Catindig Revised 2007 NOSCL Supplement
Page 1 of 25 10. 11. 12. 13. 14. 15. 16. Payroll of banking
employees; Telephone operator/receptionist services; Sales/disposal
of acquired assets; Personnel training and development; Building,
ground and other facilities maintenance; legal services from local
legal counsel; and compliance risk assessment and testing.
CHAPTER I: BANGKO SENTRAL NG PILIPINAS LAWSUPPLEMENT TO
PARAGRAPH 1.17 (A), PP. 12-13 On account of the issuance by the BSP
of new coins in higher denominations after the affectivity of the
BSP Law in 1993, the BSP, pursuant to Section 52 of the BSP Law and
Monetary Board Resolution No. 862, dated July 6, 2006, issued
Circular No. 537, dated July 18, 2006, which adjusted the maximum
amount of coins to be considered as legal tender as follows: 1.
(P1,000) for denominations of 1-Piso, 5-Piso and 10-Piso coins; and
2. (P100) for denominations of 1-sentimo, 5-sentimo, 10-sentimo,
and 25sentimo.
Banks are required to assume a degree of diligence higher than
that of a good father (Philippine Banking Corporation vs. CA, G.R.
No. 127469, January 15, 2004) The Court held that Section 2 of the
GBL of 2000 expressly imposes a fiduciary duty on banks when it
declares that the State recognizes the fiduciary nature of banking
that requires high standards of integrity and performance. For this
reason, the fiduciary nature of banking requires a bank to assume a
degree of diligence higher than that of a good father of a family.
Thus, the Court ruled: The BANK is liable to Marcos for offsetting
his time deposits with a fictitious promissory note. The existence
of PN No. 20-979-83 could have been easily proven had the BANK
presented the original copies of the promissory note and its
supporting evidence. In lieu of the original copies, the BANK
presented the machine copies of the duplicate of the documents.
These substitute documents have no evidentiary value. Its failure
to explain the absence of the original documents and to maintain a
record of the offsetting of this loan with the time deposits bring
to fore the Banks dismal failure to fulfill its fiduciary duty to
Marcos.
CHAPTER II: GENERAL BANKING LAW OF 2000SUPPLEMENT TO PARAGRAPH
2.31, PP. 32-33 Under BSP Circular No. 488, dated June 21, 2005,
and BSP Circular No. 493, dated September 16, 2005, the BSP added
the following functions, services or activities that banks could
outsource subject to prior approval of the Monetary Board: 1.
Internal audit (subject to a number of conditions); 2. Marketing
loans, deposits and other bank products and services, provided it
does not involve the actual opening of deposit accounts; 3. General
bookkeeping and accounting services, provided that these activities
do not include servicing bank deposits or other inherent banking
functions; 4. Offsite record storage services; 5. Back-up and data
recovery operations. 6. Without need of prior Monetary Board
approval, banks may outsource the following functions, services or
activities: 1. Printing of bank loan statements and other
non-deposit records, bank forms and promotional materials; 2.
Transfer agent services for debt and equity securities; 3.
Messenger, courier and postal services; 4. Security guard services;
5. Vehicle service contracts; 6. Janitorial services; 7. Public
relations services, procurement services, and temporary staffing,
provided that these activities do not include servicing bank
deposits or other inherent banking functions; 8. Sorting and
bagging of notes and coins; 9. Maintenance of computer
hardware;
CHAPTER IV: PHILIPPINE DEPOSIT INSURANCE CORPORATIONREVISED
CHAPTER IV, PP. 53-56 4.1 What is the purpose of the law? (Sec. 1)
The purpose of the law is to create a government-owned and
controlled entity, the Philippine Deposit Insurance Corporation,
which shall insure the deposit liabilities of all banks entitled to
the benefits of insurance under the Act. Such insurance is intended
to protect depositors from situations that prevent banks from
paying out deposits, as in bank failures or closures, and to
encourage people to deposit in banks.
Catindig Revised 2007 NOSCL Supplement 4.2 What are the main
functions of the PDIC? (a) Insurance of banks (Sec. 5, et seq.) The
PDIC insures the deposit liabilities of banks. For this purpose, it
assesses and collects insurance assessments from member-banks.
Whenever an insured bank is closed, the PDIC processes and services
claims of insured deposits. (b) Examination of banks (Secs. 8 and
9) The PDIC may examine a bank with the prior approval of the
Monetary Board of the Bangko Sentral ng Pilipinas. Such examination
may extend to all the affairs of the bank and includes the
authority to investigate frauds, irregularities and anomalies
committed in the bank. (c) Rehabilitation of banks (Sec. 17) Upon
determination by the PDIC that (i) a bank is in danger of closing,
(ii) the continued operation of such bank is essential to provide
adequate banking service in the community or maintain financial
stability in the economy, and (iii) the actual liquidation and
payoff of the bank will be more expensive than the extension of
financial assistance to the bank, it may make loans to, purchase
the assets or assume the liabilities of, or make deposits in, said
bank to prevent its closing. Authority may also be exercised by the
PDIC over a closed bank. (d) Receivership of closed banks (Secs. 8
and 10; see also Sec. 30, RA 7653) As receiver, the PDIC shall
control, manage and administer the affairs of the closed bank for
the purpose of preserving its assets for the benefit of bank
creditors . (e) Liquidation of closed banks (Sec. 30, RA 7653) If
the closed bank cannot be rehabilitated, the PDIC would proceed
with its liquidation. This would involve the conversion of the
assets of the bank into cash for distribution to the creditors in
accordance with the provisions of the NCC on concurrence and
preference of credits. Insurance Coverage 4.3 Deposit liabilities
are required to be insured with the PDIC? (Sec. 5) The deposit
liabilities of any bank, including the branches in the Philippines
of foreign banks, engaged in the business of receiving deposits are
required . 4.4 Is PDIC insurance coverage required of foreign
currency deposits maintained in Philippine banks? Yes. Section 9 of
the Foreign Currency Deposit Act (RA 6426) and Section 79 of CB
Circular No. 1389, dated August 13, 1993, require foreign currency
deposits to be insured under the PDIC Law. Foreign currency
depositors are entitled to receive payment in the same currency in
which the insured deposit is denominated. 4.5 Are the deposit
liabilities of a local bank payable in its branch located abroad
covered by PDIC insurance? (Sec. 4[f]) No, they would not be
covered by PDIC insurance. However, subject to PDIC approval, a
local bank that maintains a branch outside the Philippines may
Page 2 of 25 elect to include for insurance its deposit
obligations payable only at such branch. 4.6 When the PDIC becomes
liable to pay the insured deposits? (Sec. 14) The PDIC becomes
liable to pay the insured deposits in a bank when the bank is
closed by the Monetary Board of the Bangko Sentral ng Pilipinas,
that is, prohibited from doing further business in the Philippines,
on account of insolvency and other grounds under the law (see
Paragraph 1.10). 4.7 Does PDIC insurance cover risks other than
bank closure? No, PDIC insurance covers only the risk of bank
closure ordered by the Monetary Board. Losses that a bank may
suffer due to natural calamities, theft, war, strike, etc. would
not be covered by PDIC insurance. 4.8 Extent of the PDICs liability
to a bank depositor? (Sec. 4[g]) The PDICs liability is up to
P250,000 per depositor per capacity. 4.9 What is an insured
deposit? (Sec. 4[g]; see also PDIC Bulletin No. 2004-04, August 12,
2004) An insured deposit is the amount due any depositor for
deposits in an insured bank net of any matured or unmatured
obligation of the depositor to the insured bank as of the date of
closure but not to exceed P250,000. In determining s depositors
insured deposit, the PDIC shall add together all deposits in the
bank maintained by the depositor in the same right and capacity for
his benefit either in his own name or in the name of others. The
outstanding balance of each account would also be adjusted to take
into account any interest earned by the account as of the date of
closure of the bank less any withholding tax due on such interest.
4.10 How would joint accounts be insured and what rules would apply
in the payment of PDIC insurance to such accounts? (Sec. 4[g]; see
also PDIC Bulletin No. 2004-04, August 12, 2004) (a) A joint
account, regardless of whether the conjunction and, or, or and/or
is used, shall be insured separately from any individually-owned
deposit account. The maximum insured deposit of P250,000 shall be
divided into as many equal shares as there are depositors unless a
different sharing is stipulated in the document of deposit.
Example: Pedro and Mario have P400,000 in a joint savings account
with ABC Bank. Pedro also has P300,000 in another savings account
that he maintains with the same bank solely in his name. Marios
total deposit is P200,000 while that of Pedro is P500,000. If ABC
Bank were closed, Mario could claim P125,000 from PDIC
(representing his 50% share of the maximum insured deposit of the
joint account with
Catindig Revised 2007 NOSCL Supplement Pedro) while Pedro could
claim a total of P250,000 (P125,000, representing his 50% share of
the maximum insured deposit of the joint account with Mario), plus
P125,000 out of the savings account solely in his name. (b) If the
account were held by a juridical person jointly with one or more
natural persons, the maximum insured deposit shall be presumed to
belong entirely to such juridical person or entity. Example: XYZ
Corporation and Pedro have P250,000 in a joint savings account with
ABC Bank. Pedro also has P250,000 in another savings account that
he maintains with the same bank solely in his name. If ABC Bank
were closed, XYZ Corporation could claim P250,000 from PDIC. The
P250,000 in the joint account would be presumed to belong entirely
to XYZ Corporation. (c) In case one of the co-depositors in a joint
and/or or or account has an obligation to the closed bank covered
by a hold-out agreement (i.e., a security arrangement whereby the
obligation is secured by the account), the obligation secured by
the agreement shall be deducted from the balance of the joint
account regardless of the fact that only one of the co-depositors
is indebted to the bank. Example: Pedro and Mario have P200,000 in
a joint and/or savings account with ABC Bank. Pedro borrowed
P50,000 from the bank and secured it with a hold-out on the joint
and/or savings account. If ABC Bank were closed, Pedro and Mario
could each claim only P75,000 from the PDIC. (d) In case the
deposit is a joint and account, the obligation shall be deducted
only from the share of the indebted co-depositor unless the other
co-depositor is himself a co-signatory to the hold-out agreement.
Example: If the account in the immediately preceding problem were a
joint and account, Pedro could claim only P50,000 from the PDIC.
Mario could claim P100,000. (e) Where the deposit is not covered by
a hold-out agreement, the obligation shall be deducted only from
the share of the indebted co-depositor regardless of whether the
deposit is a joint and, or, or and/or account. Payment of Insured
Deposits 4.11 Is the PDIC required to notify the depositors of a
closed bank of the fact of such closure and the need to file their
claims? (Sec. 16) Yes, The PDIC shall publish the notice to
depositors once a week for (3) consecutive weeks in a newspaper of
general circulation or, in a newspaper
Page 3 of 25 circulated in the community or communities where
the closed bank or its branches are located. 4.12 Is there a
prescriptive period for the filing of claims with the PDIC by the
depositors of a closed bank? (Sec. 16[e]) Yes. A depositor of a
closed bank must file his claim with the PDIC within 2 years from
actual takeover of the closed bank by PDIC. If he does not, all his
rights against the PDIC in respect of the insured deposits shall be
barred. However, all the rights of the depositor against the closed
bank and its shareholders or the receivership estate to which PDIC
may have become subrogated shall thereupon revert to the depositor.
4.13 When PDIC required to settle a claim for an insured deposit?
(Sec. 14) The PDIC is required to settle the claim within 6 months
from the date of filing thereof provided that the claim was filed
within 2 years from actual takeover of the closed bank by PDIC. The
6-month period shall not apply if the documents of the claimant are
incomplete or the validity of the claim requires the resolution of
issues of facts or law by another office, body or agency,
independently or in coordination with the PDIC. 4.14 When an
insured bank is closed, how will payment of the insured deposits in
such bank be made by the PDIC? (Sec. 14) The PDIC shall pay either
(i) in cash or (ii) by making available to each depositor a
transferred deposit in another insured bank in an amount equal to
the insured deposit. 4.15 What is a transferred deposit? (Sec.
4[h]) It is a deposit in an insured bank made available to a
depositor by the PDIC as payment of the insured deposit of such
depositor in a closed bank and assumed by another insured bank. By
paying its liabilities to depositors in this manner, the PDIC hopes
to persuade these depositors to keep their savings in banks where
such funds could be lent out, rather than hoarded and kept out of
the banking system. 4.16 Effect of payment to the depositor of his
insured deposit? (Sec. 16[b]) It (i) discharges the PDIC from any
further liability to the depositor, and (ii) subrogates the PDIC to
all the rights of the depositor against the closed bank to the
extent of such payment. 4.17 What is the nature of the payments of
insured deposits made by the PDIC and do they enjoy any preference
under Article 2244 of the Civil Code? (Sec. 15) All payments by the
PDIC of insured deposits in closed banks partake of the nature of
public funds, as such, must be considered a preferred credit
similar
Catindig Revised 2007 NOSCL Supplement to taxes due to the
National Government in the order of preference under Article 2244
of the NCC. 4.18 If the deposit account in a closed bank were more
than P250,000, would it still be possible for the depositor to
recover the excess? Yes. Assuming that the bank is not
rehabilitated or taken over by another bank, the depositor could
claim the excess amount from the liquidator of the closed bank.
However, the liquidator might not be able to pay the claim if the
final liquidation of the remaining assets of the closed bank does
not generate enough cash to pay such claim. Such claim would also
be subject to the provisions of the Civil Code on concurrence and
preference of credits. If the bank is rehabilitated or taken over
by another bank, the rehabilitator or the bank taking over the
closed bank would usually assume the liability for the payment of
the excess deposits. Powers of the PDIC 4.19 What is the extent of
the power of the PDIC to examine banks? (Sec. 8) The PDIC may
examine a bank with the prior approval of the Monetary Board.
However, no examination can be conducted within 12 months from the
last examination date. 4.20 Could the PDIC provide legal assistance
to its directors, officers, employees or agents? (Sec. 9[f]) Yes.
The PDIC shall underwrite or advance the litigation expenses of,
including legal fees and other expenses of external counsel, or
provide legal assistance to, its directors, officers, employees or
agents in connection with any civil, criminal, administrative or
any other action or proceeding to which such directors, officers,
employees or agents are made a party by reason of, or in connection
with, their exercise of authority or performance of functions and
duties under the PDIC Law. 4.21 As receiver, does the PDIC take
over the powers, functions and duties of the directors, officers
and stockholders of the closed bank? (Sec. 10[b], 1st paragraph)
Yes. The PDIC as receiver shall control, manage and administer the
affairs of the closed bank. Effective immediately upon its takeover
as receiver of such bank, the powers, functions and duties, as well
as all allowances, remunerations and perquisites of the directors,
officers, and stockholders of such bank are suspended, and the
relevant provisions of the Articles of Incorporation and By-laws of
the closed bank are likewise deemed suspended. 4.22
Page 4 of 25 What is the status of the assets of the closed bank
under receivership? (Sec. 10[b], 2nd paragraph) The assets of the
closed bank under receivership shall be deemed in custodia legis in
the hands of the receiver. From the time the closed bank is placed
under such receivership, its assets shall not be subject to
attachment, garnishment, execution, levy or any other court
processes. 4.23 What are some of the additional powers of the PDIC
as a receiver? (Sec. 10[c]) (a) suspend or terminate the employment
of officers and employees of the closed bank; provided, that
payment of separation pay or benefits shall be made only after the
closed bank has been placed under liquidation pursuant to the order
of the Monetary Board under Section 30 of R.A. 7653, and that such
payment shall be made from available funds of the bank after
deducting reasonable expenses for receivership and liquidation; (b)
hire or retain private counsels as may be necessary; (c) if the
stipulated interest on deposits is unusually high compared with the
prevailing applicable interest rate, the PDIC as receiver may
exercise such powers that may include a reduction of the interest
rate to a reasonable rate; provided, that any modification or
reduction shall apply only to unpaid interest. 4.24 Is the PDIC
required to pay docket and other court fees in the cases it might
file as receiver for the recovery, or involving any asset, of the
closed bank? (Sec. 11) Yes. However, payment of docket and other
court fees shall be deferred until the action is terminated with
finality. Any such fees shall be a first lien on any judgment in
favor of the closed bank or, in case of unfavorable judgment, such
fees shall be paid as administrative expenses during distribution
of the assets of the closed bank.
CHAPTER V: TRUTH IN LENDING ACTADDITIONAL SUPREME COURT CASES 1.
Excessive interests, penalties and other charges not revealed in
disclosure statements issued by banks, even if stipulated in the
promissory notes, cannot be given effect under the Truth in Lending
Act (New Sampaguita Builders Construction, Inc., et al. vs.
Philippine National Bank, G.R. No. 148753, July 30, 2004) The Court
ruled in this case that excessive interests, penalties and other
charges not revealed in disclosure statements issued by banks, even
if stipulated in the promissory notes, cannot be given effect under
the Truth in Lending Act. The Court further said: No penalty
charges or increases thereof appear either in the Disclosure
Statements or in any of the clauses in the second and
Catindig Revised 2007 NOSCL Supplement the third Credit
Agreements earlier discussed. While a standard penalty charge of 6
percent per annum has been imposed on the amounts stated in all
three Promissory Notes still remaining unpaid or unrenewed when
they fell due, there is no stipulation therein that would justify
any increase in that charges. The effect, therefore, when the
borrower is not clearly informed of the Disclosure Statements --
prior to the consummation of the availment or drawdown -- is that
the lender will have no right to collect upon such charge or
increases thereof, even if stipulated in the Notes. The time is now
ripe to give teeth to the often ignored forty-one-year old Truth in
Lending Act and thus transform it from a sniveling paper tiger to a
growling financial watchdog of hapless borrowers. 2. Failure to
disclose required information in disclosure statement cured by
disclosure thereof in loan transaction documents (DBP vs. Arcilla,
G.R. No. 161397, June 30, 2005) The Court ruled that the failure of
the DBP to disclose the required information in the disclosure
statement form authorized by the BSP was cured by the DBPs
disclosure of such information in the loan transaction documents
(i.e., the deed of conditional sale and the supplement thereto, the
promissory notes, and the release sheet) between the DBP and
Arcilla.
Page 5 of 25 opening bank through which it advises the
beneficiary of the letter of credit, (e) negotiating bank which is
usually any bank in the city of the beneficiary. The services of
the notifying bank must always be utilized if the letter of credit
is to be advised to the beneficiary through cable, (f) the paying
bank which buys or discounts the drafts contemplated by the letter
of credit, if such draft is to be drawn on the opening bank or on
another designated bank not in the city of the beneficiary. As a
rule, whenever the facilities of the opening bank are used, the
beneficiary is supposed to present his drafts to the notifying bank
for negotiation and (g) the confirming bank which, upon the request
of the beneficiary, confirms the letter of credit issued by the
opening bank. From the foregoing, it is clear that letters of
credit, being usually bank to bank transactions, involve more than
just one bank. Consequently, there is nothing unusual in the fact
that the drafts presented in evidence by respondent bank were not
made payable to PBCom. As explained by respondent bank, a draft was
drawn on the Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of
Taiwan, supplier of the goods covered by the foreign letter of
credit. Having paid the supplier, the Bank of Taiwan then presented
the bank draft for reimbursement by PBComs correspondent bank in
Taiwan, the Irving Trust Company which explains the reason why on
its face, the draft was made payable to the Bank of Taiwan. Irving
Trust Company accepted and endorsed the draft to PBCom. The draft
was later transmitted to PBCom to support the latters claim for
payment from MICO. MICO accepted the draft upon presentment and
negotiated it to PBCom. -o A trust receipt is considered as a
security transaction intended to aid in financing importers and
retail dealers who do not have sufficient funds or resources to
finance the importation or purchase of merchandise, and who may not
be able to acquire credit except through utilization, as collateral
of the merchandise imported or purchased. A trust receipt,
therefor, is a document of security pursuant to which a bank
acquires a security interest in the goods under trust receipt.
Under a letter of credit-trust receipt arrangement, a bank extends
a loan covered by a letter of credit, with the trust receipt as a
security for the loan. The transaction involves a loan feature
represented by a letter of credit, and a security feature which is
in the covering trust receipt which secures an indebtedness. 2.
Commercial and standby letters of credit; independence principle;
fraud exception rule (Transfield Philippines, Inc. vs. Luzon Hydro
Corporation, et al., G.R. No. 146717, November 22, 2004)
CHAPTER VI: LETTERS OF CREDITADDITIONAL SUPREME COURT CASES 1.
Possible parties to a letter of credit transaction; nature of
letter of credit-trust receipt arrangement (Lee, et al. vs. CA and
Philippine Bank of Communications, G.R. No. 117913, February 1,
2002)
The pertinent parts of the Courts decision are set out below:
Modern letters of credit are usually not made between natural
persons. They involve bank to bank transactions. Historically, the
letter of credit was developed to facilitate the sale of goods
between, distant and unfamiliar buyers and sellers. It was an
arrangement under which a bank, whose credit was acceptable to the
seller, would at the instance of the buyer agree to pay drafts
drawn on it by the seller, provided that certain documents are
presented such as bills of lading accompanied the corresponding
drafts. Expansion in the use of letters of credit was a natural
development in commercial banking. Parties to a commercial letter
of credit include (a) the buyer or the importer, (b) the seller,
also referred to as beneficiary, (c) the opening bank which is
usually the buyers bank which actually issues the letter of credit,
(d) the notifying bank which is the correspondent bank of the
The relevant parts of the Courts decision are set out below:
Catindig Revised 2007 NOSCL Supplement At the core of the
present controversy is the applicability of the independence
principle and fraud exception rule in letters of credit. Thus, a
discussion of the nature and use of letters of credit, also
referred to simply as credits, would provide a better perspective
of the case. The letter of credit evolved as a mercantile
specialty, and the only way to understand all its facets is to
recognize that it is an entity unto itself. The relationship
between the beneficiary and the issuer of a letter of credit is not
strictly contractual, because both privity and a meeting of the
minds are lacking, yet strict compliance with its terms is an
enforceable right. Nor is it a third-party beneficiary contract,
because the issuer must honor drafts drawn against a letter
regardless of problems subsequently arising in the underlying
contract. Since the banks customer cannot draw on the letter, it
does not function as an assignment by the customer to the
beneficiary. Nor, if properly used, is it a contract of suretyship
or guarantee, because it entails a primary liability following a
default. Finally, it is not in itself a negotiable instrument,
because it is not payable to order or bearer and is generally
conditional, yet the draft presented under it is often negotiable.
In commercial transactions, a letter of credit is a financial
device developed by merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control of
the goods before paying. The use of credits in commercial
transactions serves to reduce the risk of nonpayment of the
purchase price under the contract for the sale of goods. However,
credits are also used in non-sale settings where they serve to
reduce the risk of nonperformance. Generally, credits in the
non-sale settings have come to be known as standby credits. There
are three significant differences between commercial and standby
credits. First, commercial credits involve the payment of money
under a contract of sale. Such credits become payable upon the
presentation by the seller-beneficiary of documents that show he
has taken affirmative steps to comply with the sales agreement. In
the standby type, the credit is payable upon certification of a
party's nonperformance of the agreement. The documents that
accompany the beneficiary's draft tend to show that the applicant
has not performed. The beneficiary of a commercial credit must
demonstrate by documents that he has performed his contract. The
beneficiary of the standby credit must certify that his obligor has
not performed the contract. [Underscoring supplied] By definition,
a letter of credit is a written instrument whereby the writer
requests or authorizes the addressee to pay money or deliver goods
to a third person and assumes responsibility for payment of debt
therefor to the addressee. A letter of credit, however, changes its
nature as different
Page 6 of 25 transactions occur and if carried through to
completion ends up as a binding contract between the issuing and
honoring banks without any regard or relation to the underlying
contract or disputes between the parties thereto. Since letters of
credit have gained general acceptability in international trade
transactions, the ICC has published from time to time updates on
the Uniform Customs and Practice (UCP) for Documentary Credits to
standardize practices in the letter of credit area. The vast
majority of letters of credit incorporate the UCP. First published
in 1933, the UCP for Documentary Credits has undergone several
revisions, the latest of which was in 1993. In Bank of the
Philippine Islands v. De Reny Fabric Industries, Inc. this Court
ruled that the observance of the UCP is justified by Article 2 of
the Code of Commerce which provides that in the absence of any
particular provision in the Code of Commerce, commercial
transactions shall be governed by usages and customs generally
observed. More recently, in Bank of America, NT & SA v. Court
of Appeals, this Court ruled that there being no specific
provisions which govern the legal complexities arising from
transactions involving letters of credit, not only between or among
banks themselves but also between banks and the seller or the
buyer, as the case may be, the applicability of the UCP is
undeniable. Article 3 of the UCP provides that credits, by their
nature, are separate transactions from the sales or other
contract(s) on which they may be based and banks are in no way
concerned with or bound by such contract(s), even if any reference
whatsoever to such contract(s) is included in the credit.
Consequently, the undertaking of a bank to pay, accept and pay
draft(s) or negotiate and/or fulfill any other obligation under the
credit is not subject to claims or defenses by the applicant
resulting from his relationships with the issuing bank or the
beneficiary. A beneficiary can in no case avail himself of the
contractual relationships existing between the banks or between the
applicant and the issuing bank. Thus, the engagement of the issuing
bank is to pay the seller or beneficiary of the credit once the
draft and the required documents are presented to it. The so-called
independence principle assures the seller or the beneficiary of
prompt payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main
contract is actually accomplished or not. Under this principle,
banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect
of any documents, or for the general and/or particular conditions
stipulated in the documents or superimposed thereon, nor do they
assume any liability or responsibility for the description,
quantity, weight, quality, condition, packing, delivery, value or
existence of the goods represented by any documents, or for the
good faith or acts and/or
Catindig Revised 2007 NOSCL Supplement omissions, solvency,
performance or standing of the consignor, the carriers, or the
insurers of the goods, or any other person whomsoever. The
independent nature of the letter of credit may be: (a) independence
in toto where the credit is independent from the justification
aspect and is a separate obligation from the underlying agreement
like for instance a typical standby; or (b) independence may be
only as to the justification aspect like in a commercial letter of
credit or repayment standby, which is identical with the same
obligations under the underlying agreement. In both cases the
payment may be enjoined if in the light of the purpose of the
credit the payment of the credit would constitute fraudulent abuse
of the credit. Can the beneficiary invoke the independence
principle? Petitioner insists that the independence principle does
not apply to the instant case and assuming it is so, it is a
defense available only to respondent banks. LHC, on the other hand,
contends that it would be contrary to common sense to deny the
benefit of an independent contract to the very party for whom the
benefit is intended. As beneficiary of the letter of credit, LHC
asserts it is entitled to invoke the principle. As discussed above,
in a letter of credit transaction, such as in this case, where the
credit is stipulated as irrevocable, there is a definite
undertaking by the issuing bank to pay the beneficiary provided
that the stipulated documents are presented and the conditions of
the credit are complied with. Precisely, the independence principle
liberates the issuing bank from the duty of ascertaining compliance
by the parties in the main contract. As the principles nomenclature
clearly suggests, the obligation under the letter of credit is
independent of the related and originating contract. In brief, the
letter of credit is separate and distinct from the underlying
transaction. Given the nature of letters of credit, petitioners
argumentthat it is only the issuing bank that may invoke the
independence principle on letters of creditdoes not impress this
Court. To say that the independence principle may only be invoked
by the issuing banks would render nugatory the purpose for which
the letters of credit are used in commercial transactions. As it
is, the independence doctrine works to the benefit of both the
issuing bank and the beneficiary. Letters of credit are employed by
the parties desiring to enter into commercial transactions, not for
the benefit of the issuing bank but mainly for the benefit of the
parties to the original transactions. With the letter of credit
from the issuing bank, the party who applied for and obtained it
may confidently present the letter of credit to the beneficiary as
a security to convince the beneficiary to enter into the business
transaction. On the other hand, the other party to the business
transaction, i.e., the beneficiary of the letter of credit, can be
rest assured of being empowered to call on the letter
Page 7 of 25 of credit as a security in case the commercial
transaction does not push through, or the applicant fails to
perform his part of the transaction. It is for this reason that the
party who is entitled to the proceeds of the letter of credit is
appropriately called beneficiary. Petitioners argument that any
dispute must first be resolved by the parties, whether through
negotiations or arbitration, before the beneficiary is entitled to
call on the letter of credit in essence would convert the letter of
credit into a mere guarantee. Jurisprudence has laid down a clear
distinction between a letter of credit and a guarantee in that the
settlement of a dispute between the parties is not a pre-requisite
for the release of funds under a letter of credit. In other words,
the argument is incompatible with the very nature of the letter of
credit. If a letter of credit is drawable only after settlement of
the dispute on the contract entered into by the applicant and the
beneficiary, there would be no practical and beneficial use for
letters of credit in commercial transactions. Professor John F.
Dolan, the noted authority on letters of credit, sheds more light
on the issue: The standby credit is an attractive commercial device
for many of the same reasons that commercial credits are
attractive. Essentially, these credits are inexpensive and
efficient. Often they replace surety contracts, which tend to
generate higher costs than credits do and are usually triggered by
a factual determination rather than by the examination of
documents. Because parties and courts should not confuse the
different functions of the surety contract on the one hand and the
standby credit on the other, the distinction between surety
contracts and credits merits some reflection. The two commercial
devices share a common purpose. Both ensure against the obligors
nonperformance. They function, however, in distinctly different
ways. Traditionally, upon the obligors default, the surety
undertakes to complete the obligors performance, usually by hiring
someone to complete that performance. Surety contracts, then, often
involve costs of determining whether the obligor defaulted (a
matter over which the surety and the beneficiary often litigate)
plus the cost of performance. The benefit of the surety contract to
the beneficiary is obvious. He knows that the surety, often an
insurance company, is a strong financial institution that will
perform if the obligor does not. The beneficiary also should
understand that such
Catindig Revised 2007 NOSCL Supplement performance must await
the sometimes lengthy and costly determination that the obligor has
defaulted. In addition, the suretys performance takes time. The
standby credit has different expectations. He reasonably expects
that he will receive cash in the event of nonperformance, that he
will receive it promptly, and that he will receive it before any
litigation with the obligor (the applicant) over the nature of the
applicants performance takes place. The standby credit has this
opposite effect of the surety contract: it reverses the financial
burden of parties during litigation. In the surety contract
setting, there is no duty to indemnify the beneficiary until the
beneficiary establishes the fact of the obligors performance. The
beneficiary may have to establish that fact in litigation. During
the litigation, the surety holds the money and the beneficiary
bears most of the cost of delay in performance. In the standby
credit case, however, the beneficiary avoids that litigation burden
and receives his money promptly upon presentation of the required
documents. It may be that the applicant has, in fact, performed and
that the beneficiarys presentation of those documents is not
rightful. In that case, the applicant may sue the beneficiary in
tort, in contract, or in breach of warranty; but, during the
litigation to determine whether the applicant has in fact breached
the obligation to perform, the beneficiary, not the applicant,
holds the money. Parties that use a standby credit and courts
construing such a credit should understand this allocation of
burdens. There is a tendency in some quarters to overlook this
distinction between surety contracts and standby credits and to
reallocate burdens by permitting the obligor or the issuer to
litigate the performance question before payment to the
beneficiary. While it is the bank which is bound to honor the
credit, it is the beneficiary who has the right to ask the bank to
honor the credit by allowing him to draw thereon. The situation
itself emasculates petitioners posture that LHC cannot invoke the
independence principle and highlights its puerility, more so in
this case where the banks concerned were impleaded as parties by
petitioner itself. Respondent banks had squarely raised the
independence principle to justify their releases of the amounts due
under the Securities. Owing to the nature
Page 8 of 25 and purpose of the standby letters of credit, this
Court rules that the respondent banks were left with little or no
alternative but to honor the credit and both of them in fact
submitted that it was ministerial for them to honor the call for
payment. -oNext, petitioner invokes the fraud exception principle.
It avers that LHCs call on the Securities is wrongful because it
fraudulently misrepresented to ANZ Bank and SBC that there is
already a breach in the Turnkey Contract knowing fully well that
this is yet to be determined by the arbitral tribunals. It asserts
that the fraud exception exists when the beneficiary, for the
purpose of drawing on the credit, fraudulently presents to the
confirming bank, documents that contain, expressly or by
implication, material representations of fact that to his knowledge
are untrue. In such a situation, petitioner insists, injunction is
recognized as a remedy available to it. [Underscoring supplied]
Citing Dolans treatise on letters of credit, petitioner argues that
the independence principle is not without limits and it is
important to fashion those limits in light of the principles
purpose, which is to serve the commercial function of the credit.
If it does not serve those functions, application of the principle
is not warranted, and the common law principles of contract should
apply. It is worthy of note that the propriety of LHCs call on the
Securities is largely intertwined with the fact of default which is
the self-same issue pending resolution before the arbitral
tribunals. To be able to declare the call on the Securities
wrongful or fraudulent, it is imperative to resolve, among others,
whether petitioner was in fact guilty of delay in the performance
of its obligation. Unfortunately for petitioner, this Court is not
called upon to rule upon the issue of defaultsuch issue having been
submitted by the parties to the jurisdiction of the arbitral
tribunals pursuant to the terms embodied in their agreement. Would
injunction then be the proper remedy to restrain the alleged
wrongful draws on the Securities? Most writers agree that fraud is
an exception to the independence principle. Professor Dolan opines
that the untruthfulness of a certificate accompanying a demand for
payment under a standby credit may qualify as fraud sufficient to
support an injunction against payment. The remedy for fraudulent
abuse is an injunction. However, injunction should not be granted
unless: (a) there is clear proof of fraud; (b) the fraud
constitutes fraudulent abuse of the independent purpose of the
letter of credit and not only fraud under the main agreement; and
(c) irreparable injury might follow if injunction is not granted or
the recovery of damages would be seriously damaged.
Catindig Revised 2007 NOSCL Supplement -oThe pendency of the
arbitration proceedings would not per se make LHCs draws on the
Securities wrongful or fraudulent for there was nothing in the
Contract which would indicate that the parties intended that all
disputes regarding delay should first be settled through
arbitration before LHC would be allowed to call upon the
Securities. It is therefore premature and absurd to conclude that
the draws on the Securities were outright fraudulent given the fact
that the ICC and CIAC have not ruled with finality on the existence
of default. Nowhere in its complaint before the trial court or in
its pleadings filed before the appellate court, did petitioner
invoke the fraud exception rule as a ground to justify the issuance
of an injunction. What petitioner did assert before the courts
below was the fact that LHCs draws on the Securities would be
premature and without basis in view of the pending disputes between
them. Petitioner should not be allowed in this instance to bring
into play the fraud exception rule to sustain its claim for the
issuance of an injunctive relief. -oWith respect to the issue of
whether the respondent banks were justified in releasing the
amounts due under the Securities, this Court reiterates that
pursuant to the independence principle the banks were under no
obligation to determine the veracity of LHCs certification that
default has occurred Neither were they bound by petitioners
declaration that LHCs call thereon was wrongful. To repeat,
respondent banks undertaking was simply to pay once the required
documents are presented by the beneficiary. At any rate, should
petitioner finally prove in the pending arbitration proceedings
that LHCs draws upon the Securities were wrongful due to the
non-existence of the fact of default, its right to seek
indemnification for damages it suffered would not normally be
foreclosed pursuant to general principles of law.
Page 9 of 25
CHAPTER VII: TRUST RECEIPTSADDITIONAL SUPREME COURT CASES 1. An
entrustee does not have authority to mortgage goods covered by
trust receipts (DBP vs. Prudential Bank, G.R. No. 143772, November
22, 2005)
In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable
commercial letter of credit with Prudential Bank (Prudential) for
the importation of 5,000 spindles and various accessories and spare
parts (the Articles) for use with spinning machinery. These
Articles were released to Litex under covering trust receipts it
executed in favor of Prudential. Litex installed and used the
Articles in its textile mill located in Montalban, Rizal. In 1980,
DBP granted a foreign currency loan to Litex. To secure the loan,
Litex executed real estate and chattel mortgages on its plant site
in Montalban, Rizal, including the buildings and other
improvements, machineries and equipments there. Among the
machineries and equipments mortgaged in favor of DBP were the
Articles. In 1982, Prudential informed DBP that it was the absolute
and juridical owner of the Articles and they were thus not part of
the mortgaged assets that could be legally ceded to DBP. In 1983,
DBP extra-judicially foreclosed on the real estate and chattel
mortgages, including the Articles, and acquired the foreclosed
properties as the highest bidder. In 1987, over the objections of
Prudential, DBP sold the Litex properties it acquired at the
foreclosure sale, including the Articles. to Lyon Textile Mills,
Inc. (Lyon). In 1988, Prudential filed a complaint for a sum of
money with damages against DBP. The trial court decided in favor of
Prudential and its decision was affirmed in toto by the Court of
Appeals to which DBP appealed. DBP thereafter filed a petition for
review on certiorari with the Supreme Court. The Court held that
the Articles were owned by Prudential and Litex only held them in
trust. While it was allowed to sell the items, Litex had no
authority to dispose of them or any part thereof or their proceeds
through conditional sale, pledge or any other means. Thus, Litex
could not have subjected them to a chattel mortgage. Their
inclusion in the mortgage was void and had no legal effect. There
being no valid mortgage, there could also be no valid foreclosure
or valid auction sale. Thus, DBP could not be considered either
Catindig Revised 2007 NOSCL Supplement as a mortgagee or as a
purchaser in good faith. DBP merely stepped into the shoes of Litex
as trustee of the Articles with an obligation to pay their value or
to return them on Prudentials demand. By its failure to pay or
return them despite Prudentials repeated demands and by selling
them to Lyon without Prudentials knowledge and conformity, DBP
became a trustee ex maleficio [i.e., one who acquires title to
property through actual fraud]. 2. Acquittal in criminal case for
estafa under Section 13 of the Trust Receipts Law does not
extinguish civil liability arising from breach of trust receipt
contract (Tupaz IV, et al. vs. CA and BPI, G.R. No. 145578,
November 18, 2005
Page 10 of 25
CHAPTER XI: CHATTEL MORTGAGE LAWADDITIONAL SUPREME COURT CASES
1. Loss of vessel before foreclosure borne by mortgagors (Allied
Banking Corporation vs. Cheng Yong, et al., G.R. N0. 154109,
October 6, 2005) 2. The loss of the mortgaged chattel brought about
by its sinking must be borne not by Allied Bank but by the spouses
Cheng. As owners of the fishing vessel, it was incumbent upon the
spouses to insure it against loss. Thus, when the vessel sank
before the chattel mortgage could be foreclosed, uninsured as it
is, its loss must be borne by the spouses Cheng. 2. Creditor not
obliged to foreclose chattel mortgage constituted to secure credit
(Spouses Rosario vs. PCI Leasing and Finance, Inc., G.R., No.
139233, November 11, 2005)
The relevant portion of the Courts decision is as follows: The
rule is that where the civil action is impliedly instituted with
the criminal action, the civil liability is not extinguished by
acquittal [w]here the acquittal is based on reasonable doubt xxx as
only preponderance of evidence is required in civil cases; where
the court expressly declares that the liability of the accused is
not criminal but only civil in nature xxx as, for instance, in the
felonies of estafa, theft, and malicious mischief committed by
certain relatives who thereby incur only civil liability (See Art.
332, Revised Penal Code); and, where the civil liability does not
arise from or is not based upon the criminal act of which the
accused was acquitted xxx. (Emphasis supplied) Here, respondent
bank chose not to file a separate civil action to recover payment
under the trust receipts. Instead, respondent bank sought to
recover payment in Criminal Case Nos. 8848 and 8849. Although the
trial court acquitted petitioner Jose Tupaz, his acquittal did not
extinguish his civil liability. As the Court of Appeals correctly
held, his liability arose not from the criminal act of which he was
acquitted (ex delito) but from the trust receipt contract (ex
contractu) of 30 September 1981. Petitioner Jose Tupaz signed the
trust receipt of 30 September 1981 in his personal capacity.
Instead of foreclosing on the chattel mortgage on a motor
vehicle constituted by the spouses Rosario to secure the loan
obtained by them from PCI Leasing, the latter filed a case for Sum
of Money with Damages with a Prayer for a Writ of Replevin. The
Court ruled that even if Article 1484 of the New Civil Code were to
be applied, the chattel mortgage had not been foreclosed; hence,
PCI Leasing was not precluded from collecting the balance of the
account of the spouses Rosario. It held that the remedy of the
unpaid seller under Article 1484 of the New Civil Code is
alternative and not cumulative. A creditor is not obliged to
foreclose a chattel mortgage even if there is one. 3. Entrustee,
not being owner of articles covered by trust receipts and without
authority from owner, cannot mortgage said articles (DBP vs.
Prudential Bank, G.R. No. 143772, November 22, 2005)
Citing Article 2085 of the Civil Code (which requires that, in a
contract of pledge or mortgage, the pledgor or mortgagor should be
the absolute owner of the thing pledged or mortgaged), the Court
ruled that Lirag Textile Mills, Inc. as the entrustee of the 5,000
spindles and related accessories in question, had neither absolute
ownership, free disposal nor the authority to freely dispose of the
said articles and could not have subjected them to a chattel
mortgage inasmuch as the title to the said articles belongs to the
entruster, Prudential Bank. The inclusion of the articles in the
real estate and chattel mortgages constituted by Lirag Textile on
its plant site in Montalban, Rizal to secure the foreign currency
loan it obtained from the DBP was void
Catindig Revised 2007 NOSCL Supplement and had no legal effect.
There being no valid mortgage, there could also be no valid
foreclosure or valid auction sale of such articles. 4. Invalidity
of loan invalidates mortgage intended to secure it (Spouses Saguid
vs. Security Finance, Inc., G.R. No. 159467, December 9, 2005)
Page 11 of 25 It is further prayed that pendent lite, an Order
of Replevin issue commanding the Provincial Sheriff at Legazpi City
or any of his deputies to take such multicab into his custody and,
after judgment, upon default in the payment of the amount adjudged
due to the plaintiff, to sell said chattel at public auction in
accordance with the chattel mortgage law. The MTCC decided in favor
of Magna as follows: WHEREFORE, judgment is hereby rendered in
favor of plaintiff Magna Financial Services Group, Inc. and against
the defendant Elias Colarina, ordering the latter: (a) to pay
plaintiff the principal sum of one hundred thirty one thousand six
hundred seven (P131,607.00) pesos plus penalty charges at 4.5% per
month computed from January, 1999 until fully paid; (b) to pay
plaintiff P10,000.00 for attorneys fees; and (c) to pay the costs.
The foregoing money judgment shall be paid within ninety (90) days
from the entry of judgment. In case of default in such payment, the
one (1) unit of Suzuki Multicab, subject of the writ of replevin
and chattel mortgage, shall be sold at public auction to satisfy
the said judgment Colarina appealed to the Regional Trial Court but
the latter affirmed the MTCC decision. Colarina then filed a
petition for review with the Court of Appeals. The CA ruled as
follows: We find merit in petitioners assertion that the MTC and
the RTC erred in ordering the defendant to pay the unpaid balance
of the purchase price of the subject vehicle irrespective of the
fact that the instant complaint was for the foreclosure of its
chattel mortgage. The principal error committed by the said courts
was their immediate grant, however erroneous, of relief in favor of
the respondent for the payment of the unpaid balance without
considering the fact that the very prayer it had sought was
inconsistent with its allegation in the complaint. Verily, it is
beyond cavil that the complaint seeks the judicial foreclosure of
the chattel mortgage. The fact that the respondent had
unconscionably sought the payment of the unpaid balance regardless
of its complaint for the foreclosure of the said mortgage is
glaring proof that it intentionally
The Court ruled that since it has been sufficiently established
that there was no cause or consideration for the promissory note,
it follows that the chattel mortgage constituted on the subject
vehicle to secure the said promissory note cannot have any legal
effect on the spouses Saguid. It stated that a mortgage is a mere
accessory contract and its validity would depend on the validity of
the loan secured by it. The chattel mortgage constituted over the
subject vehicle is an accessory contract to the loan obligation as
embodied in the promissory note. It cannot exist as an independent
contract since its consideration is the same as that of the
principal contract. A principal obligation is an indispensable
condition for the existence of an accessory contract. 5. Suing for
collection of unpaid amortizations and at the same time suing for
replevin not allowed under Art. 1484, Civil Code (Magna Financial
Services Group, Inc. vs. Colarina, G.R. No. 158635, December 9,
2005)
Colarina bought on installment from Magna Financial Services a
Suzuki Multicab and constituted a chattel mortgage thereon to
secure the unpaid balance of the purchase price thereof. On account
of Colarinas failure to pay the requisite installments, Magna filed
against Colarina a Complaint for Foreclosure of Chattel Mortgage
with Replevin before the Municipal Trial Court in Cities (MTCC). In
its Complaint, Magna made the following prayer: WHEREFORE, it is
respectfully prayed that judgment render ordering defendant: 1. To
pay the principal sum of P131,607.00 with penalty charges at 4.5%
per month from January 1999 until paid plus liquidated damages. 2.
Ordering defendant to reimburse the plaintiff for attorneys fee at
25% of the amount due plus expenses of litigation at not less than
P10,000.00. 3. Ordering defendant to surrender to the plaintiff the
possession of the Multicab described in paragraph 2 of the
complaint. 4. Plaintiff prays for other reliefs just and equitable
in the premises.
Catindig Revised 2007 NOSCL Supplement devised the same to
deprive the defendant of his rights. A judgment in its favor will
in effect allow it to retain the possession and ownership of the
subject vehicle and at the same time claim against the defendant
for the unpaid balance of its purchase price. In such a case, the
respondent would luckily have its cake and eat it too.
Unfortunately for the defendant, the lower courts had readily,
probably unwittingly, made themselves abettors to respondents
devise to the detriment of the defendant. WHEREFORE, finding error
in the assailed decision, the instant petition is hereby GRANTED
and the assailed decision is hereby REVERSED AND SET ASIDE. Let the
records be remanded to the court of origin. Accordingly, the
foreclosure of the chattel mortgage over the subject vehicle as
prayed for by the respondent in its complaint without any right to
seek the payment of the unpaid balance of the purchase price or any
deficiency judgment against the petitioners pursuant to Article
1484 of the Civil Code of the Philippines, is hereby ORDERED.
Having lost in the CA, Magna then filed a petition for review on
certiorari with the Supreme Court based on the sole issue: What is
the true nature of a foreclosure of chattel mortgage, extrajudicial
or judicial, as an exercise of the 3rd option under Article 1484,
paragraph 3 of the Civil Code? In its Memorandum, petitioner
assails the decision of the Court of Appeals and asserts that a
mortgage is only an accessory obligation, the principal one being
the undertaking to pay the amounts scheduled in the promissory
note. To secure the payment of the note, a chattel mortgage is
constituted on the thing sold. It argues that an action for
foreclosure of mortgage is actually in the nature of an action for
sum of money instituted to enforce the payment of the promissory
note, with execution of the security. In case of an extrajudicial
foreclosure of chattel mortgage, the petition must state the amount
due on the obligation and the sheriff, after the sale, shall apply
the proceeds to the unpaid debt. This, according to petitioner, is
the true nature of a foreclosure proceeding as provided under Rule
68, Section 2 of the Rules of Court.[13] On the other hand,
respondent countered that the Court of Appeals correctly set aside
the trial courts decision due to the inconsistency of the remedies
or reliefs sought by the petitioner in its Complaint where it
prayed for the custody
Page 12 of 25 of the chattel mortgage and at the same time asked
for the payment of the unpaid balance on the motor vehicle.[14]
Article 1484 of the Civil Code explicitly provides: ART. 1484. In a
contract of sale of personal property the price of which is payable
in installments, the vendor may exercise any of the following
remedies: (1) Exact fulfillment of the obligation, should the
vendee fail to pay; (2) Cancel the sale, should the vendees failure
to pay cover two or more installments; (3) Foreclose the chattel
mortgage or the thing sold, if one has been constituted, should the
vendees failure to pay cover two or more installments. In this
case, he shall have no further action against the purchaser to
recover any unpaid balance of the price. Any agreement to the
contrary shall be void. Our Supreme Court in Bachrach Motor Co.,
Inc. v. Millan[15] held: Undoubtedly the principal object of the
above amendment (referring to Act 4122 amending Art. 1454, Civil
Code of 1889) was to remedy the abuses committed in connection with
the foreclosure of chattel mortgages. This amendment prevents
mortgagees from seizing the mortgaged property, buying it at
foreclosure sale for a low price and then bringing the suit against
the mortgagor for a deficiency judgment. The almost invariable
result of this procedure was that the mortgagor found himself minus
the property and still owing practically the full amount of his
original indebtedness. xxx In its Memorandum before us, petitioner
resolutely declared that it has opted for the remedy provided under
Article 1484(3) of the Civil Code,[17] that is, to foreclose the
chattel mortgage. It is, however, unmistakable from the Complaint
that petitioner preferred to avail itself of the first and third
remedies under Article 1484, at the same time suing for replevin.
For this reason, the Court of Appeals justifiably set aside the
decision of the RTC. Perusing the Complaint, the petitioner, under
its prayer number 1, sought for the payment of the unpaid
amortizations which is a remedy that is provided under Article
1484(1) of the Civil Code, allowing an unpaid
Catindig Revised 2007 NOSCL Supplement vendee to exact
fulfillment of the obligation. At the same time, petitioner prayed
that Colarina be ordered to surrender possession of the vehicle so
that it may ultimately be sold at public auction, which remedy is
contained under Article 1484(3). Such a scheme is not only
irregular but is a flagrant circumvention of the prohibition of the
law. By praying for the foreclosure of the chattel, Magna Financial
Services Group, Inc. renounced whatever claim it may have under the
promissory note.[18] Article 1484, paragraph 3, provides that if
the vendor has availed himself of the right to foreclose the
chattel mortgage, he shall have no further action against the
purchaser to recover any unpaid balance of the purchase price. Any
agreement to the contrary shall be void. In other words, in all
proceedings for the foreclosure of chattel mortgages executed on
chattels which have been sold on the installment plan, the
mortgagee is limited to the property included in the mortgage.[19]
Contrary to petitioners claim, a contract of chattel mortgage,
which is the transaction involved in the present case, is in the
nature of a conditional sale of personal property given as a
security for the payment of a debt, or the performance of some
other obligation specified therein, the condition being that the
sale shall be void upon the seller paying to the purchaser a sum of
money or doing some other act named.[20] If the condition is
performed according to its terms, the mortgage and sale immediately
become void, and the mortgagee is thereby divested of his
title.[21] On the other hand, in case of non payment, foreclosure
is one of the remedies available to a mortgagee by which he
subjects the mortgaged property to the satisfaction of the
obligation to secure that for which the mortgage was given.
Foreclosure may be effected either judicially or extrajudicially,
that is, by ordinary action or by foreclosure under power of sale
contained in the mortgage. It may be effected by the usual methods,
including sale of goods at public auction.[22] Extrajudicial
foreclosure, as chosen by the petitioner, is attained by causing
the mortgaged property to be seized by the sheriff, as agent of the
mortgagee, and have it sold at public auction in the manner
prescribed by Section 14 of Act No. 1508, or the Chattel Mortgage
Law.[23] This rule governs extrajudicial foreclosure of chattel
mortgage. In sum, since the petitioner has undeniably elected a
Page 13 of 25 remedy of foreclosure under Article 1484(3) of the
Civil Code, it is bound by its election and thus may not be allowed
to change what it has opted for nor to ask for more. On this point,
the Court of Appeals correctly set aside the trial courts decision
and instead rendered a judgment of foreclosure as prayed for by the
petitioner. The next issue of consequence is whether or not there
has been an actual foreclosure of the subject vehicle. In the case
at bar, there is no dispute that the subject vehicle is already in
the possession of the petitioner, Magna Financial Services Group,
Inc. However, actual foreclosure has not been pursued, commenced or
concluded by it. Where the mortgagee elects a remedy of
foreclosure, the law requires the actual foreclosure of the
mortgaged chattel. Thus, in Manila Motor Co. v. Fernandez,[24] our
Supreme Court said that it is actual sale of the mortgaged chattel
in accordance with Sec. 14 of Act No. 1508 that would bar the
creditor (who chooses to foreclose) from recovering any unpaid
balance.[25] And it is deemed that there has been foreclosure of
the mortgage when all the proceedings of the foreclosure, including
the sale of the property at public auction, have been
accomplished.[26] That there should be actual foreclosure of the
mortgaged vehicle was reiterated in the case of De la Cruz v. Asian
Consumer and Industrial Finance Corporation:[27] It is thus clear
that while ASIAN eventually succeeded in taking possession of the
mortgaged vehicle, it did not pursue the foreclosure of the
mortgage as shown by the fact that no auction sale of the vehicle
was ever conducted. As we ruled in Filinvest Credit Corp. v. Phil.
Acetylene Co., Inc. (G.R. No. 50449, 30 January 1982, 111 SCRA 421)
Under the law, the delivery of possession of the mortgaged property
to the mortgagee, the herein appellee, can only operate to
extinguish appellants liability if the appellee had actually caused
the foreclosure sale of the mortgaged property when it recovered
possession thereof (Northern Motors, Inc. v. Sapinoso, 33 SCRA 356
[1970]; Universal Motors Corp. v. Dy Hian Tat, 28 SCRA 161 [1969];
Manila Motors Co., Inc. v. Fernandez, 99 Phil. 782 [1956]).
Catindig Revised 2007 NOSCL Supplement Be that as it may,
although no actual foreclosure as contemplated under the law has
taken place in this case, since the vehicle is already in the
possession of Magna Financial Services Group, Inc. and it has
persistently and consistently avowed that it elects the remedy of
foreclosure, the Court of Appeals, thus, ruled correctly in
directing the foreclosure of the said vehicle without more.
WHEREFORE, premises considered, the instant petition is DENIED for
lack of merit and the decision of the Court of Appeals dated 21
January 2003 is AFFIRMED. Costs against petitioner.
Page 14 of 25
CHAPTER XII: EXTRAJUDICIAL FORECLOSURE OF MORTGAGE LAWIssues
Prior to Foreclosure Sale 1. Blanket mortgage clause or dragnet
clause (Spouses Cuyco vs. Spouses Cuyco, G.R. No. 168736, April 19,
2006)
The Court ruled that it is unmistakable from the Complaint that
Magna preferred to avail itself of the first and third remedies
under Article 1484, at the same time suing for replevin. Perusing
the Complaint, Magna, under its prayer number 1, sought for the
payment of the unpaid amortizations which is a remedy that is
provided under Article 1484(1) of the Civil Code, allowing an
unpaid vendee to exact fulfillment of the obligation. At the same
time, Magna prayed that Colarina be ordered to surrender possession
of the vehicle so that it may ultimately be sold at public auction,
which remedy is contained under Article 1484(3). Such a scheme is
not only irregular but is a flagrant circumvention of the
prohibition of the law. By praying for the foreclosure of the
chattel, Magna renounced whatever claim it may have under the
promissory note. Article 1484, paragraph 3, provides that if the
vendor has availed himself of the right to foreclose the chattel
mortgage, he shall have no further action against the purchaser to
recover any unpaid balance of the purchase price. Any agreement to
the contrary shall be void. In other words, in all proceedings for
the foreclosure of chattel mortgages executed on chattels which
have been sold on the installment plan, the mortgagee is limited to
the property included in the mortgage. The Court also ruled that it
is the actual sale of the mortgaged chattel in accordance with Sec.
14 of the Chattel Mortgage Law (Act No. 1508) that would bar the
creditor who chooses to foreclose from recovering any unpaid
balance. There has been foreclosure of the mortgage when all the
proceedings of the foreclosure, including the sale of the property
at public auction, have been accomplished. In the case at bar,
there is no dispute that the subject vehicle is already in the
possession of Magna Financial Services. However, actual foreclosure
has not been pursued, commenced or concluded by it. As it has
persistently and consistently avowed that it elects the remedy of
foreclosure, the Court ruled that the Court of Appeals has
correctly directed Magna to proceed with the foreclosure of the
said vehicle without more.
According to the Court, the general rule is that a mortgage
liability is usually limited to the amount mentioned in the
contract. However, the amounts named as consideration in a contract
of mortgage do not limit the amount for which the mortgage may
stand as security if from the four corners of the instrument the
intent to secure future and other indebtedness can be gathered.
This stipulation is valid and binding between the parties and is
known in American Jurisprudence as the blanket mortgage clause,
also known as a dragnet clause. A dragnet clause operates as a
convenience and accommodation to the borrowers as it makes
available additional funds without their having to execute
additional security documents, thereby saving time, travel, loan
closing costs, costs of extra legal services, recording fees, et
cetera. While a real estate mortgage may exceptionally secure
future loans or advancements, these future debts must be
sufficiently described in the mortgage contract. An obligation is
not secured by a mortgage unless it comes fairly within the terms
of the mortgage contract. The pertinent provisions of the November
26, 1991 real estate mortgage reads: That the MORTGAGOR is indebted
unto the MORTGAGEE in the sum of ONE MILLION FIVE THOUSAND PESOS
(sic) (1,500,000.00) Philippine Currency, receipt whereof is hereby
acknowledged and confessed, payable within a period of one year,
with interest at the rate of eighteen percent (18%) per annum; That
for and in consideration of said indebtedness, the MORTGAGOR does
hereby convey and deliver by way of MORTGAGE unto said MORTGAGEE,
the latters heirs and assigns, the following realty together with
all the improvements thereon and situated at Cubao, Quezon City,
and described as follows: xxxx PROVIDED HOWEVER, that should the
MORTGAGOR duly pay or cause to be paid unto the MORTGAGEE or his
heirs
Catindig Revised 2007 NOSCL Supplement and assigns, the said
indebtedness of ONE MILLION FIVE HUNDRED THOUSAND PESOS
(1,500,000.00), Philippine Currency, together with the agreed
interest thereon, within the agreed term of one year on a monthly
basis then this MORTGAGE shall be discharged, and rendered of no
force and effect, otherwise it shall subsist and be subject to
foreclosure in the manner and form provided by law. It is clear
from a perusal of the aforequoted real estate mortgage that there
is no stipulation that the mortgaged realty shall also secure
future loans and advancements. Thus, what applies is the general
rule above stated. Even if the parties intended the additional
loans of P150,000.00 obtained on May 30, 1992, P150,000.00 obtained
on July 1, 1992, and P500,00.00 obtained on September 5, 1992 to be
secured by the same real estate mortgage, as shown in the
acknowledgement receipts, it is not sufficient in law to bind the
realty for it was not made substantially in the form prescribed by
law. In order to constitute a legal mortgage, it must be executed
in a public document, besides being recorded. A provision in a
private document, although denominating the agreement as one of
mortgage, cannot be considered as it is not susceptible of
inscription in the property registry. A mortgage in legal form is
not constituted by a private document, even if such mortgage be
accompanied with delivery of possession of the mortgage property.
Besides, by express provisions of Section 127 of Act No. 496, a
mortgage affecting land, whether registered under said Act or not
registered at all, is not deemed to be sufficient in law nor may it
be effective to encumber or bind the land unless made substantially
in the form therein prescribed. It is required, among other things,
that the document be signed by the mortgagor executing the same, in
the presence of two witnesses, and acknowledged as his free act and
deed before a notary public. A mortgage constituted by means of a
private document obviously does not comply with such legal
requirements. What the parties could have done in order to bind the
realty for the additional loans was to execute a new real estate
mortgage or to amend the old mortgage conformably with the form
prescribed by the law. Failing to do so, the realty cannot be bound
by such additional loans, which may be recovered by the respondents
in an ordinary action for collection of sums of money. 2. Debtors
default; liquidated debt (Selegna Management and Development
Corporation, et al. vs. UCPB, G.R. No. 165662, May 3, 2006) In the
words of the Court, it is a settled rule of law that foreclosure is
proper when the debtors are in default of the payment of their
obligation. In fact, the
Page 15 of 25 parties stipulated in their credit agreements,
mortgage contracts and promissory notes that respondent was
authorized to foreclose on the mortgages, in case of a default by
petitioners. That this authority was granted is not disputed. Mora
solvendi, or debtors default, is defined as a delay in the
fulfillment of an obligation, by reason of a cause imputable to the
debtor. There are three requisites necessary for a finding of
default. First, the obligation is demandable and liquidated;
second, the debtor delays performance; third, the creditor
judicially or extrajudicially requires the debtors performance. The
Court also stated that a debt is liquidated when the amount is
known or is determinable by inspection of the terms and conditions
of the relevant promissory notes and related documentation. Failure
to furnish a debtor a detailed statement of account does not ipso
facto result in an unliquidated obligation. 3. Remedies of mortgage
creditor alternative, not successive or cumulative (Suico Rattan
& Buri Interiors, Inc., et al. vs. CA, et al., G.R. No. 138145,
June 15, 2006; see also Caltex Phils. Vs. IAC, et al., G.R. 74730,
August 25, 1989)
The Court ruled that it is settled that a mortgage creditor may,
in the recovery of a debt secured by a real estate mortgage,
institute against the mortgage debtor either a personal action for
debt or a real action to foreclose the mortgage. These remedies
available to the mortgage creditor are deemed alternative and not
cumulative. An election of one remedy operates as a waiver of the
other. In sustaining the rule that prohibits mortgage creditors
from pursuing both the remedies of a personal action for debt or a
real action to foreclose the mortgage, the Court held in the case
of Bachrach Motor Co., Inc. v. Esteban Icarangal, et al. that a
rule which would authorize the plaintiff to bring a personal action
against the debtor and simultaneously or successively another
action against the mortgaged property, would result not only in
multiplicity of suits so offensive to justice and obnoxious to law
and equity, but also in subjecting the defendant to the vexation of
being sued in the place of his residence or of the residence of the
plaintiff, and then again in the place where the property lies.
Hence, a remedy is deemed chosen upon the filing of the suit for
collection or upon the filing of the complaint in an action for
foreclosure of mortgage, pursuant to the provisions of Rule 68 of
the Rules of Court. As to extrajudicial foreclosure, such remedy is
deemed elected by the mortgage creditor upon filing of the petition
not with any court of justice but with the office of the sheriff of
the province where the sale is to be made, in accordance with the
provisions of Act No. 3135, as amended by Act No. 4118.
Catindig Revised 2007 NOSCL Supplement 4. Mortgage invalid if
mortgagor not the property owner; doctrine of mortgagee in good
faith not applicable (Erea vs. Querrer-Kaufman, G.R. No. 165853,
June 22, 2006)
Page 16 of 25 appears on the face of the title. But this is only
in a situation where the mortgagor has a fraudulent or otherwise
defective title, but not when the mortgagor is an impostor and a
forger. In a forged mortgage, as in this case, the doctrine of
mortgagee in good faith cannot be applied and will not benefit a
mortgagee no matter how large is his or her reservoir of good faith
and diligence. Such mortgage is void and cannot prejudice the
registered owner whose signature to the deed is falsified. When the
instrument presented is forged, even if accompanied by the owners
duplicate certificate of title, the registered owner does not lose
his title, and neither does the assignee in the forged deed acquire
any right or title to the property. An innocent purchaser for value
is one who purchases a titled land by virtue of a deed executed by
the registered owner himself not a forged deed. 5. Foreclosure of
mortgage arising out of a settlement of estate not covered by Act
3135 but by Section 7 of Rule 86 of the Revised Rules of Court
(Philippine National Bank vs. CA, et al., G.R. 121597, June 29,
2001)
The Court explained the doctrine of mortgagee in good faith by
citing its decision in Cavite Development Bank v. Lim, 381 Phil.
355 (2000) as follows: There is, however, a situation where,
despite the fact that the mortgagor is not the owner of the
mortgaged property, his title being fraudulent, the mortgage
contract and any foreclosure sale arising therefrom are given
effect by reason of public policy. This is the doctrine of
mortgagee in good faith based on the rule that all persons dealing
with the property covered by a Torrens Certificate of Title, as
buyers or mortgagees, are not required to go beyond what appears on
the face of the title. The public interest in upholding the
indefeasibility of a certificate of title, as evidence of lawful
ownership of the land or of any encumbrance thereon, protects a
buyer or mortgagee who, in good faith, relied upon what appears on
the face of the certificate of title. Indeed, a mortgagee has a
right to rely in good faith on the certificate of title of the
mortgagor of the property given as security and in the absence of
any sign that might arouse suspicion, has no obligation to
undertake further investigation. Hence, even if the mortgagor is
not the rightful owner of, or does not have a valid title to, the
mortgaged property, the mortgagee in good faith is nonetheless
entitled to protection. This doctrine presupposes, however, that
the mortgagor, who is not the rightful owner of the property, has
already succeeded in obtaining a Torrens title over the property in
his name and that, after obtaining the said title, he succeeds in
mortgaging the property to another who relies on what appears on
the said title. The innocent purchaser (mortgagee in this case) for
value protected by law is one who purchases a titled land by virtue
of a deed executed by the registered owner himself, not by a forged
deed, as the law expressly states. Such is not the situation of
petitioner, who has been the victim of impostors pretending to be
the registered owners but who are not said owners. The doctrine of
mortgagee in good faith does not apply to a situation where the
title is still in the name of the rightful owner and the mortgagor
is a different person pretending to be the owner. In such a case,
the mortgagee is not an innocent mortgagee for value and the
registered owner will generally not lose his title. We thus agree
with the following discussion of the CA: The trial court wrongly
applied in this case the doctrine of mortgagee in good faith which
has been allowed in many instances but in a milieu dissimilar from
this case. This doctrine is based on the rule that persons dealing
with properties covered by a Torrens certificate of title are not
required to go beyond what
This case involves a foreclosure of mortgage arising out of a
settlement of estate, wherein the administrator mortgaged a
property belonging to the estate of the decedent, pursuant to an
authority given by the probate court. The Court ruled that Section
7 of Rule 86 of the Revised Rules of Court, rather than Act 3135,
is the applicable law. Section 7 of Rule 86 grants to the mortgagee
three distinct, independent and mutually exclusive remedies that
can be alternatively pursued by the mortgage creditor for the
satisfaction of his credit in case the mortgagor dies, among them:
(1) to waive the mortgage and claim the entire debt from the estate
of the mortgagor as an ordinary claim; (2) to foreclose the
mortgage judicially and prove any deficiency as an ordinary claim;
and (3) to rely on the mortgage exclusively, foreclosing the same
at any time before it is barred by prescription without right to
file a claim for any deficiency. In Perez v. Philippine National
Bank, 124 Phil. 260 (1966), the Court recognized that the third
remedy includes extrajudicial foreclosures. 6. Newspaper of general
circulation (Perez, et al. vs. Perez, et al., G.R. No. 143768,
March 28, 2005) To be a newspaper of general circulation, it is
enough that it is published for the dissemination of local news and
general information, that it has a bona fide subscription list of
paying subscribers; and that it is published at regular intervals.
The newspaper must not also be devoted to the interests or
Catindig Revised 2007 NOSCL Supplement published for the
entertainment of a particular class, profession, trade, calling,
race or religious denomination. The newspaper need not have the
largest circulation so long as it is of general circulation. 7.
Waiver by parties of publication requirement void (Ouano vs. CA, et
al., G.R. 129279, March 4, 2003; see also PNB vs. Nepomuceno
Productions, Inc., et al., G.R. 139479, December 27, 2002)
Page 17 of 25 of real property under Act 3135. If the sale could
not be held on the scheduled date, then a republication of the
notice of extrajudicial sale would be necessary. This is true even
if the mortgagor and the mortgagee should agree to the rescheduling
of the date of sale. Failure to publish the notice of auction sale
on the new date would constitute a jurisdictional defect which
would invalidate the sale (Ouano vs. CA, G.R. 129279, March 4,
2003; DBP vs. Aguirre, et al., G.R. No. 144877, September 7, 2001;
Masantol Rural Bank vs. CA (204 SCRA 752 [1991]). In this case, the
public auction sale of the real properties originally scheduled on
August 12, 1986 was postponed to September 11, 1986 upon the
request of the mortgagor with the agreement of DBP, the mortgagee.
Neither the DBP nor the mortgagor republished the notice of the
rescheduled auction sale and, thus, the Supreme Court ruled that
the extrajudicial foreclosure of the real estate mortgage by DBP
was not valid. Obviously, republication of the notice would
increase the expenses of the mortgagee. It would also encourage the
practice of some mortgagors in requesting postponement of the
auction sale and then later attacking the validity of the sale for
lack of republication. These circumstances have not escaped the
attention of the Supreme Court and a remedy was provided in
provided in the form of the Notice of Extra-Judicial Sale now
prescribed in Circular No. 7-2002 issued by the Office of the Court
Administrator on January 22, 2002. Section 4(a) of Circular No.
7-2002 provides that: Sec. 4. The Sheriff to whom the application
for extra-judicial foreclosure of mortgage was raffled shall do the
following: a. Prepare a Notice of Extra-Judicial Sale using the
following form: NOTICE OF EXTRA-JUDICIAL SALE Upon extra-judicial
petition for sale under Act 3135/1508 filed __________ against
(name and address of Mortgagor/s) to satisfy the mortgage
indebtedness which as of ___________ amounts to P ________
excluding penalties, charges, attorney's fees and expenses of
foreclosure, the undersigned or his duly authorized deputy will
sell at public auction on (date of sale) _________ at 10:00 A.M. or
soon thereafter at the main entrance of the ___________________
(place of sale) to the highest bidder, for cash or manager's check
and in Philippine Currency, the following property with all its
improvements, to wit:
The general rule is that everyone has a right to waive, and
agree to waive, the advantage of a law or rule made solely for the
benefit and protection of the individual in his private capacity,
if it can be dispensed with and relinquished without infringing on
any public right, and without detriment to the community at large.
However, a waiver in derogation of a statutory right is not
favored, and a waiver will be inoperative and void if it infringes
on the rights of others, or would be against public policy or
morals and the public interest may be waived. The principal object
of a notice of sale in a foreclosure of mortgage is not so much to
notify the mortgagor as to inform the public generally of the
nature and condition of the property to be sold, and of the time,
place, and terms of the sale. Notices are given to secure bidders
and prevent a sacrifice of the property. Clearly, the statutory
requirements of posting and publication are mandated, not for the
mortgagors benefit, but for the public or third persons. In fact,
personal notice to the mortgagor in extrajudicial foreclosure
proceedings is not even necessary, unless stipulated. As such, it
is imbued with public policy considerations and any waiver thereon
would be inconsistent with the intent and letter of Act No. 3135.
Publication, therefore, is required to give the foreclosure sale a
reasonably wide publicity such that those interested might attend
the public sale. To allow the parties to waive this jurisdictional
requirement would result in converting into a private sale what
ought to be a public auction. More importantly, the waiver being
void for being contrary to the express mandate of Act No. 3135,
such cannot be ratified by estoppel. Estoppel cannot give validity
to an act that is prohibited by law or one that is against public
policy. Neither can the defense of illegality be waived. 8.
Republication of notice of sale (DBP vs. CA and Emerald Resorts
Hotel, G.R. No. 125838, June 10, 2003) The rule enunciated by the
Supreme Court in previous cases is that the publication of the
notice of extrajudicial sale is indispensable to the validity of an
extrajudicial foreclosure sale
Catindig Revised 2007 NOSCL Supplement (Description of Property)
All sealed bids must be submitted to the undersigned on the above
stated time and date. In the event the public auction should not
take place on the said date, it shall be held on _______________
without further notice. _____________(date) SHERIFF The last
paragraph of the prescribed Notice of Extra-Judicial Sale allows
the holding of a rescheduled auction sale without reposting or
republication of the notice. However, the rescheduled auction sale
will only be valid if the rescheduled date of auction is clearly
specified in the prior notice of sale. The absence of this
information in the prior notice of sale will render the rescheduled
auction sale void for lack of reposting or republication. If the
notice of auction sale contains this particular information,
whether or not the parties agreed to such rescheduled date, there
is no more need for the reposting or republication of the notice of
the rescheduled auction sale.
Page 18 of 25 pending before any court, tribunal, board or body
shall be suspended accordingly. The Court pointed out that a claim
is a right to payment, whether or not it is reduced to judgment,
liquidated or unliquidated, fixed or contingent, matured or
unmatured, disputed or undisputed, legal or equitable, and secured
or unsecured. The claim of private respondents against petitioner
PAL for their missing luggage is a money claim or financial demand
that the law requires to be suspended pending the rehabilitation
proceedings. Quoting its earlier decision in the case of B.F.
Homes, Inc. vs. Court of Appeals, the Court stated that ...(T)he
reason for suspending actions for claims against the corporation
should not be difficult to discover. It is not really to enable the
management committee or the rehabilitation receiver to substitute
the defendant in any pending action against it before any court,
tribunal, board or body. Obviously, the real justification is to
enable the management committee or rehabilitation receiver to
effectively exercise its/his powers free from any judicial or extra
judicial interference that might unduly hinder or prevent the
rescue of the debtor company. To allow such other action to
continue would only add to the burden of the management committee
or rehabilitation receiver, whose time, effort and resources would
be wasted in defending claims against the corporation instead of
being directed toward its restructuring and rehabilitation. 2.
Non-suspension of claims against guarantors and sureties solidarily
liable with debtor (Metropolitan Waterworks and Sewerage System vs.
Hon. Renaldo B. Daway, et al., G.R. No. 160732, June 21, 2004)
CHAPTER XIV: SUPREME COURT INTERIM RULES OF PROCEDURE ON
CORPORATE REHABILITATIONADDITIONAL SUPREME COURT CASES 1. Claim for
missing luggage is a money claim and is suspended pending
rehabilitation proceedings (Philippine Airlines vs. Spouses
Kurangking, et al., G.R. No. 146698, September 24, 2002)
This case involved the interpretation of Section 6 of Rule 4 of
the SC Interim Rules of Procedure on Corporate Rehabilitation. The
said provision requires the trial court, if it finds the petition
for corporate rehabilitation to be sufficient in form and
substance, to issue, among other things, an Order staying
enforcement of all claims, whether for money or otherwise and
whether such enforcement is by court action or otherwise, against
the debtor, its guarantors and sureties not solidarily liable with
the debtor. The stay order is effective from the date of its
issuance until the dismissal of the petition or the termination of
the rehabilitation proceedings. According to the Court, the interim
rules must be read and applied along with Section 6(c) of P.D.
902-A, as amended, directing that upon the appointment of a
management committee, rehabilitation receiver, board or body
pursuant to the decree, all actions for claims against the
distressed corporation
In 1997, MWSS granted Maynilad Water Services, Inc. under a
Concession Agreement a 20-year period to manage, operate, repair,
decommission and refurbish the existing MWSS water delivery and
sewerage services in the West Zone Service Area, for which Maynilad
undertook to pay the corresponding concession fees on the dates
agreed upon. The fees, among other things, are intended to pay off
MWSSs mostly foreign loans absorbed by Maynilad. To secure the
performance of its obligations under the Concession Agreement,
Maynilad arranged for the issuance of an Irrevocable Standby Letter
of Credit (ISLC) in the amount of US$120 million in favor of MWSS.
Maynilad