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BANKS AND FINANCIAL INTERMEDIARIES: Atty.

Rafael Morales

E. Commercial papers
"guaranty" SC would recharacterize the assignment as a pledge or a mortgage
F. Security Devices and other Credit Supports/Enhancements

In Sycip, Salazar: "Deed of Assignment without recourse by way of Security"


1.

Types
1
(a) Real Estate Mortgage
(b) Chattel Mortgage
1
(c) Mortgage Trust Indenture
(d) Pledge
(e) Guarantee/Suretyship/Standby Letter of Credit
(f) Aval

(g) Hold-out

Avoids security language such as "by way of security" to secure ---in order to
secure the prompt payment of the obligation, assign absolutely the receivables
defined below (so absolute assignment which transfers from day one both legal
and beneficial title from the assignor to the assignee)
Provision that would clarify that no dacion en pago intended from day 1
"notwithstanding the assignment, it is not the intention of the parties to
extinguish the obligation. Principal obligation extinguished by the time the
proceeds are actually applied to payment" (avoid argument that there is dacion
en pago, therefore extinguishment of the obligation)
Reconveyance of the receivable...once the obligation is satisfied, there's an
automatic reconveyance from the assignee to the assignor (in accordance with
A1454 of NCC)
"Nothing in this assignment shall be construed as creating a pledge or a chattel
mortgage" (so as to clarify the intention of the parties)

(h) Assignment by way of Security


*Pages 97 and 98 of the book

In cases, youll notice that this was characterized as a pledge under CM


because justices mindset is tied to the Civil Code BUT there is a NCC provision
on freedom to contract, and obscure provision Art. 1454 which states that an
absolute conveyance of property is made to secure an obligation there is an
implied trust. If the obligation is fulfilled by the grantor, he may demand
conveyance of property. (Art. 1454 remains obscure)

If assignment is construed as a pledge, foreclosure would extinguish the


obligation

If Chattel Mortgage, there is registration requirements. Unless satisfied, the


mortgage is not valid as against third persons. There would be no affidavit of
good faith in deed of assignments

when the documentation is replete with words such as "by way of security",

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

This kind of document is similar to a deed of assignmentWe're going to take


that up in derivative transactions

(i) Trust Receipt

Allied Banking Corp v. Ordonez (1990)


Ng v. People (2010)
Colinares v. CA (2000)

H: For IBAA

Letter of credit/trust receipt agreement: 2 features

Loan feature + security feature

Trust receipt is a security agreement where the bank acquires a right over the
proceeds, not over the property.

IBAA, by the surrender of the sea shells, can still recover based on BOC of the
loan contract, not the trust receipt agreement.

SC made some troubling pronouncements. If you look at your SCRA version, on


page 730, 1st two paragraph, laste sentence.....distinction between loan feature
and security feature: It conveys that the trust receipt is NOT an accessory to the
loan transaction when in fact it is! It conveys the perception that it is separate
and distinct but in reality it is connected with one another. A trust receipt is in
the same position as a pledge and mortgage, thus, a security, which cannot exist
if there is no principal obligation.

*the surrender of the goods extinguishes the Criminal action, but NOT THE
CIVIL ACTION!

DBP v. Prudential Bank (2005)


Rosario Textile Mills v. Home Bankers Savings and Trust (2005)

Vintola v. IBAA (1987)

F: Puca shells case: Vintola spouses who bought Puca shells executed a trust
receipt agreement with IBAA. When spouses were unable to sell the sea shell
products, they offered to surrender the goods to IBAA instead. IBAA refused to
accept the products.
IBAA filed a crim case for estafa againste Vintola. Dismissed when Vintola SPs
consigned the Puca shells to the court.
IBAA filed another case, this time a civil case for recovery of the amount under
the Trust Receipt Agreement. Vintola spouses argued that IBAA is alredy barred:
No reservation + res judicata

People v. Nitafan (1992)

Trust receipt agreement over plastic products. Nitafan assailed the Trust
Receipts Law under 2 arguments:

H: No violation of consti right against compelling to pay for nonpayment of


debts:

It already serves as protection of public interest.

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

No need for malice. It is mala prohibitum thus not an element of the crime.

Punishment is a valid exercise of police power.

**Dissenting opinion of CJ which proposes criminalization of trust receipt


transaction. Took out penalty for trust receipt violations...

Read seriously the different provisions and decisions, SC confused concepts of


trust recipts transactions

Example: In Vintola, court mentioned that Vintola spouses hold the property at
their own risk- but the bank owns it, not the entrustee!

Trust in Civil Code: trustor has the legal title, theres a trustee, and a beneficiary.
But in a trust receipt arrangement: entrustor has legal title, no passing of title to
the entrustee, entrustee would just either sell the goods and deliver the proceeds
of the sale to the entruster or just return it if failed to sell it. The buyer from the
entrustee is free from the security interest of the entrustee over the good. The
terminology in the trust receipts law is different from the concepts of Trust in the
Civil Code so the SC might have been confused.

(j) Set-off/Netting

Art. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. (1195)

(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the
latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the debtor.
(1196)

*Banker's Lien: right to set off the deposit of its own borrower. Recognized in case
of Dullas vs. PNB (P73 of book)

it is security in a sense that the bank has protection against the depositor's
obligation with it if the depositor has an account with it. As a result, there is
netting of the two accounts

legal compensation elements: See A1279.

This refers to the concept of compensation in the Civil Code. This is a mode of
extinguishment of obligations usually used in a hold-out. To be able to use this
in a conventional manner, all requisites of legal compensation must exist.

The ISDA Master Agreement is a good example where set-off or netting is used.
This has been upheld in our jurisdiction.

Art. 1279. In order that compensation may be proper, it is necessary:


Traders Royal Bank v. Castanares (2010)

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

(k) Comfort Letter (Letter of awareness, Keepwell Agreement)

These letters may not be enforced in Philippine courts. But in case subsidiary
defaults and parent does not help out, reputation of letter-issuer is affected.
Thus, parent company usually make good their moral duties.

-but it really depends on how the letter writer writes the letter. If strongly
worded, it may give rise to a COA.

Sec. 41, GBL of 2000

not really a security interest but Sir placed it under Section 41 because there
would be an "unsecured loans"

Comfort letters are usually sent by a parent company for a subsidiary to the
would-be lender bank that it will maintain fiscal integrity and/or controlling
interest in the subsidiary.

The loan secured by a comfort letter is an unsecured, clean loan. This is not a
guarantee but rather more of a moral obligation imposed by parent company
unto itself to ensure that subsidiary will not default.

Section 41. Unsecured Loans or Other Credit Accommodations. - The Monetary


Board is hereby authorized to issue such regulations as it may deem necessary with
respect to unsecured loans or other credit ccommodations that may be granted by
banks.

*maybe you would find some comfort if the issuer of the comfort letter is the parent
company of a big international financial group
Why issue a comfort letter (and not a straight forward guarantee)?
1.

Parent company may be prohibited to issue guarantees under contract (Articles


of incorporation)

there would be an issue of WON extension of guarantee is ultra vires or intra


vires

WON the approval of the guarantee needs formalities (refer to Corpo Code)

2.

Comfort letters do not affect credit standing of parent company since it is not
required to be footnoted in statement of assets and liabilities

3.

Company policy may prohibit the issuance of guarantees

2.

Certain Issues

Scope of the Mortgage: Obligations and property covered

In Chattel Mortgage Law, AAP and AIC not included because of Section 5 and 7 of
Chattel Mortgage Law:

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

Art. 2091. The contract of pledge or mortgage may secure all kinds of obligations,
be they pure or subject to a suspensive or resolutory condition.
Affidavit of Good Faith is interpreted to cover only Present obligations and only the
properties listed therein.

this appears to suggest that even future obligations may be covered by the CM.
However, you must be careful in understanding the Civil Code provisions on
Mortgage under Chapter 16. When it speaks of a mortgage, it doesn't cover both
REM and CM, only REM. Chattel Mortgage is governed by another chapter!
A2091 is under Chapter 16 so only concerns REM, not CM! Plus Section 5 & 7
of CM

A stipulation in mortgage documents which seeks to cover properties


(obligations) acquired (incurred) by mortgagor after execution of mortgage
agreement.

What if the CM provides a contractual stipulation that the CM covers future


obligations?

Court said that it is an enforceable obligation for the execution of either a new
document or amend the existing document

Section 7: covers only PROPERTIES described in the deed.

So any provision cannot do the trick. No way out but to execute a new contract
or amend the existing document. Pag hindi nakalista, wala na!

AFTER-ACQUIRED PROPERTY (AAP)

properties acquired/bought by the debtor after the conclusion of a chattel


mortgage agreement

Floating charge vs. Fixed charge

in Philippines, fixed charged only. Specific properties are subject to a lien.

Is AAP valid in REM/ Chattel Mortgage?

REM: Yes, in view of Article 2085, CC.

(a) Validity of after-acquired property and after-incurredobligation clauses in a chattel mortgage


Article 2091, Civil Code

Art. 2085. The following requisites are essential to the contracts of pledge and
mortgage:
(1) That they be constituted to secure the fulfillment of a principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

mortgaged;
(3) That the persons constituting the pledge or mortgage have the free disposal of
their property, and in the absence thereof, that they be legally authorized for the
purpose.
Third persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property. (1857)

CM: No, in view of Section 7 of Chattel Mortgage Law. However, there are
exceptions to this.

Chattel Mortgage Law provides that ONLY SUCH PERSONAL PROPERTY


AS STATED IN THE MORTGAGE DOCUMENT SHALL BE COVERED BY
THE SAME MORTGAGE.

Exception..............

Torres vs. Limjap: revolving stock or goods which are for retail sale (accdg to
Prof. Catindig): perishable goods, subjet to wear-and-tear
When the Mortgage Agreement provides that after-acquired properties may be
included as securities to the obligation, and a new contract or amendment of the
contract is executed (as required in ACME Shoe, Rubber & Plastic Corp vs. CA)

Is AIO valid in REM/ chattel mortgage?

REM: Article 2091, CC ("all kinds of obligations") suggests that even future
properties are subject to mortgages.
Note: Belgian Missionary Case (see the case na lang)

CM: No, in view of Section 5, Chattel Mortgage Law re affidavit of good faith.

-Section 5, CML requires that the mortgage be made for the purpose of securing
the obligation SPECIFIED IN THE CONDITIONS THEREOF, AND FOR NO
OTHER PURPOSE. As held in Acme Shoe, Rubber & Plastic Corp, the said
provision contemplates the obligation existing at the time the mortgage was
executed AND NOT SUBSEQUENT ONES. If the mortgage contract provides
for AIO, there should still be either a new contract or an amended contract
containing the new obligation.

*Note: The Affidavit of Good Faith which specifies the properties subject to the
agreement and the obligations incurred therefor. If not listed, not included in the
Chattel Mortgage

*it is still necessary to include a supplement of REM to cover after acquired


properties and register it with the Registrar of deeds so that at foreclosure time,
there would be no issue as to the scope of the REM.
Torres v. Limjap (1931)

AFTER INCURRED OBLIGATION (AIO)

F: Henson allegedly obtained Loans from Torres which were secured by two
chattel mortgages on the drug store. Henson failed to pay the loan so the
Plaintiffs wanted to take possession of the chattels and foreclose their mortgages
thereon (the drugstores dito).

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

spirit about a handicap to trade and business, would restrain the circulation of
capital, and would defeat the purpose for which the law was enacted, to wit, the
promotion of business and the economic development of the country.

-Henson's heirs (patay na si Henson) alleged the following defenses:

chattel mortgages VOID for lack of sufficient particularity in


the description of the property mortgage

chattels sought to be recovered by the plaintiffs were not the


same property described in the mortgage

*NOTE: THERE WAS A STIPULATION IN THE MORTGAGE


AUTHORIZING HENSON TO SELL THE GOODS COVERED BY THE
MORTGAGE AND REPLACE THEM WITH THE OTHER GOODS
THEREAFTER ACQUIRED

STIPULATION VALID AND BINDING: where the after-acquired property is in


renewal of, or in substitution for, goods on hand when the mortgage was
executed, or is purchased with the proceeds of the sale of such goods, etc.
Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity
of stipulations relating to after-acquired and substituted chattels.
-DAPAT BY EXPRESS STIPULATION: the mortgage must expressly provide
that such future acquisitions shall be held as included in the mortgage

Thie case presents an EXCEPTION to validity of AAP. It is practicable and


sound.

TC:
o

Hensons defaulted in payment

mortgages became due

plaintiffs, as mortgagees, were entitled to the possession of the DRUG


STORES

Peoples Bank and Trust Co. v. Dahican Lumber Company (1967)


1.

WON after AAP are included in the deed of mortgage? YES.

HELD: Affirm. Allowed AAP to be included in the mortgage; the provision of


the last paragraph of section 7 of Act. 1508 is not applicable to drug stores,
bazaars, and all other stores in the nature of revolving and floating business.

It is clear from the provision in both deeds of mortgage that the Lumber
concession "shall immediately be and become subject to the lien" of both
mortgages as if already included therein at the time of execution.

INTENT OF CML: to promote business and trade in these Islands and to give
impetus to the economic development of the country

...it could not have been the intention of the Philippine Commission to apply the
provision of section 7 above quoted to stores open to the public for retail
business, where the goods are constantly sold and substituted with new stock,
such as drug stores, grocery stores, dry-goods stores, etc. If said provision were
intended to apply to this class of business, it would be practically impossible to
constitute a mortgage on such stores without closing them, contrary to the very

It is common and logical in cases where the properties given as collateral are
perishable or subject to inevitable wear and tear or were intended to be sold
or were intended to be used thus becoming inevitable to wear and tear

Purpose: to maintain, to the extent allowed by circumstances, the original


value of the properties given as security.

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

2.

WON the mortgage of the AAP is void because they were not registered in
accordance with the Chattel Mortgage Law

CML DOES NOT APPLY TO THIS CASE. THIS CONCERNS REAL ESTATE
MORTGAGE!

Belgian Catholic Missionaries v. Magallanes Press (1926)

The Mortgages were executed when the OLD CIVIL CODE was still in force.
Still, BOTH old and new civil codes recognize that machinery, receptacles,
instruments or replacements intended by the owner of the tenement for an
industry or works which may be carried on in a building or on a piece of land,
and shall tend directly to meet the needs of the said industry or works. SO, the
properties in dispute should be deemed as real estate and the mortgages
executed are REMs not CMs!
*So does not need to be registered a second time as chattel mortgages in order to
bind the "after acquired properties" and affect third parties.
*DAVAO SAW MILL CASE not applicable because in this case both parties
recognized the after acquired properties as REAL PROPERTIES and not as
chattel.

*This is a mortgage-trust indenture since the bank is a trustee for the foreign
bank.

On the discussion of perishable collateral...then goes on to say that it is not


immoral, etc. poor judgment on the creditor not to include such provision in the
agreement.. BUT theres Section 7 which prohibits precisely inclusion of AAP
clause!!! How can it be poor judgment??

Plus sweeping pronouncement on exclusion of collaterals subject to wear and


tear. BUT all proeprties are subject to wear and tear! No need even to discuss the
said exception since this involves property which was considered REAL
ESTATE MORTGAGE, not Chattel mortgage!

F: Magallanes Press obtained two loans:

1st loan: from JP Heilbronn for P14k. CHATTEL MORTGAGE on all its
printing machinery and accessories was executed in favor of HEILBRONN

2nd Loan: from Belgian Catholic Missionaries for P30k. CHATTEL


MORTGAGE on the same properties executed in favor of Belgian Catholic
Missionaries

-Heilbronn transferred all its mortgage credit to Memije

Extension of 1st loan: Memije, as successor in interest of Heilbronn, extended


an additional P5k loan, and the chattel mortgage executed before was made to
cover the new P5k loan

-fire occurred. Properties covered by the CM were burned. Since it was covered
by an insurance policy, Memije could have recovered the amount due from the
insurance policy but Belgian Catholic Missionaries filed a petition for writ of
injunction to stop the award of the proceeds of the insurance to Memije with the
action to cancel the document of transfer of mortgage

WON Mortgage extension made by Memije (so that the CM would cover after
incurred obligation) is void?

YES

-increase made by Memije in the mortgage credit and the extension made by
Magallanes press of the mortgage to the additional credit, w/o the knowledge or
consent of Belgian Catholic as 2nd mortgagee, prejudices the credit of the 2nd

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

mortgagee inasmuch as the security for the payment of said credit was reduced =
fraud that vitiates the contract of extension of the mortgage, VOID

"The increase of P5,895.59 made by the defendant Jose Ma. Memije of the
mortgage thereto, are not only subordinate to the mortgage credit of the
plaintiff company, being subsequent in time and in registration, but said increase
in the security is also void."
*NOTE: court recognized that the mortgage in favor of JP Heilbronn was
preferenced vs. the mortgage in favor of Belgian Catholic. But as to the
extension granted by Memije, Belgian Catholic would be preferred, as the said
extension is void (plus prefer Belgian because the after incurred obligation was
executed after the mortgage in favor of Belgian Catholic, and thus, subordinate
to it.
The increase of the mortgage security becomes a new mortgage in itself,
inasmuch as the original mortgage did not contain any stipulation in regard to
the increase of the mortgage credit, and even if it did, said increase would take
effect only from the date of the increase. A mortgage that contains a stipulation
in regard to future advances in the credit will take effect only from the date
the same are made and not from the date of the mortgage.
In accordance with the provisions of section 5 of Act No. 1508, known as the
Chattle Mortgage Law, the parties to the original deeds swore that the same was
mortgaged "to secure the obligations specified therein and for no other purpose."
Neither the increase in question, nor the extension of the mortgage to secure the
payment of the same is specified in the deed, consequently said extension is
void. "Where the statute provides that the parties to a chattel mortgage must
make oath that the debt is a just debt, honestly due and owing from the
mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made
to secure a debt to be thereafter contacted."
On SC statement on p655 of SCRA: "The increase of the mortgage security
becomes a new mortgage in itself, inasmuch as the original mortgage did not
contain any stipulation in regard to the increase of the mortgage credit, and even
if it did, said increase would take effect only from the date of the increase". BUT

THE INCREASE IN THE FINANCIAL CREDIT ACCOMODATION WOULD


NOT BE COVERED BY THE CM IF NO ADDITIONAL
DOCUMENTATION! This statement by the SC gives rise to the mistaken
notion that we could do away with the documentation requirements!

Remember this because this case is cited in the next case!

Acme Shoes, Rubber and Plastic Corp. v. CA (1996)

F: ACME SHOE obtained a loan for P3M from Producer's Bank. ACME also
executed a CM which provides that the mortgage shall also stand as security
for any subsequent loans extended by the bank (Producer's Bank) to
ACME SHOE.

initial P3M Loan was paid by ACME SHOE (therefore at this point, the CM was
extinguished).

subsequently, ACME Shoe obtained another loan from Producer's Bank for P1M
(note: NO new CM was executed)

ACME shoe defaulted on their P1M obligation so Producer's Bank sought the
EXTRAJUDICIAL FORECLOSURE OF THE CHATTEL MORTGAGE

WON a clause in a chattel mortgage that purports to likewise extend its coverage to
obligations yet to be contracted or incurred is valid

NO. Rule in favor of ACME

VOID. Should execute a new CM over the new debt OR Amend the old

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

contract conformably with the form prescribed in the CML

*Refusal to execute a new agreement by the borrower = default

*the remedy of foreclosure can only cover debts extent at the time of
constitution and during the life of the CM sought to be foreclosed.

*SEC5, CML: Affidavit of GF: the parties must execute an oath that the
mortgage is made for the purpose of SECURING THE OBLIGATION
SPECIFIED IN THE CONDITIONS THEREOF, AND FOR NO OTHER
PURPOSE

the debt referred to in the law is a current, not an obligation that is yet merely
contemplated.

DECISION IN ACME SHOE COULD HAVE BEEN ALRIGHT WITHOUT


CITING THE BELGIAN CATHOLIC CASE. BY JUST CITING SECTION 5,
ITS CLEAR. Belgian contradicts the early position. Section 5 still requires
documentation but the Belgian case doesn't!

NOTE: SIR INTENDS TO CHANGE HIS QUESTIONS! HIS STUDENTS


TEND TO CITE ACME SHOE AND BELGIAN IN REM! ACME and
BELGIAN concerns CM!!

for the payment to the said mortgagee in addition to the aforesaid notes of the
purchase price or cost of any and all gasoline, tires, automobile accessories or
parts, and repairs furnished or made by the said mortgagee at any time up to the
date this mortgage is completely satisfied as and when the same becomes due,
and of any other indebtedness of the mortgagor in favor of the mortgagee
incurred in any other manner whatever.

Choa Siong acted as surety for P300 for a certain Angeles for paints and
accessories the latter obtained from Macondray. Macondray assigned its credit
to Luneta, as Choa Siong still had P140 balance. Chao Siong paid P40 so there
was P100 left unpaid.

Choa Siong was able to pay all the PNs though. But since there is still P100 left
unpaid arising from the surety made by Choa Siong, the credit of which was
assigned to Luneta, Luneta refused to extinguish the CM.

Chao Siong sold the auto to Ong Liong Tiak.

For the nonpayment of the P100, Luneta sought the forclosure of the CM.
Sheriff attached the auto (ppor Ong Liong Tiak :( )

Ong Liong Tiak filed petition for writ of injunction and damages vs. Luneta. CFI
ruled against him

WON the surety secured by Ong Liong Tiak is included in the CM executed by Ong
Liong Tiak in favor of Luneta Motor Co?
Ong Liong Tiak v. Luneta Motor Co. (1938)

F: Chao Siong purchased a Chrysler Sedan from Luneta Motors co for P1.8k,
secured by 18 PNs for P100 each and a CM in favor of Luneta. CM included a
clause as follows:

YES

Instruments of mortgage, as said Exhibit 2, are binding, while they subsist, not
only upon the parties executing them but also upon those who later, by purchase
or otherwise, acquire the properties referred to therein.

. . it being expressly agreed further that this mortgage shall also serve as security

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

The right of those who so acquire said properties should not and can not be
superior to that of the creditor who has in his favor an instrument of mortgage
executed for the formalities of the law, in good faith, and without the least
indication of fraud. This is all the more true in the present case, because, when
the plaintiff purchased the automobile in question on august 22, 1933, he knew,
or at least, it is presumed that he knew, by the mere fact that the instrument of
mortgage, Exhibit 2, was registered in the office of the register of deeds of
Manila, that said automobile was subject to a mortgage lien. In purchasing it,
with full knowledge that such circumstances existed, it should be presumed that
he did so, very much willing to respect the lien existing thereon, since he should
not have expected that with the purchase, he would acquire a better right than
that which the vendor then had.

Kawawa naman si OLT! Walang napunta sa kanya. May COA ba sha against
Chao Siong?

SC validated an AIP w/o even explaining why. Sir included this case so that you
would know that there's a SC that contradicts what is provided in law. This case
supports the wrong position. But since it is also supported by SC, "legal practice
becomes more interesting"

Prudential bank v. Alviar (2005)

F: (loan 1) Sps. Alviar obtained a P250k loan from Prudential Bank and as a
security, they executed a REM over their parcels of land in San Juan. The REM
contained a "blanket clause/dragnet clause" (see below in the decision)
(loan 2) Don Alviar executed a PN for P2,640,000 in favor of Prudential Bank
secured by a "hold-out" on the mortgagor's (Alviar's) foreign currency savings
account with Prudential Bank and Alviar's passbook is to be surrendered to
Prudential Bank until the amount secured by the holdout is settled.

(loan 3) Another PN for P545,000 was executed by Don Alviar, this time in
behalf of DONALCO trading (the spouses are the Chairman and the VP of the
company), in favor of Prudential Bank. This was secured by "Clean Phase out of
TOD CA 3923: meaning that the temporary overdraft incurred by DONALCO
trading is to be converted into an ordinary loan. Prudential bank approved the
straight loan. Securities were deed of assignment on 2 PNs executed by Bancom
Realty Corp.and chattel mortgage on various heavy and transpo equipment

Alviars paid Prudential Bank P2M to be applied to the obligations of Alviars (as
GB Alviar Realty and Development Inc) and for the release of the REM for
P450k (cf P250k at the start) which covered their 2 San Juan lots. Payment was
acknowledged and Prudential Bank released the mortgage over the 2 properties.
STILL, PRUDENTIAL BANK MOVED FOR EXTRAJUDICIAL
FORECLOSURE OF THE MORTGAGE ON THE PROPERTY, arguing that
the Alviars had the total obligation of P1,608,256.68 covering 3 PNs (the first
loan + another loan + 3rd loan).

Alviars filed for DAMAGES + prayer for issuance of writ of preliminary


injunction: claimed to have paid principal loan secured by the 2 San Juan
properties by payment of P2M

Vs. Prudential Bank: Payment of P2M was for the obligations of GB ALVIAR
REALTY & DEV'T CORP under a separate loan secured by a separate mortgage
(and not by the spouses! themselves)

TC: proceed with foreclosure; MFR: reverse - even awarded damages in favor
of Alviars. The REM only covers the 1st loan and not the subsequent loans.

The blanket mortgage clause relied upon by Prudential Bank applies only to
future loans obtained by the mortgagors, and not by parties other than the
said mortgagors, such as Donalco Trading, Inc., for which respondents merely
signed as officers thereof.

CA: Affirmed: while a continuing loan or credit accommodation based on only


one security or mortgage is a common practice in financial and commercial
institutions, such agreement must be clear and unequivocal. In the instant case,

11

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

the parties executed different promissory notes agreeing to a particular


security for each loan. Thus, the appellate court ruled that the extrajudicial
foreclosure sale of the property for the three loans is improper.

-mortgages given to secure future advancements are valid and legal


contracts, and the amounts named as consideration in said contracts do not limit
the amount for which the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and other indebtedness can
be gathered.

In this case:

That for and in consideration of certain loans, overdraft and other credit
accommodations obtained from the Mortgagee by the Mortgagor and/or
________________ hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and those that may hereafter
be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty
Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest
and expenses or any other obligation owing to the Mortgagee, whether direct or
indirect, principal or secondary as appears in the accounts, books and records of
the Mortgagee, the Mortgagor does hereby transfer and convey by way of
mortgage unto the Mortgagee, its successors or assigns, the parcels of land
which are described in the list inserted on the back of this document, and/or
appended hereto, together with all the buildings and improvements now existing
or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and
incumbrances. . . .

SC: ALL OTHER LOANS INCLUDED! Parties intended the real estate
mortgage to secure not only the P250,000.00 loan from the petitioner, but also
future credit facilities and advancements that may be obtained by the
respondents. The terms of the above provision being clear and unambiguous,
there is neither need nor excuse to construe it otherwise.

The problem: Would the "blanket Mortgage clause/dragnet clause" apply when
the subsequent loans are covered by separate securities?

-However, it found that the spouses has not paid under the 1st obligation as the
P2M payment was for the obligation of the GB Alviar Realty and Development
Inc and not in their personal capacity

WON The "Blanket mortgage clause" or the "dragnet mortgage clause" expressly
covers not only the 1st loan but also the 2 subsequent loans? And if it is valid?

services, recording fees, et cetera.

-Court held that the 3rd loan was clearly not covered by the "blanket mortgage
clause" because the said loan was undertaken by the spouses in behalf of
DONALCO and not in their personal capacity. No piercing of corporate veil as
no evidence of evasion and fraud was shown.

blanket mortgage clause/dragnet clause:

-one which is specifically phrased to subsume all debts of past or future origins.

-should be carefully scrutinized and strictly construed

-Mortgages of this character enable the parties to provide continuous dealings,


the nature or extent of which may not be known or anticipated at the time, and
they avoid the expense and inconvenience of executing a new security on each
new transaction

-operates as a convenience and accommodation to the borrowers as it makes


available additional funds without their having to execute additional security
documents, thereby saving time, travel, loan closing costs, costs of extra legal

12

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

2 SCHOOLS OF THOUGHT:

Dragnet clause covers ALL OTHER DEBTS, EVEN IF THE OTHER DEBT IS
SECURED BY ANOTHER MORTGAGE
Dragnet clause would not secure a note that is otherwise secured as to its
entirety. Would only cover the deficiency after exhausting the security specified
therein. (so pag may natira pang obligation, yun ung under ng dragnet clause

SC: 2nd school of thought!

RELIANCE ON THE SECURITY TEST: when the mortgagor takes another


loan for which another security was given it could not be inferred that such loan
was made in reliance solely on the original security with the dragnet clause,
but rather, on the new security given

Ratio: the dragnet clause in the first security instrument constituted a


continuing offer by the borrower to secure further loans under the security of the
first security instrument, and that when the lender accepted a different security
he did not accept the offer

*Where deeds absolute in form were executed to secure any and all kinds of
indebtedness that might subsequently become due, a balance due on a note,
after exhausting the special security given for the payment of such note, was in
the absence of a special agreement to the contrary, within the protection of the
mortgage, notwithstanding the giving of the special security.This is recognition
that while the dragnet clause subsists, the security specifically executed for
subsequent loans must first be exhausted before the mortgaged property can be
resorted to.

*any ambiguity in a contract whose terms are susceptible of different


interpretations must be read against the party who drafted it, Prudential Bank.

*BUT PRUDENTIAL BANK could still subject the properties to foreclosure


proceedings for the unpaid P250k, which both TC and CA found to have not yet
been paid. If there are deficiencies for the second loan, could also apply the

proceeds as to the second loan.

Qualification to the validity of the AIO clause: Dragnet Clause

Even if there is a Dragnet Clause in REM which might have secured future
obligations, when the future obligations are secured separately,

GR: mortgagee cannot foreclose the REM to satisfy the unpaid subsequent
obligations. Exhaust first the specified collateral for the loan, not the property
under the Dragnet clause!

X: unless there's an explicit stipulation to the contrary!

Justice Tinga, who loves to cite American jurisprudence, is saying that dragnet
clause is used in mortgages to allow.he is actually describing a Mortgage
Trust Indenture (the Philippine Equivalent)!

Cuyco v. Cuyco (2006)

F: Petitioners obtained a P1.5M loan from respondents, secured by REM over


their Cubao property.

REM provides:

PROVIDED HOWEVER, that should the MORTGAGOR duly pay or cause to


be paid unto the MORTGAGEE or his heirs and assigns, the said indebtedness
of ONE MILLION FIVE HUNDRED THOUSAND PESOS (1,500,000.00),
Philippine Currency, together with the agreed interest thereon, within the agreed
term of one year on a monthly basis then this MORTGAGE shall be discharged,
and rendered of no force and effect, otherwise it shall subsist and be subject to

13

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

foreclosure in the manner and form provided by law.

(eto ang na-gets koung P1.5M loan lang ang kasama)

Subsequently, petitioners obtained additional loans from the respondents in the


aggregate amount of P1,250,000.

GR: a mortgage liability is usually limited to the amount mentioned in the


contract.

Petitioners only paid P291,700 but defaulted as to the rest.

Respondents filed a complaint for foreclosure of mortgage, alleging that the


loans (all of them) were secured by the REM and as of August 31, 1997, the
debt amounted to P6,967,241.14 (with interest of 18% mo)

X: However, the amounts named as consideration in a contract of mortgage do


not limit the amount for which the mortgage may stand as security if from the
four corners of the instrument the intent to secure future and other
indebtedness can be gathered. This stipulation is valid and binding between the
parties and is known in American Jurisprudence as the blanket mortgage
clause, also known as a dragnet clause.

Vs. Petitioners: REM only covers P1.5M loan, no agreement that the 18%
interest was to be compounded mo as it was per annum!

A dragnet clause operates as a convenience and accommodation to the


borrowers as it makes available additional funds without their having to execute
additional security documents, thereby saving time, travel, loan closing costs,
costs of extra legal services, recording fees, et cetera.

While a real estate mortgage may exceptionally secure future loans or


advancements, these future debts must be sufficiently described in the
mortgage contract. An obligation is not secured by a mortgage unless it comes
fairly within the terms of the mortgage contract. HOWEVER, it is clear from a
perusal of the real estate mortgage that there is no stipulation that the
mortgaged realty shall also secure future loans and advancements. Thus, what
applies is the general rule above stated.

What the parties could have done in order to bind the realty for the additional
loans was

to execute a new real estate mortgage or


to amend the old mortgage conformably with the form prescribed by the law.

Failing to do so, the realty cannot be bound by such additional loans, which may
be recovered by the respondents in an ordinary action for collection of sums of
money.

RTC: For respondents

CA: REM was expressly intended to cover only the original P1.5M loan and the
subsequent P150k and P500k loans, not the P150k loan, the P200k loan and
P250k loan. 12% interest imposed by TC also proper

WON the 12% interest rate imposed by TC Proper

YES. As was held in Eastern shipping lines and in the law. Interest on judicial
awards until paid.

WON all five additional loans were intended to be secured by the real estate
mortgage

NO.

14

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

stipulation to the contrary.


WON the amount of obligation should include interest?

In pledge, if there's a deficiency

YES. Rule 68.2 provides so.

GR: Creditor cannot claim deficiency once foreclosure obtained

No dragnet clause involved here!

EXC: if stipulated

(b) No deficiency claim in a pledge

Pactum commisorium is not allowed under RP Laws. If you have a multiple


security agreement (chattel mortgage, REM, pledge, assignment) for the same
principal obligation, ALWAYS REMEMBER THAT FORECLOSURE OF THE
PLEDGE SHOULD BE DONE LAST (As there's a prohibition to undergo other
remedies under Article 2115)
Sir was saying something about pledge of shares of stock and the argument that
the situs is not Philippines but sir said that even if it be argued that situs not in
RP, RP laws would still applybasta sorry I don't know eh...

No deficiency claim in a pledge

Art. 2115. The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the amount of the
principal obligation, interest and expenses in a proper case. If the price of the
sale is more than said amount, the debtor shall not be entitled to the excess,
unless it is otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding any

(c) Deficiency claim in a chattel mortgage; exception (Article 1484,


par 3, Civil Code)

Art. 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:
...
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted,
should the vendee's failure to pay cover two or more installments.
...In this case, he shall have no further action against the purchaser to recover any
unpaid balance of the price. Any agreement to the contrary shall be void. (1454-A-a)

Review for Article 1484:


General Rule: Creditor shall always be entitled to collect the deficiency judgement.
(Ablaza v. Ignacio, 58).

15

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

Differentiating Pledge and Chattel Mortgage

Pledge

Chattel Mortgage

In pledge, the pledgor cannot be made


answerable for deficiency after
foreclosure since the principal
obligation is extinguished. Thus,
foreclosure of pledge must be your
last remedy.

GR: Action for deficiency is


allowed. (Chattel Mortgage Law,
Garrido v. Tuason)

denied.

Garrido commenced a civil case vs. Pila Tuason, and now with her husband, for
the recovery of the alleged balance in the earlier case. MTD filed by Tuason. TC
for TUASON,

CFI: Affirmed dismissal of civil case in pursuance to Article 2115 of Civil Code:

Article 2115 provides:


". . . The sale of the thing pledged shall extinguish the principal obligation,
whether or not the proceeds of the sale are equal to the amount of the principal
obligation, interest and expenses in a proper case. If the price of the sale is more
than said amount, the debtor shall not be entitled to the excess, unless it is
otherwise agreed. If the price of the sale is less, neither shall the creditor be
entitled to recover the deficiency, notwithstanding any stipulation to the
contrary."

Exception: Article 1484(3), Civil


Code/ Recto Law.

Possible Solution: Subject pledge to


foreign law.

Garrido v. Tuason (1968)

WON Garrido could still claim the deficiency?

NO, but based on res judicata, not because there was already foreclosure of the
CM.

*Article 2115 of the Civil Code does not apply to Chattel Mortgage. Article
2115 is inconsistent with the provisions of the Chattel Mortgage Law, and that,
accordingly, the chattel mortgage creditor may maintain an action for the
deficiency.

-TC must have applied 2115 based on Article 2141 of CC which provides that
provisions on pledge shall be applicable to chattel mortgages "insofar as they are
not in conflict with the Chattel Mortgage Law". But as it does conflict, it should
not be applied!

F: Pila Tuason executed a CM over her car for the sum of P1k which she owed
to Jose Garrido. As she was unable to pay, Jose Garrido commenced a case for
the foreclosure of the CM + atty's fees and costs (note: not for collection of the
outstanding obligation!)

TC: pay P1k + interests + P100 + costs (even if Garrido prayed for foreclosure!)

writ of execution issued, car of Tuason was sold at a public auction for P550
with Garrido as the highest bidder

as there was still P450 left unsatisfied + P165 allegedly spend to carry out writ
of execution and P1,290.58 as aggregate outstanding balance due under
decision, Garrido filed motions (for alias writ of execution) which were both

16

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

HOW CONFLICT? DI ko rin alam eh. Wehe. Eto sabi sa footnote sa case:

The last part of the second paragraph of Section 14 of Act No. 1508, provides:

SECTION 14. Sale of property at public

". . . The proceeds of such sale shall be applied to the payment, first, of the costs
and expenses of keeping and sale, and then to the payment of the demand or
obligation secured by such mortgage, and the residue shall be paid to persons
holding subsequent mortgages in their order, and the balance, after paying the
mortgages, shall be paid to the mortgagor or person holding under him on
demand."

Pero hellurh, this contemplates a situation where there is excess in the proceeds
of the sale, and not when there's a deficiency. So how does this conflict?

TC might have acted under the impression that the first case was for the
foreclosure of a chattel mortgage. But the first case was an ordinary money
judgment so no previous ruling on foreclosure

...(okay eto pagkagets ko a, since di pa naman judicially ordered ang


foreclosure, pede pa magforeclosure on other properties to cover the deficiency
of the money judgment. In this case, Garrido prayed for foreclosure and not
payment but since the MTC ordered payment instead, no judicial order of
foreclosure)

SC: Municipal court should have NOT DENIED plaintiff's motion for issuance
of alias writ of execution

-but since instead of filing an appeal to the denial of his motion, the decision of
the MC have been final and executory and thus binding and res judicata on the
Civil Action he later filed.

NOTE: Why did CM arise? May sale ba or may utang lang? If may sale, A1484
would apply!

There's no explicit statement in the Chattel Mortgage law which provides that
the creditor could recover deficiency. SC interpreted it and declared that there's
such right WITHOUT EXPLAINING WHY Sir said that in previous cases,
the ruling was different but he didn't assign to us the said cases because it was
not assigned to him when he was a student...

PCI Leasing and Finance v. Trojan Metal Industries (2010)

Magna Financial Services Group v. Colarina (2005)

F: Colorina bought on installment from Magna Financial Services a Suzuki


Multicab. He executed a PN for the balance of P229,284 and executed an
integrated PN and deed of CM over the Multicab as security.

-Colorina failed to pay the monthly amortization, with accumulating unpaid


balance of P131,607. Colorina still failed to pay inspite of demands so MAGNA
filed a COMPLAINT FOR FORECLOSURE of CHATTEL MORTGAGE w/
REPLEVIN

-bond was filed by MAGNA, writ of replevin was issued

TC: Colarina pay the P131,607 plus penalty + atty's fees + costs. In case of
nonpayment, multicab shall be sold at public auction

RTC: affrim

17

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

mortgagee divested of title

CA: complaint was for foreclosure of the chattel mortgage so wrong to order
Colorina to pay the balance due

-if nonpayment: foreclosure one of the remedies under A1484

may either be judicial or extrajudicial

*** Since the petitioner has undeniably elected a 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.

What is the true nature of a foreclosure of chattel mortgage under Article 1484(3)

YEY! Eto na ung sinasabi ni ma'am Chit!

BACHRACH MOTOR CO. VS. MILLAN: 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.

-HERE: MAGNA PRAYED BOTH FOR PAYMENT OF THE


OBLIGATION AND FORECLOSURE OF THE CHATTEL. However, by
praying for the foreclosure of the chattel, Magna renounced whatever claim
it may have under the PN.

WON there has been an actual foreclosure of the vehicle

Not yet, but since the vehicle is with Magna already and Magna consistently
avowed that it elects the remedy of foreclosure, CA correctly directed the
foreclosure of the vehicle.

SC: A contract of chattel mortgage is the nature of a conditional sale of


personality. WITHOUT EXPLAINING WHY IT WAS SO EVEN AFTER
SAYING IT WAS INACCURATE, IN CERRA V. RODRIGUEZ. SIR: The
characterization of CM as conditional sale has been abandoned since the
enactment of Civil Code (A2141 of NCC).

-Art 1484(3) PROHIBITS OTHER ACTION TO RECOVER ANY


UNPAID BALANCE OF THE PURCHASE PRICE AFTER
FORECLOSURE. 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.
-NATURE OF CONTRACT OF CHATTEL MORTGAGE: conditional sale of
personal property given as 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 OR PERFORMING
THE
OBLIGATION
SPECIFIED.
-if condition performed: mortgage and sale immediately become void,

(d) Dacion en pago with repurchase (as an alternative to


foreclosure of mortgage)

This set-up is used to do away with foreclosure proceeding

18

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

RA 133

Dacion en Pago: mode of extinguishing an obligation whereby the debtor


alienates in favor of the creditor property for the satisfaction of monetary debt;
extinguish up to amount of property unless w/ contrary stipulation; A special
form of payment because 1 element of payment is missing: IDENTITY

result is the same, in the sense that the mortgagor ends up with the property but
no foreclosure proceeding

Sir's book:

Is this a circumvention of pactum commisorium?

YES. Precisely, the mortgage is set aside. NO mortgage to speak of in the first
place as it's substituted with another contractual arrangement. But valid as it is
under the freedom of the parties to contract.

(e) Effect of stay order on enforcement of security

In Petition for Rehabilitation, the Court may issue a stay order which works as a
standstill order prohibiting creditors to enforce their securities.

court needs to see if the petition is sufficient in form and substance

"Cram down" clause

(f) Foreclosure of real estate mortgage


Section 47, GBL of 2000

REM may be foreclosed Judicially or extrajudicially:

Judicially

Extrajudicially

R68, Rules of Civ Pro

Act 3135

No right of redemption, only an equity of redemption


(right of mortgagor to extinguish the mortgage and
retain ownership of the property by paying the
mortgage debt w/n period of not less than 90d nor
more than 120d from entry of final and executory
judgment)

Right of redemption

GR: 1 yr (individual/natural perso


certificate of sale

X: 3 months max for Juridical Persons

**If the mortgagee = bank - follow Section 47


*if mortgagee=bank >>> there's always right of redemption, regardless if judicial or
extrajudicial
---w/n 1 year counted from the date of registrationof the certificate of sale in the
Registry of Property (Huerta vs. CA)
but period shortened under GBL if JURIDICAL PERSON: 3 months from

19

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

extrajudicial foreclosure

administer the same in accordance with law. (RIGHT OF THE PURCHASER TO


ENTER PROPERTY AFTER SALE - HUERTA VS. CA)

foreign banks may not benefit from the 2nd paragraph of Section 47 since it may
not be able to resort to extrajudicial foreclosure and therefore, will be unable to
benefit from the 2nd paragraph of A67

SECTION 47. Foreclosure of Real Estate Mortgage.

Any petition in court to enjoin or restrain the conduct of foreclosure proceedings


instituted pursuant to this provision shall be given due course only upon the filing
by the petitioner of a bond in an amount fixed by the court conditioned that he will
pay all the damages which the bank may suffer by the enjoining or the restraint of
the foreclosure proceeding.

In the event of foreclosure,


whether judicially or extrajudicially,
Notwithstanding Act 3135,
of any mortgage on real estate which is security for any loan or other credit
accommodation granted,
the mortgagor or debtor whose real property has been sold for the full or partial
payment of his obligation shall have the right within one year after the sale of the
real estate, to redeem

juridical persons whose property is being sold pursuant to an extrajudicial


foreclosure,
shall have the right to redeem the property in accordance with this provision

the property

until, but not after, the registration of the certificate of foreclosure sale with the
applicable Register of Deeds

by paying the amount due under the mortgage deed, with interest thereon at the rate

which in no case shall be more than three (3) months after foreclosure,

specified in the mortgage, and all the costs and expenses incurred by the bank or
institution from the sale and custody of said property less the income derived
therefrom. (RIGHT TO REDEEM PROPERTY W/N 1 YEAR FROM DATE OF
REGISTRATION OF THE CERTIFICATE OF SALE IN THE REGISTRY OF
PROPERTY)

whichever is earlier.
Owners of property that has been sold in a foreclosure sale prior to the effectivity of
this Act shall retain
their redemption rights until their expiration. (78a)

However, the purchaser at the auction sale concerned whether in a judicial or


extrajudicial foreclosure shall have the right to enter upon and take possession of
such property immediately after the date of the confirmation of the auction sale and

RA NO. 133

20

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

Sec. 1. Any provision of law to the contrary notwithstanding,


private real property may be mortgaged for a period not exceeding five years,
renewable for another five,

Facts: Pangilinan and Chua were charged and convicted of qualified theft for P275k
from China Banking Corporation. In furtherance of the judgment, Pangilinan
executed in favor of China Banking Corporation a public instrument entitled DEED
OF TRANSFER whereby he ceded and transferred to CBC a parcel of land located
in Manila.

but the mortgagee or his successor in interest,

-When CBC presented the document to the Registrar of Deeds, Registrar denied it
because CBC was alien-owned and as such, barred from acquiring lands in the
Philippines

if disqualified to acquire or hold lands of the public domain in the Philippines,

-CBC submitted matter to the Land Registration Commission for Resolution.

shall not bid or take part in any sale of such real property as a consequence of
such mortgage.

LRC: unregistrable

in favor of any individual, corporation, or association,

HELD: CBC cannot register the property in their name


Sir: foreign banks can be mortgagees but cannot acquire the property in a foreclosure
saleonly entitled to proceeds of the sale

-Section 25, RA 337 par and (d) ARE NOT APPLICABLE TO ALIEN BANKS!

Note however that RA 133 specifies judicial foreclosure, not extrajudicial


foreclosure
ON PAR :

(okay, I can't find it anywhere in RA 133wala namang nakaspecify kung judicial


or extrajudicial basta as a consequence of such mortgage)
See page 156

"Sec. 25. Any commercial bank may purchase, hold, and convey real estate for the
following purposes:
(c)Such as shall be conveyed to it in satisfaction of debts previously contracted in
the course of its dealings;

the "debts" referred to are ONLY THOSE RESULTING FROM PREVIOUS


LOANS AND OTHER SIMILAR TRANSACTIONS MADE OR ENTERED
INTO BY A COMMERCIAL BANK IN THE ORDINARY COURSE OF ITS
BUSINESS AS SUCH

"CIVIL LIABILITY" arising from a criminal offense WAS NOT A DEBT

Register of Deeds v. China Banking Corp (1962)

21

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

RESULTING FROM A LOAN OR A SIMILAR TRANSACTION HAD


BETWEEN TWO PARTIES IN THE ORDINARY COURSE OF BANKING
BUSINESS

SECTION 25 = SEC 52 of the NEW LAW


SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims.
Notwithstanding the limitations of the preceding Section, a bank may acquire, hold
or convey real

ON PAR (D)
property under the following circumstances:
"Sec. 25. Any commercial bank may purchase, hold, and convey real estate for the
following purposes:

52.1. Such as shall be mortgaged to it in good faith by way of security for debts;

(d) Such as it shall purchase at sales under judgments, decrees, mortgages, or trust
deeds held by it and such as it shall purchase to secure debts due to it.

52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in


the course of

But no such bank shall hold the possession of any real estate under mortgage or trust
deed, or the title and possession of any real estate purchased to secure any debt due
to it, for a longer period than five years."

its dealings; or

the deed of transfer sale made by virtue of judgment, decree, mortgage, or


trust deed held by CBC

real property in question was not purchased by CBC to secure debts due it

debts: refer only to such debts as may become payable to appellant bank as a
result of a banking transaction.

52.3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust
deeds held
by it and such as it shall purchase to secure debts due it.
Any real property acquired or held under the circumstances enumerated in the above
paragraph
shall be disposed of by the bank within a period of five (5) years or as may be
prescribed by the

ON Argument that consti prohibition should be liberally construed to be limited


to PERMANENT ACQUISITION OF REAL ESTATE BY ALIENS

Monetary Board: Provided, however, That the bank may, after said period, continue
to hold the property

for its own use, subject to the limitations of the preceding Section. (25a)

the consti prohibition is ABSOLUTE IN TERMS. Smith Bell & Co Case not
applicable because what was allowed to be registered there was a 50-year
LEASE which does not involve transfer of dominion over the land

This is the case when SYCIP lost (SYCIP's dad was one of the founders of China
Bank)

See sir's annotation of the section! "1st paragraph of my annotation it took me


hours to put up this paragraph"

22

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

El Hobar Filipino: Bank made some effort in GF to sell the property w/n 5 years. So
substantial compliance with Section 52.

properties until the discharge of the principal obligation, WHOEVER


POSSESSOR OF THE LAND MAY BE.

Now there are online sales of the ROPA!


WON Spouses have right to redeem

YES. But right already prescribed.

-as successors-in-interest of MICC, they have right to redeem 1 year FROM


THE DATE OF REGISTRATION OF THE CERTIFICATE OF SALE W/ THE
REGISTRY OF DEEDS. That is, from July 29, 1985 (thus, UNTIL JULY 29,
1986)

But since they failed to redeem within said period, right prescribed. Ownership
of the subject properties was thus consolidated in favor of BF

Paderes v. CA (2005)

Facts: MICC obtained a loan from Banco Filipino Savings and Mortgage Bank
and executed REM over 21 parcels of land, including 2 parcels of land in Pque
which MICC sold though unregistered.

-since MICC defaulted in their obligation, Banco Filipino filed PETITION FOR
THE EXTRAJUDICIAL FORECLOSURE of MICC's Mortgage (question: if
extrajudicial, bakit may petition?).

WON there was a binding AGREEMENT FOR REPURCHASE


NO.

-Auction Sale: BF declared the highest bidder. Certificate of Sale issued in favor
of BF.
-NO REDEMPTION W/N REGLEMENTARY PERIOD so BF filed a petition
for issuance of writ of possession of foreclosed properties which was granted.
Notice to vacate served on spouses who bought 2 lands from MICC. Spouses
(petitioners) fiiled petition before CA - dismissed for lack of merit.

(apparently there were negotiations entered by the Spouses with BF. However,
the correspondence failed to show that the parties agreed to the valuation of the
properties and that any of the parties agreed to the redemption on a fixed price)

Court held that the correspondence between the parties reveals absence of
DEFINITE OFFER AND ABSOLUTE ACCEPTANCE OF THE DEFINITE
OFFER.

WON spouses have superior right over BF (alleging Buyers in GF)


WON house should have been excluded from the auction sale

NO. Sale occurred AFTER MORTGAGE in favor of BF registered. A real right


or lien in favor of BF had already been established, subsisting over the

23

BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

NO. Article 448, NCC does not apply

-The houses purchased by the spouses from MICC are improvements on the
properties subjected to the REM, thus covered by the REM as improvements are
deemed part of real property

-Santiago filed a complaint for redemption and specific performance with RTC vs.
BF
-BF Filed MTD: no redemption effected w/n 1 year from date of registration.
*RTC: dismissed redemption complaint
a

WON writ of possession could still be enforced after 8 years from promulgation

YES. Right of applicant/subsequent purchaser to request for the issuance of a


writ of possession of land NEVER PRESCRIBES

*CA: reversed TC: sustained complaint for redemption


a

If you register your REM and have it annotated to the back of your title, subsequent
buyers of the land are bound by the REM

a
a

Banco Filipino Savings and Mortgage Bank v. CA (2005)


Facts: Santiago Memorial Park obtained a loan with BF and executed a REM over a
parcel of lot. Because of default, BF foreclosed REM and certificate of sale was
issued in favor of BF.
-Santiago manifested its interest to exercise its right to redemption and offered as
payment P700k (loan was for P500k). Deputy liquidator gave Santiago until end of
March 1992 to negotiate payment. Santiago remitted P50k to manifest willingness to
redeem property. Santiago later offered P1M for the property. Senior VP demanded
later P5,830,000 as purchase price of property.

NO DEFINITE REDEMPTION (offer was not coupled with tender of the


price)
Complaint did not state that Santiago tendered correct redemption price w/n
redemption period

Complaint alleged that as eary as August 6, 1991 (6 months before the


expiration of the statutory period for redemption), Santiago exerted earnest
efforts to effect redemption
Santiago did deposit the price which they believed was the agreed redemption
price, with the belief that BF was negotiating in GF
Granted that Santiago is barred, as the parties entered into a new contract
extending period w/n which to purchase property, Santiago could still
purchase property
---Santiago tendered payment and consigned amount of P1,300,987.96 in
accordance with CA deci

HELD: for BF. NO COA for redemption. Regardless if Santiago was diligent in
asserting its willingness to pay, REDEMPTION W/N THE PERIOD ALLOWED BY
LAW IS NOT A MATTER OF INTENT BUT A QUESTION OF PAYMENT OR
VALID TENDER OF FULL REDEMPTION PRICE W/N SAID PERIOD.

*Banco Filipino v. CA (2005): The right of redemption must be exercised within the

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

III. Other Tax Matters


specified time limit, which is one (1) year from date of registration of certificate of
sale. In case of disagreement over the redemption price, the redemptioner may
preserve his right of redemption through judicial action which in every case must be
filed within the same one (1) year.

A. Applicable Taxes

Note: Redemption amount as provided in Section 47 of GBL is different from that in


Rules of Court. This is to insure that the bank will not incur losses.

1.

Income Tax

2.

DST

3.

GRT

*Provisions of GBL are juxtaposed with ROC provisions.

2. DST
If non bank

Redemption price: foreclosure sale

Bank

Redemption price: mortgage deed + interest

e.g. loan P1M, REM, foreclosed, sold for only P500k

BIR RR 9-94, Section 8: If the loan agreement and security device are evidenced by
1 agreement (omnibus agreement), pay only the higher DST

e.g. 1 borrower entered into the ff transactions (I'm not sure if this is accurate
should find the applicable DST rates):

What the mortgagor would do to redeem the property is to give you back
P500k:: if non-bank
P1M+ interests :: if bank

Tanchan v. Allied Banking Corporation (2008)

Transaction DST to be paid


*200M Loan agreement 300T
*100M Loan agreement 150T
*50M Loan Agreement 75T
*REM securing the 200M and 100M loan 600,010
*CM securing the 200M & 100M loan 600,010
*guarantee securing the 50M loan 0
*but if there's an omnibus agreement, pay P700,010 or P675,010
From Sir's lecture the other meeting:

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

If the bank lends money, the interest is subject to gross receipts tax (normally
5%) but the same amount is includable as part of the gross income of the bank,
the net taxable portion of which is taxed by income tax (30% beginning 2009).
DST also imposed on certain bank transactions:

from all taxes


EXC: interest income from foreign currency loans with RESIDENTS: subject to
10% final tax rate
From Sir's lecture the other meeting:

FCDUs are taxed differently.

The income of FCDUs

(a) loan agreements and PNs: .5% of the amount in the transaction
(b) pledges, mortgages, trust receipts: .2% of the amount involved in the transaction
from foreign currency transactions: 10% final witholding tax (should be with
residence: include local KB, local branches of Foreign banks, other fcdus, obus)

(c) but if combine loan+security (omnibus agreement): .5% (higher between the
two)
(d) if assignment: P15.00 (tax certificate)

It used to be that this onshore 10% tax is imposed in lieu of the other taxes. Now
the law is not very clear because the "In lieu" of provision was deleted in the
NLRC. Intent before was to encourage foreign banks to invest in the Philippines
(thus mas konting tax imposed on them).

If FCDU derive income from non-foreign currency transaction: regular


corporate income tax rate (10%)

if the counterparty is a nonresident: income derived by that nonresident is not


taxable here; similarly, the income by FCDU is not taxed.

SO favorite customer of a FCDU is a nonresident, as there is no tax!

3. Gross Receipts Tax

B. Taxation of FCDUs and OBUs


RA No. 9294
BIR Ruling No. 052-10

B. Taxation of FCDUs and OBUs


RA 9294

GR: All income derived from transactions with NONRESIDENTS are EXEMPT

C. Tax minimizing structures


1.

Omnibus agreement

2.

Originating bank structure

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

F is actually a "FRONT", and thereby turns around and executes a participation


agreement w/local banks FCDUs, in effect making these local bank FCDUs
"silent participants".

Another variation involves the booking of the "front" (like IFC) of an "A" loan
in its books, and another "B" loan, participated in by local banks for which the
"front" acts as such.

Omnibus Agreement

An omnibus loan agreement is a loan agreement with the mortgage agreement


already included as one of the provisions

should also include a waiver (if mortgage is REM) of the credit preferences in
NCC as a loan agreement with pari passu provision requires that the loan
agreement should not be notarized. However, REM is required to be notarized.
From Sir's lecture last time:

To comply with the latter requirement, the creditor in the loan agreement should
waive the preference of credit provision in the NCC and specify that the
notarization is only for the purpose of the loan agreement
An omnibus agreement is a tax minimizing structure because for executing
transactions, DST is required to be paid for each transaction. However, as the
omnibus agreement combines two transactions, only 1 DST is required to be
paid (BIR RR 9-94, Section 8 requires the higher rate be paid)

"Originating bank" structure (a.k.a. "Fronting Strcuture")

This is otherwise known as fronting bank structure. It takes advantage of tax


exemption status of foreign lenders. It is a form of tax avoidance.
In this structure, a foreign bank acts as creditor on record while domestic bank
participates silently.

In this structure, a fronting entity/bank which enjoys TAX-EXEMPTION or a


LOWER TAX RATE under prevailing tax laws "FRONTS" for what would
otherwise be direct lenders to a borrower.

The fronting bank (F) lends dollars/money to borrower (B), a local company,
w/o need of witholding taxes on interest payments because of the tax-exemption
or tax treaty overrides (lower taxes).

idea is the borrower would look for a bank that is exempt from Philippine
income tax

Either under
*tax treaty
*NIRC

SEC 32: Financial institutions getting from their government


(a) Income Derived by Foreign Government. - Income derived from
investments in the Philippines in loans, stocks, bonds or other domestic
securities, or from interest on deposits in banks in the Philippines by
(i) foreign governments,
(ii) financing institutions owned, controlled, or enjoying refinancing from
foreign governments, and
(iii) international or regional financial institutions established by foreign
governments.

*Bank doesn't want to pay tax when it lends money (interest income tax and other
income taxes from its transactions). (Check TAX 1 FOR WHO ARE EXEMPT
FROM PAYING INCOME TAXES!). So they would search for other banks who are
EXEMPT from paying taxes.

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

plant, NPC has to pay)


In MRT
Offtaker: DOTC (even if nobody rides the train, DOTC would still pay the
periodic lease payments)

IV. Project Financing

Sponsors of the project


-it would establish a special purpose company

Project Financing is the financing of an economic asset capable of generating enough


revenues to cover operation costs and debt servicing for a duration of time longer
than the life of such asset. It is most often undertaken in projects involving electricity
and power generation, transportation infrastructures and the like.

What usually happens is that a sponsor undertakes to cover the initial financing of
the project, lenders are resorted to cover the deficiency, a SPECIAL PROJECT
VEHICLE (SPV) is established (which is usually a joint venture or limited
partnership) to undertake the building of the infrastructure, the SPV enters into a
loan agreement with the lenders backed by securities: mortgage over the assets of the
SPV and pledge of equity of sponsors. (hay, basta on page 10)

SIR in lecture

Relates to infrastructure projects you see around


e.g. MRT, power plants, skyway

You have a project, its economic life more or less is more than 25 years (must
exceed the term of the loan). It is anticipated by the lenders that the project
would earn revenues because the lenders would look at the revenues

it is a without recourse transaction so the lenders usually need an offtaker

If the project does not earn revenues, the lenders would not get paid. So it is
essential for the project to have an offtaker (entity that's going to buy the public
project?)
e.g. in powerplant project
OFFTAKER: NPC (WON NPC uses the electricity generated by the power

SPONSORS >>>establish>>> SPECIAL PURPOSE COMPANY (SPV) >>>


Sponsors would provide an EQUITY which would fund the project (but it's not
sufficient) so there would be lenders that would put money in the company
LENDERS: mainly banks and multilateral development banks such as ADB, US
EXIM Bank or Japan EXIM Bank
>>>The project company would mortgage to the lenders (trustee designated by
the lenders) the property/equipment/facilities
>>>there would be REM, CM, pledge of shares (pledged by the sponsors in
favor of the lenders not because the shares are very valuable on the standpoint of
the lendersbut for the lenders to be able to take over the project company just
in case the sponsors would not be able to pay the loan
>>>to make sure that the revenues are all delivered and remitted to the lenders,
there's the TRUST RETENTION ACCOUNT/AGREEMENT wherein all
revenues from the project would be remitted
e.g. all payments from NPC are remitted to the trust account managed by the
trustees of the lenders. If for instance there's a need to pay the employees of the
project company, a request would be made to the trustee of the account to
release (disburse) money from the account
(the diagram drawn by sir "looks like a waterfall" so it is called cash waterfall
account)
>>>the issue is WON the company could be owned by foreigners (as usually,
foreigners provide the funds)
-SC ruling said that (implicitly) yes, because the actual operation is nationalized,
not the facilities - para ngang may ganito na pinabasa on MRT

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

B. BOT and similar arangements


Operation Maintenance Agreement

usually lenders require technicians to run the facility to make sure that it would
earn revenues
Field List transfer: the arrangement in MRT
Rehabilititate-Operate-Transfer: rehabilitate
Rehabilitate-Own:

Inter-Creditor Agreement

lenders agree among themselves how to synchronize their activities in case


there's a default

*Unsolicited Proposal
e.g. Megaworld Proposal
-develop hectares of land in Global City
e.g. Terminal 3
BOT Law

*OMNIBUS AGREEMENT...contain all these agreements!!!


V. Derivative Transactions
A. Mechanism
A. Concept

without recourse financing

There must be a guaranteed taker/purchaser of the output of the project

e.g. MRT >>riding public

Power plant >> NPC

lenders look to revenues of the project as the main soure of the payment (hence,
it is important that the project is earning money)

Financial asset derived from another financial asset


i.e. option on treasury bill

CALL OPTION: option to buy


PUT OPTION: option to sell
-the option is called a derivative

*buyer: one who wants the option

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

seller/writer: one giving the option


From reviewer:
*American Option: exercise option before the strike date (any time during the option
period)
-more flexible but higher premium

DERIVATIVE

*European Option: exercise option on the strike date (end of the option)
-stricter but lower premium

*Bermudan Option: Exercise option on any date


DERIVATIVE CONTRACT

contract for the differences

concerned with the differences between the price on strike date and price on
trade date

i.e. forward foreign exchange contract


TRADE DATE: P57 = $1
After 3 months (strike date): P60 = $1
-the buyer is said to be "in the money" because ha has a gain of P3/$1
BUT IF DURING THE STRIKE DATE
P56 = $1
-buyer is "out of money" because he loses P1/$1. Hence, he shall forego the
option and will buy the dollars elsewhee.
*CURRENCY SWAP
-simultaneous purchase and sale of currency involving the same counter party

a financial instrument, the value of which is dependent upon the price of one or
more other assets, such as commodities, foreign currencies, etc.
-rephrase: they are financial assets which derive their value from other financial
assets such as:
(1) equity, securities
(2) fixed-income securities
(3) foreign currency and
(4) commodities
-aka Contracts for differences: difference between agreed future price and actual
price

DERIVATIVE TRANSACTION

one that involves derivatives

purpose: manage risks of exposure/investment to the underlying financial assets


it represents

it can either be OPTIONS OR FORWARDS

a. OPTIONS
*CALL OPTION: the buyer is given the right (not obligation) to purchase an asset at
a specified price on or before a specified date
*PUT OPTION: the seller/rider is given the right (not the obligation) to sell an asset
for a specified price on or before a specified date

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

b. FORWARD
-involves the OBLIGATION to either buy or sell an asset at a specified price on or
before a specified date

Illustration:
Co. A will buy US$1M 6mths from now at PhP40=US$1
ForEx Rate in 6mths Situation
PhP50=US$1 In the money
PhP30=US$1 Out of the money; but in the market
PhP40=US$1 At the money; exercise forward given assured amount
common examples of Derivative Transactions:
*currency swap
*forward contract
*call option
*put option
This is a contract for differences. The income is derived from the difference between
agreed settlement price and actual market price on the agreed settlement date.
CURRENCY SWAP:

It is the simultaneous buying and selling of currencies involving spot (near leg)
and forward (far leg) rates.

***A bank cannot engage in derivative transactions without necessary BSP license.
Example ni sir from lecture
FORWARD: buy currency from the future
e.g. you're a borrower, you earn an interest rate every 6 months at $1. You want to
lock the interest rate. Let's assume that the Exchange rate is $1=P50
-you enter into a forward contract, you buy $1 which is equivalent to P50.
6 months from now:

Supposing exchange rate is


$1.00=P60 You made the right decision! In the money: you would exercise your
option! (you anticipate a gain)
$1.00= P50 Out of the money: the market price 6 months from now is lower than the
agreed price under the forward agreement - you would not exercise your option to
buy (you would just lose the premium you paid). You would buy somewhere else not
under forward contract
$1.00=P55 At the money
2 Derivatives In the Philippines
1. Equity related securities
2. Exchange for Debt Securities
All other transactions outside the exchange are called OTC (over the counter):
IN US
1. New York Future Exchange
2. New York Cotton Exchange
3. CSCE (Coffee Sugar and Cocoa Exchange)
-commodities Exchange
In Exchange: you have remedy: clearing agency makes sure that the buyer is able to
pay and the seller is able to deliver
Exchange Traded Derivatives
-governed by agreements in prescribed forms
-OTC derivatives: there's an organization that took initiative to provide uniform
documentation (International Swaps and Dealers Association -ISDA) - see below
CROSS-CURRENCY SWAP
(refer to diagram on page 48 of the reviewer)

B. BSP Licensing Requirements

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

A. BSP Licensing Requirements


Section X602 (BSP Circular)
-the license will enable the licensee to engage in currency forwards and currency
swap
2 Types of License:
a. Regular Derivative license: any bank, NBQB, affiliate
b. Expanded Derivative License: only Commercial and universal banks can apply
BSP Circ. No. 102-95
Section 2. General Authority
-any
*BANK
*NBQB
*And or its subsidiaries/affiliates
may engage in financial derivatives activities upon prior approval of the BSP
-a bank may engage in derivative activities BOTH in its RBU and FCDU/expanded
FCDU
BSP Circ. No 297-01

a. for expanded derivatives authority


SCOPE: ONLY UBs and KBs
-what may be done after acquiring license: may
*trade
*Sell
*deal
*take positions in currency swap
*forward of any tenor as well as all other derivatives for their own account or on
behalf of customers

b. For regular derivatives authority


SCOPE: other Financial institutions (Fis) supervised by the BSP pede
-what may be done after acquiring license: may
*sell derivative products to its customers PROVIDED

>FI shall hedge such derivatives


>the risk being hedged is already existing with the FI itself

c. No license derivatives
SCOPE: UB and KB w/ no license
-what may be done:
*trade
*sell
*deal
*take positions for their own account or in behalf of customers in currency swaps
and
*forwards w/ tenor of one year or less
*sell other derivative products of licensed entities to its customers PROVIDED
>customer currently has a risk w/ the bank it wishes to hedge

d. For engaging in derivative transactions as end-users


SCOPE: Banks, NBQB, Other BSP supervised FI
-no license needed as they are purely end-users
BSP Circ 594
-latest Circular on derivative transactions
*if banks does hedging, no need for license but other than that, needs special license
*corporates (corporations): not governed by BSP, it would depend on the articles of
incorporations on WON they could enter into derivative transactions (or else,
transaction is ultra vires)

---in other jurisdictions, corporates does not do ultra vires transactions: they could do
anything! But sir thinks it's better to regulate the activities of the corporates
because it sounds goodultra vires..

C. ISDA Master Agreements

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

1992 ISDA MASTER AGREEMENT


(international swap dealer's association)
-standardize documentation
-cannot modify terms of agreement
-have to use schedule to change the agreement
-one of the most carefully drafted agreement
-has 7 pages long of lists of Derivative Agreements

Chua signed a Tradig Contract and other documents w/o being aware of the risks
involved
Chua was asked to deposit again P300k. She wanted to withdraw her money but
DIAZ wouldn't allow her
Chua instituted the present action to recover her money
I: WON the TRADING CONTRACT is VALID
HELD: VALID IN ITSELF BUT TRANSATION CARRIED OUT TO
IMPLEMETN IT VOID

Cross-out netting
-you have a master agreement which you want to amend: you can't just cross it out.
The master agreement stays as is, you have to make a schedule to the master
agreement whch reflect the amendment

Commodity Fixtures Contract


-specie of securities
-agreement to buy or sell a specified quantity and grade of a commodity at a future
sale at a price established at the floor of exchange

SCHEDULE
-contains the terms agreed upon by the parties
-actual transactions evidenced by confirmation
-contains a serial agreement clause (any and all transactions are considered as one
agreement)
>>>gross out netting provision satisfies the delivery requirement to render a future
contract valid

Terms of Contract signed by Chua


-Onapal will act as broker and will directly transmit the order of customers (includes
Chua) to its principal Frankwell Enterprises in HK. The later will then place the
order to Tokyo Exchange.
-however, in this case, there was no evidence that the orders and the money were
transmitted to Frankwell.

If there's a default on the part of 1 party, all of these transactions are netted such that
only 1 number emerges.
Single agreement: all the agreements treated as a single transaction
(then sir discusses cherry picking) - See below

Onapal Philippines Commodities v. CA (1993)

F: Onapal is a registered and licensed commodity futures broker.


Susan Chua was invited by Diaz, Account Exec. Of Onapal, to invest in the
commodity futures trading by depositing P500k

*the trading contract IS VALID IN ITSELF because it complies with the RULE
AND REGULATIONS ON COMMODITY FUTURES TRADING
*BUT the transaction which was carried out to implement the contract DEVIATED
from the true import of the agreement
>no actual delivery to Frankwell
>final settlement is made by payment of the differences of prices
-the dealings became mere speculative contracts in which parties merely GAMBLE
in the rise and fall of prices WHICH IS ILLEGAL
As such, the trading contract became in the nature of a GAMBLING CONTRACT
WHICH IS NULL AND VOID.
Onapal v. CA: In ISDA, there is netting off of agreements which may give rise to
gambling issues. In case there is but pretended delivery of goods involved in the
transactions, the Civil Code provision prohibiting gambling is violated.

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

SIR: There's a section that pending the issuance of SEC of rules of trading of
securities of futures, trading is suspended. However, in the document called
HISTORY OF BACKGROUND of SEC, what is suspended is public trading of
commodity future transactions

Onapal happened when commodities trading was still allowed. The problem in this
case is that even if the contract was valid, its implementation was such that there was
no delivery of the commodity, in violation of ART 2018, NCC

The issue now is WON cross-currency swapping after this, or contracts about
currencies, is comprehended in ART 2018. In other words, is ForEx securities? Share
of stocks? NO, NOBut is it goods?

Look at A1636: Goods defined. It excludes money and legal tender in the
Philippines. It is implied to include foreign exchange. If that is the case, then is
Forex supposed to be contemplated under Art 2018? SIR says no, because
introductory paragraph of A1636 states that the definition of goods undr that article
is for the title of sales, not under the title of aleatory contracts. SO A2018 does not
contemplate forex.

First Philippine International Bank v. CA (1996)


F: First Philippine International Bank went insolvent
H: Cherry picking (liquidator picks out the contracts not favorable to the insolvent
bank) is not allowed. The conservator is not allowed to disregard contracts
unfavorable to the insolvent bank.
-power of conservator is not unilateral...
SECTION 70, insolvency law

-prohibits the sale, transfer, etc. of the assets of the insolvent 1 month prior to filing
for insolvency
-does not apply to banks and insurance companies because they have their own set of
insolvency rules
FPIC v. CA: Cherry picking is not allowed in Philippine jurisdiction. The powers
granted to the conservator, enormous and extensive as they are, cannot extend to the
post facto repudiation of perfected transactions. Otherwise, they would infringe upon
non-impairment of contracts clause in Constitution.
SIR:
-because of the single transactions clause, there's no cherry picking because there
would only be one cherry to pick
+page 177 of sir's book

VI. Securitization

A. Concept

Securitization
-means by which the seller/originator discounts receivables to the buyer on a true
sale basis
-absolute transfer: creditors of the seller cannot reach the assets
-without recourse transaction
-buyer must be a Special Purpose Entity (special purpose corporation or special
purpose trust)
>>the SPE repackages the receivables in the asset pool and issues a security known
as ABS (Asset Bracket Security)
(See part B)

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

-receivables transformed into securities


DIFFERENTIATED FROM AN SPV:
SPV: involves bad debts
Securitization: performing receivables (credit card receivables, PLDT)

B. Asset-backed securities

B. Asset-backed securities
>>ABS is sold to investors who look to revenues collected from the asset pool
>>there is overcollateralization in this situation
BSP Circ. 185
-Originating bank cannot use its own trust department to issue ABS, has to do it
through another bank

C. Securitization Act of 2004 (R.A. 9267)

SECTION 3. Definition of Terms. - For purpose of this Act, the term:


(a) "Securitization" means the process by which assets are sold on a without recourse
basis by the Seller to a Special Purpose Entity (SPE) and the issuance of assetbacked securities (ABS) by the SPE which depend, for their payment, on the cash
flow from the assets so sold and in accordance with the Plan.
(b) Asset-backed securities (ABS)" refer to the certificates issued by an SPE, the
repayment of which shall be derived from the cash flow of the assets in accordance
with the Plan.

(c) "Assets", whether used alone or in the term "Asset-backed securities," refer to
loans or receivables or other similar financial assets with an expected cash payment
stream. The term "Assets" shall include, but shall not be limited to, receivables,
mortgage loans and other debt instruments: Provided, That receivables that are to
arise in the future and other receivables of similar nature shall be subject to approval
by the Securities and Exchange Commission (SEC) or the Bangko Sentral ng
Pilipinas (BSP), as the case may be: Provided, further, That the term "Assets" shall
exclude receivables from future expectation of revenues by government, national or
local, arising from royalties, fees or imposts.
(d) "Asset Pool" means the group of identified, homogeneous assets underlying the
ABS.
(e) "Commission" refers to the Securities and Exchange Commission (SEC).
(f) "Credit Enhancement" means any legally enforceable scheme intended to
improve the marketability of the ABS and increase the probability that the holders of
the ABS receive payment of amounts due them under the ABS in accordance with
the Plan.
(g) "Originator" means the person or entity which was the original obligee of the
Assets, such as financial institution that grants a loan or a corporation in the books of
which the Assets were created in accordance with the Plan.
(h) "Plan" means the plan for securitizations as approved by the Commission
(i) "Secondary Mortgage Institution (SMI)" means an entity created for the purpose
of enhancing a secondary market for residential mortgages and housing-related ABS.
(j) "Seller" means the person or entity which conveys to the SPE the Assets forming
the Asset Pool in accordance with the Plan. In most instances, the Seller may itself
be the Originator.
(k) "Servicer" refers to the entity designated by the SPE to collect and record
payments received on the assets, to remit such collections to the SPE, and perform
such other services as may be specifically required by the SPE, excluding asset
management or administration.
(l) "Special Purpose Entity (SPE)" means either a Special Purpose Corporation
(SPC) or a Special Purpose Trust (SPT).
(m) "Special Purpose Corporation (SPC)" refers to a juridical person created in
accordance with the Corporation Code of the Philippine solely for the purpose of
securitization and to which the Seller makes a true and absolute sale of assets.
(n) "Special Purpose Trust (SPT)" means a trust administered by an entity duly
licensed to perform trust functions under the General Banking Law, and created

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

solely for the purpose of securities and to which the Seller makes a true and absolute
sale of assets
SIR: even if securitization act passed 2004, not much securitization transaction under
the act
-quite recently, because of the subPrime prices, securitization acquired bad
reputation
-SP Entity (SPE), which can be an SPC or SP trust, will be the one to issue the assetbacked securities (ABS)
ABS: receivables that were acquired by the SPE
--it's source or repayment would come from the obligors of the receivables
--the holders of ABS are looking to the payments from the obligors, in a sense, it's a
limited recourse

HOW DONE: Collateralization


e.g. Issue is P1M, the pool of receivables supporting it is 1%,
SELLER of the receivables = originator = Globe, Smart, PLDT
Servicer = can also be the originator
SPT: trust department can act as one. A mere account w/n trust department (there can
be several SPTs in one trust department)
SPC: corporation that is formed and established for the purpose of that single
securitization transaction
--more cumbersome: should have board of directors, meet reporting requirements of
SECetc.
----HOWEVER, if you use an SPT, it would be easier than SPC!

-but why is it that there's not much securitization transactions: a bank that want to
enter a securitization transaction CANNOT USE ITS OWN TRUST
DEPARTMENT! The SPT must be independent from the ORIGINATOR!
-sir says this should be reversed as the trust department of a bank is separate and
distinct from the bank's operations!

WON a bank can purchase ABS? BSP issued Circ 468 that states that bank can
acquire ABS (to that effect, there's underlying securities mentioned but sir said that
it's the same as ABS)

e.g. share of LGUs on the tobacco taxes were securitized (but there's a provision in
the new act which prohibits securitization of tax revenues. Sir says the example is
not covered by the prohibition because it is not revenue flow, it is not liquid yet)

VII. Due-Diligence Investigation

Due diligence team in a lawfirm: examines an entity


2 types:
1. Prospectus
Due Diligence
-derived from securities act where there's astatement to the effect that securities to be
sold to the public must be registered with SEC and there must be a prospectus
accompanying statement and the facts mentioned therein must be accurate in all
material respect, no omissions which would make any statement in it misleading. In
that act, it was a defense on the part of the issuer that it has exercised DUE
DILIGENCE in making the RS in the prospectus. That defense is supported by the
issuer's employing a DUE DILIGENCE TEAM.
~so balik sa DUE DILIGENCE TEAM: inspects the documents of the company,
transactions, etc. to make sure that all material information about the company is
correct
Under SRC, due diligence is no longer a defense. The KNOWLEDGE DEFENSE is
the only defense left: the issuer or underwriter might escape liability if proves that
purchaser had knowledge of the fact incorrectly stated. DUE DILIGENCE may be
mitigating circumstance in admin case before SEC but not defense.

-what entity in the Philippines expect lots of receivables? BANKS!!!

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

2. Acquisition Due Diligence


e.g. Philamlife is being sold by AIG, there are several lawyers and underwriters
Nyek, moot because transaction was aborted

E.g. Foreign bank buys RP bonds? For $1M


-but foreign bank worries about credit-worthiness of RP (no-election news) so it
wants to get rid of the transaction with RP. SO bank issues CLN to a local bank,
local bank gives $1M to foreign bank in exchange of CLN. The agreement is that the
CLN would carry a higher interest than the credit rate then I'm lost

VIII. Certain Financial Products/Esoteric Structures

A. Trade Account/Brokering

e.g.
SMC has several dealersSMC delivers products to SMC, Dealers would not pay
all at once

Cash settlement: foreign bank would sell its holdings of RP bonds to market (and
probably for a lesser price). The proceeds of the sale would then be paid to the local
bank

Physical settlement: the RP bond is delivered to the local bank; this is better because
the RP bond is the most prime (nonrisk item) in the Philippines. If worse comes to
worst, the local bank would still be paid in Pesos.

SMC could mandate a bank to look for investors that would buy the receivables
IX. Certain Other Matters

bank acting for several investors, investors would enter agreement with the bank to
look for investments

When SMC sells receivables to a bank representing several investors, the bank
merely gives PARTICIPATION PARTICIPATES/CONFIRMATION SALE to the
investors, this way the bank receives commission (Manila Type of Trade Brokering)

B. Credit-Linked Notes/Deposits

A. Anti-Money Laundering Act

Financial Action Task Force (FATF): a task force organized by developed countries
which identified noncooperative countries (Philippines was formerly included in it,
together with Nauru and Russia)
-if the Philippines did not comply with it w/n the deadline, there's a sanction! (money
- remittances to the Philippines would be cross checked, meaning delay in the receipt

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

of remittances in the Philippines)


-however, 1st AMLA was not compliant in certain aspects.

AMLC: authorized to freeze assets but this power taken out from it, should petition
CA for freezing of assets (but this is problematic because a mole in the SC could
easily inform the money-launderer of the attempt to freeze the latter's assets, and thus
the account would be w/drawn) - The 2nd AMLA was inferior from the 1st one but it
became compliant because the one who checked it wined and dined with
Congressmen!

On cases when there's no need for freezing order from CA:


*Hi-jacking
*Drug trafficking
(as if the first thing that the violators would do is to deposit the proceeds of their
illegal acts in the banks!)
-there's also suggestion that lawyers be whistle-blowers: BUT THIS WOULD NOT
DO BECAUSE OF THE CONFIDENTIALITY AGREEMENT BETWEEN
LAWYERS AND CLIENTS

-there are many recommendations of the FATF: but only few are taken
-among the recommendation is to amend the bank secrecy law
-threshhold amount loweredif you transact with covered institutions and the
amount of the transaction is above the threshold, the bank is obligated to file a
CTRbut even if lower than the threshold and the bank would be suspicious, the
bank could still file a "suspicious transaction report" (CHA: I don't know why it's
CTR when it stands for suspicious transactions report)

B. Scurities Regulation Code

B. Securities Regulation Code


-statute in Securities law, among which are:
*Truth in lending act
*GBL provs: truth in borrowing act
*SRC: truth in securities act
-persons who want to sell securities need to comply with the requirements of
registration by SEC
Exceptions:
1. Exempt securities: when sold to the public, no need to register it (example, gov't
securities issued to the public)
2. Securities sold in transactions classified as exempt in SEC: e.g. Private placement
---just file with SEC a notice/form of exception w/n 10d from date of sale
3. Offshore offering: not covered by SEC because SEC would not have jurisdiction
over sale of securities outside the Philippines
*SEC could come up with a list of exempt securities and transactions
*some of the list are discussed in Sir's bookwhich is unfortunately out of stock
hehe.
-Any public offering of securities is prohibited unless the securities are registered w/
SEC and SEC has declared effective the Registration Statement
PRIVATE PLACEMENT: sale to not more than 19 nonqualified buyers (qualified
buyers are the banks, financial institutions)
PUBLIC OFFERING: random or indiscriminate offering to the public (any member
of qualified buyers)
Qualified buyers: they can fend for themselves
***To avoid regulation by the SEC:
OFFSHORE OFFERING: a contract is signed abroad and payments are made
through FCDU
INSIDER TRADING: when you are in possession of information not known to the
public, you're not supposed to trade with that shares until the public was made aware
of the information (only after disclosure can an insider trade)
-insider trading rules meant to remedy the asymmetry in information to make the
insider and non-insider pari passu in terms of information

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BANKS AND FINANCIAL INTERMEDIARIES: Atty. Rafael Morales

-INSIDER: given, you have access to non-public information from an insider


(insider becomes the Tipper, you become a Tippee)
-insiders mandated to disgorge "short-swing profit" (if you were able to detect
transactions in which the insider has made money, then the net gain must be
disgorged by the insider) - turnover the profit to the company

-for corporations

Tender-offer
-if you intend to acquire at least 35% of the outstanding capital stock of a public
company, e.g. listed company, whether alone or in concert with other persons, you
need to make a tender-offer to the remaining shareholders who might be left out
(because 67% is control).
In a case, the SC has ruled that the 35% can be direct or indirect shareholding
Continuing disclosure requirements

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