Banking Notes for August 8

Qualifications in Euro-Dollar Loan Agreement Closing Opinion (for it to be enforceable):

1. exceptions to payment of scheduled installments due to bankruptcy, rehabilitation, etc.

2. possible requirements of BSP approval

3. exchange crisis provision in CB Act

4. conflict of laws provision in Civil Code

5. Rules of Court provisions on enforcement of foreign judgment

6. on pari passu provision

7. enforcement of obligations subject to equity: RP court might require the parties to act reasonably! A19 of Civil Code (on abuse of rights)

8. Corporation Code provision on foreign corporation’s right to sue

9. effect of injunctions and court orders to covenants’ effectivity

10. waiver of sovereign immunity: (in the future)

11. judgment currency clause (Don’t express any opinion due to res judicata issue): if subject to another suit, 2 actions under 2 jurisdiction…splitting of COA

-sir would leave a copy! Yey!

Why was CB closed? (it was closed???)

1. high interest payment in Jobo bills

2. Jumbo loans: “syndicating” of debtors

3. Swap loans

1. Loan Transfers and Participations

1. Section X238, Manual of Regulations for Banks

Section X238. Without Recourse Transactions.

No bank shall

...sell,

...discount,

...assign, or

...negotiate, in whole or in part,

...such as thru syndications, participations and other similar arrangements,

ANY

…notes

…receivables

…loans

…debt instruments

…and any type of financial asset or claim

X: government securities

OR

Be a party in any capacity in any of the above transactions, on a without recourse basis

UNLESS such receivables, notes, loans, debt instruments and financial assets or claims are registered with SEC.

This prohibition includes transactions between a bank and its trust department.

*Unregistered commercial papers (those not registered with SEC) may be sold, discounted, assigned, or negotiated by the banks to other financial intermediaries with quasi-banking functions.

GR: No without recourse assignment or transfer of financial assets,

Unless:

1. SEC registration

Except: Government securities

2. Buyers are one of those specified in Section X238.

Who are these buyers? Qualified buyers under Section 10.1 of SRC.

Sir: Exception must include all other exempt securities. (Note: See SEC Memo 06-2007 for discussion of qualified buyer.) - so even if bank goes to SEC to register it, SEC would not register the same because it's already exempt! (SEC 9.a, Securities regulation Code)

What are the other types of exempt securities: Also in Section 9.a of SRC

e.g. securities in foreign countries in which RP has diplomatic relations

Securities issued by insurance companies….

Securities issued by banks, except shares of stocks

-receivables and non-exposures may be thought to be easily transferable. However, Section X238 imposes an additional requirement

Section 10.i vs. 10.l (SRC): verbatim except for reference to Qbanks and funds managed by trust entities (I and h) - refer to sir's book to get this… PAGES 68-71

Type of purchasers under Section 10.1l of src: exempt transactions: not to be registered to SEC

2. Participation vs. Assignment

Assignment	Participation
Involves BOTH transfer of the legal and beneficial title	What is assigned to the participant is merely the beneficial title. The assigning bank remains to be the creditor on record. The credit risk of the borrower no longer resides with the bank but with the participant

Participant cannot sue the borrower because there is no privity of contract between the borrower and the participant. Enforcement must be made through the bank (lender).

Participant is substituted in the place of the lender bank (assignment)

Participation Agreement

-an agreement wherein the beneficial ownership is transferred to another individual (participant) while the lender (bank) still retains legal title over the same

Risks involved in participation:

1. Credit risk: creditworthiness of the borrower or the borrower's ability to pay

2. Delivery risk: even if the borrower is able to pay, the bank may become insolvent and unable to deliver the participant

SUBPARTICIPATION.

In participation, participant may sub-participate its obligation and right, unless it is prohibited by the principal bank.

SILENT PARTICIPATION

-is a participation agreement wherein the borrower does not know or is not aware of such transaction. Consequently, the transferee of beneficial ownership (silent participant) cannot himself enforce payment against the borrower since it is a silent participation.

-is useful in fronting transactions involving a tax-exempt entity: An example is when a tax-exempt entity executes a loan agreement where the borrower pays the interest. If there is a silent participation, the transferee is allowed to avail of the interest tax-free as per BIR ruling.

*Silent Participation: this occurs when the borrower is not notified of the participation. This is used to hide from borrower the fact that it(bank) lessens its exposure to show that there is full trust on borrower’s creditworthiness. - hahaha! Meaning walang tiwala bank kay borrower pero ayaw nya sabihin kay borrower. Plastic si bank! Plastic!!! :D

Illustration:

Bank loans out to Company A.

X is participant.

If A goes under, X cannot directly sue A since there is no privity of contract between them. Thus, X must rely on Bank to collect from A.

Assignment of Deposits and Hold-Out arrangement (as security for loan):

(Note: Loans and other credit accommodations covered by assignment of deposits and accompanied by hold-out arrangement are considered as non-risk items)

WHAT IS A HOLD-OUT? MUST IT BE COUPLED WITH A SET-OFF CLAUSE TO BE MORE EFFECTIVE? Explain.

A hold-out arrangement usually accompanies an assignment of deposit maintained in the lending bank and held in the Philippines. A hold-out arrangement prohibits the withdrawal of the deposits by the assigning depositor.

The depositor is also made to consent to a conventional compensation or set-off, for good measure.

a. in this respect, the application of the deposit in payment of the loan or credit accommodation (w/o foreclosure) would not be construed as a pactum commissorium under A2088 of the Civil Code

b. A set-off provision is advisable, because the depositor may not necessarily be the borrower. It is well to note that a bank's right of set-off over one's deposit applies only if the depositor is at the same time the debtor o the bank. If the debtor is merely accommodating a borrower, a contractual stipulation is necessary for the bank to effect a set-off.

It may be comforting to the bank to know that a "hold-out cum set-off" arrangement is enforceable independent of the "absolute assignment" structure, even as both recourses are contained in one agreement. Thus, if, for the sake of argument, the "absolute assignment" route is declared ineffective for any reason, the bank still has the hold-out and set-off as protection.

Difference between Assignment of Note & Novation:

In assignment, assignee merely steps into shoes, no change in instrument. It does not attract DST.

In novation, whole PN is changed so there is new transaction and DST is collected.

4. Other Issues

1. BSP approval and/or registration

-when necessary:

*for non residents if they open Peso accounts

X: supported by inward forEx remittance

*for pre-payment of Foreign currency loan

-when not necessary: for Peso loans

2. Notarization
   Article 2244 (14), NCC

Art. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred in the order named:

(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the subject of litigation. These credits shall have preference among themselves in the order of priority of the dates of the instruments and of the judgments, respectively.

FROM NOTES:

Notarized loan agreements enjoy preference over unnotarized ones over the free assets of the insolvent debtor.

Omnibus agreement: Notarial Preference is waived, but only with respect to loan transactions and not to mortgage transactions as notarization is mandatory.

This is to prevent violations of pari passu agreement (e.g. 1st loan with pari passu agreement not notarized; 2nd loan is notarized - notarization of the 2nd loan violates the pari passu agreement in the 1st)

IN A EURODOLLAR LOAN AGREEMENT APPROVED BY THE BSP AND SECURED BY A REAL ESTATE MORTGAGE, HOW WOULD YOU ADDRESS THE BSP'S REQUIREMENTS THAT SUCH LOAN AGREEMENT NOT BE NOTARIZED, IF THE LOAN AND THE MORTGAGE ARE EMBODIED IN ONE INSTRUMENT?

(FROM AMS BLUEBOOK)

Since the law requires that a mortgage be notarized to be valid and binding as against 3rd parties, there is a problem in the case of an omnibus agreement that contains both a loan agreement and a mortgage.

A loan agreement that is notarized is a preferred credit and this would affect "pari passu" representation

A solution would be:

1. to waive the preferences of credit under A2244(14) of NCC in the Omnibus Agreement.
2. To include a provision stating that the notarization pertains only to the mortgage agreement

Pari Passu: means equal pace

"pari passu representation" all loan agreements shall be on equal footing, in terms of preference of credits, in relation to the borrower/debtor.

*BSP issued a circular prohibiting loan agreements denominated in foreign currency. So if you ask for BSP approval, one of the requirement is for the borrower to submit w/n2 weeks a copy of an UNNOTARIZED loan agreement (BSP is worried that when the borrower notarizes the loan agreeement, there is a possibility that there is a pari passu default…)

OTHER issues:

*Article 2244 contemplates individuals who may become insolvent - not the republic - so DOJ opinion says that even if the Republic notarizes its agreements, the preference would not arise - mali daw sabi ni sir

*Omnibus Agreement (supposed to be discussed in page 5 of the outline) - in a loan agreement, there is a mention that a mortgage be executed. The sample loan agreement shows the ancient form. The omnibus agreement is a loan + security agreement rolled into one. Provisions of the mortgage already set out in the loan agreement. SO the agreement may be called a loan-mortgage agreement, or an omnibus agreement.

WHY: save from DST (if separate pa, there would be .7% DSTrate)

RMC: if combine both, pay the higher rate which is .5% DST rate

PROBLEM: you have to notarize a mortgage agreement. But BSP would not register your loan if you present to them a notarized agreement;

>>>SOLUTION: waiver provision

…the lenders are waiving the preference arising out of A2244 but only in respect to the loan transaction, not to the mortgage document. That way, BSP would register the loan as preference of credits would not apply

3. DOCUMENTARY STAMP TAX (DST)

Section 179, NIRC Stamp Tax on Bank Checks, Drafts, Certificates of Deposit not Bearing Interest, and Other Instruments

On each

...bank check

… draft

…or certificate of deposit not drawing interest

…or order of payment of any sum of money drawn upon or issued by any

>bank

> trust company

>or any person or persons

>companies or corporations

At sight or on demand

There shall be collected a DST of P1.50.

*Rate of DST is .5% of loan. This is imposed wherever the loan is executed. If short term, it is prorated.

(i) upon execution

-pay DST 5 days of following month. It is arguable that DST is to be paid upon execution of PN as the loan agreement is a real contract for which the object need to be delivered for its perfection. Delivery takes place when PN has been issued.

(ii) upon transfer

apply Section 199(f), NIRC, so no DST if no change in tenor of obligation, ie silent participation.

RMC No. 13-87

Are DOCUMENTS OF CONVEYANCE where the primary underlying instrument are those defined under Section 229 subject to DST? If so, at what rate? And who is liable?

1. Per NIRC Section 225 (now 189), DST shall be affixed

...on all sales or agreement to sell or transfer bonds

…due bills

…certificates of obligations or shares of stock in any association, company, or corporation

>so: ALL DOCUMENTS OF CONVEYANCES COVERING INSTRUMENTS enumerated in NOW Section 187and 188 of NIRC are subject to DST.

>Since Section 225 (now 189) applies ONLY TO DOCUMENTS OF CONVEYANCES COVERING INSTRUMENTS STATED IN SECS 187 AND 188, it follows that DCUMENTS OF CONVEYANCE COVERING INSTRUMENTS IN SECTION 229 (now 193) are NOT

SUBJECT TO DST.

2. Said documents of conveyances shall be subject to P0.50 per P200 or fractional part thereof of the par/face value

3. Per NIRC Section 222 (now 186), the person

...making

…signing

…issuing

…accepting

…or transferring the documents or instruments stated in NIRC Sections 223 and 224 (now 187 and 188)

Shall be responsible for the DST

-if 1 party to the taxable document is exempt from DST, other party not exempt shall be the one directly liable

Are DEPOSIT SUBSTITUTES subject to DST under Section 223 (now 187)? NO.

Section 223 (now 187) covers only capital or quasi-capital instruments such as "bonds, debentures, and certificates of indebtedness issued by any association, company or corporation

DEPOSTI SUBSTITUTES are covered under Section 229, NIRC (now 193) and as such, is subject to a DST of P0.20 per every P200 or fractional part thereof, of the face value.

Section 199 (f), NIRC: as long as you change the tenor, no DST?

Before Section 199, rely on RMC 13-87:

Applicable DST is that provided in Section 170? But according to RMC 13-87, what is being taxed is the documents on Section 174 to 175…

Ah, basta, NOW, there are already EXPRESS EXEMPTION found in Section 199(f) of NIRC.

4. TRUTH-IN-LENDING ACT (R.A. NO. 3765)

(see separate tab)

-the case of DBP vs. Arcilla had as an issue the compliance with the said act. Sir said that the decision in this case is not correct, in view of the express requirements of the law

WHY? "The truth would set us free!"

DBP v. ARCILLA - compliance with Truth-in-lending act (but more on Estoppel)

F: Arcilla was an employee of DBP. He availed of a loan under the INDIVIDUAL HOUSING PROJECT of the bank for the purchase of a lot and the construction of the house therein for P160k. They executed a DEED OF CONDITIONAL SALE.

ARCILLA:

-Borrow P160k

-pay the loan in 25 years, with a monthly amortization of P1,417.91, w/ 9% interest per annum, to be deducted from his monthly salary

DBP:

-transfer title of propery UPON PAYMENT of the loan, including any increments thereof

-if Arcilla availed of optional retirement, he could elect to continue paying the loan, provided that the loan/amount would be converted into a regular real estate loan w/ prevailing interest assigned on real estate loans, payable w/n remaining term of the loan account

-Arcilla opted to resign from the bank in December 1986. So bank informed him that the balance of his loan account had been converted to a regular housing loan.

-Arcilla signed PNs, total amount of which is P186, 364.15.

-Arcilla also agreed to pay to DBP insurance premiums, taxes, etc.

-Arcilla also agreed to the reservation of DBP of its RIGHT TO INCREASE (W/NOTICE TO ARCILLA) the “rate of interest on the loan, as well as all other fees and charges on loans and advances pursuant to such policy as it may adopt from time to time during the period of the loan; Provided, that the rate of interest on the loan shall be reduced by law or by the Monetary Board; Provided, further, that the adjustment in the rate of interest shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest.”

-An additional cash advance of P32k was granted to Arcilla.

-BUT ARCILLA FAILED TO PAY total obligation due: P241,940.93.

>DBP rescinded the Deed of Conditional Sale by notarial act. DBP tried to give Arcilla a chance to repurchase the property but Arcilla did not respond. Property was advertised for sale at public bidding.

Arcilla filed complaint vs. DBP for failure to furnish him with the disclosure statement required by RA 3765 and CB Circular No. 158 prior to the execution of the deed of conditional sale and the conversion of his loan w/ the bank into a regular housing loan.

>DBP still immediately deducted the account from his salary as early as 1984.

>Morever, the bank applied its own formula and imposed its usurious interests, penalties and charges on his loan and advances.

DBP: Substantial compliance

>details required were particularly disclosed in the:

-PNs

-Deed of Conditional Sale

-Required notices sent to Arcilla

+failure to comply strictly with RA 3765 did not affect the validity and enforcement of the subject contract or transactions.

-Arcilla estopped from invoking RA 3765 because he failed to demand compliance before consummation of the loan transaction, until the time his complaint was filed in court.

RTC: for Arcilla

CA: for DBP (If so, bakit DBP ang petitioner????)

WON DBP COMPLIED W/ DISCLOSURE REQUIREMENT? Yes

RA 3765, Section 1:

-before consummation of loan transaction,

…the bank, as creditor

…is obliged to furnish a client with

A CLEAR STATEMENT, IN WRITING, setting forth to the extent applicable and in accordance with the rules and regulations prescribed by the Monetary Board of the CBP, the following information:

(1) the cash price or delivered price of the property or service to be acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and (2);

(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit;

(5) the total amount to be financed;

(6) the finance charges expressed in terms of pesos and centavos; and

(7) the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.

CBP Circular No. 3765

-the information required by RA 3765 shall be included in

…the contract covering the credit transaction

…or any document to be acknowledged and signed by the debtor

-if the borrower is not duly informed of the data required by law prior to consummation of the availment or drawdown, the lender will have no right to collect such charge or increases thereof, even if stipulated in the PN

-BUT failure such not affect the validity or enforcement of any contract or transaction.

IN this case:

*DBP failed to disclose the requisite information in the disclosure statement form authorized by CB - but did so in the LOAN TRANSACTION DOCUMENTS BETWEEN DBP AND ARCILLA. NO evidence that DBP would collect other charges other than those disclosed in the deeds.

*Claim of Arcilla a mere afterthought

*Arcilla is a lawyer, so he would not be so gullible to sign documents w/o knowing fully well the legal implications and consequences of his actions

*Arcilla is also a former employee so he is presumed to know DBP's business, terms of the loan applied for, including the charges that had to be paid.

(DBP's counterclaim that Arcilla vacate property + pay rentals after notarial rescission of the deed of conditional sale was remanded, DBP not showing evidence on the reasonable amount of rentals for Arcilla's occupancy)

*SIR's Comment: this is a worrisome ruling from the supreme court because if there is failure to disclose…

There is a disclosure form.

Ruling here: if the bank fails to include something in the disclosure form, the bank would not be able to recover from it

SIR: problematic: failure to disclose only entails a fine

Plus section 6: failure to disclose would not affect the validity or enforceability of the transaction

If the lender could not collect what is stated anymore, then failure to disclose affects the validity or enforceability of the transaction

WHAT SIR does: include condition precedents…(di ko lang na-gets kung anong condition precedent)

Deposit Transactions

1. Savings, Current and Time Deposits

Deposits:

*savings (demand or current)

*time

*Fixed

Civil Code: Deposits as loans from the depositor to the bank

DEMAND DEPOSITS

GR: Only a UB or KB can accept or create demand deposits

WHY: because they are functionally suited and geared to managing these funds for optimum use

X: other banks with PRIOR AUTHORIZATION from Monetary Board

e.g.

• RURAL BANKS under RA 7353: only if they have NET ASSETS OF AT LEAST P5M
• THRIFT BANKS under RA 7906: only if they have NET ASSETS OF AT LEAST P20M

1. DEPOSITORY (RBU/FCDU)

Regular Banking Unit (RBU):

---accepts peso deposits; known as the bank proper

---a nonresident cannot open a peso account unless it is funded by a remittance of foreign exchange

*bank as the debtor/borrower of the depositor in respect of the latter's deposits

*bank acquires OWNERSHIP of such deposits

*bank can use the same for its operations, simply paying to the depositor the STIPULATED INTEREST on the portion of the unwithdrawn deposit (IN SHORT, ONCE YOU DEPOSIT, THE BANK ACQUIRES OWNERSHIP OVER YOUR MONEY AND CAN USE IT FOR THEIR OPERATIONS, THEN THE BANK WOULD JUST PAY YOU THE INTEREST FOR THE MONEY THAT IS WITH THEM)

BASIS:
Art. 1953. A person who receives a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.

And other jurisprudence

---peso deposits may be garnished and the depositary bank ought to comply with the order of garnishment w/o violating the Secrecy of Bank Deposits Law

Foreign Currency Deposit Unit (FCDU):

---authorized to accept deposits in foreign currency (which is acceptable as part of the international reserve of the country)

----required to maintain (meaning AT ALL TIMES) 100% cover for their foreign currency liabilities

---any person - natural or juridical, resident or nonresident - can open an FCDU Account

GR: ( SECTION 8, FCD Act)

FCDU is exempt from:

>attachment

>Garnishment

>any other order or process of any court, legislative body, or other government agency

X: Salvacion vs. CB (rape case: objective of FCD Act is to attract and invite deposit of foreign currencies, foreign investors - not TRANSCIENTS!!! Who are even rapists!!!)

2. TAX

Peso Deposits: Subject to 20% tax

FCDU:

If resident: 7.5% tax

If nonresident: tax exempt

NO estate tax in case of survivorship contract.

3. SECRECY OF BANK DEPOSITS

There is a distinction between peso deposits and FCDU deposits in secrecy rules

Peso deposits - under RA 1405	FCDU deposits - under RA 6426
Exceptions all apply	Only allow disclosure if with WRITTEN PERMISSION OF THE DEPOSITOR
	When disclosure allowed (see 1-5 exceptions below) - other AMLA

WHY: to encourage people to deposit their money + economy would not be affected

RA 1405

Secrecy of Bank Deposits Law

This protects the confidentiality only in PhP deposits and investments in government bonds/securities. This includes bonds in foreign currency (so these government bonds covers both Peso and foreign currency investments).

OTHER EXCEPTIONS to the Secrecy of Bank Deposits Law

1. Prosecution for unexplained wealth under RA 3019
2. Upon order of a competent court in cases of violation of the Anti-Money Laundering Act of 2001, when it has been established that there is probable cause that the deposits or investments involved are in any way related to an unlawful activity or a money laudering offense

X to X: when no court order

1. Kidnapping for ransom
2. Unlawful activities under Comprehensive Dangerous Drugs Act
3. Hijacking and other violations of RA 6235
4. Destructive arson and murder

3. BSP's inquiry into or examination of deposits or investments w/ any bank made in the course of periodic or special examination
4. Inquiry by CIR into deposits of decedent to determine GROSS ESTATE
5. Disclosure of info about bank deposits dormant for at least 10 years to the Treasurer of the Philippines in a sworn statement
6. Under RA 3779 (Savings and Loan Association Act): MB or official of CB in charge of savings and loan associations or his deputies may examine all deposits of whatever nature w/ savings and loan associations in the Philippines
7. Ombudsman can examine bank accounts (Marquez vs. Desierto), provided:

1. Before in camera inspection
2. There's a pending case before a court of competent jurisdiction
3. Account clearly identified
4. Inspection limited to the subject matter of the pending case
5. Notice to bank personnel and account holder
6. Both in letter e should be present during the inspection
7. Inspection only covers account identified

8. PCGG can compel banks to disclose or produce bank records
9. Davide Commission could ask monetary board to disclose info and/or grant authority to examine any bank deposits, trust or investment funds, or banking transactions in the name of and/or utilized by a person….see page 153 of sir's book
10. When prior waiver of secrecy is required to be given by depositor in favor of lending bank:

1. Loans secured by hold-out or assignment of certificates of time deposit
2. In case f DOSri loans

11. Tax payer offers to compromise his tax liabilities on the ground of financial incapacity

EJERCITO vs. CA

--trust placements were characterized as deposits as the money was deemed as for the boosting of economic development. The SC said that RA1405 is broad enough to cover trust department.

Sir: The decision is very unconvincing. Take note that trust department has no depository character and when the law referred to investment, it meant investment in bonds.

What happened?

Criminal case for Plunder was filed against Erap. In relation to this, a special prosecution panel was organized to try the case vs. him. The said panel requested several documents and information from Export and Industry Bank (EIB) and Equitable-PCI bank regarding the Trust Account and Savings Account of Erap. Erap filed Motion to quash and Urgent Motion to quash the said requests for issuance of subpoena duces tecum/ad testificandum but Sandiganbayan denied the said motions to quash. Reconsideration was also denied.

People (represented by the Special Prosecution Panel) argues that the Trust Account is not covered by RA 1405 upon which Erap relies on because it is not included in the term "Deposits"

H:

ON WON Trust Account is included under the term DEPOSITS:

1405, by the mere fact that they do not entail a creditor-debtor relationship between the trustor and the bank, does not lie. An examination of the law shows that the term "deposits" used therein is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor relationship between the depositor and the bank.

--If the money deposited under an account may be used by banks for authorized loans to third persons, then such account, regardless of whether it creates a creditor-debtor relationship between the depositor and the bank, falls under the category of accounts which the law precisely seeks to protect for the purpose of boosting the economic development of the country.

--Trust Account No. 858 is, without doubt, one such account. The Trust Agreement between petitioner and Urban Bank provides that the trust account covers "deposit, placement or investment of funds" by Urban Bank for and in behalf of petitioner. 6 The money deposited under Trust Account No. 858, was, therefore, intended not merely to remain with the bank but to be invested by it elsewhere. To hold that this type of account is not protected by R.A. 1405 would encourage private hoarding of funds that could otherwise be invested by banks in other ventures, contrary to the policy behind the law.

--Also,

SECTION 2. All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation. (Emphasis and underscoring supplied)

>gave broad interpretation of the law

ON WON THE CASE FALLS UNDER THE TERMS BRIBERY OR DERELICTION OF DUTY (THIS BEING PLUNDER)

YES. Cases of unexplained wealth are similar to cases of bribery or dereliction of duty and no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential

--Indeed, all the above-enumerated overt acts are similar to bribery such that, in each case, it may be said that "no reason is seen why these two classes of cases cannot be excepted from the rule making bank deposits confidential."

--The crime of bribery and the overt acts constitutive of plunder are crimes committed by public officers, and in either case the noble idea that "a public office is a public trust and any person who enters upon its discharge does so with the full knowledge that his life, so far as relevant to his duty, is open to public scrutiny" applies with equal force.

WON the the money deposited or invested is the subject matter of the litigation

Union Bank vs. CA: "the subject of the action is the matter or thing with respect to which the controversy has arisen, concerning which the wrong has been done, and this ordinarily is the property or the contract and its subject matter, or the thing in dispute."

Melon Bank vs. Magsino: an inquiry into the whereabouts of the illegally acquired amount extends to whatever is concealed by being held or recorded in the name of persons other than the one responsible for the illegal acquisition

--The plunder case now pending with the Sandiganbayan necessarily involves an inquiry into the whereabouts of the amount purportedly acquired illegally by former President Joseph Estrada.

In light then of this Court’s pronouncement in Union Bank, the subject matter of the litigation cannot be limited to bank accounts under the name of President Estrada alone, but must include those accounts to which the money purportedly acquired illegally or a portion thereof was alleged to have been transferred. Trust Account No. 858 and Savings Account No. 0116-17345-9 in the name of petitioner fall under this description and must thus be part of the subject matter of the litigation.

WON fruit of the poisonous tree doctrine applies, it being that the specificity of the bank account necessarily entails that the Special Prosecution Panel has already made an initial illegality to acquire the information on his bank accounts

NO. Ra 1405 does not provide that if the information is acquired through violation of said law, it would be inadmissible as evidence.

--plus, the specifics were obtained from previous valid subpoena duces tecum from the impeachment proceedings and investigation of the Ombudsman who has the power to examine even bank accounts

*COMMENTS NI SIR: Intention of SC: Law of bank deposits covers trust placements.

SC EXPANDED definition of deposits.

+on SC's ruling that the last portion of Section 2, there is INVESTED (so not only deposits): SC failed to consider the initial portion of Section 2, in which the reference of investments is on the bonds issued by the government. Invested refers NOT TO TRUST PLACEMENTS

+SC: money deposited under a trust accounts for authorized loans to 3rd persons, then such account falls under category protected by bank: SIR: trust placements are not necessarily used by banks for loans. There's a list of investment outlets. Outside it, the trustor-beneficiary's consent should be obtained before the bank lends it to 3rd persons.

*Trust placements are already covered by RA 1405 under EJERCITO vs. SB

--this is a step backwards in the fight vs. money laundering

RA 6426, as amended

Foreign Currency Deposit Act

This is for non-Php denominated deposits. For FCDU

Only 1 exemption to confidentiality here: with consent of depositor + AMLA

CBC v. CA:

a co-payee is deemed a co-depositor.

F: A US dollar check, payable to a father and/or his daughter, was deposited by her in an FCDU account under her name. When the father wanted to look into such FCDU account, he was not allowed to do so by the depository bank as he was not a depositor of record thereof.

H: He is considered a "co-depositor" of the account since he was a co-payee of the check deposited in that account. So he can look w/o written consent of his daughter.

*this is pro hac vice

SECTION 55.1.a, GBL

SECTION 55. Prohibited Transactions. —

55.1. No director, officer, employee, or agent of any bank shall —

(a) Make false entries in any bank report or statement or participate in any fraudulent

transaction, thereby affecting the financial interest of, or causing damage to, the bank or

any person;

SIR:

It covers funds which are not deposits!

False entries in bank reports or statements distort the true financial condition of the bank concerned, and may mislead not only the BSP but also the general public.

-UP TO WHAT EXTENT LIABLE: to extent that such falsity causes damage to the bank itself or to any person

-punishes any individual who participates in any fraudulent transaction affecting the financial interest of the bank or a third person

---Section 25, New Central Bank Act clarifies authority fo BSP to compel persons to produce documents under Section 6, GBL, providing that this is subject to existing law protecting or safeguarding the secrecy or confidentiality of bank deposits as well as investments of private persons, natural or juridical, in debt instruments issued by the government. This refers to RA 1405 and RA 6426. However, BSP May still inquire into or examine deposits ONLY if made in the course of periodic or special examination in accordance with Section 11 of the Anti-Money Laundering Act of 2001

2. Floating Rate Certificate of Deposit (FRCD) vs. Floating Rate Note (FRN)

FRCD	FRN
Certificate of time deposits with the floating rate	Similar, issuances by FCDUs
	Easily traded

*FCDUs usually issue FRCDs for deposits…but now investors want FRNs

PROBLEM: Regulation in manual which freely authorizes FCDUs

But consent if borrowing other than deposit taking

So pede ba issue FRNs w/o BSP approvals: solution: FRN include provision that the funds received by FCDU would be booked as deposits - and this seem to be acceptable to BSP

*CDs not subject to DST but notes are; at that time, FCDUs were deemed not subject to DST which is contrary to position of BIR

-official contemplation: exempt FCDUs from all taxes except INCOME TAX

--these were replaced by…wah!

3. Overdrafts

Checking Account (current/demand)

Def: checks not sufficiently funded

-may be used as a loan facility with a term

-in respect of current accounts, overdrafts are not permitted. Mas maganda if there's automatic transfer of funds to current account, or through cash sweeping

CASH Sweeping

-when: MNC w/ several subsidiaries all over the world

e.g. there's a current account in RP then another current account in NY. Then there is a master account, say, kept in NY. At the end of the day, all balances are transferred to master account, minimal balance kept to current accounts. When there is a need to replenish funds in RP, it would be debited from the master account. It would be easier if these accounts are maintained in 1 bank.

• UNDER MANUAL: Banks are prohibited from allowing overdrafts

Lusot: Banks may extend loan to the customer so that the check can still be honored

4. Survivorship Issue

*if you look at the w/drawal slip, when the depositor has a co-depositor, there is a statement for authorized representation? WHY? Section 97

-but no actual implementation

-see pages 74-75 of sir's book: Section 97 does not apply when there is a survivorship agreement between the co-depositors and it is known to the bank.

-A survivorship agreement may also apply to shares of stock. It is a good method of estate planning.

Section 97, NIRC

If a bank has knowledge of the death of a person, who has a deposit account with it alone or jointly with another, it must not allow any withdrawal from said account, unless the Commissioner of Internal Revenue certified that the estate tax thereon has been paid

Ana Rivera vs Peoples Bank and Trust Co

F: Ana Rivera, the housekeeper of Edgar Stephenson, was made by the latter as co-depositor of the funds in PBTC. Upon the latter's death, Ana Rivera claims the amount left in the account. Bank refused to comply, doubting the validity of the survivorship agreement. So Ana River filed complaint for collection. Administratix of the Estate intervened, claiming the amount to be theirs.

TC: Ana Rivera was a mere atty-in-fact, and such relationship ended upon death of Stephenson.

H: A survivorship agreement is an aleatory contract supported y a lawful consideration - the mutual agreement of the joint depositors permitting either of them to withdraw the whole during their lifetime, and transferring the balance to the survivor upon the death of one of them.

But while the survivorship agreement is per se not contrary to law, its operation or effect may be violative of law where it is shown that such agreement is a mere cloak to hide an inofficious donation to transfer property in fraud of creditors, or to defeat the legitime of a forced heir.

*it doesn't mean that when the relationship between the co-depositors is that of a master-servant, the servant doesn't have the capacity to make deposits. It is not uncommon for other people to make deposits for others, or open accounts for others. Ana Rivera has been the housekeeper of Stephenson for 19 years!

Vitug vs. CA

F: Vitug and his wife had a savings account and had a survivorship contract wherein, upon the death of one of them, the remaining alive spouse would be the sole owner of the proceeds of the savings account. His wife died, and pending probate of the estate, he asked for authority to sell certain shares of stock and real properties belonging to estate of his wife to cover allegedly his advances to the estate (P667,731.66) which he claimed were personal funds.

-Corona opposed the motion to sell: funds w/drawn from savings account were conjugal partnership property and part of the estate

TC: Granted VITUG's prayer

CA: Reversed TC:

(1) survivorship agreement = conveyance mortis causa - did not comply with the formalities of a valid will as prescribed in A805, NCC

(2) if mere donation inter vivos, it is a prohibited donation under A133, NCC

H: The survivorship agreement is neither a donation mortis causa or inter vivos. It is an aleatory contract in reality the contract imposed a mere obligation w/ a term - the term being death.

(1) WHY NOT A WILL? Because for it to be a will, the property should belong solely to the testator. The funds involved here belong to both Vitug and his wife

(2)WHY NOT A DONATION INTER VIVOS? Because it was to take effect after the death of one of the spouses AND the other spouse could not donate what is not solely his/hers.

-the savings account being part of Vitug's separate property, it does not belong to the estate.

BIR RULING No. 010-2003

*eto baligtad. It ruled that even if with a survivorship agreement, the account is deemed a joint account, 50-50 share and the survivorship agreement is deemed a donation mortis cause, subject to estate tax. 50% of the proceeds in the account are subject to estate tax and may not be w/drawn.

ISSUE: WON a Survivorship Agreement executed by the joint depositors under a joint deposit account expressly stipulating that upon death of any one of the joint depositors, the entire remaining balance of the deposit shall belong to the surviving depositor/s and, in effect, may be forthwith withdrawn by the latter notwithstanding the provisions of Section 97 of the 1997 Tax Code.

HELD:

As can be readily gleaned from the Survivorship Agreement, the funds deposited in the joint deposit account are under co-ownership because the ownership or right over the same belong to different persons, the joint depositors. The share or portion belonging to the joint depositors in the joint deposit account shall be presumed equal and the benefits as well as the charges in the joint account shall be proportional to their respective shares. [Arts. 484 and 485, Civil Code]

In the Survivorship Agreement, the joint depositors cannot withdraw any portion of the said deposit account without the consent of the other. However, upon death of any of them, the whole amount of the funds shall belong to the surviving co-depositor/s, and mayforthwith be withdrawn by the latter. The said provision contained in the agreement is valid and binding between the joint depositors but it has an effect of a gift or donation morits causa made by the deceased co-depositor during his lifetime but effective upon death because the acquisition by the survivor of the share of the decedent in the joint account is considered to be acquired by bequest and hence subject to estate tax under Section 84 of the

1997 Tax Code.

Considering that the joint account is co-owned by the depositors, there is a presumption that they owned it equally or in 50/50 shares, in which case, the transfer of the remaining balance of the whole deposit to the surviving co-depositor/s upon death of the other co-depositor pursuant to their Survivorship Agreement is a transfer made by the said depositor in contemplation of death, as provided under Section 85(B) of the 1997 Tax Code, viz:

“(B) Transfer in Contemplation of Death – To the extent of any interest therein

of which the decedent has at any time made a transfer, by trust or otherwise, in

contemplation of or intended to take effect in possession or enjoyment at or after death,

or of which he has at any time made a transfer, by trust or otherwise, under which he has

retained for his life or for any period which does not in fact end before his death (1) the

possession or enjoyment of, or the right to the income from the property, or (2) the right,

either alone or in conjunction with any person, to designate the person who shall possess

or enjoy the property or the income therefrom; except in case of a bona fide sale for an

adequate and full consideration in money or money’s worth.”

Thus, upon the death of the co-depositors, the 50% share of the deceased co-depositor in the

deposit shall be included in computing the value of his gross estate.

Hence, the funds in the joint deposit account cannot be withdrawn by the surviving

co-depositor/s unless the Commissioner has certified that the taxes imposed thereon by Title

III of the 1997 Tax Code have been paid; Provided, however, That the administrator of

the estate or any one (1) of the heirs of the deceased co-depositor may, upon the

authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand

pesos (P20,000.00) without the said certification.

SIR: this ruling in conflict with SC decisions! (VITUG vs. CA also involves a conjugal property- which applies co-ownership rules!)

ON citation of 85B in the Ruling: it shows doubt as to the validity of the survivorship agreement because it evades estate tax! But there is no harm in coming up with a survivorship agreement

Deposit substitute activities

1. Quasi-banking

Section 6, GBL

SECTION 6. Authority to Engage in Banking and Quasi-Banking Functions. —

No person or entity

shall engage in

...banking operations

…or quasi-banking functions

without authority from the Bangko Sentral:

Provided, however, That an entity authorized by the Bangko Sentral to perform universal or

commercial banking functions shall likewise have the authority to engage in quasi-banking functions.

(UB/KB = can engage in quasi-banking)

The determination of whether a person or entity is performing banking or quasi-banking functions

without Bangko Sentral authority shall be decided by the Monetary Board.

To resolve such issue, theMonetary Board may, through the appropriate supervising and examining department of the Bangko Sentral,

>examine,

>inspect

>or investigate the books and records of such person or entity.

Upon issuance of this authority, such person or entity may commence to engage in banking operations or quasi-banking functions and shall continue to do so

...unless such authority is sooner

>surrendered,

>revoked,

>suspended or

>annulled by the Bangko Sentral in accordance with this Act or other special laws.

The department head and the examiners of the appropriate supervising and examining

department are hereby authorized

...to administer oaths to any such person, employee, officer, or director of any such entity and

...to compel the presentation or production of such books, documents, papers or records that are reasonably necessary to ascertain the facts relative to the true functions and operations of such person or entity.

Failure or refusal to comply with the required presentation or production of such

books, documents, papers or records

within a reasonable time

shall subject the persons responsible therefore to the penal sanctions provided under the New Central Bank Act.

Persons or entities found to be performing banking or quasi-banking functions without authority

from the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act and

other applicable laws. (4a)

SIR:

*Section 6 reaffirms role of BSP as the gatekeeper of the banking system

*ONLY a stock corporation can be licensed as a bank or quasi-bank

*UB and KB have the inherent authority to engage in quasi-banking activities. Othe banks and financial institutions (Quasi-banks) have to apply for a quasi-banking authority from the BSP.

QUASI-BANKS:

(a) obtain deposit substitutes

(b) through the

1. issuance

Ii. endorsement

Iii. or acceptance

WITH RECOURSE to it

Of debt instruments:

*banker's acceptance in trade transactions

*promissory notes

*participations

*certificates of assignment

*other similar instruments WITH RECOURSE

*repurchase agreements

(c) for the purpose of

i. relending

ii. purchasing of receivables and other obligations

2. Reserves

SIR:

Purpose: to control the volume of money created by the credit operations of the banking system

-it is maintained against their deposit and deposit-substitute liabilities (Section 94, NCBA)

-reserve requirements may vary from time to time (depends on the Monetary Board)

-because a fraction of the deposit and deposit substitute is set aside as reserve, the country is said to adhere to the "fractional reserve" banking system.

KINDS

1. Liquidity reserve

-NOW: maintained by placing term deposits w/ BSP

B4: maintained in the form of short-term market yielding government securities purchased directly from the BS's Treasury Department then the interest goes to the banks

-reserve requirement: 11% of the PESO deposit and deposit substitute liabilities of UB and KB (BSP Circ No. 491, July 12, 2003)

2. Regular reserve (a.k.a. statutory or legal reserve)

-maintained as deposits with BSP

-regular reserve requirement: 10% (BSP Circ No. 491, July 12, 2003)

-only 40% of it is credited interest quarterly at 4% per annum based on their average daily balance (INTERPRETATION: 40% of the regular interest yields interest. The rate of interest is 4% per annum)

...what happens to the other 60%? It does not earn interest: Section 94, NCBA

Letters of Credit (L/C)

SIR:

-means of settling obligations arising from trade transactions

-it's a question of trust when you enter into commercial transactions

-normal way of settling transactions: through cash: DP (delivery against payment)

-if there are previous transactions between the parties, the seller may be content with accepting a bank draft (DA: documents against acceptance)

-if the acceptor is a bank: banker's acceptance (pages 60-61)

- even if there's no immediate receipt of cash, the seller would be comfortable to depart with goods

-but in cross-border transactions, normal way of payment is through L/C

-on types of contract: see below

-if W/O TRUST RECEIPT: 3

Buyer-seller - CONTRACT OF SALE: BUYER

Buyer-bank: the BUYER (ACCOUNT PARTY

Bank-seller: the bank agrees to pay

TYPES OF BANKS in a L/C

"Shipside bond" - item G of Section 4 of GBA - quoted in Section 78 of the book...boo! Di ko makita!

-basta, from narinig ko, if kulang L/C or di pa naiissue, bank would issue this bond para marelease na from customs

-A joint undertaking of the Bank and client-importer issued in favor of the shipping line for the delivery of cargo without submission of the original Bill of Lading (B/L).

(pages 61-68)

-usually with Banker's Acceptance

-by issuing letters of credit, a bank performs its basic function "to facilitate the exchange of goods and services between the sellers and buyers"

-definition in Bank of America vs. CA, 228 SCRA 357: is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and the buyer, who wants to have control fo the goods before paying...

*Unless this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires the said documents and control over the goods only after reimbursing the bank.

-if W/O TRUST RECEIPT: 3 intertwined contracts:

1. Buyer-seller - CONTRACT OF SALE: BUYER (account party) agrees to pay money to the SELLER (beneficiary)
2. Buyer-bank: the BUYER (ACCOUNT PARTY) applies to the issuing bank for a specified L/C and agrees to reimburse the bank for amounts paid by that bank pursuant to the L/C.
3. Bank-seller: the bank agrees to pay the seller (BENEFICIARY) to support contract # 1 (between seller and buyer)

1. Types

According to purpose

1. Trade
1. Import
2. Export

2. Standby

According to commitment

1. Revocable
2. Irrevocable

According to the terms of payment

1. SLIGHT L/C: payable upon demand or on sight
2. Time of usance - with a term

According to transferability

1. Transferable
2. Non-tranferable

TYPES OF BANKS in a L/C As found in FEATI BANK CASE:

• NOTIFYING BANK: assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit
• NEGOTIATING BANK: a correspondent bank which buys or discounts a draft under the letter of credit.

-LIABILITY: dependent upon the stage of the negotiation

>before negotiation: no liability w/ respect to the seller

>after negotiation: a contractual relationship will then prevail between the negotiating bank and the seller

• CONFIRMING BANK: correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit

*when the credit of the initial bank is not satisfactory to the seller

1. UCP 500/ISP 98

ICC no. 600/UCP 600	UCP 500
CREDIT: any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation "COMPLYING PRESENTATION": a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of and international standard banking practice	CREDIT: Any arrangement, however named or described whereby a bank (the Issuing bank) acting at the request and on the instruction of a customer ("The Applicant") or on its own behalf 1. is to make a payment or to the order of a third party (the BENEFICIARY), or is to accept and pay bills of exchange (Drafts) drawn by the Beneficiary Ii. Authorizes another bank to effect such payment, or to accept and pay such bills of exchange (drafts) Iii. Authorizes another bank to negotiate
Considers L/C as CREDIT: described as "documentary" because the parties thereto only deal with documents to demand or make payment, w/o regard to the underlying transaction involving goods or services

*a basta, both contain INDEPENDENCE PRINCIPLE

....Credit operations as only dealing with documents

TRANSFIELD PHILIPPINES INC. VS. LUZON HYDRO CORPORATION: the untruthfulness of a certificate accompanying a demand for payment under a standby L/C may qualify as fraud sufficient to support an injunction against payment.

WHY ARE STANDBY LETTERS OF CREDIT THE CHOICE OF LENDERS AND OTHER PARTIES WHOSE CREDITS OR OTHER ENTITLEMENTS ARE TO BE SECURED?

*as standby letters of credit are also governed by UCP500, they are covered by the "independence principle" which serves to separate the undertakings under the standby letter of credit from those arising from the contract being secured

*the rules applicable to standby letters of credit are updated regularly to keep pace w/ market practices and developments (ISP 98)

INDEPENDENCE PRINCIPLE

A L/C transaction is described as "documentary" because the parties thereto only deal with documents to demand or make payment, w/o regard to the underlying transaction involving goods or services

In other words, the obligations of the parties to the L/C are independent of the obligations of the parties to the underlying transaction (walang pakialam ang bank if ever may problema ang contract ng buyer-seller)

GR: if strictly complied, has to pay the seller

X: fraud: the beneficiary fraudulently presents to the issuing or confirming bank documents that contain material facts that, to his knowledge, are untrue, then payment under the L/C may be prevented

RULE of STRICT COMPLIANCE:

The documents tendered must strictly conform to the terms of the L/C. The tender of documents by the beneficiary (seller) must include all documents required by the letter.

A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender,

>acts on its own risks and

>may not thereafter be able to recover from the buyer or the issuing bank as the case may be, the money thus paid to the beneficiary.

FEATI Bank:

-must strictly conform to the terms of the letter of credit; once the seller complies with the terms of the L/C, the bank has no choice but to comply with the terms of the agreement

FEATI Bank and Trust Co vs. CA

F: Villaluz agreed to sell to Christiansen lauan logs. Accordingly, Villaluz shipped the lauan logs to the consignee. However, Christiansen refused to issue a certification, stating that the logs have been approved prior to the shipment. Certification was required as a documentary requirement that must be presented to FEATI before the L/C in favor of Villauz (seller) could be negotiated. FEATI refused to negotiate the L/C because of the absence of certification from Christiansen

H: In commercial transactions involving L/C, the documents tendered must strictly conform to the terms of the L/C. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent banks which departs from what has been stipulated under the L/C as when it accepts a faulty tender ACTS ON ITS OWN RISK and MAY NOT THEREAFTER BE ABLE TO RECOVER FROM THE BUYER OR THE ISSUING BANK AS THE CASE MAY BE, THE MONEY THUS PAID TO THE BENEFICIARY. [RULE OF STRICT COMPLIANCE]

Four Contracts in relation to L/C:

1. issuing bank and buyer

2. buyer and seller

3. issuing bank and confirming bank

4. confirming bank and seller

* significant: it explains that an L/C transaction is a documentary transaction. As long as the beneficiary is able to submit documents to the bank set out under the terms of the LC, the bank has no recourse but to pay under the L/C

*problem: exporter agreed that the document be issued by the broker (but it should be issued by the certifier...?)

*another: applicability of the UCP: now UCP 600 (updated every 10 years or so)

*SC cited Art2, Code of Commerce: use customs - since UCP used "customs", then that must be it!

Transfield Philippines vs. Luzon Hydro Corporation

F: Transfield, a Turnkey contractor, and Luzon Hydro Corporation (LHC) entered into a Turnkey Contract wherein Transfield would construct a power station.

To secure performance of its obligation, Transfield opened in favor of LHC 2 standby letters of credit each in the amount of US$8,988,907.

-however, due to force majeure, Transfield delayed in the construction and its requests for extensions were denied by LHC.

-The parties first underwent arbitration before CIAC and another in ICC.

-Foreseeing that LHC would claim the standby letters of credit which are their securities for the performance of the obligation, Transfield advised respondents banks of the arbitration proceedings already pending and asserted THAT LHC had no right to call on the securities until the resolution of the disputes before the arb tribunals and any transfer, release, or disposition of the Securities in favor of LHC would constrain it to hold respondent banks liable for liquidated damages. - banks said that they would pay LHC when it calls on them (HAHA! Wala kaming paki sa inyo!)

-LHC declared Transfield in default, so it served notice to the banks that it would call on the securities.

-Transfield filed complaint for injunction w/TRO vs. banks and LHC, praying that LHC refrain from calling on the securities and the banks from disposing any securities

RTC: DENY, employ, "independent contract" doctrine

CA: Affirm

H:

Nature of LC. The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the bank’s customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable.

In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the sale of goods. However, credits are also used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as standby credits.

Commercial vs Standby Credits. There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract.

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee. A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto.

Independence Principle. Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit area.

Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the required documents are presented to it. The so-called “independence principle” assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not. Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever.

The independent nature of the letter of credit may be: (a) independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement like for instance a typical standby; or (b) independence may be only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. In both cases the payment may be enjoined if in the light of the purpose of the credit the payment of the credit would constitute fraudulent abuse of the credit.

Issue: Would injunction be the proper remedy to restrain the wrongful draws on the Securities?

Ratio: Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment. The remedy for fraudulent abuse is an injunction.

However, injunction should not be granted unless:

(a) there is clear proof of fraud;

(b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and

(c) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged.

In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of 253 days which would move the target completion date. If its claims for extension would be found meritorious by the ICC, then LHC would not be entitled to any liquidated damages.

Generally, injunction is a preservative remedy for the protection of one’s substantive right or interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case, the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law.

Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right. It must be shown that the invasion of the right sought to be protected is material and substantial, that the right of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious damage. Moreover, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard compensation.

In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHC’s call on the Securities which would justify the issuance of preliminary injunction. By petitioner’s own admission, the right of LHC to call on the Securities was contractually rooted and subject to the express stipulations in the Turnkey Contract. Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of default.

The pendency of the arbitration proceedings would not per se make LHC’s draws on the Securities wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default.

Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction. What petitioner did assert before the courts below was the fact that LHC’s draws on the Securities would be premature and without basis in view of the pending disputes between them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not brought out in the proceedings below will ordinarily not be considered by a reviewing court as they cannot be raised for the first time on appeal. The lower courts could thus not be faulted for not applying the fraud exception rule not only because the existence of fraud was fundamentally interwoven with the issue of default still pending before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHC’s call upon the Securities.

Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. More importantly, pursuant to the principle of autonomy of contracts embodied in Article 1306 of the Civil Code, petitioner could have incorporated in its Contract with LHC, a proviso that only the final determination by the arbitral tribunals that default had occurred would justify the enforcement of the Securities. However, the fact is petitioner did not do so; hence, it would have to live with its inaction.

With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation to determine the veracity of LHC’s certification that default has occurred. Neither were they bound by petitioner’s declaration that LHC’s call thereon was wrongful. To repeat, respondent banks’ undertaking was simply to pay once the required documents are presented by the beneficiary.

At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC’s draws upon the Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general principles of law.

Moreover, in a Manifestation, dated 30 March 2001, LHC informed this Court that the subject letters of credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition.

Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait accompli or an accomplished or consummated act. In Ticzon v. Video Post Manila, Inc. this Court ruled that where the period within which the former employees were prohibited from engaging in or working for an enterprise that competed with their former employer—the very purpose of the preliminary injunction —has expired, any declaration upholding the propriety of the writ would be entirely useless as there would be no actual case or controversy between the parties insofar as the preliminary injunction is concerned.

In the instant case, the consummation of the act sought to be restrained had rendered the instant petition moot—for any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief could have no practical effect on the existing controversy. The other issues raised by petitioner particularly with respect to its right to recover the amounts wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate proceeding.

*A basta, in short on fraud, Transfield was arguing that the LHC would be fraudulently demanding the proceeds of the standby L/H when the dispute is not resolved yet in the arbitration proceedings. The court held that the injunction would not lie, Transfield failing to show that it has a right to restrain the banks from claiming the funds and that the right of LHC to claim rests on their contract plus it is premature to say that there is fraud.

*Important because this is the 1st judicial declaration of an exemption from the independence principle: FRAUD

*SC: if there is fraud on the part of the beneficiary (seller), then it might be possible to prevent the payment under the L/C by filing a petition for injunction, provided the requisites for such be satisfied first

3 requisites: (4 daw sabi ng PLJ)

1. Clear proof of fraud
2. Fraud constitute abuse of the independent purpose of the L/C
3. Irreparable injury might follow if injunction not granted

Sir's problem: SC citing Prof. Dolan about surety that it could mislead civil students (e.g. page 331 of scra version, 3rd part of quotation from Prof. Dolan

-under NCC: a surety only pays a certain amount

-we'll take this up again under security devices (GUARANTEE)

PNP vs. Pineda

F: TCC filed w/PNB an application for L/C for $7M to cover the importation of cement plant machinery and equipment. The application for L/C was approved w/ the Arroyo spouses as surety (Arroyo Sps own a controlling interest in TCC). TCC drew against the L/C, but later failed to pay the drawings made.

-PNB took possession of the imported machinery and equipment pursuant to the TRUST RECEIPT AGREEMENT executed by PNB and TCC which gave the former the unqualified right to the possession and disposal of all property shipped under the L/C.

H: PNB's possession of the subject machinery and equipment being precisely as a form of security for the advances given to TCC under the L/C, said possession itself CANNOT BE CONSIDERED PAYMENT OF THE LOAN SECURED THEREBY.

-payment would LEGALLY RESULT ONLY AFTER

>PNB HAD FORECLOSED ON SAID SECURITIES

> sold the same

>applied the proceeds thereof to TCC's loan obligation.

Mere possession does not amount to foreclosure; foreclosure denotes the procedure adopted by the mortgagee to terminate the rights of the mortgagor on the property and includes the sale itself

-Neither can said repossession amount to dacion en pago. Dation in payment takes place when property is alienated to the creditor in satisfaction of a debt in money and the same is governed by sales. In CAB, no dacion en pago was ever accomplished because the repossession was merely to secure the payment of TCC's loan obligation and not for the purpose of transferring ownership therof to PNB.

*In an L/C with TR transaction, the L/C represents the loan while the TR the security. The fact that goods have been delivered to the bank does not extinguish the liability under the TR, foreclosure is necessary.

*coverage next meeting: commercial papers up to