Prudential Bank vs.

IAC
FACTS:

August 8, 1962: Philippine Rayon Mills, Inc.(PRMI) entered into a contract with Nissho
Co., Ltd. of Japan for the importation of textile machineries under a 5-year deferred
payment plan

To effect the payment, PRMI applied for a commercial letter of credit with the
Prudential Bank and Trust Company in favor of Nissho.

Prudential Bank opened Letter of Credit No. DPP-63762 for $128,548.78

Against this letter of credit, drafts were drawn and issued by Nissho, which
were all paid by the Prudential Bank through its correspondent in Japan, the Bank of
Tokyo, Ltd.

2 of these drafts were accepted by PRMI through its president,

Anacleto R. Chi, while the others were not

Upon the arrival of the machineries, the Prudential Bank indorsed the shipping
documents to the PRMI which accepted delivery of the same.

To enable PRMI to take delivery of the machineries, it executed, by prior

arrangement with the Prudential Bank, a trust receipt which was signed by Anacleto R.
Chi in his capacity as President of PRMI company

At the back of the trust receipt is a printed form to be accomplished by 2

sureties who, by the very terms and conditions thereof, were to be jointly and severally
liable to the Prudential Bank should the PRMI fail to pay the total amount or any portion
of the drafts issued by Nissho and paid for by Prudential Bank.

The PRMI was able to take delivery of the textile machineries and installed the
same at its factory site

1967: PRMI ceased business operation

December 29, 1969: PRMI's factory was leased by Yupangco Cotton Mills for an
annual rental of P200K T

January 3, 1973: lease was renewed

January 5, 1974: all the textile machineries in PRMI's factory were sold to AIC
Development Corporation for P300K

The PRMI's obligation from the letter of credit and the trust receipt remained unpaid
and unliquidated despite repeated demands

October 3, 1974: present action for the collection of the principal amount of
P956,384.95 was filed on against PRMI and Anacleto R. Chi.

RTC: PRMI ordered to pay for the 2 drafts which were accepted the 10 were not yet
accepted and for Chi it was dismissed

CA: Affirmed

relationship governed by specific contracts: application for letters of credit,

the promissory note, the drafts and the trust receipt

acceptance of the drafts by Philippine Rayon was indispensable to make the

latter liable
ISSUE: W/N presentment for acceptance of the drafts was indispensable to make PRMI liable
HELD: NO. Petition GRANTED. Philippine Rayon Mills, Inc. liable on the 12 drafts. Anacleto R.
Chi (as guarantor) secondarily liable on the trust receipt

letter of credit

an engagement by a bank or other person made at the request of a customer

that the issuer will honor drafts or other demands for payment upon compliance with
the conditions specified in the credit.

Through a letter of credit, the bank merely substitutes its own promise to pay
for one of its customers who in return promises to pay the bank the amount of funds
mentioned in the letter of credit plus credit or commitment fees mutually agreed upon.

affording celerity and certainty of payment

In the instant case

drawee (to whom drafts were presented for payment) = Prudential Bank

no need for acceptance as the issued drafts are sight drafts

NOTE: sight drafts vs. after sight drafts
Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the Negotiable Instruments Law (NIL).
Sec. 143. When presentment for acceptance must be made. - Presentment for acceptance
must be made:
(a) Where the bill is payable after sight, or in any other case, where presentment for
acceptance is necessary in order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place of business of
the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the
bill liable.

acceptance of a bill

signification by the drawee of his assent to the order of the drawer

may be done in writing by the drawee in:

the bill itself, or

a separate instrument

PRMI immediately became liable upon Prudential Bank's payment - essence of the
letter of credit issued by the Prudential Bank

trust receipt

banker advances money to an intending importer

banker takes the full title to the goods at the very beginning until the goods
are sold and the vendee is called upon to pay for them

any transaction by and between an entruster, and entrustee, whereby the

entruster, who owns or holds absolute title or security interests' over certain specified
goods, documents or instruments, releases the same to the possession of the entrustee
upon the latter's execution and delivery to the entruster of a signed document called
the "trust receipt" wherein the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell or otherwise dispose of
the goods, documents or instruments with the obligation to turn over to the entruster
the proceeds thereof to the extent of the amount owing to the entruster or as appears in
the trust receipt or the goods, instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions specified in the
trusts receipt, or for other purposes substantially equivalent to any one of the following
ISSUE:
Whether presentment for acceptance of the drafts was indispensable to make Philippine
Rayon liable thereon.
RULING:
In the case at bar, the drawee was necessarily the herein petitioner. It was to the latter that
the drafts were presented for payment. There was in fact no need for acceptance as the
issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases
expressly provided for in Section 143 of the Negotiable Instruments Law (NIL). The said
section provides that presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where presentment for
acceptance is necessary in order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place of
business of the drawee.

In no other case is presentment for acceptance necessary in order to render any party to the
bill liable. Obviously then, sight drafts do not require presentment for acceptance.
ISSUE:
Whether or not a valid RE mortgage can be constituted on the building erected on the

belonging to another.
HELD:
A real estate mortgage can be constituted on the building erected on the land belonging to
another.
The inclusion of building distinct and separate from the land in the Civil Code can only mean
that the building itself is an immovable property.
While it is true that a mortgage of land necessarily includes in the absence of stipulation of
the improvements thereon, buildings, still a building in itself may be mortgaged by itself
apart from the land on which it is built. Such a mortgage would still be considered as a REM
for the building would still be considered as immovable property even if dealt with
separately and apart from the land.
The original mortgage on the building and right to occupancy of the land was executed
before the issuance of the sales patent and before the government was divested of title to
the land. Under the foregoing, it is evident that the mortgage executed by private
respondent on his own
building was a valid mortgage.
As to the second mortgage, it was done after the sales patent was issued and thus prohibits
pertinent provisions of the Public Land Act.
Bank of America NT & SA v Court of Appeals and Francisco et. al G.R. No. 105395
December 10, 1993
There would at least be three (3) parties: (a) the buyer, who procures the letter
of credit and obliges himself to reimburse the issuing bank upon receipts of the
documents of title; (b) the bank issuing the letter of credit, which undertakes to
pay the seller upon receipt of the draft and proper document of titles and to
surrender the documents to the buyer upon reimbursement; and, (c) the seller,
who in compliance with the contract of sale ships the goods to the buyer and
delivers the documents of title and draft to the issuing bank to recover payment.
Facts : Bank of America received an Irrevocable Letter of Credit issued by Bank of Ayudhya
for the Account of General Chemicals Ltd., Inc. for the sale of plastic ropes and agricultural
files. Under the letter of credit, Bank of America acted as an advising bank and Inter-Resin
Industrial Corp. (IR) acted as the beneficiary. Upon receipt of the letter advice, Inter- Resin
told Bank of America to confirm the letter of credit.
Notwithstanding such instruction, Bank of America failed to confirm the letter of credit. InterResin made a partial availment of the Letter of Credit after presentment of the required
documents to Bank of America. After confirmation of all the documents Bank of
America issued a check in favor of IR. BA advised Bank of Ayudhya of IRs availment under
the letter of credit and asked for the corresponding reimbursement. IR presented documents
for the second availment under the same letter of credit. However, BA stopped the
processing of such after they received a telex from Bank of Ayudhya delaring that the LC
fraudulent. BA sued IR for the recovery of the first LC payment.
The IR contended that Bank of America should have first checked the authenticity of the
letter of credit with bank of Ayudhya
Issue: Whether or not Bank of America may recover what it has paid under the letter of
credit to Inter-Resin
Held : May Bank of America then recover what it has paid under the letter of credit when the
corresponding draft

There would at least be three (3) parties: (a) the buyer, who procures the letter of credit and
obliges himself to reimburse the issuing bank upon receipts of the documents of title; (b) the
bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft
and proper document of titles and to surrender the documents to the buyer upon
reimbursement; and, (c) the seller, who in compliance with the contract of sale ships the
goods to the buyer and delivers the documents of title and draft to the issuing bank to
recover payment.
The services of an advising (notifying) bank may be utilized to convey to the seller the
existence of the credit; or, of a confirming bank 16 which will lend credence to the letter of
credit issued by a lesser known issuing bank; or, of a paying bank, which undertakes to
encash the drafts drawn by the exporter. Further, instead of going to the place of the issuing
bank to claim payment, the buyer may approach another bank, termed the negotiating
bank, 18 to have the draft discounted.
Bank of America has acted independently as a negotiating
from the hardship of presenting the documents directly to
payment. As a negotiating bank, Bank of America has a right
bank and until reimbursement is obtained, Inter-Resin, as the
to assume a contingent liability thereon.

bank, thus saving Inter-Resin

Bank of Ayudhya to recover
to recourse against the issuer
drawer of the draft, continues

Furthermore, bringing the letter of credit to the attention of the seller is the primordial
obligation of an advising bank. The view that Bank of America should have first checked the
authenticity of the letter of credit with bank of Ayudhya, by using advanced mode of
business communications, before dispatching the same to Inter-Resin finds no real support.
Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 35 SCRA 253
(1970)
FACTS:-On four (4) diffierent occasions in 1961, the De Reny Fabric Industries, Inc., a
Philippine corporation, applied to theBank for four (4) irrevocable commercial letters of
credit to cover the purchase by the corporation of goodsdescribed in the covering L/C
applications as "dyestuffs of various colors" from its American supplier, the J.B.Distributing
Company.-All the applications of the corporation were approved, and the corresponding
Commercial L/C Agreements wereexecuted pursuant to banking procedures.-Pursuant to
banking regulations then in force, the corporation delivered to the Bank peso marginal
deposits aseach letter of credit was opened.-By virtue of the foregoing transactions, the
Bank issued irrevocable commercial letters of credit addressed to itscorrespondent banks in
the United States, with uniform instructions for them to notify the beneficiary thereof, the
JB.Distributing Company, that they have been authorized to negotiate the latter's sight
drafts up to the amountsmentioned therein, respectively, if accompanied, upon
presentation, by a full set of negotiable clean "on board"ocean bills of lading,
covering the merchandise appearing in the L/Cs, that is, dyestuffs
of various colors,Consequently, the J.B. Distributing Company drew upon, presented to and
negotiated with these banks, its sightdrafts covering the amounts of the merchandise
ostensibly being exported by it, together with clean bills of lading,and collected the full
value of the drafts up to the amounts appearing in the L/ Cs as above indicated.-These
correspondent banks then debited the account of the Bank of the Philippine Islands with
them up to the fullvalue of th drafts presented by the J.B. Distributing Company, thereafter,
endorsed and forwarded all documents tothe Bank of the Philippine Islands.-In the

meantime, as each shipment (covered by the above-mentioned letters of credit) arrived in

the Philippines, theDe Reny Fabric Industries, Inc. made partial payments to the Bank
amounting, in the aggregate, to P90,000.-Further payments were, however, subsequently
discontinued by the corporation when it became established, as aresult of a chemical test
conducted by the National Science Development Board, that the goods that arrived inManila
were colored chalks instead of dyestuffs.-The corporation also refused to take possession of
these goods, and for this reason, the Bank caused them to bedeposited with a bonded
warehouse paying therefor the amount of P12,609.64 up to the filing of its complaint withthe
court below on December 10, 1962.
LOWER COURT:
Ordered the corporation and its co-defendants (the herein appellants) to pay BPI the amount
of the LC agreement.
DEFENSE OF DE RENY:
It was the duty of the foreign correspondent banks of the Bank of the Philippine Islands to
take the necessaryprecautions to insure that the goods shipped under the covering L/Cs
conformed with the item appearing therein,and, that the foreign banks having failed to
perform this duty, no claim for recoupment against the defendants-appellants, arising from
the losses incurred for the non-delivery or defective delivery of the articles ordered,
couldaccrue. SPCL Letters of Credit Comia, A.T.
HELD:Under the terms of their Commercial Letter of Credit Agreements with the Bank, the
appellants agreed that the Bankshall not be responsible for the "existence, chancier, quality,
quantity, conditions, packing, value, or delivery of theproperty purporting to be represented
by documents, for any difference in character, quality, quantity, condition, or value of the
property front that expressed in documents," or for "partial or incomplete shipment, or
failure or omission to ship my or all of the property referred to in the Credit," as well as "for
any deviation from instructions,delay, default or fraud by the shipper or inyone else in
connection with the property or the shipping thereof," and "for any breach of contract
between the shippers or vendors and ourselves, [purchasers] or any of us."Having agreed to
these terms, the appellants have, therefore, no recourse but to comply with their covenant
to therules of evidence."The Code of Commerce, in its Article 2, likewise provides that "Acts
of commerce, whether those who execute thembe merchants or not, and whether specified
in this Code or not, should be governed by the provisions contained init, in their absence, b)
the usages of commerce generally observed in each place, and in the absence of both
rules,by those of the civil law" "Those acts contained in this Code and all Others of
analogous character, shall be deemedacts of commerce." It must be noted that certain
principles governing the issuance, acceptance and payment of letters of credit arc
specifically provided for in the Code of Commerce.But even without the stipulation recited
above, the appellants cannot shift the burden of loss to the Bank on accountof the violation
by their vendor of its prestation.Banks, in providing financing in international business
transactions such as those entered into by the appellants,
donot deal with the property to be exported or shipped to the importer, but deal only with
documents.

The Bankintroduced in evidence a provision contained in the "Uniform Customs and

Practices for Commercial DocumentaryCredits Fixed for the Thirteenth Congress of
International Chamber of Commerce," to which the Philippines is asignatory nation. Article
10 thereof provides:"Its documentary credit operations, all parties concerned deal in
documents and not in goods. payment, negotiationor acceptance against documents in
accordance with the terms and conditions of a credit by a Bank authorized todo so binds the
party giving the authorization to take up the documents and reimbursed the Bank making
thepayment, negotiation or acceptance."The existence of a custom in international banking
and financing circles negating any duty on the part of a bank toverify whether what has
been described in letters of credits or drafts or shipping documents actually tallies with
whatwas loaded aboard ship, having been positively proven as a fact, the appellants me
bound by this establishedusage. They were, after all, the ones who tapped the facilities
afforded by the Bank in order to engage ininternational business.
Feati Bank and Trust Company v Court of Appeals G.R. No. 94209 April 30, 1991
In case of a notifying bank, the correspondent bank assumes no liability except to
notify and/or transmit to the beneficiary the existence of the letter of credit.
A negotiating bank, on the other hand, is a correspondent bank which buys or
discounts a draft under the letter of credit. Its liability is dependent upon the
stage of the negotiation. If before negotiation, it has no liability with respect to
the seller but after negotiation, a contractual relationship will then prevail
between the negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct
obligation to the seller and its liability is a primary one as if the correspondent
bank itself had issued the letter of credit.
Facts: Bernardo Villaluz entered into a contract of sale with Axel Christiansen in which
Villaluz agreed to deliver to Christiansen 2,000 cubic meters of lauan logs at $27.00 per
cubic meter FOB. On the arrangements made and upon the instructions of consignee, Hanmi
Trade Development, Ltd., the Security Pacific National Bank of Los Angeles, California issued
an irrevocable letter of credit available at sight in favor of Villaluz for the sum of $54,000.00,
the total purchase price of the lauan logs.
The letter of credit was mailed to the Feati Bank and Trust Company with the instruction to
the latter that it forward the enclosed letter of credit to the beneficiary. The letter of credit
also provided that the draft to be drawn is on Security Pacific National Bank and that it be
accompanied by certain documents. The logs were thereafter loaded on a vessel but
Christiansen refused to issue the certification required in paragraph 4 of the letter of credit,
despite repeated requests by the private respondent. The logs however were still shipped
and received by consignee, to whom Christiansen sold the logs. Because of the absence of
the certification by Christiansen, the Feati Bank and Trust company refused to advance the
payment on the letter of credit until such credit lapsed. Since the demands by Villaluz for
Christiansen to execute the certification proved futile, he filed an action for mandamus and
specific performance against Christiansen and Feati Bank and Trust Company before the
Court of First Instance of Rizal. Christiansen however left the Philippines and Villaluz filed an
amended complaint making Feati Bank and Trust Company.
Issue: Whether or not Feati Bank is liable for Releasing the funds to Christiansen
Held: In commercial transactions involving letters of credit, the functions assumed by a
correspondent bank are classified according to the obligations taken up by it. The
correspondent bank may be called a notifying bank, a negotiating bank, or a confirming
bank.

In case of a notifying bank, the correspondent bank assumes no liability except to notify
and/or transmit to the beneficiary the existence of the letter of credit.
A negotiating bank, on the other hand, is a correspondent bank which buys or discounts a
draft under the letter of credit. Its liability is dependent upon the stage of the negotiation. If
before negotiation, it has no liability with respect to the seller but after negotiation, a
contractual relationship will then prevail between the negotiating bank and the seller.
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the
seller and its liability is a primary one as if the correspondent bank itself had issued the
letter of credit.
In this case, the letter merely provided that the petitioner forward the enclosed original
credit to the beneficiary. (Records, Vol. I, p. 11) Considering the aforesaid instruction to the
petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the
petitioner is only a notifying bank and not a confirming bank as ruled by the courts below.
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he
assumes no liability. It follows therefore that when the petitioner refused to negotiate with
the private respondent, the latter has no cause of action against the petitioner for the
enforcement of his rights under the letter.
Since the Feati was only a notifying bank, its responsibility was solely to notify and/or
transmit the documentary of credit to the private respondent and its obligation ends there.
At the most, when the petitioner extended the loan to the private respondent, it assumed
the character of a negotiating bank. Even then, the petitioner will still not be liable, for a
negotiating bank before negotiation has no contractual relationship with the seller. Whether
therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable.
Absent any definitive proof that it has confirmed the letter of credit or has actually
negotiated with Feati, the refusal by the petitioner to accept the tender of the private
respondent is justified.
Reliance Commodities, Inc. v. Daewoo Industrial Co., Ltd. G.R. No. L-100831
December 17, 1993
The failure of a buyer seasonably to furnish an agreed letter of credit is a breach
of he contract between buyer and seller. Where the buyer fails to open a letter of
credit as stipulated, the seller or exporter is entitled to claim damages for such
breach.
Facts: Reliance Commodities, Inc. (Reliance) and Daewoo Industrial Co Ltd (Daewoo) entered
into a contract of sale where Reliance undertook to ship and deliver to Daewoo 2,000 tons of
foundry pig iron. First contract was consummated and completed but Daewoo fell short of
135.655 metric tons. Second contract for 2,000 metric tons was also perfected. However,
Reliances application for a letter of credit was denied by the China Banking Corporation, and
it was shown later that the reason for this is that it has exceeded its foreign exchange
allocation.
Because of the failure of Reliance to comply with its undertaking under the contract, Daewoo
was forced to sell the foundry pig irons to another buyer at a lower price. Reliance filed an
action for damages against Daewoo for the recovery of P226,370.48 representing the value

of the short delivery of 135.655 metric tons of foundry pig iron under the first contract.
Daewoo filed a counterclaim, contending that Reliance was guilty of breach of contract when
it failed to open a letter of credit as required in the second contract.
Issue: Whether or not Reliance is liable for breach of contract by failing to obtain the letter of
credit
Held: Daewoo is liable for damages because the contract to deliver the goods were already
perfected. The opening of an L/C upon application of Reliance was not a condition precedent
for the birth of the obligation of Reliance to purchase foundry pig iron from Daewoo. As a
rule, the failure of to open the appropriate letter of credit did not prevent the birth of the
contract, and neither did such failure extinguish the contract.
In the instant case, the opening of the letter of credit in favor of Daewoo was an obligation of
Reliance and the performance of that obligation by Reliance was a condition for enforcement
of the reciprocal obligation of Daewoo to ship the subject matter of the contract the
foundry pig iron to Reliance. But the contract itself between Reliance and Daewoo had
already sprung into legal existence and was enforceable.
Thus the failure of a buyer seasonably to furnish an agreed letter of credit is a breach of he
contract between buyer and seller. Where the buyer fails to open a letter of credit as
stipulated, the seller or exporter is entitled to claim damages for such breach. Damages for
failure to open a commercial credit may, in appropriate cases, include the loss of profit
which the seller would reasonably have made had the transaction been carried out.
Once the credit is established, the seller ships the goods to the buyer and in the process
secures the required shipping documents or documents of title. To get paid, the seller
executes a draft and pays cash to the seller if it finds that the documents submitted by the
seller conform with what the letter of credit requires. The bank then obtains possession of
the documents upon paying the seller. The transaction is completed when the buyer
reimburses the issuing bank and acquires the documents entitling him to the goods. Under
this arrangement, the seller gets paid only if he delivers the documents of title over the
goods, while the goods only after reimbursing the bank.