinations may be conducted with or without these provisos: prior notice "but always with fairness and reasonable opportunity for the "13. The bank is not a depositary of the contents of the safe and it association or any of its officials to give their side." As may be gathered has neither the possession nor control of the same. from the records, the said requirement was properly complied with by the respondent Monetary Board. 14. The bank has no interest whatsoever in said contents, except herein expressly provided, and it assumes absolutely no liability in connection therewith." 3. Collection/Payment Agent Renters keys were given to Aguirre, and the Pugaos. A guard key remained Sec. 53.3, GBL: Other Banking Services. – In addition to the operations with the bank. Thereafter, a certain Margarita Ramos offered to buy the land specifically authorized in this Act, a bank may perform the following from Ca-Agro at a price P280k higher than market, but demanded services, make collections and payments for the account of others and immediate execution of deeds of sale and transfer of OCTs. Aguirre and the perform such other services for their customers as are not incompatible Pugaos went to SBTC to open the safety deposit box, but when they opened with banking business it...the titles were GONE (dun dun dun). Ca-Agro attempted to have the Titles reconstituted, but because of the delay Ms. Ramos withdrew her offer to purchase. CA-Agro then filed this damage suit against the bank, losing at the RTC and CA level.

ISSUES that either of them could ask the Bank for access to the safety deposit box and, with the use of such key and the Bank's own guard key, could open the What is the contractual relation between the bank and a third party in a said box, without the other renter being present." contract of safety deposit? (If lease, then bank not liable because of SDB being in total control of depositor, as held by RTC and CA). Is SBTC Liable? HELD Sia v. Court of Appeals, 222 SCRA 24 (1993)

SBTC is liable because the contract is not one of lease. The contract of FACTS safety deposit is a special kind of deposit. Luzan Sia rented a safety deposit box with the Security Bank and Trust Company to put his collection of stamps. An agreement was entered between the parties that the liability of the bank will be limited only to Note that clauses 13 and 14 in the contract do not exempt the bank from prevent the opening of the box by any person other than the renter, and liability. Any stipulation exempting the depositary from any liability arising that the bank will not be considered a depositary. There had been a flood from the loss of the thing deposited on account of fraud, negligence or delay that entered into the bank’s premises, which seeped through the box, and would be void for being contrary to law and public policy, and are destroyed the stamps. Sia filed a complaint with the RTC, which ruled in his inconsistent with the respondent Bank's responsibility as a depositary under favor. The CA reversed. Section 72(a) of the General Banking Act. ISSUE It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and absolute possession and control of the safety Whether or not renting of a deposit box is lease or deposit agreement deposit box was not given to the joint renters — the petitioner and the Pugaos. The guard key of the box remained with the respondent Bank; RULING without this key, neither of the renters could open the box. It is a deposit agreement. Both stipulations (stated above) are contrary to Our provisions on safety deposit boxes are governed by Section 72(a) of the law and public policy, and must be considered void. The primary functions of General Banking Act, and this primary function is still found within the the bank are within the scope of an agreement of deposit, and not of a lease parameters of a contract of deposit like the receiving in custody of funds, agreement. Under the General Banking Act, a bank shall perform the act of documents and other valuable objects for safekeeping. The renting out of renting out a safety deposit box as depositaries. the safety deposit boxes is not independent from, but related to or in conjunction with, this principal function. Thus, a depositary's liability is *The bank was also considered negligent when it did not report the effects governed by our Civil Code rules on oblicon, and thus the SBTC would be of the flooding with Sia. It failed to apply the diligence of a good father in liable if, in performing its obligation, it is found guilty of fraud, negligence, protecting the stamps deposited with them. It also aggravated the status of delay or contravention of the tenor of the agreement. the stamps in its failure to tell Sia that flood entered its premises. "Thus, we reach the same conclusion which the Court of Appeals arrived at, that is, that the petition should be dismissed, but on grounds quite different D. OTHER FUNCTIONS/OPERATIONS from those relied upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration cannot, contrary to the holding of the Court 1. Issue Guarantees of Appeals, be based on or proceed from a characterization of the impugned Sec. 74, General Banking Act: No bank or banking institution shall contract as a contract of lease, but rather on the fact that no competent enter, directly or indirectly, into any contract of guaranty or suretyship, proof was presented to show that respondent Bank was aware of the or shall guarantee the interest or principal of any obligation of any agreement between the petitioner and the Pugaos to the effect that the person, co-partnership, association, corporation or other entity. The certificates of title were withdrawable from the safety deposit box only upon provisions of this section shall, however, not be held to apply to the both parties' joint signatures, and that no evidence was submitted to reveal that the loss of the certificates of title was due to the fraud or negligence of borrowing of money by any such bank or institution through the rediscounting of its receivables, or otherwise, as may be permitted by the respondent Bank. This in turn flows from this Court's determination that law, nor to the granting or guaranteeing of acceptance credits in the the contract involved was one of deposit. Since both the petitioner and the ordinary course of its business. Nor shall the provisions of this section Pugaos agreed that each should have one (1) renter's key, it was obvious

apply to the certification of checks or to transactions involving the that the condition was void since it depended on the sole will of the debtor, release of documents attached to items received for collection, nor to the defendant Christiansen. The trial court ordered the immediate execution any other transaction which may properly be regarded as common of its judgment upon the private respondent's filing of a bond. usage and accepted banking practice. ISSUE 2. Act as Correspondent Bank Whether or not a correspondent bank is to be held liable under the letter of Cases credit despite non-compliance by the beneficiary with the terms thereof? Feati Bank & Trust Company v. Court of Appeals, 196 SCRA 576 (1991) RULING

FACTS It is a settled rule in commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of Villaluz agreed to sell to the then defendant Christiansen 2,000 cubic meters credit. The tender of documents by the beneficiary (seller) must include all of lauan logs. The Security Pacific National Bank of Los Angeles, California documents required by the letter. A correspondent bank which departs from issued Irrevocable Letter of Credit available at sight in favor of Villaluz for what has been stipulated under the letter of credit, as when it accepts faulty the sum of the total purchase price. The letter of credit was mailed to the tender, acts on its own risks and it may not thereafter be able to recover Feati Bank and Trust Company (now Citytrust) with the instruction to the from the buyer or the issuing bank. latter that it "forward the enclosed letter of credit to the beneficiary." The letter of credit provided that the draft to be drawn is on Security Pacific The bank may only negotiate, accept or pay, if the documents tendered to it National Bank and that it be accompanied by some specified documents, are on their face in accordance with the terms and conditions of the including a Certification from Christiansen stating that logs have been documentary credit. And since a correspondent bank, like the petitioner, approved prior to shipment. However, Christiansen refused to issue the principally deals only with documents, the absence of any document certification as required, despite several requests made by the private required in the documentary credit justifies the refusal by the correspondent respondent. Because of the absence of the certification by Christiansen, the bank to negotiate, accept or pay the beneficiary, as it is not its obligation to Feati Bank and Trust Company refused to advance the payment on the look beyond the documents. It merely has to rely on the completeness of letter of credit. Since the demands by the private respondent for the documents tendered by the beneficiary. Christiansen to execute the certification proved futile, Villaluz, instituted an In regard to the ruling of the lower court and affirmed by the Court of action for mandamus and specific performance against Christiansen and the Appeals that the petitioner is not a notifying bank but a confirming bank, it Feati Bank and Trust Company before the Court. was found to be erroneous. The trial court wrongly mixed up the meaning of The Court agreed with the plaintiff that the defendant bank may be held an irrevocable credit with that of a confirmed credit. In its decision, the trial liable under the principles and laws on both trust and estoppels, arguing court ruled that the petitioner, in accepting the obligation to notify the that when the defendant bank accepted its role as the notifying and respondent that the irrevocable credit has been transmitted to the petitioner negotiating bank for and in behalf of the issuing bank, it in effect accepted a on behalf of the private respondent, has confirmed the letter. The trial court trust reposed on it, and became a trustee in relation to plaintiff as the overlooked the fact that an irrevocable credit is not synonymous with a beneficiary of the letter of credit. As trustee, it was then duty bound to confirmed credit. These types of letters have different meanings and the protect the interests of the plaintiff under the terms of the letter of credit. legal relations’ arising from there varies. A credit may be an irrevocable When the defendant bank assumed the role of a notifying and negotiating credit and at the same time a confirmed credit or vice-versa. bank, it in effect represented to the plaintiff that, if the plaintiff complied Hence, the mere fact that a letter of credit is irrevocable does not with the terms and conditions of the letter of credit and presents the same necessarily imply that the correspondent bank in accepting the instructions to the bank together with the documents mentioned therein the said bank of the issuing bank has also confirmed the letter of credit. Another error will pay the plaintiff the amount of the letter of credit. which the lower court and the CA made was to confuse the obligation The defendant bank, in insisting upon the certification of defendant assumed by the petitioner. Christiansen as a condition precedent to negotiating the letter of credit, in In commercial transactions involving letters of credit, the functions the Court's opinion acted in bad faith, not only because of the clear assumed by a correspondent bank are classified according to the declaration of the Central Bank that such a requirement was illegal, but obligations taken up by it. The correspondent bank may be called a because the bank, with all the legal counsel available to it must have known notifying bank, a negotiating bank, or a confirming bank. In case of

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 175 a notifying bank, the correspondent bank assumes no liability To be able to recover the amounts credited, PNB applied/appropriated the except to notify and/or transmit to the beneficiary the existence of amounts of $2,600 and P34,000 from the remittances of Lapez's principals the letter of credit. A negotiating bank, on the other hand, is a abroad. correspondent bank which buys or discounts a draft under the letter ISSUE of credit. Its liability is dependent upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but Whether PNB was justified in making the set-off against the 2 remittances after negotiation, a contractual relationship will then prevail coursed though it in favor of Lapez to recover on the double credits, based between the negotiating bank and the seller. In the case of a on solutio indebiti confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the RULING correspondent bank itself had issued the letter of credit. NO. Not all requisites for legal compensation are existing in this case. In this case, the letter merely provided that the petitioner "forward the enclosed original credit to the beneficiary." Considering the aforesaid The telegraphic money transfer was sent by the IBN, Lapez’s principal in instruction to the petitioner by the issuing bank, it is indubitable that the Jeddah, Saudi Arabia, thru the National Commercial Bank of Jeddah, Saudi petitioner is only a notifying bank and not a confirming bank as ruled by the Arabia (NCB, for short), for his account with Citibank, coursed thru the courts below. Since the petitioner was only a notifying bank, its PNB's head office, the NCB's correspondent bank in the Philippines. responsibility was solely to notify and/or transmit the documentary of credit The credit account, or simply account means that the amount stated in the to the private respondent and its obligation ends there. A notifying bank is telegraphic money transfer is to be credited in the account of plaintiff with not a privy to the contract of sale between the buyer and the seller, its the Citibank, and, in that sense, presupposes a creditor-debtor relationship relationship is only with that of the issuing bank and not with the beneficiary between the PNB, as creditor and the Citibank, as debtor. Withal the to whom he assumes no liability. It follows therefore that when the telegraphic money transfer, no such creditor-debtor relationship could have petitioner refused to negotiate with the private respondent, the latter has no been created between them. cause of action against the petitioner for the enforcement of his rights under the letter. The telegraphic money transfer, or simply telegraphic transfer, was purchased by the IBN from the NCB in Saudi Arabia, and since the PNB is In order that the petitioner may be held liable under the letter, there should the NCB's corresponden) bank in the Philippines, there is created between be proof that the petitioner confirmed the letter of credit. No proof was the two banks a sort of communication exchange for the correspondent found. Whether therefore the petitioner is a notifying bank or a negotiating bank to transmit and/or remit and/or pay the value of the telegraphic bank, it cannot be held liable. Absent any definitive proof that it has transfer in accordance with the dictate of the correspondence exchange. confirmed the letter of credit or has actually negotiated with the private Some such responsibility of the correspondent bank is akin to section 7 of respondent, the refusal by the petitioner to accept the tender of the private the Rules and Regulations Implementing E.O. 857, as amended by E.O. 925, respondent is justified. ". . . to take charge of the prompt payment" of the telegraphic transfer, that is, by transmitting the telegraphic money transfer to the Citibank so that the amount can be promptly credited to the account of the plaintiff with the said Philippine National Bank v. Court of Appeals, 259 SCRA 174 (1996) bank. That is all that the PNB can do under the remittance arrangement that it has with the NCB. With its responsibility as defined as well as by the FACTS nature of its banking business and the responsibility attached to it, and through which the industry, trade and commerce of all countries and Lapez had remittances from Jeddah and Libya to be credited to his Citibank communities are carried on, the PNB's liability as correspondent bank and PNB accounts, respectively. continues until it has completely performed and discharged its obligation Prior to this, in 1980 and 1981, Lapez's PNB account was doubly credited thereunder." with $5,600 and $5,800 (total of P87,000). PNB made a demand upon Lapez Even if the beneficiary (Lapez) is indebted to PNB, the bank cannot do a for the refund of the double credits erroneously made on his account. shortcut and simply intercept the funds being coursed through it, for Thereafter, a reduction of P34,000 was made by PNB not without the transmittal to another bank (Citi) and eventually to be deposited to the knowledge and consent of Lapez, who was in fact issued a receipt. account of the beneficiary. The bank cannot invoke legal compensation in such case.

3. Credit Card Operations – general powers incident to corporations, shall have the power to: xSec. X320, MRB: Credit Card Operations; General Policy. The BSP shall 83.1. Act as trustee on any mortgage or bond issued by any foster the development of consumer credit through innovative products municipality, corporation, or any body politic and to accept and execute such as credit cards under conditions of fair and sound consumer credit any trust consistent with law; practices. The BSP likewise encourages competition and transparency to 83.2. Act under the order or appointment of any court as guardian, ensure more efficient delivery of services and fair dealings with receiver, trustee, or depositary of the estate of any minor or other customers. incompetent person, and as receiver and depositary of any moneys paid Towards this end, the following rules and regulations shall govern the into court by parties to any legal proceedings and of property of any credit card operations of banks and subsidiary/affiliate credit card kind which may be brought under the jurisdiction of the court; companies, aligned with global best practices. 83.3. Act as the executor of any will when it is named the executor E. TRUST OPERATIONS thereof; Sec. 79, GBL: Authority to Engage in Trust Business. – Only a stock 83.4. Act as administrator of the estate of any deceased person, with corporation or a person duly authorized by the Monetary Board to engage in the will annexed, or as administrator of the estate of any deceased trust business shall act as a trustee or administer any trust or hold property person when there is no will; in trust or on deposit for the use, benefit, or behoof of others. For purposes 83.5. Accept and execute any trust for the holding, management, and of this Act, such a corporation shall be referred to as a trust entity. administration of any estate, real or personal, and the rents, issues and Sec. 80, GBL: Conduct of Trust Business. – A trust entity shall administer profits thereof; and the funds or property under its custody with the diligence that a prudent 83.6. Establish and manage common trust funds, subject to such rules man would exercise in the conduct of an enterprise of a like character and and regulations as may be prescribed by the Monetary Board. with similar aims. Sec. 84, GBL: Deposit for the Faithful Performance of Trust Duties. – Before No trust entity shall, for the account of the trustor or the beneficiary of the transacting trust business, every trust entity shall deposit with the Bangko trust, purchase or acquire property from, or sell, transfer, assign, or lend Sentral, as security for the faithful performance of its trust duties, cash or money or property to, or purchase debt instruments of, any of the securities approved by the Monetary Board in an amount equal to or not less departments, directors, officers, stockholders, or employees of the trust than Five hundred thousand pesos (P500,000.00) or such higher amount as entity, relatives within the first degree of consanguinity or affinity, or the may fixed by the Monetary Board: Provided, however, That the Monetary related interests, of such directors, officers and stockholders, unless the Board shall require every trust entity to increase the amount of its cash or transaction is specifically authorized by the trustor and the relationship of securities on deposit with the Bangko Sentral in accordance with the the trustee and the other party involved in the transaction is fully disclosed provisions of this paragraph. Should the capital and surplus fall below said to the trustor of beneficiary of the trust prior to the transaction. amount, the Monetary Board shall have the same authority as that granted The Monetary Board shall promulgate such rules and regulations as may be to it under the provisions of the fifth paragraph of Section 34 of this Act. necessary to prevent circumvention of this prohibition or the evasion of the A trust entity so long as it shall continue to be solvent and comply with laws responsibility herein imposed on a trust entity. or regulations shall have the right to collect the interest earned on such Sec. 81, GBL: Registration of Articles of Incorporation and By-Laws of a securities deposited with the Bangko Sentral and, from time to time, with Trust Entity. – The Securities and Exchange Commission shall not register the approval of the Bangko Sentral, to exchange the securities for others. If the articles of incorporation and by-laws or any amendment thereto, of any the trust entity fails to comply with any law or regulation, the Bangko trust entity, unless accompanied by a certificate of authority issued by the Sentral shall retain such interest on the securities deposited with it for the Bangko Sentral. benefit of rightful claimants. Al claims rising out of the trust business of a trust entity shall have priority over all other claims as regards the cash or Sec. 82, GBL: Minimum Capitalization. – A trust entity, before it can securities deposited as above provided. The Monetary Board may not engage in trust or other fiduciary business, shall comply with the minimum permit the cash or securities deposited in accordance with the provisions of paid-in capital requirement which will be determined by the Monetary Board. this Section to be reduced below the prescribed minimum amount until the Sec. 83, GBL: Powers of a Trust Entity. – A trust entity, in addition to the depositing entity shall discontinue its trust business and shall satisfy the

Monetary Board that it has complied with all its obligations in connection Sec. 89, GBL: Real Estate Acquired by a Trust Entity. – Unless otherwise with such business. specifically directed by the trustor or the nature of the trust, real estate acquired by a trust entity in whatever manner and for whatever purposes, Sec. 85, GBL: Bond of Certain Persons for the Faithful Performance of shall likewise be governed by the relevant provisions of Section 52 of this Duties. – Before an executor, administrator, guardian, trustee, receiver or Act. depositary appointed by the court enters upon the execution of his duties, he shall, upon order of the court, file a bond in such sum as the court may Sec. 90, GBL: Investment of Non-Trust Funds. – The investment of funds direct. other than trust funds of a trust entity which is a bank, financing company or an investment house shall be governed by the relevant provisions of this Upon the application of any executor, administrator, guardian, trustee, Act and other applicable laws. receiver, depositary or any other person in interest, the court may, after notice and hearing, order that the subject matter of the trust or any part, Sec. 91, GBL: Sanctions and Penalties. - A trust entity or any of its officers thereof be deposited with a trust entity. Upon presentation of proof to the and directors found to have willfully violated any pertinent provisions of this court that the subject matter of the trust has been deposited with a trust Act, shall be subject to the sanctions and penalties provided tinder Section entity. Upon presentation of proof to the court that the subject matter of 66 of this Act as well as Sections 36 and 37 of the New Central Bank Act. the trust has been deposited with a trust entity, the court may order that Sec. 92, GBL: Exemption of Trust Assets from Claims. - No assets held by the bond given by such persons for the faithful performance of their duties a trust entity in its capacity as trustee shall be subject to any claims other be reduced to such sums as it may deem proper: Provided, however, That than those of the parties interested in the specific trusts. the reduced bond shall be sufficient to secure adequately the proper administration and care of any property remaining under the control of such Sec. 93, GBL: Establishment of Branches of a Trust Entity. – The ordinary persons and the proper accounting for such property. business of a trust entity shall be transacted at the place of business specified in its articles of incorporation. Such trust entity may, with prior Property deposited with any trust entity in conformity with this Section shall approval of the Monetary Board, establish branches in the Philippines and be held by such entity under the orders and direction of the court. the said entity shall be responsible for all business conducted in such Sec. 86, GBL: Exemption of Trust Entity from Bond Requirement. – No branches to the same extent and in the same manner as though such bond or other security shall be required by the court from a trust entry for business had all been conducted in the head office. the faithful performance of its duties as court-appointed trustee, executor, For the purpose of this Act, the trust entity and its branches shall be treated administrator, guardian, receiver, or depositary. However, the court may, as one unit. upon proper application with it showing special cause therefore, require the trust entity to post a bond or other security for the protection of funds or property confided to such entity. F. PROHIBITED ACTS Sec. 87, GBL: Separation of Trust Business from General Business. – The trust business and all funds, properties or securities received by any trust 1. Insurance business entity as executor, administrator, guardian, trustee, receiver, or depositary Sec. 54, GBL: Prohibition to Act as Insurer. - A bank shall not directly shall be kept separate and distinct from the general business including all engage in insurance business as the insurer. other funds, properties, and assets of such trust entity. The accounts of all such funds, properties, or securities shall likewise be kept separate and Sec. 2, Insurance Code: Whenever used in this Code, the following distinct from the accounts of the general business of the trust entity. terms shall have the respective meanings hereinafter set forth or indicated, unless the context otherwise requires: Sec. 88, GBL: Investment Limitations of a Trust Entity. – Unless otherwise directed by the instrument creating the trust, the lending and investment of (1) A "contract of insurance" is an agreement whereby one undertakes funds and other assets acquired by a trust entity as executor, administrator, for a consideration to indemnify another against loss, damage or liability guardian, trustee, receiver or depositary of the estate of any minor or other arising from an unknown or contingent event. incompetent person shall be limited to loans or investments as may be A contract of suretyship shall be deemed to be an insurance contract, prescribed by law, the Monetary Board or any court of competent within the meaning of this Code, only if made by a surety who or which, jurisdiction. as such, is doing an insurance business as hereinafter provided.

(2) The term "doing an insurance business" or "transacting an insurance in terms of their financial resources and technical expertise and business", within the meaning of this Code, shall include: integrity. The bank licensing process shall incorporate an assessment of the bank’s ownership structure, directors and senior management, its (a) making or proposing to make, as insurer, any insurance operating plan and internal controls as well as its projected financial contract; condition and capital base. (b) making or proposing to make, as surety, any contract of a. Stock corporation (Sec. 8.1, GBL) See supra suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; (i) Issuance of stocks (c) doing any kind of business, including a reinsurance business, Sec. 9, GBL: Issuance of Stocks. – The Monetary Board may specifically recognized as constituting the doing of an insurance prescribe rules and regulations on the types of stock a bank may business within the meaning of this Code; issue, including the terms thereof and rights appurtenant thereto to determine compliance with laws and regulations (d) doing or proposing to do any business in substance equivalent to governing capital and equity structure of banks; Provided, That any of the foregoing in a manner designed to evade the provisions banks shall issue par value stocks only. of this Code. (ii) Treasury stocks In the application of the provisions of this Code the fact that no profit is derived from the making of insurance contracts, agreements or Sec. 10, GBL: Treasury Stocks. – No bank shall purchase or transactions or that no separate or direct consideration is received acquire shares of its own capital stock or accept its own shares therefor, shall not be deemed conclusive to show that the making as a security for a loan, except when authorized by the thereof does not constitute the doing or transacting of an insurance Monetary Board: Provided, That in every case the stock so business. purchased or acquired shall, within six (6) months from the time of its purchase or acquisition, be sold or disposed of at a public (3) As used in this code, the term "Commissioner" means the or private sale. "Insurance Commissioner". Cases 2. Outsourcing of inherent bank functions Fua Cun v. Summers, 44 Phil. 705 (1923) Sec. 55(1)(e), GBL: No director, officer, employee, or agent of any FACTS bank shall outsource inherent banking functions. Chua Soco subscribed 500 shares of stock with China Bank. He already made payment of P25,000 representing 250 shares of stock, with the balance forthcoming. VI. BANK REGULATIONS On a different transaction, Chua executed a promissory note in favor of Fue A. OWNERSHIP/CAPITALIZATION OF BANKS Cun for P25,000 payable within 90 days. The note was secured by a chattel mortgage on the shares of stock subscribed. 1. Organization Meanwhile, Chua became indebted to China Bank for dishonored Sec. 8, GBL: Organization. – The Monetary Board may authorize the acceptances of commercial papers. China bank brought an action against organization of a bank or quasi-bank subject to the following conditions: Chua, resulting in the attachment of the whole 500 shares of stock. It was 8.1 That the entity is a stock corporation; after the attachment that Fue brought an action against Chua due to default 8.2 That its funds are obtained from the public, which shall mean in payment. In addition, Fue allege that he is the owner of 250 shares of twenty (20) or more persons; and stock by virtue of the chattel mortgage. The TC ruled in favor of Fue. 8.3 That the minimum capital requirements prescribed by the ISSUE Monetary Board for each category of banks are satisfied. W/N Fue owns the 250 shares of stock. No new commercial bank shall be established within three (3) years from the effectivity of this Act. In the exercise of the authority granted RULING herein, the Monetary Board shall take into consideration their capability YES. Fue owns the 250 shares. China Bank has no right over the shares of stock of Chua on account of non-payment of drafts. The Corporation Act (old

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 179 law) provides that a corporation has no lien upon the shares of stockholders d. Capability and other requirements for any indebtedness to the corporation. The rationale being that if the Sec. 8, par. 2, GBL: No new commercial bank shall be established corporations were given a lien on their own stocks for indebtedness of the within three (3) years from the effectivity of this Act. In the stockholders, the prohibition against granting loans or discounts upon the exercise of the authority granted herein, the Monetary Board shall security of the stock would become largely ineffective. take into consideration their capability in terms of their financial It is decided that shares of stock are classified as equity not permitted to be resources and technical expertise and integrity. The bank licensing a subject of a chattel mortgage. Having a character of intangibility, it would process shall incorporate an assessment of the bank’s ownership be difficult to place it under a chattel mortgage. Though that being the case, structure, directors and senior management, its operating plan and the shares of stock can still be validly assigned. The endorsement presented internal controls as well as its projected financial condition and explicitly mentions the assignment of rights in the shares from Chua to Fue. capital base. The TC erred in holding Chua, as the owner of the shares upon the payment 2. Stockholdings of P25,000, had the right to dispose it to Fue. It should have been held that Chua, having interest in the shares of stock, validly assigned said stocks to a. Foreign stockholdings Fue. Cases Nunga, Jr. v. Nunga III, 574 SCRA 760 (2008) FACTS Filipinas Mils, Inc. v. Dayrit, 192 SCRA 177 (1990) FACTS Gonzalez decided to sell his shares of stock in the Rural Bank of Apalit. Petitioners (father and son tandem) Francisco Nunga Jr and Victor Nunga FMI obtained a loan of P70,000 from CBT . Despite repeated demands, the then negotiated a contract to sell with Gonzalez for the shares of stock for loan remained unpaid. CBT filed a complaint before the RTC where it was 200k. Initial payment of 50k the rest after. Gonzalez wrote a letter to the able to obtain a Decision, and a writ of execution was issue pursuant to the Corp. Sec Isabel Firme to transfer to Victor the remaining shares of stock Decision. A Notice of garnishment was issued on the goods, effects, but they could no longer be found. The contract to sell was notarized only interests, credits, moneys, stocks, shares and any other personal property on February 28 1996. in the possession of FMI. A Notice of Sale was issued but the shares of stock (issued by CBT, and owned by FMI) were not included in the items for sale. Before Petitioners could pay the balance they found out that on Feb 27 Gonzalez executed a Deed of Assignment of his RBA shares in favor of ISSUE Francisco III (respondent) for 300k paid in full. On the 28th Francisco Jr. Whether or not the sale of CBT’s capital stock (owned by FMI) in a public arrives from the USA and proceeded with his son to the residence of auction initiated by CBT itself, is a violation of Sec. 24 of the GBL. Gonzalez and convinced him to accept the balance despite having been told the shares were sold the day before. Gonzales signed his name at the dorsal RULING portion of the stock certificates to endorse the same to Francisco Jr. and also executed the absolute deed of sale in favor of Junior. NO. The sale in a public auction is not a violation. CBT must have misread th the provision. There is a specific exception (“unless such security or On the same day, the 28 of Feb, Franciso III demanded that Junior purchase be necessary to prevent loss upon a debt previously contracted in surrender the shares to him, while Junior demanded corp sec. Firme to good faith”) and a general exception (“or purchased or acquired for any register the sale to Junior but she denied because Franciso III had already other reason in the course of its operations”) mentioned therein. Thus, if bought them the day before. They sued each other with Francisco III and when, CBT decides to purchase those shares of stock in the public contending that Junior was not allowed to own shares of stock of a Rural auction sale will not be a violation of Sec. 24 as it will come under the Bank because he was a US citizen. Junior said that RA 8179, an act to general exception. liberalize foreign investments granted Junior, who was a former natural born citizen equal investment rights in rural banks of the Philippines because it had retroactive effect (the act came after the sale of the shares of stock). b. Funds obtained from the public (Sec. 8.2, GBL) See supra CA sided with Franciso III, hence the SC case. c. Minimum capital requirements (Sec. 8.3, GBL) See supra

ISSUE subsequent law.

Whether or not a former natural born citizen who is now a foreigner may Nonetheless, it would not matter that Gonzalez executed the contract invest in Rural Banks by virtue of RA 8179 “The act to further liberalize to sell in favor of Junior prior to the Deed of Assignment to Franciso foreign investments”? III because the Contract to Sell between Gonzalez and Francisco was void and without effect for being contrary to law. HELD

NO. Petition without merit. (i) Individuals and non-bank corporations Francisco Jr. was disqualified from acquiring Gonzalez’s shares of stock in Sec. 11, GBL: Foreign Stockholdings – Foreign individuals and RBA. The argument of junior and victor that there was no specific provision non-bank corporations may own or control up to forty percent in RA 7353 that prohibited the transfer of rural bank shares to individuals (40%) of the voting stock of a domestic bank. This rule shall who were not Philippine citizens or declared such transfer void is both apply to Filipinos and domestic non-bank corporations. erroneous and unfounded. Section 4 of RA 3353 states: The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders “With exception of shareholdings of corporations organized primarily to hold in that bank. The citizenship of the corporation which is a equities in rural banks as provided for under section 12-C of RA 337, as stockholder in a bank shall follow the citizenship of the amended, and of Filipino-controlled domestic banks, the capital stock of controlling stockholders of the corporation, irrespective of the any rural bank shall be fully owned and held directly or indirectly by place of incorporation. citizens of the Philippines or corporations, associations or cooperatives qualified under Philippine laws to own and hold such capital stock: xxx.” (ii) Foreign banks IN SUMMARY Sec. 11, GBL: See supra Sec. 73, GBL: Acquisition of Voting Stock in a Domestic Bank. – The court held that the afore-quoted provision categorically provides that Within seven (7) years from the effectivity of this act and only citizens of the Philippines can own and hold, directly or indirectly, the subject to guidelines issued pursuant to the Foreign Banks capital stock of a rural bank, subject only to the exception of corporations, Liberalization Act, the Monetary Board may authorize a foreign associations, associations or cooperatives qualified under Philippine laws to bank to acquire up to one hundred percent (100%) of the voting own and hold such capital stock. This was the very interpretation of Section stock of only one (1) bank organized under the laws of the 4 of RA 7353 made by this court in Bulos, Jr. v. Yasuma, on the basis of Republic of the Philippines. which the Court disqualified Yasuma, a foreigner from owning capital stock in the Rural Bank of Paranaque. Within the same period, the Monetary Board may authorize any In the instant case, it is undisputed that when Gonzalez executed the foreign bank, which prior to the effectivity of this Act availed contract to sell and the deed of absolute sale covering his RBA itself of the privilege to acquire up to sixty percent (60%) of the shares of stock in favor of Franciso Jr, the latter was already a voting stock of a bank under the Foreign Banks Liberalization naturalized citizen of the Untied States of America. Consequently, Act and the Thrift Banks Act, to further acquire voting shares the acquisition by Franciso Jr. of the disputed RBA shares by virtue such bank to the extent necessary for it to own one hundred of the foregoing contracts is a violation of the clear and mandatory percent (100%) of the voting stock thereof. dictum of RA 7353 which the Court cannot countenance. Even with In the exercise of the authority, the Monetary Board shall adopt the subsequent enactment of RA 8179 (Foreign Invenstment measures as may be necessary to ensure that at all times the Liberalization Act), such cannot benefit Franciso Junior. It is true that control of seventy percent (70%) of the resources or assets of under the Civil Code, laws shall have no retroactive effect, unless the the entire banking system is held by banks which are at least contrary is provided or when the statute is curative or remedial, or when it majority-owned by Filipinos. creates new rights PROVIDED such rights do not prejudice or impair any vested right. Francisco III clearly already had a vested right when such act was enacted hence junior’s qualification could not have been cured by the

Any right, privilege or incentive granted to a foreign bank under xSec. 2.2, BSP Circular No. 271 (Series of 2001) this Section shall be equally enjoyed by and extended under the Public offering of bank shares. A domestic bank applying for a same conditions to banks organized under the laws of the UB authority shall, as a condition to the approval of its Republic of the Philippines. application, make a public offering of at least ten percent (10%) of the required minimum capital and this condition must be b. Filipino stockholdings complied with before it can be granted the license for authority (i) Individuals and non-bank corporations to operate as a UB. Sec. 11, par. 1, GBL: Foreign Stockholdings – Foreign The term public offering shall mean the offer to sell equity individuals and non-bank corporations may own or control up to shares to the public stockholders. forty percent (40%) of the voting stock of a domestic bank. Public stockholders shall refer to all stockholders, excluding the This rule shall apply to Filipinos and domestic non-bank bank’s directors, shareholders owning twenty percent (20%) or corporations. more of the bank’s subscribed capital stock together with those (iii) Domestic banks of their relatives within the fourth degree of consanguinity or affinity, and corporations controlled or affiliated with them. Sec. 25, GBL: Equity Investments of a Universal Bank in Financial Allied Enterprises. - A universal bank can own up to A bank whose shares of stock are already listed in the Philippine one hundred percent (100%) of the equity in a thrift bank, a Stock Exchange (PSE) at the time of filing of its application for rural bank or a financial allied enterprise. UB authority shall be deemed to have complied with the public offering requirement. Likewise, an applicant bank may opt to A publicly-listed universal or commercial bank may own up to have its shares listed in the PSE directly instead of passing one hundred percent (100%) of the voting stock of only one through the process of public offering. In either case, at least other universal or commercial bank. ten percent (10%) of the applicant bank’s capital stock should Sec. 31, GBL: Equity Investments of a Commercial Bank in be held by public stockholders before it can be granted the Financial Allied Enterprises. - A commercial bank may own up to license for authority to operate as a UB. one hundred percent (100%) of the equity of a thrift bank or a B. DIRECTORS AND OFFICERS rural bank. 1. Composition of Board Where the equity investment of a commercial bank is in other financial allied enterprises, including another commercial bank, Sec. 15, GBL: Board of Directors. - The provisions of the Corporation such investment shall remain a minority holding in that Code to the contrary notwithstanding, there shall be at least five (5), enterprise. and a maximum of fifteen (15) members of the board or directors of a bank, two (2) of whom shall be independent directors. An "independent c. Stockholdings of family groups or related interests director" shall mean a person other than an officer or employee of the Sec. 12, GBL: Stockholdings of Family Groups of Related bank, its subsidiaries or affiliates or related interests. . Interests. – Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate Non-Filipino citizens may become members of the board of directors of a or common-law, shall be considered family groups or related bank to the extent of the foreign participation in the equity of said bank. interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank. The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and Sec. 13, GBL: Corporate Stockholdings. - Two or more video-conferencing. corporations owned or controlled by the same family group or same group of persons shall be considered related interests and Sec. 17, GBL: Directors of Merged or Consolidated Banks. - In the case must be fully disclosed in all transactions by such corporations of a bank merger or consolidation, the number of directors shall not or related group of persons with the bank. exceed twenty-one (21). d. Required public offering – Sec. 7, Foreign Banks Liberalization Act: Board of Directors. - Non-Filipino citizens may become members of the Board of Directors of

a bank to the extent of the foreign participation in the equity of said Association (PESALA). CB sent letters to the Board of Directors of PESALA bank. inviting them to a conference to discuss the findings. Petitioners did not attend. Sec. 23, Corporation Code: The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all The Monetary Board adopted and issued MB Resolution No. 805, which corporations formed under this Code shall be exercised, all business noted, among others, the findings in the 16th regular examination. It also conducted and all property of such corporations controlled and held by contained a provision which states: the board of directors or trustees to be elected from among the holders 5. To include the names of Mr. Catalino Banez, Mr. Romeo Busuego of stocks, or where there is no stock, from among the members of the and Mr. Renato Lim in the Sector's watchlist to prevent them from corporation, who shall hold office for one (1) year until their successors holding responsible positions in any institution under Central Bank are elected and qualified. supervision; Every director must own at least one (1) share of the capital stock of Petitioners then filed an injunction suit to enjoin the Monetary Board from the corporation of which he is a director, which share shall stand in his implementing the resolution putting them under a watch list. According to name on the books of the corporation. Any director who ceases to be them their right to due process was violated since they were not granted the owner of at least one (1) share of the capital stock of the opportunity to be heard. corporation of which he is a director shall thereby cease to be a director. Trustees of non-stock corporations must be members thereof. a ISSUE majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines. (1) W/N petitioners’ right to due process was violated? (2) W/N the MB Resolution is valid insofar as it deprives petitioner of the 2. Qualifications opportunity to seek employments in the field which they can excel and a. Own at least one share are best fitted? HELD Sec. 23, Corporation Code: See supra b. Fit and proper rule 1. NO. Petitioners were duly afforded their right to due process by the Monetary Board but they did not appear. Petitioners therefore cannot Sec. 16, GBL: Fit and Proper Rule. - To maintain the quality of complain of deprivation of their right to due process, as they were given bank management and afford better protection to depositors and ample opportunity by the Monetary Board to air their submission and the public in general the Monetary Board shall prescribe, pass upon defenses as to the findings of irregularity during the said 16th regular and review the qualifications and disqualifications of individuals examination. The essence of due process is to be afforded a reasonable elected or appointed bank directors or officers and disqualify those opportunity to be heard and to submit any evidence one may have in found unfit. support of his defense. What is offensive to due process is the denial of the After due notice to the board of directors of the bank, the Monetary opportunity to be heard. Petitioner having availed of their opportunity to Board may disqualify, suspend or remove any bank director or present their position to the Monetary Board by their letters-explanation, officer who commits or omits an act which render him unfit for the they were not denied due process. position. 2. NO. The resolution is valid. t must be remembered that the Central Bank In determining whether an individual is fit and proper to hold the of the Philippines (now Bangko Sentral ng Pilipinas), through the Monetary position of a director or officer of a bank, regard shall be given to his Board, is the government agency charged with the responsibility of integrity, experience, education, training, and competence. administering the monetary, banking and credit system of the country and is granted the power of supervision and examination over banks and non- Cases bank financial institutions performing quasi-banking functions of which savings and loan associations, such as PESALA, from part of. Busuego v. Court of Appeals, 304 SCRA 473 (1999) FACTS The special law governing savings and loan associations is Republic Act No. On the 16th regular examination, Central Bank examiners discovered several 3779, as amended, otherwise known as the "Savings and Loan Association anomalies and irregularities committed by PAL Employees Savings and Loan Act." Said law authorizes the Monetary Board to conduct regular yearly examinations of the books and records of savings and loans associations, to

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 183 suspend a savings and loan association for violation of law, to decide any obligations guaranteed as to principal and interest by the Republic of controversy over the obligations and duties of directors and officers, and to the Philippines. (As amended by R.A. 6037, 04 August 1969; take remedial measures, among others. renumbered from Sec. 12 by R.A. 9302, 12 August 2004) b. The banking or checking accounts of the Corporation shall be kept with the Bangko Sentral ng Pilipinas, with the Philippine National c. Other minimum qualifications – Bank, or with any other bank designated as depository or fiscal xSubsec. X141.2, MRB: Qualifications of a director agent of the Philippine government. (As amended by R.A. 9302, 12 August 2004) A director shall have the following minimum qualifications: c. It is hereby declared to be the policy of the State that the Deposit a. He shall be at least twenty-five (25) years of age at the time Insurance Fund of the Corporation shall be preserved and of his election or appointment; maintained at all times. Accordingly, all tax obligations of the b. He shall be at least a college graduate or have at least five Corporation for a period of five (5) years reckoned from the date of (5) years experience in business; effectivity of this Act shall be chargeable to the Tax Expenditure Fund (TEF) in the annual General Appropriations Act pursuant to the c. He must have attended a special seminar on corporate provisions of Executive Order No. 93, series of 1986; Provided, governance for board of directors conducted or accredited That, on the 6th year and thereafter, the Corporation shall be by the BSP: Provided, That incumbent directors as well as exempt from income tax, final withholding tax, value-added tax on those elected after September 17, 2001 must attend said assessments collected from member banks, and local taxes. (As seminar on or before June 30, 2003 or within a period of six added by R.A 9576, 29 April 2009) (6) months from date of election for those elected after June 30, 2003, as the case may be; and d. When the Corporation has determined that an insured bank is in danger of closing, in order to prevent such closing, the Corporation, d. He must be fit and proper for the position of a director of the in the discretion of its Board of Directors, is authorized to make bank. In determining whether a person is fit and proper for loans to, or purchase the assets of, or assume liabilities of, or make the position of a director, the following matters must be deposits in, such insured bank, upon such terms and condition as considered: integrity/probity, competence, education, the Board of Directors may prescribe, when in the opinion of the diligence and experience/training. Board of Directors, the continued operation of such bank is essential The foregoing qualifications for directors shall be in addition to those to provide adequate banking service in the community or maintain required or prescribed under R.A. No. 8791 and other existing financial stability in the economy. (Renumbered from Sec. 17 (c) by applicable laws and regulations. R.A. 9576, 29 April 2009) 3. Disqualifications – The authority of the Corporation under the foregoing paragraph to extend financial assistance to, assume liabilities of, purchase the xSubsec. X141.2, MRB: See supra assets of an insured bank may also be exercised in the case of a a. Criminal conviction closed insured bank if the Corporation finds that the resumption of operations of such bank is vital to the interests of the community, or Sec. 27, Corporation Code: Disqualification of directors, a severe financial climate exists which threatens the stability of a trustees or officers. - No person convicted by final judgment of an number of banks possessing significant resources: Provided, That offense punishable by imprisonment for a period exceeding six (6) the reopening and resumption of operations of the closed bank shall years, or a violation of this Code committed within five (5) years be subject to the prior approval of the Monetary Board. (As prior to the date of his election or appointment, shall qualify as a amended by R.A. 7400, 13 April 1992) director, trustee or officer of any corporation. The Corporation may provide any corporation acquiring control of, Sec. 17, PDIC Charter merging or consolidating with or acquiring the assets of an insured bank in danger of closing in order to prevent such closing or of a a. Money of the Corporation not otherwise employed shall be closed insured bank in order to restore to normal operations, with invested in obligations of the Republic of the Philippines or in such financial assistance as it could provide an insured bank under

this subsection: Provided, That, within sixty (60) days from date of No director or officer of any rural bank shall, either directly or assistance the Corporation shall submit a report thereof to the indirectly, for himself or as the representative or agent of another, Monetary Board. (As amended by R.A. 7400, 13 April 1992) borrow any of the deposits or funds of such banks, nor shall he become a guarantor, indorser, or surety for loans from such bank to The Corporation, prior to the exercise of the powers under this others, or in any manner be an obligor for money borrowed from the Section, shall determine that actual payoff and liquidation thereof bank or loaned by it except with the written approval of the majority will be more expensive than the exercise of this power: Provided, of the directors of the bank, excluding the director concerned. Any That when the Monetary Board has determined that there are such approval shall be entered upon the records of the corporation systemic consequences of a probable failure or closure of an insured and a copy of such entry shall be transmitted forthwith to the bank, the Corporation may grant financial assistance to such insured appropriate supervising department. The director/officer of the bank bank in such amount as may be necessary to prevent its failure or who violates the provisions of this section shall be immediately closure and/or restore the insured bank to viable operations, under dismissed from his office and shall be penalized in accordance with such terms and conditions as may be deemed necessary by the Section 26 of this Act. Board of Directors, subject to concurrence by the Monetary Board and without additional cost to the Deposit Insurance Fund. (As The Monetary Board may regulate the amount of credit amended by R.A. 9302, 12 August 2004) accommodations that may be extended directly to the directors, officers or stockholders of rural banks of banking institutions. A systemic risk refers to the possibility that failure of one bank to However, the outstanding credit accommodations which a rural bank settle net transactions with other banks will trigger a chain reaction, may extend to each of its stockholders owning two percent (2%) or depriving other banks of funds leading to a general shutdown of more of the subscribed capital stock, its directors, or officers shall normal clearing and settlement activity. Systemic risk also means be limited to an amount equivalent to the respective outstanding the likelihood of a sudden, unexpected collapse of confidence in a deposits and book value of the paid-in capital contributions in the significant portion of the banking or financial system with potentially bank. large real economic effects. Finally, the Corporation may not use its authority under this subsection to purchase the voting or common c. MB member/BSP personnel stock of an insured bank but it can enter into and enforce Sec. 9, NCBA: Disqualifications. — In addition to the agreements that it determines to be necessary to protect its disqualifications imposed by Republic Act No. 6713, a member of the financial interests: Provided, That the financial assistance may take Monetary Board is disqualified from being a director, officer, the form of equity or quasiequity of the insured bank as may be employee, consultant, lawyer, agent or stockholder of any bank, deemed necessary by the Board of Directors with concurrence by quasi-bank or any other institution which is subject to supervision or the Monetary Board: Provided, further, That the Corporation shall examination by the Bangko Sentral, in which case such member dispose of such equity as soon as practicable. (As amended by R.A. shall resign from, and divest himself of any and all interests in such 9302, 12 August 2004) institution before assumption of office as member of the Monetary b. Public officials Board. Sec. 19, GBL: Prohibition on Public Officials. - Except as otherwise The members of the Monetary Board coming from the private sector provided in the Rural Banks Act, no appointive or elective public shall not hold any other public office or public employment during official whether full-time or part-time shall at the same time serve their tenure. as officer of any private bank, save in cases where such service is No person shall be a member of the Monetary Board if he has been incident to financial assistance provided by the government or a connected directly with any multilateral banking or financial government owned or controlled corporation to the bank or unless institution or has a substantial interest in any private bank in the otherwise provided under existing laws. Philippines, within one (1) year prior to his appointment; likewise, Sec. 5, Rural Banks Act: All members of the Board of Directors of no member of the Monetary Board shall be employed in any such the rural bank shall be citizens of the Philippines at the time of their institution within two (2) years after the expiration of his term assumption to office: Provided, however, That nothing in this Act except when he serves as an official representative of the Philippine shall be construed as prohibiting any appointive or in any capacity in Government to such institution. the bank. Sec. 27, NCBA: Prohibitions. — In addition to the prohibitions

found in Republic Act Nos. 3019 and 6713, personnel of the Bangko for reasonable pre diems: Provided, however, That any such Sentral are hereby prohibited from: compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the a. Being an officer, director, lawyer or agent, employee, consultant outstanding capital stock at a regular or special stockholders' meeting. or stockholder, directly or indirectly, of any institution subject to In no case shall the total yearly compensation of directors, as such supervision or examination by the Bangko Sentral, except non- directors, exceed ten (10%) percent of the net income before income stock savings and loan associations and provident funds tax of the corporation during the preceding year. organized exclusively for employees of the Bangko Sentral, and except as otherwise provided in this Act; 5. Meetings b. Directly or indirectly requesting or receiving any gift, present or Sec. 15, par. 3, GBL: The meetings of the board of directors may be pecuniary or material benefit for himself or another, from any conducted through modern technologies such as, but not limited to, institution subject to supervision or examination by the Bangko teleconferencing and video-conferencing. Sentral; c. Revealing in any manner, except under orders of the court, the Sec. 25, Corporation Code: Corporate officers, quorum. - Congress or any government office or agency authorized by law, Immediately after their election, the directors of a corporation must or under such conditions as may be prescribed by the Monetary formally organize by the election of a president, who shall be a director, Board, information relating to the condition or business of any a treasurer who may or may not be a director, a secretary who shall be institution. This prohibition shall not be held to apply to the a resident and citizen of the Philippines, and such other officers as may giving of information to the Monetary Board or the Governor of be provided for in the by-laws. Any two (2) or more positions may be the Bangko Sentral, or to any person authorized by either of held concurrently by the same person, except that no one shall act as them, in writing, to receive such information; and president and secretary or as president and treasurer at the same time. d. Borrowing from any institution subject to supervision or examination by the Bangko Sentral shall be prohibited unless The directors or trustees and officers to be elected shall perform the said borrowings are adequately secured, fully disclosed to the duties enjoined on them by law and the by-laws of the corporation. Monetary Board, and shall be subject to such further rules and Unless the articles of incorporation or the by-laws provide for a greater regulations as the Monetary Board may prescribe: Provided, majority, a majority of the number of directors or trustees as fixed in however, That personnel of the supervising and examining the articles of incorporation shall constitute a quorum for the transaction departments are prohibited from borrowing from a bank under of corporate business, and every decision of at least a majority of the their supervision or examination. directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which 4. Compensation and Other Benefits shall require the vote of a majority of all the members of the board. Sec. 18, GBL: Compensation and Other Benefits of Directors and Directors or trustees cannot attend or vote by proxy at board meetings. Officers. To protect the finds of depositors and creditors the Monetary Board may regulate the payment by the bark to its directors and officers 6. Powers of Directors of compensation, allowance, fees, bonuses, stock options, profit sharing a. General Powers and fringe benefits only in exceptional cases and when the circumstances warrant, such as but not limited to the following: Sec. 23, Corporation Code: The board of directors or trustees. - Unless otherwise provided in this Code, the corporate powers of all 18.1. When a bank is under comptrollership or conservatorship; or corporations formed under this Code shall be exercised, all business 18.2. When a bank is found by the Monetary Board to be conducted and all property of such corporations controlled and held conducting business in an unsafe or unsound manner; or by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the 18.3. When a bank is found by the Monetary Board to be in an members of the corporation, who shall hold office for one (1) year unsatisfactory financial condition. until their successors are elected and qualified. Sec. 30, Corporation Code: Compensation of directors. - In the Every director must own at least one (1) share of the capital stock absence of any provision in the by-laws fixing their compensation, the of the corporation of which he is a director, which share shall stand directors shall not receive any compensation, as such directors, except in his name on the books of the corporation. Any director who

ceases to be the owner of at least one (1) share of the capital stock (10) To meet regularly of the corporation of which he is a director shall thereby cease to be (11) To keep the individual members of the board and the a director. Trustees of non-stock corporations must be members shareholders informed. thereof. a majority of the directors or trustees of all corporations (12) To ensure that the bank has beneficial influence on the organized under this Code must be residents of the Philippines. economy. (13) To assess at least annually its performance and xSubsec. X141.3, MRB: General responsibility of the board of effectiveness as a body, as well as its various committees, the directors. The position of a bank director is a position of trust. A chief executive officer and the bank itself. director assumes certain responsibilities to different constituencies (14) To keep their authority within the powers of the institution or stakeholders, i.e., the bank itself, its stockholders, its depositors as prescribed in the articles of incorporation, charter, by-laws and other creditors, its management and employees, and the public and in existing laws, rules and regulations. at large. These constituencies or stakeholders have the right to expect that the institution is being run in a prudent and sound c. Certification of Directors manner. xBSP Circular No. 283 (Series of 2001): The directors concerned The board of directors is primarily responsible for the corporate shall each be required to acknowledge receipt of the copies of such governance of the bank. To ensure good governance of the bank, specific duties and responsibilities and shall certify that they fully the board of directors should establish strategic objectives, policies understand the same. and procedures that will guide and direct the activities of the bank Copies of the acknowledgement and certification herein required and the means to attain the same as well as the mechanism for shall be submitted to the appropriate supervisory and examining monitoring management’s performance. While the management of department of SES within fifteen (15) days from date thereof. It the day-to-day affairs of the institution is the responsibility of the shall be considered a major report (category a-2) and delay in its management team, the board of directors is, however, responsible submission shall be subject to penalty in accordance with existing for monitoring and overseeing management action. regulations. b. Specific Duties/ Responsibilities 7. Doctrine of Apparent Authority xSubsec. X141.5, MRB: Specific duties and responsibilities of the Cases board of directors (1) To select and appoint officers who are qualified to administer Prudential Bank v. Court of Appeals, 223 SCRA 350 (1993) the bank’s affairs effectively and soundly and to establish FACTS adequate selection process for all personnel. Aurora Cruz invested P200k in Central Bank bills with Prudential Bank. The (2) To establish objectives and draw up a business strategy for placement was for 63 days at 13.75% annual interest. For this purpose, the achieving them. amount of P196,122.88 was withdrawn from her account and applied to the (3) To conduct the affairs of the institution with high degree of investment. The difference of P3,877.07 represented the pre-paid interest. integrity. Susan Quimbo was the employee of the bank to whom Cruz was referred (4) To establish and ensure compliance with sound written and who was apparently in charge of such transactions. The transaction was policies. evidenced by a Confirmation of Sale delivered to Cruz , together with a (5) To prescribe a clear assignment of responsibilities and Debit Memo in the amount withdrawn and applied to the confirmed sale. decision-making authorities, incorporating a hierarchy of Upon maturity of the placement, Cruz returned to the bank to "roll-over" or required approvals from individuals to the board of directors. renew her investment. Quimbo, who again attended to her, prepared a (6) To effectively supervise the bank’s affairs. Credit Memo crediting the amount of P200k in Cruz's savings account (7) To monitor, assess and control the performance of passbook. She also prepared a Debit Memo for the amount of P196,122.88 management. to cover the re-investment of P200,000.00 minus the prepaid interest of (8) To adopt and maintain adequate risk management policy. P3,877.02.This time, Cruz was asked to sign a Withdrawal Slip for (9) To constitute the following committees (optional for banks P196,122.98, representing the amount to be re-invested after deduction of with net worth of less than P20 million but mandatory if a the prepaid interest. Quimbo explained this was a new requirement of the subsidiary of other banks) bank. Several days later, Cruz received another Confirmation of Sale and a

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 187 copy of the Debit Memo. is considered as entered into between the principal and the third person. Subsequently, Cruz returned to the bank and sought to withdraw her P200k. A bank is liable for wrongful acts of its officers done in the interests of the However, she was informed that the investment appeared to have been bank or in the course of dealings of the officers in their representative already withdrawn by her (on the same day of the renewal) There was no capacity but not for acts outside the scope of their authority. A bank holding copy on file of the (2nd) Confirmation of Sale and the Debit Memo allegedly out its officers and agent as worthy of confidence will not be permitted to issued to her by Quimbo. Quimbo herself was not available for questioning profit by the frauds they may thus be enabled to perpetrate in the apparent as she had not been reporting for the past week. Shocked by this scope of their employment; nor will it be permitted to shirk its responsibility information, Cruz became hysterical and burst into tears. for such frauds, even though no benefit may accrue to the bank therefrom. Accordingly, a banking corporation is liable to innocent third persons where She then filed suit for breach of contract against the bank. The RTC and CA the representation is made in the course of its business by an agent acting awarded damages in her favor. within the general scope of his authority even though, in the particular case, ISSUE the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person, for his own ultimate benefit. Whether or not the bank should be liable (for Quimbo's acts)?

HELD First Philippine International Bank v. Court of Appeals, 252 SCRA 259 1. "It could not be that plaintiff Aurora F. Cruz withdrew only the amount of (1996) P196,122.98 from their savings account, if her only intention was to make FACTS such a withdrawal. For, if, indeed, it was the desire of the plaintiffs to Producer Bank (now FPIB) obtained six parcels of land with a size o totaling withdraw their money from the defendant/third-party plaintiff, they could to 101 hectares. Demetrio Demeteria and Jose Janolo wanted to buy the have withdrawn an amount in round figures. Certainly, it is unbelievable property, for which they wrote a letter with Mercurio Rivera, Manager of the that their withdrawal was in the irregular amount of P196,122.98." Property Management Department of the bank, offering P3.5M. Rivera wrote back, making a counter-offer worth P5.5M. Demetria and Janolo made 2. "The bank has also not succeeded in impugning the authenticity of the another counter-offer worth P4.25M for which the bank did not reply to. Two Confirmation of Sale and the Debit Memo which were made on its official, weeks later, they met with the majority stockholder, Mr. Co and Rivera, and forms...[e]ven assuming that they were not signed by its authorized eventually accepted the P5.5M counter-offer. Two weeks had passed, the officials, as it claims, there was no obligation on the part of Cruz to verify bank was put under conservatorship. Demetria and Janolo demanded the their authority because she had the right to presume it. The documents had compliance for their agreement, which the bank ignored. After multiple been issued in the office of the bank itself and by its own employees with demands, they filed a case for specific performance, tendering payment with whom she had previously dealt. Such dealings had not been questioned the court. The bank lost with the RTC and CA level. before, much leas invalidated. There was absolutely no reason why she should not have accepted their authority to act on behalf of their employer." ISSUES Whether there was a perfected contract of sale 3. "The liability of the principal for the acts of the agent is not even debatable. Law and jurisprudence are clearly and absolutely against the RULING petitioner. He who does a thing by an agent is considered as doing it himself. This rule is affirmed by the Civil Code thus: 1. Yes. Although a counter-offer was made for P4.25M and was rejected by the bank, the previous offer of P5.5M was revived when the respondents Art. 1910. The principal must comply with all the obligations which met with Co and Rivera, to which they acceded two days after. This was the agent may have contracted within the scope of his authority. evidenced by the letter and their meetings. Since there was meeting of the Art. 1911. Even when the agent has exceeded his authority, the minds, when the bank offered a price, to which respondents accepted, principal is solidarily liable with the agent if the former allowed the object, the six parcels of land, and price, worth P5.5M, there was a latter to act as though he had full powers. perfected contract of sale. ***Petitioners contend that Rivera did not have the authority to negotiate Conformably, we have declared in countless decisions that the principal is as to the property involved in the litigation. There had been an apparent liable for obligations contracted by the agent. The agent's apparent authority when Rivera was the Manager of the Property Management representation yields to the principal's true representation and the contract Department; he was the one who talks to potential buyers of such property;

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 188 he referred the prices offered to him to the committee that decided the RULING counter-offer worth P5.5M; he was present in all transactions involving the property. The bank cannot feign ignorance to the acts of its Manager that It’s a time deposit. While it may be true that barely one month and seven handled the property. days from the date of deposit, respondent FMIC demanded the withdrawal through the issuance of a check payable to itself, the same was made as a result of the fraudulent and unauthorized transfer by petitioner BPI FB of its BPI Family Savings Bank, Inc. v. First Metro Investment P80 million deposit to Tevesteco’s savings account. It was a normal reaction Corporation, 429 SCRA 30 (2004) of respondent as a depositor to petitioner’s failure in its fiduciary duty to treat its account with the highest degree of care. Under this circumstance, FACTS the withdrawal of deposit by respondent FMIC before the one-year maturity date did not change the nature of its time deposit to one of demand deposit. Respondent FMIC, through Executive VP Ong, opened an account and Petitioner bound by the act of its Branch Manager. Petitioner maintains that deposited P100 million to petitioner BPI FB. Ong made the deposit upon respondent should have first inquired whether the deposit of P100 Million request of his friend who is a close acquaintance of Sebastian, then Branch and the fixing of the interest rate were pursuant to its internal procedures. Manager of the BPI FB branch. Sebastian’s aim was to increase the deposit Petitioner’s stance is a futile attempt to evade an obligation clearly level in his Branch. established by the intent of the parties. What transpires in the corporate BPI FB, through Sebastian, guaranteed a payment of 17% per annum board room is entirely an internal matter. Hence, petitioner may not impute interest of what was deposited by FMIC. The latter, in turn, assured BPI FB negligence on the part of respondent’s representative in failing to find out that it will maintain its deposit for a period of one year on condition that the the scope of authority of Sebastian. Indeed, the public has the right to interest of 17% per annum is paid in advance. This agreement between the rely on the trustworthiness of bank managers and their acts. parties was reached through their communications in writing. BPI FB paid Significantly, the transaction was actually acknowledged and ratified by FMIC 17% interest upon clearance of the latter’s check deposit. However, on petitioner when it paid respondent in advance the interest for one year. the basis of an Authority to Debit signed by Ong, BPI FB transferred P80 Thus, petitioner is estopped from denying that it authorized Sebastian to million from FMIC’s current account to the savings account of Tevesteco. enter into an agreement with Ong concerning the deposit with the FMIC denied having authorized the transfer of its funds to Tevesteco, corresponding 17% interest per annum. claiming that the signatures were falsified. To recover immediately its deposit, FMIC, issued a BPI FB check payable to itself and drawn on its deposit with BPI FB. But upon presentation for payment, BPI FB dishonored the check as it was "drawn against insufficient funds". Associated Bank v. Pronstroller, 558 SCRA 113 (2008) FMIC filed with the RTC against BPI FB. The court adjudged BPI FB liable to FACTS FMIC for the amount plus interest at 17% per annum, among others. BPI FB then filed a motion for reconsideration which was denied. Petitioner BPI FB In 1988, Spouses Vaca executed a REM in favor of Associated Bank (now contended that the CA erred in awarding the 17% per annum interest United Overseas Bank) over a parcel of residential land and the house corresponding to the amount deposited by respondent FMIC. Petitioner constructed thereon. insists that respondent’s deposit is not a special savings account similar to a time deposit, but actually a demand deposit, withdrawable upon demand, For failure to pay, the property was sold at a public auction with the bank as proscribed from earning interest. It also contended that the transaction is the highest bidder. not valid as its Branch Manager clearly overstepped his authority in entering into such an agreement with Ong. However, Spouses Vaca commenced an action for the nullification of the REM and the foreclosure sale. A writ of possession was granted by the CA, ISSUE after it was denied by the RTC. This CA decision was questioned by Spouses Vaca before the SC in another case. Whether the deposit is a demand deposit or a time deposit? Pending these cases, the bank advertised the property for sale for P9.7M. (Relevant) Whether the bank was bound by the acts of its Branch Manager? Spouses Pronstroller offered to purchase the property for P7.5M, which was accepted by the bank.

Prior to the expiration of the 90-day period within which to make the escrow certain acts for and on his behalf, the board may validly delegate some of deposit (as stipulated in the Letter-Agreement setting forth the terms and its functions and powers to officers, committees and agents. The authority conditions of the sale), Spouses Pronstroller requested that the balance of of such individuals to bind the corporation is generally derived from law, the purchase price be made payable only upon service on them of a final corporate bylaws or authorization from the board, either expressly or decision of the SC affirming the bank's right to possess the property. Atty. impliedly, by habit, custom, or acquiescence, in the general course of Soluta, acting for the bank, allowed the Spouses' request. business.

In 1994, the bank reorganized its management. Atty. Dayday replaced Atty. The authority of a corporate officer or agent in dealing with third persons Soluta as Asst. VP and Head of Documentation Section. Atty. Dayday may be actual or apparent. The doctrine of "apparent authority," with discovered that Spouses Pronstroller failed to pay the balance of the special reference to banks, had long been recognized in this jurisdiction. purchase price and that they requested extension of time to pay. Upon Apparent authority is derived not merely from practice. Its existence may be referral to ARRMC (Asset Recovery and Remedial Management Committee), ascertained through 1) the general manner in which the corporation holds it was disapproved. Consequently, this was referred to the bank's Legal out an officer or agent as having the power to act, or in other words, the Department for rescission of the contract. apparent authority to act in general, with which it clothes him; or 2) the acquiescence in his acts of a particular nature, with actual or constructive Spouses Pronstroller proposed to pay the balance of the purchase price knowledge thereof, within or beyond the scope of his ordinary powers. (P3M upon approval and the balance after 6 months). But this was disapproved by the bank's president and will only be allowed if they would Accordingly, the authority to act for and to bind a corporation may be pay interest at 24.5% p.a. on the unpaid balance. presumed from acts of recognition in other instances, wherein the power was exercised without any objection from its board or shareholders. For failure to arrive to an agreement, Spouses Pronstroller reiterated that Undoubtedly, petitioner had previously allowed Atty. Soluta to enter into the they would enforce their agreement with Atty. Soluta. However, Atty. first agreement without a board resolution expressly authorizing him; thus, Soluta's authority to enter into that agreement was denied by the bank. it had clothed him with apparent authority to modify the same via the second letter-agreement. It is not the quantity of similar acts which In 1994, Spouses Pronstroller instituted this suit against the bank. The bank establishes apparent authority, but the vesting of a corporate officer with countered saying that their contract had already been rescinded because of the power to bind the corporation. the Spouses' failure to deposit in escrow the balance of the purchase price. Naturally, the third person has little or no information as to what occurs in During the pendency of this case, the bank sold the property to Spouses corporate meetings; and he must necessarily rely upon the external Vaca, who registered the sale. manifestations of corporate consent. The integrity of commercial transactions can only be maintained by holding the corporation strictly to RTC ruled in favor of Spouses Pronstroller on the ground of the rule of the liability fixed upon it by its agents in accordance with law. What "Apparent Authority" vested upon Atty. Soluta. CA affirmed ruling further transpires in the corporate board room is entirely an internal matter. Hence, that the bank had no right to unilaterally rescind the contract and that the petitioner may not impute negligence on the part of the respondents in bank were estopped from questioning the efficacy of the Soluta-Pronstroller failing to find out the scope of Atty. Soluta's authority. Indeed, the public agreement because of its failure to repudiate the same for 1 year. has the right to rely on the trustworthiness of bank officers and their acts.

ISSUE If a corporation knowingly permits its officer, or any other agent, to perform Whether the bank is bound by the agreement signed by Atty. Soluta under acts within the scope of an apparent authority, holding him out to the public the doctrine of apparent authority as possessing power to do those acts, the corporation will, as against any person who has dealt in good faith with the corporation through such agent, RULING be estopped from denying such authority. YES. The general rule is that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. The power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board of directors. However, just as a natural person may authorize another to do

8. Prohibited Acts Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its Philippine Sec. 55.1, GBL: No director, officer, employee, or agent of any bank branch. shall – (a) Make false entries in any bank report or statement or Residents and citizens of the Philippines who are creditors of a branch in participate in any fraudulent transaction, thereby affecting the the Philippines of a foreign bank shall have preferential rights to the financial interest of, or causing damage to, the bank or any person; assets of such branch in accordance with the existing laws.

(b) Without order of a court of competent jurisdiction, disclose to 2. Banking Days and Hours any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private Sec. 21, GBL: Banking Days and Hours. – Unless otherwise authorized individuals, corporations, or any other entity: Provided, That with by the Bangko Sentral in the interest of the banking public, all banks respect to bank deposits, the provisions of existing laws shall including their branches and offices shall transact business on all prevail; (c) Accept gifts, fees, or commissions or any other form of working days for at least six (6) hours a day. In addition, banks or any remuneration in connection with the approval of a loan or other of their branches or offices may open for business on Saturdays, credit accommodation from said bank; (d) Overvalue or aid in Sundays or holidays for at least three (3) hours a day: Provided, That overvaluing any security for the purpose of influencing in any way banks which opt to open on days other than working days shall report to the actions of the bank or any bank; or (e) Outsource inherent the Bangko Sentral the additional days during which they or their banking functions. branches or offices shall transact business. For purposes of this Section, working days shall mean Mondays to Fridays, except if such days are holidays. C. BANK OPERATIONS 3. Independent Auditor 1. Branches Sec. 58, GBL: Independent Auditor. - The Monetary Board may require Sec. 20, GBL: Bank Branches. - Universal or commercial banks may a bank, quasi-bank or trust entity to engage the services of an open branches or other offices within or outside the Philippines upon independent auditor to be chosen by the bank, quasi-bank or trust prior approval of the Bangko Sentral. Branching by all other banks shall entity concerned from a list of certified public accountants acceptable to be governed by pertinent laws. the Monetary Board. The term of the engagement shall be as prescribed by the Monetary Board which may either be on a continuing basis where A bank may, subject to prior approval of the Monetary Board, use any or the auditor shall act as resident examiner, or on the basis of special all of its branches as outlets for the presentation and/or sale of the engagements; but in any case, the independent auditor shall be financial products of its allied undertaking or of its investment house responsible to the bank’s, quasi-bank’s or trust entity’s board of units. directors. A copy of the report shall be furnished to the Monetary Board. The Monetary Board may also direct the board of directors of a A bank authorized to establish branches or other offices shall be bank, quasi-bank, trusty entity and/or the individual members thereof; responsible for all business conducted in such branches and offices to to conduct, either personally or by a committee created by the board, the same extent and in the same manner as though such business had an annual balance sheet audit of the bank, quasi-bank or trust entity to all been conducted in the head office. A bank and its branches and review the internal audit and control system of the bank, quasi-bank or offices shall be treated as one unit. trust entity and to submit a report of such audit. Sec. 74, GBL: Local Branches of Foreign Banks. – In the case of a 4. Financial Statements foreign bank which has more than one (1) branch in the Philippines, all such branches shall be treated as one (1) unit for the purpose of this Sec. 60, GBL: Financial Statements. – Every bank, quasi-bank or trust Act, and all references to the Philippine branches of foreign banks shall entity shall submit to the appropriate supervising and examining be held to refer to such units. department of the Bangko Sentral financial statements in such form and frequency as may be prescribed by the Bangko Sentral. Such Sec. 75, GBL: Head Office Guarantee. – In order to provide effective statements, which shall be as of a specific date designated by the protection of the interests of the depositors and other creditors of Bangko Sentral, shall show thee actual financial condition of the

institution submitting the statement, and of its branches, offices, 5. Electronic Transactions subsidiaries and affiliates, including the results of its operations, and Sec. 59, GBL: Authority to Regulate Electronic Transactions. - The shall contain such information as may be required in Bangko Sentral Bangko Sentral shall have full authority to regulate the use of electronic regulations. devices, such as computers, and processes for recording, storing and Sec. 61, GBL: Publication of Financial Statements. - Every bank, quasi- transmitting information or data in connection with the operations of a bank or trust entity, shall publish a statement of its financial condition, bank; quasi-bank or trust entity, including the delivery of services and including those of its subsidiaries and affiliates, in such terms products to customers by such entity. understandable to the layman and in such frequency as may be 6. Unsound Banking Practice prescribed Bangko Sentral, in English or Filipino, at least once every quarter in a newspaper of general circulation in the city or province Sec. 56, GBL: Conducting Business in an Unsafe or Unsound Manner - where the principal office, in the case of a domestic institution or the In determining whether a particular act or omission, which is not principal branch or office in the case of a foreign bank, is located, but if otherwise prohibited by any law, rule or regulation affecting banks, no newspaper is published in the same province, then in a newspaper quasi-banks or trust entities, may be deemed as conducting business in published in Metro Manila or in the nearest city or province. an unsafe or unsound manner for purposes of this Section, the Monetary Board shall consider any of the following circumstances: The Bangko Sentral may by regulation prescribe the newspaper where the statements prescribed herein shall be published. . 56.1. The act or omission has resulted or may result in material loss or damage, or abnormal risk or danger to the safety, stability, The Monetary Board may allow the posting of the financial statements of liquidity or solvency of the institution; a bank, quasi-bank or trust entity in public places it may determine, lieu of the publication required in the preceding paragraph, when warranted 56.2. The act or omission has resulted or may result in material by the circumstances. loss or damage or abnormal risk to the institution's depositors, creditors, investors, stockholders or to the Bangko Sentral or to the Additionally, banks shall make available to the public in such form and public in general; manner as the Bangko Sentral may prescribe the complete set of its audited financial statements as well as such other relevant information 56.3. The act or omission has caused any undue injury, or has including those on enterprises majority-owned or controlled by the given any unwarranted benefits, advantage or preference to the bank, that will inform the public of the true financial condition of a bank bank or any party in the discharge by the director or officer of his as of any given time. . duties and responsibilities through manifest partiality, evident bad faith or gross inexcusable negligence; or In periods of national and/or local emergency or of imminent panic which directly threaten monetary and banking stability, the Monetary 56.4. The act or omission involves entering into any contract or Board, by a vote of at least five (5) of its members, in special cases and transaction manifestly and grossly disadvantageous to the bank, upon application of the bank, quasi-bank or trust entity, may allow such quasi-bank or trust entity, whether or not the director or officer bank, quasi-bank or trust entity to defer for a stated period of time the profited or will profit thereby. publication of the statement of financial condition required herein. Whenever a bank, quasi-bank or trust entity persists in conducting its Sec. 62, GBL: Publication of Capital Stock. – A bank, quasi-bank or business in an unsafe or unsound manner, the Monetary Board may, trust entity incorporated under the laws of the Philippines shall not without prejudice to the administrative sanctions provided in Section 37 publish the amount of its authorized or subscribed capital stock without of the New Central Bank Act, take action under Section 30 of the same indicating at the same time and with equal prominence, the amount of Act and/or immediately exclude the erring bank from clearing, the its capital actually paid up. provisions of law to the contrary notwithstanding. No branch of any foreign bank doing business in the Philippines shall in a. Factors to be considered by MB any way announce the amount of the capital and surplus of its head office, or of the bank in its entirety without indicating at the same time b. Effect of persistence in conducting business in unsafe and and with equal prominence the amount of the capital, if any, definitely unsound manner assigned to such branch, such fact shall be stated in, and shall form part of the publication.

7. Settlement of Disputes the relevancy of the testimony and the materiality thereof has been demonstrated to the arbitrators. Arbitrators may also require the Sec. 63, GBL: Settlement of Disputes. – The provisions of any law to retirement of any witness during the testimony of any other witness. All the contrary notwithstanding, the Bangko Sentral shall be consulted by of the arbitrators appointed in any controversy must attend all the other government agencies or instrumentalities in actions or hearings in that matter and hear all the allegations and proofs of the proceedings initiated by or brought before them involving controversies parties; but an award by the majority of them is valid unless the in banks, quasi-banks or trust entities arising out of and involving concurrence of all of them is expressly required in the submission or relations between and among their directors, officers or stockholders, as contract to arbitrate. The arbitrator or arbitrators shall have the well as disputes between any or all of them and the bank, quasi-bank or power at any time, before rendering the award, without prejudice trust entity of which they are directors, officers or stockholders. to the rights of any party to petition the court to take measures to Cases safeguard and/or conserve any matter which is the subject of the dispute in arbitration. Home Bankers Savings and Trust Co. v. Court of Appeals, 318 SCRA Participants in the regional clearing operations of the Philippine Clearing 558 (1999) House Corporation cannot bypass the arbitration process laid out by FACTS the body and seek relief directly from the courts. In the case at bar, Victor Tancuan issued a check amounting to P25,250,000 while Eugene undeniably, private respondent has initiated arbitration proceedings as Arriesgado issued 3 checks, all amounting to P25,200,000. Both exchanged required by the PCHC rules and regulations, and pending arbitration has each other’s check and deposited them with their respective banks for sought relief from the trial court for measures to safeguard and/or conserve collection. When Far East Bank and Trust Company (FEBTC) presented the subject of the dispute under arbitration, as sanctioned by section 14 of Victor’s check to Home Bankers Savings and Trust Company (HBSTC), the Arbitration Law, and otherwise not shown to be contrary to the PCHC HBSTC dishonored the check for insufficiency of funds. on the other hand, rules and regulations. when HBSTC presented Eugene’s checks to FEBTC, it was also dishonored for insufficiency. HBSTC returned the checks to FEBTC through the Philippine Basically, the case filed by FEBTC is allowed on the ground of primarily Clearing House Corporation for the reason “Beyond Reglementary Period”, taking measures to safeguard the subject matter of the dispute implying that HBSTC already treasted Eugene’s checks as cleared and (attachment), notwithstanding the arbitration proceedings. allowed to be withdrawn.

Now, FEBTC demands reimbursements for the returned checks. The issue was subjected for arbitration. However, during the pendency of the Allied Banking Corporation v. Court of Appeals, 294 SCRA 803 (1998) arbitration, FEBTC filed a case in court with prayer for attachment. HBSTC FACTS countered with a motion to dismiss, arguing the case cannot be filed while Hyatt Terraces Baguio issued two crossed checks drawn against Allied the arbitration is still on going. The LC ruled dismissed the motion of Banking Corp. (hereinafter, ALLIED) in favor of appellee Meszellen FEBTC. Commodities Services, Inc. (hereinafter, MESZELLEN). Said checks were deposited on August 5, 1980 and August 18, 1980, respectively, with the ISSUE now defunct Commercial Bank and Trust Company (hereinafter, COMTRUST). Upon receipt of the above checks, COMTRUST stamped at the W/N FEBTC can file a separate case in court over the same subject matter of back thereof the warranty "All prior endorsements and/or lack of an arbitration, while the arbitration is still ongoing. endorsements guaranteed." After the checks were cleared through the RULING Philippine Clearing House Corporation (hereinafter, PCHC), ALLIED BANK paid the proceeds of said checks to COMTRUST as the collecting bank. YES. Section 14 of of RA 876 “Arbitration Law allows any party to the On March 17, 1981, the payee, MESZELLEN, sued the drawee, ALLIED arbitration proceeding to petition the court to take measures to safeguard BANK, for damages which it allegedly suffered when the value[s] of the and/or conserve any matter which is the subject of the dispute in checks were paid not to it but to some other person. arbitration Before defendant ALLIED BANK could finish presenting its evidence, it filed a Section 14. Subpoena and subpoena duces tecum. - Arbitrators shall third party complaint against Bank of the Philippine Islands (hereinafter, have the power to require any person to attend a hearing as a witness. BPI, appellee herein) as successor-in-interest of COMTRUST, for They shall have the power to subpoena witnesses and documents when reimbursement in the event that it would be adjudged liable in the main

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 193 case to pay plaintiff, MESZELLEN. petition for review in the earlier case filed by respondent at the RTC Makati. Respondent filed a Motion to Dismiss Petition for Review for Lack of A Motion to Dismiss was filed by BPI on the ground that the trial court had jurisdiction. RTC upheld and stated that petitioner should have been filed as no jurisdiction over the case as they are subject to mandatory arbitration a separate case. under the PCHC Rules. ISSUE ISSUE Whether or not RTC erred in dismissing the Petition of Petitioner for lack of Whether or not the trial court has jurisdiction over the Third Party Complaint jurisdiction on the ground it should have been docketed as a separate case? of ALLIED against BPI. HELD RULING Petition Lacks merit. RTC ruling upheld except for ruling on requirement to NO. The parties are subject to mandatory arbitration. file a separate case. Sec. 38 — Arbitration PCHC has its own rules of procedure for arbitration. However, this is Any dispute or controversy between two or more clearing governed by the arbitration law and supplemented by the rules of court. As participants involving any check/item cleared thru PCHC shall be provided in the PCHC rules, the findings of facts of the decision or awared submitted to the Arbitration Committee, upon written complaint of rendered by the Arbitration Committee shall be final and conclusive upon all any involved participant by filing the same with the PCHC serving the parties in said arbitration dispute. Under Article 2055 of the Civil Code, the same upon the other party or parties, who shall within fifteen the validy of any stipulation on the finality of arbitratior’s award or decision (15) days after receipt thereof file with the Arbitration Committee its is recognized however, where the conditions desrbied in articles 2038-2040 written answer to such written complaint and also within the same applicable to both compromises and arbitration obtaining, the arbitrators period serve the same upon the complaining participant, . . . . awards may be annulled or resciended. Consequently, the decision of the arbi committee is subject to judicial review. We defer to the primary authority of PCHC over the present dispute, because its technical expertise in this field enables it to better resolve Furthermore, petitioner had several judicial remedies available at its questions of this nature. This is not prejudicial to the interest of any party, disposal after the Arbitration Committee denied its Motion for since primary recourse to the PCHC does not preclude an appeal to the Reconsideration. It may petition the proper RTC to issue an order regional trial courts on questions of law. vacating the award on the grounds provided for under Section 24 of the Arbitration Law. Petitioner likewise has the option to file a petition for review under Rule 43 of the Rules of Court with the Court of Appeals on

Insular Savings Bank v. Far East Bank and Trust Company, 492 SCRA questions of fact, of law, or mixed questions of fact and law. Lastly, 145 (2006) petitioner may file a petition for certiorari under Rule 65 of the Rules of FACTS Court on the ground that the Arbitrator Committee acted without or in Far East filed a complaint against Home Banks Trust and Company (HBTC) excess of its jurisdiction or with grave abuse of discretion amounting to lack with the Philippine Clearing House Corporation’s (PCHC) arbitration or excess of jurisdiction. Since this case involves acts or omissions of a committee for 25.2M. for the total amount of three checks drawn and quasi-judicial agency, the petition should be filed in and cognizable only by debited against its clearing account. HBTC sent these checks to respondent the Court of Appeals. for to respondent for clearing through the PCHC clearing system. In this instance, petitioner did not avail of any of the Respondent dishonour the checks for insuffiency of funds and returned to abovementioned remedies available to it. Instead it filed a petition HBTC however, the latter refused to accept them since the checks were for review with the RTC where Civil Case No. 92-145 is pending returned by respondent after the reglementary regional clearing period. pursuant to Section 13 of the PCHC Rules to sustain its action. Pending arbitration respondent filed another complaint but this time with the Clearly, it erred in the procedure it chose for judicial review of the RTC in Makati. The RTC then suspended the case pending the outcome of arbitral award. arbitration. In the instant case, petitioner and respondent have agreed that the PCHC Arbitration was in favour of respondent and petitioners were told to pay the Rules would govern in case of controversy. However, since the PCHC 25.2M. MR was denied at the arbitration committee so petitioner filed a Rules came about only as a result of an agreement between and

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 194 among member banks of PCHC and not by law, it cannot confer such bank and may require that part or all of the net profits be used to jurisdiction to the RTC. Thus, the portion of the PCHC Rules granting increase the capital accounts of the bank until the minimum requirement jurisdiction to the RTC to review arbitral awards, only on questions has been met The Monetary Board may, furthermore, restrict or prohibit of law, cannot be given effect. the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable Consequently, the proper recourse of petitioner from the denial of its motion evidences of indebtedness of the Republic of the Philippines and of the for reconsideration by the Arbitration Committee is to file either a motion to Bangko Sentral and any other evidences of indebtedness or obligations vacate the arbitral award with the RTC, a petition for review with the Court the servicing and repayment of which are fully guaranteed by the of Appeals under Rule 43 of the Rules of Court or a petition for certiorari Republic of the Philippines, until the minimum required capital ratio has under Rule 65 of the Rules of Court. been restored. . In the case at bar, petitioner filed a petition for review with the RTC In case of a bank merger or consolidation, or when a bank is under when the same should have been filed with the Court of Appeals rehabilitation under a program approved by the Bangko Sentral, under Rule 43 of the Rules of Court. Thus, the RTC of Makati did not Monetary Board may temporarily relieve the surviving bank, err in dismissing the petition for review for lack of jurisdiction but consolidated bank, or constituent bank or corporations under not on the ground that petitioner should have filed a separate case rehabilitation from full compliance with the required capital ratio under but on the necessity of filing the correct petition in the proper court. It is such conditions as it may prescribe. immaterial whether petitioner filed the petition for review in Civil Case No. 92-145 as an appeal of the arbitral award or whether it Before the effectivity of rules which the Monetary Board is authorized to filed a separate case in the RTC, considering that the RTC will only prescribe under this provision, Section 22 of the General Banking Act, as have jurisdiction over an arbitral award in cases of motions to amended, Section 9 of the Thrift Banks Act, and all pertinent rules vacate the same. Otherwise, as elucidated herein, the Court of Appeals issued pursuant thereto, shall continue to be in force. retains jurisdiction in petitions for review or in petitions for a. MB Authority certiorari. b. Effect of Non-Compliance

2. Major Investments/Ownership of Real Property D. OTHER REGULATIONS Sec. 50, GBL: Major Investments. - For the purpose or enhancing bank 1. Risk Based Capital supervision, the Monetary Board shall establish criteria for reviewing Sec. 34, GBL: Risk-Based Capital. - The Monetary Board shall prescribe major acquisitions of investments by a bank including corporate the minimum ratio which the net worth of a bank must bear to its total affiliations or structures that may expose the bank to undue risks or in risk assets which may include contingent accounts. any way hinder effective supervision. For purposes of this Section, the Monetary Board may require such ratio Sec. 51, GBL: Ceiling on Investments in Certain Assets. – Any bank be determined on the basis of the net worth and risk assets of a bank may acquire real estate as shall be necessary for its own use in the and its subsidiaries, financial or otherwise, as well as prescribe the conduct of its business: Provided, however, That the total investment in composition and the manner of determining the net worth and total risk such real estate and improvements thereof including bank equipment, assets of banks and their subsidiaries: Provided, That in the exercise of shall not exceed fifty percent (50%) of combined capital accounts: this authority, the Monetary Board shall, to the extent feasible conform Provided, further, That the equity investment of a bank in another to internationally accepted standards, including those of the Bank for corporation engaged primarily in real estate shall be considered as part International Settlements (BIS), relating to risk-based capital of the bank’s total investment in real estate, unless otherwise provided requirements: Provided further, That it may alter or suspend compliance by the Monetary Board. with such ratio whenever necessary for a maximum period of one (1) Sec. 52, GBL: Acquisition of Real Estate by Way of Satisfaction of year: Provided, finally, That such ratio shall be applied uniformly to Claims. – Notwithstanding the limitations of the preceding Section, a banks of the same category. . bank may acquire, hold or convey real property under the following In case a bank does not comply with the prescribed minimum ratio, the circumstances: Monetary Board may limit or prohibit the distribution of net profits by 52.1. Such as shall be mortgaged to it in good faith by way of

security for debts; thousand pesos (P100,000) or by imprisonment of not less than one (1) year nor more than five (5) years, or both, in the discretion of the court. 52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or Sec. 35, NCBA: False Statement. — The willful making of a false or misleading statement on a material fact to the Monetary Board or to the 52.3. Such as it shall purchase at sales under judgments, decrees, examiners of the Bangko Sentral shall be punished by a fine of not less than mortgages, or trust deeds held by it and such as it shall purchase One hundred thousand pesos (P100,000) nor more than Two hundred to secure debts due it. thousand pesos (P200,000), or by imprisonment of not more than (5) years, or both, at the discretion of the court. Any real property acquired or held under the circumstances enumerated Sec. 36, NCBA: Proceedings Upon Violation of This Act and Other in the above paragraph shall be disposed of by the bank within a period Banking Laws, Rules, Regulations, Orders or Instructions. — of five (5) years or as may be prescribed by the Monetary Board: Whenever a bank or quasi-bank, or whenever any person or entity willfully Provided, however, That the bank may, after said period, continue to violates this Act or other pertinent banking laws being enforced or hold the property for its own use, subject to the limitations of the implemented by the Bangko Sentral or any order, instruction, rule or preceding Section. regulation issued by the Monetary Board, the person or persons responsible 3. Declaration of Dividends for such violation shall unless otherwise provided in this Act be punished by a fine of not less than Fifty thousand pesos (P50,000) nor more than Two Sec. 57, GBL: Prohibition on Dividend Declaration. – No bank or quasi- hundred thousand pesos (P200,000) or by imprisonment of not less than bank shall declare dividends, if at the time of declaration: two (2) years nor more than ten (10) years, or both, at the discretion of the court. 57.1. Its clearing account with the Bangko Sentral is overdrawn; or Whenever a bank or quasi-bank persists in carrying on its business in an 57.2. It is deficient in the required liquidity floor for government unlawful or unsafe manner, the Board may, without prejudice to the deposits for five (5) or more consecutive days, or penalties provided in the preceding paragraph of this section and the administrative sanctions provided in Section 37 of this Act, take action 57.3. It does not comply with the liquidity standards/ratios under Section 30 of this Act. prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration; or 57.4. It has committed a Sec. 37, NCBA: Administrative Sanctions on Banks and Quasi-banks. major violation as may be determined by the Bangko Sentral. — Without prejudice to the criminal sanctions against the culpable persons provided in Sections 34, 35, and 36 of this Act, the Monetary Board may, at E. PENALTY FOR VIOLATIONS its discretion, impose upon any bank or quasi-bank, their directors and/or Sec. 66, GBL: Penalty for Violation of this Act. – Unless otherwise herein officers, for any willful violation of its charter or by-laws, willful delay in the provided, the violation of any of the provisions of this Act shall be subject to submission of reports or publications thereof as required by law, rules and Sections 34, 35, 36 and 37 of the New Central Bank Act. If the offender is a regulations; any refusal to permit examination into the affairs of the director or officer of a bank, quasi-bank or trust entity, the Monetary Board institution; any willful making of a false or misleading statement to the may also suspend or remove such director or officer. If the violation is Board or the appropriate supervising and examining department or its committed by a corporation, such corporation may be dissolved by quo examiners; any willful failure or refusal to comply with, or violation of, any warranto proceedings instituted by the Solicitor General. banking law or any order, instruction or regulation issued by the Monetary Board, or any order, instruction or ruling by the Governor; or any Sec. 34, NCBA: Refusal to Make Reports or Permit Examination. — commission of irregularities, and/or conducting business in an unsafe or Any officer, owner, agent, manager, director or officer-in-charge of any unsound manner as may be determined by the Monetary Board, the institution subject to the supervision or examination by theBangko Sentral following administrative sanctions, whenever applicable: within the purview of this Act who, being required in writing by the Monetary Board or by the head of the supervising and examining (a) fines in amounts as may be determined by the Monetary Board to be department willfully refuses to file the required report or permit any lawful appropriate, but in no case to exceed Thirty thousand pesos (P30,000) a examination into the affairs of such institution shall be punished by a fine of day for each violation, taking into consideration the attendant not less than Fifty thousand pesos (P50,000) nor more than One hundred circumstances, such as the nature and gravity of the violation or irregularity and the size of the bank or quasi-bank;

(b) suspension of rediscounting privileges or access to Bangko Sentral Cases credit facilities; Perez v. Monetary Board, 20 SCRA 592 (1967) (c) suspension of lending or foreign exchange operations or authority to FACTS accept new deposits or make new investments; Perez instituted mandamus proceedings against the Monetary Board, the (d) suspension of interbank clearing privileges; and/or (e) revocation of Superintendent of Banks, the Central Bank and the Secretary of Justice. His quasi-banking license. object was to compel respondents to prosecute, Pablo Roman and several other Republic Bank officials for violations of the General Banking Act Resignation or termination from office shall not exempt such director or (specifically secs. 76-78 and 83 thereof) and the Central Bank Act, and for officer from administrative or criminal sanctions.The Monetary Board may, falsification of public or commercial documents in connection with certain whenever warranted by circumstances, preventively suspend any director or alleged anomalous loans authorized by Roman and the other bank officials. officer of a bank or quasi-bank pending an investigation: Provided, That should the case be not finally decided by the Bangko Sentral within a period Respondents assailed the propriety of mandamus. The Secretary of Justice of one hundred twenty (120) days after the date of suspension, said director claimed that it was not their specific duty to prosecute the persons or officer shall be reinstated in his position: Provided, further, That when the denounced by Perez. The Central Bank and its respondent officials, on the delay in the disposition of the case is due to the fault, negligence or petition other hand, averred that they had already done their duty under the law by of the director or officer, the period of delay shall not be counted in referring to the special prosecutors of the Department of Justice for criminal computing the period of suspension herein provided. investigation and prosecution those cases involving the alleged anomalous loans. The above administrative sanctions need not be applied in the order of their severity. ISSUE

Whether or not there is an administrative proceeding, if the institution W/N mandamus would lie against respondents? (specifically the Central and/or the directors and/or officers concerned continue with or otherwise Bank) persist in the commission of the indicated practice or violation, the Monetary Board may issue an order requiring the institution and/or the directors HELD and/or officers concerned to cease and desist from the indicated practice or violation, and may further order that immediate action be taken to correct NO. The Central Bank and its respondent officials may have the duty under the conditions resulting from such practice or violation. The cease and desist the Central Bank Act and the General Banking Act to cause the prosecution order shall be immediately effective upon service on the respondents. of those alleged violators, yet We find nothing in said laws that imposes a clear, specific duty on the former to do the actual prosecution of the latter. The respondents shall be afforded an opportunity to defend their action in a The Central Bank is a government corporation created principally to hearing before the Monetary Board or any committee chaired by any administer the monetary and banking system of the Republic, not a Monetary Board member created for the purpose, upon request made by the prosecution agency like the fiscal's office. Being an artificial person, The respondents within five (5) days from their receipt of the order. If no such Central Bank is limited to its statutory powers and the nearest power to hearing is requested within said period, the order shall be final. If a hearing which prosecution of violators of banking laws may be attributed is its power is conducted, all issues shall be determined on the basis of records, after to sue and be sued. But this corporate power of litigation evidently refers to which the Monetary Board may either reconsider or make final its order. civil cases only. The Governor is hereby authorized, at his discretion, to impose upon The Central Bank and its respondent officials have already done all they banking institutions, for any failure to comply with the requirements of law, could, within the confines of their powers, to cause the prosecution of those Monetary Board regulations and policies, and/or instructions issued by the persons denounced by Perez. Monetary Board or by the Governor, fines not in excess of Ten thousand pesos (P10,000) a day for each violation, the imposition of which shall be final and executory until reversed, modified or lifted by the Monetary Board on appeal.

VII. BANKS IN DISTRESS; may exceed twenty-five percent (25%) of the bank's total deposit and deposit substitutes if the same is adequately secured by CESSATION OF BANKING BUSINESS applicable loan values of government securities and unencumbered first class collaterals approved by the Monetary Board, and the A. LOANS TO BANKS principal stockholders of the institution furnish an acceptable undertaking to indemnify and hold harmless from suit a conservator 1. Loans without collateral whose appointment the Monetary Board may find necessary at any Sec. 83, NCBA: Loans for Liquidity Purposes. — The Bangko time. Sentral may extend loans and advances to banking institutions for a period of not more than seven (7) days without any collateral for the Prior to the release of the first tranche, the banking institution shall purpose of providing liquidity to the banking system in times of submit to the Bangko Sentral a resolution of its board of directors need. authorizing the Bangko Sentral to evaluate other assets of the banking institution certified by its external auditor to be good and 2. Emergency loans available for collateral purposes should the release of the Sec. 84, NCBA: Emergency Loans and Advances. — In periods subsequent tranche be thereafter applied for. of national and/or local emergency or of imminent financial panic which directly threaten monetary and banking stability, the The Monetary Board may, by a vote of at least five (5) of its Monetary Board may, by a vote of at least five (5) of its members, members, authorize the release of a subsequent tranche on authorize the Bangko Sentral to grant extraordinary loans or condition that the principal stockholders of the institution: advances to banking institutions secured by assets as defined (a) furnish an acceptable undertaking to indemnify and hold hereunder: Provided, That while such loans or advances are harmless from suit a conservator whose appointment the outstanding, the debtor institution shall not, except upon prior Monetary Board may find necessary at any time; and authorization by the Monetary Board, expand the total volume of its loans or investments. (b) provide acceptable security which, in the judgment of the Monetary Board, would be adequate to supplement, where The Monetary Board may, at its discretion, likewise authorize the necessary, the assets tendered by the banking institution to Bangko Sentral to grant emergency loans or advances to banking collateralize the subsequent tranche. institutions, even during normal periods, for the purpose of assisting a bank in a precarious financial condition or under serious financial In connection with the exercise of these powers, the prohibitions in pressures brought by unforeseen events, or events which, though Section 128 of this Act shall not apply insofar as it refers to foreseeable, could not be prevented by the bankconcerned: acceptance as collateral of shares and their acquisition as a result of Provided, however, That the Monetary Board has ascertained that foreclosure proceedings, including the exercise of voting rights the bank is not insolvent and has the assets defined hereunder to pertaining to said shares: Provided, however, That should the secure the advances: Provided, further, That a concurrent vote of at Bangko Sentral acquire any of the shares it has accepted as least five (5) members of the Monetary Board is obtained. collateral as a result of foreclosure proceedings, the Bangko Sentral shall dispose of said shares by public bidding within one (1) year The amount of any emergency loan or advance shall not exceed the from the date of consolidation of title by the Bangko Sentral. sum of fifty percent (50%) of total deposits and deposit substitutes of the banking institution and shall be disbursed in two (2) or more Whenever a financial institution incurs an overdraft in its account tranches. The amount of the first tranche shall be limited to twenty- with the Bangko Sentral, the same shall be eliminated within the five percent (25%) of the total deposit and deposit substitutes of the period prescribed in Section 102 of this Act. institution and shall be secured by government securities to the extent of their applicable loan values and other unencumbered first B. CONSERVATORSHIP class collaterals which the Monetary Board may approve: Provided, Sec. 67, GBL: Conservatorship. – The grounds and procedures for That if as determined by the Monetary Board, the circumstances placing a bank under conservatorship, as well as, the powers and duties surrounding the emergency warrant a loan or advance greater than of the conservator appointed for the bank shall be governed by the the amount provided hereinabove, the amount of the first tranche provisions of Section 29 and the last two paragraphs of Section 30 of

the New Central Bank Act: Provided, That this Section shall also apply Sec. 30, NCBA: Proceedings in Receivership and Liquidation. — to conservatorship proceedings of quasi-banks. Whenever, upon report of the head of the supervising or examining department, the Monetary Board finds that a bank or quasi- bank: Sec. 29, NCBA: Appointment of Conservator. — Whenever, on the basis of a report submitted by the appropriate supervising or examining (a) Is unable to pay its liabilities as they become due in the ordinary department, the Monetary Board finds that a bank or a quasi-bank is in course of business: Provided, That this shall not include inability to pay a state of continuing inability or unwillingness to maintain a condition of caused by extraordinary demands induced by financial panic in the liquidity deemed adequate to protect the interest of depositors and banking community; creditors, the Monetary Board may appoint a conservator with such powers as the Monetary Board shall deem necessary to take charge of (b) By the Bangko Sentral, to meet its liabilities; or the assets, liabilities, and the management thereof, reorganize the management, collect all monies and debts due said institution, and (c) Cannot continue in business without involving probable losses to its exercise all powers necessary to restore its viability. The depositors or creditors; or conservatorshall report and be responsible to the Monetary Board and shall have the power to overrule or revoke the actions of the previous (d) Has willfully violated a cease and desist order under Section 37 that management and board of directors of the bank or quasi-bank. has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; in which cases, the The conservator should be competent and knowledgeable in bank Monetary Board may summarily and without need for prior hearing operations and management. The conservatorship shall not exceed one forbid the institution from doing business in the Philippines and (1) year. designate the Philippine Deposit Insurance Corporation as receiver of the banking institution. The conservator shall receive remuneration to be fixed by the Monetary Board in an amount not to exceed two-thirds (2/3) of the salary of the For a quasi-bank, any person of recognized competence in banking or president of the institution in one (1) year, payable in twelve (12) equal finance may be designed as receiver. monthly payments: Provided, That, if at any time within one-year period, the conservatorship is terminated on the ground that the The receiver shall immediately gather and take charge of all the assets institution can operate on its own, the conservator shall receive the and liabilities of the institution, administer the same for the benefit of its balance of the remuneration which he would have received up to the creditors, and exercise the general powers of a receiver under the end of the year; but if the conservatorship is terminated on other Revised Rules of Court but shall not, with the exception of grounds, the conservator shall not be entitled to such remaining administrative expenditures, pay or commit any act that will involve the balance. The Monetary Board may appoint a conservator connected with transfer or disposition of any asset of the institution: Provided, That the the Bangko Sentral, in which case he shall not be entitled to receive any receiver may deposit or place the funds of the institution in non- remuneration or emolument from the Bangko Sentral during the speculative investments. The receiver shall determine as soon as conservatorship. The expenses attendant to the conservatorship shall be possible, but not later than ninety (90) days from take over, whether borne by the bank or quasi-bank concerned. the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to The Monetary Board shall terminate the conservatorship when it is its depositors and creditors and the general public: Provided, That any satisfied that the institution can continue to operate on its own and the determination for the resumption of business of the institution shall be conservatorship is no longer necessary. The conservatorship shall subject to prior approval of the Monetary Board.If the receiver likewise be terminated should the Monetary Board, on the basis of the determines that the institution cannot be rehabilitated or permitted to report of the conservator or of its own findings, determine that the resume business in accordance with the next preceding paragraph, the continuance in business of the institution would involve probable loss to Monetary Board shall notify in writing the board of directors of its its depositors or creditors, in which case the provisions of Section 30 findings and direct the receiver to proceed with the liquidation of the shall apply. institution. The receiver shall:

1. File ex parte with the proper regional trial court, and without requirement of prior notice or any other action, a petition for assistance

in the liquidation of the institution pursuant to a liquidation plan adopted liquidation proceedings under the New Central Bank Act (Republic Act by the Philippine Deposit Insurance Corporation for general application No. 7653) or successor legislation; to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board. Upon acquiring jurisdiction, the court (b) Insurance company shall refer to those companies that are shall, upon motion by the receiver after due notice, adjudicate disputed potentially or actually subject to insolvency proceedings under the claims against the institution, assist the enforcement of individual Insurance Code (Presidential Decree No. 1460) or successor legislation; liabilities of the stockholders, directors and officers, and decide on other and issues as may be material to implement the liquidation plan adopted. The receiver shall pay the cost of the proceedings from the assets of the (c) Pre-need company shall refer to any corporation authorized/licensed institution. to sell or offer to sell pre-need plans. Provided, That government financial institutions other than banks and 2. Convert the assets of the institutions to money, dispose of the same government-owned or controlled corporations shall be covered by this to creditors and other parties, for the purpose of paying the debts of Act, unless their specific charter provides otherwise. such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines and he may, 1. Grounds in the name of the institution, and with the assistance of counsel as he Sec. 29, par. 1, NCBA: Whenever, on the basis of a report may retain, institute such actions as may be necessary to collect and submitted by the appropriate supervising or examining department, recover accounts and assets of, or defend any action against, the the Monetary Board finds that a bank or a quasi-bank is in a state of institution. The assets of an institution under receivership or liquidation continuing inability or unwillingness to maintain a condition of shall be deemed in custodia legis in the hands of the receiver and shall, liquidity deemed adequate to protect the interest of depositors and from the moment the institution was placed under such receivership or creditors, the Monetary Board may appoint a conservator with such liquidation, be exempt from any order of garnishment, levy, attachment, powers as the Monetary Board shall deem necessary to take charge or execution. of the assets, liabilities, and the management thereof, reorganize the management, collect all monies and debts due said institution, The actions of the Monetary Board taken under this section or under and exercise all powers necessary to restore its viability. The Section 29 of this Act shall be final and executory, and may not be conservator shall report and be responsible to the Monetary Board restrained or set aside by the court except on petition for certiorari on and shall have the power to overrule or revoke the actions of the the ground that the action taken was in excess of jurisdiction or with previous management and board of directors of the bank or quasi- such grave abuse of discretion as to amount to lack or excess of bank. jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital stock 2. Appointment of Conservator within ten (10) days from receipt by the board of directors of the Sec. 29, par. 1, NCBA: see supra institution of the order directing receivership, liquidation or conservatorship. The designation of a conservator under Section 29 of Sec. 30, last par. NCBA: The actions of the Monetary Board taken this Act or the appointment of a receiver under this section shall be under this section or under Section 29 of this Act shall be final and vested exclusively with the Monetary Board. Furthermore, the executory, and may not be restrained or set aside by the court designation of a conservator is not a precondition to the designation of a except on petition for certiorari on the ground that the action taken receiver. was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for Sec. 5, FRIA: Exclusions. - The term debtor does not include banks, certiorari may only be filed by the stockholders of record insurance companies, pre-need companies, and national and local representing the majority of the capital stock within ten (10) days government agencies or units. from receipt by the board of directors of the institution of the order For purposes of this section: directing receivership, liquidation or conservatorship. The designation of a conservator under Section 29 of this Act or the (a) Bank shall refer to any duly licensed bank or quasi-bank that is appointment of a receiver under this section shall be vested potentially or actually subject to conservatorship, receivership or exclusively with the Monetary Board. Furthermore, the designation

of a conservator is not a precondition to the designation of a Third, the power under the Central Bank Law regarding conservatorship in receiver. preservation of the bank’s assets CANNOT EXTEND to the post-facto repudiation of perfected transaction; otherwise, it would infringe the non- 3. Powers of Conservator Impairment clause of the Constitution. Thus, the authority under Section Sec. 29, par. 1, NCBA: see supra 28-A only pertains the power to revoke defective contracts – void, voidable, unenforceable or rescissible. The conservator cannot repudiate a contract Cases validly made under the doctrine of implied authority. Its only authority in First Philippine International Bank v. Court of Appeals, 252 SCRA 259 such case is to assail such contract in court. (1996) FACTS NOTE: The Bank is guilty of Forum-Shopping. There is a Perfected Contract First Phil International Bank (formerly Producers Bank of the Phil) acquired 6 of Sale. Such Contract is Enforceable. There is no Reversible Error of Facts. parcels of land from BYME Investment and Development Corporation through mortgage and foreclosure. Now, Demetrio Demetria and Jose Janolo desire to buy the said property from the Bank. 4. Qualifications and Remuneration Sec. 29, pars. 2 and 3, NCBA: The conservator should be The potential buyers coursed his offer to Mecurio Rivera, the manager of competent and knowledgeable in bank operations and management. property management department of the bank. initially, both offered 3.5M. The conservatorship shall not exceed one (1) year. Rivera counter-offered with 5.5M. Both again offered 4.2M but later agreed to the 5.5M purchase price. However, the Conservator of the bank was The conservator shall receive remuneration to be fixed by the replaced by an Acting Conservator, thus, the offer by Demetria and Janolo Monetary Board in an amount not to exceed two-thirds (2/3) of the was subjected to further review. Demetria and Janolo insisted that there salary of the president of the institution in one (1) year, payable in was a perfected contract of sale already. They tendered the price of 5.5M twelve (12) equal monthly payments: Provided, That, if at any time but the Bank refused to acknowledge the “perfected contact”. within one-year period, the conservatorship is terminated on the ground that the institution can operate on its own, the conservator RTC ruled in favor of Demetria and Janolo. CA affirmed. shall receive the balance of the remuneration which he would have received up to the end of the year; but if the conservatorship is Note that the bank was placed under conservatorship during the time of terminated on other grounds, the conservator shall not be entitled negotiation and perfection of the contact. to such remaining balance. The Monetary Board may appoint a conservator connected with the Bangko Sentral, in which case he ISSUE shall not be entitled to receive any remuneration or emolument from W/N the Conservator of the Bank can unilaterally repudiate the authority of the Bangko Sentral during the conservatorship. The expenses Bank Officers. attendant to the conservatorship shall be borne by the bank or quasi-bank concerned. RULING NO. The Conservator has no power to repudiate the contract. 5. Period—NOT EXCEED 1 YEAR First, the issue of Conservator’s authority to repudiate a contract was raised Sec. 29, par. 2, NCBA: see supra for the first time on appeal. Issues not raised in the trial court cannot be raised for the first time on appeal, as it is offensive to basic rules of fair 6. Termination of Conservatorship play. Sec. 29, par. 2 and last par., NCBA: The conservator should be competent and knowledgeable in bank operations and management. Second, there was no evidence that the Conservator actually repudiated the The conservatorship shall not exceed one (1) year. contract at the time it was perfected. The Acting Conservator never objected to the contact, it only informed that the transaction was subject to review. x x x What the Acting Conservator did was he repudiated the authority of Rivera to make a binding offer, NOT repudiate the contract itself. The Monetary Board shall terminate the conservatorship when it is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary. The conservatorship

shall likewise be terminated should the Monetary Board, on the 2. Convert the assets of the institutions to money, dispose basis of the report of the conservator or of its own findings, of the same to creditors and other parties, for the purpose determine that the continuance in business of the institution would of paying the debts of such institution in accordance with the involve probable loss to its depositors or creditors, in which case the rules on concurrence and preference of credit under the Civil provisions of Section 30 shall apply. Code of the Philippines and he may, in the name of the institution, and with the assistance of counsel as he may 6. Effect retain, institute such actions as may be necessary to collect xProducers Bank of the Philippines v. NLRC, 355 SCRA 489 (2001) and recover accounts and assets of, or defend any action Under Section 28-A, the Monetary Board may place a bank under against, the institution. The assets of an institution under the control of a conservator when it finds that the bank is receivership or liquidation shall be deemed in custodia legis continuously unable or unwilling to maintain a condition of solvency in the hands of the receiver and shall, from the moment the or liquidity .In Central Bank of the Philippines v. Court of Appeals, institution was placed under such receivership or liquidation, the Court declared that the order placing petitioner herein under be exempt from any order of garnishment, levy, conservatorship had long become final and its validity could no attachment, or execution. longer be litigated upon. Also, in the same case, the Court found that sometime in August, 1983, some news items triggered a bank- C. VOLUNTARY LIQUIDATION run in petitioner which resulted in continuous over- drawings on Sec. 68, GBL: Voluntary Liquidation. – In case of voluntary liquidation petitioner's demand deposit account with the Central Bank; the of any bank organized under the laws of the Philippines, or of any over- drawings reached P143.955 million by 17 January 1984; and branch or office in the Philippines of a foreign bank, written notice of as of 13 February 1990, petitioner had over-drawings of up to such liquidation shall be sent to the Monetary Board before such P1.233 billion, which evidences petitioner's continuing inability to liquidation shall be sent to the Monetary Board before such liquidation is maintain a condition of solvency and liquidity, thus justifying the undertaken, and the Monetary Board shall have the right to intervene conservatorship. and take such steps as may be necessary to protect the interests of creditors. 7. Judicial Review nd Sec. 30, 2 to last par., NCBA: If the receiver determines that D. RECEIVERSHIP AND INVOLUNTARY LIQUIDATION the institution cannot be rehabilitated or permitted to resume Sec. 69, GBL: Receivership and Involuntary Liquidation. – The grounds business in accordance with the next preceding paragraph, the and procedures for placing a bank under receivership or liquidation, as Monetary Board shall notify in writing the board of directors of its well as the powers and duties of the receiver or liquidator appointed for findings and direct the receiver to proceed with the liquidation of the the bank shall be governed by the provisions of Sections 30, 31, 32, and institution. The receiver shall: 33 of the New Central Bank Act: Provided, That the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a 1. File ex parte with the proper regional trial court, and bond, executed in favor of the Bangko Sentral, in an amount to be fixed without requirement of prior notice or any other action, a by the court. This Section shall also apply to the extent possible to the petition for assistance in the liquidation of the institution receivership and liquidation proceedings of quasi-banks. pursuant to a liquidation plan adopted by the Philippine Deposit Insurance Corporation for general application to all Sec. 30, NCBA: Whenever, upon report of the head of the supervising closed banks. In case of quasi-banks, the liquidation plan or examining department, the Monetary Board finds that a bank or shall be adopted by the Monetary Board. Upon acquiring quasi- bank: jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate disputed claims against the (a) Is unable to pay its liabilities as they become due in the ordinary institution, assist the enforcement of individual liabilities of course of business: Provided, That this shall not include inability to pay the stockholders, directors and officers, and decide on other caused by extraordinary demands induced by financial panic in the issues as may be material to implement the liquidation plan banking community; adopted. The receiver shall pay the cost of the proceedings from the assets of the institution. (b) By the Bangko Sentral, to meet its liabilities; or

(c) Cannot continue in business without involving probable losses to its 2. Convert the assets of the institutions to money, dispose of the same depositors or creditors; or to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and (d) Has willfully violated a cease and desist order under Section 37 that preference of credit under the Civil Code of the Philippines and he may, has become final, involving acts or transactions which amount to fraud in the name of the institution, and with the assistance of counsel as he or a dissipation of the assets of the institution; in which cases, the may retain, institute such actions as may be necessary to collect and Monetary Board may summarily and without need for prior hearing recover accounts and assets of, or defend any action against, the forbid the institution from doing business in the Philippines and institution. The assets of an institution under receivership or liquidation designate the Philippine Deposit Insurance Corporation as receiver of shall be deemed in custodia legis in the hands of the receiver and shall, the banking institution. from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, For a quasi-bank, any person of recognized competence in banking or or execution. finance may be designed as receiver. The actions of the Monetary Board taken under this section or under The receiver shall immediately gather and take charge of all the assets Section 29 of this Act shall be final and executory, and may not be and liabilities of the institution, administer the same for the benefit of its restrained or set aside by the court except on petition for certiorari on creditors, and exercise the general powers of a receiver under the the ground that the action taken was in excess of jurisdiction or with Revised Rules of Court but shall not, with the exception of such grave abuse of discretion as to amount to lack or excess of administrative expenditures, pay or commit any act that will involve the jurisdiction. The petition for certiorari may only be filed by the transfer or disposition of any asset of the institution: Provided, That the stockholders of record representing the majority of the capital stock receiver may deposit or place the funds of the institution in non- within ten (10) days from receipt by the board of directors of the speculative investments. The receiver shall determine as soon as institution of the order directing receivership, liquidation or possible, but not later than ninety (90) days from take over, whether conservatorship. The designation of a conservator under Section 29 of the institution may be rehabilitated or otherwise placed in such a this Act or the appointment of a receiver under this section shall be condition so that it may be permitted to resume business with safety to vested exclusively with the Monetary Board. Furthermore, the its depositors and creditors and the general public: Provided, That any designation of a conservator is not a precondition to the designation of a determination for the resumption of business of the institution shall be receiver. subject to prior approval of the Monetary Board.If the receiver determines that the institution cannot be rehabilitated or permitted to Sec. 31, NCBA: Distribution of Assets. — In case of liquidation of a resume business in accordance with the next preceding paragraph, the bank or quasi-bank, after payment of the cost of proceedings, including Monetary Board shall notify in writing the board of directors of its reasonable expenses and fees of the receiver to be allowed by the court, findings and direct the receiver to proceed with the liquidation of the the receiver shall pay the debts of such institution, under order of the institution. The receiver shall: court, in accordance with the rules on concurrence and preference of credit as provided in the Civil Code. 1. File ex parte with the proper regional trial court, and without requirement of prior notice or any other action, a petition for assistance Sec. 32, NCBA: Disposition of Revenues and Earnings. — All in the liquidation of the institution pursuant to a liquidation plan adopted revenues and earnings realized by the receiver in winding up the affairs by the Philippine Deposit Insurance Corporation for general application and administering the assets of any bank or quasi-bank within the to all closed banks. In case of quasi-banks, the liquidation plan shall be purview of this Act shall be used to pay the costs, fees and expenses adopted by the Monetary Board. Upon acquiring jurisdiction, the court mentioned in the preceding section, salaries of such personnel whose shall, upon motion by the receiver after due notice, adjudicate disputed employment is rendered necessary in the discharge of the liquidation claims against the institution, assist the enforcement of individual together with other additional expenses caused thereby. The balance of liabilities of the stockholders, directors and officers, and decide on other revenues and earnings, after the payment of all said expenses, shall issues as may be material to implement the liquidation plan adopted. form part of the assets available for payment to creditors. The receiver shall pay the cost of the proceedings from the assets of the institution. Sec. 33, NCBA: Disposition of Banking Franchise. — The Bangko Sentral may, if public interest so requires, award to an institution, upon

such terms and conditions as the Monetary Board may approve, the Whether a bank placed under receivership by the BSP is required to secure banking franchise of a bank under liquidation to operate in the area a tax clearance certificate before the court approves the project distribution where said bank or its branches were previously operating: Provided, of the assets of the bank That whatever proceeds may be realized from such award shall be subject to the appropriate exclusive disposition of the Monetary Board. RULING NO. Section 52(c) of the NIRC only refers to dissolutions falling under the Sec. 5, FRIA: Exclusions. - The term debtor does not include banks, SEC, and not with the BSP. All liquidation of banks falls under Section 30 of insurance companies, pre-need companies, and national and local the New Central Bank Act. Between a general law (NIRC) and a special law government agencies or units. (NCBA), the latter will prevail. The court cannot apply by analogy the tax For purposes of this section: clearance requirement because dissolution of corporation and the receivership and liquidation of banks have a totally different proceeding. (a) Bank shall refer to any duly licensed bank or quasi-bank that is The Monetary Board may summarily and without need for prior hearing, potentially or actually subject to conservatorship, receivership or forbid the bank from conducting business, appoint PDIC as receiver, and file liquidation proceedings under the New Central Bank Act (Republic Act an ex parte with the RTC for liquidation of the bank. What the BIR should No. 7653) or successor legislation; have required was to submit the final return of the RBBI, and there assess the tax liabilities of the bank. (b) Insurance company shall refer to those companies that are potentially or actually subject to insolvency proceedings under the ***It must be noted that the liquidation proceedings in the RTC is NOT Insurance Code (Presidential Decree No. 1460) or successor legislation; summarily in nature, and the concurrence and preference in credit found in and Art 2241 and 2242 of the Civil Code may be applied, and the parties concerned may question such project distribution of the PDIC. (c) Pre-need company shall refer to any corporation authorized/licensed to sell or offer to sell pre-need plans. Koruga v. Arcenas, 590 SCRA 49 (2009) Provided, That government financial institutions other than banks and FACTS government-owned or controlled corporations shall be covered by this Koruga’s Complaint charged defendants with violation of Sections 31 to 34 Act, unless their specific charter provides otherwise. of the Corporation Code, prohibiting self-dealing and conflict of interest of directors and officers; invoked her right to inspect the corporation’s records under Sections 74 and 75 of the Corporation Code; and prayed for 1. Governing Law Receivership and Creation of a Management Committee, pursuant to Rule Cases 59 of the Rules of Civil Procedure, the Securities Regulation Code, the In Re: Petition for Assistance in the Liquidation of the Rural Bank of Interim Rules of Procedure Governing Intra-Corporate Controversies, the Bokod (Benguet), Inc., PDIC v. Bureau of Internal Revenue, 511 General Banking Law of 2000, and the New Central Bank Act. She accused SCRA 123 (2006) the directors and officers of Banco Filipino of engaging in unsafe, unsound, FACTS and fraudulent banking practices, more particularly, acts that violate the A special examination of the Rural Bank of Bokod, Inc (RBBI) was conducted prohibition on self-dealing. by the Bangko Sentral ng Pilipinas (BSP). The latter required RBBI to infuse fresh capital, which the bank failed to do. The BSP warned the RBBI and Koruga invoked Secs. 31, 32, 33 and 34 of the Corporation Code to support recommended closure, but the bank still failed to comply. An order was his claims. released, putting the bank under receivership and transferred the liquidation proceedings with the Philippine Deposit Insurance Corporation (PDIC). A ISSUE case was filed with the RTC, for the liquidation of the bank. PDIC then filed a Which law governs in the appointment of conservator or liquidator in banks? Motion for Approval of Project of Distribution in accordance with sec 30 and 31 of the New Central Bank Act. The BIR required PDIC to comply with RULING section 52(c) of the NIRC, which PDIC to secure a tax clearance certificate. NEW CENTRAL BANK ACT governs in this case. Koruga’s invocation of the The RTC released an order, requiring the PDIC to comply. provisions of the Corporation Code is misplaced. In an earlier case with similar antecedents, the Court ruled that, the Corporation Code is a general ISSUE law applying to all types of corporations, while the New Central Bank Act

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 204 regulates specifically banks and other financial institutions, including the 53.2. Act as financial agent and buy and sell, by order of and for the dissolution and liquidation thereof. As between a general and special law, account of their customers, shares, evidences of indebtedness and the latter shall prevail – generalia specialibus non derogant. all types of securities;

Consequently, it is not the Interim Rules of Procedure on Intra-Corporate 53.3. Make collections and payments for the account of others and Controversies, or Rule 59 of the Rules of Civil Procedure on Receivership, perform such other services for their customers as are not that would apply to this case. Instead, Sections 29 and 30 of the New incompatible with banking business; 53.4 Upon prior approval of Central Bank Act should be followed. the Monetary Board, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy 2. Grounds accounts; and 53.5. Rent out safety deposit boxes. Sec. 30, NCBA: Whenever, upon report of the head of the supervising or examining department, the Monetary Board finds that a bank or The bank shall perform the services permitted under Subsections quasi- bank: 53.1., 53.2., 53.3. and 53.4. as depositary or as an agent. Accordingly, it shall keep the funds, securities and other effects (a) Is unable to pay its liabilities as they become due in the ordinary which it receives duly separate from the bank's own assets and course of business: Provided, That this shall not include inability to pay liabilities: caused by extraordinary demands induced by financial panic in the banking community; The Monetary Board may regulate the operations authorized by this Section in order to ensure that such operations do not endanger the (b) By the Bangko Sentral, to meet its liabilities; or interests of the depositors and other creditors of the bank.

(c) Cannot continue in business without involving probable losses to its In case a bank or quasi-bank notifies the Bangko Sentral or publicly depositors or creditors; or announces a bank holiday, or in any manner suspends the payment of its deposit liabilities continuously for more than thirty (30) days, (d) Has willfully violated a cease and desist order under Section 37 that the Monetary Board may summarily and without need for prior has become final, involving acts or transactions which amount to fraud hearing close such banking institution and place it under or a dissipation of the assets of the institution; in which cases, the receivership of the Philippine Deposit Insurance Corporation. Monetary Board may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and Cases designate the Philippine Deposit Insurance Corporation as receiver of Banco Filipino Savings and Mortgage Bank v. Monetary Board, 204 the banking institution. SCRA 767 (1991) FACTS x x x This refers to nine consolidated cases concerning the legality of the closure and receivership of Banco Filipino Savings and Mortgage Bank pursuant to Sec. 36, 2nd par., NCBA: Whenever a bank or quasi-bank persists the order of the Monetary Board. Six cases involve the common issue of in carrying on its business in an unlawful or unsafe manner, the whether or not the liquidator appointed by the Central Bank has the Board may, without prejudice to the penalties provided in the authority to prosecute as well as to defend suits, and to foreclose mortgage preceding paragraph of this section and the administrative sanctions and in behalf of the bank while the issue on the validity of the receivership provided in Section 37 of this Act, take action under Section 30 of and liquidation of the bank is pending resolution. Corollary to this issue is this Act. whether the CB can be sued to fulfill financial commitments of a closed bank pursuant to Section 29 of the Central Bank Act. On the other hand the other Sec. 53, last par., GBL: Other Banking Services. – In addition to three cases all seek to annul and set aside the M.B. Resolution No. 75 the operations specifically authorized in this Act, a bank may issued by the Monetary Board. perform the following services: ISSUE 53.1. Receive in custody funds, documents and valuable objects; What are the grounds for placing a bank under receivership?

HELD and free from ambiguity, it must be given its literal meaning and applied Based on the afore-quoted provision the Monetary Board may order the without attempted interpretation. cessation of operation of a bank in the Philippines and place it under receivership upon a finding of insolvency or when its continuance in Whenever, upon examination by the head of the appropriate supervising or business would involve probable loss to its depositors or creditors. If the examining department or his examiners or agents into the condition of any Monetary Board shall determine and confirm within 60 days that the bank is bank, it shall be disclosed that the condition of the same is one of insolvent or can no longer resume business with safety to its depositors, insolvency, or that its continuance in business would involve creditors, and the general public, it shall, if public interest will be served, probable loss to its depositors or creditors, it shall be the duty of the order its liquidation. department head concerned forthwith, in writing, to inform the Monetary Board of the facts. The Board may, upon finding the statements of the Rural Bank of San Miguel, Inc. v. Monetary Board, Bangko Sentral ng department head to be true, forbid the institution to do business in the Pilipinas, 516 SCRA 154 (2007) Philippines and designate an official of the Central Bank or a person of FACTS recognized competence in banking or finance, as receiver to immediately Respondent Monetary Board (MB), prohibited RBSM from doing business in take charge of its assets and liabilities, as expeditiously as possible collect the Philippines, placing it under receivership and designating respondent and gather all the assets and administer the same for the benefits of its Philippine Deposit Insurance Corporation (PDIC) as receiver. Petitioners filed creditors, and represent the bank personally or through counsel as he may a petition for certiorari and prohibition in the RTC to nullify and set aside the retain in all actions or proceedings for or against the institution, exercising resolution. But on February 2000, they filed a notice of withdrawal in the all the powers necessary for these purposes including, but not limited to, RTC and a special civil action for certiorari and prohibition in the CA. The bringing and foreclosing mortgages in the name of the bank. RTC dismissed the case. The absence of an examination before the closure of RBSM did not mean RBSM was unable to pay its liabilities as they became due in the ordinary that there was no basis for the closure order. Needless to say, the decision course of business; it was also found that they cannot continue in business of the MB and BSP, like any other administrative body, must have without involving probable losses to its depositors and creditors. The MB, something to support itself and its findings of fact must be supported by after evaluating and deliberating on the findings, issued closure order and substantial evidence. But it is clear under RA 7653 that the basis need not took over the management of RBSMs assets and affairs. arise from an examination as required in the old law. The Court thus ruled that the MB had sufficient basis to arrive at a sound conclusion that there In their petition before the CA, petitioners claimed that respondents MB and were grounds that would justify RBSMs closure. In short, MB and BSP BSP committed grave abuse of discretion in issuing the said order and the it complied with all the requirements of RA 7653. By relying on a report before was bereft of any basis considering that no complete examination had been placing a bank under receivership, the MB and BSP did not only follow the conducted before it was issued. letter of the law, they were also faithful to its spirit, which was to act expeditiously. Accordingly, the issuance of Resolution was untainted with Thereafter, MB passed a resolution directing PDIC to proceed the liquidation arbitrariness. of RBSM.

ISSUE 3. Who May Be Receiver Whether or not Section 30 of RA 7653 (also known as the New Central Bank Sec. 30, 1st and 2nd pars., NCBA: Whenever, upon report of the Act) and applicable jurisprudence require a current and complete head of the supervising or examining department, the Monetary examination of the bank before it can be closed and placed under Board finds that a bank or quasi- bank: receivership? (a) Is unable to pay its liabilities as they become due in the ordinary RULING course of business: Provided, That this shall not include inability to NO. Examination connotes in-depth analysis, evaluation, inquiry or pay caused by extraordinary demands induced by financial panic in investigation while report connotes a simple disclosure or narration of facts the banking community; for informative purposes. In RA 7653, only a report of the head of the supervising or examining department is necessary. It is an established rule (b) By the Bangko Sentral, to meet its liabilities; or in statutory construction that where the words of a statute are clear, plain

(c) Cannot continue in business without involving probable losses to "The Central Bank Act," as amended, insofar as it authorizes the Central its depositors or creditors; or Bank to take over a banking institution even if it is not charged with violation of any law or regulation, much less found guilty thereof. The RTC (d) Has willfully violated a cease and desist order under Section 37 granted a TRO against the CB resolution. that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; in which Central Bank filed a motion to dismiss the complaint before the RTC for cases, the Monetary Board may summarily and without need for failure to state a cause of action, i.e., it did not allege ultimate facts showing prior hearing forbid the institution from doing business in the that the action was plainly arbitrary and made in bad faith, which are the Philippines and designate the Philippine Deposit Insurance only grounds for the annulment of Monetary Board resolutions placing a Corporation as receiver of the banking institution. bank under conservatorship, and that TSB was without legal capacity to sue except through its receiver. These were denied. The denial was elevated to For a quasi-bank, any person of recognized competence in banking the CA, which upheld the orders of the RTC. Thus, this petition for (Rule 45) or finance may be designed as receiver. certiorari.

4. Duties of Receiver Central BAnk claims that it is the essence of Sec. 29 of R.A. 265 that prior Sec. 30, par. 3, NCBA: The receiver shall immediately gather and notice and hearing in cases involving bank closures should not be required take charge of all the assets and liabilities of the institution, since in all probability a hearing would not only cause unnecessary delay but administer the same for the benefit of its creditors, and exercise the also provide bank "insiders" and stockholders the opportunity to further general powers of a receiver under the Revised Rules of Court but dissipate the bank's resources, create liabilities for the bank and even shall not, with the exception of administrative expenditures, pay or destroy evidence of fraud or irregularity in the bank's operations to the commit any act that will involve the transfer or disposition of any prejudice of its depositors and creditors. asset of the institution: Provided, That the receiver may deposit or place the funds of the institution in non- speculative investments. ISSUES The receiver shall determine as soon as possible, but not later than 1) Is absence of prior notice and hearing constitutive of acts of ninety (90) days from take over, whether the institution may be arbitrariness and bad faith, as to annul the MB resolution? rehabilitated or otherwise placed in such a condition so that it may 2) Is it only the receiver who has a right of action to question the be permitted to resume business with safety to its depositors and resolution of the CB, and not the stockholders of the corporation? creditors and the general public: Provided, That any determination for the resumption of business of the institution shall be subject to HELD prior approval of the Monetary Board. NO. Contrary to the notion of private respondent, Sec. 29 does not contemplate prior notice and hearing before a bank may be directed to stop operations and placed under receivership. When par. 4 provides for the 5. “Close Now-Hear Later Doctrine” filing of a case within ten (10) days after the receiver takes charge of the assets of the bank, it is unmistakable that the assailed actions should Cases precede the filing of the case. Plainly, the legislature could not have Central Bank of the Philippines v. Court of Appeals, 220 SCRA 536 intended to authorize "no prior notice and hearing" in the closure of the (1993) bank and at the same time allow a suit to annul it on the basis of absence FACTS thereof. A previous hearing is NOT required. It is enough that a subsequent Based on examination reports submitted by the Supervision and judicial review be provided. Examination Sector of the Central Bank "that the financial condition of TSB is one of insolvency and its continuance in business would involve probable This "close now and hear later" scheme is grounded on practical and legal loss to its depositors and creditors," the Monetary Board issued a considerations to prevent unwarranted dissipation of the bank's assets and RESOLUTION ordering the closure of Triumph Savings Bank, forbidding it as a valid exercise of police power to protect the depositors, creditors, from doing business in the Philippines, placing it under receivership, and stockholders and the general public. The mere filing of a case for appointing Ramon V. Tiaoqui as receiver. One week later, TSB filed a receivership by the Central Bank can trigger a bank run and drain its assets complaint against Central Bank and Ramon V. Tiaoqui challenging in the in days or even hours leading to insolvency even if the bank be actually process the constitutionality of Sec. 29 of R.A. 269, otherwise known as solvent. The procedure prescribed in Sec. 29 is truly designed to protect the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 207 interest of all concerned, i.e., the depositors, creditors and stockholders, the HELD bank itself, and the general public. NO. A liquidation court may not continue with the liquidation proceedings of Philippine Veterans Bank after congress has mandated its rehabilitation and The absence of notice and hearing is not a valid ground to annul a Monetary reopening. RA 7169 entitled an act to rehabilitate the PVB which was Board resolution placing a bank under receivership. The absence of prior published in the official gazette provides in part for the reopening of PVB notice and hearing cannot be deemed acts of arbitrariness and bad faith. together with all its branches within the period of three years from the date of the reopening of the head office. The law likewise provides for the 2) As regards the second ground, to rule that only the receiver may bring creation of a rehabilitation committee in order to facilitate the suit in behalf of the bank is, to echo the respondent appellate court, "asking implementation of the provisions of the same. The rehab committee for the impossible, for it cannot be expected that the master, the CB, will submitted the proposed rehab plan of PVB to the monetary board for its allow the receiver it has appointed to question that very appointment." approval. Meanwhile, ALX PRZ fag, PVB filed a motion to terminate the Consequently, only stockholders of a bank could file an action for annulment liquidation of PVB with the respondent judge praying the proceedings be of a Monetary Board resolution placing the bank under receivership and immediately terminated in view of the passage of RA 7169. The MB issued prohibiting it from continuing operations. MB resolution, which approved the rehab plan of PVB that led to them issuing a certificate of authority allowing PVB to reopen. Liquidator then filed a motion with the respondent judge to terminate the proceedings. The 6. Liquidation Court then issued a TRO restraining respondent judge from further a. As opposed to rehabilitation proceeding with the liquidation of PVB. Clearly RA7169 as well as Cases subsequent developments has rendered the liquidation court functus offico, Philippine Veterans Bank Employees Union-N.U.B.E. v. Hon. consequently, respondent judge has been stripped of the authority to issue Benjamin Vega, 360 SCRA 33 (2001) orders involving acts of liquidation for PVB. RA7169, by express provision FACTS took effect immediately without need of the usual 15-day wait after Sometime in 1985 the Central Bank filed with the RTC of Manila a petition publication. for assitance in the liquidation of Philippine Veterans Bank (PVB) Thereafter, the petitioner, the PVB Employees Union, filed claims for accrued and unpaid (Definition is part of the case) employee wages and benefits with the said court. Liquidation: In corporation law, connotes a winding up or settling with creditors and debtors. Assets are distributed to those entitled to receive After lengthy proceedings, partial payment of the sums due to the them. It is the process of reducing assets to cash, discharging liabilities and employees were made. However, many remain unpaid. On March 8, 1991, dividing surplus or loss. petitioners moved to disqualify the respondent judge from hearing the above case on grounds of bias and hostility towards petitioners. January 2, Rehabilitation: contemplates a continuance of corporate life and activities 1992 Congress enacted RA 7169 providing for the rehabilitation of the in an effort to restore and reinstate the corporation to its former position of Philippine Veterans Bank. Thereafter, petitioners filed with the labor successful operation and solvency. It is contrary to the concept of tribunals their residual claims for benefits and for reinstatement upon liquidation; to allow liquidation proceedings to continue would seriously reopening of the bank. Sometime after in May 1992 the PVB reopened upon hinder the rehabilitation of the bank. authority issued by the Central Bank b. Actions to take Despite the legislative mandate for rehabilitation and reopening of PVB, Sec. 30, NCBA: 1. File ex parte with the proper regional trial respondent judge continued with the liquidation proceedings of the bank. court, and without requirement of prior notice or any other Moreover, petitioners learned that the respondents (The judge, Central bank action, a petition for assistance in the liquidation of the and the liquidators of PVB) were set to order the payment and release of institution pursuant to a liquidation plan adopted by the employee benefits for another set of employees but not for the petitioner Philippine Deposit Insurance Corporation for general application (their claims were frozen). to all closed banks. In case of quasi-banks, the liquidation plan shall be adopted by the Monetary Board. Upon acquiring ISSUE jurisdiction, the court shall, upon motion by the receiver after May a liquidation court continue with liquidation proceedings of the PVB due notice, adjudicate disputed claims against the institution, when congress had mandated its rehabilitation and reopening? assist the enforcement of individual liabilities of the

stockholders, directors and officers, and decide on other issues bank within the purview of this Act shall be used to pay the as may be material to implement the liquidation plan adopted. costs, fees and expenses mentioned in the preceding section, The receiver shall pay the cost of the proceedings from the salaries of such personnel whose employment is rendered assets of the institution. necessary in the discharge of the liquidation together with other additional expenses caused thereby. The balance of revenues 2. Convert the assets of the institutions to money, dispose of and earnings, after the payment of all said expenses, shall form the same to creditors and other parties, for the purpose of part of the assets available for payment to creditors. paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of d. All claims filed in liquidation court the Philippines and he may, in the name of the institution, and Cases with the assistance of counsel as he may retain, institute such Ong v. Court of Appeals, 253 SCRA 105 (1996) actions as may be necessary to collect and recover accounts and FACTS assets of, or defend any action against, the institution. The The Rural Bank of Olongapo (RBO) owned 2 parcels of land in Tagaytay, assets of an institution under receivership or liquidation shall be which it mortgaged in favor of Jerry Ong to guarantee the payment of deemed in custodia legis in the hands of the receiver and shall, Omnibus Finance, Inc., which is undergoing liquidation proceedings of its from the moment the institution was placed under such money market obligations to Ong. receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution. Omnibus Finance failed to seasonably settle its obligations to Ong, which prompted him to extrajudicially foreclose on the mortgages. The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be final and executory, and Ong was not able to effect the registration of the lands, after the public sale, may not be restrained or set aside by the court except on because RBO refused to surrender its copies of the TCT of the lands. For its petition for certiorari on the ground that the action taken was in part, RBO contended that it was undergoing liquidation and, pursuant to excess of jurisdiction or with such grave abuse of discretion as to jurisprudence, it is the liquidation court which has jurisdiction to take amount to lack or excess of jurisdiction. The petition for cognizance of the case. certiorari may only be filed by the stockholders of record representing the majority of the capital stock within ten (10) RTC ruled in favor of Ong, which the CA reversed. days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. ISSUE The designation of a conservator under Section 29 of this Act or Whether the liquidation court has jurisdiction to take cognizance of this case the appointment of a receiver under this section shall be vested exclusively with the Monetary Board. Furthermore, the RULING designation of a conservator is not a precondition to the YES. Section 29, par. 3, of R.A. 265 as amended by P. D. 1827 provides designation of a receiver. If the Monetary Board shall determine and confirm within (sixty days) that the bank . . . is insolvent or cannot resume business with c. How assets are distributed safety to its depositors, creditors and the general public, it shall, if Sec. 31, NCBA: Distribution of Assets. — In case of the public interest requires, order its liquidation, indicate the liquidation of a bank or quasi-bank, after payment of the cost of manner of its liquidation and approve a liquidation plan. The Central proceedings, including reasonable expenses and fees of the Bank shall, by the Solicitor General, file a petition in the Court of receiver to be allowed by the court, the receiver shall pay the First Instance 7 reciting the proceedings which have been taken and debts of such institution, under order of the court, in accordance praying the assistance of the court in the liquidation of such with the rules on concurrence and preference of credit as institution. The court shall have jurisdiction in the same proceedings provided in the Civil Code. to adjudicate disputed claims against the bank . . . . and enforce individual liabilities of the stockholders and do all that is necessary Sec. 32, NCBA: Disposition of Revenues and Earnings. — to preserve the assets of such institution and to implement the All revenues and earnings realized by the receiver in winding up liquidation plan approved by the Monetary Board. the affairs and administering the assets of any bank or quasi-

In Hernandez v Rural Bank of Lucena, the SC held that "The fact that the RULING insolvent bank is forbidden to do business, that its assets are turned over to NO. The case falls within the jurisdiction of regular courts. the Superintendent of Banks, as a receiver, for conversion into cash, and Section 29 of the Central Bank Act regarding the Liquidation Court only that its liquidation is undertaken with judicial intervention means that, as far applies were there are claims against an insolvent bank. The Exclusive as lawful and practicable, all claims against the insolvent bank should be jurisdiction of the liquidation court pertains only to the adjudication of filed in the liquidation proceeding ." claims against the bank. It does not cover the reverse situation where it is the bank which files a claim against another person or legal entity. The The rationale behind the provision, i.e., the judicial liquidation is intended to intended purpose is to prevent multiplicity of actions against an insolvent prevent multiplicity of actions against the insolvent bank. It is a pragmatic bank and designed to establish due process and orderliness in the arrangement designed to establish due process and orderliness in the liquidation of the bank. being the situation where it is an action instituted by liquidation of the bank, to obviate the proliferation of litigations and to avoid the Bank, the liquidation court does not have jurisdiction over the case. injustice and arbitrariness. The lawmaking body contemplated that for convenience only one court, if possible, should pass upon the claims against There is no forum shopping as only one case was filed by the bank for writ the insolvent bank and that the liquidation court should assist the of possession. Though the bank was already closed, it still has juridical Superintendent of Banks and regulate his operations. personality, which can sue and be sued. The bank, through its liquidator, can still act on its claims. Manalo v. Court of Appeals, 366 SCRA 752 (2001) FACTS NOTE: There is no prejudicial question regarding the redemption price as it S. Villanueva Enterprises, through its president Therese Vargas, obtained a only applies to pending civil and criminal actions. Manalo has no right to 3M loan and 1M from PAIC Savings and Mortgage Bank. To secure the loan, intervene as he acquired no right from Vargas, who possessed no right of they mortgaged 2 parcels of land. However, Villanueva Enterprise defaulted ownership. The new lease agreement is a different issue to be decided in in their payment and the properties were foreclosed in favor of the bank. another case. The redemption period lapsed and the title was consolidated in the Bank’s name. e. Disposition of banking franchise The Central Bank decided the Bank to be liquidated and put under Sec. 33, NCBA: Disposition of Banking Franchise. — The liquidation proceedings. Bangko Sentral may, if public interest so requires, award to an institution, upon such terms and conditions as the Monetary Meanwhile, Vargas petitioned to annul the foreclosure but was denied. In Board may approve, the banking franchise of a bank under turn, the Bank filed a case for issuance of writ of possession over the liquidation to operate in the area where said bank or its subject property. branches were previously operating: Provided, That whatever proceeds may be realized from such award shall be subject to Notwithstanding the judgment and pending case, Vargas sold the foreclosed the appropriate exclusive disposition of the Monetary Board. properties to Armando Angsico and leased the property to Domingo Manalo for 10 years. Angsico then sold his rights to Manalo. Manalo now sought to 7. Effects of Receivership and Liquidation intervene in the case for possession and insists his right of ownership over a. Restriction on capacity to act the foreclosed properties. Cases Villanueva v. Court of Appeals, 244 SCRA 395 (1995) The RTC ruled in favor of the Bank and granted a writ of possession. The CA FACTS affirmed. The lots in litigation were originally owned by spouses Celestino Villanueva and Miguela Villanueva. Miguela tried to obtain a loan from Philippine Note: Manalo entered into a new lease agreement with the Bank. Veterans Bank (PVB), through Jose Viudez and Andres Sebastian. Viudez and Sebastian was able to obtain the title of the land, but without signature ISSUE of Celestino. Miguela never got the loan. She then tried to repurchase the W/N the case is under the jurisdiction of the Liquidation Court. lots, now in the name of PVB. This was stalled by the liquidation proceedings filed against PVB.

Ildefonso Ong, on the other hand, offered to purchase the property, which building for One Hundred Fifty Million Pesos (P150,000,000.00). On PVB accepted. He only knew of the acceptance when PVB was already under September 16, 1994, Abacus sent a letter to Manila Bank informing the receivership by the Central Bank (CB). He tried to purchase from CB but latter of its desire to exercise its “exclusive option to purchase”. However, was unheeded, which opted him to file a case against the CB that got Manila Bank refused to honor the same. referred to the liquidation court. The Trial Court ruled in favor of Miguela Villanueva, but was reversed by the CA. ISSUE Whether or not Laureano may exercise the Option to Purchase. ISSUE Whether there was a valid contract between PVB and Ong RULING NO. There can be no quibbling that respondent Manila Bank was under RULING receivership, pursuant to Central Bank’s MB Resolution No. 505 dated May NO. At the time Ong offered to purchase the property from PVB, the bank 22, 1987, at the time the late Vicente G. Puyat granted the “exclusive was still functioning normally. When he learned of the acceptance of the option to purchase” to the Laureano group of investors. Owing to this bank, which should have created the contract, PVB was already under the defining reality, the appellate court was correct in declaring that Vicente G. control of the CB. Under Art 1323 of the Civil Code, an offer becomes Puyat was without authority to grant the exclusive option to purchase the lot ineffective upon insolvency of either party before acceptance is conveyed. and building in question. With respondent bank having been already placed Therefore, the offer of Ong became ineffective due to the subsequent under receivership, its officers, inclusive of its acting president, Vicente G. insolvency of PVB, and the contract did not reach the perfection stage. Puyat, were no longer authorized to transact business in connection with the bank’s assets and property. Clearly then, the “exclusive option to purchase” Abacus Real Estate Development Center, Inc. v. The Manila Banking granted by Vicente G. Puyat was and still is unenforceable against Manila Corporation, 455 SCRA 97 (2005) Bank. FACTS Prior to 1984, the Manila Bank began constructing on said land a 14-storey Clearly, the receiver appointed by the Central Bank to take charge of the building. Not long after, however, the bank encountered financial difficulties properties of Manila Bank only had authority to administer the same for that rendered it unable to finish construction of the building. the benefit of its creditors. Granting or approving an “exclusive option to purchase” is not an act of administration, but an act of strict ownership, On May 22, 1987, the Central Bank of the Philippines, now Bangko Sentral involving, as it does, the disposition of property of the bank. Not being an ng Pilipinas, ordered the closure of Manila Bank and placed it under act of administration, the so-called “approval” by Atty. Renan Santos receivership, with Feliciano Miranda, Jr. being initially appointed as amounts to no approval at all, a bank receiver not being authorized to do so Receiver. On November 11, 1988, the Central Bank, by virtue of Monetary on his own. Board (MB) Resolution No. 505, ordered the liquidation of Manila Bank and designated Atty. Renan V. Santos as Liquidator. b. Penalties for transaction after Bank becomes insolvent Sec. 70, GBL: Penalty for Transactions After a Bank Becomes In the interim, Manila Bank’s then acting president, the late Vicente G. Insolvent. – Any director or officer of any bank declared Puyat, in a bid to save the bank’s investment, started scouting for possible insolvent or placed under receivership by the Monetary Board investors who could finance the completion of the building earlier who refuses to turn over the bank’s records and assets to the mentioned. On August 18, 1989, a group of investors, represented by designated receivers, or who tampers with banks records, or Calixto Y. Laureano (hereafter referred to as Laureano group), wrote who appropriates for himself for another party or destroys or Vicente G. Puyat offering to lease the building for ten (10) years and to causes the misappropriation and destruction of the bank’s advance the cost to complete the same, with the advanced cost to be assets, or who receives or permits or causes to be received in amortized and offset against rental payments during the term of the lease. said bank any deposit, collection of loans and/or receivables, or Likewise, the letter-offer stated that in consideration of advancing the who pays out or permits or causes to be transferred any construction cost, the group wanted to be given the “exclusive option to securities or property of said bank shall be subject to the penal purchase” the building and the lot on which it was constructed. provisions of the New Central Bank Act.

In a letter dated August 30, 1989, Vicente G. Puyat accepted the Laureano group’s offer and granted it an “exclusive option to purchase” the lot and

c. Effect on garnishment, levy on attachment or execution assets of the insolvent bank are held in trust for the equal benefit of all Sec. 30, NCBA: The actions of the Monetary Board taken creditors, and after its insolvency, one cannot obtain an advantage or a under this section or under Section 29 of this Act shall be final preference over another by attachment, execution, or otherwise. and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave d. Stoppage of business abuse of discretion as to amount to lack or excess of jurisdiction. Cases The petition for certiorari may only be filed by the stockholders Provident Savings Bank v. Court of Appeals, 222 SCRA 125 (1993) of record representing the majority of the capital stock within FACTS ten (10) days from receipt by the board of directors of the On 16 February 1967, the spouses Lorenzo K. Guarin and Liwayway J. institution of the order directing receivership, liquidation or Guarin (Guarins) obtained a loan from provident bank in the amount of conservatorship. The designation of a conservator under Section P62,500.00 payable on or before 20 June 1967. As security for the loan, 29 of this Act or the appointment of a receiver under this section they executed a real estate mortgage in favor of provident bank over a shall be vested exclusively with the Monetary Board. parcel of land. Furthermore, the designation of a conservator is not a precondition to the designation of a receiver. In September, 1972, provident bank was placed under receivership by the Central Bank of the Philippines until 27 July 1981 when the receivership was Cases set aside by the Honorable Supreme Court. Lipana v. Development Bank of Rizal, 154 SCRA 257 (1987) FACTS On 10 July 1986, the Guarins and respondent Wilson Chua executed a Deed From 1982 to 1984, Spouses Lipana opened and maintained both time and of Absolute Sale With Assumption of Mortgaged whereby the Guarins sold savings deposits with the Development Bank of Rizal. When some of the the mortgaged property to Guarins sold the appellant for the sum of time deposit certificates matured, Lipana were not able to cash them but P250,000.00 and plaintiff-appellant undertook to assume the mortgaged instead were issued a manager’s check which was dishonored upon obligation of the Guarins with defendant-appellant which as of 15 February presentment. Lipana later on filed a complaint with prayer for issuance of 1985 amounted to P591,088.80 preliminary attachment for collection of a sum of money with damages. Wilson Chua wrote to Provident bank that the former had purchased the Meanwhile, the Monetary Board, in its Resolution No. 1009, finding the mortgaged property from the Guarin's and requesting that the owner's copy condition of Development Bank was one of insolvency and that its of TCT in the possession of defendant-appellant be released to him so that continuance in business would result in probable loss to its depositors and he can register the sale and have the title to the property transferred in his creditors, decided to place it under receivership. name. He likewise, informed defendant-appellant that it had lost whatever right or action had against the Guarins because of prescription. (Defendant- Respondent judge ordered the issuance of a writ of execution. Later on, appellant replied on 10 August 1987 stating the reasons why they could not upon motion, the same respondent judge stayed the execution. comply with plaintiff-appellant's demands

ISSUE Provident bank argues that the prescriptive period was suspended due to Whether or not respondent judge could legally stay excecution of judgment the prohibition “to do business” issued by the Monetary Board. that has already become final and executory? ISSUE HELD Whether a foreclose proceeding falls within the purview of the phrase "doing YES. The stay of execution of a judgment is warranted by the fact that business"? Whether the prescriptive period for the mortage was Development Bank was placed under receivership. To execute the judgment suspended? would unduly deplete the assets of the respondent bank to the obvious prejudice of other depositors and creditors, as stated in Central Bank v. RULING Morfe, after the Monetary Board has declared that a bank is insolvent and YES to both. has ordered it to c ease operation, the Board becomes the trustee of its Doing business means “a continuity of commercial dealings and assets for the equal benefit of all the creditors, including depositors. The arrangements, and contemplates to that extent, the exercise of some of the

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 212 words or the normally incident to, and in progressive prosecution of, the ISSUES purpose ands object of its organizations.” With banks it also involves the 1) Can an insolvent bank be adjudged to pay interest even after its closure? collection of debts and foreclosure of mortgages. 2) Can they be asked to pay damages?

Generally, an appointment of a receiver does not dissolve the corporation HELD nor does it interfere with the exercise of its corporate rights. But this 1) NO. It is settled jurisprudence that a banking institution which has been principles is, of course, applicable to a situation where there is no restraint declared insolvent and subsequently ordered closed by the Central Bank of imposed on the corporation, unlike in the case at bar where petitioner the Philippines cannot be held liable to pay interest on bank deposits which Provident Savings Bank was specifically forbidden and immobilized from accrued during the period when the bank is actually closed and non- doing business in the Philippines on September 15, 1972 1981 when the operational. decision in Central Bank vs. Court of Appeals was rendered. "What enables a bank to pay stipulated interest on money deposited with it Having arrived at the conclusion that the foreclosure is part of bank's is that thru the other aspects of its operation it is able to generate funds to business activity which could not have been pursued by the receiver then cover the payment of such interest. Unless a bank can lend money, engage because of the circumstances discussed in the Central Bank case, we are in international transactions, acquire foreclosed mortgaged properties or thus convinced that the prescriptive period was legally interrupted by fuerza their proceeds and generally engage in other banking and financing mayor in 1972 on account on the prohibition imposed by the Monetary activities from which it can derive income, it is inconceivable how it can Board against petitioner from transacting business, until the directive of the carry on as a depository obligated to pay stipulated interest. Conventional board was nullified in 1981. Indeed, the period during which the obligee was wisdom dictates this inexorable fair and just conclusion. And it can be said prevented by a caso fortuito from enforcing his right is not reckoned against that all who deposit money in banks are aware of such a simple economic him (Article 1154, New Civil Code). When prescription is interrupted, all the proposition. Consequently, it should be deemed read into every contract of benefits acquired so far from the possession cease and when prescription deposit with a bank that the obligation to pay interest on the deposit ceases starts anew, it will be entirely a new one the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank." Also when respondent wrote to the Guarins requesting that the former be allowed to pay off the loan of the mortgage, he in turn acknowledged the 2) NO. There is no valid basis for the award of exemplary damages which is existing debt thereby suspending the prescriptive period for the second supposed to serve as a warning to other banks from dissipating their assets time. in anomalous transactions. It was not proven by private respondents, and neither was there a categorical finding made by the trial court, that petitioner bank actually engaged in anomalous real estate transactions. In e. Interest on deposits the absence of fraud, bad faith, malice or wanton attitude, petitioner bank Cases may, therefore, not be held responsible for damages which may be Fidelity Savings and Mortgage Bank v. Cenzon, 184 SCRA 141 (1990) reasonably attributed to the non-performance of the obligation. thus it FACTS cannot even be held liable for Attorney's fees. The spouses Santiago had P100k Time Deposit in Fidelity Bank. On February 18, 1969, the Monetary Board, after finding that the condition of the The award of damages and attorney's fees was deleted, while the bank was defendant Fidelity Savings and Mortgage Bank is one of insolvency issued a adjudged liable for the P90k. with accrued interest only until the day the resolution deciding, to forbid the Fidelity Savings Bank to do business in the bank was put under receivership via the MB resolution. Philippines and to instruct the Acting Superintendent of Banks to take charge, in the name of the Monetary Board, of the Bank's assets. But See Rural Bank of Sta. Catalina, Inc. v. Land Bank of the Philippines, 435 SCRA 183 (2004) The PDIC paid 10k of the Santiago's deposit. THe Bank subsequently FACTS underwent liquidation (pending). The Santiagos then demanded the balance Respondent Land Bank filed a complaint against the petitioner at the RTC for from Fidelity in a collection case. The RTC awarded a) P90k accrued interest, the collection of the sun of 2.8m capitalized, accrued interests, penalties b) P30k exemplary damages, and c) P10k attorney's fees. Thus this petition and surcharges. On motion of the respondent, the petitioner was held in for certiorari. default for failing to file an answer. The Rural Bank of Sta. Catalina (RBC) was placed under receivership. And the Philippine Deposit Insurance

Corporation (PDIC) was designated as receiver (conservator) of the The petitioner is, thus, barred from relying on the orders of the Monetary petitioner as the latter was prohibited from doing business in the Philippines. Board of the Central Bank of the Philippines placing its assets and affairs Unaware of the action of the Central Bank putting petitioner under under receivership and ordering its liquidation. receivership, RTC rendered judgment against RBC to pay Land Bank with interest. Petitioner, through PDIC appealed to the CA which affirmed RTC. It bears stressing that a defending party declared in default loses his standing in court and his right to adduce evidence and to present his ISSUE defense. He, however, has the right to appeal from the judgment by default Whether or not the court erred in holding that Petitioner bank (RBC) is still and assail said judgment on the ground, inter alia, that the amount of the liable to pay interest and penalty on its loan obligation after it has been judgment is excessive or is different in kind from that prayed for, or that placed under receivership/liquidation? the plaintiff failed to prove the material allegations of his complaint, or that the decision is contrary to law. Such party declared in default is proscribed HELD from seeking a modification or reversal of the assailed decision on the basis Petition has no merit,. of the evidence submitted by him in the Court of Appeals, for if it were otherwise, he would thereby be allowed to regain his right to adduce The petitioner asserts that, based on the ruling of this Court in Overseas evidence, a right which he lost in the trial court when he was declared in Bank of Manila vs. Court of Appeals ,its liability to the respondent under its default, and which he failed to have vacated. In this case, the petitioner availments must be limited only to P5,814,712.40, the aggregate amount of sought the modification of the decision of the trial court based on the its outstanding liability as of the date of its closure, inclusive of accrued evidence submitted by it only in the Court of Appeals. interests and penalties. The petitioner avers that the PDIC, as the liquidator of the petitioner, should not be faulted for failing to file its Answer to the The petitioner cannot, likewise, rely on the ruling of the Court in Overseas complaint and to move for a reconsideration of the default order in the trial Bank of Manila vs. Court of Appeals, because in the said case, the issue of court and in the CA, because it had no knowledge of the case filed against whether a party who had been declared in default is entitled to relief from the petitioner. The petitioner avers that it was only when the PDIC was the judgment by default based on evidence presented only in the appellate served with a copy of the decision of the trial court that it learned, for the court, when such order of default was not vacated by the trial court prior to first time, of the pendency of the case in the RTC. the appeal from the judgment of default was not raised therein, much less resolved by the Court. The records show that the petitioner was served with a copy of summons and the complaint, but failed to file its answer thereto. It also failed to file a 8. Judicial Review verified motion to set aside the Order of default despite its receipt of a copy a. Availability of remedy thereof. We note that the trial court rendered judgment only on April 7, Sec. 30, NCBA: The actions of the Monetary Board taken under 1998 or more than a year after the issuance of the default order; yet, the this section or under Section 29 of this Act shall be final and petitioner failed to file any verified motion to set aside the said order before executory, and may not be restrained or set aside by the court the rendition of the judgment of default. The PDIC was designated by the except on petition for certiorari on the ground that the action Central Bank of the Philippines as receiver (conservator) as early as January taken was in excess of jurisdiction or with such grave abuse of 14, 1998, and in the course of its management of the petitioner bank’s discretion as to amount to lack or excess of jurisdiction. The affairs, it should have known of the pendency of the case against the latter petition for certiorari may only be filed by the stockholders of in the trial court. record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the Moreover, the petitioner, through the PDIC, received a copy of the decision institution of the order directing receivership, liquidation or of the trial court on June 2, 1998, but did not bother filing a motion for conservatorship. The designation of a conservator under partial reconsideration, under Rule 37 of the Rules of Court, appending Section 29 of this Act or the appointment of a receiver under thereto the orders of the Monetary Board or a motion to set aside the order this section shall be vested exclusively with the Monetary Board. of default. Instead, the petitioner appealed the decision, and even failed to Furthermore, the designation of a conservator is not a assign as an error the default order of the trial court. precondition to the designation of a receiver.

b. Ground: grave abuse of discretion complaint with the RTC of Quezon City on the 8th day following the takeover Cases by the receiver of the bank's assets on 3 June 1985. Central Bank v. Court of Appeals, 106 SCRA 143 (1981) FACTS This "close now and hear later" scheme is grounded on practical and legal In 1985, the Monetary Board ordered the closure of Triumph Savings Bank considerations to prevent unwarranted dissipation of the bank's assets and (TSB) after it found that its financial condition is one of insolvency and its as a valid exercise of police power to protect the depositors, creditors, continuance in business would involve probable loss to its depositors and stockholders and the general public. creditors. Admittedly, the mere filing of a case for receivership by the Central Bank TSB filed a complaint against Central Bank to annul its closure and can trigger a bank run and drain its assets in days or even hours leading to challenging the constitutionality of the Central Bank Act insofar as it insolvency even if the bank be actually solvent. The procedure prescribed in authorizes the Central Bank to take over a banking institution even if it is Sec. 29 is truly designed to protect the interest of all concerned, i.e., the not charged with violation of any law or regulation. depositors, creditors and stockholders, the bank itself, and the general public, and the summary closure pales in comparison to the protection It further alleged that the Central Bank violated the rule on administrative afforded public interest. At any rate, the bank is given full opportunity to due process, which requires that prior notice and hearing be afforded to all prove arbitrariness and bad faith in placing the bank under receivership, in parties in administrative proceedings. Since MB Resolution No. 596 was which event, the resolution may be properly nullified and the receivership adopted without TSB being previously notified and heard, according to lifted as the trial court may determine. respondents, the same is void for want of due process; consequently, the bank's management should be restored to its board of directors and officers. The Court ruled in Banco Filipino (as relied upon by TSB) that the closure of the bank was arbitrary and attendant with grave abuse of discretion, not ISSUE because of the absence of prior notice and hearing, but that the Monetary May a Monetary Board resolution placing a private bank under receivership Board had no sufficient basis to arrive at a sound conclusion of insolvency to be annulled on the ground of lack of prior notice and hearing? justify the closure. In other words, the arbitrariness, bad faith and abuse of discretion were determined only after the bank was placed under RULING conservatorship and evidence thereon was received by the trial court. NO. Under Sec. 29 of R.A. 265, the Central Bank, through the Monetary Board, is vested with exclusive authority to assess, evaluate and determine We rule that Sec. 29 of R.A. 265 is a sound legislation promulgated in the condition of any bank, and finding such condition to be one of accordance with the Constitution in the exercise of police power of the state. insolvency, or that its continuance in business would involve probable loss Consequently, the absence of notice and hearing is not a valid ground to to its depositors or creditors, forbid the bank or non-bank financial annul a Monetary Board resolution placing a bank under receivership. The institution to do business in the Philippines; and shall designate an official of absence of prior notice and hearing cannot be deemed acts of arbitrariness the CB or other competent person as receiver to immediately take charge of and bad faith. Thus, an MB resolution placing a bank under receivership, or its assets and liabilities. The fourth paragraph, which was then in effect at conservatorship for that matter, may only be annulled after a determination the time the action was commenced, allows the filing of a case to set aside has been made by the trial court that its issuance was tainted with the actions of the Monetary Board, which are tainted with arbitrariness and arbitrariness and bad faith. Until such determination is made, the status quo bad faith. shall be maintained, i.e., the bank shall continue to be under receivership.

Sec. 29 does not contemplate prior notice and hearing before a bank may Banco Filipino Savings and Mortgage Bank v. Monetary Board, 204 be directed to stop operations and placed under receivership. It may be SCRA 767 (1991) emphasized that Sec. 29 does not altogether divest a bank or a non-bank FACTS financial institution placed under receivership of the opportunity to be heard This refers to nine consolidated cases concerning the legality of the closure and present evidence on arbitrariness and bad faith because within ten (10) and receivership of Banco Filipino Savings and Mortgage Bank pursuant to days from the date the receiver takes charge of the assets of the bank, the order of the Monetary Board. Six cases involve the common issue of resort to judicial review may be had by filing an appropriate pleading with whether or not the liquidator appointed by the Central Bank has the the court. Respondent TSB did in fact avail of this remedy by filing a authority to prosecute as well as to defend suits, and to foreclose mortgage and in behalf of the bank while the issue on the validity of the receivership

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 215 and liquidation of the bank is pending resolution. Corollary to this issue is whether the CB can be sued to fulfill financial commitments of a closed bank This prohibition shall apply in all cases, disputes or controversies pursuant to Section 29 of the Central Bank Act. On the other hand the other instituted by a private party, the insured bank, or any three cases all seek to annul and set aside the M.B. Resolution No. 75 shareholder of the insured bank. (As added by R.A. 9302, 12 issued by the Monetary Board. August 2004)

ISSUE The Supreme Court may issue a restraining order or injunction What are the grounds for placing a bank under receivership? when the matter is of extreme urgency involving a constitutional issue, such that unless a temporary restraining order is issued, HELD grave injustice and irreparable injury will arise. The party Based on the afore-quoted provision the Monetary Board may order the applying for the issuance of a restraining order or injunction cessation of operation of a bank in the Philippines and place it under shall file a bond in an amount to be fixed by the Supreme Court, receivership upon a finding of insolvency or when its continuance in which bond shall accrue in favor of the Corporation if the court business would involve probable loss to its depositors or creditors. If the should finally decide that the applicant was not entitled to the Monetary Board shall determine and confirm within 60 days that the bank is relief sought. (As added by R.A. 9302, 12 August 2004) insolvent or can no longer resume business with safety to its depositors, creditors, and the general public, it shall, if public interest will be served, Any restraining order or injunction issued in violation of this order its liquidation. Section is void and of no force and effect and any judge who has issued the same shall suffer the penalty of suspension of at least sixty (60) days without pay. (As added by R.A. 9302, 12 August c. Jurisdiction 2004) Sec. 4, Rule 65, Rules of Court: The petition may be filed not later than sixty (60) days from notice of the judgment, order or Cases resolution sought to be assailed in the Supreme Court or, if it Central Bank of the Philippines v. Dela Cruz, 191 SCRA 346 (1990); relates to the acts or omissions of a lower court or of a FACTS corporation, board, officer or person, in the Regional Trial Court The Rural Bank of Libmanan started operations in 1965. In 1979, the exercising jurisdiction over the territorial area as defined by the Department of Rural Banks and Savings and Loans Associations (DRBSLA) of Supreme Court. It may also be filed in the Court of Appeals the Central Bank conducted an examination on the conditions of the whether or not the same is in aid of its appellate jurisdiction, or Libmanan Bank. It discovered serious irregularities; false entries and false in the Sandiganbayan if it is in aid of its jurisdiction. If it statement giving the appearance of solidity and soundness of the bank involves the acts or omissions of a quasi-judicial agency, and which it did not have. The DRBSLA recommended the bank to be prohibited unless otherwise provided by law or these Rules, the petition from doing business and place it under receivership. The bank was then shall be filed in and cognizable only by the Court of Appeals. placed under receivership. After that, the Central Bank decided to liquidate the bank due to failure to submit rehabilitation plans. d. Who may question Cases The Libmanan Bank filed a complaint to restrain the Central Bank from Central Bank of the Philippines v. Court of Appeals, 220 SCRA 537 enforcing the liquidation in the RTC. Judge Rafael De la Cruz granted the (1993); restraining order and ordered the Central Bank to desist from liquidating the FACTS Libmanan Bank. it also allowed Libmanan Bank to withdraw money from its bank deposits. Central Bank now challenges the orders of Judge De la Cruz under a petition for certiorari. e. Actions of the MB final and executory; Injunction Sec. 22, PDIC Charter: No court, except the Court of Appeals, ISSUE shall issue any temporary restraining order, preliminary W/N the judge acted with grave abuse of discretion in issuing the injunction or preliminary mandatory injunction against the questioned orders. Corporation for any action under this Act. (As added by R.A. 9302, 12 August 2004)

RULING ISSUE YES. Section 29 of the Central Bank Act provides that the actions of the Whether or not the submission of the ROE with the MB for the closure of the Monetary Board in proceedings on insolvency are explicitly declared by law banks may be prevented by an injunction to be final and executory. They may not be set aside or restrained by the courts except upon convincing proof that the action is plainly arbitrary and RULING made in bad faith. Judge De la Cruz disregarded the law by ordering to NO. The issuance by the RTC of an injunction is an unwarranted restrain the Monetary Board without receiving any convincing proof that the interference with the powers of the MB. The actions of the MB under the actions of the Monetary Board was plainly arbitrary and made in bad faith. New Central Bank Act may not be restrained or set aside by the court Such act constitutes a grave abuse of discretion tantamount to excess or except on petition for certiorari on the ground that the action was taken lack of jurisdiction. with grave abuse of discretion as to amount to lack or excess of jurisdiction. This “close now, hear later” scheme is grounded on practical and legal In addition, a preliminary injunction should never be used to transfer the considerations to prevent unwarranted dissipation of the bank’s assets and possession or control of a thing to a party who did not have such possession as a valid exercise of police power to protect the depositors, creditors, or control at the inception of the case. Its proper function is simply to stockholders, and the general public. Such power of the MB to close banks maintain the status quo. At the filing of the case by Libmanan Bank, it was may be considered as an exercise of police power. already under control of DRBSLA. Thus, the order should not have removed the Bank from the control of DRBSLA. f. Effect of Filing Petition for Review Cases The judge also erred in denying the Central Bank’s motion to dismiss the Banco Filipino Savings and Mortgage Bank v. Ybañez, 445 SCRA 482 complaint by Libmanan Bank. The complaint of Libmanan Bank should be (2004) filed in the proceedings for assistance in liquidation. It should have been a FACTS counterclaim and not a separate action to avoid multiplicity of suits. Failure On March 7, 1978, respondents obtained a loan secured by a Deed of Real to assert arbitrariness and bad faith in the liquidation proceedings Estate Mortgage over Transfer Certificate of Title (TCT) No. 69836 from constitutes a waiver of that defense. petitioner bank. The loan was used for the construction of a commercial building in Cebu City. On October 25, 1978, respondents obtained an The judge also was wrong in allowing the Libmanan Bank to withdraw funds additional loan from the petitioner thus increasing their obligation to one from its deposit. Such act would result in the further diminution and million pesos. dissipation of its assets to the prejudice of its depositors and creditors in the liquidation proceedings. From 1989 onwards, respondents did not pay a single centavo. They aver that Banco Filipino had ceased operations and/or was not allowed to Bangko Sentral ng Pilipinas Monetary Board v. Antonio-Valenzuela, continue business, having been placed under liquidation by the Central 602 SCRA 698 (2009) Bank. FACTS The BSP conducted examinations of the books of a lot of rural banks. They On January 15, 1990, respondents’ lawyer wrote Special Acting Liquidator, required these banks to infuse fresh capital. Though the banks claimed that Renan Santos, and requested that plaintiff return the mortgaged property of they did, the BSP informed them that they failed to comply with the the respondents since it had sufficiently profited from the loan and that the remedial requirements imposed by the BSP. The banks asked for more interest and penalty charges were excessive. Petitioner bank denied the time, and told BSP that they have not received the Report of Examination request. (ROE), which finalizes the audit findings. The Rural Bank of Paranaque filed a complaint for nullification of the BSP ROE, with application for TRO and Banco Filipino was closed on January 1, 1985 and re-opened for business on preliminary Injunction, which was raffled with Judge Nina Antonio- July 1, 1994. From its closure to its re-opening, petitioner bank did not Valenzuela. Other banks followed suit with their respective RTC branches. transact any business with its customers. The TRO application of RBPI was granted, and the other banks filed for consolidation, where both the consolidation, and their TRO application were On August 24, 1994, respondents were served a Notice of Extra Judicial granted. BSP filed a petition for certiorari, annulling the grant of injunction Sale of their property covered by TCT No. 69836 to satisfy their against them. The CA dismissed the petition. indebtedness allegedly of P6,174,337.46 which includes the principal,

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 217 interest, surcharges and 10% attorney’s fees. The public auction was HELD scheduled on September 22, 1994 at 2:00 in the afternoon. NO. It is only Prime Savings Bank that is liable for the two cashier’s checks. Solidary liability cannot attach to the BSP, in its capacity as government On September 19, 1994, respondents filed a suit for Injunction, regulator of banks, and the PDIC as statutory receiver under RA 7653, Accounting and Damages, alleging that there was no legal and factual because they are the principal government agencies mandated by law to basis for the foreclosure proceedings since the loan had already been fully determine the financial viability of banks and quasi-banks, and facilitate paid. A restraining order was issued the following day by the lower court receivership and liquidation of closed financial institutions, upon factual enjoining petitioner to cease and desist from selling the property at a public determination f the latter’s insolvency. auction.

ISSUE E. PDIC FINANCIAL ASSISTANCE Sec. 12(c), PDIC Charter: When the Corporation has determined that What is the effect of the temporary closure of Banco Filipino from January 1, an insured bank is in danger of closing, in order to prevent such closing, 1985 to July 1, 1994 on the loan? the Corporation, in the discretion of its Board of Directors, is authorized to make loans to, or purchase the assets of, or assume liabilities of, or RULING make deposits in, such insured bank, upon such terms and condition as NONE. In Banco Filipino Savings and Mortgage Bank v. Monetary Board, the the Board of Directors may prescribe, when in the opinion of the Board validity of the closure and receivership of Banco Filipino was put in issue. of Directors, the continued operation of such bank is essential to provide But the pendency of the case did not diminish the authority of the adequate banking service in the community or maintain financial designated liquidator to administer and continue the bank’s transactions. stability in the economy. The Court allowed the bank’s liquidator to continue receiving collectibles and receivables or paying off creditor’s claims and other transactions pertaining to normal operations of a bank. Among these transactions were the VIII. THE BANGKO SENTRAL NG PILIPINAS AND prosecution of suits against debtors for collection and for foreclosure of mortgages. The bank was allowed to collect interests on its loans while THE SUPERVISION OF BANKS under liquidation, provided that the interests were legal. A. THE BSP g. Liability of the MB and PDIC Cases 1. Nature Miranda v. Philippine Deposit Insurance Corporation, 501 SCRA 288 Sec. 1, NCBA: Declaration of Policy. — The State shall maintain (2006) a central monetary authority that shall function and operate as an FACTS independent and accountable body corporate in the discharge of its Leticia Miranda was a depositor of Prime Savings Bank. She withdrew a mandated responsibilities concerning money, banking and credit. In substantial amount from her account but instead of cash she opted to be line with this policy, and considering its unique functions and issued a crossed cashier’s check. She deposited the the two checks in her responsibilities, the central monetary authority established under account in another bank on the same day, however, Bangko Sentral ng this Act, while being a government-owned corporation, shall enjoy Pilipinas (BSP) suspended the clearing privileges of Prime Savings Bank. The fiscal and administrative autonomy. two checks were returned unpaid. 2. Responsibility and Primary Objective Later on Prime Savings bank declared a bank holiday. Subsequently BSP Sec. 3, NCBA: Responsibility and Primary Objective. — The placed Prime Savings Bank under receivership of the PDIC. Miranda filed a Bangko Sentral shall provide policy directions in the areas of money, collection suit and impleaded Prime Savings Bank, BSP, and PDIC. RTC held banking, and credit. It shall have supervision over the operations of all three solidarily liable. CA reversed and absolved BSP and PDIC. banks and exercise such regulatory powers as provided in this Act and other pertinent laws over the operations of finance companies ISSUE and non-bank financial institutions performing quasi- banking Whether or not BSP and PDIC can be held liable? functions, hereafter referred to as quasi-banks, and institutions performing similar functions.

The primary objective of the Bangko Sentral is to maintain price RULING stability conducive to a balanced and sustainable growth of the YES to both. Even in the absence of contract, the record plainly shows that economy. It shall also promote and maintain monetary stability and the CB made express representations to petitioners herein that it would the convertibility of the peso. support the OBM, and avoid its liquidation if the petitioners would execute (a) the Voting Trust Agreement turning over the management of OBM to the 3. Corporate Powers CB or its nominees, and (b) mortgage or assign their properties to the Sec. 5, NCBA: Corporate Powers. — The Bangko Sentral is Central Bank to cover the overdraft balance of OBM. The petitioners having hereby authorized to adopt, alter, and use a corporate seal which complied with these conditions and parted with value to the profit of the CB shall be judicially noticed; to enter into contracts; to lease or own (which thus acquired additional security for its own advances), the CB may real and personal property, and to sell or otherwise dispose of the not now renege on its representations and liquidate the OBM, to the same; to sue and be sued; and otherwise to do and perform any detriment of its stockholders, depositors and other creditors, under the rule and all things that may be necessary or proper to carry out the of promissory estoppel purposes of this Act. We are constrained to agree with petitioners that the conduct of the CB The Bangko Sentral may acquire and hold such assets and incur from and after January, 1968, reveals a calculated attempt to evade such liabilities in connection with its operations authorized by the rehabilitating OBM despite its promises. What is more aggravating is that by provisions of this Act, or as are essential to the proper conduct of the ordered liquidation, depositors and other creditors would have to share such operations. The Bangko Sentral may compromise, condone or in the assets of the OBM, while the CB's own credits for advances were release, in whole or in part, any claim of or settled liability to the secured by the new mortgages it had obtained from the petitioners, thereby Bangko Sentral, regardless of the amount involved, under such gaining for it what amounts to an illegal preference. To cap it all, the CB terms and conditions as may be prescribed by the Monetary Board disregarded its representations and promises to rehabilitate and normalize to protect the interests of the Bangko Sentral. the financial condition of OBM, as it had previously done with the Republic Bank, without even offering to discharge the mortgages, given by Cases petitioners in consideration for its promises, or notifying petitioners that it Emerito Ramos v. Central Bank of the Philippines, October 4, 1971 desired to rescind its contract, or bringing action in court for the purpose. FACTS And all the while CB knew that the situation of the OBM was deteriorating OBM was in dire financial distress. To aid them, CB prompted the former to daily, with penalties at 3% per month continually accumulating, while its enter into a trust agreement with PNB which the CB eventually took over. creditors, depositors and stockholders awaited the promised aid that never came, and which apparently CB never intended to give. In lieu of the Trust agreement, CB made OBM mortgage all its properties in favour of CB and in return, the latter promised to support, normalize and We conclude that having induced the petitioners to part with additional rehabilitate OBM (to do what it can to prevent OBM from being liquidated.) security in reliance upon its (CB's) promises and commitments to avert liquidation and to support, normalize and rehabilitate the OBM, the Upon effectivity of the Trust agreement, CB elected its own directors and respondent CB is duty bound to comply in good faith with such promises. officers. OBM, with its new officers and directors, requested substantial Consequently, being contrary thereto, CB Resolutions should be annulled loans from to help rehabilitate OBM. CB extended an initial 10M loan and set aside for having been adopted in abuse of discretion, equivalent to however this measly sum proved to be inadequate as CB eventually was excess of jurisdiction. And never having attempted to comply, nor even to force to liquidate OBM less than a year after the effectivity of the trust begin compliance, with its commitments and promises, the respondent CB is agreement. precluded to invoke the expiration of the period specified for the duration of its obligations under the Voting Trust Agreement. Such period should, in OBM is now questioning the resolutions of CB ordering the former’s clearing, justice and equity, be deemed to start running from and after the CB begins suspension of operations and liquidation. due performance of its commitments, promises and representations in good faith. ISSUES W/N CB agreed to rehabilitate OBM? W/N the questioned resolutions were issued by CB in abuse of its discretion?

Central Bank of the Philippines v. Intermediate Appellate Court, This case is distinguished from Batchelder v Central Bank. In that case the December 4, 1989 SC ruled that the Monetary Board Resolutions merely laid down a general FACTS policy on the utilization of the dollar earnings of Filipino and resident The Central Bank, in 1954, in order to improve the textile industry, entered American contracts undertaking projects in U.S. military bases. They "are into an agreement with various textile mills for the latter to purchase not contracts that give rise to obligations which must be fulfilled by the spinning mills to manufacture yarn from raw cotton. This was called a Central Bank in favor of affected parties." Textile Mills Integration Program". Pursuant to this, these mills incurred contractual obligations, payable in foreign currency, in the purchase of Unlike the Batchelder case, however, the mills were required to integrate capital machineries needed for the improvement of their textile mills. To and thereafter authorized to import capital machinery only upon CB cover the importation of their textile mill machineries, equipment, approval of the foreign currency costs of the project, as well as the accessories and spare parts under the plan, the mills filed applications for corresponding peso payments, aside from being directed to undertake the corresponding foreign exchange allocations, approved by the Central importation only on a deferred payment basis. In short, private respondents Bank under several Resolutions of its Monetary Board. These resolutions in merely complied with rules and regulations of the CB, as participants of the effect allowed the mills to purchase the needed machines at the exchange textile mills integration program. As a result, they should not now be rate of P2 = $1. deprived of rights acquired by reason thereof.

Then in 1961, Central Bank issued CB Circular No. 121 which eliminated existing contractual obligations previously approved by the Monetary Board 4. Organization from among the enumerated foreign exchange transactions within the a. Monetary Board coverage of the P2 to $1 preferred exchange rate. Thus, plaintiffs were Sec. 6, NCBA: Composition of the Monetary Board. — The denied access to the P2 to $1 exchange rate with which to service their powers and functions of the Bangko Sentral shall be exercised aforesaid foreign exchange obligations. by the Bangko Sentral Monetary Board, hereafter referred to as the Monetary Board, composed of seven (7) members appointed The mills filed a complaint for declaratory relief, praying that they be by the President of the Philippines for a term of six (6) years. allowed to complete all existing contractual obligations at the preferred exchange rate, and that the Central Bank be ordered to pay back all The seven (7) members are: amounts that the mills had been forced to shell out so that they would not (a) The Governor of the Bangko Sentral, who shall be the be in default in the performance of existing contracts. The RTC and the IAC Chairman of the Monetary Board. The Governor of the found for the mills. Bangko Sentral shall be head of a department and his appointment shall be subject to confirmation by the ISSUE Commission on Appointments. Whenever the Governor is Whether CB made an enforceable promise to sell foreign exchange to unable to attend a meeting of the Board, he shall private respondents at the preferred rate of P2 to $1 to service the payment designate a Deputy Governor to act as his alternate: of imported machinery and equipment? At what point does promissory Provided, That in such event, the Monetary Board shall estoppel apply? designate one of its members as acting Chairman;

HELD (b) A member of the Cabinet to be designated by the YES. Under the doctrine of promissory estoppel, an estoppel may arise from President of the Philippines. Whenever the designated the making of a promise, even though without consideration, if it was Cabinet Member is unable to attend a meeting of the intended that the promise should be relied upon and in fact it was relied Board, he shall designate an Undersecretary in his upon, and if a refusal to enforce it would be virtually to sanction the Department to attend as his alternate; and perpetration of fraud or would result in other injustice. It applies in this case. It was established that the mills would not have entered into long (c) Five (5) members who shall come from the private term deferred payment contracts with foreign companies if they had not sector, all of whom shall serve full-time: Provided, been promissed the purchase of dollars at the preferred rate. however, That of the members first appointed under the provisions of this subsection, three (3) shall have a term of six (6) years, and the other two (2), three (3) years.

No member of the Monetary Board may be reappointed more (b) If he is physically or mentally incapacitated that he cannot than once. properly discharge his duties and responsibilities and such incapacity has lasted for more than six (6) months; or Sec. 7, NCBA: Vacancies. — Any vacancy in the Monetary (c) If the member is guilty of acts or operations which are of Board created by the death, resignation, or removal of any fraudulent or illegal character or which are manifestly member shall be filled by the appointment of a new member to opposed to the aims and interests of the Bangko Sentral; or complete the unexpired period of the term of the member (d) If the member no longer possesses the qualifications concerned. specified in Section 8 of this

Sec. 8, NCBA: Qualifications. — The members of the Sec. 11, NCBA: Meetings. — The Monetary Board shall meet Monetary Board must be natural-born citizens of the Philippines, at least once a week. The Board may be called to a meeting by at least thirty-five (35) years of age, with the exception of the the Governor of the Bangko Sentral or by two (2) other Governor who should at least be forty (40) years of age, of good members of the Board. moral character, of unquestionable integrity, of known probity and patriotism, and with recognized competence in social and The presence of four (4) members shall constitute a quorum: economic disciplines. Provided, That in all cases the Governor or his duly designated alternate shall be among the four (4). Sec. 9, NCBA: Disqualifications. — In addition to the disqualifications imposed by Republic Act No. 6713, a member Unless otherwise provided in this Act, all decisions of the of the Monetary Board is disqualified from being a director, Monetary Board shall require the concurrence of at least four (4) officer, employee, consultant, lawyer, agent or stockholder of members. any bank, quasi-bank or any other institution which is subject to supervision or examination by the Bangko Sentral, in which case The Bangko Sentral shall maintain and preserve a complete such member shall resign from, and divest himself of any and all record of the proceedings and deliberations of the Monetary interests in such institution before assumption of office as Board, including the tapes and transcripts of the stenographic member of the Monetary Board. notes, either in their original form or in microfilm.

The members of the Monetary Board coming from the private Sec. 12, NCBA: Attendance of the Deputy Governors. — sector shall not hold any other public office or public The Deputy Governors may attend the meetings of the Monetary employment during their tenure. Board with the right to be heard.

No person shall be a member of the Monetary Board if he has Sec. 13, NCBA: Salary. — The salary of the Governor and the been connected directly with any multilateral banking or members of the Monetary Board from the private sector shall be financial institution or has a substantial interest in any private fixed by the President of the Philippines at a sum commensurate bank in the Philippines, within one (1) year prior to his to the importance and responsibility attached to the position. appointment; likewise, no member of the Monetary Board shall be employed in any such institution within two (2) years after Sec. 14, NCBA: Withdrawal of Persons Having a Personal the expiration of his term except when he serves as an official Interest. — In addition to the requirements of Republic Act No. representative of the Philippine Government to such institution. 6713, any member of the Monetary Board with personal or pecuniary interest in any matter in the agenda of the Monetary Sec. 10, NCBA: Removal. — The President may remove any Board shall disclose his interest to the Board and shall retire member of the Monetary Board for any of the following reasons: from the meeting when the matter is taken up. The decision taken on the matter shall be made public. The minutes shall (a) If the member is subsequently disqualified under the reflect the disclosure made and the retirement of the member provisions of Section 8 of this Act; or concerned from the meeting.

Sec. 15, NCBA: Exercise of Authority. — In the exercise of (d) Adopt an annual budget for and authorize such expenditures its authority, the Monetary Board shall: by the Bangko Sentral as are in the interest of the effective administration and operations of (a) Issue rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the (e) The Bangko Sentral in accordance with applicable laws and powers vested upon the Monetary Board and the Bangko regulations; and Sentral. The rules and regulations issued shall be reported to the President and the Congress within fifteen (15) days from the (f) Indemnify its members and other officials of the Bangko date of their issuance; Sentral, including personnel of the departments performing supervision and examination functions against all costs and (b) Direct the management, operations, and administration of expenses reasonably incurred by such persons in connection the Bangko Sentral, reorganize its personnel, and issue such with any civil or criminal action, suit or proceedings to which he rules and regulations as it may deem necessary or convenient may be, or is, made a party by reason of the performance of his for this purpose. The legal units of the Bangko Sentral shall be functions or duties, unless he is finally adjudged in such action under the exclusive supervision and control of the Monetary or proceeding to be liable for negligence or misconduct. Board; In the event of a settlement or compromise, indemnification (c) Establish a human resource management system which shall shall be provided only in connection with such matters covered govern the selection, hiring, appointment, transfer, promotion, by the settlement as to which the Bangko Sentral is advised by or dismissal of all personnel. Such system shall aim to establish external counsel that the person to be indemnified did not professionalism and excellence at all levels of the Bangko commit any negligence or misconduct. Sentral in accordance with sound principles of management. The costs and expenses incurred in defending the A compensation structure, based on job evaluation studies and aforementioned action, suit or proceeding may be paid by the wage surveys and subject to the Board's approval, shall be Bangko Sentral in advance of the final disposition of such action, instituted as an integral component of the Bangko Sentral's suit or proceeding upon receipt of an undertaking by or on human resource development program: Provided, That the behalf of the member, officer, or employee to repay the amount Monetary Board shall make its own system conform as closely advanced should it ultimately be determined by the Monetary as possible with the principles provided for under Republic Act Board that he is not entitled to be indemnified as provided in No. 6758: Provided, however, That compensation and wage this subsection. structure of employees whose positions fall under salary grade 19 and below shall be in accordance with the rates prescribed Sec. 16, NCBA: Responsibility. — Members of the Monetary under Republic Act No. 6758. Board, officials, examiners, and employees of the Bangko Sentral who willfully violate this Act or who are guilty of On the recommendation of the Governor, appoint, fix the negligence, abuses or acts of malfeasance or misfeasance or fail remunerations and other emoluments, and remove personnel of to exercise extraordinary diligence in the performance of his the Bangko Sentral, subject to pertinent civil service laws: duties shall be held liable for any loss or injury suffered by the Provided, That the Monetary Board shall have exclusive and final Bangko Sentral or other banking institutions as a result of such authority to promote, transfer, assign, or reassign personnel of violation, negligence, abuse, malfeasance, misfeasance or the Bangko Sentral and these personnel actions are deemed failure to exercise extraordinary diligence. made in the interest of the service and not disciplinary: Provided, further, That the Monetary Board may delegate such Similar responsibility shall apply to members, officers, and authority to the Governor under such guidelines as it may employees of the Bangko Sentral for: (1) the disclosure of any determine. information of a confidential nature, or any information on the discussions or resolutions of the Monetary Board, or about the confidential operations of the Bangko Sentral, unless the disclosure is in connection with the performance of official

functions with the Bangko Sentral, or is with prior authorization (f) Exercise such other powers as may be vested in him by the of the Monetary Board or the Governor; or (2) the use of such Monetary Board. information for personal gain or to the detriment of the Government, the Bangko Sentral or third parties: Provided, Sec. 18, NCBA: Representation of the Monetary Board and however, That any data or information required to be submitted the Bangko Sentral. — The Governor of the Bangko Sentral to the President and/or the Congress, or to be published under shall be the principal representative of the Monetary Board and the provisions of this Act shall not be considered confidential. of the Bangko Sentral and, in such capacity and in accordance with the instructions of the Monetary Board, he shall be b. Governor and Deputy Governors empowered to: Sec. 17, NCBA: Powers and Duties of the Governor. — The Governor shall be the chief executive officer of the Bangko (a) Represent the Monetary Board and the Bangko Sentral in all Sentral. His powers and duties shall be to: dealings with other offices, agencies and instrumentalities of the Government and all other persons or entities, public or private, (a) Prepare the agenda for the meetings of the Monetary Board whether domestic, foreign or international; and to submit for the consideration of the Board the policies and measures which he believes to be necessary to carry out the (b) Sign contracts entered into by the Bangko Sentral, notes purposes and provisions of this Act; and securities issued by the Bangko Sentral, all reports, balance sheets, profit and loss statements, correspondence and other (b) Execute and administer the policies and measures approved documents of the Bangko Sentral. by the Monetary Board; The signature of the Governor may be in facsimile whenever (c) Direct and supervise the operations and internal appropriate; administration of the Bangko Sentral. The Governor may delegate certain of his administrative responsibilities to other (c) Represent the Bangko Sentral, either personally or through officers or may assign specific tasks or responsibilities to any counsel, including private counsel, as may be authorized by the full-time member of the Monetary Board without additional Monetary Board, in any legal proceedings, action or specialized remuneration or allowance whenever he may deem fit or subject legal studies; and to such rules and regulations as the Monetary Board may prescribe; (d) Delegate his power to represent the Bangko Sentral, as provided in subsections (a), (b) and (c) of this section, to other (d) Appoint and fix the remunerations and other emoluments of officers upon his own responsibility: Provided, however, That in personnel below the rank of a department head in accordance order to preserve the integrity and the prestige of his office, the with the position and compensation plans approved by the Governor of the Bangko Sentral may choose not to participate in Monetary Board, as well as to impose disciplinary measures preliminary discussions with any multilateral banking or financial upon personnel of the Bangko Sentral, subject to the provisions institution on any negotiations for the Government within or of Section 15(c) of this Act: Provided, That removal of personnel outside the Philippines. During the negotiations, he may instead shall be with the approval of the Monetary Board; be represented by a permanent negotiator.

(e) Render opinions, decisions, or rulings, which shall be final Sec. 19, NCBA: Authority of the Governor in Emergencies. and executory until reversed or modified by the Monetary Board, — In case of emergencies where time is sufficient to call a on matters regarding application or enforcement of laws meeting of the Monetary Board, the Governor of the Bangko pertaining to institutions supervised by the Bangko Sentral and Sentral, with the concurrence of two (2) other members of the laws pertaining to quasi- banks, as well as regulations, policies Monetary Board, may decide any matter or take any action or instructions issued by the Monetary Board, and the within the authority of the Board. implementation thereof; and

The Governor shall submit a report to the President and of the operations of institutions and the substantive similarities of Congress within seventy-two (72) hours after the action has specific functions to which such rules, modes or standards are to be been taken. applied;

At the soonest possible time, the Governor shall call a meeting 4.2.The conduct of examination to determine compliance with laws of the Monetary Board to submit his action for ratification. and regulations if the circumstances so warrant as determined by the Monetary Board; Sec. 20, NCBA: Outside Interests of the Governor and the Full-time Members of the Board — The Governor of the 4.3. Overseeing to ascertain that laws and regulations are complied Bangko Sentral and the full-time members of the Board shall with; limit their professional activities to those pertaining directly to their positions with the Bangko Sentral. Accordingly, they may 4.4. Regular investigation which shall not be oftener than once a not accept any other employment, whether public or private, year from the last date of examination to determine whether an remunerated or ad honorem, with the exception of positions in institution is conducting its business on a safe or sound basis: eleemosynary, civic, cultural or religious organizations or Provided, That the deficiencies/irregularities found by or discovered whenever, by designation of the President, the Governor or the by an audit shall be immediately addressed; full-time member is tasked to represent the interest of the Government or other government agencies in matters connected 4.5. Inquiring into the solvency and liquidity of the institution; or with or affecting the economy or the financial system of the country. 4.6. Enforcing prompt corrective action.

Sec. 21, NCBA: Deputy Governors. — The Governor of the The Bangko Sentral shall also have supervision over the operations Bangko Sentral, with the approval of the Monetary Board, shall of and exercise regulatory powers over quasi-banks, trust entities appoint not more than three (3) Deputy Governors who shall and other financial institutions which under special laws are subject perform duties as may be assigned to them by the Governor and to Bangko Sentral supervision. . the Board. For the purposes of this Act, “quasi-banks” shall refer to entities In the absence of the Governor, a Deputy Governor designated engaged in the borrowing of funds through the issuance, by the Governor shall act as chief executive of the Bangko endorsement or assignment with recourse or acceptance of deposit Sentral and shall exercise the powers and perform the duties of substitutes as defined in Section 95 of Republic Act No. 7653 the Governor. Whenever the Government is unable to attend (hereafter the “New Central Bank Act”) for purposes of re-lending or meetings of government boards or councils in which he is an ex purchasing of receivables and other obligations. officio member pursuant to provisions of special laws, a Deputy Governor as may be designated by the Governor shall be vested Cases with authority to participate and exercise the right to vote in Busuego v. Court of Appeals, 304 SCRA 473 (1999) such meetings. FACTS CB examiners conducted a regular examination of the books and records of B. SUPERVISION OF BANKS the PAL Employees Savings and Loan Association, Inc. (PESALA), after which, several irregularities committed by Banez, Busuego and Lim 1. Scope and Extent (petitioners), PESALA's directors and officers, were uncovered, among which Sec. 4, GBL: Supervisory Powers. The operations and activities of are: banks shall be subject to supervision of the Bangko Sentral. 1. Questionable investment in a multi-million peso real estate project “Supervision” shall include the following: (Pesalaville).

4.1. The issuance of rules of, conduct or the establishment 2. Conflict of interest in the conduct of business. standards of operation for uniform application to all institutions or functions covered, taking into consideration the distinctive character 3. Unwarranted declaration and payment of dividends.

4. Commission of unsound and unsafe business practices. SC rejected petitioners’ claims that the MB is not vested with "the authority to disqualify persons from occupying positions in institutions under CB MB Resolution No. 805 was issued providing, among others: supervision without proper notice and hearing" nor is it vested with 2. To require the PESALA board of directors to immediately inform its authority "to file civil and criminal cases against its officers/directors for members of the results of the CB examination and their effects on its suspected fraudulent acts." financial condition; The CB, through the MB, is the government agency charged with the 5. To include the names of petitioners in the CB’s watchlist to prevent them responsibility of administering the monetary, banking and credit system of from holding responsible positions in any institution under CB supervision; the country and is granted the power of supervision and examination over banks and non-bank financial institutions performing quasi-banking 6. To require PESALA to enforce collection of the overpayment to the Vista functions of which savings and loan associations, such as PESALA, form part Grande Management and Development Corp. and to require the accounting of The Savings and Loan Association Act (RA 3779) authorizes the MB to of P12.28 million unaccounted and unremitted bank loan proceeds and P3.9 conduct regular yearly examinations of the books and records of savings million other unsupported cash disbursements from the responsible directors and loan associations, to suspend a savings and loan association for and officers; violation of law, to decide any controversy over the obligations and duties of directors and officers, and to take remedial measures, among others. Also, 7. To require the PESALA board to file civil and criminal cases against if any irregularity is discovered in the process, the MB may impose petitioners. appropriate sanctions, such as suspending the offender from holding office or from being employed with the CB, or placing the names of the offenders Petitioners secured a TRO and the declaration of nullity of the MB Resolution in a watchlist. from the RTC, but the CA dismissed the same. Petitioners filed this petition, claiming that they were denied due process. They also alleged that the MB The requirement of prior notice is also relaxed under RA 3779, as Resolution virtually deprived them of their gainful employment, and at the investigations or examinations may be conducted with or without prior same time marked them for judicial prosecution. notice "but always with fairness and reasonable opportunity for the association or any of its officials to give their side." Here, the said ISSUE requirement was properly complied with by the MB. Whether or not Petitioners were depriVed of theIr right to due process , who WINS? At any rate, petitioners' suspension was only preventive in nature and therefore, no notice or hearing was necessary. Until such time that the HELD petitioners have proved their innocence, they may be preventively Petitioners were duly afforded their right to due process by the MB, it suspended from holding office so as not to influence the conduct of appearing that: investigation, and to prevent the commission of further irregularities. 1. They were invited to a conference to discuss the findings made in the regular examination, but they did not attend said conference; Neither were petitioners deprived of their lawful calling as they are free to 2. Petitioner Lim's letter to PESALA's Board, explaining his side of the look for another employment so long as the company involved is not subject controversy, was forwarded to the MB which the latter considered in to CB control and supervision. They can still practice their profession or adopting MB Resolution No. 805; and engage in business as long as these are not within the ambit of MB 3. PESALA's Board’s letter to the MB, explaining the Board's side of the Resolution No. 805. controversy, was properly considered in the adoption of MB Resolution No. 805. Union Bank of the Philippines v. Securities and Exchange Commission, 358 SCRA 479 (2001) The essence of due process is to be afforded a reasonable opportunity to be FACTS heard and to submit any evidence one may have in support of his defense. In 1997, Union Bank sought the opinion of SEC Chairman Yasay as to the What is offensive to due process is the denial of the opportunity to be heard. applicability and coverage of Full Material Disclosure Rule on banks, Petitioners having availed of their opportunity to present their position to contending that these, in effect, amend Revised Securites Act, exempting the MB by their letters-explanation, they were not denied due process.

ANTONIO, PAENG | DELOS SANTOS, CHRISTIAN | FRAGANTE, FRANCIS| HIPOLITO, NIKKI | MARTINEZ, ENZO | PEREZ, ALEX | ROSALES, VIC | SIA, EMAN BANKING LAW 1 | ATTY. ALEXANDER DY | SY 2010-2011 NOTES 225 securities issued or guaranteed by banking institutions from the registration partnerships or associations which are grantees of government-issued requirement provided therein. primary franchises and/or licenses or permits to operate in the Philippines.

Yasay informed petitioner that while the requirements of registration do not That petitioner is under the supervision of the Bangko Sentral ng Pilipinas apply to securities of banks which are exempt under the Revised Securities (BSP) and the Philippine Stock Exchange (PSE) does not exempt it from Act, however, banks with a class of securities listed for trading on the complying with the continuing disclosure requirements embodied in the Philippine Stock Exchange, Inc. are covered by certain Revised Securities assailed Rules. Petitioner, as a bank, is primarily subject to the control of Act Rules governing the filing of various reports with respondent the BSP; and as a corporation trading its securities in the stock market, it is Commission. under the supervision of the SEC. It must be pointed out that even the PSE is under the control and supervision of respondent.14 There is no over- Unsatisfied, Union Bank referred the matter to the PSE, which reiterated supervision here. Each regulating authority operates within the sphere of its that Union Bank is NOT exempt from the filing of certain reports. powers. That stringent requirements are imposed is understandable, considering the paramount importance given to the interests of the Two months after, SEC wrote Union Bank enjoining the latter to show cause investing public. why it should not be penalized for failure to submit certain records as required under the Rules. Otherwise stated, the mere fact that in regard to its banking functions, petitioner is already subject to the supervision of the BSP does not exempt Union Bank failed to respond, prompting SEC to send another "Show Cause" the former reasonable disclosure regulations issued by the SEC. These letter to it and assessing it a fine of P50,000 + P500 for every report not regulations are meant to assure full, fair and accurate disclosure of filed (total of P91,000). Union Bank disputed the assessment through an information for the protection of investors in the stock market. Imposing appeal, which the SEC denied. CA affirmed SEC's orders. such regulations is a function within the jurisdiction of the SEC. Since petitioner opted to trade its shares in the exchange, then it must abide by ISSUE the reasonable rules imposed by the SEC. Whether Union Bank is required to comply with SEC's full disclosure rules

RULING 2. Issuance of Regulations YES. Section 5(a) (3) of the said Act reads: Sec. 4.1, GBL: 4.1. The issuance of rules of, conduct or the "Sec. 5. Exempt Securities. (a) Except expressly provided, the establishment standards of operation for uniform application to all requirement of registration under subsection (a) of Section four of institutions or functions covered, taking into consideration the this Act shall not apply to any of the following classes of securities: distinctive character of the operations of institutions and the xxx xxx xxx substantive similarities of specific functions to which such rules, modes or standards are to be applied; (3) Any security issued or guaranteed by any banking institution authorized to do business in the Philippines, the business of which is Cases substantially confined to banking, or a financial institution licensed Shell Philippines, Inc. v. Central Bank of the Philippines, 162 SCRA to engage in quasi-banking, and is supervised by the Central Bank." 629 (1988) FACTS This provision exempts from registration the securities issued by banking or Congress approved RA 6125 imposing a stabilization tax on consignments financial institutions mentioned in the law. Nowhere does it state or even abroad. imply that petitioner, as a listed corporation, is exempt from complying with the reports required by the assailed RSA Implementing Rules. Subsequenlty , the Central Bank, through it Circular No. 309 (basically setting the parameters for imposing stabilization tax on certain exports). It must be emphasized that petitioner is a commercial banking corporation Shell made exports of seria residues. Later on, Monetary Board issued listed in a stock exchange. Thus, it must adhere not only to banking and Resolution No. 47 subjecting “petroleum pitch and other petroleum other allied special laws, but also to the rules promulgated by Respondent residues” to the stabilization tax. Shell paid the tax under protest. SEC, the government entity tasked not only with the enforcement of the Revised Securities Act, but also the supervision of all corporations,

Shell filed a case to declare Resolution No. 47 null and void and prayed for a 2) What is more, it is presumed that the Monetary Board has exercised its refund. power to fix maximum rates of interest conformably to law, and courts will not interfere with the policy of the Board thereon — unless it acted without ISSUE or in excess of its jurisdiction or in a manifestly arbitrary or unduly Whether or not Resolution No. 47 is null and void? oppressive manner — upon the theory that the Board is, for obvious reasons, in a better position to determine such question. HELD YES. While it is true that under RA 6125 the Central Bank was given the 3) Furthermore, they do not impair vested rights because these circulars authority to promulgate rules and regulations to implement the statutory applied only prospectively. Besides, it is understood that ALL contractual provision in question, we reiterate the principle that this authority is limited obligations are subject — as an implied reservation therein — to the policy only to carrying out into effect what the law being implemented provides. power of the state, of which the regulatory authority of the Central Bank may be regarded as a mere extension. Administrative regulations adopted under legislative authority by a particular department must be in harmony with the provisions of the law, and should It is significant that the law does not merely authorize the Board to "fix the be for the sole purpose of carrying into effect its general provisions. By such maximum rates of interest which banks may pay on deposits and on any regulations, the law itself cannot be extended. other obligations." It, also, expressly empowers the Board — "(i)n order to avoid possible evasion of maximum interest rates set by the ... Board" — to fix also "the maximum rates that banks may pay to or collect from their Central Bank v. Cloribel, 44 SCRA 307 (1972) customers in the form of ... payments of any sort." Indeed, the authority to FACTS establish maximum rates of interest carries with it, NECESSARILY, the In 1964, the Monetary board issued two circulars pegging the maximum power to determine the maximum rates payable as interest for given rate of interest on certain types of deposits and how they are imposed, periods of time. In other words, it connotes the right to specify the length of including allowing interest on savings deposits to accrue not more often time for which the rates thus fixed shall be computed. The determination of than quarterly, and providing that interest on time deposits should only be the rate must include a determinatino of how often that rate can be paid paid on maturity, not in advance. Banco Filipino, in 1966, changed is policy out. allowing interest on savings deposits to accrue monthly, and paying interest on time deposits in advance of their maturity date. THe MB issued a 4) Neverthefurthermoreless, otherwise stated, the objective of the power to resolution directing BP to comply with their circulars. BP replied by applying fix maximum rates of interest payable by banks is to establish a uniform for prohibition in the CFI of Manila, against the implementation of the MB ceiling applicable to all banks, in order to AVOID competition among the circulars. Judge Cloribel granted the TRO, and then issued an injunction. CB same. Banking is exposed to the danger of cutthroat competition. There thus filed the present petition for certiorari with the SC. exists a powerful temptation to try to attract added deposits by offering higher interest rates. This practice tends to reduce banking profits and ISSUE encourages the banker to seek increased earnings by making less What is the nature of the CB's regulatory power (specifically, to impose conservative and more remunerative loans and investments. Not all bankers interest hard caps)? can be trusted to watch competition cut into profits without taking some unwise action to prevent it, and this is what interest hard caps seek to HELD prevent. 1) It is legislative in nature. The CB has no legal obligation to notify and hear anybody, before exercising its power to fix the maximum rates of The purpose of the resolutions and circulars fixing maximum rates of interest that banks may pay on deposits or any other obligations. It is a interest payable by banks on savings deposits and prohibiting the payment settled rule that if the nature of the administrative agency is essentially in advance of interest on time deposits, is to protect the stability of banking legislative, the requirements of notice and hearing are not necessary. The institutions — as vital factors in the national economy — from the danger validity of a rule of future action which affects a group, if vested rights of that may result from cut-throat competition among said institutions. liberty or property are not involved, is not determined according to the same rules which apply in the case of the direct application of a policy to a specific individual.

3. Bank Examination stock savings and loan associations and provident funds Sec. 25, NCBA: Supervision and Examination. — The Bangko organized exclusively for employees of the Bangko Sentral, and Sentral shall have supervision over, and conduct periodic or special except as otherwise provided in this Act; examinations of, banking institutions and quasi-banks, including (b) Directly or indirectly requesting or receiving any gift, present or their subsidiaries and affiliates engaged in allied activities. pecuniary or material benefit for himself or another, from any institution subject to supervision or examination by the Bangko For purposes of this section, a subsidiary means a corporation more Sentral; than fifty percent (50%) of the voting stock of which is owned by a (c) Revealing in any manner, except under orders of the court, the bank or quasi-bank and an affiliate means a corporation the voting Congress or any government office or agency authorized by law, stock of which, to the extent of fifty percent (50%) or less, is owned or under such conditions as may be prescribed by the Monetary by a bank or quasi-bank or which is related or linked to such Board, information relating to the condition or business of any institution or intermediary through common stockholders or such institution. This prohibition shall not be held to apply to the other factors as may be determined by the Monetary Board. giving of information to the Monetary Board or the Governor of the Bangko Sentral, or to any person authorized by either of The department heads and the examiners of the supervising and/or them, in writing, to receive such information; and examining departments are hereby authorized to administer oaths (d) Borrowing from any institution subject to supervision or to any director, officer, or employee of any institution under their examination by the Bangko Sentral shall be prohibited unless respective supervision or subject to their examination and to compel said borrowings are adequately secured, fully disclosed to the the presentation of all books, documents, papers or records Monetary Board, and shall be subject to such further rules and necessary in their judgment to ascertain the facts relative to the regulations as the Monetary Board may prescribe: Provided, true condition of any institution as well as the books and records of however, That personnel of the supervising and examining persons and entities relative to or in connection with the operations, departments are prohibited from borrowing from a bank under activities or transactions of the institution under examination, their supervision or examination. subject to the provision of existing laws protecting or safeguarding the secrecy or confidentiality of bank deposits as well as Sec. 28, NCBA: Examination and Fees. — The supervising and investments of private persons, natural or juridical, in debt examining department head, personally or by deputy, shall examine instruments issued by the Government. the books of every banking institution once in every twelve (12) months, and at such other times as the Monetary Board by an No restraining order or injunction shall be issued by the court affirmative vote of five (5) members, may deem expedient and to enjoining the Bangko Sentral from examining any institution subject make a report on the same to the Monetary Board: Provided, That to supervision or examination by the Bangko Sentral, unless there is there shall be an interval of at least twelve (12) months between convincing proof that the action of the Bangko Sentral is plainly annual examinations. arbitrary and made in bad faith and the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a The bank concerned shall afford to the head of the appropriate bond executed in favor of the Bangko Sentral, in an amount to be supervising and examining departments and to his authorized fixed by the court. The provisions of Rule 58 of the New Rules of deputies full opportunity to examine its books, cash and available Court insofar as they are applicable and not inconsistent with the assets and general condition at any time during banking hours when provisions of this section shall govern the issuance and dissolution requested to do so by the Bangko Sentral: Provided, however, That of the restraining order or injunction contemplated in this section. none of the reports and other papers relative to such examinations shall be open to inspection by the public except insofar as such Sec. 27, NCBA: Prohibitions. — In addition to the prohibitions publicity is incidental to the proceedings hereinafter authorized or is found in Republic Act Nos. 3019 and 6713, personnel of the Bangko necessary for the prosecution of violations in connection with the Sentral are hereby prohibited from: business of such institutions.

(a) Being an officer, director, lawyer or agent, employee, consultant Banking and quasi-banking institutions which are subject to or stockholder, directly or indirectly, of any institution subject to examination by the Bangko Sentral shall pay to the Bangko Sentral, supervision or examination by the Bangko Sentral, except non- within the first thirty (30) days of each year, an annual fee in an

amount equal to a percentage as may be prescribed by the pesos (P100,000) or by imprisonment of not less than one (1) year Monetary Board of its average total assets during the preceding year nor more than five (5) years, or both, in the discretion of the court. as shown on its end-of-month balance sheets, after deducting cash on hand and amounts due from banks, including the Bangko Sentral Sec. 35, NCBA: False Statement. — The willful making of a false and banks abroad. or misleading statement on a material fact to the Monetary Board or to the examiners of the Bangko Sentral shall be punished by a fine Sec. 4, GBL: 4.2.The conduct of examination to determine of not less than One hundred thousand pesos (P100,000) nor more compliance with laws and regulations if the circumstances so than Two hundred thousand pesos (P200,000), or by imprisonment warrant as determined by the Monetary Board; of not more than (5) years, or both, at the discretion of the court. Sec. 36, NCBA: Proceedings Upon Violation of This Act and Sec. 7, GBL: Examination by the Bangko Sentral. – The Bangko Other Banking Laws, Rules, Regulations, Orders or Sentral shall, when examining a bank, have the authority to Instructions. — Whenever a bank or quasi-bank, or whenever any examine an enterprise which is wholly or majority-owned or person or entity willfully violates this Act or other pertinent banking controlled by the bank. laws being enforced or implemented by the Bangko Sentral or any order, instruction, rule or regulation issued by the Monetary Board, 4. Overseeing Compliance the person or persons responsible for such violation shall unless Sec. 4, GBL: 4.3. Overseeing to ascertain that laws and regulations otherwise provided in this Act be punished by a fine of not less than are complied with; Fifty thousand pesos (P50,000) nor more than Two hundred thousand pesos (P200,000) or by imprisonment of not less than two Sec. 58, GBL: Independent Auditor. - The Monetary Board may (2) years nor more than ten (10) years, or both, at the discretion of require a bank, quasi-bank or trust entity to engage the services of the court. an independent auditor to be chosen by the bank, quasi-bank or Whenever a bank or quasi-bank persists in carrying on its business trust entity concerned from a list of certified public accountants in an unlawful or unsafe manner, the Board may, without prejudice acceptable to the Monetary Board. The term of the engagement to the penalties provided in the preceding paragraph of this section shall be as prescribed by the Monetary Board which may either be and the administrative sanctions provided in Section 37 of this Act, on a continuing basis where the auditor shall act as resident take action under Section 30 of this Act. examiner, or on the basis of special engagements; but in any case, Sec. 37, NCBA: Administrative Sanctions on Banks and Quasi- the independent auditor shall be responsible to the bank’s, quasi- banks. — Without prejudice to the criminal sanctions against the bank’s or trust entity’s board of directors. A copy of the report shall culpable persons provided in Sections 34, 35, and 36 of this Act, the be furnished to the Monetary Board. The Monetary Board may also Monetary Board may, at its discretion, impose upon any bank or direct the board of directors of a bank, quasi-bank, trusty entity quasi-bank, their directors and/or officers, for any willful violation of and/or the individual members thereof; to conduct, either personally its charter or by-laws, willful delay in the submission of reports or or by a committee created by the board, an annual balance sheet publications thereof as required by law, rules and regulations; any audit of the bank, quasi-bank or trust entity to review the internal refusal to permit examination into the affairs of the institution; any audit and control system of the bank, quasi-bank or trust entity and willful making of a false or misleading statement to the Board or the to submit a report of such audit. appropriate supervising and examining department or its examiners; any willful failure or refusal to comply with, or violation of, any 5. Enforcement banking law or any order, instruction or regulation issued by the Sec. 34, NCBA: Refusal to Make Reports or Permit Monetary Board, or any order, instruction or ruling by the Governor; Examination. — Any officer, owner, agent, manager, director or or any commission of irregularities, and/or conducting business in officer-in-charge of any institution subject to the supervision or an unsafe or unsound manner as may be determined by the examination by theBangko Sentral within the purview of this Act Monetary Board, the following administrative sanctions, whenever who, being required in writing by the Monetary Board or by the head applicable: of the supervising and examining department willfully refuses to file (a) Fines in amounts as may be determined by the Monetary Board the required report or permit any lawful examination into the affairs to be appropriate, but in no case to exceed Thirty thousand pesos of such institution shall be punished by a fine of not less than Fifty (P30,000) a day for each violation, taking into consideration the thousand pesos (P50,000) nor more than One hundred thousand

attendant circumstances, such as the nature and gravity of the Cases violation or irregularity and the size of the bank or quasi-bank; United Coconut Planters Bank v. E. Ganzon, Inc., 591 SCRA 321 (2009) (b) Suspension of rediscounting privileges or access to Bangko FACTS Sentral credit facilities; E. Ganzon Inc. (EGI) obtained a loan from UCPB, and was able to pay its (c) Suspension of lending or foreign exchange operations or periodic amortization payments, until the economic crisis caught up with authority to accept new deposits or make new investments; them. A memorandum of agreement was entered into between EGI and (d) Suspension of interbank clearing privileges; and/or (e) UCPB for the settlement of the remaining loan. The MOA reflected the revocation of quasi-banking license. remaining amount due, valued at P915,838,822.50. When portion of the Resignation or termination from office shall not exempt such director properties of EGI was sold through auction, it only amounted to or officer from administrative or criminal sanctions. P723,592,000.00, where there was still an unpaid balance of The Monetary Board may, whenever warranted by circumstances, P192,246,822.50. Some other properties valued at P166,127,369.50 was preventively suspend any director or officer of a bank or quasi-bank transferred to UCPB by way of dacion en pago. However, EGI noticed that pending an investigation: Provided, That should the case be not the value they owe changed to P226,963,905.50. This prompted them to finally decided by the Bangko Sentral within a period of one hundred recheck their files, and saw that there are actually two values that points to twenty (120) days after the date of suspension, said director or how much they owe: loan with a heading “ACTUAL” amounting to officer shall be reinstated in his position: Provided, further, That P146,849,412.58, and another with the heading “DISCLOSED TO EGI” when the delay in the disposition of the case is due to the fault, amounting to P226,967,194.80. EGI demanded an explanation from UCPB, negligence or petition of the director or officer, the period of delay which the latter ignored. EGI then filed a case of unfair and unsound bank shall not be counted in computing the period of suspension herein practices against UCPB with the BSP, which dismissed the complaint. EGI provided. appealed with the CA via Rule 43 of the Rules of Court which ruled that BSP The above administrative sanctions need not be applied in the order summarily dismissed the complaint, and remanded the case with the BSP. of their severity. Whether or not there is an administrative proceeding, if the ISSUE institution and/or the directors and/or officers concerned continue Whether the CA had jurisdiction over the case with or otherwise persist in the commission of the indicated practice Whether CA was correct in remanding the case with BSP or violation, the Monetary Board may issue an order requiring the institution and/or the directors and/or officers concerned to cease RULING and desist from the indicated practice or violation, and may further YES and YES. Under sec 9 of BP 129 which amended Rule 43 of the Rules of order that immediate action be taken to correct the conditions Court, the list of quasi-judicial agency listed is not an exclusive list. Since resulting from such practice or violation. The cease and desist order BSP is a quasi-judicial agency, BSP is included under Rule 43 where the CA shall be immediately effective upon service on the respondents. may review the decisions made by the BSP. The respondents shall be afforded an opportunity to defend their CA was also correct in remanding the case with the BSP. BSP summarily action in a hearing before the Monetary Board or any committee dismissed the case filed by EGI against UCPB, where it had not made any chaired by any Monetary Board member created for the purpose, conclusive findings, and since BSP is the proper quasi-judicial agency to upon request made by the respondents within five (5) days from determine such allegations, it must be remanded back to the BSP. The CA their receipt of the order. If no such hearing is requested within said also failed to fined enough evidence on the record to resolve the complaint, period, the order shall be final. If a hearing is conducted, all issues which is the main reason that the CA remanded the case with the BSP. shall be determined on the basis of records, after which the Monetary Board may either reconsider or make final its order. The Governor is hereby authorized, at his discretion, to impose upon C. MONEY FUNCTION banking institutions, for any failure to comply with the requirements Section 49. Definition of Currency. — The word "currency" is hereby of law, Monetary Board regulations and policies, and/or instructions defined, for purposes of this Act, as meaning all Philippine notes and issued by the Monetary Board or by the Governor, fines not in coins issued or circulating in accordance with the provisions of this Act. excess of Ten thousand pesos (P10,000) a day for each violation, the imposition of which shall be final and executory until reversed, Section 50. Exclusive Issue Power. — The Bangko Sentral shall have modified or lifted by the Monetary Board on appeal. the sole power and authority to issue currency, within the territory of the Philippines. No other person or entity, public or private, may put

into circulation notes, coins or any other object or document which, in facsimile, of the President of the Philippines and of the Governor of the the opinion of the Monetary Board, might circulate as currency, nor Bangko Sentral. reproduce or imitate the facsimiles of Bangko Sentral notes without prior authority from the Bangko Sentral. Similarly, the Monetary Board, with the approval of the President of the Philippines, shall prescribe the weight, fineness, designs, denominations The Monetary Board may issue such regulations as it may deem and other characteristics of the coins issued by the Bangko Sentral. In advisable in order to prevent the circulation of foreign currency or of the minting of coins, the Monetary Board shall give full consideration to currency substitutes as well as to prevent the reproduction of facsimiles the availability of suitable metals and to their relative prices and cost of of Bangko Sentral notes. minting.

The Bangko Sentral shall have the authority to investigate, make Section 54. Printing of Notes and Mining of Coins. — The Monetary arrests, conduct searches and seizures in accordance with law, for the Board shall prescribe the amounts of notes and coins to be printed and purpose of maintaining the integrity of the currency. minted, respectively, and the conditions to which the printing of notes and the minting of coins shall be subject. The Monetary Board shall have Violation of this provision or any regulation issued by the Bangko the authority to contract institutions, mints or firms for such operations. Sentral pursuant thereto shall constitute an offense punishable by All expenses incurred in the printing of notes and the minting of coins imprisonment of not less than five (5) years but not more than ten (10) shall be for the account of the Bangko Sentral. years. In case the Revised Penal Code provides for a greater penalty, then that penalty shall be imposed. Section 55. Interconvertibility of Currency. — The Bangko Sentral shall exchange, on demand and without charge, Philippine currency of Section 51. Liability for Notes and Coins. — Notes and coins issued any denomination for Philippine notes and coins of any other by the Bangko Sentral shall be liabilities of the Bangko Sentral and may denomination requested. If for any reason the Bangko Sentral is be issued only against, and in amounts not exceeding, the assets of the temporarily unable to provide notes or coins of the denominations Bangko Sentral. Said notes and coins shall be a first and paramount lien requested, it shall meet its obligations by delivering notes and coins of on all assets of the Bangko Sentral. the denominations which most nearly approximate those requested.

The Bangko Sentral's holdings of its own notes and coins shall not be Section 56. Replacement of Currency Unfit for Circulation. — The considered as part of its currency issue and, accordingly, shall not form Bangko Sentral shall withdraw from circulation and shall demonetize all part of the assets or liabilities of the Bangko Sentral. notes and coins which for any reason whatsoever are unfit for circulation and shall replace them by adequate notes and coins: Provided, however, Section 52. Legal Tender Power. — All notes and coins issued by the That the Bangko Sentral shall not replace notes and coins the Bangko Sentral shall be fully guaranteed by the Government of the identification of which is impossible, coins which show signs of filing, Republic of the Philippines and shall be legal tender in the Philippines for clipping or perforation, and notes which have lost more than two-fifths all debts, both public and private: Provided, however, That, unless (2/5) of their surface or all of the signatures inscribed thereon. Notes otherwise fixed by the Monetary Board, coins shall be legal tender in and coins in such mutilated conditions shall be withdrawn from amounts not exceeding Fifty pesos (P50.00) for denominations of circulation and demonetized without compensation to the bearer. Twenty-five centavos and above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos or less. Section 57. Retirement of Old Notes and Coins. — The Bangko Sentral may call in for replacement notes of any series or denomination Section 53. Characteristics of the Currency. — The Monetary Board, which are more than five (5) years old and coins which are more than with the approval of the President of the Philippines, shall prescribe the (10) years old. denominations, dimensions, designs, inscriptions and other characteristics of notes issued by the Bangko Sentral: Provided, Notes and coins called in for replacement in accordance with this however, That said notes shall state that they are liabilities of the provision shall remain legal tender for a period of one (1) year from the Bangko Sentral and are fully guaranteed by the Government of the date of call. After this period, they shall cease to be legal tender but Republic of the Philippines. Said notes shall bear the signatures, in during the following year, or for such longer period as the Monetary Board may determine, they may be exchanged at par and without

charge in the Bangko Sentral and by agents duly authorized by the Bangko Sentral for this purpose. After the expiration of this latter (b) Submit to the President of the Philippines and the Congress, and period, the notes and coins which have not been exchanged shall cease make public, a detailed report which shall include, as a minimum, a to be a liability of the Bangko Sentral and shall be demonetized. The description and analysis of: Bangko Sentral shall also demonetize all notes and coins which have been called in and replaced. (1) The causes of the rise or fall of the monetary aggregates, of credit or of prices; B. DEMAND DEPOSITS Section 58. Definition. — For purposes of this Act, the term "demand (2) The extent to which the changes in the monetary aggregates, in deposits" means all those liabilities of the Bangko Sentral and of other credit, or in prices have been reflected in changes in the level of banks which are denominated in Philippine currency and are subject to domestic output, employment, wages and economic activity in payment in legal tender upon demand by the presentation of checks. general, and the nature and significance of any such changes; and

Section 59. Issue of Demand Deposits. — Only banks duly (3) The measures which the Monetary Board has taken and the authorized to do so may accept funds or create liabilities payable in other monetary, fiscal or administrative measures which it pesos upon demand by the presentation of checks, and such operations recommends to be adopted. shall be subject to the control of the Monetary Board in accordance with the powers granted it with respect thereto under this Act. Whenever the monetary aggregates, or the level of credit, increases or decreases by more than fifteen percent (15%), or the cost of living Section 60. Legal Character. — Checks representing demand deposits index increases by more than ten percent (10%), in relation to the level do not have legal tender power and their acceptance in the payment of existing at the end of the corresponding month of the preceding year, or debts, both public and private, is at the option of the creditor: Provided, even though any of these quantitative guidelines have not been reached however, That a check which has been cleared and credited to the when in its judgment the circumstances so warrant, the Monetary Board account of the creditor shall be equivalent to a delivery to the creditor of shall submit the reports mentioned in this section, and shall state cash in an amount equal to the amount credited to his account. thereinwhether, in the opinion of the Board, said changes in the monetary aggregates, credit or cost of living represent a threat to the D. MONETARY POLICY stability of the Philippine economy or of important sectors thereof.

1. Domestic Monetary Stabilization The Monetary Board shall continue to submit periodic reports to the Section 61. Guiding Principle. — The Monetary Board shall endeavor President of the Philippines and to Congress until it considers that the to control any expansion or contraction in monetary aggregates which is monetary, credit or price disturbances have disappeared or have been prejudicial to the attainment or maintenance of price stability. adequately controlled.

Section 62. Power to Define Terms. — For purposes of this article 2. International Monetary Stabilization and of this Act, the Monetary Board shall formulate definitions of Section 64. International Monetary Stabilization. — The monetary aggregates, credit and prices and shall make public such Bangko Sentral shall exercise its powers under this Act to preserve definitions and any changes thereof. the international value of the peso and to maintain its convertibility into other freely convertible currencies primarily for, although not Section 63. Action When Abnormal Movements Occur in the necessarily limited to, current payments for foreign trade and Monetary Aggregates, Credit, or Price Level. — Whenever abnormal invisibles. movements in the monetary aggregates, in credit, or in prices endanger the stability of the Philippine economy or important sectors thereof, the Section 65. International Reserves. — In order to maintain the Monetary Board shall: international stability and convertibility of the Philippine peso, the Bangko Sentral shall maintain international reserves adequate to (a) Take such remedial measures as are appropriate and within the meet any foreseeable net demands on the Bangko Sentral for powers granted to the Monetary Board and the Bangko Sentral under foreign currencies. the provisions of this Act; and

In judging the adequacy of the international reserves, the Monetary (a) Take such remedial measures as are appropriate and within the Board shall be guided by the prospective receipts and payments of powers granted to the Monetary Board and the Bangko Sentral foreign exchange by the Philippines. The Board shall give special under the provisions of this Act; and attention to the volume and maturity of the Bangko Sentral's own liabilities in foreign currencies, to the volume and maturity of the (b) Submit to the President of the Philippines and to Congress a foreign exchange assets and liabilities of other banks operating in detailed report which shall include, as a minimum, a description and the Philippines and, insofar as they are known or can be estimated, analysis of: the volume and maturity of the foreign exchange assets and liabilities of all other persons and entities in the Philippines. (1) The nature and causes of the existing or imminent decline; (2) The remedial measures already taken or to be taken by the Section 66. Composition of the International Reserves. — The Monetary Board; international reserves of the Bangko Sentral may include but shall (3) The monetary, fiscal or administrative measures further not be limited to the following assets: proposed; and (4) The character and extent of the cooperation required from (a) Gold; and other government agencies for the successful execution of the policies of the Monetary Board. (b) Assets in foreign currencies in the form of: documents and instruments customarily employed for the international If the resultant actions fail to check the deterioration of the reserve transfer of funds; demand and time deposits in central position of the Bangko Sentral, or if the deterioration cannot be banks, treasuries and commercial banks abroad; foreign checked except by chronic restrictions on exchange and trade government securities; and foreign notes and coins. transactions or by sacrifice of the domestic objectives of a balanced and sustainable growth of the economy, the Monetary Board shall The Monetary Board shall endeavor to hold the foreign exchange propose to the President, with appropriate notice of the Congress, resources of the Bangko Sentral in freely convertible currencies; such additional action as it deems necessary to restore equilibrium moreover, the Board shall give particular consideration to the in the international balance of payments of the Philippines. prospects of continued strength and convertibility of the currencies in which the reserve is maintained, as well as to the anticipated The Monetary Board shall submit periodic reports to the President demands for such currencies. The Monetary Board shall issue and to Congress until the threat to the international monetary regulations determining the other qualifications which foreign stability of the Philippines has disappeared. exchange assets must meet in order to be included in the international reserves of the Bangko Sentral. 3. Basic Tools of Monetary Policy

The Bangko Sentral shall be free to convert any of the assets in its a. Operations in Gold and Foreign Exchange international reserves into other assets as described in subsections Section 69. Purchases and Sales of Gold. — The Bangko Sentral (a) and (b) of this section. may buy and sell gold in any form, subject to such regulations as the Monetary Board may issue. Section 67. Action When the International Stability of the Peso Is Threatened. — Whenever the international reserve of the The purchases and sales of gold authorized by this section shall be Bangko Sentral falls to a level which the Monetary Board considers made in the national currency at the prevailing international market inadequate to meet prospective net demands on the Bangko Sentral price as determined by the Monetary Board. for foreign currencies, or whenever the international reserve appears to be in imminent danger of falling to such a level, or Section 70. Purchases and Sales of Foreign Exchange. — The whenever the international reserve is falling as a result of payments Bangko Sentral may buy and sell foreign notes and coins, and or remittances abroad which, in the opinion of the Monetary Board, documents and instruments of types customarily employed for the are contrary to the national welfare, the Monetary Board shall: international transfer of funds. The Bangko Sentral may engage in future exchange operations.

The Bangko Sentral may engage in foreign exchange transactions may require that any foreign exchange thereafter obtained by any with the following entities or persons only: person residing or entity operating in the Philippines be delivered to the Bangko Sentral or to any bank or agent designated by the (a) Banking institutions operating in the Philippines; Bangko Sentral for the purpose, at the effective exchange rate or (b) The Government, its political subdivisions and rates: Provided, however, That foreign currency deposits made instrumentalities; under Republic Act No. 6426 shall be exempt from these (c) Foreign or international financial institutions; requirements. (d) Foreign governments and their instrumentalities; and (e) Other entities or persons which the Monetary Board is hereby Section 73. Acquisition of Inconvertible Currencies. — The empowered to authorize as foreign exchange dealers, subject Bangko Sentral shall avoid the acquisition and holding of currencies to such rules and regulations as the Monetary Board shall which are not freely convertible, and may acquire such currencies in prescribe. an amount exceeding the minimum balance necessary to cover current demands for said currencies only when, and to the extent In order to maintain the convertibility of the peso, the Bangko that, such acquisition is considered by the Monetary Board to be in Sentral may, at the request of any banking institution operating in the national interest. The Monetary Board shall determine the the Philippines, buy any quantity of foreign exchange offered, and procedures which shall apply to the acquisition and disposition by sell any quantity of foreign exchange demanded, by such institution, the Bangko Sentral of foreign exchange which is not freely utilizable provided that the foreign currencies so offered or demanded are in the international market. freely convertible into gold or United States dollars. This requirement shall not apply to demands for foreign notes and coins. Section 74. Exchange Rates. — The Monetary Board shall The Bangko Sentral shall effect its exchange transactions between determine the exchange rate policy of the country. foreign currencies and the Philippine peso at the rates determined in accordance with the provisions of Section 74 of this Act. The Monetary Board shall determine the rates at which the Bangko Sentral shall buy and sell spot exchange, and shall establish Section 71. Foreign Asset Position of the Bangko Sentral. — deviation limits from the effective exchange rate or rates as it may The Bangko Sentral shall endeavor to maintain at all times a net deem proper. The Bangko Sentral shall not collect any additional positive foreign asset position so that its gross foreign exchange commissions or charges of any sort, other than actual telegraphic or assets will always exceed its gross foreign liabilities. In the event cable costs incurred by it. that the equivalent amount in pesos of the foreign exchange liabilities of the Bangko Sentral exceed twice the equivalent amount The Monetary Board shall similarly determine the rates for other in pesos of the foreign exchange assets of the bank, the Bangko types of foreign exchange transactions by the Bangko Sentral, Sentral shall, within sixty (60) days from the date the limit is including purchases and sales of foreign notes and coins, but the exceeded, submit a report to the Congress stating the origin of margins between the effective exchange rates and the rates thus these liabilities, and the manner in which they will be paid. established may not exceed the corresponding margins for spot exchange transactions by more than the additional costs or Section 72. Emergency Restrictions on Exchange Operations. expenses involved in each type of transactions. — In order to achieve the primary objective of the Bangko Sentral as set forth in Section 3 of this Act, or protect the international Section 75. Operations with Foreign Entities. — The Monetary reserves of the Bangko Sentral in the imminence of, or during an Board may authorize the Bangko Sentral to grant loans to and exchange crisis, or in time of national emergency and to give the receive loans from foreign banks and other foreign or international Monetary Board and the Government time in which to take entities, both public and private, and may engage in such other constructive measures to forestall, combat, or overcome such a operations with these entities as are in the national interest and are crisis or emergency, the Monetary Board, with the concurrence of at appropriate to its character as a central bank. The Bangko Sentral least five (5) of its members and with the approval of the President may also act as agent or correspondent for such entities. of the Philippines, may temporarily suspend or restrict sales of exchange by the Bangko Sentral, and may subject all transactions in gold and foreign exchange to license by the Bangko Sentral, and

Upon authority of the Monetary Board, the Bangko Sentral may shall also bear any other typically commercial or banking risks, pledge any gold or other assets which it possesses as security including exchange risks not assumed by the Bangko Sentral under against loans which it receives from foreign or international entities. the provisions of the preceding section.

b. Regulation of Foreign Exchange Operations of Banks Section 80. Information on Exchange Operations. — The banks Section 76. Foreign Exchange Holdings of the Banks. — In shall report to the Bangko Sentral the volume and composition of order that the Bangko Sentral may at all times have foreign their purchases and sales of gold and foreign exchange each day, exchange resources sufficient to enable it to maintain the and must furnish such additional information as the Bangko Sentral international stability and convertibility of the peso, or in order to may request with reference to the movements in their accounts in promote the domestic investment of bank resources, the Monetary foreign currencies.The Monetary Board may also require other Board may require the banks to sell to the Bangko Sentral or to persons and entities to report to it currently all transactions or other banks all or part of their surplus holdings of foreign exchange. operations in gold, in any shape or form, and in foreign exchange Such transfers may be required for all foreign currencies or for only whether entered into or undertaken by them directly or through certain of such currencies, according to the decision of the Monetary agents, or to submit such data as may be required on operations or Board. The transfers shall be made at the rates established under activities giving rise to or in connection with or relating to a gold or the provisions of Section 74 of this Act. foreign exchange transaction. The Monetary Board shall prescribe the forms on which such declarations must be made. The accuracy The Monetary Board may, whenever warranted, determine the net of the declarations may be verified by the Bangko Sentral by assets and net liabilities of banks and shall, in making such a whatever inspection it may deem necessary. determination, take into account the bank's networth, outstanding liabilities, actual and contingent, or such other financial or c. Loans to Banks and Financial Institutions performance ratios as may be appropriate under the circumstances. Any such determination of net assets and net liabilities shall be A. CREDIT POLICY applied in all banks uniformly and without discrimination. Section 81. Guiding Principles. — The rediscounts, discounts, loans and advances which the Bangko Sentral is authorized to Section 77. Requirement of Balanced Currency Position. — extend to banking institutions under the provisions of the present The Monetary Board may require the banks to maintain a balanced article of this Act shall be used to influence the volume of credit position between their assets and liabilities in Philippine pesos or in consistent with the objective of price stability. any other currency or currencies in which they operate. The banks shall be granted a reasonable period of time in which to adjust their B. NORMAL CREDIT OPERATIONS currency positions to any such requirement. Section 82. Authorized Types of Operations. — Subject to the principle stated in the preceding section of this Act, the Bangko The powers granted under this section shall be exercised only when Sentral may normally and regularly carry on the following credit special circumstances make such action necessary, in the opinion of operations with banking institutions operating in the Philippines: the Monetary Board, and shall be applied to all banks alike and without discrimination. (a) Commercial credits. — The Bangko Sentral may rediscount, discount, buy and sell bills, acceptances, promissory notes and Section 78. Regulation of Non-spot Exchange Transactions. — other credit instruments with maturities of not more than one In order to restrain the banks from taking speculative positions with hundred eighty (180) days from the date of their rediscount, respect to future fluctuations in foreign exchange rates, the discount or acquisition by the Bangko Sentral and resulting from Monetary Board may issue such regulations governing bank transactions related to: purchases and sales of non-spot exchange as it may consider necessary for said purpose. (1) the importation, exportation, purchase or sale of readily saleable goods and products, or their transportation within the Section 79. Other Exchange Profits and Losses. — The banks Philippines; or shall bear the risks of non- compliance with the terms of the foreign (2) the storing of non-perishable goods and products which are duly exchange documents and instruments which they buy and sell, and insured and deposited, under conditions assuring their

preservation, in authorized bonded warehouses or in other Government maturing within three (3) years from the places approved by the Monetary Board. date of the advance; and (7) negotiable bonds issued by the Government of the (b) Production credits. — The Bangko Sentral may rediscount, Philippines, by Philippine provincial, city or municipal discount, buy and sell bills, acceptances, promissory notes and governments, or by any Philippine Government other credit instruments having maturities of not more than instrumentality, and having maturities of not more than three hundred sixty (360) days from the date of their ten (10) years from the date of advance. rediscount, discount or acquisition by the Bangko Sentral and resulting from transactions related to the production or The rediscounts, discounts, loans and advances made in accordance processing of agricultural, animal, mineral, or industrial with the provisions of this section may not be renewed or extended products. Documents or instruments acquired in accordance unless extraordinary circumstances fully justify such renewal or with this subsection shall be secured by a pledge of the extension. respective crops or products: Provided, however, That the crops or products need not be pledged to secure the documents if the Advances made against the collateral named in clauses (6) and (7) original loan granted by the Bangko Sentral is secured by a lien of subsection (d) of this section may not exceed eighty percent or mortgage on real estate property seventy percent (70%) of (80%) of the current market value of the collateral. the appraised value of which equals or exceeds the amount of the loan granted. C. SPECIAL CREDIT OPERATION Section 83. Loans for Liquidity Purposes. — The Bangko (c) Other credits. — Special credit instruments not otherwise Sentral may extend loans and advances to banking institutions for a rediscountable under the immediately preceding subsections (a) period of not more than seven (7) days without any collateral for the and (b) may be eligible for rediscounting in accordance with purpose of providing liquidity to the banking system in times of rules and regulations which the Bangko Sentral shall prescribe. need. Whenever necessary, the Bangko Sentral shall provide funds from non-inflationary sources: Provided, however, That the D. EMERGENCY CREDIT OPERATION Monetary Board shall prescribe additional safeguards for Section 84. Emergency Loans and Advances. — In periods of disbursing these funds.(d) Advances. — The Bangko Sentral national and/or local emergency or of imminent financial panic which may grant advances against the following kinds of collaterals for directly threaten monetary and banking stability, the Monetary fixed periods which, with the exception of advances against Board may, by a vote of at least five (5) of its members, authorize collateral named in clause (4) of the present subsection, shall the Bangko Sentral to grant extraordinary loans or advances to not exceed one hundred eighty (180) days: banking institutions secured by assets as defined hereunder: Provided, That while such loans or advances are outstanding, the (1) gold coins or bullion; debtor institution shall not, except upon prior authorization by the (2) securities representing obligations of the Bangko Sentral Monetary Board, expand the total volume of its loans or or of other domestic institutions of recognized solvency; investments. (3) the credit instruments to which reference is made in subsection (a) of this section; The Monetary Board may, at its discretion, likewise authorize the (4) the credit instruments to which reference is made in Bangko Sentral to grant emergency loans or advances to banking subsection (b) of this section, for periods which shall not institutions, even during normal periods, for the purpose of assisting exceed three hundred sixty (360) days; a bank in a precarious financial condition or under serious financial (5) utilized portions of advances in current amount covered pressures brought by unforeseen events, or events which, though by regular overdraft agreements related to operations foreseeable, could not be prevented by the bank concerned: included under subsections (a) and (b) of this section, Provided, however, That the Monetary Board has ascertained that and certified as to amount and liquidity by the institution the bank is not insolvent and has the assets defined hereunder to soliciting the advance; secure the advances: Provided, further, That a concurrent vote of at (6) negotiable treasury bills, certificates of indebtedness, least five (5) members of the Monetary Board is obtained. notes and other negotiable obligations of the

The amount of any emergency loan or advance shall not exceed the Whenever a financial institution incurs an overdraft in its account sum of fifty percent (50%) of total deposits and deposit substitutes with the Bangko Sentral, the same shall be eliminated within the of the banking institution and shall be disbursed in two (2) or more period prescribed in Section 102 of this Act. tranches. The amount of the first tranche shall be limited to twenty- five percent (25%) of the total deposit and deposit substitutes of the E. CREDIT TERMS institution and shall be secured by government securities to the Section 85. Interest and Rediscount. — The Bangko Sentral extent of their applicable loan values and other unencumbered first shall collect interest and other appropriate charges on all loans and class collaterals which the Monetary Board may approve: Provided, advances it extends, the closure, receivership or liquidations of the That if as determined by the Monetary Board, the circumstances debtor-institution notwithstanding. This provision shall apply surrounding the emergency warrant a loan or advance greater than prospectively. the amount provided hereinabove, the amount of the first tranche may exceed twenty-five percent (25%) of the bank's total deposit The Monetary Board shall fix the interest and rediscount rates to be and deposit substitutes if the same is adequately secured by charged by the Bangko Sentral on its credit operations in applicable loan values of government securities and unencumbered accordance with the character and term of the operation, but after first class collaterals approved by the Monetary Board, and the due consideration has been given to the credit needs of the market, principal stockholders of the institution furnish an acceptable the composition of the Bangko Sentral's portfolio, and the general undertaking to indemnify and hold harmless from suit a conservator requirements of the national monetary policy. Interest and whose appointment the Monetary Board may find necessary at any rediscount rates shall be applied to all banks of the same category time. uniformly and without discrimination.

Prior to the release of the first tranche, the banking institution shall Section 86. Endorsement. — The documents rediscounted, submit to the Bangko Sentral a resolution of its board of directors discounted, bought or accepted as collateral by the Bangko Sentral authorizing the Bangko Sentral to evaluate other assets of the in the course of the credit operations authorized in this article shall banking institution certified by its external auditor to be good and bear the endorsement of the institution from which they are available for collateral purposes should the release of the received. subsequent tranche be thereafter applied for. Section 87. Repayment of Credits. — Documents rediscounted, The Monetary Board may, by a vote of at least five (5) of its discounted or accepted as collateral by the Bangko Sentral must be members, authorize the release of a subsequent tranche on withdrawn by the borrowing institution on the dates of their condition that the principal stockholders of the institution: maturities, or upon liquidation of the obligations which they (a) Furnish an acceptable undertaking to indemnify and hold represent or to which they relate whenever said obligations have harmless from suit a conservator whose appointment the been liquidated prior to their dates of maturity. Monetary Board may find necessary at any time; and (b) Provide acceptable security which, in the judgment of the Banks shall have the right at any time to withdraw any documents Monetary Board, would be adequate to supplement, where which they have presented to the Bangko Sentral as collateral, upon necessary, the assets tendered by the banking institution to payment in full of the corresponding debt to the Bangko Sentral, collateralize the subsequent tranche. including interest charges.

In connection with the exercise of these powers, the prohibitions in Section 88. Other requirements. — The Monetary Board may Section 128 of this Act shall not apply insofar as it refers to prescribe, within the general powers granted to it under this Act, acceptance as collateral of shares and their acquisition as a result of additional conditions which borrowing institutions must satisfy in foreclosure proceedings, including the exercise of voting rights order to have access to the credit of the Bangko Sentral. These pertaining to said shares: Provided, however, That should the conditions may refer to the rates of interest charged by the banks, Bangko Sentral acquire any of the shares it has accepted as to the purposes for which their loans in general are destined, and to collateral as a result of foreclosure proceedings, the Bangko Sentral any other clearly definable aspect of the credit policy of the bank. shall dispose of said shares by public bidding within one (1) year from the date of consolidation of title by the Bangko Sentral.

Section 89. Provisional Advances to the National be issued directly against the international reserve of the Government. — The Bangko Sentral may make direct provisional Bangko Sentral or against the securities which it has acquired advances with or without interest to the National Government to under the provisions of Section 91 of this Act, or may be issued finance expenditures authorized in its annual appropriation: without relation to specific types of assets of the Bangko Provided, That said advances shall be repaid before the end of three Sentral. (3) months extendible by another three (3) months as the Monetary Board may allow following the date the National Government The Monetary Board shall determine the interest rates, received such provisional advances and shall not, in their aggregate, maturities and other characteristics of said obligations of the exceed twenty percent (20%) of the average annual income of the Bangko Sentral, and may, if it deems it advisable, denominate borrower for the last three (3) preceding fiscal years. the obligations in gold or foreign currencies.

d. Open Market Operations Subject to the principles stated in Section 90 of this Act, the Sec. 90, NCBA: Principles of Open Market Operations. — evidences of indebtedness of the Bangko Sentral to which this The open market purchases and sales of securities by the section refers may be acquired by the Bangko Sentral before Bangko Sentral shall be made exclusively in accordance with its their maturity, either through purchases in the open market or primary objective of achieving price stability. through redemptions at par and by lot if the Bangko Sentral has reserved the right to make such redemptions. The evidences of Sec. 91, NCBA: Purchases and Sales of Government indebtedness acquired or redeemed by the Bangko Sentral shall Securities. — In order to achieve the objectives of the national not be included among its assets, and shall be immediately monetary policy, the Bangko Sentral may, in accordance with retired and cancelled. the principle stated in Section 90 of this Act and with such rules and regulations as may be prescribed by the Monetary Board, e. Reserve Requirements buy and sell in the open market for its own account: Section 94. Reserve Requirements. — In order to control the volume of money created by the credit operations of the banking (a) evidences of indebtedness issued directly by the system, all banks operating in the Philippines shall be required to Government of the Philippines or by its political maintain reserves against their deposit liabilities: Provided, That the subdivisions; and Monetary Board may, at its discretion, also require all banks and/or (b) evidences of indebtedness issued by government quasi-banks to maintain reserves against funds held in trust and instrumentalities and fully guaranteed by the liabilities for deposit substitutes as defined in this Act. The required Government. reserves of each bank shall be proportional to the volume of its deposit liabilities and shall ordinarily take the form of a deposit in The evidences of indebtedness acquired under the provisions of the Bangko Sentral. Reserve requirements shall be applied to all this section must be freely negotiable and regularly serviced and banks of the same category uniformly and without discrimination. must be available to the general public through banking institutions and local government treasuries in denominations of Reserves against deposit substitutes, if imposed, shall be a thousand pesos or more. determined in the same manner as provided for reserve requirements against regular bank deposits, with respect to the Sec. 92, NCBA: Issue and Negotiation of Bangko Sentral imposition, increase, and computation of reserves. Obligations. — In order to provide the Bangko Sentral with effective instruments for open market operations, the Bangko The Monetary Board may exempt from reserve requirements Sentral may, subject to such rules and regulations as the deposits and deposit substitutes with remaining maturities of two Monetary Board may prescribe and in accordance with the (2) years or more, as well as interbank borrowings. principles stated in Section 90 of this Act, issue, place, buy and sell freely negotiable evidences of indebtedness of the Bangko Since the requirement to maintain bank reserves is imposed Sentral: Provided, That issuance of such certificates of primarily to control the volume of money, the Bangko Sentral shall indebtedness shall be made only in cases of extraordinary not pay interest on the reserves maintained with it unless the movement in price levels. Said evidences of indebtedness may Monetary Board decides otherwise as warranted by circumstances.

Section 95. Definition of Deposit Substitutes. — The term Section 100. Computation on Reserves. — The reserve position "deposit substitutes" is defined as an alternative form of obtaining of each bank or quasi- bank shall be calculated daily on the basis of funds from the public, other than deposits, through the issuance, the amount, at the close of business for the day, of the institution's endorsement, or acceptance of debt instruments for the borrower's reserves and the amount of its liability accounts against which own account, for the purpose ofrelending or purchasing of reserves are required to be maintained: Provided, That with receivables and other obligations. These instruments may include, reference to holidays or non-banking days, the reserve position as but need not be limited to, bankers acceptances, promissory notes, calculated at the close of the business day immediately preceding participations, certificates of assignment and similar instruments such holidays and non-banking days shall apply on such days. with recourse, and repurchase agreements. The Monetary Board shall determine what specific instruments shall be considered as For the purpose of computing the reserve position of each bank or deposit substitutes for the purposes of Section 94 of this Act: quasi-bank, its principal office in the Philippines and all its branches Provided, however, That deposit substitutes of commercial, and agencies located therein shall be considered as a single unit. industrial and other non-financial companies for the limited purpose of financing their own needs or the needs of their agents or dealers Section 101. Reserve Deficiencies. — Whenever the reserve shall not be covered by the provisions of Section 94 of this Act. position of any bank or quasi- bank, computed in the manner specified in the preceding section of this Act, is below the required Section 96. Required Reserves Against Peso Deposits. — The minimum, the bank or quasi-bank shall pay the Bangko Sentral one- Monetary Board may fix and, when it deems necessary, alter the tenth of one percent (1/10 of 1%) per day on the amount of the minimum reserve ratios to peso deposits, as well as to deposit deficiency or the prevailing ninety-one-day treasury bill rate plus substitutes, which each bank and/or quasi-bank may maintain, and three percentage points, whichever is higher: Provided, however, such ratio shall be applied uniformly to all banks of the same That banks and quasi-banks shall ordinarily be permitted to offset category as well as to quasi-banks. any reserve deficiency occurring on one or more days of the week with any excess reserves which they may hold on other days of the Section 97. Required Reserves Against Foreign Currency same week and shall be required to pay the penalty only on the Deposits. — The Monetary Board is similarly authorized to prescribe average daily deficiency during the week. In cases of abuse, the and modify the minimum reserve ratios applicable to deposits Monetary Board may deny any bank or quasi-bank the privilege of denominated in foreign currencies. offsetting reserve deficiencies in the aforesaid manner.

Section 98. Reserves Against Unused Balances of Overdraft If a bank or quasi-bank chronically has a reserve deficiency, the Lines. — In order to facilitate Bangko Sentral control over the Monetary Board may limit or prohibit the making of new loans or volume of bank credit, the Monetary Board may establish minimum investments by the institution and may require that part or all of the reserve requirements for unused balances of overdraft lines. net profits of the institution be assigned to surplus.

The powers of the Monetary Board to prescribe and modify reserve The Monetary Board may modify or set aside the reserve deficiency requirements against unused balances of overdraft lines shall be the penalties provided in this section, for part or the entire period of a same as its powers with respect to reserve requirements against strike or lockout affecting a bank or a quasi-bank as defined in the demand deposits. Labor Code, or of a national emergency affecting operations of banks or quasi-banks. The Monetary Board may also modify or set Section 99. Increase in Reserve Requirements. — Whenever in aside reserved deficiency penalties for rehabilitation program of a the opinion of the Monetary Board it becomes necessary to increase bank. reserve requirements against existing liabilities, the increase shall be made in a gradual manner and shall not exceed four percentage Section 102. Interbank Settlement. — The Bangko Sentral shall points in any thirty- day period. Banks and other affected financial establish facilities for interbank clearing under such rules and institutions shall be notified reasonably in advance of the date on regulations as the Monetary Board may prescribe: Provided, That which such increase is to become effective. the Bangko Sentral may charge administrative and other fees for the maintenance of such facilities.

The deposit reserves maintained by the banks in the Bangko Sentral SECTION 112. Representation with Other Financial Institutions. — in accordance with the provisions of Section 94 of this Act shall The Bangko Sentral may be authorized by the Government to represent it in serve as basis for the clearing of checks and the settlement of dealings, negotiations or transactions with the International Bank for interbank balances, subject to such rules and regulations as the Reconstruction and Development and with other foreign or international Monetary Board may issue with respect to such operations: financial institutions or agencies. The President may, however, designate Provided, That any bank which incurs on overdrawing in its deposit any of his other financial advisors to jointly represent the Government in account with the Bangko Sentral shall fully cover said overdraft, such dealings, negotiations or transactions. including interest thereon at a rate equivalent to one- tenth of one percent (1/10 of 1%) per day or the prevailing ninety-one-day SECTION 113. Official Deposits. — The Bangko Sentral shall be the treasury bill rate plus three percentage points, whichever is higher, official depository of the Government, its political subdivisions and not later than the next clearing day: Provided, further, That instrumentalities as well as of government-owned or controlled corporations settlement of clearing balances shall not be effected for any account and, as a general policy, their cash balances should be deposited with the which continues to be overdrawn for five (5) consecutive banking Bangko Sentral, with only minimum working balances to be held by days until such time as the overdrawing is fully covered or otherwise government-owned banks and such other banks incorporated in the converted into an emergency loan or advance pursuant to the Philippines as the Monetary Board may designate, subject to such rules and provisions of Section 84 of this Act: Provided, finally, That the regulations as the Board may prescribe: Provided, That such banks may appropriate clearing office shall be officially notified of banks with hold deposits of thepolitical subdivisions and instrumentalities of the overdrawn balances. Banks with existing overdrafts with the Bangko Government beyond their minimum working balances whenever such Sentral as of the effectivity of this Act shall, within such period as subdivisions or instrumentalities have outstanding loans with said banks. may be prescribed by the Monetary Board, either convert the overdraft into an emergency loan or advance with a plan of The Bangko Sentral may pay interest on deposits of the Government or of payment, or settle such overdrafts, and that, upon failure to so its political subdivisions and instrumentalities, as well as on deposits of comply herewith, the Bangko Sentral shall take such action against banks with the Bangko Sentral. the bank as may be warranted under this Act. SECTION 114. Fiscal Operations. — The Bangko Sentral shall open a Section 103. Exemption from Attachment and Other general cash account for the Treasurer of the Philippines, in which the liquid Purposes. — Deposits maintained by banks with the Bangko funds of the Government shall be deposited. Sentral as part of their reserve requirements shall be exempt from attachment, garnishments, or any other order or process of any Transfers of funds from this account to other accounts shall be made only court, government agency or any other administrative body issued upon order of the Treasurer of the Philippines. to satisfy the claim of a party other than the Government, or its political subdivisions or instrumentalities. SECTION 115. Other Banks as Agents of the Bangko Sentral. — In the performance of its functions as fiscal agent, the Bangko Sentral may engage F. BANKER AND FINANCIAL ADVISER OF GOVERNMENT the services of other government-owned and controlled banks and of other domestic banks for operations in localities at home or abroad in which the ARTICLE I. FUNCTIONS AS BANKER OF THE GOVERNMENT Bangko Sentral does not have offices or agencies adequately equipped to perform said operations: Provided, however, That for fiscal operations in SECTION 110. Designation of Bangko Sentral as Banker of the foreign countries, the Bangko Sentral may engage the services of Government. — The Bangko Sentral shall act as a banker of the foreign banking and financial institutions. Government, its political subdivisions and instrumentalities. SECTION 116. Remuneration for Services. — The Bangko Sentral may SECTION 111. Representation with the International Monetary Fund. charge equitable rates, commissions or fees for services which it renders to — The Bangko Sentral shall represent the Government in all dealings, the Government, its political subdivisions and instrumentalities. negotiations and transactions with the International Monetary Fund and shall carry such accounts as may result from Philippine membership in, or operations with, said Fund.

ARTICLE II. THE MARKETING AND STABILIZATION OF SECURITIES obligations, but shall not endeavor to alter movements of the market FOR THE ACCOUNT OF THE GOVERNMENT resulting from basic changes in the pattern or level of interest rates.

A. THE ISSUE AND PLACING OF GOVERNMENT SECURITIES The Monetary Board shall issue such regulations as may be necessary to implement the provisions of this section. SECTION 117. Issue of Government Obligations. — The issue of securities representing obligations of the Government, its political SECTION 121. Resources of the Securities Stabilization Fund. — subdivisions or instrumentalities, may be made through the Bangko Sentral, Subject to Section 132 of this Act, the resources of the Securities which may act as agent of, and for the account of, the Government or its Stabilization Fund shall come from the balance of the fund as held by the respective subdivisions or instrumentality, as the case may be: Provided, Central Bank under Republic Act No. 265 as of the effective date of this Act. however, That the Bangko Sentral shall not guarantee the placement of said securities, and shall not subscribe to their issue except to replace its SECTION 122. Profits and Losses of the Fund. — The Securities maturing holdings of securities with the same type as the maturing Stabilization Fund shall retain net profits which it may make on its securities. operations, regardless of whether said profits arise from capital gains or from interest earnings. The Fund shall correspondingly bear any net losses SECTION 118. Methods of Placing Government Securities. — The which it may incur. Bangko Sentral may place the securities to which the preceding section refers through direct sale to financial institutions and the public. ARTICLE III. FUNCTIONS AS FINANCIAL ADVISOR OF THE GOVERNMENT The Bangko Sentral shall not be a member of any stock exchange or syndicate, but may intervene therein for the sole purpose of regulating their SECTION 123. Financial Advice on Official Credit Operations. — Before operations in the placing of government securities. undertaking any credit operation abroad, the Government, through the Secretary of Finance, shall request the opinion, in writing, of the Monetary The Government, or its political subdivisions or instrumentalities, shall Board on the monetary implications of the contemplated action. Such reimburse the Bangko Sentral for the expenses incurred in the placing of the opinions must similarly be requested by all political subdivisions and aforesaid securities. instrumentalities of the Government before any credit operation abroad is undertaken by them. SECTION 119. Servicing and Redemption of the Public Debt. — The servicing and redemption of the public debt shall also be effected through The opinion of the Monetary Board shall be based on the gold and foreign the Bangko Sentral. exchange resources and obligations of the nation and on the effects of the proposed operation on the balance of payments and on monetary B. BANGKO SENTRAL SUPPORT OF THE GOVERNMENT aggregates. SECURITIES MARKET Whenever the Government, or any of its political subdivisions or SECTION 120. The Securities Stabilization Fund. — There shall be instrumentalities, contemplates borrowing within the Philippines, the prior established a "Securities Stabilization Fund" which shall be administered by opinion of the Monetary Board shall likewise be requested in order that the the Bangko Sentral for the account of the Government. Board may render an opinion on the probable effects of the proposed operation on monetary aggregates, the price level, and the balance of The operations of the Securities Stabilization Fund shall consist of purchases payments. and sales, in the open market, of bonds and other evidences of indebtedness issued or fully guaranteed by the Government. The purpose of SECTION 124. Representation on the National Economic and these operations shall be to increase the liquidity and stabilize the value of Development Authority. — In order to assure effective coordination said securities in order thereby to promote investment in government between the economic, financial and fiscal policies of the Government and obligations. the monetary, credit and exchange policies of the Bangko Sentral, the Deputy Governor designated by the Governor of the Bangko Sentral shall be The Monetary Board shall use the resources of the Fund to prevent, or an ex officio member of the National Economic and Development Authority moderate, sharp fluctuations in the quotations of said government Board.