CRC Special Commercial Laws 2010

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COSMOPOLITAN REVIEW CENTER- UNIVERSITY OF THE CORDILLERAS

OUTLINE FOR SPECIAL COMMERCIAL LAWSJune 4, 2010

PRELIMINARIES:

1. Commercial law and its characteristics

Commercial Law is that branch of law relating to the rules that govern the rights,obligations and relations of persons engaged in commerce or trade.

Its three principal characteristics are: (a) universal because it exists in everycivilized society as trade is necessary (b) progressive as it accumulates new ideasand keeps abreast with contemporary developments, and (c) equitable sincecommercial transactions involve the exchange of values or consideration.

2. Law Merchant

Law Merchant is the commercial law consisting of customs, practices, and usagesgiven the force and effect of law by the courts through judicial pronouncements. It isthe common law of commercial law.

3. Covered subjects: (a) Merchants and Commercial Transactions (b) JointAccounts (c) Letters of Credit (d) Trust Receipts (e) Bulk Sales (f) WarehouseReceipts (g) Chattel Mortgages (h) Extra-Judicial Foreclosure of Mortgages (i)Insolvency(j) Banking (k) Securities

MERCHANTS AND COMMERCIAL TRANSACTIONS:

1. Who is a merchant?

Merchants are, those who having legal capacity to engage in commerce, habituallydevote themselves thereto.

Persons shall be deemed as having met the required legal capacity to habituallyengage in commerce if:

Being an individual: (a) Must be 18 years of age and (b) having free disposal of

property

As far as an alien is concerned, his legal capacity is determined by his national lawbut is limited by the nature of the industry that he would like to participate in andPhilippine Law that will govern the: (a) creation of the establishment (b) mercantileoperations, and (c) jurisdiction of our courts or the provisions of any treatyobtaining between the Philippines and the country of which he is a national (Article15, Code of Commerce).

Being a juridical person, it is required that it be organized in accordance with law. Ifit is a foreign juridical person, it must obtain a license to transact business in thePhilippines and is subject to the same limitations imposed on individual aliens.

The legal presumption of habitually engaging in commerce shall exist from themoment the person who intends to engage therein announces through circulars,newspapers, handbills, posters exhibited to the public, or in any other mannerwhatsoever, an establishment which has for its object some commercial operation(Article 3, Code of Commerce)

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1.1 Distinguishing between absolute and relative incapacity

An absolute incapacity extends over all of Philippines and the act is void, while inrelative incapacity, it is only co-extensive with the place wherein the officerincapacitated exercises functions and the act is valid but there is a disciplinarysanction.

Acts of persons who are incapacited are generally voidable as they are unable togive effective consent ( Article 1390, Civil Code)

2. What are commercial contracts?

Commercial Contracts are those entered into by merchants in the pursuit of theiractivities and involve articles of commerce. It is an agreement between two or moremerchants, and at times between those who are not, whereby they bind themselvesto give or do something in commercial transactions. The rules to be observed inrespect to commercial contracts are:

2.1 Formalities required of commercial contracts

As to formalities- commercial contracts shall be valid and shall give rise toobligations and causes of action in suits, whatever the form and language in whichthey may be executed, the class to which they may belong, and the amount theymay involve, provided their existence is shown by any means established by thecivil law. However, the testimony of witness alone shall not be sufficient to provethe existence of a contract which involves an amount exceeding 1,500 pesetasunless supported by some other evidence (Article 51, Code of Commerce).

The exceptions to the rule on formalities are: (a) Contracts which, in accordancewith this Code or with special laws, must be reduced to writing or require forms orformalities necessary for their efficacy. Examples: Bottomry or Respondentia(b)Contracts executed in a foreign country in which the law requires certaininstruments, forms or formalities for their validity, although Philippine law does notrequire them. In either case, contracts which do not satisfy the circumstancesrespectively required shall not give rise to obligations or causes of action (Article 52,Code of Commerce)

Illicit agreements do not give rise to obligations or causes of action even if theyshould refer to a commercial transaction (Article 53, Code of Commerce).

2.2 Perfection of commercial contracts

Generally, commercial contracts are perfected by mere consent. Consequently,prior to, but never after, the perfection of the contract, an offeror may withdraw hisoffer. If a period is given to the offeree, but no valuable consideration is paidtherefore, the offer may still be withdrawn as a matter of right. But, if thewithdrawal is exercised arbitrarily or whimsically, an award for damage iswarranted. (Article 19, Civil Code, Sanchez vs Rigos, 45 SCRA 368)

Contracts entered into by correspondence shall be perfected from the moment an

answer is made accepting the offer or the conditions by which the latter may bemodified (Article 54, Code of Commerce).

In commercial contracts entered into by correspondence, the contract is deemedperfected upon the making of an answer accepting the offer or from the time theacceptance is dropped in the mailbox even before knowledge of the offeror. Thereis intent to be bound. This is known as the Manifestation Theory. In other contractsnot covered by the Code of Commerce, the acceptance is not binding until it ismade known to the offeror. This is known as the Cognition Theory.

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2.3 Construing commercial contracts and indemnification clauses

In interpreting commercial contracts, the following rules shall be observed:Commercial contracts shall be executed and complied with in good faith accordingto the terms in which they were made and drafted, without evading the honest,

proper and usual meaning of written or spoken words with arbitrary interpretations,nor limiting the effects which are naturally derived from the manner in which thecontracting parties may have explained their wishes and contracted theirobligations (Article 57, Code of Commerce).

In case of conflict between copies of the contract, and an agent should haveintervened in its negotiation, that which appears in the agents book shall prevail(Article 58, Code of Commerce)

In case of a doubt, and the rules enunciated cannot resolve the conflict, issues shallbe decided in favor of the debtor (Article 59, Code of Commerce)

In a commercial contract containing an indemnification clause against the personwho fails to comply therewith, the aggrieved party may take legal steps to demandthe fulfillment of the contract or the indemnity stipulated; but in resorting to eitherof these two actions, the other one shall be annulled unless there is an agreementto the contrary (Article 56, Code of Commerce). Note Article 1226 of the Civil Code

2.4 Determining delay or default

In commercial contracts, time generally is of the essence. Consequently, everydebtor would be in delay without making a demand. When compared to the Civil

Code, the general rule is the mere non-compliance at the designated time or periodwould not constitute default, even if a date has been fixed for the performance of anobligation. Thus, demand is necessary.

The rules on computing periods in commercial contracts are: (a) In all computationsof days, months and years, it shall be understood that a day has twenty-four hours,the months as designated in the Gregorian calendar, and the year has threehundred sixty-five days (Article 60, Code of Commerce). Note that under Article 13of the Civil Code, a month is 30 days, unless designated by name (b) Days of grace,courtesy or others which under any name whatsoever defer the fulfillment ofcommercial obligations, shall not be recognized, except those which the parties may

have previously fixed in contract or which are based on a definite provision of law(Article 61, Code of Commerce). Example is the grace period provided for by Section230 of the Insurance Code

A debtor in a commercial contract shall be determined to be in delay when: (a) Onthe eleventh day, in obligations which do not have a period previously fixed by theparties or by the provisions of this Code, as they are demandable ten days afterhaving been contracted if they give rise only to an ordinary action, or on the dayfollowing the next day if they involve immediate execution (Article 62, Code ofCommerce) (b) in contracts with a day fixed for their compliance by the will of theparties or by law, on the day following their maturity or in contracts in which no

such day is fixed, from the day on which the creditor legally makes demand uponthe debtor or notifies him of the protest of losses and damages made against himbefore a justice, notary or other public official authorized to admit the same.

In summary: (a) If period of performance fixed, next day in delay without need ofdemand, debtor in delay on the day following the day fixed; (b) If no period fixed,ten (10) days from execution of contract and on eleventh day, debtor is in delaywithout need of demand (c) If there is a Potestative period, the debtor is in delayfrom demand. Note period, as when the debtor desires (Article 1182, Civil Code)

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not condition as if the debtor desires (Article 1180), as the latter is a voidobligation.

JOINT ACCOUNTS

1. What is a joint account?

A joint account or cuentas en participacion is an arrangement among merchantswho interest themselves in the transactions of other merchants, contributingthereto the part of the capital they may agree upon, and who participate in thefavorable or unfavorable results thereof in the proportion they may determine (Art.239).

2. Formation, management and liquidation of joint accounts

A joint account may be formed without any formality and may be privatelycontracted orally or in writing (Art. 240).

A joint account shall not adopt a commercial name common to all the participants,nor shall any further direct credit be made use of except that of the merchant whotransacts and manages the business in his own name and under his individualresponsibility (Art. 241).

Those who contract with the merchant who carried on the business shall have aright of action against him only and not against the others interested therein. Thelatter shall also have no right against the third person who contracted with themanager, unless the latter formally cedes his rights to them (Art. 242)

The liquidation of the joint account shall be made by the manager thereof who,upon the conclusion of the transactions, shall render a verified account of theirresults (Art. 243)

LETTERS OF CREDIT:

1. What is a letter of credit?

A letter of credit is basically an open letter of request whereby one person requestsanother to advance money or give credit to a third person for a certain amount andpromises to repay the person advancing the money.

The primary purpose of a letter of credit is to substitute for, and therefore support,the agreement of the buyer-importer to pay money under a contract or otherarrangement.This instrument is basically a credit security through availment ofcredit facilities of the participating banks.

1.1 Essential conditions of a letter of credit

The essential conditions of a letter of credit are: (a) That it be issued in favor of adefinite person and not to order; and (b) That it be limited to a fixed and specifiedamount, or to one or more undetermined amounts, but within a maximum the limits

of which has to be stated exactly.

Hence, a letter of credit is not a negotiable instrument because it is required to bedrawn in favor of a definite person.

1.2 Distinguished from a stand-by letter of credit

It is distinguished as follows: (a) a letter of credit involves payment of a sum ofmoney under a contract of sale, in a standby letter of credit, payment is upon

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certification as a partys non-performance (b) in the former, the submitteddocuments indicate performance of the contract, while in the former, they indicatenon-performance (Transfield Philippines, Inc vs. Luzon Hydro Corp. 443 SCRA 307)

1.3 Distinguishing an irrevocable letter of credit from a confirmed letter of credit

The common types of letters of credit are: (a) Irrevocable vs. revocable Anirrevocable letter of credit obligates the issuing bank to honor drafts drawn incompliance with the credit and can be neither cancelled nor modified without theconsent of all parties, including in particular the beneficiary/exporter. A revocableletter of credit can be cancelled or amended at any time before payment; it isintended to serve as a means of arranging payment but not as a guarantee ofpayment (b) Confirmed vs. unconfirmed A letter of credit issued by one bank canbe confirmed by another, in which case both banks are obligated to honor draftsdrawn in compliance with the credit. An unconfirmed letter of credit is theobligation only of the issuing bank.

2. Parties to a letter of credit

The parties to a letter of credit are: (a) The Buyer- he is the one who procures theletter of credit and obliges himself to reimburse the issuing bank upon receipt of thedocuments of title (b) The Issuing Bank- is the bank from whom the letter of creditis procured and which undertakes to pay the seller upon receipt of the draft andproper documents of titles and to surrender the documents to the buyer uponreimbursement, and (c) The seller- who in compliance with the contract of sale shipsthe goods to the buyer and deliver the documents of title and draft to the issuingbank to recover payment.

In an international credit transaction carried through a letter of credit, the partiesare: (a) The Customer- who is the party who applies to a bank in one country for theopening of a letter of credit in favor of the seller in another country (b) The IssuingBank- is the bank in the country of the customer to which the customer applies forthe issuance of a letter of credit (c) The Beneficiary- who is the party in anothercountry who is the creditor of the customer. Usually, he is the one selling goods tothe customer (d) The Advising Bank is the bank in the country of the beneficiarywhich communicates to the beneficiary the notice of the credit issued by the issuingbank (e) The Confirming/Correspondent Bank- is the bank that undertakes that theletter of credit will be fully paid. Usually the confirming bank is also the advisingbank, otherwise it is utilized to lend credence to the letter of credit issued by a

lesser known issuing bank and is directly liable to the beneficiary.

2.1 Determining the liability of a party

The relationships of the parties are to be governed as follows: (a)Issuing bank andapplicant/buyer/importer Their relationship is governed by the terms of theapplication and agreement for the issuance of the letter of credit by the bank.Unless the contrary is provided for, the liability of the issuing bank is solidary withthe buyer (b) Issuing bank and beneficiary/seller/exporter Their relationship isgoverned by the terms of the letter of credit issued by the bank, and (c) Applicantand beneficiary Their relationship is governed by the sales contract.

It is clearly settled in law that there are thus three contracts which make up theletter of credit transaction: The contract between buyer and seller, buyer andissuing bank, and the letter of credit proper. These transactions are to bemaintained in a state of perpetual separation.

Since they are intended generally to facilitate the purchase and sale of goods byproviding assurance to the seller of prompt payment upon compliance withspecified conditions or presentation of stipulated documents without the seller

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having to rely upon the solvency and good faith of the buyer. This is known as therule of strict compliance in a letter of credit transaction means that the documentstendered by the seller or beneficiary must strictly conform to the terms of the letterof credit, i.e., they must include all documents required by the letter of credit suchas: (a) a draft which is also called a bill of exchange, is an order written by anexporter/seller instructing an importer/buyer or its agent to pay a specified amount

of money at a specified time (b) a bill of lading, which is a document issued to theexporter by a common carrier transporting the merchandise, and (c) invoices.

The issuing bank in determining compliance with the terms of the letter of credit isrequired to examine only the shipping documents presented by the seller and isprecluded from determining whether the main contract is actually accomplished ornot. This arrangement assures the seller of prompt payment, independent of anybreach of the main sales contract. This known as the independence principle in aletter of credit transaction.

TRUST RECEIPTS:

1. What is a trust receipt?

A trust receipt is a commercial document whereby the bank releases the goods inthe possession of the entrustee but retains ownership thereof while the entrusteeshall sell the goods and apply the proceeds for the full payment of the liability to thebank.

It is a security transaction intended to aid in financing importers and retail dealerswho do not have sufficient funds or resources to finance the importation orpurchases of merchandise, and who may not be able to acquire credit, except

through utilization, as collaterals, of the merchandise imported or purchased.

2. Subject of a trust receipt

The subject matter of a trust receipt is always chattel. It will not apply to chattel soattached to land so as to become part thereof.

3. Parties to a trust receipt

The parties to a trust receipt transaction are: (a) The entruster- is the personholding title over the goods, documents or instruments subject to a trust receipt

transaction, and any successor in interest of such person, and (b) The entrustee isthe person having or taking possession of goods, documents or instruments under atrust receipt transaction, and any successor in interest of such person for thepurpose or purposes specified in the trust receipt

A trust receipt transaction is a transaction between an entruster and an entrusteewhereby the entruster, who owns or hold absolute title or security interests overcertain specified goods, documents or instruments, releases the same to thepossession of the entrustee upon the latters execution and delivery to the entrusterof a trust receipt wherein the entrustee binds himself to hold the specified gods,documents or instruments in trust for the entruster and to sell or otherwise dispose

of the goods, documents or instruments with the obligation to turn over to theentruster the proceeds thereof to the extent of the amount owing to the entruster,or the goods, documents or instruments themselves if they are unsold or nototherwise disposed of.

A Security Interest means a property interest in goods, documents or instruments tosecure performance of some obligations of the entrustee or of some third persons tothe entruster and includes title, whether or not expressed to be absolute, wheneversuch title is in substance taken or retained for security only.

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Note that there is no trust receipt transaction when a debtor has received the goodsfrom a supplier thereby acquiring title and will after borrow money from a bank topay for the same, the transaction is a loan even he signs a trust receipt agreement.It is essential for a trust receipt transaction for the bank to first acquire ownershipand possession.( Colinares vs. Court of Appeals, 339 SCRA 609, Consolidated Bank

and Trust Corp. vs. Court of Appeals, 356 SCRA 671)

When a Memorandum of Agreement is entered between a debtor corporation and acreditor bank is entered into rescheduling the payments due from the former, thetrust receipt transaction is novated and transformed into a simple loan.

4. Rights and obligations of the parties

The rights of the entruster are: (a) to be entitled to receive the proceeds of the saleof the goods released under a trust receipt to the entrustee to the extent of theamount owing to the entruster (b) to the return of the said goods, in case they could

not be sold; and (c) to cancel the trust in case the entrustee defaults, takepossession of the goods, and sell the same at public or private sale.

The entrustee shall receive any surplus but shall be liable to the entruster for anydeficiency.

Cancellation of the trust receipt and repossession is not essential for the entrusterto have a cause of action against the entrustee. They are options available to theentruster and do not prejudice resort to other remedies.

The obligations of the entrustee are as follows: (a) to hold the goods in trust for the

entruster and to dispose of them strictly in accordance with the terms of the trustreceipt; This includes the authority to manufacture or process the goods with thepurpose of ultimate sale. Provided, however, that the entruster retains title over thegoods whether in its original or processed form until the entrustee has compliedwith the obligation under the receipt. It also includes authority to load, unload, shipor transship or otherwise deal with the goods in a manner preliminary or necessaryto their sale (b)To receive the proceeds of the sale of the goods in trust for theentruster and to turn over the same to the entruster to the extent of the amountowing to the entruster (c) to insure the goods for their total value against loss fromfire, theft, pilferage or other casualties (d) to keep the goods or the proceedsthereof, whether in money or whatever form, separate and capable of identification

as property of the entruster; and (e) to return the goods,to the entruster in casethey could not be sold or upon demand of the entruster.

Notwithstanding the security interest of the entruster, the entrustee shall beresponsible as principal or as vendor under any sale or contract to sell made by theentrustee. Hence, although the entrustee is not the owner of the goods under atrust receipt (ownership is retained by the entrustor) anyone who acquires thegoods from the entrustee acquires good title (ownership) over the goods. Note thatit runs counter to the provisions of Article 1505 of the Civil Code, where there is acontract of sale, the buyer is to acquire only whatever title the seller had at the timethe sale was perfected.

Risk of loss shall aslso be borne by the entrustee. Hence, the loss of goods,documents, or instruments which are the subject of a trust receipt, pending theirdisposition, irrespective of whether or not it was due to the fault or negligence ofthe entrustee, shall not extinguish his obligation to the entruster for the valuethereof. This is not in accordance with the civil law principle that it is generally theowner who must bear the risk of loss of the object

4.1 Validity of entrusters security interest against creditors of entrustee

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A trust receipt arrangement does not involve a simple loan transaction between acreditor and debtor-importer. The law warrants the validity of the trust receiptagreement. Consequently, the goods covered by the trust receipt cannot be leviedupon by the creditors of the entrustee. The validity of entrusters security interestas against creditors-the entrusters security interest in goods, documents, or

instruments pursuant to the written terms of a trust receipt shall be valid as againstall creditors of the entrustee for the duration of the trust receipt agreement.

5. Sanctions for violation

The acts punishable by the Trust Receipts Law as Estafa as defined by Article 315,Section 1(b) of the Revised Penal Code are: (a) The failure to comply with theprovision referring to the obligation involving the duty to deliver (entregaria) themoney received to the owner of the merchandise sold, or(b)The failure to complywith the provision referring to the obligation involving the duty to return (devolvera)the goods to the owner if not disposed of in accordance with the terms of the trust

receipt.

There is no need to prove intent to defraud as the offense is malum prohibitum.

There is also no need to prove damage to the entrustor because the nature of atrust receipt transaction and the damage caused to trade circles and the bankingcommunity in case of a violation thereof is the basis for the criminal offense.

BULK SALES:

1. What is a bulk sale?

A sale is considered as a sale and transfer in bulk if: (a) It is a sale, transfer,mortgage, or assignment of a stock of goods, wares, merchandise, provisionsotherwise than in the ordinary course of trade and the regular prosecution of thebusiness, or (b) It is a sale or transfer of all or substantially all, of the business ortrade; or (c) It is a sale or transfer of all, or substantially all, of the fixtures andequipment used in the business.

The purpose of the law is to prevent the defrauding of creditors by the secret sale inbulk of all or substantially all of a merchants stock of goods until the creditors ofthe sellers should have been paid in full.

2. Exempt sales

A sale or transaction in bulk is not covered by the Bulk Sales Law when: (a)thetransaction is in the ordinary course of trade and the regular prosecution of thebusiness of the vendor (b) the vendor in bulk produces and delivers a written waiverof the provisions of the Bulk Sales Law from the creditors (c) the sale in bulk ismade by executors, administrators, receivers, assignees in insolvency, or publicofficers acting under judicial process; and (d) sales of properties that are exempt

from attachment or execution by creditors (Sec. 13, Rule 39 of Rules of Court)

3. Protection of creditors in case of a bulk sale

The protection afforded to creditors of the seller in bulk are: (a) requirement thatthe vendor deliver to the vendee a written statement under oath of the names andaddresses of all creditors to whom said vendor is indebted together with the amountof his indebtedness (b) requirement that at least ten days before the sale, thevendor shall make a full detailed inventory thereof showing the quantity and the

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cost price of the goods and shall notify every creditor of the price, terms andconditions of the sale (c) requirement that the purchase price paid must be appliedto the debt owing to the creditors. In addition, the law also prohibits the vendor inbulk to transfer title to the same without consideration or for a nominal value.

4. Effect of a bulk sale

If the sale in bulk is not made in accordance with the Bulk Sales Law, the sale isfraudulent and void. The creditors may proceed against the vendee who shall holdthe stock of merchandise in trust for the creditors.

The provision of the law that the sale is fraudulent and void is not a merepresumption. Therefore, the motivation of the parties or whether they are in good orbad faith is immaterial

WAREHOUSE RECEIPTS:

1. Warehouse receipt defined

A warehouse receipt is a written acknowledgment by a warehouseman that heholds certain goods in store for the person to whom the document is issued. This isalso known as warehouse-keepers receipt or storage receipt.

1.1 Distinguishing between a negotiable and non-negotiable warehouse receipt

A negotiable warehouse receipt is not a negotiable instrument as the same does notcomply with the requisites of Section 1, Act 2031. However, ownership thereof may

be transferred by delivery if it states that it is deliverable to bearer or a namedperson or bearer. If it is deliverable to a named person or order, ownership may betransferred by special endorsement and delivery. The endorsement can be to beareror to a specified person.

A negotiable warehouse receipt is not convertible to a non-negotiable receipt. Theinsertion of a provision making it non-negotiable is void. To make a warehousereceipt non-negotiable, it must be written out as such and to prevent any personfrom supposing it to be negotiable, the words non-negotiable should be placedplainly on its face. A non-negotiable receipt may only be assigned.

The advantages of a negotiable warehouse receipt over one which is non-negotiableare: (a) goods cannot be garnished or levied upon under execution unlessreceipt is surrendered, or impounded or its negotiation enjoined (Section 25,Warehouse Receipts Law) (b) In case of negotiation, holder acquires the directobligation of the warehouseman to hold possession of the goods for him (Section41, Warehouse Receipts Law), and (c) Goods are not subject to vendors lien orstoppage in transitu (Section 49, Warehouse Receipts Law)

2. Obligations of the warehouseman

The Primary Obligations of the Warehouseman are:(a) he must issue a receipt for

any commodity that he receives for storage (b) he must exercise that degree ofcare in the safekeeping of the goods entrusted to him which a reasonable carefulman would exercise in regard to similar goods of his own. However, in the absenceof an agreement to the contrary, he shall not be liable for any loss or injury to thegoods which could not have been avoided by the exercise of such care (c) In theabsence of any lawful excuse, he is bound to deliver the goods upon a demand by:(1) holder of a receipt for the goods, or (2) by the depositor, provided that thedemand be accompanied by (a) an offer to satisfy the warehousemans lien (b) anoffer to surrender the receipt if it is negotiable, and (c) a readiness and willingness

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to sign acknowledgment of delivery of the goods if requested by thewarehouseman.

A warehouseman is obliged to deliver goods to: (a) person lawfully entitled to it. (b)the person who is himself entitled to delivery by the terms of the receipt. If receiptis non-negotiable, delivery will be to the person entitled to it under its terms or by

written authority clearly indicated therein or another document. If receipt isnegotiable, to the person named or the last indorsee.

A warehouseman may thus legally refuse to deliver goods covered by a warehousereceipt under the following instances: (a)When the demand is not accompanied bythe three requirements provided in Section 8 (b)When he has a lien valid againstthe person demanding the goods, he can refuse to deliver the goods until the lien issatisfied and, (c) In cases when there are several adverse claimants to the title orpossession of the goods. The warehouseman can refuse to deliver to any of theclaimants until he has had a reasonable to ascertain the validity of the claims.

A warehouseman cannot commingle as he is bound to keep the goods of adepositor separate from the goods of other depositors or from the goods of thesame depositor for which a separate receipt has been issued. The purpose of theprohibition is to permit inspection and redelivery at all times.Exceptions are: (a) thegoods are fungible, as when any unit of the good is from its nature or mercantileusage, treated as an equivalent of any other unit (Section 58, Warehouse ReceiptsLaw) or (b) it is authorized by agreement or custom.

For failure to take up and cancel a negotiable receipt, or one the negotiation ofwhich would transfer the right to the possession of the goods when goods aredelivered(Section 11, Warehouse Receipts Law) or for the failure to take up and

cancel a negotiable receipt or to place upon it a statement of what goods have beendelivered, when goods are partly delivered (Section 12, Warehouse Receipts Law).The warehouseman shall be liable for failure to deliver the goods to any one whopurchases for value in good faith such receipt whether such purchaser acquired titleto the receipt before or after the delivery of the goods by warehouseman

Exception: The warehouseman shall not be liable for failure to deliver the goodscovered by the receipt or be guilty of a crime where the goods (a) have beenlawfully sold to satisfy the warehousemans lien, or (b) have been lawfully sold ordisposed of because of their perishable or hazardous nature (Section 36, WarehouseReceipts Law)

For the non-existence or misdescription of goods, a warehouseman shall be liable tothe holder of a receipt for damages caused by the non-existence of the goods or bythe failure of the goods to correspond with the description thereof in the receipt atthe time of its issue.

Exception: No such liability shall attach to the warehouseman if the goods aredescribed in the receipt merely (a) by a statement of the marks or labels upon themor upon the packages containing them, or (b) by a statement that the goods are of acertain kind or that the packages containing the goods contain goods of a certainkind or by words of similar import.

2.1 Conversion

A misdelivery or conversion occurs when (a) delivery is made to one not lawfullyentitled to it, or (b) even if delivery is made to a person holding a non-negotiable ornegotiable receipt, if prior to delivery, he had either been requested not to makedelivery by the person lawfully entitled to a right of property or possession in thegoods or had information that delivery about to be made was to one not lawfullyentitled to possession of the goods.

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A warehouseman can protect against a misdelivery by: (a) availing of a thereasonable time that he is entitled to within which to ascertain the validity of anadverse claim or to bring legal proceedings to force the claimants to interplead ormay actually require the claimants to interplead.

2.2 Warehousemans lien

The warehousemans lien refers to the lien of that a warehouseman has on thegoods deposited with him or on the proceeds thereof in his hands for all lawfulcharges for storage and preservation of the goods, money advanced by him inrelation to such goods such as the expenses of transportation or labor, or otherrelated expenses.

The basis for the lien is the obligation of the depositor to pay the warehouseman for(a) Storage and preservation charges (b) Money advanced (c) Interest (d) Insurance(e) Transportation (f) Labor (g) Weighing, and (h)Coopering and other similar

charges (Section 27, Warehouse Receipts Law)

With the exception of storage and preservation charges, the other claims must beexpressly specified in the warehouse receipt for it to serve as basis for the lien(Section 30, Warehouse Receipts Law)

The lien may be enforced against all goods belonging to the person liable for thecharges, as well as against all goods belonging to the others deposited by theperson liable for the charges who has been entrusted with the possession of thegoods and could have validly pledged the same (Section 28, Warehouse ReceiptsLaw). Hence, it is enforceable against the depositors goods and the goods of other

persons stored by depositor, if pledge of such goods by him are valid but notagainst the true owner if the depositor has neither title nor right of possession tothe goods (Section 31, Warehouse Receipts Law; Young v. Colyear, 201 Pac. 623)

The warehouseman can enforce his lien by the sale of the goods (Section 33,Warehouse Receipts Law) or by an action in court (Section 35, Warehouse ReceiptsLaw). Provided, however, that notice of sale of goods in order to satisfy thewarehousemans lien is given.

The lien can be lost if a warehouseman surrenders possession of the goods, or byrefusing to deliver the goods when a demand is made with which he is bound to

comply under the provisions of the Act (Section 29, Warehouse Receipts Law)

The effect of the sale of goods to satisfy the warehousemans lien or on account ofthe goods perishable or hazardous nature under Section 36 shall not make thewarehouseman, after the sale, liable for failure to deliver the goods to the depositor,or owner of the goods, or to the holder of a receipt given for the goods when theywere deposited, even if such receipt were negotiable.

3. Alteration of a warehouse receipt

An alteration in a warehouse receipt is said to be:(a)Immaterial if it does not change

the tenor of the warehouse receipt (b)Material if it substantially changes the tenorof the receipt (c) Authorized if it is made with the authority of the holder and thewarehouseman (d)Unauthorized if it is made without the authority of the holder andwarehouseman. This may be material or immaterial (e) Fraudulent if it is made withmalice or bad faith by the holder with intent to defraud subsequent holders (f)

Without fraudulent intent if it is made without malice or bad faith

The effects of an alteration in a warehouse receipt are: (a)Where the alteration isimmaterial, the warehouseman shall be liable according to the terms of the receipt

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as originally issued (b)Where the alteration is immaterial, whether fraudulent or not,authorized or not, the warehouseman is liable according to the terms of the receiptas originally issued (c) Where the alteration is material and is authorized, thewarehouseman shall be liable according to the terms of the receipts as altered (d)

Where the alteration is material, unauthorized but without fraudulent intent,the warehouseman shall be liable according to the terms of the receipts as they

were before the alteration (e) Where the alteration is material, unauthorized andwith fraudulent intent, the warehouseman shall be liable according to the terms ofthe receipts as originally issued even (1) to a purchaser of the receipt for valuewithout notice of the alteration, or (2) to the person who made the alteration and toany person who took it with notice of the alteration. However, in the latter case,such material and fraudulent alteration shall excuse the warehouseman from anyother liability to the said persons. except as regards the alterer and subsequentholders with notices.

4. Negotiation of a warehouse receipt

A negotiable receipt is negotiated by delivery when: (a) the goods are deliverable tobearer, or (b) the goods are deliverable to a specified person and the latter hasindorsed it in blank or to bearer. If endorsed as deliverable to a person, the bearerreceipt is transformed into an order receipt.

A negotiable receipt is negotiated by indorsement when the goods are, by the termsof the receipt, deliverable to a specified person or order (Section 38, WarehouseReceipts Law)

The negotiation may be made by the: (a) owner or (b) the person to whompossession of the receipt was entrusted by the owner (Section 40, Warehouse

Receipts Law)

The rights acquired by one to whom a negotiable warehouse receipt has been dulynegotiated are: (a) Such title to the goods as the one negotiating could convey to apurchaser in good faith for value (b) Such title to the goods as the depositor or oneto whose order the goods were to be delivered could convey to a purchaser in goodfaith for value, and (c)Direct obligation of the warehouseman to hold the goods forhim as if the warehouseman contracted with him directly. Hence, a person to whoma warehouse receipt has been negotiated by one who has stolen the goods stated inthe receipt cannot claim a misdelivery if the warehouseman delivers the goods tothe rightful owner, who is the person lawfully entitled to it.

Mortgagee or pledgee of a warehouse receipt to whom a negotiable warehousereceipt has been indorsed does not acquire title over the goods. He only acquiresthe rights of a pledgee or mortgagee, namely to foreclose the pledge or mortgage.The intent in this case is not the negotiation of the receipt with its consequenttransfer of title, but merely as security (Martinez v. P.N.B., 93 Phil. 765); P.N.B. v.Atendido, 94 Phil. 254)

A non-negotiable receipt is transferred by delivery accompanied with a deed ofassignment or transfer. If this is indorsed, the indorsement will not give thetransferee any right whatsoever (Section 39, Warehouse Receipts Law)

Rights acquired by a person to whom a warehouse receipt has been transferred butnot negotiated are: (a) Title to the goods subject to the terms of any agreementwith the transferor, and (b)The right to notify the warehouseman of the transfer inhis favor and thereby acquire the direct obligation of the warehouseman to hold thegoods for him (Section 42, Warehouse Receipts Law). Note that pending notification,his rights can still be defeated by a subsequent attaching creditor, or levy onexecution, a vendors lien or right of stoppage in transitu.

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CHATTEL MORTGAGES:

1. Chattel Mortgage defined and its essential requisites

A chattel mortgage defined - personal property is recorded in the Chattel MortgageRegister as a security for the performance of an obligation.

If the movable, instead of being recorded, is delivered to the creditor or a thirdperson, the contract is a pledge and not a chattel mortgage.

The essential requisites of a chattel mortgage are: (a) It must be constituted tosecure the fulfillment of a principal obligation (b) The mortgagor must be absoluteowner of the property mortgaged (c) The mortgagor must have free disposal of suchproperty , or be legally authorized for the purpose (d)The property involved must bepersonal or movable, and (e) Contract must be recorded in the Chattel MortgageRegister

2. Obligations secured by a chattel mortgage

A chattel mortgage which provides that the security stated therein is for thepayment of any and all obligations therein before contracted and which maythereafter be contracted, or future debts and obligations, by the mortgagor in favorof the mortgagee is void. The law requires parties to a mortgage to execute anaffidavit of good faith, that the debt is honestly due and owing. A valid mortgagecannot be made to secure a debt to be contracted in the future (Jaca v. DavaoLumber, L-25771, March 29, 1982, 113 SCRA 107; Vide; Lopez v. CA, 114 SCRA 671,Co v. PNB, 114 SCRA 842). An affidavit of good faith is a certificate included in thechattel mortgage contract executed by both mortgagor and mortgagee that the

mortgage is constituted to secure the specified obligation, and that said obligationis a valid, just and subsisting obligation and not one entered into for the purpose offraud.

Although a promise expressed in the chattel mortgage to include debts that are yetto be contracted can be a binding commitment that can be acted upon, the securityitself does not come into existence or arise until after a chattel mortgageagreement covering the newly contracted debt is executed either by a fresh chattelmortgage deed or by amending the old contract to conform to the law, particularlythe execution of an affidavit of good faith (Acme Shoe etal v. CA, GR No. 103576,August 22, 1996)

The chattel mortgage cannot be considered to include after-acquired properties as itshall cover only the property described in the deed and not any other like orsubstituted property (Section 7). Recognized as exceptions are: (1) properties thatare perishable, like fruits or subject to inevitable wear and tear like tires or intendedto be sold or used but with the understanding that they would be replaced withsimilar properties to be thereafter acquired by the mortgagor. An Example is: Wherethe debtor gives as security the stock or merchandise in his store and it is theintention of the parties that the mortgage shall cover the stock that will take itsplace in the course of the business. [Torres v. Limjap, 56 Phil. 141 ,1931] (2) In thecase of other properties, if their inclusion is expressly stipulated and a supplement

to the mortgage specifically listing and describing the property is executed andregistered in the chattel mortgage register

3. Remedies of a creditor with a chattel mortgage

The remedies of a creditor are: (a) Extrajudicial Foreclosure (b) An action forreplevin (c) Judicial Foreclosure, and (d) Bring an action for the payment of a sumof money

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3.1 Remedies of the seller on instalment with a chattel mortgage

There are limitations on the enforcement of chattel mortgages executed in relationto the sale of personal property in installments, where the remedies are: (1) Exactfulfillment of the obligation (2)Cancel the sale, should the vendees failure to paycover two or more installments; or (3) Foreclose the chattel mortgage on the thing

sold should the vendees failure to pay cover two or more installments. In this case,he shall have no further action against the purchaser to recover any unpaid balanceof the price. Any agreement to the contrary shall be void (Art. 1484, N.C.C.). Thisremedies are exclusive not alternative.

EXTRA-JUDICIAL FORECLOSURE OF MORTGAGES:

1. When extra-judicial foreclosure is allowed

The resort to the process of extra-judicial foreclosure emanates from the presenceof a stipulation that allows the creditor/mortgagee to extra-judicially foreclose and

designating the said party as the attorney-in-fact of the mortgagor to cause thesame and to sell the subject property at a foreclosure sale by an insertion into orattachment to the real estate mortgage.

2. Remedies available to the mortgagee

When a debt is secured by a real estate mortgage, the creditor has two options: (a)to foreclose, or (b) file an ordinary action to collect. If he avails of the option toforeclose, he is still allowed to bring a claim for any deficiency. On the other hand, ifhe avails of the option to file an ordinary action, he abandons or waives hismortgage lien, without prejudice to his levying on the same property but subject to

the rights of other creditors, if any.

When the mortgagor files a criminal case for violation of BP Blg 22 against themortgage debtor, he is deemed to have already availed himself of the remedy of acollection suit, and following the rule on alternative remedies, he is barred fromsubsequently resorting to an action for foreclosure.

A mortgage contract is, by nature, indivisible. The debtor who has paid cannot askfor a proportionate extinguishment of the mortgage as long as the debt is notcompletely satisfied. Generally, the divisibility of the principal obligation is notaffected by the indivisibility of the mortgage.

3. Redemption of foreclosed property

The foreclosed property shall be redeemed within 1 year from and after the date ofthe sale (Sec. 6). The aforementioned date of sale has been construed by theSupreme Court to mean the date of registration of the sheriffs certificate offoreclosure sale in the office of the Register of Deeds concerned (Reyes vs.Noblejas, et al., G.R. No. L-23691, November 25, 1967). Note that the period forredemption may be the subject of an extension as may be agreed upon by theparties.

4. Writ of possession

The purchaser of foreclosed property is not automatically entitled to the possessionthereof during the redemption period as he must petition the Regional Trial Court ofthe province or city where the property is situated to give him possession thereofduring the redemption period. He must also put up a bond equivalent in value tothe use of the property for a period of 12 months to indemnify the debtor in case itis shown that the sale was made without complying with the requirements of ActNo. 3135 or that there was no violation of the mortgage deed.

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The obligation of the court to issue a writ of possession in favor of the purchaser inan extrajudicial foreclosure sale ceases to be ministerial once it is shown that thereis a third party in possession of the property who is claiming a right adverse to thatof the mortgagor and that such third party is a stranger to the foreclosureproceedings in which the ex-parte writ of possession was applied for.

As a limitation on the right to possession, a writ of possession may be legally issuedonly if the debtor is in possession and no third person has intervened.

Order granting a writ of possession under Act 3135 is a final order. Hence, it isappealable. In expropriation, it is interlocutory.

5. Dragnet Clauses

Issue of the mortgage as security for future loans. The rule is unless a continuingreal estate mortgage is involved, a real estate mortgage is not a valid security for

future loans under the so called Dragnet Clause.

This finds basis in the fact that real estate mortgage is an accessory contract,which cannot exist independently of the principal obligation. The consideration forthe mortgage is the consideration of the contract of loan. Consequently, the amountof the loan must be specified, otherwise the contract of loan, as well as theaccessory contract of mortgage, shall not be perfected for lack of consideration withrespect to the unspecified loan in the future. The Supreme Court has held in ChinaBanking Corporation vs. Lichuaco, 46 Phil 460 that: a mortgage is an accessorycontract, its consideration is the very consideration of the principal contract, fromwhich it derives life, and without which it cannot exist as an independent contract.

Further, under Article 2176 of the Civil Code, a mortgage may only be foreclosed forthe fulfillment of the obligation for whose security it was constituted

A Mortgage with a dragnet clause is a contract of adhesion that must be strictlyconstrued as against the bank.

To constitute a real estate mortgage as security for future loans, the future loansmust be agreed upon and fixed in the mortgage deed at the time of the execution ofthe same

A stipulation that the amounts named as consideration in a contract of mortgage donot limit the amount for which the mortgage may stand as security if from the fourcorners of the instrument the intent to secure future and other indebtedness can begathered is valid and binding and is known in American Jurisprudence as theblanket mortgage clause.

INSOLVENCY:

1. Object of the law and coverage

The purpose of the law is to provide for an orderly mechanism by which the assets

of the insolvent debtor could be converted into money for distribution among hiscreditors and thereby relieve the debtor from the weight of his debts and permithim to start anew free from such debts.

The situations contemplated by law are: (a) suspension of payments (b) voluntaryinsolvency, and (c) involuntary insolvency

1.1 Defining and distinguishing between suspension of payments and insolvency

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Suspension of Payments contemplates a state desired by a debtor who, possessingsufficient property to cover all his debts, foresees the impossibility of meeting themwhen they fall due.

Insolvency contemplates a state where the debtor has more obligations than assets.

Further distinguishing between the two: Suspension of Payments is always initiatedby the debtor, while Insolvency is initiated by the debtor when it is voluntary, or byhis creditors or other persons when it is involuntary.

Other distinctions are: (a) The object of a suspension of payments is thedeferment of the payment of debts until such time as the debtor, who possessessufficient property to cover all his debts, is able to convert such assets into cash orotherwise acquires the cash necessary to pay his debts. In an insolvencyproceeding, the object is to compel the presentment of all debts, due or not due,and secure a complete discharge from such debts (b)The amount of debts insuspension of payments is not affected although their payment is postponed. In

insolvency, the creditors receive less than what they are entitled to. In some caseswhere preferences are proper, some creditors may not receive any amount at all

2. Suspension of payments in detail

A petition for the suspension of payments is initiated by the debtor, whether he isan individual, corporation, partnership or association.

When initiated by a natural person, he must have assets sufficient to settle liabilitiesand will not bar enforcement of claims by creditors holding contractual mortgages.If by a juridical entity, it may avail of the remedy even if it has no sufficient assets

to cover debts and liabilities but is under the management of a rehabilitationreceiver or management committee and it will result in preferred creditors not beingable to enjoy their preference.

Jurisdiction is vested in the regular courts if initiated by a natural person. If by ajuridical person, it is vested with the designated Special Commercial Court.

The petition may be filed with the court of the province or city in which the debtorhas resided for 6 months next preceding the filing of the petition.

Upon the filing of the petition, the court shall issue an order calling for a meeting of

the creditors, which to be published and served on the creditors.

Subsequently, a meeting of creditors for approval or disapproval of the debtorsproposition is to be held.

The meeting of the creditors on the debtors proposal requires a quorum andminimum vote consisting of the presence of at least two thirds of the creditorsrepresenting at least three-fifths of the liabilities (Section 8[e]). This is known as thetwo-thirds/three-fifths rule. There is no requirement for a majority to reject.

It shall be forbidden of a petitioner for suspension of payments to dispose of his

property, unless such disposition is in the ordinary operation of his business, ormake any payments outside of the necessary or legitimate expenses of hisbusiness.

2.1 The effects of the filing of a petition for suspension of payments

On execution pending against the debtor- Any execution pending against the debtorshall be suspended before the sale of the property is made. However, the debtormust make a request for this purpose to the court before which the proceeding for

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suspension of payments is pending. Such suspension shall lapse after 3 monthswithout the proposed agreement being accepted by the creditors or as soon as it isdenied. (Section 6)

An execution against a property of the debtor specially mortgaged the executionis not suspended (Section 9)

An action to be filed against the debtor for the collection of a sum of money nocreditor may sue to collect his claim from the debtor from the moment thatsuspension of payments is applied for and while the proceedings are pendingsubject to certain exceptions such as claims for personal labor, maintenance,expenses of last illness and claims by persons having mortgages. (Sections 6 and 9)

3. Voluntary and Involuntary Insolvency in detail

Voluntary insolvency is the state desired by an insolvent debtor who owes debtsexceeding the sum of P1, 000.00. He may apply to be discharged from his debts by

filing a petition with the Regional Trial Court of the province or city in which he hasresided for 6 months next preceding the filing of such petition. The petition must beaccompanied by a schedule of debts and an inventory of properties.

Voluntary Insolvency is different from Involuntary Insolvency in the followingmanner: In voluntary insolvency, a debtor is deemed insolvent upon his filing of apetition for voluntary insolvency; while in involuntary insolvency, the debtor isconsidered insolvent upon the issuance by the court of an order declaring him aninsolvent.

The procedure for voluntary insolvency is initiated by the filing by the debtor of a

petition, while involuntary insolvency is initiated by the filing by 3 or more of hiscreditors of the debtor, residents of the Philippines, whose credits accrued in thePhilippines and the amount of which credits are in the aggregate not less thanP1,000.00 alleging the commission by the debtor of one or more acts of insolvency.

Issuance by the court of an order declaring, among other things, that the petitioneris insolvent. Note that the filing of such petition shall be an act of insolvency. Thus,if the court finds the petition to be in order, it shall issue on the same date it is filedan Order of Adjudication that the debtor is insolvent. If found to contain a falsity, thepetition is dismissed. In the case of involuntary insolvency, an order is issued bythe court requiring the debtor to show cause why he should not be declared

insolvent. If the court finds for the debtor, then the proceedings shall be dismissed(Section 23); if the debtor defaults or the court finds for the creditors, then the courtshall issue an order adjudging debtor insolvent (Section 24);

Common procedure: Publication of order and service thereof on the creditors. Beinga proceeding in rem, there must be publication, as many times as the court maydeem proper, and all creditors appearing in the schedule shall be given notice.

Meeting of creditors for election of assignee in insolvency. An assignee in insolvencyis a person selected in both voluntary and involuntary proceedings, either by thecreditors or by the court, to whom a debtor declared insolvent, by legal mandate,

makes an assignment of his properties for the benefit of creditors.His principalfunction is to recover all the estate, debts and effects of the insolvent. He shallthereafter as speedily as possible convert the estate, real or personal, into money.The following property of the insolvent debtor shall pass to the assignee: (a) Allreal and personal property and effects (b) All deeds, books, and papers (c) Thedebtors right of action for damages to real property (d)Right to release propertyfraudulently conveyed. The following property shall not pass to the assignee andshall remain with the debtor: (a) After acquired property, except its fruits andincome. After-acquired property is that acquired by the debtor subsequent to the

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filing of petition for insolvency (b)Non leviable assets, such as an insurance policywithout any cash surrender value or the premium of which does not exceed P500.00(c)An expectancy to inherit (d) Right of action in personal injury cases whichpertains exclusively to the debtor (e) Property held in trust by debtor or merelyleased by debtor (f) Property exempt from execution. (Sec. 12, Rule 39, Rules ofCourt; Art. 223, Civil Code).

It is the creditors who have filed their claims who are entitled to elect the assigneeand when they submit the name to the court (Section 29). The court will thenappoint the person nominated and from then on he will be an officer of the court. Amajority of the creditors concurring with majority of the claims will be necessary toproperly elect the assignee. (Section 30).

The assignees duty is to convert the property of the debtor to cash and, thereafter,he will declare dividends (Sec. 43) to the creditors. Dividends are the equitabledistribution of the property to the creditors. They are the amounts paid, upon orderof the court, to the creditors of an insolvent out of the capital or assets of the

insolvents estate for the purpose of liquidating or discharging a debt.

4. Composition

Composition is an agreement whereby the creditors of an insolvent agree to accepta certain percentage of their claims in full settlement of such claims. It is a methodof dividing the estate of the insolvent among his creditors amicably.

Requisites for Valid Offer of Composition are: (a) Offer must be made after the filingof the Schedule of the debtors property and the list of his creditors (b) Offer mustbe accepted in writing by a majority of the creditors representing a majority of theclaims which have been allowed (c) Offer must be made only after the insolventdeposits the consideration to be paid to the creditors; and (d) Offer accepted by thecreditors must be confirmed by the Court. (Sec. 53).

The effects of composition are: (1) Insolvency proceedings dismissed, the amountagreed upon is deposited in court, and if the court finds settlement meritorious itshall approve the same (2) All debts are discharged Effect shall be as if thedebtor has obtained a discharge, so that all claims against debtor are extinguished

and assignee must return all properties to debtor.

5. Discharge

Discharge is the release of the debtor from his debts which were or might be provedin the insolvency proceedings such that they are no longer a charge upon him.

An insolvent debtor may apply to the court for a discharge from his debts anytime after the expiration of 3 months from the adjudication of insolvency but notlater than 1 year from such adjudication, unless the property of the insolvent hasnot been converted into money.

To obtain a discharge, the following should be complied with: (1) Debtor must havecomplied with statutory requirements regarding surrender of his assets for thebenefit of creditors and regarding the rendition of an account of his assets andliabilities (2) He must have applied for discharge after three months from date ofadjudication of insolvency, but not later than one year thereafter (3)Debtor must nothave committed any of the acts of insolvency enumerated in Sec. 65 of InsolvencyLaw, preventing discharge of a debtor.

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If after being adjudged insolvent, the debtor fails to apply for a discharge within therequired period, he loses his right to be discharged.

The debtor would be entitled to a second discharge if it takes place after 6 yearsfrom the first discharge or, if takes place within 6 years from the first discharge, ifthe second insolvency proceeding is involuntary.

The effect of a discharge is that it releases a debtor from all debts contracted byhim prior to the insolvency proceeding, with the exception of those expresslymentioned by the law. The debts that are not discharged are: (1)Taxes andassessments due to the government, national or local (2)Debts created by the fraudor embezzlement of the debtor (3) Debts created by the defalcation of the debtoras a public officer or while acting in a fiduciary capacity (4) Debts which have notbeen scheduled, unless the creditor had actual knowledge or notice of theproceedings in insolvency; and (5) Debts owing to creditors who were not dulynotified and had no actual knowledge of the insolvency proceedings.

6. After acquired properties

Note that if debtor is one who is in bad faith, the concept of after-acquiredproperties does not apply. In such instance, all properties of the debtor acquiredbefore or after the date of cleavage shall be liable for the payment of all his debts.

Cleavage is the date when the petition is filed, from which the period of thirty daysis counted forward or backward in determining the effects provided for in the

Insolvency Law, as when: (a) Under Section 20-to determine if at least three (3)creditors filed the petition for insolvency-a creditor by assignment of credit madewithin thirty (30) days from date of cleavage shall be disqualified as petitioningcreditor (b) Under Section 32- (1) attachment levied upon within a period of thirty(30) days before the date of cleavage may be set aside by the assignee (2)judgments on cases filed and decided within thirty (30) days prior to the date ofcleavage may be set aside by the assignee (3)judgments on cases filed before thirty(30) days from the date of cleavage but decided within said thirty (30) days becauseof confession of judgment or declaration of default of debtor may be set aside byaction of assignee (4) properties acquired after date of cleavage, after discharge ofdebtor in good faith shall not be liable for debts incurred prior to date of cleavage

(5) Under Section 70-fraudulent preferences made within thirty (30) days prior tothe date of cleavage may be set aside in an action brought by assignee.

Section 70 pertains to Fraudulent Preferences when debtor transferred property toany person to give him preference, such transfer may be set aside by proper courtaction by the assignee provided that the transfer took place within 30 days periodfrom the date of cleavage. The property transferred will be returned to theinsolvents estate for equitable distribution among his creditors. There is aPresumed Fraudulent Transfer if: (a) Not in the ordinary course of business (b)

Under confession of judgment (c)Not for valuable consideration.

7. Resolution of Claims

Effects of the filing of a Voluntary or Involuntary Petition of Insolvency onProceedings against the debtor:

In general the civil proceedings against the debtor, upon application by the debtorhimself, any creditor or the assignee, will be stayed or suspended.

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Secured claims already begun actions for secured claims already begun aresuspended until the assignee is elected. Upon election of the assignee, the actionwill be continued in the same court where it was filed.

The remedies of a secured creditor, or of one who holds a real estate mortgage,chattel mortgage and or a pledge are: (a)Rely on the security then he will not be

eligible to take part in the insolvency proceedings (b) Evaluate this security he canask this from the court, the balance of the loan not secured may be claimed in theinsolvency proceedings (c) File a contingent claim the creditor will file a claim inthe insolvency proceedings, that in case the proceeds from the sale of the securityis not enough to cover the loan, the deficiency shall be recovered in the insolvencyproceedings.

These three alternatives are also available to a debt secured by a chattel mortgagewith the exception of those falling of those under Art. 1484 of the Civil Code (sale ofmovables under installments), in which case the creditors shall only be entitled toremedies (1) and (2). The same is true with pledge as the Civil Code expressly

prohibits a deficiency judgment in pledge.

Secured claims not yet begun actions for secured claims may be begun while theinsolvency proceedings are pending with the permission of the insolvency court.However, if the assignee in insolvency has not yet been elected, the said action willbe suspended until the assignee is elected.

Unsecured claims already begun actions for unsecured claims already begun aresuspended except in cases where the amount due the creditor is in dispute. In suchcases, the suit, by leave of the insolvency court, may proceed to judgment for thepurpose of ascertaining the amount due, but execution shall be stayed. After the

election of the assignee in insolvency, such unsecured claims shall be filed andallowed in the insolvency proceedings, not in the court where they were originallyfiled.

Unsecured claims not yet begun actions for unsecured claims cannot be filedduring the pendency of the insolvency proceedings but it filed, such actions will bedismissed upon motion of the assignee. Such unsecured claims shall then be filedand allowed in the insolvency proceedings, not in the court where they wereoriginally filed.

BANKING:

1. What is a Central Bank?

A central bank is a bank that holds the cash reserves of a countrys commercialbanks, performs monetary services for the government, issues bank notes, andmakes funds available to commercial banks

They exist in practically every country as they are first and foremost a banker to thegovernment. It does not lend money to the general public. More importantly, it shall:(a) manage the countrys debt and ensure that it has the currency to pay them.Included is the power to buy and sell foreign exchange (b) carry out a countrys

monetary policy, primarily by controlling the money supply, which is the totalquantity of money in the country (c) issue currency (d) regulate all the banks orfinancial institutions of a country

1.1 Conservatorship, Receivership and Liquidation

The appointintment by the Monetary Board of a conservator takes place whenever abank or quasi-bank is in a state of continuing inability or unwillingness to maintain acondition of liquidity deemed adequate to protect the interest of depositors and

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creditors. It is an attempt to save the bank from bankruptcy and ultimateliquidation.The appointed conservator is to take charge of the assets, liabilities, andthe management thereof for a period not exceeding one (1) year

The conservatorship is terminated when: (a) When Monetary Board is satisfiedthat institution can continue to operate on its own and the conservatorship is no

longer necessary (b) Should Monetary Board determine that the continuance inbusiness of the institution would involve probable loss to its depositors or creditors,in which case proceedings for receivership and liquidation shall be pursued. (Sec.29).

Receivership ensues whenever the Monetary Board finds that a bank or quasi-bank:(a) Is unable to pay its liabilities as they become due in the ordinary course ofbusiness but: Shall not include inability to pay caused by extraordinarydemands induced by financial panic in the banking community (b) Has insufficientrealizable assets to meet its liabilities (c) Cannot continue in business withoutinvolving probable losses to its depositors or creditors; or (d) Has willfully violated a

cease and desist order that has become final, involving acts or transactions whichamount to fraud or a dissipation of the assets of the institution;

In which cases, the Monetary Board may summarily and without need for priorhearing, forbid the institution from doing business in the Philippines and designatethe PDIC as receiver of the banking institution.

There is no requirement that a hearing be first conducted before a bankinginstitution may be placed under receivership. The appointment of a receiver may bemade by the Monetary Board without notice and hearing but its action is subject tojudicial inquiry( Rural Bank of Buhi v. Court of Appeals,162 SCRA 288)

The Central Bank, through the Monetary Board, is vested with exclusive authority toassess, evaluate and determine the condition of any bank and if it finds thecondition to be one of insolvency, or its continuance in business would involveprobable loss to creditors and depositors, it can forbid the bank to do business andcan designate a receiver to take charge of its assets and liabilities. Sec. 29 of theCentral Bank Act does not contemplate prior notice and hearing before a bank isplaced under receivership. It is enough that such action is made the subject of asubsequent judicial review. Close now and hear later scheme under the Act is forthe purpose of protecting the depositors, creditors, stockholders and general public(Central Bank v. Court of Appeals, 220 SCRA 536)

Prior notice and hearing is not required before placement of bank underreceivership. Section 29 does not contemplate prior notice and hearing before abank may be directed to stop operation and placed under receivership. Whenparagraph 4 (now paragraph 5 as amended by E.O. 289) provides for the filing of acase within ten (10) days after the receiver takes charge of the assets of the bank,it is unmistakable that the assailed actions should precede the filing of the case.Plainly, the legislature could not have intended to authorize no prior notice andhearing in the closure of the bank and at the same time allow a suit to annul it onthe basis of absence thereof (CB vs. CA, 220 SCRA 539)

Judicial review is allowed to determine the presence of arbitrariness and bad faith inplacing bank under receivership. Admittedly, the mere filing of a case forreceivership by Central Bank can trigger a bank run. The procedure prescribed inSection 29 is truly designed to protect the interest of all concerned, and thesummary closure pales in comparison to the protection afforded public interest. Atany rate, the bank is given full opportunity to prove arbitrariness and bad faith inplacing the bank under receivership, in which event, the resolution may be properlynullified and the receivership lifted as the trial court may determine. Until such

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determination is made, the status quo shall be maintained, i.e., the bank shallcontinue to be under receivership.Receivership is equivalent to an injunction to restrain in the bank officers fromintermeddling with the property of the bank in any way. Thus, the appointment of areceiver operates to suspend the authority of the bank and of its directors and

officers over its property and effects (Villanueva vs. CA, 244 SCRA 395)

Liquidation shall take place if the receiver determines that the institution cannot berehabilitated or permitted to resume business, the Monetary Board shall notify inwriting the Board of Directors of its findings and direct the receiver to proceed withthe liquidation of the institution.

2. Organization of Banks

Banks are entities engaged in the lending of funds obtained in the form of deposits.

The definition under Section 2 of the old General Banking Law: banks are entitiesduly authorized by the Monetary Board to engage in the business of regularlylending funds obtained regularly from the public through the receipt of deposits ofany kind. Thus, entities which lend funds obtained from the public but not asdeposits but rather as debts for their own account, whether done regularly or not,and those which regularly lend funds obtained through the occasional receipt ofdeposits, would not be considered as banks.

The minimum conditions that a prospective bank must comply with before it may beauthorized by the BSP to be organized as a bank are: (a) That the entity must beorganized as a stock corporation; (b) That its funds must be obtained from the

public, i.e., 20 or more persons; and (c) That the minimum capital requirementprescribed by the Monetary Board for each category of banks are satisfied.

3. Management of Banks

The principle that since a bank is a juridical person that its powers are to beexercised, its business is to be conducted, and that its properties are to be held by aboard as provided for by Section 23 of the Corporation Code obtains.

However, an independent director, who is a person other than an officer oremployee of the bank, its subsidiaries or affiliates or related interests must be

elected to the board. Note that the term independent director is also used in theSecurities Regulation Code to refer to a person other than an officer or employee ofthe corporation, its parent or subsidiaries, or any other individual having arelationship with the corporation, which would interfere with the exercise ofindependent judgment in carrying out the responsibilities of a director.

There must also be adherence to the fit and proper rule which provides that tomaintain the quality of bank management and afford better protection to depositorsand the public in general, the Monetary Board shall: (a) prescribe, pass uponand review the qualifications and disqualifications of individuals elected orappointed bank directors or officers and disqualify those found unfit; or (b) After

due notice to the board of directors of the bank, the Monetary Board may disqualify,suspend or remove any bank director or officer who commits or omits an act whichrender him unfit for the position.

In determining whether an individual is fit and proper to hold the position of adirector or officer of a bank, regard shall be given to his integrity, experience,education, training, and competence.

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An elective or appointive public official cannot serve as an officer of a private bank ,whether full-time or part-time shall at the same time serve as officer of any privatebank, save in cases where such service is incident to financial assistance providedby the government or a government-owned or controlled corporation to the bank orunless otherwise provided under existing laws.

The Rural Banks Act, allows an elected or appointive public official to serve asdirector, officer, consultant or in any other capacity in a rural bank.

4. Limitations on banking operations

Single Borrower Limit Rules- these rules regulate the total amount of loans, creditaccommodations and guarantees that may be extended by a bank to any person,partnership, association, corporation or other entity.

DOSRI Rules- these are rules promulgated by the BSP, upon the authority of Section36 of the GBL, which regulate the amount of credit accommodations that a bank

may extend to its directors, officers, stockholders and their related interests, thusthe term, DOSRI.

Generally, a banks credit accommodations to its DOSRI must be in the regularcourse of business and on terms not less favorable to the bank than those offered tonon-DOSRI borrowers.

5. Nature of Deposits

As to nature, all kinds of deposits whether fixed or current are to be treated as loansand are to be covered by the law on loan.

They are also considered in the nature of irregular deposits, they are really loansbecause they earn interest. Considering a deposit involves the delivery of a thingfor safekeeping with the obligation to return the very same thing upon demand anda loan is a contract whereby one of the parties delivers to another money or otherconsumable thing upon the condition that the same amount of the same kind andquality shall be paid.

Banks may use the money deposited with them as money deposited in banks,whether fixed, savings and current, are really loans to a bank because the bank canuse the same for its ordinary transactions and for banking business in which it is

engaged.

In fact banks are not obligated to return exactly the money deposited in the samedenomination as it was deposited. While the banks have the obligation to return theamount deposited, they have no obligation to return or deliver the same moneydeposited. Thus, estafa will not prosper.

The relation created between the bank and depositor is that of a creditor and debtorwith the bank as debtor and the depositor as creditor.

5.1 Safety Deposit Boxes

The deposits made by a depositor in a safety deposit box are not the depositscontemplated by the law as the bank is never in possession or control of thecontents of the safety deposit box in this instance, the depositor is merely leasingthe deposit box from the bank.

Prevailing jurisprudence is that the ensuing relationship between the bank rentingout the safety deposit box and the client with respect to the contents of the box isthat of bailor-bailee, the bailment being for hire and mutual benefit. The bank would

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be liable for loss of the contents of the box if it is guilty of fraud, negligence or delayor contravention of the tenor of the agreement.

Without order of a court of competent jurisdiction, disclose to any authorized personany information relative to the funds or properties in the custody of the bankbelonging to private individuals, corporations, or any other entity; Provided, that

with respect to bank deposits, the provisions of existing laws shall prevail.

6. Secrecy of Deposits

The law prohibits: (a) The examination and inquiry or looking into all deposits ofwhatever nature with banks or banking institutions in the Philippines includinginvestments in bonds issued by the Government or its political subdivisions andinstrumentalities by any person, government official, bureau or office; and (b) Thedisclosure by any official or employee of any banking institution to any unauthorizedperson of any information concerning said deposits.

Note that the law is applicable to trust accounts or an account that has been set upas an inter vivos or testamentary trust as Section 2 has been held to cover not onlymoney that has been deposited but also to money which has been investedalthough no creditor-debtor relationship is created between the bank and the client.

6.1 Exceptions

The exceptions are: (a) Upon written permission of the depositor (b)In cases ofimpeachment (c)Upon order of a competent court in cases of bribery or derelictionof duty of public officials (d) In cases where the money deposited or invested is thesubject matter of litigation (e)Upon order of the court or subpoena issued by the

Ombudsman in cases of unexplained wealth; This is subject to the followingrequisites: (1) only an in-camera inspection is allowed (2) there must be a pendingcase before a court of competent jurisdiction (3) account is clearly identified (4)examination is limited to account subject of the court case, and (5) bank personneland the account holder must be notified to be present during the inspection (f)Uponorder of the Commissioner of Internal Revenue in respect of the bank deposits of adecedent for the purpose of determining such decedents gross estate (g)Uponorder of the Commissioner of Internal Revenue when a taxpayer files an applicationto compromise his tax liability by reason of financial incapacity (h)Upon examinationmade in the course of a special or general audit of a bank as authorized by theMonetary Board after being satisfied that there is reasonable ground to believe that

a bank fraud or irregularity is being committed and it has become necessary to lookinto the deposit to establish the same (i)Upon examination of a banks independentauditor, the result of which are for the exclusive use of the bank (j)In case ofsuspicious transactions under the Anti-Money Laundering Law (k)Under the Anti-Money Laundering Law where banks are required to report to the Anti-MoneyLaundering Council any transaction in cash or other equivalent monetary instrumentin excess of P500,000 in any one day (l)Also under the Money-Laundering Law, theAnti-Money Laundering Council may inquire into a deposit or investment maintainedwith any financial institution upon order of a competent court, in cases of violationof the Act, when there is probable cause that the deposit or investment is in anyway related to an unlawful activity as defined in the Act or a money laundering

offense under the Act (m) When a director, officer, stockholder, and related interest(DOSRI) obtains a loan from his bank or its subsidiaries, or with related controllinginterests of more than 5% of the capital or surplus of the bank, it shall constitute awaiver of secrecy of all his deposits of whatever nature in all banks in thePhilippines; (n)Under the Unclaimed Balances Law (o)The examination of a bankaccount under Section 10, Rule 57 in relation to the examination of a party whoseproperty is attached and persons indebted to a defendant or controlling hisproperty.

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6.2 Persons liable for a violation

The persons primarily liable for a violation of the law would be a bank employee orofficer and the person, government officer, agency or office looking into the depositwhen not authorized by any of the exceptions to the law.

7. PDIC- Extent of coverage

Insured deposits under the law means the net amount due the depositor for anydeposits in the insured bank after deducting any offsets but should not exceed PHP500,000.00.

Hence, if a depositor has two or more accounts maintained in the same right andcapacity, the coverage of PHP 500,000.00 shall be held to apply to the sum of allsuch accounts.

A joint account (whether and/or, or, and shall be insured separately from any

individual-owned account. If held by a juridical person or entity with a naturalperson, the account shall be presumed to belong to the juridical person.

Accounts under joint ownership is considered equally shared among co-depositorsunless otherwise indicated in the deposit document.

8. Truth in Lending

The provisions of the law apply to creditors, who is defined by law as: any personengaged in the business of extending credit, including any person who as a regularbusiness practice makes loans or sells or rents property or services on a time, credit

or installment basis either as principal or agent, who requires as an incident to theextension of credit the payment of a finance charge.

The application of the law is compulsory for (a) banks (b) non-bank financialintermediaries authorized to engage in quasi-banking are required strictly to adhereto the law. Banks and non-bank financial intermediaries authorized to engage inquasi-banking functions are required to strictly adhere to the provisions of theTruth in Lending Act and shall make the true and effective cost of borrowing anintegral part of every loan contract (Consolidated vs. CA, 246 SCRA 195)

The provisions of the law does not apply to the following credit transactions:

(a)those that do not involve the payment of any finance charge by the debtor; and(b) those in which the debtor is the one specifying a definite and fixed set of creditterms such as bank deposits, insurance contracts, sale of bonds, etc.

The disclosure must be made in a separate document, and not one that is merelyincorporated in a document by the statement that the transaction subjects thedebtor to a finance charge.

The failure to comply does not render the principal contract invalid orunenforceable, but would entitle the debtor to recover any interest payment made.

SECURITIES REGULATION

1. What are securities?

In general, securities are Shares, Participation or Interest (SPI) in a Corporation or ina Commercial enterprise or Profit-making venture (CCP) and evidenced by aCertificate, Contract; Instrument, whether written or electronic in character (CCI).

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They are evidences of investment in a common enterprise made with theexpectation of deriving a profit solely from the efforts of others who acquire controlover the fund invested

1.1 Exempt securities and transactions

The exempt securities are those: (a) issued by the government (b) issued by areceiver or trustee in bankruptcy (c) issued or guaranteed by the government of anycountry with which the Philippines has diplomatic relations (d) bank securitiesexcept its own shares of stock

The exempt transactions are those: (a) merger or consolidation (b) isolatedtransactions (c) bank transactions

2. Intra-corporate disputes

For an intra-corporate dispute to exist there must be an intra-corporate relationship

and the controversy must arise from the said relationship. The controversy must beintrinsically connected with the regulation of the internal affairs of the corporation.

Jurisdiction is determined by (1) the status of the relationship between the parties,and (2) nature of the question that is the subject of the controversy. Hence, if thedispute is between two corporations and when there is a 3rd person involved and theconflict arises among those assuming the formation of a corporation and whotherefore know that it has not yet been registered, there is no intra-corporatedispute.

If the thrust of the main action is intra-corporate, the SEC (Special Commercial

Court) should take cognizance in its entirety, otherwise, jurisdiction is with theregular courts. When the controversy involves the contractual rights andobligations of the parties/stockhold

CRC Special Commercial Laws 2010

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Transcript of CRC Special Commercial Laws 2010