Professional Documents
Culture Documents
Banking Morales
Banking Morales
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
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)
when the documentation is replete with words such as "by way of security",
H: For IBAA
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.
*the surrender of the goods extinguishes the Criminal action, but NOT THE
CIVIL ACTION!
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
Trust receipt agreement over plastic products. Nitafan assailed the Trust
Receipts Law under 2 arguments:
No need for malice. It is mala prohibitum thus not an element of the crime.
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
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.
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.
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.
*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.
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.
2.
Certain Issues
In Chattel Mortgage Law, AAP and AIC not included because of Section 5 and 7 of
Chattel Mortgage Law:
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
Court said that it is an enforceable obligation for the execution of either a new
document or amend the existing document
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!
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
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.
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)
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
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).
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.
TC:
o
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
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!
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.
1st loan: from JP Heilbronn for P14k. CHATTEL MORTGAGE on all its
printing machinery and accessories was executed in favor of HEILBRONN
-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
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
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
VOID. Should execute a new CM over the new debt OR Amend the old
*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.
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.
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
10
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"
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).
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.
11
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?
-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.
-one which is specifically phrased to subsume all debts of past or future origins.
12
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
*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.
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!
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)!
REM provides:
13
Vs. Petitioners: REM only covers P1.5M loan, no agreement that the 18%
interest was to be compounded mo as it was per annum!
What the parties could have done in order to bind the realty for the additional
loans was
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.
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
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
EXC: if stipulated
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
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)
15
Pledge
Chattel Mortgage
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:
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
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:
". . . 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
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...
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
CA: complaint was for foreclosure of the chattel mortgage so wrong to order
Colorina to pay the balance due
What is the true nature of a foreclosure of chattel mortgage under Article 1484(3)
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.
18
RA 133
result is the same, in the sense that the mortgagor ends up with the property but
no foreclosure proceeding
Sir's book:
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.
In Petition for Rehabilitation, the Court may issue a stay order which works as a
standstill order prohibiting creditors to enforce their securities.
Judicially
Extrajudicially
Act 3135
Right of redemption
19
extrajudicial foreclosure
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
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)
RA NO. 133
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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.
-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
shall not bid or take part in any sale of such real property as a consequence of
such mortgage.
LRC: unregistrable
-Section 25, RA 337 par and (d) ARE NOT APPLICABLE TO ALIEN BANKS!
"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;
21
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.
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
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
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)
22
El Hobar Filipino: Bank made some effort in GF to sell the property w/n 5 years. So
substantial compliance with Section 52.
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?).
-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.
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-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
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
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
24
A. Applicable Taxes
1.
Income Tax
2.
DST
3.
GRT
2. DST
If non bank
Bank
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
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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:
(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).
GR: All income derived from transactions with NONRESIDENTS are EXEMPT
Omnibus agreement
2.
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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
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)
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
*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.
27
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
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
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
28
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
*Unsolicited Proposal
e.g. Megaworld Proposal
-develop hectares of land in Global City
e.g. Terminal 3
BOT Law
lenders look to revenues of the project as the main soure of the payment (hence,
it is important that the project is earning money)
29
DERIVATIVE
*European Option: exercise option on the strike date (end of the option)
-stricter but lower premium
concerned with the differences between the price on strike date and price on
trade date
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
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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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:
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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
---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..
32
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
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
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
*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.
33
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.
-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)
34
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) "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
35
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
-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)
36
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
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
37
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!
-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)
38
-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
39