Banking Finals Notes_cha

Commercial Papers CP: -evidence of indebtedness of corporation REVISED SECURITIES ACT (BP78): CPs are included in the enumeration of securities -under the SECURITIES REGULATION CODE, CPs are not expressly mentioned as securities. BUT they can qualify as such under the CATCH ALL PROVISION GR: before CPs can be sold to the public, they must first be registered w/ the SEC X: 1. Exempt securities 1. They are sold in exempt transactions SEC rules regarding registration of CP: 1 . Rules on registration of short-term CP (w/ maturity of less than 365days) 2 . Rules on registration of long-term CP (w/maturity of more than 365 days) …these 2 rules are attached as appendix to MANUAL OF REGULATION OF BANKS Commercial papers (CPs) -no longer stated in SRC, but you cannot draw the conclusion that … [it's not included anymore] ...There a term in SRC "evidence of indebtedness" -there's a provision that require registration of CPs if it is long term. Sir said that to prevent registration requirement, short term na lang? -next version of SRC would not contain anymore dapat long term CPs but the person who drafted it forgot to define CPs in the SRC -Rules in registration of short term and long term CPs, CPs are supposed to be issued by Corporations BUT in SRC, even individuals could issue CPs -SRC created certain exemption from registration… Security Devices and Other Credit Supports/Enhancements -Further obligation of the obligor to support its credit 1. Types 2 general types of security devices: (1) personal security -obligation secured by the personal commitment of another -person would provide the guaranty to support the credit of the obligor/debtor/borrower e.g. guaranty, surety (2) real security (res = property) -obligation secured by AN ENCUMBRANCE OF REAL PROPERTY -requires the execution of a public instrument or corresponding deed encumbering the property in the form prescribed by law -collateral e.g. pledge, mortgage, antichresis MORTGAGE (MOR- Gage) -really a debt pledge -a pledge to forfeit a property in case of default -debt: if the borrower is unable to fulfill the principal obligation, the borrower's property is forfeited in favor of the lender; but if able to pay off the principal obligation, wala na…. "By the way, it's silent 'T', mor-gage, not morTgage" 1. REAL SECURITIES (a) Real Estate Mortgage (REM) -Requisites: (1) mortgagor must be the owner of the real property (2) constituted to secure the fulfilment of an obligation 1|Cha’s banking notes

(3) person constituting mortgage has free disposal of his property (4) execution of a public instrument acknowledged before a notary public (5) must cover IMMOVABLE PROPERTY, if land, state the description and location thereof (6) registration in the Register of Deeds where the property is located *note: there is some formality in REM (see numbers 4 and 6) Look at SEC 112 of Property Registration Act? If mortgage is over parcels of land, notary public has to mention that in notarial … 2 witnesses must sign On the left hand margin of each and every page sign It should be mentioned by the notary public in the notarial accounts: Notary public should state that *it is a REM *location of property *signatories *that it was signed in each and every page Note the new rules of notarial practice provides stringent requirements for …something like that What is the effect if the notary public fails to mention those details in the notarial accounts??? >>>Still arguable that it is valid, binding to 3rd persons (registration would bind them) No registration of REM if DST not paid (payable w/n 5 months after the month of execution - 2%) (b) Chattel Mortgage Requisites: (1) must cover PERSONAL PROPERTY (2) constituted to secure the fulfillment of an obligation (3) person constituting mortgage has free disposal of his property (4) mortgagor must be the owner of the personal property (5) execution of a public instrument acknowledged before a notary public (6) the instrument must contain an AFFIDAVIT OF GOOD FAITH -there's a form! -in its absence, the instrument is still binding BETWEEN THE PARTIES BUT NOT AGAINST 3RD PERSONS (7) registration in the Register of Deeds where the property is located and/or where mortgagor resides *double registration requirement: where the mortgagor and morgagee's domicile is not the same! If the mortgagor is outside the RP, register in the place where property is located X: when the property is more than P5k ??? --no registration if DST not paid (c) Mortgage Trust Indenture (add from reviewer) -REM/chattel mortgage -only difference: In a bilateral mortgage document, the mortgagee is the obligee of the lender but in an MTI, the morgagee is not necessarily a lender but a trustee (usu, trust dept of a bank) - trustee acting in the benefit of the lenders -Mortgage Participation Certificate issued to represent interest in the mortgage collateral -lenders would come and go but the MTI is supposed to remain there e.g. borrower was able to obtain a loan facility, then wanted more. There would be a supplementary mortgage trust indenture with a second set of lenders (listed in the supplement) and so on But it is not necessarily the case that when the borrower borrows, a second set of lenders allowed to be joined (because the property of the borrower may not be enough) so there is a requirement to preserve the collateral to a percentage of the outstanding obligations (150% collateral maintained as to 100% outstanding obligation) or else, borrower would provide additional property as collateral.

(d) Pledge -there is a requirment to deliver the property being pledged to the pledgee Must describe the pledge properly Must be dated *to bind 3P -if the property being pledge is an incorporeal right, then it must be endorsed to the pledgee! In a stock certificate, the dorsal side of it may contain endorsement form so that the pledgor would just sign the form to endorse it -afterwards, stock certificates delivered to the pledgee IS IT ALWAYS THE CASE THAT DELIVERY REQUIRED? NO MORE SECTION 45 OF SECURITIES REGISTRATION CODE -you can constitute a pledge by entries in the book, that entry is deemed to be delivery under the civil code so in a sense, Civil code is deemed amended There is even a procedure for pledging uncertificated securiities: entries needed You can uplift the shares in a scriptless (?) system?: shareholder given the physical stock certificate If you are able to payoff the obligation, you could re-enter the same into the scriptless system

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PERSONAL SECURITIES (e) Guarantee/suretyship/standby letter of credit Tri-Party 1. Lender 1. Borrower 1. Guarantor/surety Guarantor

SURETY

Benefit of excusion (should go after the guaranteed party first

No benefit of excussion

Standby LC -EXAMPLE OF A SURETY -GUARANTEE PAID ON 1ST DEMAND -used as guarantee prior to enactment of GBL -section 74 of sir's book (78-79): there was a prohibition against the bank being able to extend guarantee except in certain cases So in Item e, there's a reference to standby arrangement (construed as standby L/C) -now, section 74 no longer found so it is arguable that a bank may issue a guarantee now (and not just standby L/C)

Insular Bank of Asia & America vs CA F: Mendoza sps obtained 2 loans from Philam Life for P600k to finance construction of their residential house. -as security for payment, Philam Life required that the amortizations be guaranteed by an irrevocable standby letter of credit of a commercial bank. Thus, Mendoza Sps. Contracted with IBAA for the issuance of 2 irrevocable standby letters of credit for a total of P600k. These standby letters of credit were secured by real estate mortgage for the same amount. -Mendoza sps executed PNs in favor of IBAA which authorized IBAA to sell the real estate securities for purpose of applying their proceeds to such payments of Mendoza to IBAA -Mendozas failed to pay Philam Life for June amortization so Philam Life demanded from IBAA but IBAA contested the default. Mendoza sps failed again to pay for September the next year so Philam Life again demanded from IBAA> 2|Cha’s

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-IBAA claimed that AS GUARANTOR, its remaining outstanding balance was the balance not paid by the sps. Later it even claimed overpayment -IBAA foreclosed the securities of the standby letter of credit. -Philam filed collection suit vs. IBAA and the sps for revocery of P274k allegedly still owed under the loan RTC: IBAA was a surety, and discharged of its liability to the extent of the payment made by Mendozas CA: reversed RTC. IBAA's liability was not reduced by payments made by Mendoza Sps. H: Affirm CA -Even if its a Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to exceed P600,000.00. But while they are a security arrangement, they are not converted thereby into contracts of guaranty. That would make them ultra vires rather than a letter of credit, which is within the powers of a bank (Section 74[e], RA 337, General Banking Act). 1 The standby L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount for which credit is given on the faith of the instrument.". They are primary obligations and not accessory contracts. Being separate and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA's liability under its own standby letters of credit. Payments made by the Mendozas directly to Philam Life are in compliance with their own prestation under the loan agreements. And although these payments could result in the reduction of the actual amount which could ultimately be collected from IBAA, the latter's separate undertaking under its L/Cs remains. Both the Trial Court and the Appellate Court found, as a fact, that there still remains a balance on the loan, Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the obligation to pay Philam Life for this unexpended balance. The Appellate Court found it to be P222,000.00, arrived at by the Trial Court and adopted by the Appellate Court, as follows: ... In the summary of application of payments (Exhibit "KK") the plaintiff applied Pl,918.00 as commitment fee, P4,397.66 as surcharges, P199,683.40 as interests, and P320,000.00 on the principal. The P58,000.00 which is covered by OR No. 74396 was also applied "against the total loan." Since plaintiff applied P378,000.00 against the total indebtedness of P600,000.00 there still remains an outstanding balance on the principal P322,000.00 (should be P222,000.00) aside from the agreed penalty interest until the whole amount is fully paid. ... (Decision, Trial Court, p. 50, Rollo) The amount of P222,000.00, therefore, considered as "any obligation of the accountee" under the L/Cs will still have to be paid by IBAA under the explicit terms thereof, which IBAA had itself supplied. Letters of credit are strictly construed to the end that the rights of those directly parties to them may be preserved and their interest safeguarded. Like any other writing, it will be construed most strongly against the writer and so as to be. As to the liability of the Mendozas to IBAA, it bears recalling that the Mendozas, upon their application for the opening and issuance of the Irrevocable Standby Letters of Credit in favor of Philam Life, had executed a Real Estate Mortgage as security to IBAA for any payment that the latter may remit to Philam Life on the strength of said Letters of Credit; and that IBAA had recovered from the Mendozas the amount of P432,386.07 when it foreclosed on the mortgaged property of said spouses in the concept of "principal (unpaid advances under the 2 standby L/Cs plus interest and charges)." In addition, IBAA had recovered P255,364.95 representing its clean loans to the Mendozas plus accrued interest besides the fact that it now has the foreclosed property. As between IBAA and the Mendozas, therefore, there has been full liquidation. The remaining obligation of P222,000.00 on the loan of the Mendozas, therefore, is now IBAA's sole responsibility to pay to Philam Life by virtue of its absolute and irrevocable undertaking under the standby L/Cs. Specially so, since the promissory notes executed by the Mendozas in favor of IBAA authorized the sale of the mortgaged security "for the purpose of applying their proceeds to ... payments" of their obligations to IBAA! SO final decision: IBAA lang magbabayad!!!

*"That would make them ultra vires rather than a letter of credit, which is within the powers of a bank (Section 74[e], RA 337, General Banking Act)." - sabi ni sir, dapat daw INTRA VIRES, not ultra vires *accessory contract: sir said that SL/C is not an accessory contract, court probably refers to the independence principle, there's even a UN Convention on standby L/Cs….it is not accessory to anything but it is actually a guarantee; it is an accessory in the sense that it cannot exist without a valid obligation L/Cs are not covered by NCC lang, also covered by ICP 80 etc. Transfield Philippines vs. Luzon Hydro Corp, supra F: Transfield, a Turnkey contractor, and Luzon Hydro Corporation (LHC) entered into a Turnkey Contract wherein Transfield would construct a power station. To secure performance of its obligation, Transfield opened in favor of LHC 2 standby letters of credit each in the amount of US$8,988,907. -however, due to force majeure, Transfield delayed in the construction and its requests for extensions were denied by LHC. -The parties first underwent arbitration before CIAC and another in ICC. -Foreseeing that LHC would claim the standby letters of credit which are their securities for the performance of the obligation, Transfield advised respondents banks of the arbitration proceedings already pending and asserted THAT LHC had no right to call on the securities until the resolution of the disputes before the arb tribunals and any transfer, release, or disposition of the Securities in favor of LHC would constrain it to hold respondent banks liable for liquidated damages. - banks said that they would pay LHC when it calls on them (HAHA! Wala kaming paki sa inyo!) -LHC declared Transfield in default, so it served notice to the banks that it would call on the securities. -Transfield filed complaint for injunction w/TRO vs. banks and LHC, praying that LHC refrain from calling on the securities and the banks from disposing any securities RTC: DENY, employ, "independent contract" doctrine CA: Affirm ON L/C Nature of LC. The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the bank’s customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable.

Commercial credits

Standby credits

Involve the payment of money under a contract of sale. Such credits become payable upon presentation by seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement.

The credit is payable upon certification of a party's nonperformance of the agreement.

Beneficiary must demonstrate by

Documents would tend to show that the

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applicant has not performed. Beneficiary must certify that his obligor has not performed.

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and assumes responsibility for payment of debt therefor to the addressee. A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto. SC here was citing Prof. Dolan; but it is not applicable to Philippine situation. A surety obligation is a monetary obligation Ong vs. PCIB F: Ong (treasurer) and Alfredo (President) acted as SURETIES for the loan acquired by the BMC. BMC defaulted. PCIB filed a collection suit. BMC applied for rehabilitation and suspension of payments with SEC. PCIB and BMC executed a MOA. BMC filed MTD the complaint, arguing that the MOA suspended any pending civil action against BMC. RTC: denied CA: affirm: a creditor can proceed against petitioners Ong and Alfredo as surety independently of its right to proceed vs. BMC H: Ong and Alfredo acted as principal obligors. As sureties, even if the principal debtor was granted suspension of payments, they are not affected by it. -the provisions they are citing are for guarantors, not sureties. (difference between surety and guarantors) Guarantee vs. suretyship. Suretyship in NCC (A2476) solidarily bound with principal debtor. Therefore, a surety is a principal debtor in the beginning.

Guarantor has benefit of principle of excussion. Should collect from Principal borrower first. Not a primary obligor.

On contracts saying "not only a primary obligor, more than a surety" -so what is it? A surety is a primary obligor! This contract is actually a suretyship. International Finance Corporation vs. Imperial Textile Mills F: IFC granted a P7M loan obligation of PPIC, PPIC executed REM. Also, ITM and Grantex guaranteed it (primarily bound) but contract called guaranty. -PPIC defaulted. IFC foreclosed REM but kulang, so demand from ITM and Grantex ITM and Grantex: used guarantors and guarantee SC: for IFC -"jointly and severally liable daw", even if called guarantors.

Commercial vs Standby Credits.

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documents that he has performed his contract

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SC did not really explained meaning of the phrase commented on by sir: "primary obligor and not merely as surety". Just said primary obligor and surety have same legal consequences. What should have been stated is that ITC was acting as a primary obligor and surety and not merely as a guarantor to be consistent with NCC. IFC is the investment arm of the World Bank. So it was couched in language familiar with the world bank. JN Dev't Corp vs. Phil Export and Foreign Loan Guarantee Corp

F: Credit line covered by REM and a guarantee. Letter of guaranty covers 70% of credit line. JN failed to pay traders royal bank. Pursuant to L/C, Traders collected from Phil Guaranty. Phil Guaranty collected from JN. SO collection case filed by Phil Guaranty vs. JN. JN: 1. the guaranty letter, by the time that Phil Guaranty paid, was already expired. SO at the time Phil Guaranty paid the obligation to Traders, it has actually no obligation to pay such 2. Failure to object of Phil Guaranty to the extension precluded it to collect SC: the obligation fell w/n the period for guaranty. So payment by Phil Guaranty's payment was warranted. -on failure to object: it was not a defense. Failure to object is not a defense available to JN -while the guarantor enjoys the benefit of excussion, it is a benefit that can be waived. FOR Phil GUARANTY. Can collect from JN The benefit of excussion is waivable. It is in favor of the guarantor so it is up to him to exercise this right. If the guarantor chooses to pay immediately without resorting to remedies against borrower, guarantor could still collect from principal debtor (f) Aval (Insert notes from reviewer) -a French word for "foot or bottom" -a 2nd layer of guaranty over and above that provided by acceptor (BoE draft accepted, acceptor would be primary liable) SEC 74 (page 78): among the permissible forms of guarantee is acceptance of drafts or BOE; according to ARTICLE 487, Code of Commerce, the obligation of the avalista is that of a guarantor and is independent (486) of that contracted by the acceptor. *Avalista signs "for aval", it is signed at the foot of a BOE. But there are avalistas signing at the side, not anymore at the bottom. So does that make the "avalista" a "sidelista"? (g) Hold-out -term was injected into banking laws through the PD 71? -there's a holdout if the depositor cannot withdraw … WHY: if there's a deposit held-out, the bank can easily settle off -guaranteed party able to fulfill its obligations with the bank -normally if you look a a holdout document, in addition to holdout provision, it is coupled with a set off provision (which looks redundant. But it assumes significance when the depositor agreed to a holdout when it is a mere accommodation party) - there's no legal compensation because not creditor-debtor relation -under NY banking law, no more term "holdout" Term is not an original from RP, it is borrowed from US (h) Assignment by way of security In cases, you'll notice that this was characterized as a "pledge" under chattel mortgage because justices' mindset is tied to what is found in civil code -but there is NCC provision on freedom to contract, and obscure provision (A1454) which states that an absolute conveyance of property is made to secure an obligation there is an implied trust. If the obligation is fulfilled by the grantor, he may demand conveyance of property. Article 1454 remains obscure People's Bank and Trust Co. vs. Odom F: H: the parties intended the assignment to be security. Odom still liable to pay SC paid attention to wording of document. Language found in chattel mortgage loan -if obli fulfilled then mortgage becomes null and void SC said it sounds like a chattel mortgage so it is not an absolute assignment Case is replete with citation from US Sources. At that time, decision of SC RP were appealable to US SC. 4|Cha’s banking notes

Lopez vs. CA F: Lopez applied for a loan, and was required to secure it with a surety bond. Philamgen executed a surety in favor of Lopez. Lopez signed "stock assignment separate from Certificate" which provided the 4k shares of lopez sold, transferred and assigned to Philamgen inconsideration of the surety bond Lopez defaulted, Philamgen was ordered to pay by Court. Philamgen sued Lopez to recover amount. LOPEZ: obli already extinguished by stock assignment (dacion en pago) H: Lopez stock assignment IS NOT DACION EN PAGO. Lopez' obligation would only arise only when he would default in the payment of the loan and the surety had to pay for it. -no express provision in the stock assignment that the loan is immediately extinguished by reason of assignment -this is an absolute conveyance? No. There's a continuous obligation which is not extinguished. -all the requisite of pledge is available This case could have been decided the other way: when the stock certificates were cancelled and issued to Philamgen, you cannot just issue a stock certificate to replace an old one unless the incoming shareholder (buyer/transferee) is able to submit proof that the shares of stocks have been paid. Evidence of payment is CAR (certificate of Arising Registration?) + DST Manila Banking Corporation vs. Teodoro F: Teodoros, in order to comply with a loan contract, they executed a deed of assigment of receivables in favor of MBC -Teodoros defaulted. MBC sued for recovery. H: Assignment did not result from a sale transaction. It cannot be said to have been constituted by virtue of a dacion en pago. -the intention of the parties is primordial Court characterized the assignment as a collateral (vs. ODON: chattel mortgage; vs. LOPEZ: pledge) Sir: Odon is a male. But court referred to Odon here as a female Note: Concurring opinion of Justice Feliciano: absolute conveyance of credit + security arrangement (A1454 to but not able to pinpoint said provision): purpose of the document was to sell upfront the receivables to sidestep the provision of pactum promissorium….? Referred to Continuing Guaranty Integrated Realty Corp vs. PNB F: IRC acquired loan from PNB. To secure loan, a deed of assignment over time deposits of President was made. IRC unable to pay. PNB demanded payment IRC, President: deed of assignment already payment H: Deed of Assignment is a pledge, citing Lopez vs. CA Liability of OBM: not liable for interest during time it was suspended by CB Time deposit assigned to PNB. Deposit secured PNB's loan. Was the loan subjected to "Single Borrower's Limit"? Here, the loan is a risk item because the deposit used as a security is not contained in the lending bank but with another bank. If the deposit used as a collateral is w/ PNB, it is not covered by the SBL (SEC 35.5 c) Legal rate of Interest: 6%, not 12% - it is difficult to find the precise legal citation of the 12% X305.1 Yau Chu vs. CA F: Mrs. Chua executed Deed of Assignment w/ Family savings bank as security Mrs Chua filed a case vs. bank for restoration of her money in Time deposit

H: Pledge! Pactum Commissorium does not apply. Money involved here is lower than the amount of debt. What is pledged is already in liquid form so no need to resort to sale by public auction. Foreclosure dispensed with A2118, NCC? It is there that was stated that what is pledged is credit and it is due, collect amount of credit and apply amount of proceeds in payment of the loan (so no foreclosure needed) A2112 cited by SC: question arises is it always the case that the foreclosure must always be done in a public auction??? SIR: You can argue that a private sale is permissible. "creditor may proceed…" if auction done privately in the pledge contract, allowed.

DBP vs. Prudential Bank F: Litex opened a L/C w/ prudential Bank for importation of spindles, and were released to Litex under Trust receipt agreement. Litex obtained loan from DBP and executed REM and Chattel Mortgage over spindles under trust receipt agreement with Prudential Bank. DBP wanted to foreclose the REM and Chattel Mortgage so Prudential Bank protested to DBP. Still, DBP continued with the foreclosure. So Prudential Bank filed action vs. DBP. TC: DBP liable to Prudential Bank CA: Affirm H: There was a trust receipt agreement! Litex only a entrustee of DBP, cannot assign the products to another. Can only sell it then pay the proceeds to Prudential Bank.

Caltex Phil vs. CA F: A certain de la cruz opened a loan with bank and opened time deposit there. De la cruz also had an obligation in favor of Caltex, and assigned the certificate of time deposit. De la cruz alleged that he los the certificate of time deposit so he was issued new ones. He assigned it to the bank.

(1)SC did not even bother to ask why spindles are subject to trust receipts which were not meant to be sold (but used by Litex)! (2) Prudential banks forever the owner attached to the machines? Pano yun, di nila pede gamitin?if the goods not intended to be sold, here the bank would be forever the owner. Something on security interest. Under trust receipts law, absolute ownership may also mean security interest.

(i) Trust Receipt security involved in the issuance of letters of credit where the entrustor (bank) releases to the entrustee (borrower) goods for the latter to sell in order and such proceeds shall be used to pay obligation with entrustor. Sir: this is not a good solution. What would the bank do with the goods? What if the goods were shells? Would they put up a Hawaiian something??? (to that effect) Violation of trust receipts law is malum prohibitum. However, it is prosecuted in relation to estafa under Section 315(1)(b), RPC. Allied Banking Corp vs. Ordonez F: L/C issued in favor of seller, seller issued drafts in favor of PBM. PBM issued trust receipts. -Trust receipt agreement recognized bank's ownership over goods and PBM's obligation to deliver proceeds to bank WON PD 115 covers goods that do not form finished products H: nonpayment of amount covered by trust receipt which gives rise to liability, regardless of the product covered (regardless if it is to be sold or just used by trustor in its trade) Trust receipt transaction: transaction between trustor and trustee wherein trustor who has absolute title over object transfers such title to trustee upon execution of trust receipt wherein trustee undertakes to keep such title in trust to the trustor and the proceeds delivered to the trustor SC expanded the coverage of trust receipts law. Even goods ultimately not for sale deemed included. (The doctrine was reiterated in DBP v. Prudential Bank) Sir: This is wrong. The law is clear and penal laws must be strictly construed. As a consequence, trust receipts have been used to burden or frighten debtors with possible penal indictment. Not all trust receipts should be covered by trust receipt law. There's no annotation of trust receipt law. Difficult to understand this. SC even more confused! On reference to Estafa: it is malum in se. But trust receipt law is malum prohibitum! Colinares vs. CA Consolidated vs. CA 5|Cha’s banking

Rosario Textile Mills vs. Home Bankers Savings and Trust Company H: Trust receipt merely as a security interest. What the bank here has is only a security interest, a property interest on the goods to secure the obligation. SC undermined Trust Receipts Law pROBLEM: Section 4 lang ata nabasa ng SC! Section 10 clearly answers the problem! The risk of law shall be bourne by the entrustee! Vintola vs. IBAA The transaction has two features: 1) loan feature and 2) security feature. Given the definition of security interest, it was necessary for the law in Section 10, PD 115 to provide that it is the entrustee who bears the loss. People vs. Nitafan Acts involving the violation of the trust receipts agreement occurring after the enactment of PD 115 would make accused criminally liable for estafa pursuant to Section 13, PD 115. Sir: The statement in the case that provides that the title of the bank to the security is the one sought to be protected is WRONG. The TR is not separate from the L/C, it is but an accessory to the loan transaction. (j) Set-off/Netting 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. (k) Comfort Letter 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. Why issue a comfort letter? 1. parent company may be prohibited to issue guarantees under contract

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2. comfort letters do not affect credit standing of parent company since it is not required to be footnoted in statement of assets and liabilities 3. company policy may prohibit the issuance of guarantees 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. Section 41, GBL SECTION 41. Unsecured Loans or Other Credit Accommodations. — The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks. Til Before Part III. Other blah….Bukidnon Doctor's Hospital case…. (16 cases) Review Assignment by way of security In cases, you'll notice that this was characterized as a "pledge" under chattel mortgage because justices' mindset is tied to what is found in civil code -but there is NCC provision on freedom to contract, and obscure provision (A1454) which states that an absolute conveyance of property is made to secure an obligation there is an implied trust. If the obligation is fulfilled by the grantor, he may demand conveyance of property. Article 1454 remains obscure From Jurisprudence, SC would either characterize "Assignment by way of security" as a pledge or a chattel mortgage, because SC justices probably has their minds set within the 4 corners of the Civil Code: mortgage or a pledge or a trust receipts (under Trust Receipts law) -when the documentation is replete with words such as "by way of security", "guaranty"… SC would recharacterize the assignment as a pledge or a mortgage In Sycip, Salazar: "Deed of Assignment without recourse by way of Security" -elements: 1. 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) 1. 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) 1. 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) 1. "Nothing in this assignment shall be construed as creating a pledge or a chattel mortgage" (so as to clarify the intention of the parties) Pages 97 and 98 of the book If assignment is construed as a pledge, foreclosure would extinguish the obligation If Chattel Mortgage, there is registration requirements. Unless satisfied, the mortgage is not valid as against third persons. There would be no affidavit of good faith in deed of assignments

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This kind of document is similar to a deed of assignment…We're goint to take that up in derivative transactions Certain Issues

Typical issue: Scope of the Mortgage: Obligations and property covered In Chattel Mortgage Law, AAP and AIC not included because of Section 5 and 7 of Chattel Mortgage Law: Affidavit of Good Faith is interpreted to cover only Present obligations and only the properties listed therein. What if the CM provides a contractual stipulation that the CM covers "future obligations"? Court said that it is an enforceable obligation for the execution of either a new document or amend the existing document Section 7: covers only PROPERTIES described in the deed. -so any provision cannot do the trick. No way out but to execute a new contract or amend the existing document. Pag hindi nakalista, wala na! Floating charge? (vs. Fixed charge) -in Philippines, fixed charged only. Specific properties are subject to a lien. a. Validity of "AFTER ACQUIRED PROPERTY" AND "AFTER INCURRED OBLIGATION" CLAUSES in a CHATTEL mortgage 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. -this appears to suggest that even future obligations may be covered by the CM. However, you must be careful in understanding the Civil Code provisions on Mortgage under Chapter 16. When it speaks of a mortgage, it doesn't cover both REM and CM, only REM. Chattel Mortgage is governed by another chapter! A2091 is under Chapter 16 so only concerns REM, not CM! Plus Section 5 & 7 of CM A stipulation in mortgage documents which seeks to cover properties (obligations) acquired (incurred) by mortgagor after execution of mortgage agreement. AFTER-ACQUIRED PROPERTY (AAP) -properties acquired/bought by the debtor after the conclusion of a chattel mortgage agreement Is AAP valid in REM/ Chattel Mortgage? REM: Yes, in view of Article 2085, CC. 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. -Chattel Mortgage Law provides that ONLY SUCH PERSONAL PROPERTY AS STATED IN THE MORTGAGE DOCUMENT SHALL BE COVERED BY THE SAME MORTGAGE. X: 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) *it is still necessary to include a supplement of REM to cover after acquired properties and register it with the Registrar of deeds so that at foreclosure time, there would be no issue as to the scope of the REM.

AFTER INCURRED OBLIGATION (AIO) Is AIO valid in REM/ chattel mortgage? REM: Article 2091, CC ("all kinds of obligations") suggests that even future properties are subject to mortgages. Note: Belgian Missionary Case (see the case na lang) CM: No, in view of Section 5, Chattel Mortgage Law re affidavit of good faith. -Section 5, CML requires that the mortgage be made for the purpose of securing the obligation SPECIFIED IN THE CONDITIONS THEREOF, AND FOR NO OTHER PURPOSE. As held in Acme Shoe, Rubber & Plastic Corp, the said provision contemplates the obligation existing at the time the mortgage was executed AND NOT SUBSEQUENT ONES. If the mortgage contract provides for AIO, there should still be either a new contract or an amended contract containing the new obligation. *Note: The Affidavit of Good Faith which specifies the properties subject to the agreement and the obligations incurred therefor. If not listed, not included in the Chattel Mortgage Torres v. Limjap (1931) 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). -Henson's heirs (patay na si Henson) alleged the following defenses: (1) chattel mortgages VOID for lack of sufficient particularity in the description of the property mortgage (2) chattels sought to be recovered by the plaintiffs were not the same property described in the mortgage *NOTE: THERE WAS A STIPULATION IN THE MORTGAGE AUTHORIZING HENSON TO SELL THE GOODS COVERED BY THE MORTGAGE AND REPLACE THEM WITH THE OTHER GOODS THEREAFTER ACQUIRED TC: (1) Hensons defaulted in payment (2) mortgages became due (3) plaintiffs, as mortgagees, were entitled to the possession of the DRUG STORES *question: If it was the drugstores, bakit revolving stock ang focus? HELD: Affirm. Allowed AAP to be included in the mortgage; the provision of the last paragraph of section 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the nature of a revolving and floating business 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 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. STIPULATION VALID AND BINDING: where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods, etc. Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of stipulations relating to after-acquired and substituted chattels. -DAPAT BY EXPRESS STIPULATION: the mortgage must expressly provide that such future acquisitions shall be held as included in the mortgage This case presents exception to validity of AAP. It is practicable and sound. Joke about mortgage stamped on your sardines. "There goes your breakfast" PEOPLE'S BANK AND TRUST CO. VS DAHICAN F: AG&P sold and assigned all its rights to Dahican Lumber Concession to DALCO for $500k (but only $50k was paid). -1ST MORTGAGE: DALCO thereafter obtained loans from PBTC amounting to P200k. In addition, DALCO obtained from Export-Import Bank a loan of $250k evidenced by 5 PNs of $50k each. As security, DALCO executed in favor of PBTC (also as trustee for Export-Import Bank) a 7|Cha’s

banking

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deed of mortgage covering 5 parcels of land in Camarines Norte + all the buildings, improvements and other personal property in DALCO's place of business. *DALCO and DAMCO pledged to bank 7,296 shares of stock of DALCO and 9,286 of DAMCO to secure same obligations. -2ND MORTGAGE: DALCO also executed on the same date ANOTHER DEED OF MORTGAGE ON THE SAME PROPERTIES in favor of AG&P *both deeds of mortgage contained a provision EXTENDING THE MORTGAGE LIEN TO PROPERTIES TO BE SUBSEQUENTLY ACQUIRED (AFTER ACQUIRED PROPERTIES) BY DALCO. *both mortgages were registered in the Office of the Register of Deeds of Camarines Norte -DEFAULT: DALCO & DAMCO failed to pay the 5th PN - but was given by PBTC up extension to pay the overdue PN -before the deadline given by PBTC, DALCO purchased various machines, equipment, and spare parts and supplies in addition to or in replacement of some of those already owned and used by it. PURSUANT TO THE AFTER ACQUIRED PROPERTIES PROVISION IN THE MORTGAGE, PBTC requested DALCO to submit the complete list of properties acquired. -DALCO failed to provide PBTC the list requested. It subsequently decided (through Board of directors) to rescind the alleged sales of property recently acquired and corresponding agreements of rescission of sale were executed. -PBTC (in its own behalf and that of AG&P) DEMANDED THE CANCELLATION OF THE RESCISSION AGREEMENTS. DAMCO refused. -PBTC & AG&P commenced foreclosure proceedings in CFI over the machineries, equipment and supplies of DALCO. The proceeds of the sale were agreed to be divided between "UNDEBATED PROPERTIES" AND "AFTER ACQUIRED PROPERTIES" and were deposited with the TC pending litigation. TC ruled in favor of PBTC & AG&P. 1. WON AFTER ACQUIRED PROPERTIES ARE INCLUDED IN THE DEED OF MORTGAGE? YES -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. - It is common and logical in cases where the properties given as collateral are perishable • • or subject to inevitable wear and tear • or were intended to be sold • or were intended to be used thus becoming inevitable to wear and tear -purpose: to maintain, to the extent allowed by circumstances, the original value of the properties given as security. WON the mortgage of the after acquired properties is void because they were not 1. 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. (ruling on other issues deleted) This is a mortgage-trust indenture since the bank is a trustee for the foreign bank. You could actually cite this case … On the discussion of perishable collateral…then goes on to say that it is not immoral, etc. poor judgment on the creditor not to include such provision in the agreement. BUT THERE's SECTION 7 WHICH PROHIBITS PRECISELY INCLUSION OF AFTER-ACQUIRED PROPERTY CLAUSE!!! How can it be poor judgment????

Plus sweeping pronouncement on exclusion of collaterals subject to wear and tear. BUT ALL PROPERTIES ARE SUBJECT TO WEAR AND TEAR!!! No need even to discuss the said exception since this involves property which was considered REAL ESTATE MORTGAGE, NOT CHATTEL MORTGAGE!!! BELGIAN CATHOLIC MISSIONARIES VS. MAGALLANES PRESS F: Magallanes Press obtained two loans: 1st loan: from JP Heilbronn for P14k. CHATTEL MORTGAGE on all its printing machinery and accessories was executed in favor of HEILBRONN 2nd Loan: from Belgian Catholic Missionaries for P30k. CHATTEL MORTGAGE on the same properties executed in favor of Belgian Catholic Missionaries -Heilbronn transferred all its mortgage credit to Memije Extension of 1st loan: Memije, as successor in interest of Heilbronn, extended an additional P5k loan, and the chattel mortgage executed before was made to cover the new P5k loan -fire occurred. Properties covered by the CM were burned. Since it was covered by an insurance policy, Memije could have recovered the amount due from the insurance policy but Belgian Catholic Missionaries filed a petition for writ of injunction to stop the award of the proceeds of the insurance to Memije with the action to cancel the document of transfer of mortgage WON Mortgage extension made by Memije (so that the CM would cover after incurred obligation) is void? YES -increase made by Memije in the mortgage credit and the extension made by Magallanes press of the mortgage to the additional credit, w/o the knowledge or consent of Belgian Catholic as 2nd mortgagee, prejudices the credit of the 2nd mortgagee inasmuch as the security for the payment of said credit was reduced = fraud that vitiates the contract of extension of the mortgage, VOID "The increase of P5,895.59 made by the defendant Jose Ma. Memije of the mortgage thereto, are not only subordinate to the mortgage credit of the plaintiff company, being subsequent in time and in registration, but said increase in the security is also void." *NOTE: court recognized that the mortgage in favor of JP Heilbronn was preferenced vs. the mortgage in favor of Belgian Catholic. But as to the extension granted by Memije, Belgian Catholic would be preferred, as the said extension is void (plus prefer Belgian because the after incurred obligation was executed after the mortgage in favor of Belgian Catholic, and thus, subordinate to it. The increase of the mortgage security becomes a new mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the mortgage credit, and even if it did, said increase would take effect only from the date of the increase. A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage. In accordance with the provisions of section 5 of Act No. 1508, known as the Chattle Mortgage Law, the parties to the original deeds swore that the same was mortgaged "to secure the obligations specified therein and for no other purpose." Neither the increase in question, nor the extension of the mortgage to secure the payment of the same is specified in the deed, consequently said extension is void. "Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contacted." On SC statement on p655 of SCRA: "The increase of the mortgage security becomes a new mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the mortgage credit, and even if it did, said increase would take effect only from the date of the increase". BUT THE INCREASE IN THE FINANCIAL CREDIT ACCOMODATION WOULD NOT BE COVERED BY THE CM IF NO ADDITIONAL DOCUMENTATION! This statement by the SC gives rise to the mistaken notion that we could do away with the documentation requirements! Remember this because this case is cited in the next case! ACME SHOE, RUBBER & PLASTIC CORP VS. CA 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). 8|Cha’s banking notes

-subsequently, ACME Shoe obtained another loan from Producer's Bank for P1M (note: NO new CM was executed) -ACME shoe defaulted on their P1M obligation so Producer's Bank sought the EXTRAJUDICIAL FORECLOSURE OF THE CHATTEL MORTGAGE WON a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred is valid NO. Rule in favor of ACME -VOID. Should • execute a new CM over the new debt OR • Amend the old contract conformably with the form prescribed in the CML *Refusal to execute a new agreement by the borrower = default *the remedy of foreclosure can only cover debts extent at the time of constitution and during the life of the CM sought to be foreclosed. *SEC5, CML: Affidavit of GF: the parties must execute an oath that the mortgage is made for the purpose of SECURING THE OBLIGATION SPECIFIED IN THE CONDITIONS THEREOF, AND FOR NO OTHER PURPOSE… …the debt referred to in the law is a current, not an obligation that is yet merely contemplated. DECISION IN ACME SHOE COULD HAVE BEEN ALRIGHT WITHOUT CITING THE BELGIAN CATHOLIC CASE. BY JUST CITING SECTION 5, IT’S CLEAR. Belgian contradicts the early position. Section 5 still requires documentation but the Belgian case doesn't!!! NOTE: SIR INTENDS TO CHANGE HIS QUESTIONS! HIS STUDENTS TEND TO CITE ACME SHOE AND BELGIAN IN REM!!!!!! ACME and BELGIAN concerns CM!!!!! ONG LIONG TIAK VS. LUNETA MOTOR CO. 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: . . it being expressly agreed further that this mortgage shall also serve as security for the payment to the said mortgagee in addition to the aforesaid notes of the purchase price or cost of any and all gasoline, tires, automobile accessories or parts, and repairs furnished or made by the said mortgagee at any time up to the date this mortgage is completely satisfied as and when the same becomes due, and of any other indebtedness of the mortgagor in favor of the mortgagee incurred in any other manner whatever. -Choa Siong acted as surety for P300 for a certain Angeles for paints and accessories the latter obtained from Macondray. Macondray assigned its credit to Luneta, as Choa Siong still had P140 balance. Chao Siong paid P40 so there was P100 left unpaid. -Choa Siong was able to pay all the PNs though. But since there is still P100 left unpaid arising from the surety made by Choa Siong, the credit of which was assigned to Luneta, Luneta refused to extinguish the CM. -Chao Siong sold the auto to Ong Liong Tiak. -For the nonpayment of the P100, Luneta sought the forclosure of the CM. Sheriff attached the auto (ppor Ong Liong Tiak :( ) -Ong Liong Tiak filed petition for writ of injunction and damages vs. Luneta. CFI ruled against him WON the surety secured by Ong Liong Tiak is included in the CM executed by Ong Liong Tiak in favor of Luneta Motor Co? 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. The right of those who so acquire said properties should not and can not be superior to that of the creditor who has in his favor an instrument of mortgage executed for the formalities of the law, in good faith, and without the least indication of fraud. This is all the more true in the present case, because, when the plaintiff purchased the automobile in question on august 22, 1933, he knew, or at least, it is presumed that he knew, by the mere fact that the instrument of mortgage, Exhibit 2, was registered in the office of the register of deeds of Manila, that said automobile was subject to a mortgage lien. In purchasing it, with full knowledge that such circumstances existed, it should be presumed that he did so, very much willing to respect the lien existing thereon, since he should not have expected that with the purchase, he would acquire a better right than that which the vendor then had. Kawawa naman si OLT! Walang napunta sa kanya. May COA ba sha against Chao Siong?

SC validated an AIP w/o even explaining why. Sir included this case so that you would know that there's a SC that contradicts what is provided in law. This case supports the wrong position. But since it is also supported by SC, "legal practice becomes more interesting…" PRUDENTIAL BANK VS. ALVIAR F: (loan 1) Sps. Alviar obtained a P250k loan from Prudential Bank and as a security, they executed a REM over their parcels of land in San Juan. The REM contained a "blanket clause/dragnet clause" (see below in the decision) (loan 2) Don Alviar executed a PN for P2,640,000 in favor of Prudential Bank secured by a "hold-out" on the mortgagor's (Alviar's) foreign currency savings account with Prudential Bank and Alviar's passbook is to be surrendered to Prudential Bank until the amount secured by the holdout is settled. (loan 3) Another PN for P545,000 was executed by Don Alviar, this time in behalf of DONALCO trading (the spouses are the Chairman and the VP of the company), in favor of Prudential Bank. This was secured by "Clean Phase out of TOD CA 3923: meaning that the temporary overdraft incurred by DONALCO trading is to be converted into an ordinary loan. Prudential bank approved the straight loan. Securities were deed of assignment on 2 PNs executed by Bancom Realty Corp….and chattel mortgage on various heavy and transpo equipment Alviars paid Prudential Bank P2M to be applied to the obligations of Alviars (as GB Alviar Realty and Development Inc) and for the release of the REM for P450k (cf P250k at the start) which covered their 2 San Juan lots. Payment was acknowledged and Prudential Bank released the mortgage over the 2 properties. STILL, PRUDENTIAL BANK MOVED FOR EXTRAJUDICIAL FORECLOSURE OF THE MORTGAGE ON THE PROPERTY, arguing that the Alviars had the total obligation of P1,608,256.68 covering 3 PNs (the first loan + another loan + 3rd loan). Alviars filed for DAMAGES + prayer for issuance of writ of preliminary injunction: claimed to have paid principal loan secured by the 2 San Juan properties by payment of P2M Vs. Prudential Bank: Payment of P2M was for the obligations of GB ALVIAR REALTY & DEV'T CORP under a separate loan secured by a separate mortgage (and not by the spouses! themselves) TC: proceed with foreclosure; MFR: reverse - even awarded damages in favor of Alviars. The REM only covers the 1st loan and not the subsequent loans. The “blanket mortgage clause” relied upon by Prudential Bank applies only to future loans obtained by the mortgagors, and not by parties other than the said mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as officers thereof. CA: Affirmed: while a continuing loan or credit accommodation based on only one security or mortgage is a common practice in financial and commercial institutions, such agreement must be clear and unequivocal. In the instant case, the parties executed different promissory notes agreeing to a particular security for each loan. Thus, the appellate court ruled that the extrajudicial foreclosure sale of the property for the three loans is improper. -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. “blanket mortgage clause/dragnet clause”: -one which is specifically phrased to subsume all debts of past or future origins. -should be carefully scrutinized and strictly construed -Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction -operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. -mortgages given to secure future advancements are valid and legal contracts, and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. 9|Cha’s banking notes

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? 2 SCHOOLS OF THOUGHT: 1. Dragnet clause covers ALL OTHER DEBTS, EVEN IF THE OTHER DEBT IS SECURED BY ANOTHER MORTGAGE 1. Dragnet clause would not secure a note that is otherwise secured as to its entirety. Would only cover the deficiency after exhausting the security specified therein. (so pag may natira pang obligation, yun ung under ng dragnet clause SC: 2nd school of thought! RELIANCE ON THE SECURITY TEST: when the mortgagor takes another loan for which another security was given it could not be inferred that such loan was made in reliance solely on the original security with the “dragnet clause,” but rather, on the new security given Ratio: the “dragnet clause” in the first security instrument constituted a continuing offer by the borrower to secure further loans under the security of the first security instrument, and that when the lender accepted a different security he did not accept the offer *Where deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently become due, a balance due on a note, after exhausting the special security given for the payment of such note, was in the absence of a special agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of the special security.This is recognition that while the “dragnet clause” subsists, the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be resorted to. *any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it, Prudential Bank. *BUT PRUDENTIAL BANK could still subject the properties to foreclosure proceedings for the unpaid P250k, which both TC and CA found to have not yet been paid. If there are deficiencies for the second loan, could also apply the proceeds as to the second loan. Qualification to the validity of the AIO clause: Dragnet Clause Even if there is a Dragnet Clause in REM which might have secured future obligations, when the future obligations are secured separately, GR: mortgagee cannot foreclose the REM to satisfy the unpaid subsequent obligations. Exhaust first the specified collateral for the loan, not the property under the Dragnet clause! X: unless there's an explicit stipulation to the contrary! Justice Tinga, who loves to cite American jurisprudence, is saying that dragnet clause is used in mortgages to allow….he is actually describing a Mortgage Trust Indenture (the Philippine Equivalent)! CUYCO VS. CUYCO F: Petitioners obtained a P1.5M loan from respondents, secured by REM over their Cubao property. REM provides: PROVIDED HOWEVER, that should the MORTGAGOR duly pay or cause to be paid unto the MORTGAGEE or his heirs and assigns, the said indebtedness of ONE MILLION FIVE

HUNDRED THOUSAND PESOS (1,500,000.00), Philippine Currency, together with the agreed interest thereon, within the agreed term of one year on a monthly basis then this MORTGAGE shall be discharged, and rendered of no force and effect, otherwise it shall subsist and be subject to foreclosure in the manner and form provided by law. -Subsequently, petitioners obtained additional loans from the respondents in the aggregate amount of P1,250,000. -Petitioners only paid P291,700 but defaulted as to the rest. -Respondents filed a complaint for foreclosure of mortgage, alleging that the loans (all of them) were secured by the REM and as of August 31, 1997, the debt amounted to P6,967,241.14 (with interest of 18% mo) Vs. Petitioners: REM only covers P1.5M loan, no agreement that the 18% interest was to be compounded mo as it was per annum! RTC: For respondents CA: REM was expressly intended to cover only the original P1.5M loan and the subsequent P150k and P500k loans, not the P150k loan, the P200k loan and P250k loan. 12% interest imposed by TC also proper WON the 12% interest rate imposed by TC Proper YES. As was held in Eastern shipping lines and in the law. Interest on judicial awards until paid. WON all five additional loans were intended to be secured by the real estate mortgage NO. (eto ang na-gets ko…ung P1.5M loan lang ang kasama) GR: a mortgage liability is usually limited to the amount mentioned in the contract. X: However, the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. This stipulation is valid and binding between the parties and is known in American Jurisprudence as the “blanket mortgage clause,” also known as a “dragnet clause.” A “dragnet clause” operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera. While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract. HOWEVER, it is clear from a perusal of the real estate mortgage that there is no stipulation that the mortgaged realty shall also secure future loans and advancements. Thus, what applies is the general rule above stated. What the parties could have done in order to bind the realty for the additional loans was • to execute a new real estate mortgage or • to amend the old mortgage conformably with the form prescribed by the law. Failing to do so, the realty cannot be bound by such additional loans, which may be recovered by the respondents in an ordinary action for collection of sums of money. WON the amount of obligation should include interest? YES. Rule 68.2 provides so. No dragnet clause involved here!

Trust receipt is a security agreement where the bank acquires a right over the proceeds, not over the property. _IBAA, by the surrender of the sea shells, can still recover based on BOC of the loan contract, not the trust receipt agreement. SC made some troubling pronouncements. If you look at your SCRA version, on page 730, 1st two paragraph, last sentence: distinction between loan feature and security feature: It conveys that the trust receipt IS NOT AN ACCESSORY TO THE LOAN TRANSACTION WHEN IN FACT IT IS! It conveys the perception that it is separate and distinct but in reality it is connected with one another. A trust receipt is in the same position as a pledge and mortgage, thus, a security, which cannot exist if there is no principal obligation *the surrender of the goods extinguishes the Criminal action, but NOT THE CIVIL ACTION! People vs. Nitafan -Trust receipt agreement over plastic products. Nitafan assailed the Trust Receipts Law under 2 arguments: H: No violation of consti right against compelling to pay for nonpayment of debts: It already serves as protection of public interest. No need for malice. It is mala prohibitum thus not an element of the crime. -punishment is a valid exercise of police power. Dissenting opinion of CJ which proposes criminalization of trust receipt transaction. Took out penalty for trust receipt violations… (clarify mamaya) Read seriously the different provisions and decisions, SC confused concepts of trust receipts transactions e.g. in Vintola, court mentioned that Vintola sps hold the property at their own risk - but the bank own it, not the entrustee! Trust in Civil code: trustor has the legal title, there's 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 just 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) Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

Vintola vs. IBAA 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

(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;

H: For IBAA Letter of credit/trust receipt agreement: 2 features Loan feature + security feature 10 | C h a ’ s b a n k i n g n o t e s

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

(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)

-it is security in a sense that the bank has protection against the depositor's obligation with it if the depositor has an account with it. As a result, there is netting of the two accounts -legal compensation elements: See A1279.

expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary.

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.

In pledge, if there's a deficiency… GR: Creditor cannot claim deficiency once foreclosure obtained X: if stipulated

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

1. Deficiency claim in a chattel mortgage; exception 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)

(k) Comfort Letter (a.k.a. Letter of awareness, keepwell agreement) -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. Why issue a comfort letter (and not a straight forward guarantee)? 1. parent company may be prohibited to issue guarantees under contract (Articles of incorporation) -there would be an issue of WON extension of guarantee is ultra vires or intra vires -WON the approval of the guarantee needs formalities (refer to Corpo Code) 2. comfort letters do not affect credit standing of parent company since it is not required to be footnoted in statement of assets and liabilities 3. company policy may prohibit the issuance of guarantees 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. SECTION 41. Unsecured Loans or Other Credit Accommodations. — The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks. *maybe you would find some comfort if the issuer of the comfort letter is the parent company of a big international financial group Pactum commisorium is not allowed under RP Laws. If you have a multiple security agreement (chattel mortgage, REM, pledge, assignment) for the same principal obligation, ALWAYS REMEMBER THAT FORECLOSURE OF THE PLEDGE SHOULD BE DONE LAST (As there's a prohibition to undergo other remedies under Article 2115) -Sir was saying something about pledge of shares of stock and the argument that the situs is not Philippines but sir said that even if it be argued that situs not in RP, RP laws would still apply… basta sorry I don't know eh... 1. No deficiency claim in a pledge Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and 11 | C h a ’ s b a n k i n g n o t e s

Review for Article 1484 General Rule: Creditor shall always be entitled to collect the deficiency judgement. (Ablaza v. Ignacio, ‘58). State Investment House, Inc. v. CA (93) When the proceeds of the sale are insufficient to cover the debts in an extra-judicial foreclosure of chattel mortgage, the mortgagee is entitled to claim the deficiency from the debtor. Ratio: mortgages as accessory contracts serve only as securities and not for the satisfaction of the principal obligation Prescriptive Period: Ten (10) years under Art, 1142 of the Civil Code. (DBP v. Tomeldan, ‘80). Exception: If the property was sold in installments, the mortgagee can no • longer take any action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary is void. (Art. 1484, Civil Code, aka the Recto Law) O. Recto Law • The Recto law, which is now reflected in Articles 1484-1485 of the Civil Code, which provides that 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: Exact fulfillment of the obligation, should the vendee fail to pay (specific • performance); Cancel the sale, should the vendee's failure to pay cover two or more • installments (Note that this is not the same as rescission because here, the vendor gets back the object of the sale and retains the installments paid. However, this is not available in the absence of stipulation in the contract.); • Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover 2 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 contract is void. • The principal object of this amendment was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price, and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness. Pacific Commercial Co. v. Dela Rama These remedies are alternative, not cumulative.

Filipinas Investement v. Vitug (69) When the creditor can no longer recover from the maker of the note with chattel mortgage because the deficiency is covered by the Recto Law, after the foreclosure of the mortgage, said creditor can still recover balance from the endorse who endorsed “with recourse”. Cruz v. Filipinas Investment (68) C sold to D a car payable on installments. The car was given as security by way of chattel mortgage to secure payment. In addition, the debtor put up a real estate mortgage as further security for the payment of the debt. D did not pay 2 or more installments and so C foreclosed the chattel mortgage. The proceeds therefrom were insufficient and so C wanted to get a deficiency judgment and satisfy it by foreclosing on the real estate mortgage. The established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel bars further recovery (whether by judicial or extra-judicial foreclosure) by the vendor, of any balance on the purchaser’s outstanding obligation not so satisfied by the public sale. To allow further recovery by the foreclosure of the real estate mortgage is contrary to public policy. Northern Motors v. Sapinoso (70) Northern Motors sold a car to Sapinoso on installments. A chattel mortgage was executed on the car sold. When S failed to pay 2 or more installments, NM sought to foreclose the chattel mortgage and asked the court for a writ of replevin. Meantime, S made several payments while the replevin suit was pending. The lower court ruled that NM, by bringing the suit, was barred from accepting any further payments from S and ordered NM to reimburse the amount collected. The court a quo erred in concluding that the legal effect of the filing of the action for replevin was to bar NM from accepting further payments on the promissory note. That the ultimate objective of the action was for the foreclosure of the chattel mortgage is of no moment, for it is the fact of foreclosure “and” actual sale at public auction of the mortgaged chattel that bars further recovery by the vendor of any balance on the buyer’s outstanding obligation not satisfied by the sale. Pascual v. Universal Motors (74) When the seller imposes a double security by a chattel mortgage of the thing sold on installments and another mortgage on another property of the buyer, such is contrary to the public policy sought to be protected by the Recto Law, and the foreclosure of the chattel mortgage on the object of the sale bars recovery on any deficiency. Ridad v. Filipinas Investment (83) The precise purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment, otherwise, the mortgagor-buyer would find himself without the property and still owing practically the full amount of his original indebtedness. The corporation elected to foreclose its mortgage upon default by the plaintiffs in the payment of the agreed installments. Having chosen to foreclose the chattel mortgage, and bought the purchased vehicles at the public auction as the highest bidder, it submitted itself to the consequences of the law as specifically mentioned. Bicol Savings and Loan Asso. v. Guinhawa (90) The prohibition under the Recto Law against recovery does not apply to foreclosure of chattel mortgage constituted to secure a loan and not originating from a sales transaction. Differentiating Pledge and Chattel Mortgage Pledge

CM

In pledge, the pledgor cannot be made answerable for deficiency after foreclosure since the principal obligation is extinguished. Thus, foreclosure of pledge must be your last remedy. Possible Solution: Subject pledge to foreign law.

GR: Action for deficiency is allowed. (Chattel Mortgage Law, Garrido v. Tuason) Exception: Article 1484(3), Civil Code/ Recto Law.

GARRIDO V. TUASON (1968) 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!) 12 | C h a ’ s b a n k i n g n o t e s

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 denied. -Garrido commenced a civil case vs. Pila Tuason, and now with her husband, for the recovery of the alleged balance in the earlier case. MTD filed by Tuason. TC for TUASON, CFI: Affirmed dismissal of civil case in pursuance to Article 2115 of Civil Code: Article 2115 provides: ". . . The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary." WON Garrido could still claim the deficiency? NO, but based on res judicata, not because there was already foreclosure of the CM. *Article 2115 of the Civil Code does not apply to Chattel Mortgage. Article 2115 is inconsistent with the provisions of the Chattel Mortgage Law, and that, accordingly, the chattel mortgage creditor may maintain an action for the deficiency. -TC must have applied 2115 based on Article 2141 of CC which provides that provisions on pledge shall be applicable to chattel mortgages "insofar as they are not in conflict with the Chattel Mortgage Law". But as it does conflict, it should not be applied! HOW CONFLICT? DI ko rin alam eh. Wehe. Eto sabi sa footnote sa case: The last part of the second paragraph of Section 14 of Act No. 1508, provides: SECTION 14. Sale of property at public ". . . The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgages, shall be paid to the mortgagor or person holding under him on demand." Pero hellurh, this contemplates a situation where there is excess in the proceeds of the sale, and not when there's a deficiency. So how does this conflict? TC might have acted under the impression that the first case was for the foreclosure of a chattel mortgage. But the first case was an ordinary money judgment so no previous ruling on foreclosure ...(okay eto pagkagets ko a, since di pa naman judicially ordered ang foreclosure, pede pa magforeclosure on other properties to cover the deficiency of the money judgment. In this case, Garrido prayed for foreclosure and not payment but since the MTC ordered payment instead, no judicial order of foreclosure) SC: Municipal court should have NOT DENIED plaintiff's motion for issuance of alias writ of execution -but since instead of filing an appeal to the denial of his motion, the decision of the MC have been final and executory and thus binding and res judicata on the Civil Action he later filed. NOTE: Why did CM arise? May sale ba or may utang lang? If may sale, A1484 would apply! There's no explicit statement in the Chattel Mortgage law which provides that the creditor could recover deficiency. SC interpreted it and declared that there's such right WITHOUT EXPLAINING WHY… Sir said that in previous cases, the ruling was different but he didn't assign to us the said cases because it was not assigned to him when he was a student... MAGNA FINANCIAL SERVICES GROUP VS. COLARINA

F: Colorina bought on installment from Magna Financial Services a Suzuki Multicab. He executed a PN for the balance of P229,284 and executed an integrated PN and deed of CM over the Multicab as security. -Colorina failed to pay the monthly amortization, with accumulating unpaid balance of P131,607. Colorina still failed to pay inspite of demands so MAGNA filed a COMPLAINT FOR FORECLOSURE of CHATTEL MORTGAGE w/ REPLEVIN -bond was filed by MAGNA, writ of replevin was issued TC: Colarina pay the P131,607 plus penalty + atty's fees + costs. In case of nonpayment, multicab shall be sold at public auction RTC: affrim 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) YEY! Eto na ung sinasabi ni ma'am Chit! BACHRACH MOTOR CO. VS. MILLAN: “Undoubtedly the principal object of the above amendment (referring to Act 4122 amending Art. 1454, Civil Code of 1889) was to remedy the abuses committed in connection with the foreclosure of chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness.” -HERE: MAGNA PRAYED BOTH FOR PAYMENT OF THE OBLIGATION AND FORECLOSURE OF THE CHATTEL. However, by praying for the foreclosure of the chattel, Magna renounced whatever claim it may have under the PN. -Art 1484(3) PROHIBITS OTHER ACTION TO RECOVER ANY UNPAID BALANCE OF THE PURCHASE PRICE AFTER FORECLOSURE. In other words, in all proceedings for the foreclosure of chattel mortgages executed on chattels which have been sold on the installment plan, the mortgagee is limited to the property included in the mortgage. -NATURE OF CONTRACT OF CHATTEL MORTGAGE: conditional sale of personal property given as security for the payment of a debt, or the performance of some other obligation specified therein, the condition being that the sale shall be VOID UPON THE SELLER PAYING OR PERFORMING THE OBLIGATION SPECIFIED. -if condition performed: mortgage and sale immediately become void, mortgagee divested of title -if nonpayment: foreclosure one of the remedies under A1484 …may either be judicial or extrajudicial *** Since the petitioner has undeniably elected a remedy of foreclosure under Article 1484(3) of the Civil Code, it is bound by its election and thus may not be allowed to change what it has opted for nor to ask for more. On this point, the Court of Appeals correctly set aside the trial court’s decision and instead rendered a judgment of foreclosure as prayed for by the petitioner. WON there has been an actual foreclosure of the vehicle Not yet, but since the vehicle is with Magna already and Magna consistently avowed that it elects the remedy of foreclosure, CA correctly directed the foreclosure of the vehicle. SC: A contract of chattel mortgage is the nature of a conditional sale of personality. WITHOUT EXPLAINING WHY IT WAS SO EVEN AFTER SAYING IT WAS INACCURATE, IN CERRA V. RODRIGUEZ. SIR: The characterization of CM as conditional sale has been abandoned since the enactment of Civil Code (A2141 of NCC). (pause)………."Did you notice that my pauses are getting longer and longer?…" (pause)… 1. Dacion en pago with repurchase (as an alternative to foreclosure of mortgage) This set-up is used to do away with foreclosure proceeding Dacion en Pago: mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor property for the satisfaction of monetary debt; extinguish up to amount of property unless w/ contrary stipulation; A special form of payment because 1 element of payment is missing: IDENTITY -result is the same, in the sense that the mortgagor ends up with the property but no foreclosure proceeding… 13 | C h a ’ s b a n k i n g n o t e s

Is this a circumvention of pactum commisorium? YES. Precisely, the mortgage is set aside. NO mortgage to speak of in the first place as it's substituted with another contractual arrangement. But valid as it is under the freedom of the parties to contract. 1. Effect of "stay order" on enforcement of security In Petition for Rehabilitation, the Court may issue a stay order which works as a standstill order prohibiting creditors to enforce their securities. -court needs to see if the petition is sufficient in form and substance "Cram down" clause 1. Foreclosure of Real Estate Mortgage Sir's book: REM may be foreclosed Judicially or extrajudicially: Judicially

Extrajudicially

R68, Rules of Civ Pro

Act 3135

No right of redemption, only an equity of redemption (right of mortgagor to extinguish the mortgage and retain ownership of the property by paying the mortgage debt w/n period of not less than 90d nor more than 120d from entry of final and executory judgment)

Right of redemption GR: 1 yr (individual/natural person) from registration of certificate of sale X: 3 months max for Juridical Persons

**If the mortgagee = bank - follow Section 47 *if mortgagee=bank >>> there's always right of redemption, regardless if judicial or extrajudicial ---w/n 1 year counted from the date of registrationof the certificate of sale in the Registry of Property (Huerta vs. CA) …but period shortened under GBL if JURIDICAL PERSON: 3 months from 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 SECTION 47. Foreclosure of Real Estate Mortgage. — In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate 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) However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. (RIGHT OF THE PURCHASER TO ENTER PROPERTY AFTER SALE - HUERTA VS. CA) Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.

Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, 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 Sec. 1. Any provision of law to the contrary notwithstanding, private real property may be mortgaged for a period not exceeding five years, renewable for another five, in favor of any individual, corporation, or association, but the mortgagee or his successor in interest, if disqualified to acquire or hold lands of the public domain in the Philippines, shall not bid or take part in any sale of such real property as a consequence of such mortgage. Sir: foreign banks can be mortgagees but cannot acquire the property in a foreclosure sale… only entitled to proceeds of the sale Note however that RA 133 specifies judicial foreclosure, not extrajudicial foreclosure (okay, I can't find it anywhere in RA 133…wala namang nakaspecify kung judicial or extrajudicial basta as a consequence of such mortgage) See page 156… REGISTER OF DEEDS VS. CHINA BANKING CORPORATION 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 -CBC submitted matter to the Land Registration Commission for Resolution. LRC: unregistrable HELD: CBC cannot register the property in their name -Section 25, RA 337 par © and (d) ARE NOT APPLICABLE TO ALIEN BANKS! ON PAR ©: "Sec. 25. Any commercial bank may purchase, hold, and convey real estate for the following purposes: (c)Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; -the "debts" referred to are ONLY THOSE RESULTING FROM PREVIOUS LOANS AND OTHER SIMILAR TRANSACTIONS MADE OR ENTERED INTO BY A COMMERCIAL BANK IN THE ORDINARY COURSE OF ITS BUSINESS AS SUCH -"CIVIL LIABILITY" arising from a criminal offense WAS NOT A DEBT RESULTING FROM A LOAN OR A SIMILAR TRANSACTION HAD BETWEEN TWO PARTIES IN THE ORDINARY COURSE OF BANKING BUSINESS ON PAR (D) "Sec. 25. Any commercial bank may purchase, hold, and convey real estate for the following purposes: (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. 14 | C h a ’ s

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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." -the deed of transfer ≠ sale made by virtue of judgment, decree, mortgage, or trust deed held by CBC -real property in question was not purchased by CBC to secure debts due it -debts: refer only to such debts as may become payable to appellant bank as a result of a banking transaction. ON Argument that consti prohibition should be liberally construed to be limited to PERMANENT ACQUISITION OF REAL ESTATE BY ALIENS 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) SECTION 25 = SEC 52 of the NEW LAW SECTION 52. Acquisition of Real Estate by Way of Satisfaction of Claims. — Notwithstanding the limitations of the preceding Section, a bank may acquire, hold or convey real property under the following circumstances: 52.1. Such as shall be mortgaged to it in good faith by way of security for debts; 52.2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or 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) See sir's annotation of the section! "1st paragraph of my annotation… it took me hours to put up this paragraph" El Hobar Filipino: Bank made some effort in GF to sell the property w/n 5 years. So substantial compliance with Section 52. Now there are online sales of the ROPA! PAREDES VS. CA 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. 1. WON spouses have superior right over BF (alleging Buyers in GF) NO. Sale occurred AFTER MORTGAGE in favor of BF registered. A real right or lien in favor of BF had already been established, subsisting over the properties until the discharge of the principal obligation, WHOEVER POSSESSOR OF THE LAND MAY BE. 1. WON Spouses have right to redeem YES. But right already prescribed.

-as successors-in-interest of MICC, they have right to redeem 1 year FROM THE DATE OF REGISTRATION OF THE CERTIFICATE OF SALE W/ THE REGISTRY OF DEEDS. That is, from July 29, 1985 (thus, UNTIL JULY 29, 1986) But since they failed to redeem within said period, right prescribed. Ownership of the subject properties was thus consolidated in favor of BF 1. WON there was a binding AGREEMENT FOR REPURCHASE NO. (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. 1. WON house should have been excluded from the auction sale NO. Article 448, NCC does not apply -The houses purchased by the spouses from MICC are improvements on the properties subjected to the REM, thus covered by the REM as improvements are deemed part of real property 1. WON writ of possession could still be enforced after 8 years from promulgation YES. Right of applicant/subsequent purchaser to request for the issuance of a writ of possession of land NEVER PRESCRIBES 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 BANCO FILIPINO SAVINGS AND MORTGAGE BANK VS. CA Facts: Santiago Memorial Park obtained a loan with BF and executed a REM over a parcel of lot. Because of default, BF foreclosed REM and certificate of sale was issued in favor of BF. -Santiago manifested its interest to exercise its right to redemption and offered as payment P700k (loan was for P500k). Deputy liquidator gave Santiago until end of March 1992 to negotiate payment. Santiago remitted P50k to manifest willingness to redeem property. Santiago later offered P1M for the property. Senior VP demanded later P5,830,000 as purchase price of property. -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 • NO DEFINITE REDEMPTION (offer was not coupled with tender of the price) • Complaint did not state that Santiago tendered correct redemption price w/n redemption period *CA: reversed TC: sustained complaint for redemption a. Complaint alleged that as eary as August 6, 1991 (6 months before the expiration of the statutory period for redemption), Santiago exerted earnest efforts to effect redemption a. Santiago did deposit the price which they believed was the agreed redemption price, with the belief that BF was negotiating in GF a. Granted that Santiago is barred, as the parties entered into a new contract extending period w/n which to purchase property, Santiago could still purchase property ---Santiago tendered payment and consigned amount of P1,300,987.96 in accordance with CA deci HELD: for BF. NO COA for redemption. Regardless if Santiago was diligent in asserting its willingness to pay, REDEMPTION W/N THE PERIOD ALLOWED BY LAW IS NOT A MATTER OF INTENT BUT A QUESTION OF PAYMENT OR VALID TENDER OF FULL REDEMPTION PRICE W/N SAID PERIOD.

*Banco Filipino v. CA (2005): The right of redemption must be exercised within the specified time limit, which is one (1) year from date of registration of certificate of sale. In case of disagreement over the redemption price, the redemptioner may preserve his right of redemption through judicial action which in every case must be filed within the same one (1) year. Note: Redemption amount as provided in Section 47 of GBL is different from that in Rules of Court. This is to insure that the bank will not incur losses. *Provisions of GBL are juxtaposed with ROC provisions. If non bank

Bank

Redemption price: foreclosure sale

Redemption price: mortgage deed + interest

e.g. loan P1M, REM, foreclosed, sold for only P500k What the mortgagor would do to redeem the property is to give you back P500k:: if non-bank P1M+ interests :: if bank RURAL BANKING OF CALINOG VS. CA Facts: To pay the redemption price for the mortgaged property, the owner of the subject property obtained another loan with Rural Banking of Calinog. The mortgagor died, thus, the spouses who were successors of interest of the mortgagor, paid the bank to satisfy the loan with Rural Banking of Calinog (and alleged they paid the whole obligation). However, Rural Bank of Calinog initiated foreclosure proceedings for the said property, claiming the loan was unpaid. Even after the spouses demanded the accounting of the accounts, the bank still proceeded with the foreclosure sale. -Spouses filed complaint for nullification of the sale. MTD filed by Rural Bank, arguing that since the mortgagor has already died, the payments made by the spouses were irrelevant as they were not parties to the mortgage. RTC: for bank CA: For the spouses. They had a COA and irrelevant if they were not parties to the mortgage as they were successors-in-interest HELD: for the spouses! -the spouses had COA: spouses sufficiently alleged that they made payments to discharge the obligation of Carmen Cerbo under the mortgage and that the bank failed to make an accounting of the payments made even after demand of the spouses and that if accounting was indeed made, it would show that the spouses has already discharged of the obligation with the Rural Bank. Whether these allegations entitle private respondents to the reliefs prayed for is a question which can best be resolved after trial on the merits at which each party can present evidence to prove their respective allegations and defenses. -BANK ALREADY FILED ANSWER ADMITTING THAT RESPONDENT GREGORIO CERBANA MADE DEPOSITS AS INITIAL PAYMENT OF REDEMPTION PRICE AND THAT GREGORIO PAID A TOTAL OF P101K, therefore acknowledging that it was Gregorio who was making payments on the loan obligation, even referred to Gregorio as the REDEMPTIONER of the foreclosed property. -ON RELEVANCE OF THE FACT THAT SPOUSES WERE NOT PARTIES TO THE MORTGAGE CONTRACT: SPOUSES' COA MAY BE DIFFERENT FROM THAT OF CARMEN. While the death of Carmen Cerbo certainly extinguished whatever cause of action she had against petitioner, private respondents’ cause of action, based on the allegations in the complaint, was not thereby similarly extinguished. Indeed, assuming the allegations of the complaint to be true, private respondents, having paid the redemption price, have the right to demand an accounting, to be refunded for whatever excess payments they made, and even to redeem the property. Correlatively, petitioner, having accepted payment from private respondents, has the obligation to account for such payment, to return the excess, if any, and to allow redemption. This case is more of a civpro case!

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BUKIDNON DOCTOR'S HOSPITAL VS. METROBANK Facts: Bukidnon Doctor's Hospital obtained a P25M loan from MBTC for the construction of its hospital. It also constituted a REM over the lands over which the hospital would be built as a security. As the Bukidnon Doctor's defaulted, MBTC foreclosed the REM and then was able to buy it. No redemption made by Bukidnon Doctors so MBTC consolidated ownership over the properties. ---however, it was apparent that before the end of the redemption period, Bukidnon Doctor's and MBTC had a lease agreement so that the operation of the hospital erected on the lands mortgaged would not be disrupted. …but after the consolidation of the ownership over the properties, MBTC asked Bukidnon Doctors to vacate the property. Bukidnon Doctors refused, invoking the lease agreement -MBTC filed EX PARTE MOTION FOR WRIT OF POSSESSION w/ RTC RTC: granted WON MBTC ENTITLED TO WRIT OF POSSESSION AS A MATTER OF RIGHT DESPITE THE LEASE AGREEMENT BETWEEN ITSELF AND THE FORMER MORTGAGOR-SELLER? NO where a lease agreement, whether express or implied, is subsequently entered into by the mortgagor and the mortgagee after the expiration of the redemption period and the consolidation of title in the name of the latter, a case for ejectment or unlawful detainer, not a motion for a writ of possession, is the proper remedy in order to evict from the questioned premises a mortgagorturned-lessee. The rationale for this rule is that a new relationship between the parties has been created. What applies is no longer the law on extrajudicial foreclosure, but the law on lease. And when an issue arises, as in the case at bar, regarding the right of the lessee to continue occupying the leased premises, the rights of the parties must be heard and resolved in a case for ejectment or unlawful detainer under Rule 70 of the Rules of Court. Bukidnon Doctors v. MetroBank: In extrajudicial foreclosure, a writ of possession shall be issued as a matter of course upon proper motion after expiration of redemption period without the mortgagor exercising his right of redemption. 1. Other Tax Matters (AS THIS WAS NOT ASSIGNED AND SIR WANTED TO DISCUSS IT, NO PRIOR NOTES. PLEASE BARE WITH ME) Other Tax Matters A. Applicable Taxes 1. Income Tax 2. DST (.5% for loan, .2% for mortgage) 3. Gross Receipt Tax Omnibus Agreement: a contract similar to a syndicated loan which includes volumes of agreements Omnibus Agreement is a tax avoidance scheme since only the higher rate of DST is paid (ie, that of loan). Since guarantee is not subject to DST, it makes no sense to include the same to the agreement since it only raises the base for computation of DST. Problem: Pari Passu Representation violation in view of notarization of mortgage. Solution: There must be waiver of preference re notarization of mortgage agreement. Also, include a provision that the notarization does not apply to the loan. FCDU Tax Transaction with

Tax Status

Resident

10% Final Tax

Non-residents, OBU & local commercial banks including foreign

Exempt

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bank branches 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: -loan agreements and PNs: .5% of the amount in the transaction -pledges, mortgages, trust receipts: .2% of the amount involved in the transaction -but if combine loan+security (omnibus agreement): .5% (higher between the two) -if assignment: P15.00 (tax certificate) FCDUs are taxed differently. The income of FCDUs from foreign currency transactions: 10% final witholding tax (should be with residence: include local KB, local branches of Foreign banks, other fcdus, obus) It used to be that this onshore 10% tax is imposed in lieu of the other taxes. Now the law is not very clear because the "In lieu" of provision was deleted in the NLRC. Intent before was to encourage foreign banks to invest in the Philippines (thus mas konting tax imposed on them). If FCDU derive income from non-foreign currency transaction: regular corporate income tax rate (10%) -if the counterparty is a nonresident: income derived by that nonresident is not taxable here; similarly, the income by FCDU is not taxed. SO favorite customer of a FCDU is a nonresident, as there is no tax! Originating bank structure, the basic…is tax minimizing structure Tax minimizing structure: tax avoidance scheme (not tax evasion) Omnibus Agreement: combine loan with security agreement Mondragon Leisure and Resorts Corporation vs. CA Parties entered into a Originating bank structure =fronting bank structure -idea is the borrower would look for a bank that is exempt from Philippine income tax Either under *tax treaty *NIRC - SEC 32: Financial institutions getting …from their government (a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. Originating Bank Structure This is otherwise known as fronting bank structure. It takes advantage of tax exemption status of foreign lenders. It is a form of tax avoidance. In this structure, a foreign bank acts as creditor on record while domestic bank participates silently.

This involves the transfer of credit risks in a true sale transaction to transform the receivables into asset-backed securities. Due Diligence: Two Types: 1. Prospectus: undertaken by underwriter in offer of securities 2. Securities: undertaken by buyer in insuring that property to be acquired is worth-buying Defense of due diligence in insuring omission or non-disclosure of material facts is but a mitigating circumstance. The SRC only recognizes knowledge defense. Certain Other Matters 1. AMLA (RA 9160) 2.Securities Regulation Code The Code is for consumer protection. The SEC no longer issues “license to sell”, rather it declares securities as defective to protect buyers. Derivative Transactions 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. Derivative: financial asset the price of which is derived from value of other financial assets ISDA: International Swaps and Derivatives Association Types: 1. Option Contract a. Call Option: right, not obligation, of buyer to exercise option to buy PN within a specified period b. Put Option: right, not obligation, of seller to exercise option to sell PN within a specified period 2. Forward Transaction 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

3. 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. 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. 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. Securitization: See Securitization Act of 2004. 17 | C h a ’ s

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Redherring: review of preliminary prospecturs GR: Every security must be registered. Exception: 1. exempt securities 2. exempt transactions 3. offshore offering of securities (ii) is the system of ownership and rights in relation to property other than land sufficiently developed to encourage lending on the security of such property? In the philippine, there are two ways of securing a loan with personal property. This may be done either by a chattel mortgage or through a pledge. Chattel Mortgage Article 2140 of the Civil Code provides: "Art. 2140. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage." There are two principles applicable to chattel mortgages which often create problems for creditors: (1) a chattel mortgage cannot be executed over future property or property not yet in existence at the time the chattel mortgage is executed; and (2) a chattel mortgage may not be executed to secure future obligations. In the case of a real estate mortgage, any improvements introduced on the land after the execution of the mortgage are automatically included in the mortgage, unless they had been expressly excluded. However, Section 7 of Act. No. 1508, otherwise known as the Chattel Mortgage Law, prohibits a chattel mortgage over future property: "A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding." Decisions of the Supreme Court, however, have carved out exceptions to this rule. The Court reasoned that the intention behind the enactment of the Chattel Mortgage Law was to promote business and trade in the philippine, and that it could not have been the intention to apply that prohibition to retail stores open to the public, such as drug, grocery and dry goods stores whose stocks-in-trade are constantly sold and substituted with new stock. The Supreme Court held in one case: "A stipulation in the mortgage, extending its scope and effect to after acquired property, is valid and binding... where the after acquired property is in renewal of, or in substitution for goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods etc. 11 C.J., p.436) Present practice in the Philippine financial community has extended the exception to the rule against a mortgage of future chattels to inventories of raw materials, goods in process and

finished goods. Many lawyers believe that inventories are continually being consumed and subsequently replaced and are of the same nature as stock-in-trade; thus they claim that inventories qualify for this exception. To extend the exception much further, however, would be to tread on uncharted and possibly dangerous ground. For future obligations, a real estate mortgage may secure not only a specific credit accommodation but also all other present and future obligations of a debtor in favor of a creditor. Thus, the Philippine Supreme Court has upheld the validity of a stipulation in a real estate mortgage that the mortgage would secure a specific loan as well as "such other loans or other advances already obtained or still to be obtained by the mortgagors as makers." However, this does not apply to chattel mortgages. The Supreme Court has adhered (although not uniformly) to the rule that a chattel mortgage may not secure future obligations. The reason cited for this rule is the fact that Section 5 of the Chattel Mortgage Law requires the parties involved to execute a so-called affidavit of good faith, in which both parties state: "We severally swear that the foregoing is made for the purpose of securing the obligation specified in the conditions thereof and for no other purpose, and that the same is a just and valid obligation and not one entered into for the purpose of fraud." In Belgian Catholic Missionaries v. Magallanes Press, the Philippine Supreme Court struck down a chattel mortgage that secured an obligation that had not yet been contracted by the mortgagor at the time of the mortgage's execution; the Court explained: "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 contracted." In a subsequent case, however, the Supreme Court held that this ruling would not apply had there been an express stipulation in the mortgage that it would secure future obligations as well. These conflicting decisions appeared to have been resolved, at least temporarily when the Supreme Court in a later case categorically stated: "This deed of chattel mortgage is void because it provides that the security stated herein is for the payment of any and all obligations herein before contracted and which may hereafter be contracted by the Mortgagor in favor of the Mortgagee." However, the Philippine Supreme Court appeared to weaken its position in this ruling by citing as its support part of the Belgian Catholic Missionaries decision, namely that "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 an even later case the Supreme Court held that a chattel mortgage could not secure future advances but only those obligations that were expressly specified in the mortgage, namely "[P=40,000] including the interest thereon, the cost of collection and other obligations owing by the Debtor-Mortgagor to the mortgagee, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the mortgagee. In Philippine National Bank v. Court of Appeals, although the Court could have simply reasoned that future advances could not have been secured by the mortgage because they were future obligations, the Court chose not to. Instead, the Court implied that certain future obligations, such as costs of collection and certain other obligations, could be secured by the chattel mortgage provided they were embraced within the scope of the mortgage. The Court stated: "Applying the principle of ejusdem generis, the term 'other obligations' must be limited to such as are the same nature as interest and costs of collection. The term cannot be enlarged to include future additional advances to debtor-mortgagor. . ." The extent to which future obligations may be secured by a chattel mortgage is thus not yet well settled. Previous decisions of the Philippine Supreme Court suggest that provided that the chattel mortgage expressly includes within its coverage certain well-defined future obligations, then the mortgage would be upheld. Pledge As for creation of pledge, personal or movable property may also be given as security by way of pledge. A pledge is a contract whereby the debtor delivers to the creditor or to a third person by common agreement a movable(or a document that evidences an incorporeal right) for the purpose of securing the fulfillment of a principal obligation. In addition to the delivery of the thing pledged to the creditor to a third person, it is necessary that a description of the thing pledged and the date of the pledge should appear in a public instrument. On the basis of this rule, a deed of pledge, in order to be valid against a third person, 18 | C h a ’ s

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should be acknowledged before a notary public. There is no requirement, however, for the pledge to be registered or recorded in any registry. Incorporeal rights, which are evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents, may also be pledged. In these cases, the instrument proving the right pledged must be delivered to the creditor and, if negotiable, must be endorsed. The difficulties confronting the lender in case shares of stock are pledged to secure a loan is that of ascertaining the value of the shares especially after a default has occurred, unless the shares are listed in the exchange, in which case the market value thereof may easily be determined. C2. Secured financing (a) What mechanisms for taking of security over assets of a corporate borrower are available to financiers in this economy (for example mortgages over land; fixed and/or floating charges over personal property; legal and/or equitable mortgages; debentures; pledges; liens, etc.)? In the main, there are six main classes of security arrangements available to secure the payment and performance of loans and other credit accommodations. They are the following: i. guarantee - where a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so; ii. suretyships - where a person binds himself solidarily with the principal debtor; iii. real estate mortgage - a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to such security immovable property or real rights over immovable property in case the principal obligation is not complied with at the time stipulated. The documents in which the mortgage appears must be recorded in the appropriate Registry of Property, and if the instrument is not recorded, the mortgage is nevertheless binding between the parties. iv) chattel mortgages - a contract by virtue of which personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation; and v) pledges - a contract by virtue of which the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled the thing delivered shall be returned with all its fruits and accessions. (b) In practice, which of these types of security are most commonly employed by financiers? In practice, what is most commonly employed type of security by financiers are real estate mortgages, chattel mortgages, and suretyships. (c) Is there a system of registration in this economy for any of these types of security taken by financiers? For guarantees, suretyships, and pledges, in order for the security agreement to be valid against third parties, it should be acknowledged before a notary public. There's no requirement for the guarantee or pledge agreement to be registered or recorded in any registry. As for Real Estate Mortgages, in order to create a valid mortgage over land, it is necessary to record the mortgage document in the Registry of Property located where the land is situated. However, if the mortgage is not recorded, it is nevertheless binding between the parties to the mortgage. For Chattel Mortgages, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. (d) To what extent are priorities between competing securities regulated? The provisions on Concurrence and Preference of Credits in the Civil Code shall regulate this. C3. Enforcement of securities: (a) When a corporate borrower is in financial difficulties and a secured debt has become due, would it be usual or customary for a secured lender and/or the corporate borrower to attempt to negotiate a suitable arrangement for repayment and/or refinancing before the secured lender invokes legal enforcement methods?

Yes. Usually the corporate borrower shall exert efforts to extend the credit facilitates given to them by their creditors in order that their loans will not be considered as past due. Creditors are amenable to this and are also open to the possibility of entering into a workout for as long as they feel that the corporate borrower will not file for insolvency, suspension of payments, or will dispose of their assets in fraud of their creditors. Once they feel that their security is threatened, then they will not hesitate to seek legal remedy in enforcing such securities. (b) What mechanisms are available to security holders to enforce their securities under the legal system of this economy (For example, power to take possession of the property, power to appoint a receiver, power to foreclose on a mortgage, power to sell the secured property, power to wind up the corporate borrower)? For Real Estate Mortgages, upon default in the principal obligation that it secures, it may be foreclosed either judicially or extrajudicially. In foreclosure proceedings, the property given by way of security is sold at public auctions; the proceeds of the sale are then used to pay or settle the obligations secured by the mortgage. If the proceeds of sale are not sufficient to cover the secured obligations, the creditor has a right of action against the debtor for the deficiency and may file a complaint is court against the debtor for the shortfall. The creditor may not, however, appropriate for himself the mortgaged property given by way of security without going through foreclosure proceedings. The reason is because of Art. 2088 of the Civil Code which states that "the [creditor] cannot appropriate to himself the things given by way of pledge or mortgage, or otherwise dispose of them." A stipulation such as this is known as a pactum commisorium The rationale behind this prohibition is that forfeiture of property given as security has traditionally not been allowed because it was considered to be contrary to morals and public policy. Although a debtor, instead of paying for its obligation in cash, can transfer to his creditor property to satisfy the obligation, a debtor may not grant previous authorization to the creditor to appropriate the property mortgaged or pledged as the latter's own payment of the debt. Thus, a stipulation in a mortgage that, in case of default of payment, the mortgaged property would be considered full payment "without further action in court" is held to be null and void as a pactum commisorium. A Real Estate Mortgage may be foreclosed judicially or extrajudicially. It is foreclosed judicially if the mortgagee files a complaint in court for foreclosure of the mortgage pursuant to the Rules of Court. A real estate mortgage may be foreclosed extrajudicially if the real estate mortgage grants a power of attorney to the creditor allowing it to do so. Because of the expense, inconvenience and length of time that a judicial proceeding for the foreclosure of a mortgage would ental, almost all mortgages contain a clause authorizing extrajudicial foreclosure of the mortgage. Practically all defaulted mortgages are now foreclosed extrajudicially. As with a real estate mortgage, a chattel mortgage may also be foreclosed judicially or extrajudicially. However, as with a real estate mortgage, practically all chattel mortgages are foreclosed extrajudicially because of the time and expense that a judicial proceeding would require. Similar to a real estate mortgage, any provision in the contract granting the creditor the right to appropriate the thing mortgaged upon debtor default is null and void as a pactum commisorium. As for pledges, if the debtor defaults in its obligation, the creditor may foreclose the pledge by having the thing sold at a public auction by a notary public. The debtor and the owner of the thing pledged must be given prior notice of the sale. If at the first sale the thing is not sold, a second one with the same formalities must be held; and, if at the second auction there is no sale, the creditor may appropriate the thing pledged. In this case the creditor must give an acquittance for its entire claim. At the public auction, both the pledgor and owner may bid, and they will have first claim if they offer the same terms as the highest bidder. The creditor may also bid, but its offer will not be valid if it is the only bidder. All bids at the public auction must be for cash, and, if the creditor accepts any other bid, it will be deemed to have received cash. After the auction, the pledge must promptly advise the pledgor of the results. Any provision in a deed of pledge granting the creditor the right to appropriate as its own the thing pledged increase of default is null and void as a pactum commisorium. Upon foreclosure of either a real estate or chattel mortgage, the creditor may bring an action in court against the debtor for any deficiency in case the proceeds of the foreclosure sale are not 19 | C h a ’ s b a n k i n g n o t e s

sufficient to cover the secured obligations. In the case of a pledge, however, the sale of the thing pledged at a foreclosure sale extinguishes the principal obligation that it secures, 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 the amount, the debtor is not entitled to the excess, unless it is otherwise agreed. Likewise, if the price of the sale is less, the creditor is not entitled to recover the deficiency, unless there is a stipulation to the contrary. The creditor, however, is not obliged to foreclose a pledge. It may choose instead to sue in court on the principal obligation rather than foreclosure. If the creditor prevails in the court action, it may then have the pledged property sold at an execution sale. If the proceeds of the execution sale are not sufficient to cover the secured obligations, the creditor may then recover the deficiency by levying upon other assets of the debtor. The fact that the creditor is granted possession of the thing pledged may provide a creditor with a greater degree of security than a chattel mortgage. However, many creditors dislike pledges because it is practically impossible to recover any pledge deficiency. An attempt can be made to combine both a chattel mortgage and a pledge by having a chattel mortgage registered in the chattel mortgage register while also delivering possession of the mortgaged chattel to the creditor. Although this would appear to grant the creditor the best features of both a chattel mortgage and a pledge, most lawyers in the philippine would be unwilling to express the opinion that such an arrangement would not be construed as a pledge. A creditor may still be unable to recover any deficiency in case of foreclosure. For an antichresis, a contract of antichresis is self-executing and need not await the occurrence of an event of default under the principal obligation. Thus, there is no requirement of foreclosure since the creditor in possession of the debtor's property merely harvests the fruits and applies them in payment of the debtor's obligation. (c) Do these methods include that a secured creditor may 'self-enforce' the security (ie, without the need for an order of a court or the consent of a regulatory authority)? See answer in C3(b). (d) In practice, which method(s) of enforcement are most commonly employed by security holders? See answer in C3(b). (e) Briefly describe the process involved in these method(s). See answer in C3(b). Pasted from 1. Other Tax Matters 1. Applicable Taxes 1. Income Tax 1. DST 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): Transaction

DST to be paid

*200M Loan agreement

300T

*100M Loan agreement

150T

*50M Loan Agreement

75T

*REM securing the 200M and 100M loan

600,010

*CM securing the 200M & 100M loan

600,010

*guarantee securing the 50M loan

0

*but if there's an omnibus agreement, pay P700,010 or P675,010 From Sir's lecture the other meeting: 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: -loan agreements and PNs: .5% of the amount in the transaction -pledges, mortgages, trust receipts: .2% of the amount involved in the transaction -but if combine loan+security (omnibus agreement): .5% (higher between the two) -if assignment: P15.00 (tax certificate) 1.

Gross Receipts Tax

1. Taxation of FCDUs and OBUs RA 9294 GR: All income derived from transactions with NONRESIDENTS are EXEMPT from all taxes X: interest income from foreign currency loans with RESIDENTS: subject to 10% final tax rate From Sir's lecture the other meeting: FCDUs are taxed differently. The income of FCDUs from foreign currency transactions: 10% final witholding tax (should be with residence: include local KB, local branches of Foreign banks, other fcdus, obus) It used to be that this onshore 10% tax is imposed in lieu of the other taxes. Now the law is not very clear because the "In lieu" of provision was deleted in the NLRC. Intent before was to encourage foreign banks to invest in the Philippines (thus mas konting tax imposed on them). If FCDU derive income from non-foreign currency transaction: regular corporate income tax rate (10%) -if the counterparty is a nonresident: income derived by that nonresident is not taxable here; similarly, the income by FCDU is not taxed. SO favorite customer of a FCDU is a nonresident, as there is no tax! 1. Tax Minimizing Structures 1. Omnibus Agreement *An omnibus loan agreement is a loan agreement with the mortgage agreement already included as one of the provisions *should also include a waiver (if mortgage is REM) of the credit preferences in NCC as a loan agreement with pari passu provision requires that the loan agreement should not be notarized. However, REM is required to be notarized. 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) Mondragon Leisure and Resorts Corp. v. CA F: Mondragon International Philippines, Inc. (MIPI), Mondragon Securities Corporation (MSC) and Mondragon Leisure and Resorts Corporation (MLRC) entered a lease agreement with CLARK DEVELOPMENT CORPORATION (CDC) for the development of Mimosa Leisure Estate. 20 | C h a ’ s b a n k i n g n o t e s

-Omnibus agreement in this case composed of: *loan agreement for US$20M *Pledge of US$20M worth of MIPI shares of stocks *assignment, transfer and delivery of all rights, titles and interest in the pledged shares *assignment of leasehold rights over the project and all the rights, title, interests and benefits to and under any and all agreements in connection with the project ***the case does not really show how an omnibus agreement is a tax minimizing scheme but gives an example of an omnibus agreement 1. "Originating bank" structure (a.k.a. "Fronting Strcuture") (from Sharry's Notes) This is otherwise known as fronting bank structure. It takes advantage of tax exemption status of foreign lenders. It is a form of tax avoidance. In this structure, a foreign bank acts as creditor on record while domestic bank participates silently. From Reviewer: In this structure, a fronting entity/bank which enjoys TAX-EXEMPTION or a LOWER TAX RATE under prevailing tax laws "FRONTS" for what would otherwise be direct lenders to a borrower. The fronting bank (F) lends dollars/money to borrower (B), a local company, w/o need of witholding taxes on interest payments because of the tax-exemption or tax treaty overrides (lower taxes). F is actually a "FRONT", and thereby turns around and executes a participation agreement w/local banks FCDUs, in effect making these local bank FCDUs "silent participants". Another variation involves the booking of the "front" (like IFC) of an "A" loan in its books, and another "B" loan, participated in by local banks for which the "front" acts as such. From Sir's lecture last time: Originating bank structure =fronting bank structure -idea is the borrower would look for a bank that is exempt from Philippine income tax Either under *tax treaty *NIRC - SEC 32: Financial institutions getting …from their government (a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. *Feeling ni Cha ganito un… 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. 1. Project Financing Reviewer on Project Financing: Project Financing is the financing of an economic asset capable of generating enough revenues to cover operation costs and debt servicing for a duration of time longer than the life of such asset. It is most often undertaken in projects involving electricity and power generation, transportation infrastructures and the like. What usually happens is that a sponsor undertakes to cover the initial financing of the project,

lenders are resorted to cover the deficiency, a SPECIAL PROJECT VEHICLE (SPV) is established (which is usually a joint venture or limited partnership) to undertake the building of the infrastructure, the SPV enters into a loan agreement with the lenders backed by securities: mortgage over the assets of the SPV and pledge of equity of sponsors…. (hay, basta on page 10) SIR in lecture Relates to infrastructure projects you see around e.g. MRT, power plants, skyway… You have a project, its economic life more or less is more than 25 years (must exceed the term of the loan). It is anticipated by the lenders that the project would earn revenues because the lenders would look at the revenues… -it is a without recourse transaction so the lenders usually need an offtaker If the project does not earn revenues, the lenders would not get paid. So it is essential for the project to have an offtaker (entity that's going to buy the public project?) e.g. in powerplant project OFFTAKER: NPC (WON NPC uses the electricity generated by the power plant, NPC has to pay) In MRT Offtaker: DOTC (even if nobody rides the train, DOTC would still pay the periodic lease payments) Sponsors of the project -it would establish a special purpose company SPONSORS >>>establish>>> SPECIAL PURPOSE COMPANY (SPV) >>> Sponsors would provide an EQUITY which would fund the project (but it's not sufficient) so there would be lenders that would put money in the company LENDERS: mainly banks and multilateral development banks such as ADB, US EXIM Bank or Japan EXIM Bank… >>>The project company would mortgage to the lenders (trustee designated by the lenders) the property/equipment/facilities >>>there would be REM, CM, pledge of shares (pledged by the sponsors in favor of the lenders not because the shares are very valuable on the standpoint of the lenders…but for the lenders to be able to take over the project company just in case the sponsors would not be able to pay the loan >>>to make sure that the revenues are all delivered and remitted to the lenders, there's the TRUST RETENTION ACCOUNT/AGREEMENT wherein all revenues from the project would be remitted e.g. all payments from NPC are remitted to the trust account managed by the trustees of the lenders. If for instance there's a need to pay the employees of the project company, a request would be made to the trustee of the account to release (disburse) money from the account (the diagram drawn by sir "looks like a waterfall" so it is called cash waterfall account) >>>the issue is WON the company could be owned by foreigners (as usually, foreigners provide the funds) -SC ruling said that (implicitly) yes, because the actual operation is nationalized, not the facilities - para ngang may ganito na pinabasa on MRT Operation Maintenance Agreement -usually lenders require technicians to run the facility to make sure that it would earn revenues Inter-Creditor Agreement -lenders agree among themselves how to synchronize their activities in case there's a default OMNIBUS AGREEMENT -contain all these agreements!!! 1. Mechanism 21 | C h a ’ s b a n k i n g

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-without recourse financing -There must be a guaranteed taker/purchaser of the output of the project -e.g. MRT >>riding public Power plant >> NPC -lenders look to revenues of the project as the main soure of the payment (hence, it is important that the project is earning money) 1. BOT and similar arrangements -there are several Field List transfer: the arrangement in MRT Rehabilititate-Operate-Transfer: rehabilitate Rehabilitate-Own: *Unsolicited Proposal e.g. Megaworld Proposal -develop hectares of land in Global City e.g. Terminal 3 BOT Law 1. Derivative Transactions 1. Concept Financial asset derived from another financial asset i.e. option on treasury bill CALL OPTION: option to buy PUT OPTION: option to sell -the option is called a derivative *buyer: one who wants the option seller/writer: one giving the option *American Option: exercise option before the strike date (any time during the option period) -more flexible but higher premium *European Option: exercise option on the strike date (end of the option) -stricter but lower premium *Bermudan Option: Exercise option on any date DERIVATIVE CONTRACT -contract for the differences -concerned with the differences between the price on strike date and price on trade date i.e. forward foreign exchange contract TRADE DATE: P57 = $1 After 3 months (strike date): P60 = $1 -the buyer is said to be "in the money" because ha has a gain of P3/$1 BUT IF DURING THE STRIKE DATE… P56 = $1 -buyer is "out of money" because he loses P1/$1. Hence, he shall forego the option and will buy the dollars elsewhee. *CURRENCY SWAP -simultaneous purchase and sale of currency involving the same counter party From reviewer: DERIVATIVE -a financial instrument, the value of which is dependent upon the price of one or more other assets, such as commodities, foreign currencies, etc. -rephrase: they are financial assets which derive their value from other financial assets such as: (1) equity, securities (2) fixed-income securities (3) foreign currency and

(4) commodities -aka Contracts for differences: difference between agreed future price and actual price DERIVATIVE TRANSACTION -one that involves derivatives -purpose: manage risks of exposure/investment to the underlying financial assets it represents -it can either be OPTIONS OR FORWARDS 1. 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 1. 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 From Sharry: 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. On CURRENCY SWAP: -It is the simultaneous buying and selling of currencies involving spot (near leg) and forward (far leg) rates. ***A bank cannot engage in derivative transactions without necessary BSP license. Example ni sir from lecture FORWARD: buy currency from the future e.g. you're a borrower, you earn an interest rate every 6 months at $1. You want to lock the interest rate. Let's assume that the Exchange rate is $1=P50 -you enter into a forward contract, you buy $1 which is equivalent to P50. …6 months from now: Supposing exchange rate is $1.00=P60

You made the right decision! In the money: you would exercise your option! (you anticipate a gain)

$1.00= P50

Out of the money: the market price 6 months from now is lower than the agreed price under the forward agreement - you would not exercise your option to buy (you would just lose the premium you paid). You would buy somewhere else not under forward contract

$1.00=P55

At the money

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2 Derivatives In the Philippines 1. Equity related securities 1. Exchange for Debt Securities All other transactions outside the exchange are called OTC (over the counter): IN US 1. New York Future Exchange 1. New York Cotton Exchange 1. CSCE (Coffee Sugar and Cocoa Exchange) -commodities Exchange In Exchange: you have remedy: clearing agency makes sure that the buyer is able to pay and the seller is able to deliver Exchange Traded Derivatives -governed by agreements in prescribed forms -OTC derivatives: there's an organization that took initiative to provide uniform documentation (International Swaps and Dealers Association -ISDA) - see below CROSS-CURRENCY SWAP (refer to diagram on page 48 of the reviewer) 1. BSP Licensing Requirements Section X602 (BSP Circular) -the license will enable the licensee to engage in currency forwards and currency swap 2 Types of License: a. Regular Derivative license: any bank, NBQB, affiliate a. Expanded Derivative License: only Commercial and universal banks can apply BSP Circ. No. 102-95 Section 2. General Authority -any *BANK *NBQB *And or its subsidiaries/affiliates …may engage in financial derivatives activities upon prior approval of the BSP -a bank may engage in derivative activities BOTH in its RBU and FCDU/expanded FCDU BSP Circ. No 297-01 a. for expanded derivatives authority SCOPE: ONLY UBs and KBs -what may be done after acquiring license: may *trade *Sell *deal *take positions in currency swap *forward of any tenor as well as all other derivatives for their own account or on behalf of customers b. For regular derivatives authority SCOPE: other Financial institutions (Fis) supervised by the BSP pede -what may be done after acquiring license: may *sell derivative products to its customers PROVIDED >FI shall hedge such derivatives >the risk being hedged is already existing with the FI itself c. No license derivatives

SCOPE: UB and KB w/ no license -what may be done: *trade *sell *deal *take positions for their own account or in behalf of customers in currency swaps and *forwards w/ tenor of one year or less *sell other derivative products of licensed entities to its customers PROVIDED >customer currently has a risk w/ the bank it wishes to hedge d. For engaging in derivative transactions as end-users SCOPE: Banks, NBQB, Other BSP supervised FI -no license needed as they are purely end-users BSP Circ 594 -latest Circular on derivative transactions *if banks does hedging, no need for license but other than that, needs special license *corporates (corporations): not governed by BSP, it would depend on the articles of incorporations on WON they could enter into derivative transactions (or else, transaction is ultra vires) ---in other jurisdictions, corporates does not do ultra vires transactions: they could do anything! But sir thinks it's better to regulate the activities of the corporates…because it sounds good… ultra vires…:) ) 1. ISDA Master Agreements 1992 ISDA MASTER AGREEMENT (international swap dealer's association) -standardize documentation -cannot modify terms of agreement -have to use schedule to change the agreement -one of the most carefully drafted agreement -has 7 pages long of lists of Derivative Agreements 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 Onapal Philippines Commodities, Inc. v. CA F: Onapal is a registered and licensed commodity futures broker. Susan Chua was invited by Diaz, Account Exec. Of Onapal, to invest in the commodity futures trading by depositing P500k 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 23 | C h a ’ s

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I: WON the TRADING CONTRACT is VALID HELD: VALID IN ITSELF BUT TRANSATION CARRIED OUT TO IMPLEMETN IT VOID Commodity Fixtures Contract -specie of securities -agreement to buy or sell a specified quantity and grade of a commodity at a future sale at a price established at the floor of exchange Terms of Contract signed by Chua -Onapal will act as broker and will directly transmit the order of customers (includes Chua) to its principal Frankwell Enterprises in HK. The later will then place the order to Tokyo Exchange. -however, in this case, there was no evidence that the orders and the money were transmitted to Frankwell. *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. 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, NO…But is it goods? Look at A1636: Goods defined. It excludes money and legal tender in the Philippines. It is implied to include foreign exchange. If that is the case, then is Forex supposed to be contemplated under Art 2018? SIR says no, because introductory paragraph of A1636 states that the definition of goods undr that article is for the title of sales, not under the title of aleatory contracts. SO A2018 does not contemplate forex. First Philippine International Bank v. CA F: First Philippine International Bank went insolvent H: Cherry picking (liquidator picks out the contracts not favorable to the insolvent bank) is not allowed. The conservator is not allowed to disregard contracts unfavorable to the insolvent bank. -power of conservator is not unilateral... SECTION 70, insolvency law -prohibits the sale, transfer, etc. of the assets of the insolvent 1 month prior to filing for insolvency -does not apply to banks and insurance companies because they have their own set of insolvency rules

FPIC v. CA: Cherry picking is not allowed in Philippine jurisdiction. The powers granted to the conservator, enormous and extensive as they are, cannot extend to the post facto repudiation of perfected transactions. Otherwise, they would infringe upon non-impairment of contracts clause in Constitution. SIR: -because of the single transactions clause, there's no cherry picking because there would only be one cherry to pick +page 177 of sir's book

1. Securitization 1. Concept -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) -receivables transformed into securities DIFFERENTIATED FROM AN SPV: SPV: involves bad debts Securitization: performing receivables (credit card receivables, PLDT) 1. 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

1.

Securitization Act of 2004 (RA 9267) SECTION 3. Definition of Terms. - For purpose of this Act, the term: (a) "Securitization" means the process by which assets are sold on a without recourse basis by the Seller to a Special Purpose Entity (SPE) and the issuance of asset-backed securities (ABS) by the SPE which depend, for their payment, on the cash flow from the assets so sold and in accordance with the Plan. (b) Asset-backed securities (ABS)" refer to the certificates issued by an SPE, the repayment of which shall be derived from the cash flow of the assets in accordance with the Plan. (c) "Assets", whether used alone or in the term "Asset-backed securities," refer to loans or receivables or other similar financial assets with an expected cash payment stream. The term "Assets" shall include, but shall not be limited to, receivables, mortgage loans and other debt instruments: Provided, That receivables that are to arise in the future and other receivables of similar nature shall be subject to approval by the Securities and Exchange Commission (SEC) or the Bangko Sentral ng Pilipinas (BSP), as the case may be: Provided, further, That the term "Assets" shall exclude receivables from future expectation of revenues by government, national or local, arising from royalties, fees or imposts. (d) "Asset Pool" means the group of identified, homogeneous assets underlying the ABS. (e) "Commission" refers to the Securities and Exchange Commission (SEC). (f) "Credit Enhancement" means any legally enforceable scheme intended to improve the marketability of the ABS and increase the probability that the holders of the ABS receive payment of amounts due them under the ABS in accordance with the Plan. 24 | C h a ’ s

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(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 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 asset-backed securities (ABS) ABS: receivables that were acquired by the SPE --it's source or repayment would come from the obligors of the receivables --the holders of ABS are looking to the payments from the obligors, in a sense, it's a limited recourse HOW DONE: Collateralization e.g. Issue is P1M, the pool of receivables supporting it is 1%, SELLER of the receivables = originator = Globe, Smart, PLDT… Servicer = can also be the originator SPT: trust department can act as one. A mere account w/n trust department (there can be several SPTs in one trust department) SPC: corporation that is formed and established for the purpose of that single securitization transaction --more cumbersome: should have board of directors, meet reporting requirements of SEC…etc. ----HOWEVER, if you use an SPT, it would be easier than SPC! -but why is it that there's not much securitization transactions: a bank that want to enter a securitization transaction CANNOT USE ITS OWN TRUST DEPARTMENT! The SPT must be independent from the ORIGINATOR! -sir says this should be reversed as the trust department of a bank is separate and distinct from the bank's operations! -what entity in the Philippines expect lots of receivables? BANKS!!! 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…) 1. Due Diligence Due diligence team in a lawfirm: examines an entity… 2 types: 1. Prospectus Due Diligence

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

1. Certain Financial Products/Exoteric Structures (not EXOTIC!!!) 1. Trade Account/Brokering e.g. SMC has several dealers…SMC delivers products to SMC, Dealers would not pay all at once SMC could mandate a bank to look for investors that would buy the receivables -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) 1. Credit-Linked Notes/Deposits E.g. Foreign bank buys RP bonds? For $1M -but foreign bank worries about credit-worthiness of RP (no-election news…) so it wants to get rid of the transaction with RP. SO bank issues CLN to a local bank, local bank gives $1M to foreign bank in exchange of CLN. The agreement is that the CLN would carry a higher interest than the credit rate… then I'm lost… 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. 1.

Certain Other Matters Anti-Money Laundering Act Financial Action Task Force (FATF): a task force organized by developed countries which identified noncooperative countries (Philippines was formerly included in it, together with Nauru and Russia) -if the Philippines did not comply with it w/n the deadline, there's a sanction! (money remittances to the Philippines would be cross checked, meaning delay in the receipt of remittances in the Philippines) -however, 1st AMLA was not compliant in certain aspects. AMLC: authorized to freeze assets but this power taken out from it, should petition CA for freezing of assets (but this is problematic because a mole in the SC could easily inform the money-launderer of the attempt to freeze the latter's assets, and thus the account would be w/drawn) - The 2nd AMLA was inferior from the 1st one but it became compliant because the one who checked it wined and dined with Congressmen! On cases when there's no need for freezing order from CA: *Hi-jacking

1.

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*Drug trafficking (as if the first thing that the violators would do is to deposit the proceeds of their illegal acts in the banks!) -there's also suggestion that lawyers be whistle-blowers: BUT THIS WOULD NOT DO BECAUSE OF THE CONFIDENTIALITY AGREEMENT BETWEEN LAWYERS AND CLIENTS -there are many recommendations of the FATF: but only few are taken -among the recommendation is to amend the bank secrecy law… -threshhold amount lowered…if you transact with covered institutions and the amount of the transaction is above the threshold, the bank is obligated to file a CTR…but 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…) 1. Securities Regulation Code -statute in Securities law, among which are: *Truth in lending act *GBL provs: truth in borrowing act *SRC: truth in securities act -persons who want to sell securities need to comply with the requirements of registration by SEC Exceptions: 1. Exempt securities: when sold to the public, no need to register it (example, gov't securities issued to the public…) 1. Securities sold in transactions classified as exempt in SEC: e.g. Private placement ---just file with SEC a notice/form of exception w/n 10d from date of sale 1. Offshore offering: not covered by SEC because SEC would not have jurisdiction over sale of securities outside the Philippines *SEC could come up with a list of exempt securities and transactions *some of the list are discussed in Sir's book…which is unfortunately out of stock… hehe. -Any public offering of securities is prohibited unless the securities are registered w/ SEC and SEC has declared effective the Registration Statement PRIVATE PLACEMENT: sale to not more than 19 nonqualified buyers (qualified buyers are the banks, financial institutions) PUBLIC OFFERING: random or indiscriminate offering to the public (any member of qualified buyers) Qualified buyers: they can fend for themselves ***To avoid regulation by the SEC: OFFSHORE OFFERING: a contract is signed abroad and payments are made through FCDU INSIDER TRADING: when you are in possession of information not known to the public, you're not supposed to trade with that shares until the public was made aware of the information (only after disclosure can an insider trade) -insider trading rules meant to remedy the asymmetry in information to make the insider and non-insider pari passu in terms of information -INSIDER: given, you have access to non-public information from an insider (insider becomes the Tipper, you become a Tippee) -insiders mandated to disgorge "short-swing profit" (if you were able to detect transactions in which the insider has made money, then the net gain must be disgorged by the insider) turnover the profit to the company 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 -for corporations

FINALS: Oct 17 -from security devices til end (focus on the principles, not on ready-made answers!)

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