Cases on Truth in Lending Act

HEIRS OF ZOILO ESPIRITU vs. LANDRITO

(G.R. No. 169617, April 3, 2007)

Facts:
The Spouses Landrito loaned from the Spouses Espiritu the amount of
P350,000, payable in three months. To secure the loan, the Spouses Landrito
executed a real estate mortgage over their property in Alabang.
From the P350,000 that the Landritos were supposed to receive, P17,500 was
deducted as interest for the first month (equivalent to 5% of the principal debt), and
P7,500 as service fee. Thus, they actually received a net amount of P325,000. The
agreement, however, provided that the principal debt earns interest at the legal rate.
Because the Landritos failed to pay when the debt became due and
demandable, the loan agreement was extended through an Amendment of Real
Estate Mortgage. The loan was restructured in such a way that the unpaid interest
became part of the principal, thus increasing the principal to P385,000. The
Landritos were still unable to pay, the agreement was renewed for several times, until
the principal was increased to more than P874,000. Zoilo Espiritu, while admitting
that said amount did not correspond the amount that the Landritos received, insisted
that the increase in the principal was because of the unpaid interest and other
charges.
The debt remained unpaid and the property was foreclosed. The Landritos
failed to redeem their property during the redemption period, although they have
been negotiating for the redemption of the property before said period lapsed. While
the land was valued at P1.5 Million, the Espiritus increased the amount from time to
time. When the Landritos tendered 2 manager’s checks and some cash totaling P1.8
Million, the Espiritus refused to accept the same. The Espiritus increased the
amount to P2.5 Million, and gave them until July to pay said amount. However, the
Landritos found out that the Espiritus had already registered the property in their
name.
The Landritos filed an action for reconveyance of title with the trial court, but
said court found for the Espiritus and upheld the validity of the foreclosure sale. On
appeal, however, the Court of Appeals declared the 5% interest imposed on the first
month and the varying rates of interests in the succeeding months void.

Issue:
Whether or not the Espiritu spouses had the right to increase the interest rates
unilaterally, in contravention with their agreement.

Held:
No. The charges that the Espiritus imposed are not found in any written
agreement between the parties. The interest rates and the service charge imposed, at
an average of 6.39% per month, are excessive.
In enacting the “Truth in Lending Act”, the State seeks to protect its citizens
from a lack of awareness of the true cost of credit by assuring the full disclosure of
such costs. Section 4 of said law enumerates specific information required to be
disclosed, among which are the interest and other charges incident to the extension
of credit. In addition, the Civil Code provides that “No interest shall be due unless
stipulated in writing.” The omission of the Espiritus in specifying in the contract the
interest rate which was actually imposed, manifested bad faith.
Although the Usury Law was suspended by CB Circular no. 905, nothing in
said circular grants lenders free reign to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets. A stipulation
authorizing iniquitous interests is contrary to morals, if not against the law. These
contracts are inexistent and void from the beginning. Since the debt due is limited to
the principal of P350,000 with 12% per annum as legal interest, the previous demand
for payment of P874,000 cannot be considered a valid demand for payment. For an
obligation to become due, there must be a valid demand. Nor can the foreclosure
proceedings be considered valid since the total amount of indebtedness was pegged
at P874,000 which included interest and which is now nullified for being excessive.
The Landritos had tried, but failed, to pay an amount way over the indebtedness they
were supposed to pay. It is only proper that the Spouses Landrito be given
opportunity to pay the real amount of their indebtedness. The registration of the
foreclosure sale, declared, invalid, cannot vest title over the mortgaged property.
CONSOLIDATED BANK (Solidbank) AND TRUST CORPORATION vs. CA
(G.R. No. 91494, July 14, 1995)

Facts:
George Pua’s loans
PERSONAL THROUGH GEORGE AND GEORGE TRADE, INC.
Charges
P500k P300k 1. interest of 14% per
annum compounded
monthly until paid
2. 10% as attorney’s
fees and costs,
bearing 1% per
month until paid
P400k P200k 1. interest of 14% per
annum compounded
monthly until paid
2. 10% as attorney’s
fees and costs,
bearing 1% per
month until paid
3. Penalty rate of 3%
per annum until
fully paid
P400k P150k 1. interest of 14% per
annum compounded
monthly until paid
2. 10% as attorney’s
fees and costs,
bearing 1% per
month until paid
3. Penalty rate of 3%
per annum until
fully paid
P220k, P450K, P65k

To secure the payment, Pua assigned unto Solidbank the proceeds of a fire
insurance policy worth P2.9 million. After applying the proceeds, the personal
account of Pua was fully satisfied but there remained the amount of P383k.
Solidbank then proceeded to apply said amount to the unpaid loans of George and
George Trade, Inc, thus leaving a balance of over P288k of the loans.
Solidbank instituted an action for recovery of the unpaid balances, but Pua
insists that the loans had already been extinguished by way of payment through
assignment of the fire insurance proceeds, and that it was in fact Solidbank who
failed to return the balance of said proceeds. The trial court found for petitioner but
the Court of Appeals reversed the judgment and ordered Solidbank to pay Pua.

Issue:
Whether or not Solidbank has to reimburse Pua (P466k)

Held:
Yes, but for a lesser amount.
The 14% interest rate charged by petitioner was within the limits set by the Usury
law. The charging of compounded interest is proper as long as the payment thereof
has been agreed upon by the parties. As to handling charged, banks are authorized to
collect such charges on loans of large amounts, but they are still required to strictly
adhere to the “Truth in Lending Act” and shall make the true and effective cost of
borrowing an integral part of every loan contract. The payment of penalty is proper as
well.
As regards the attorney’s fees, however, the stipulation was that Pua agreed to
pay such fees only in addition to expenses and costs of suit. Solidbank is entitled to
collect from Pua said fees only in case it was compelled to litigate with third persons
or to incur expenses to protect its interest. These conditions did not happen.
Solidbank must pay Pua the amount of P3,616.65 instead.
New Sampaguita v. PNB
NEW SAMPAGUITA vs. PNB
(G.R. No. 148753, July 30, 2004)

Facts:
Sampaguita secured a loan from PN in an aggregate amount of 8M pesos, mortgaging
the properties of Sampaguita’s president and chairman of theboard.
Sampaguita also executed several promissory notes due on different dates.
A uniform clause therein permitted PN to increase the rate “within the limits allowed
by law at any time depending on whatever policy it may adopt in the future” witout
even giving prior notice to petitioners.
Sampaguita defaulted on its payment.
Sampaguita loaned money from PNB. PNB unilaterally increased rates of interest in
the loan without informing Sampaguita. PNB claimed they were authorized to do it as
there was a clause in the agreement that they may do so. Besides, Usury law was no
longer in force.

Issue:
Whether the loan accounts are bloated.

Held:
No, PNB cannot do so, it will violate mutuality of contracts under 1308. Besides, SC
may intervene when amount of interest is unconscionable.
Court applied 12% interest rate.
DBP vs. ARCILLA
(G.R. No. 161397, June 30, 2005)

Facts:
Atty Arcilla was employed by DBP. He decided to avail of a loan under the Individual
Housing Project of the bank. DBP and Arcilla executed a Deed of Conditional Sale
over a parcel of land, as well as the house to be constructed thereon, for 160,000ph.
Arcilla borrowed the amount from DBP for the purchase of the lot and the
construction of a residential building. He obliged himself to pay the loan for 25 years
with a monthly amortization of 1,417.91ph with 9% interest per annum to be
deducted from his salary.
DBP obliged itself to transfer the title of the property upon the payment of the loan,
including
any increments thereof. It was also agreed therein that if Arcilla availed of optional
retirement, he
could elect to continue paying the loan, provided that the loan/amount would be
converted into a
regular real estate loan account with the prevailing interest assigned on real estate
loans, payable within
the remaining term of the loan account.
Arcilla opted to resign from the bank in December 1986. Conformably with the Deed
of
Conditional Sale, the bank informed him that the balance of his loan account with the
bank had been
converted to a regular housing loan. Arcilla signed three PNs for the total amount of
P186,364.15. Arcilla
also agreed to pay to DBP insurance premiums, taxes, etc.
However, Arcilla also agreed to the reservation by the DBP of its right to increase
(with notice to
him) the “ rate of interest on the loan, as well as all other fees and charges on loans
and advances pursuant to such policy as it may adopt from time to time during the
period of the loan; Provided, that the rate of interest on the loan shall be reduced by
law or by the Monetary Board; Provided, further, that the adjustment in the rate of
interest shall take effect on or after the effectivity of the increase or decrease in the
maximum rate of interest.”

Upon his request, DBP agreed to grant Arcilla an additional cash advance of
P32,000.00. Thereafter, a Supplement to the Conditional Sale Agreement was
executed However, he failed to pay his loan account, advances, penalty charges and
interests which, as of October 31, 1990, amounted to P241,940.93. DBP rescinded
the Deed of Conditional Sale by notarial act on November 27, 1990. DBP tried to give
Arcilla a chance to repurchase the property. Arcilla failed to respond. Consequently,
the property was advertised for sale at public bidding on February 14, 1994. Arcilla
filed a complaint against DBP with the RTC. He alleged that DBP failed to furnish
him with the disclosure statement required by RA 3765 and CB Circular No. 158 prior
to the execution of the deed of conditional sale and the conversion of his loan account
with the bank into a regular housing loan account. Despite this, DBP immediately
deducted the account from his salary as early as 1984. Moreover, the bank applied its
own formula and imposed its usurious interests, penalties and charges on his loan
account and advances. DBP alleged that it substantially complied with R.A. No. 3765
and CB Circular No. 158 because the details required in said statements were
particularly disclosed in the promissory notes, deed of conditional sale and the
required notices sent to Arcilla. In any event, its failure to comply strictly with R.A.
No. 3765 did not affect the validity and enforceability of the subject contracts or
transactions. DBP interposed a counterclaim for the possession of the property. The
trial court ruled in favor of Arcilla and nullified the notarial rescission of the deeds.
The CA reversed.

Issue:
WON DBP complied with the disclosure requirement

Held:
Yes
On the first issue, Arcilla avers that under R.A. No. 3765 and CB Circular No. 158, the
DBP, as the creditor bank, was mandated to furnish him with the requisite
information in such form prescribed by the Central Bank before the commutation of
the loan transaction. He avers that the disclosure of the details of the loan contained
in the deed of conditional sale and the supplement thereto, the promissory notes and
release sheet, do not constitute substantial compliance with the law and the CB
Circular. DBP, on the other hand, avers that all the information required by R.A. No.
3765 was already contained in the loan transaction documents. Also, even if it failed
to comply strictly with the disclosure requirement of R.A. No. 3765, nevertheless,
under Section 6(b) of the law, the validity and enforceability of any action or
transaction is not affected. It asserts that Arcilla was estopped from invoking R.A. No.
3765 because he failed to demand compliance with R.A. No. 3765 from the bank
before the consummation of the loan transaction, until the time his complaint was
filed with the trial court.

Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan
transaction, the bank, as creditor, is obliged to furnish a client with a clear statement,
in writing, setting forth, to the extent applicable and in accordance with the rules and
regulations prescribed by the Monetary Board of the Central Bank of the Philippines,
the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which
are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charges expressed in terms of pesos and centavos; and
(7) the percentage that the finance charge bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.

Under Circular No. 158 of the Central Bank, the information required by R.A. No.
3765 shall be included in the contract covering the credit transaction or any other
document to be acknowledged and signed by the debtor. If the borrower is not duly
informed of the data required by the law prior to the consummation of the availment
or drawdown, the lender will have no right to collect such charge or increases thereof,
even if stipulated in the promissory note. However, such failure shall not affect the
validity or enforceability of any contract or transaction.
In the present case, DBP failed to disclose the requisite information in the disclosure
statement form authorized by the Central Bank, but did so in the loan transaction
documents between it and Arcilla. There is no evidence on record that DBP sought to
collect or collected any interest, penalty or other charges, from Arcilla other than
those disclosed in the said deeds/documents.

The Court is convinced that Arcilla’s claim of not having been furnished the
data/information required by R.A. No. 3765 and CB Circular No. 158 was but an
afterthought. Despite the notarial rescission of the conditional sale in 1990, and
DBP’s subsequent repeated offers to repurchase the property, the latter maintained
his silence. Moreover, Arcilla, a lawyer, would not be so gullible or negligent as to
sign documents without knowing fully well the legal implications and consequences
of
his actions, and that appellee was a former employee of appellant. As such employee,
he is as well presumed knowledgeable with matters relating to appellant’s business
and fully cognizant of the terms of the loan he applied for, including the charges that
had to be paid
BPI vs. YU
(G.R. No. 184122, Januray 20, 2010)

Facts:
1. respondent Norman and Angelina Yu, doing business as Tuason trading, borrowed
various sums of money totaling 75M from Far Eastern Bank. For collateral, they
executed real estate mortgages over several of their properties including lands in
Legaspi City.
2. Unable to pay their loans, the Yus requested for a loan restructuring, which the
bank, now merged with BPI, granted.
3. Despite the restructuring, the Yus still had difficulties to pay. BPI extrajudicially
foreclosed the mortgaged properties.
$. Magnacraft, the highest bidder, entered into a compromise agreement for the
ownership over 10 parcels of land.
5. Yus filed a complaint for the recovery of the alleged excessive penalty charges and
foreclosure expenses that the bank caused to be incorporated in the price of the
auctioned parties.

Issue:
Whether or not the reference to the penalty charges in the promissory note
constitutes substantial compliance with disclosure of the Truth and lending act.

Held:
1. Penalty charge which is the liquidated damages resulting from breach, falls under
item 6 or finance charge representing the amount to be paid by the debtor incident to
the extension of credit. The lender may provide for a penalty as long as the amount of
the charge which is to be paid are disclosed to the borrower before he enters into
credit arrangement.

2. In this case, although BPI failed to state the penalty charges in the disclosure
statemnt, the promissory not that Yus sighned on the same date, the disclosure
statement, contained a penalty clause required by the truth and lending act.

3. They cannot avoid liability based on a rigid interpretation of the Truth in Lending
Act which contravenes its goal.

4. Nonetheless, the courts have the authority t o reduce penalty charges when they
are unreasonalble.
Cases on the General Banking Law

Section 6
REPUBLIC OF THE PHILIPPINES vs. SECURITY CREDIT AND
ACCEPTANCE CORPORATION
(G.R. No. L-20583, January 23, 1967)

Facts:
This case is a quo warranto proceeding to challenge individuals who are acting as
officers or directors of business corporations initiated by the Solicitor General to
dissolve the Security and Acceptance Corporation for engaging in banking without
the authority required by the General banking act.

As the Security Credit and Acceptance Corporation applied with the Security and
Exchanged Commission for the registration and licensing of their securities under the
Securitiesn Act, SEC referred it to the Central Bank. The Central Bank classified the
Security Credit and Acceptance Corporation as engaged in banking. So, SEC advised
the corporation to comply with the requirements under the General Banking Act or
RA No. 337.

The MTC of Manila issuedba search warrant to search the premises of the
corporation in which then Manila Police Department seized the documents and
records of the corporation relative to its business operations; and the seized
documents were placed under the custody of the Central Bank which later submitted
a memorandum. This memorandum lead to the issuance of the Monetary board of a
resolution stating that the corporation is engaged in banking without compliance
with RA No. 337.

Despite the issuance of the resolution, the corporation continued its banking
operations and had induced greater number of the public to open savings deposit
accounts. The Security Credit and Acceptance Corporation denied that its
transactions partake of the nature of banking operations.

Issue:
Whether or not the Security Credit and Acceptance Corporation was engaged in
banking and violated the General Banking Act.

Held:
Yes, the corporation is engaged in banking and violated the General Banking Act by
its non-compliance with the administrative authority required in RA No. 337.
An investment company which loans out money of its customers, collects the interest
and charges a commission to both lender and borrower,is a bank.
Any person engaged in business carried on by banks of deposit, of discount or of
circulation is doing a banking business, although but one of these functions is
exercised.
Because the corporation in engaged in banking operations for example loaningout
the money of its customers, collecting the interests and encouraging people to open
savings deposit accounts, the corporation as ordered dissolved.
CENTRAL BANK vs. MORFE
(G.R. No. L-20119, June 30, 1967)

Facts:
The legal department of the Central Bank opined that First Mutual Savings and Loan
Organization (known as ORGANIZATION) and other organizations of similar nature
are banking institution falling under the purview of the Central Bank Act. Thus the
Central Bank announced that all savings and loan organization, including the
respondent, now in operation have nerver been authorized by the monetary board
of the central bank to accept deposit of funds from the public nor to engae in
banking bussinessnor to perform any banking activity.
Pursusant thereto the Governor of the Central Bank directed the investigation of thes
institutions. Thereafter a member of teh intelligence division of the Central Bank
applied for the issuance of search ad siezure to search the premises of the
Organization. the judge issued the said warrant. The organization on the otherhand
filed certiorari, prohibition with a writ of pleriminary injunction which was approved
by judge Morfe thus preventing the search.

Issue:
W/N the issuance of injunction to stop the inforcement of the search warrant valid.

Held:
NO. the injunction order has no cause.
The issuance of the search warrant was based on a well founded belief that the
Organization was involved in banking trasaction without compliance with the
requirements set by the Banking Laws, thus its issuance is valid.

The Law requiring compliance with certain requirements before anybody can
engage in banking obviously seeks to protect the public against actual, as well as
potential injury.
BANAS vs. ASIA PACIFIC FINANCE CORPORATION
(G.R. No. 128703, October 18, 2000)

Facts:
Teodoro Banas executed a promissory note in favor of C.G Dizon Construction and
Cenen Dizon whereby he promised to pay C.G. Dizon for value reicieved the sum of
P390,000.00 in installment in every 25th day of every month. C.G. Dizon endorsed
the said amoundt to ASIA PACIFIC FINACE CROPORATION (corporation). The
Corporation, for security, ask that a deed of Chattel Mortgage be instituted on 3
Caterpillar bulldozeer of the petitioner and for the issuance of a continuing
undertaking wherein Cenen Dizon bind himself to pay the oblicagiton jointly and
severaaly with the C.G. Dizon.
C.G. Dizon was able to comply with it obligation for several months but eventually
failed to comply with the installmens. Demands was made but was unheeded. Thus a
complaint was filed against Teodoro Banas, and CG Dizon.
As a defense C.G. Dizon alledge that ASIA PACIFIC Corporation was in engaged in a
banking bussiness which it is not authorized, due to failure of the said Corporation to
comply with sec. 2 and 6 of the banking laws.

Issue:
w/n the Coporation was enganged in banking prctices without complying with the
requirements of the law.

Held:
No, It did not violate the banking laws.
It is clear from the transaction between the petitioner ad repondent that thier
transation involves purcahse of recievables at a discount, well within the purview of
"investing, reinvesting or trading in securities" which an investment company is
autorized to perform and does not constitute a violaton of the General Banking Act.
What was prohibited by law under sec. 2 of GBA is for investing company to lend
funds obtained from the public through reciepts of deposit, which is a function of
banking institution. But, in the present case, there is no showing that the funds
suppossedly lent to the petitioners have been obatained from the public by way of
deposit, hence the inapplicability of the banking laws.
Section 29
LEE vs CA
(G.R. No. 117913, February 1, 2000)

Facts:
Charles Lee, as President of MICO wrote to private respondent Philippine Bank of
Communications (PBCom) requesting for a grant of a discounting loan/credit line in
the sum of P3,000,000 for the purpose of carrying out MICO’s line of business. He
requested for another discounting loan/credit line of 300,000,000 from PBCom for
the purpose of opening letters of credit and trust receipts. PBCom approved the loan.
As security for the loans, MICO through its Vice-President and General Manager,
Mariano Sio, executed a Deed of Real Estate Mortgage over its properties situated in
Pasig.
The proceeds of all the loan availments were credited to MICO’s current
checking account with PBCom. To induce the PBCom to increase the credit line of
MICO, petitioners executed another surety agreement in favor of PBCom, whereby
they jointly and severally guaranteed the prompt payment on due dates or at
maturity of overdrafts, promissory notes, discounts, drafts, letters of credit, bills of
exchange, trust receipts and all other obligations of any kind and nature for which
MICO may be held accountable by PBCom.
MICO then applied for authority to open a foreign letter of credit in favor of Ta
Jih Enterprises Co., Ltd., and a corresponding letter of credit was then issued by
PBCom and advised that said beneficiary may draw funds from the account of
PBCom in its correspondent bank’s New York Office.
Upon maturity of all credit availments obtained by MICO from PBCom, the
latter made a demand for payment. MICO failed to pay the obligations incurred
despite demands, PBCom extrajudicially foreclosed MICO’s real estate mortgage and
sold the said mortgaged properties in a public auction sale. PBCom which emerged as
the highest bidder in the auction sale. For the unpaid balance, PBCom then
demanded the settlement of the aforesaid obligations, however, Petitioners refused to
acknowledge their obligations to PBCom under the surety agreements. Hence,
PBCom filed a complaint with prayer for writ of preliminary attachment before the
Regional Trial Court of Manila. Petitioners alleged that MICO was not granted the
alleged loans and neither did it receive the proceeds of the aforesaid loans, PBCOM
presented no evidence that it remitted payments to cover the domestic and foreign
letters of credit, and the bank drafts presented as evidence show that they were made
in favor of the Bank of Taiwan and First Commercial Bank and not for MICO.
RTC ruled against PBCom because it failed to prove that the proceeds of the
loans were ever delivered to MICO.
CA reversed the ruling of the trial court.

Issue:
Whether or not the proceeds of the loans and letters of credit transactions were ever
delivered to MICO

Held:
Petitioners’ allegations are untenable.

From the foregoing, it is clear that letters of credit, being usually bank to bank
transactions, involve more than just one bank. Consequently, there is nothing
unusual in the fact that the drafts presented in evidence by respondent bank were not
made payable to PBCom. As explained by respondent bank, a draft was drawn on the
Bank of Taiwan by Ta Jih Enterprises Co., Ltd. of Taiwan, supplier of the goods
covered by the foreign letter of credit. Having paid the supplier, the Bank of Taiwan
then presented the bank draft for reimbursement by PBCom’s correspondent bank in
Taiwan, the Irving Trust Company — which explains the reason why on its face, the
draft was made payable to the Bank of Taiwan. Irving Trust Company accepted and
endorsed the draft to PBCom. The draft was later transmitted to PBCom to support
the latter’s claim for payment from MICO. MICO accepted the draft upon
presentment and negotiated it to PBCom.
A trust receipt is considered as a security transaction intended to aid in
financing importers and retail dealers who do not have sufficient funds or resources
to finance the importation or purchase of merchandise, and who may not be able to
acquire credit except through utilization, as collateral of the merchandise imported or
purchased.
A trust receipt, therefor, is a document of security pursuant to which a bank
acquires a “security interest” in the goods under trust receipt. Under a letter of credit-
trust receipt arrangement, a bank extends a loan covered by a letter of credit, with the
trust receipt as a security for the loan. The transaction involves a loan feature
represented by a letter of credit, and a security feature which is in the covering trust
receipt which secures an indebtedness.
Section 36
PEOPLE vs. CONCEPCION
(G.R. No. 18535, August 15, 1922)

Facts:
Defendant authorized an extension of credit in favor of Concepcion, a co-
partnership. Defendant’s wife was a director of this co-partnership. Defendant
was found guilty of violating Sec. 35 of Act No. 2747 which says that “The National
Bank shall not, directly or indirectly, grant loans to any of the members of the Board
of Directors of the bank nor to agents of the branch banks.” This Section was in effect
in 1919 but was repealed in Act No. 2938 approved on January 30, 1921.

Issue:
W/N Defendant can be convicted of violating Sections of Act No. 2747, which
were repealed by Act No. 2938.

Held:
In the interpretation and construction, the primary rule is to ascertain and give
effect to the intention of the Legislature. Section 49 in relation to Sec. 25 of Act No.
2747 provides a punishment for any person who shall violate any provisions of the
Act. Defendant contends that the repeal of these Sections by Act No. 2938 has served
to take away basis for criminal prosecution. The Court holds that where an act of the
Legislature which penalizes an offense repeals a former act which penalized the
same offense, such repeal does not have the effect of thereafter depriving the
Courts of jurisdiction to try, convict and sentence offenders charged with violations of
the old law.
GO vs. BANGKO SENTRAL NG PILIPINAS
(G.R. No. 178429, October 23, 2009)

Facts:
Go, being the GM, President and CEO of Orient Bank is charged for violation of
Section 83 of the General Banking Act (GBA). The information states:

"........... wilfully, unlawfully and knowingly borrow, either directly or indirectly,

for himself or as the representative of his other related companies, the deposits or
funds of the said banking institution and/or become a guarantor, indorser or obligor
for loans from the said bank to others, by then and there using said borrowed
deposits/funds of the said bank in facilitating and granting and/or caused the
facilitating and granting of credit lines/loans..."

Go filed a motion to quash the information averring that based on the facts alleged in
the Information, he was being prosecuted for borrowing the deposits or funds of the
Orient Bank and/or acting as a guarantor, indorser or obligor for the bank’s loans to
other persons. The use of the word “and/or” meant that he was charged for being
either a borrower or a guarantor, or for being both a borrower and guarantor. Go
claimed that the charge was not only vague, but also did not constitute an offense.
He posited that Section 83 of RA 337 penalized only directors and officers of banking
institutions who acted either as borrower or as guarantor, but not as both.

Go further pointed out that the Information failed to state that his alleged act of
borrowing and/or guarantying was not among the exceptions provided for in the law.
According to Go, the second paragraph of Section 83 allowed banks to extend credit
accommodations to their directors, officers, and stockholders, provided it is “limited
to an amount equivalent to the respective outstanding deposits and book value of the
paid-in capital contribution in the bank.” Extending credit accommodations to bank
directors, officers, and stockholders is not per se prohibited, unless the amount
exceeds the legal limit. Since the Information failed to state that the amount he
purportedly borrowed and/or guarantied was beyond the limit set by law, Go insisted
that the acts so charged did not constitute an offense.

Issue:
Whether the information should be quashed on the grounds averred by Go

Held:
NO. The information only needs to state the ultimate facts; evidentiary matters and
other details may be provided during the trial. The information must allege all the
elements of the crime.

The elements of Sec 83 of the GBA:

1. the offender is a director or officer of any banking institution;
2. the offender, either directly or indirectly, for himself or as representative or
agent of another, performs any of the following acts:
a. he borrows any of the deposits or funds of such bank; or
b. he becomes a guarantor, indorser, or surety for loans from such bank to others,
or
c. he becomes in any manner an obligor for money borrowed from bank or loaned
by it;
3. the offender has performed any of such acts without the written approval of the
majority of the directors of the bank, excluding the offender, as the director
concerned.
The essence of the crime is becoming an obligor of the bank without securing the
necessary written approval of the majority of the bank’s directors. The language of
the law is broad enough to encompass either act of borrowing or guaranteeing, or
both.Banks were not created for the benefit of their directors and officers; they
cannot use the assets of the bank for their own benefit, except as may be permitted by
law. Congress has thus deemed it essential to impose restrictions on borrowings by
bank directors and officers in order to protect the public, especially the depositors.

Credit accommodation limit is not an exception nor is it an element of the

offense.
Section 83 of RA 337 actually imposes three restrictions: approval, reportorial, and
ceiling requirements.

The approval requirement (found in the first sentence of the first paragraph of the
law) refers to the written approval of the majority of the bank’s board of directors
required before bank directors and officers can in any manner be an obligor for
money borrowed from or loaned by the bank.

The reportorial requirement, on the other hand, mandates that any such approval
should be entered upon the records of the corporation, and a copy of the entry be
transmitted to the appropriate supervising department

The ceiling requirement under the second paragraph of Section 83 regulates the
amount of credit accommodations that banks may extend to their directors or officers
by limiting these to an amount equivalent to the respective outstanding deposits and
book value of the paid-in capital contribution in the bank.

Even if the loan involved is below the legal limit, a written approval by the majority of
the bank’s directors is still required; otherwise, the bank director or officer who
becomes an obligor of the bank is liable. Compliance with the ceiling requirement
does not dispense with the approval requirement.
SORIANO v. PEOPLE
(G.R. No. 162336, February 1, 2010)

Facts:
On April 1997, the accused Soriano and Ilagan as principals by direct participation,
with abuse of confidence and taking unreasonable advantages over their position as
President and General Manager of Rural Bank of San Miguel respectively, mutually
helped one another to falsify loan documents by making it appear that a person in the
name of Enrico Carlos filled up the application sheet and filed the said loan
documents with the bank and that by virtue of said falsification coupled with deceit
and intent to cause damage, the accused succeeded in securing a loan in the amount
of 8M from the Rural Bank of San Miguel – San Ildefonso branch. Thereafter, the
accused converted the same amount to their own personal gain and benefit.

Issue:
Whether there is a violation of DOSRI if the bank officer used the name of another
person in order to indirectly secure a loan from the bank.

Held:
YES. There can also be a violation of DOSRI in such a situation wherein the accused
bank officer did not secure a loan in his own name, but was alleged to have used the
name of another person in order to indirectly secure a loan from the bank.
The prohibition in Section 83 (which is now Section 37) is broad enough to cover
various modes of borrowing. It covers loans by a bank director or officer (like herein
petitioner) which are made either: (1) directly, (2) indirectly, (3) for himself, (4) or as
the representative or agent of others.
It applies even if the director or officer is a mere guarantor, indorser or surety for
someone else's loan or is in any manner an obligor for money borrowed from the
bank or loaned by it. The covered transactions are prohibited unless the approval,
reportorial and ceiling requirements under Section 83 are complied with.
The prohibition is intended to protect the public, especially the depositors, from the
overborrowing of bank funds by bank officers, directors, stockholders and related
interests, as such overborrowing may lead to bank failures. It has been said that
“banking institutions are not created for the benefit of the directors [or officers].
While directors have great powers as directors, they have no special privileges as
individuals. They cannot use the assets of the bank for their own benefit except as
permitted by law. Stringent restrictions are placed about them so that when acting
both for the bank and for one of themselves at the same time, they must keep within
certain prescribed lines regarded by the legislature as essential to safety in the
banking business”.
A direct borrowing is obviously one that is made in the name of the DOSRI himself or
where the DOSRI is a named party, while an indirect borrowing includes one that is
made by a third party, but the DOSRI has a stake in the transaction.
The foregoing information describes the manner of securing the loan as indirect;
names petitioner as the benefactor of the indirect loan; and states that the
requirements of the law were not complied with. It contains all the required elements
for a violation of Section 83, even if petitioner did not secure the loan in his own
name.
The broad interpretation of the prohibition in Section 83 is justified by the fact that it
even expressly covers loans to third parties where the third parties are aware of the
transaction (such as principals represented by the DOSRI), and where the DOSRI’s
interest does not appear to be beneficial but even burdensome (such as in cases when
the DOSRI acts as a mere guarantor or surety). If the law finds it necessary to protect
the bank and the banking system in such situations, it will surely be illogical for it to
exclude a case like this where the DOSRI acted for his own benefit, using the name of
an unsuspecting person. A contrary interpretation will effectively allow a DOSRI to
use dummies to circumvent the requirements of the law.
Section 51
TALA REALTY SERVICES CORPORATION vs. BANCO FILIPINAS
SAVINGS AND MORTGAGE BANK
(G.R. No. 137533, November 22, 2002)

Facts:
Banco Filipino Savings and Mortgage Bank (bank) executed a Deed of Sale to Tala
Realty Services Corporation (Tala) for nine parcels of land, one of which is the
Bulacan property (subject of the controversy). Thereafter, they entered into separate
lease contracts over the said properties. The contracts provided for twenty-year lease
periods and renewable for another twenty years at the option of the bank. The rental
fee was in the amount of P9,800. However, it was revised to eleven-year period and
renewable for nine years at the option of the lessee and agreeable by both parties.

When the lease period was about to expire, Tala informed the bank that the new
rental fee would be P31,800. However, no action to renew the contract was taken by
the bank. Hence, Tala informed the bank, declaring itself free to alienate the
property. After which, the bank was closed by the Central Bank and was placed under
receivership, however, the court in 1991 (five years after the closure) declared the
closure null and void.

Even though the contract has expired, the bank continued to occupy the property and
pay the rental fee of 9,800 to the bank. Tala then demanded payment from the bank
for its outstanding balance since the rental fee is already P31,800. Bank refused to
pay; hence, Tala filed an ejectment suit against the bank.

The Bank answered the contention of Tala with a different story, it narrated that
since it has reached the limit for real estate investment set by General Banking Law,
it opted to form an allied corporation, which is Tala, where its properties, by virtue of
the “warehouse agreement,” will be sold to the Tala and thereafter be leased back to
the bank. It also contented that: (1) the agreement was one of implied trust where
Tala as a trustee of the legal title over the properties have the duty to reconvey the
same to the bank; and (2) it is not liable for the rental fees when it was closed by the
bank. The court ruled in favor of the bank. The Court of Appeals affirmed it. Hence
this appeal.

Issue (1):
Whether the bank could demand the reconveyance of the property based on implied
trust relationship with Tala.

Issue (2):
Whether the bank is liable to pay the rentals during the years when it was closed by
the Central Bank.

Held (1):
No. Clearly, the Bank was well aware of the limitations on its real estate holdings
under the General Banking Act and that its “warehousing agreement” with Tala was a
scheme to circumvent the limitation. Thus, the Bank opted not to put the agreement
in writing and call a spade a spade, but instead phrased its right to reconveyance of
the subject property at any time as a “first preference to buy” at the “same transfer
price.” This arrangement which the Bank claims to be an implied trust is contrary to
law. Thus, while we find the sale and lease of the subject property genuine and
binding upon the parties, we cannot enforce the implied trust even assuming the
parties intended to create it. In the words of the Court in the Ramos case, “the courts
will not assist the payor in achieving his improper purpose by enforcing a resultant
trust for him in accordance with the ‘clean hands’ doctrine.” The Bank cannot thus
demand reconveyance of the property based on its alleged implied trust relationship
with Tala.

Held (2):
No. Equity dictates that Tala should not be allowed to collect rent from the Bank.
The factual milieu of the instant case clearly shows that both the Bank and Tala
participated in the deceptive creation of a trust to circumvent the real estate
investment limit under Sections 25(a) and 34 of the General Banking Act. Upholding
Tala’s right to collect rent for the period during which the Bank was arbitrarily closed
would allow Tala to benefit from the illegal “warehousing agreement.” The Bank and
Tala are in pari delicto, thus, no affirmative relief should be given to one against the
other.
Section 53
PANLILIO vs. CITIBANK, N.A.
(G.R. No. 156335, November 28, 2007)

Facts:
Amalia Panlilio visited Citibank to place the amount of three million pesos in trust for
her children. However, she learned that P2,134,635.87 of the amount was placed by
Citibank in a Long Term Commercial Paper (a loan obtained by a corporation -
Camella & Palmera Homes- from the investing public, the lender -Panlilio) and the
rest was placed on Peso Repricable Promissory Note (PRPN). She also signed
documents (Directional Investment Management Agreement (DIMA), Term
Investment Application (TIA), and Directional Letter/Specific Instructions) which
provides that the Citibank is not obliged to guarantee the principal or investment,
absent any fraud or negligence on its part. Panlilio then received Confirmations of
Investment (COI). Thereafter, Amalia called the bank withdrawing the LTCP.
However, the bank refused to return the same saying that there are no available
funds yet. Hence, Panlilio filed a case against the bank for recovery of sum of money.
The court ruled in favor of Panlilio. However, the Court of Appeals revered the
decision. Hence, this appeal.

Issue (1):
Whether Panlilio is bound by the terms and conditions of the documents (DIMA, TIA
and COI) she signed.

Issue (2):
Whether petitioners are entitled to take back the money they invested from the bank.

Held (1):
Yes. The DIMA, Directional Letter, TIA and COIs, read together, establish the
agreement between the parties as an investment management agreement, which
created a principal-agent relationship between petitioners as principals and
respondent as agent for investment purposes. The agreement is not a trust or an
ordinary bank deposit; hence, no trustor-trustee-beneficiary or even borrower-lender
relationship existed between petitioners and respondent with respect to the DIMA
account.

Respondent purchased the LTCPs only as agent of petitioners; thus, the latter
assumed all obligations or inherent risks entailed by the transaction under Article
1910 of the Civil Code, which provides: “Article 1910. The principal must comply with
all the obligations which the agent may have contracted within the scope of his
authority. As for any obligation wherein the agent has exceeded his power, the
principal is not bound except when he ratifies it expressly or tacitly.”

The transaction is also perfectly legal, as investment management activities may be

exercised by a banking institution, pursuant to Republic Act No. 337 or the General
Banking Act of 1948, as amended, which was the law then in effect: (b) Act as
financial agent and buy and sell, by order of and for the account of their customers,
shares, evidences of indebtedness and all types of securities.

Held (2):
No. Petitioners may not seek a return of their investment directly from respondent at
or prior to maturity. As earlier explained, the investment is not a deposit and is not
guaranteed by respondent. Absent any fraud or bad faith, the recourse of petitioners
in the LTCP is solely against the issuer, C&P Homes, and only upon maturity.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK v. CA and RORY
LIM
(G.R. No. 97785. March 29, 1996)
Facts:

Respondent Rory Lim obtained a telegraphic transfer from petitioner PCIB. The
money was to be transferred to Equitable Banking Corporation, Cagayan de Oro
Branch. It was stipulated upon that in case of fund transfer, the bank will not be
responsible for any loss occasioned by errors, or delays in the transmission of
message and that all risks for are assumed by the private respondent.
Subsequent to the purchase of the telegraphic transfer, petitioner in turn issued
checks to his suppliers but bounced due to insufficiency of funds and as a
consequence charged Lim P 1,100. The check bounced because Lim’s telegraphic
transfer had not yet been remitted to Equitable Bank, Cagayan de Oro branch. In fact,
petitioner PCIB made the transfer of funds twenty one days after the purchase of the
telegraphic transfer.
Aggrieved, Lim filed a complaint for damages in the Regional Trial Court which held
the petitioner liable for breach of contract and struck down the provision exempting
it from any liability and declared the same to be invalid and unenforceable. The
Court of Appeals affirmed the decision and denied the motion for reconsideration,
hence this petition.

Issue:
Whether or not the stipulation which relieves the bank of any liability resulting from
loss caused by errors or delays in the course of the discharge of its services is valid.

Held:
No. It was unequivocally declared that notwithstanding the enforceability of a
contractual limitation, responsibility arising from a fraudulent act cannot be
exculpated because the same is contrary to public policy. Indeed, Article 21 of the
Civil Code is quite explicit in providing that “[a]ny person who willfully causes loss or
injury to another in a manner that is contrary to morals, good customs or public
policy shall compensate the latter for the damage.” Freedom of contract is subject to
the limitation that the agreement must not be against public policy and any
agreement or contract made in violation of this rule is not binding and will not be
enforced.]
The prohibition against this type of contractual stipulation is moreover treated by law
as void which may not be ratified or waived by a contracting party. Article 1409 of
the Civil Code states:
“ART. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy;
Undoubtedly, the services being offered by a banking institution like petitioner are
imbued with public interest. The use of telegraphic transfers have now become
commonplace among businessmen because it facilitates commercial
transactions. Any attempt to completely exempt one of the contracting parties from
any liability in case of loss notwithstanding its bad faith, fault or negligence, as in the
instant case, cannot be sanctioned for being inimical to public interest and therefore
contrary to public policy.
CA AGRO-INDUSTRIAL DEVELOPMENT CORP v. CA
(G.R. No. 90027 March 3, 1993)

Facts:
Petitioner (through its President, Aguirre) purchased parcels of land from the
spouses Pugao. It was agreed upon that the titles to the lots shall be transferred to the
petitioner upon full payment of the purchase price and that the TCTs shall be
deposited in a safety deposit box of any bank. They then rented a safety deposit of
private respondent Security Bank and Trust Company both signed a contract of lease
which contains the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein expressly
provided, and it assumes absolutely no liability in connection therewith.

Thereafter, Mrs. Margarita Ramos offered to buy from the petitioner the parcels of
land and demanded the execution of a deed of sale which necessarily entailed the
production of the certificates of title. Aguirre and the spouses Pugao then proceeded
to the respondent Bank to open the safety deposit box and get the certificates of title.
However, when opened the box yielded no such certificates. Because of the delay in
the reconstitution of the title, Mrs. Ramos withdrew from her offer and as a
consequence the petitioner allegedly failed to realize the expected profit. Hence, the
latter filed a complaint for damages against the respondent Bank.

The trial court ruled that the Bank has no liability for the loss of the certificates of
title. The court declared that the paragraphs 13 and 14 of the contract of lease are
binding on the parties. On appeal, petitioner contended that the contract for the rent
of the safety deposit box is actually a contract of deposit, therefore, the respondent
bank is liable for the loss.

Issue:
Whether or not the contractual relation between a commercial bank and another
party in a contract of rent of a safety deposit box with respect to its contents placed
by the latter one of bailor and bailee or one of lessor and lessee.

Held:
The contract for the rent of the safety deposit box is not an ordinary contract of lease.
However, it is not also a contract of deposit; the contract in the case at bar is a special
kind of deposit. It cannot be characterized as an ordinary contract of lease because
the full and absolute possession and control of the safety deposit box was not given to
the joint renters — the petitioner and the Pugaos. The guard key of the box remained
with the respondent Bank; without this key, neither of the renters could open the box.

On the other hand, the respondent Bank could not likewise open the box without the
renter's key. The prevailing rule is that the relation between a bank renting out safe-
deposit boxes and its customer with respect to the contents of the box is that of a bail
or and bailee. The depositary's responsibility for the safekeeping of the objects
deposited in the case at bar is governed by Title I, Book IV of the Civil Code.
Accordingly, the depositary would be liable if, in performing its obligation, it is found
guilty of fraud, negligence, delay or contravention of the tenor of the agreement. In
the absence of any stipulation prescribing the degree of diligence required, that of a
good father of a family is to be observed. Hence, any stipulation exempting the
depositary from any liability arising from the loss of the thing deposited on account
of fraud, negligence or delay would be void for being contrary to law and public
policy. In the instant case, conditions 13 and 14 of the questioned contract of lease of
the safety deposit box are void as they are contrary to law and public policy.
Section 56
BUSUEGO, BANEZ, LIM vs. CA and MONETARY BOARD OF CENTRAL
BANK OF THE PHIL.
(G.R. No. 95326, March 11, 1999)

Facts: From Mar. 14- Apr. 16, 1988, a team of CB Examiners conducted the 16th
regular examination of the books and records of the PAL Employees Savings & Loan
Assoc (PESALA). Several anomalies and irregularities committed by the petitioners
were uncovered.

The CB Supervision & Examination Section (SES) Department sent a letter to the
Board of Directors of PESALA inviting them to a conference to discuss about the
uncovered anomalies, but the petitioners did not attend the conference.

Petitioner Lim wrote to PESALA Board of Directors explaining his side on the said
examination of records and requesting that a copy of his letter be furnished the CB.
On Sept. 9, 1988, the CB Monetary Board issued MB Res. No. 805 which includes the
names of the petitioners in the watch list to prevent them from holding responsible
positions in any institution under CB supervision. It also requires the Board of
Directors of PESALA to file civil and criminal cases against the petitioners.

The petitioners filed a Petition for Injunction with prayer for issuance of TRO. The
trial court rendered decision declaring MB Res No. 805 void and inexistent. Upon
appeal, the CA reversed the decision of the trial court.

Issue: Whether MB Res. 805 is null and void for being violative of the petitioners’
right to due process.

Held:
The SC affirmed the decision of the CA.
The petitioners were duly afforded their right to due process by the MB, it appearing
that the petitioners were invited to a conference in which they did not attend. Also,
the Board of Directors and Lim’s letter are considered by the MB in adopting the
Resolution. The petitioner therefore cannot complain of deprivation of their right to
due process. The essence of due process is to be afforded a reasonable opportunity to
be heard and submit any evidence one may have in support of his defense. It also
appears that the requisites of procedural due process were complied with by the MB
before it issued the Resolution.

MB Res. 805 is valid. Central Bank of the Phil, through the Monetary Board is the
govt agency charged with the responsibility of administering the monetary, banking,
& credit system of the country and is granted the power of supervision & examination
over banks and non-bank financial institutions performing quasi-banking functions
of which savings and loan associations form part of.

The MB is empowered to conduct investigations & examine the records of savings

and loan assoc. If any irregularity is discovered, the MB may impose appropriate
sanctions, such as suspending the offender from holding office or from being
employed with the CB, or placing the names of the offenders in the watch list.
UNITED COCONUT PLANTERS BANK vs. GANZON INC.
(G.R. No. 168859, June 30, 2009)

These are two consolidated Petitions for Review on Certiorari.

United Coconut Planters Bank (UCPB) is a universal bank duly organized and
existing under Philippine Laws. UCPB and its corporate officers seek the reversal
and setting aside of the Decision of the Court of Appeals. The Court of Appeals, in its
assailed Decision, set aside the aforesaid letter-decision of the BSP Monetary Board
and remanded the case to the latter for further proceedings; and in its questioned
Resolution, denied for lack of merit the Motion for Reconsideration of UCPB, et al.,
as well as the Partial Motion for Reconsideration of E. Ganzon, Inc.

On the other hand, EGI is a corporation duly organized and existing under Philippine
laws and engaged in real estate construction and development business. EGI prays
for this Court to review the same Decision of the Court of Appeals, and to order the
appellate court to (1) act on its findings in the case instead of remanding the same to
the BSP Monetary Board for further proceedings; (2) direct the BSP Monetary Board
to impose the applicable administrative sanctions upon UCPB, et al.; and (3) to
amend its assailed Decision and Resolution by deleting therefrom the statements
requiring the BSP Monetary Board to scrutinize and dig deeper into the acts of UCPB,
et al., and to determine if, indeed, there were irregular and unsound practices in its
business dealings with EGI.

Facts:
EGI availed itself of credit facilities from UCPB to finance its business
expansion. To secure said credit facilities, EGI mortgaged to UCPB its condominium
unit inventories in EGI Rufino Plaza. Initially, EGI was able to make periodic
payments of its loans to UCPB until it started defaulting in its payment of
amortizations because of economic crisis. Subsequently, EGI was declared in default.
Thereafter, UCPB stopped sending EGI monthly statements of its accounts. EGI and
UCPB explored the possibility of using the mortgaged condominium unit inventories
of EGI as payment for the loans of EGI to UCPB. Upon agreeing on the valuation of
said mortgaged properties, EGI and UCPB entered into a Memorandum of
Agreement in settlement of the loans of EGI from UCPB.
EGI and UCPB executed an Amendment of Agreement to reflect the true and correct
valuation of the properties of EGI listed in the MOA that would be transferred to
UCPB in settlement of the total loan obligations of the former with the latter. The
properties of EGI to be used in paying for its debt with UCPB were valued at
P904,491,052.00.

According to the MOA and its amendments, titles to the properties of EGI shall be
transferred to UCPB by the following modes: (1) foreclosure of mortgage; (2) dacion
en pago; (3) creation of a holding company; and (4) use of other alternatives as may
be deemed appropriate by UCPB.

UCPB proceeded to foreclose some of the properties of EGI listed in the MOA but
said properties amounted only to P723,592,000.00 which is less than the value of the
properties of EGI stipulated in its amended MOA with UCPB.

Later on, some of the other properties of EGI at EGI Rufino Plaza, valued at
P166,127,369.50, were transferred by way of dacion en pago to UCPB. However,
during the signing of the transaction papers, EGI Senior Vice-President, noticed that
said papers stated that the remaining loan balance of EGI in the amount of
P192,246,822.50 had increased to P226,963,905.50. The increase was allegedly due
to the addition of the transaction costs amounting to P34,717,083.00. EGI
complained to UCPB about the increase, yet UCPB did not take any action on the
matter.

This prompted EGI to review their files to verify the figures on the loan
obligations of EGI as computed by UCPB. In the process, they discovered the UCPB
Internal Memorandum. The said Memorandum presented two columns, one with
the heading “ACTUAL” and the other “DISCLOSED TO EGI.” The figures in the two
columns were conflicting. The figures in the “DISCLOSED TO EGI” column
computed the unpaid balance of the loan obligations of EGI to be P226,967,194.80,
the amount which UCPB actually made known to and demanded from EGI. The
figures in the “ACTUAL” column calculated the remaining loan obligations of EGI to
be only P146,849,412.58.

Consequently, EGI wrote UCPB a letter demanding the refund by UCPB to

EGI of the over-payment and the return of TCTs.

In response, UCPB explained that the “ACTUAL” column in its Internal

Memorandum contained the same amounts reflected or recorded in its financial
statements, in accordance with the Manual of Accounts for Banks, Manual of
Regulations for Banks1 and BSP Circular No. 202. In contrast, the “DISCLOSED TO
EGI” column showed the total amount still due from EGI, including the total
principal, interests, transaction and other costs after the foreclosure, whether
reflected in the financial books of UCPB or not. Despite the explanation of UCPB, EGI
insisted that the figures appearing in the “ACTUAL” column of the former’s Internal
Memorandum revealed the true and actual amount of its loan obligations to UCPB.
UCPB refused to concede that UCPB had any obligation to make a refund to EGI

Based on the possession by EGI of the UCPB Internal Memorandum, UCPB

filed a criminal case for theft and/or discovery of secrets against EGI President
Ganzon and Senior Vice-President Layug, but the said case was dismissed. EGI, also
on the basis of the UCPB Internal Memorandum EGI filed with the BSP an
administrative complaint against UCPB, et al., for the commission of irregularities
and conducting business in an unsafe or unsound manner. In a letter-decision, the
BSP Monetary Board dismissed the administrative complaint of EGI.

EGI filed a Motion for Reconsideration and a Supplemental Motion for

Reconsideration of the aforequoted letter-decision of the BSP Monetary Board. The
BSP Monetary Board denied both motions in its letter2[26] dated 8 December 2003
as there was no sufficient basis to grant the same.

EGI then filed a Petition for Review under Rule 43 of the 1997 Revised Rules
of Civil Procedure with the Court of Appeals raising the sole issue of “whether the
Bangko Sentral ng Pilipinas erred in dismissing the administrative complaint filed by
EGI against UCPB, et al.” The Court of Appeals rendered its assailed Decision
granting the Petition for Review of EGI, thus, setting aside the BSP letter-decision
and remanding the case to the BSP Monetary Board for further proceedings.

UCPB, moved for the reconsideration of the Decision of the appellate court,
praying for a new judgment dismissing the appeal of EGI for lack of jurisdiction
and/or lack of merit. EGI also filed a Partial Motion for Reconsideration of the same
                                                                                                               
 
 
Court of Appeals Decision, with the prayer that the appellate court, instead of still
remanding the case to the BSP Monetary Board for further proceedings, already
direct the latter to impose the applicable administrative sanctions upon UCPB, et al.,.

In a Resolution, the Court of Appeals denied for lack of merit both the
Motion for Reconsideration of UCPB, et al. and the Motion for Partial
Reconsideration of EGI.

Issue:
Whether or not the Honorable Court of Appeals committed patent, grave, and
reversible error when it remanded the case to the [BSP] for further proceedings
instead of acting upon its findings as narrated in its Decision.

Held:
EGI avers that the Court of Appeals committed reversible error when it remanded the
case to the BSP for further proceedings instead of directing the BSP to impose the
applicable sanctions on UCPB, et al. EGI reasons that the appellate court, already
found that UCPB had committed several acts of serious irregularity and conducted
business in an unsafe and unsound manner. By reason thereof, there was no more
need for the Court of Appeals to remand this case to the BSP for a further
determination of whether there were irregular and unsound practices by UCPB, et al.
in its dealings with EGI. Should this case be remanded to the BSP, there would be
nothing to prevent the BSP from ruling again that UCPB, et al., did not commit any
irregularity and unsafe or unsound business practice. To require that this case be
reviewed by the BSP would only lead to multiplicity of suits, promote unnecessary
delay and negate the constitutional rights of all persons to a speedy disposition of
their cases before all judicial, quasi-judicial or administrative bodies.

The Court reiterates that the Court of Appeals did not yet make conclusive
findings in its Decision, that UCPB, et al., committed irregularities and unsound or
unsafe banking practices in their business dealings with EGI. The appellate court
only adjudged that the BSP Monetary Board summarily dismissed the administrative
complaint of EGI, without fully appreciating the facts and evidence presented by the
latter. Given the seriousness of the charges of EGI against UCPB, et al., the BSP
Monetary Board should have conducted a more intensive inquiry and rendered a
more comprehensive decision.

By remanding the case to the BSP Monetary Board, the Court of Appeals only
acted in accordance with Republic Act No. 7653 and Republic Act No. 8791, which
tasked the BSP, through the Monetary Board, to determine whether a particular act
or omission, which is not otherwise prohibited by any law, rule or regulation affecting
banks, quasi-banks or trust entities, may be deemed as conducting business in an
unsafe or unsound manner. Also, the BSP Monetary Board is the proper body to
impose the necessary administrative sanctions for the erring bank and its directors or
officers.

The Court of Appeals did not deem it appropriate, on appeal, to outright

reverse the judgment of the BSP Monetary Board. The Court of Appeals held that the
BSP Monetary Board did not have sufficient basis for dismissing the administrative
complaint of EGI in its 16 September 2003 letter-decision; yet, the appellate court
likewise did not find enough evidence on record to already resolve the administrative
complaint in favor of EGI and against UCPB, et al., precisely the reason why it still
remanded the case to the BSP Monetary Board for further proceedings. The Court of
Appeals never meant to give EGI an assurance of a favorable judgment; it only
ensured that the BSP Monetary Board shall accord all parties concerned to equal
opportunity for presentation and consideration of their allegations, arguments, and
evidence. While the speedy disposition of cases is a constitutionally mandated right,
the paramount duty of the courts, as well as quasi-judicial bodies, is to render justice
by following the basic rules and principles of due process and fair play.

Petitions for review of UCPB and E.Ganzon denied. Decision of CA affirmed

Section 75
CITIBANK vs. SABENIANO
(G.R. No.156132, February 6, 2007)

Facts:
Petitioner Citibank is a banking corporation duly authorized under the laws of the
USA to do commercial banking activities n the Philippines. Sabeniano was a client of
both Petitioners Citibank and FNCB Finance. Respondent filed a complaint against
petitioners claiming to have substantial deposits, the proceeds of which were
supposedly deposited automatically and directly to respondent’s account with the
petitioner Citibank and that allegedly petitioner refused to despite repeated
demands. Petitioner alleged that respondent obtained several loans from the former
and in default, Citibank exercised its right to set-off respondent’s outstanding loans
with her deposits and money. RTC declared the act illegal, null and void and ordered
the petitioner to refund the amount plus interest, ordering Sabeniano, on the other
hand to pay Citibank her indebtedness. CA affirmed the decision entirely in favor of
the respondent.

Issue:
Whether petitioner may exercise its right to set-off respondent’s loans with her
deposits and money in Citibank-Geneva

Held:
Petition is partly granted with modification.

1. Citibank is ordered to return to respondent the principal amount of P318,897.34

and P203,150.00 plus 14.5% per annum
2. The remittance of US $149,632.99 from respondent’s Citibank-Geneva account is
declared illegal, null and void, thus Citibank is ordered to refund said amount in
Philippine currency or its equivalent using exchange rate at the time of payment.
3. Citibank to pay respondent moral damages of P300,000, exemplary damages for
P250,000, attorney’s fees of P200,000.
4. Respondent to pay petitioner the balance of her outstanding loans of
P1,069,847.40 inclusive off interest.
Cases on Retail Trade Liberization Act
B.F. GOODRICH vs. REYES
(G.R. No. L-30067, April 19, 1983)

Facts:
B.F. averse that it was not within the bans indicated by R.A. 1189 with respect to
doing retail business but Secretary Reyes contends otherwise and the courts declared
that B.F. with respect to its customers cannot be considered as the sale of consumer
goods for human, personal, or household satisfaction.

Issue:
Whether B.F. was engaged in retail business?

Held:
B.F. was considered as a retailer of rubber products with respect only to its
employees and officers but not to the Government, public utilities, agricultural
enterprises, logging, mining, and natural resources exploration firms… etc.
Retail Business cover any act, occupation or calling of habitually selling direct
to the general public merchandise, commodities or good for consumption but shall
not include:
(a) XXX;
(b) XXX;
(c) A manufacturer or processor selling to the industrial and commercial
users or consumers who use the products bought by them to render
service to the general public and/or to produce or manufacture goods
which are in turn sold by them;
(d) XXX.
MARSMAN vs. FIRST COCOUNUT CENTRAL
(G.R. No. L-39841, June 20, 1988)

Facts:
First Coco bought a diesel generating machine from Madrid Trading, where the latter
assigned its right to Marsman; Marsman claimed for the outstanding balance of First
Coco but the latter appealed the court’s decision of telling them to pay Marsman.
Upon appeal it was said that the sale that ensued was in violation of R.A. 1180, that
Marsman was illegally engaged in the retail business.

Issue:
Whether the sale of industrial machinery for the use by an industrial plant
constitutes engaging in retail business?

Held:
No, Marsman cannot be considered as illegally engaged in the retail business due to
one of the elements of retail business is missing:
1. Habitually engaged in selling;
2. Sale directed to the general public; and
3. Object of such sale is limited to CONSUMER GOODS.
The sale of the industrial machine is considered as a producer good which would be
used by First Coco for the production of its products, plus the sale to industrial or
commercial users does not fall within the scope of R.A. 1180

Consumer goods- goods not intended for resale or further use in the production of
other products.
Producer goods- goods that are factors in the production of other goods.
Wholesaling- selling to retailers or jobbers rather than to consumers in a large
quantity to one who intend to resell.
Cases on Anti-Money Laundering Act
REPUBLIC vs. GLASGOW
(G.R. No. 170281, January 18, 2008)

Facts:
Republic filed a complaint in the RTC Manila for civil forfeiture of assets (with urgent
plea for issuance of temporary restraining order [TRO] and/or writ of preliminary
injunction) against the bank deposits in account number CA-005-10-000121-5
maintained by Glasgow in CSBI, pursuant to RA 9160.
The judge of RTC Manila issued a 72- hour TRO and after the hearing, issued an
order granting the issuance of a writ of preliminary injunction. Summons to Glasgow
was returned "unserved" as it could no longer be found at its last known address.
Republic filed a verified omnibus motion for (a) issuance of alias summons and (b)
leave of court to serve summons by publication.
the received a copy of the sheriff’s return stating that the alias summons was
returned "unserved" as Glasgow was no longer holding office at the given address and
left no forwarding address.

OSG received a copy of Glasgow’s Motion alleging that

(1) the court had no jurisdiction over its person as summons had not yet been served
on it;

(2) the complaint was premature and stated no cause of action as there was still no
conviction for estafa or other criminal violations implicating Glasgow and

(3) there was failure to prosecute on the part of the Republic.

The Republic opposed Glasgow’s motion to dismiss, and contended that its suit was
an action quasi in rem where jurisdiction over the person of the defendant was not a
prerequisite to confer jurisdiction on the court. It asserted that prior conviction for
unlawful activity was not a precondition to the filing of a civil forfeiture case and that
its complaint alleged ultimate facts sufficient to establish a cause of action.

trial court dismissed the case on the following grounds:

(1) improper venue as it should have been filed in the RTC of Pasig where CSBI, the
depository bank of the account sought to be forfeited, was located;

(2) insufficiency of the complaint in form and substance and

(3) failure to prosecute.

It lifted the writ of preliminary injunction and directed CSBI to release to Glasgow or
its authorized representative the funds in CA-005-10-000121-5.

Issue:

WON the complaint for civil forfeiture was properly instituted under RA 9160

Held:

Yes.
a. With respect to venue:

Section 3, Title II of the Rule of Procedure in Cases of Civil Forfeiture, the venue of
civil forfeiture cases is any RTC of the judicial region where the monetary instrument,
property or proceeds representing, involving, or relating to an unlawful activity or to
a money laundering offense are located. Pasig City, where the account sought to be
forfeited in this case is situated, is within the National Capital Judicial Region
(NCJR). Clearly, the complaint for civil forfeiture of the account may be filed in any
RTC of the NCJR. Since the RTC Manila is one of the RTCs of the NCJR,10 it was a
proper venue of the Republic’s complaint for civil forfeiture of Glasgow’s account.

b. With respect to allegation # 2:

RA 9160, as amended, and its implementing rules and regulations lay down two
conditions when applying for civil forfeiture:

(1) when there is a suspicious transaction report or a covered transaction report

deemed suspicious after investigation by the AMLC and

(2) the court has, in a petition filed for the purpose, ordered the seizure of any
monetary instrument or property, in whole or in part, directly or indirectly, related to
said report.

Since account no. CA-005-10-000121-5 of Glasgow in CSBI was (1) covered by several
suspicious transaction reports and (2) placed under the control of the trial court upon
the issuance of the writ of preliminary injunction, the conditions provided in Section
12(a) of RA 9160, as amended, were satisfied. Hence, the Republic, represented by
the AMLC, properly instituted the complaint for civil forfeiture.

A criminal conviction for an unlawful activity is not a prerequisite for the institution
of a civil forfeiture proceeding. Stated otherwise, a finding of guilt for an unlawful
activity is not an essential element of civil forfeiture.

In relation to sec. 12 of RA 9160, sec. 6 of the same law provides that:

(a) Any person may be charged with and convicted of both the offense of money
laundering and the unlawful activity as herein defined.

(b) Any proceeding relating to the unlawful activity shall be given precedence over
the prosecution of any offense or violation under this Act without prejudice to
the freezing and other remedies provided.

Thus, regardless of the absence, pendency or outcome of a criminal prosecution for

the unlawful activity or for money laundering, an action for civil forfeiture may be
separately and independently prosecuted and resolved.
LIGOT VS. REPUBLIC

(G.R. No. 176944, March 6, 2013)

Facts:

Republic, represented by the Anti-Money Laundering Council (AMLC), filed an

Urgent Ex-Parte Application for the issuance of a freeze order with the CA against
certain monetary instruments and properties of the petitioners, pursuant to Section
10 of RA 9160. This application was based on the February 1, 2005 letter of the Office
of the Ombudsman to the AMLC, recommending that the latter conduct an
investigation on Lt. Gen. Ligot and his family for possible violation of RA No. 9160.

In support of this recommendation, the Ombudsman attached the Complaint it filed

against the Ligots for perjury under Article 183 of the Revised Penal Code, and for
violations of Section 8 of RA No. 6713 and RA No. 3019. It was alleged by the
Ombudsman that petitioner served the AFP for a period of 33 years. It was found out
that petitioner declared in his SALN of 2003, that he had assets in the total amount
of (P3,848,003.00). In contrast, his declared assets in his 1982 SALN amounted to
only (P105,000.00). Aside from these declared assets, the Ombudsman’s
investigation revealed that petitioner and his family had other properties and bank
accounts, not declared in his SALN.

Ombudsman declared the assets registered in petitioner’s name, as well as those in

his wife’s and children’s names, to be illegally obtained and unexplained wealth,
pursuant to the provisions of RA No. 1379.

As a result of the Ombudsman’s complaint, the Compliance and Investigation staff

(CIS) of the AMLC conducted a financial investigation, which revealed the existence
of the petitioner’s various bank accounts with several financial institutions.

On July 5, 2005 CA found probable cause to freeze the bank accounts of the
petitioner valid for a period of 20 days from the date of issuance, ruling that an
unlawful activity and/or money laundering offense had been committed and that the
properties sought to be frozen are related to the unlawful activity or money
laundering offense.

The Republic filed an Urgent Motion for Extension of Effectivity of Freeze Order,
which was granted by the CA extending it until after all the appropriate proceedings
and/or investigations have been terminated.

The Ligots filed a motion to lift the extended freeze order, and contended that there
was no evidence to support the extension of the freeze order. They further argued
that the extension not only deprived them of their property without due process; it
also punished them before their guilt could be proven. However, CA denied their
motion.

Meanwhile, on November 15, 2005, the Rule in Civil Forfeiture Cases took effect.
Under this rule, a freeze order could be extended for a maximum period of six
months.

Ligots filed a motion for reconsideration of the CA’s January 4, 2006 resolution,
insisting that the freeze order should be lifted considering:
(a) no predicate crime has been proven to support the freeze order’s issuance;

(b) the freeze order expired six months after it was issued on July 5, 2005; and

(c) the freeze order is provisional in character and not intended to supplant a case for
money laundering. However, CA again denied their motion.

On the other hand, Republic asserted that Republic claims that the CA can issue a
freeze order upon a determination that probable cause exists, showing that the
monetary instruments or properties subject of the freeze order are related to the
unlawful activity enumerated in RA No. 9160; that it is not necessary that a formal
criminal charge must have been previously filed against them before the freeze order
can be issued. Also, it contended that the Rule in Civil Forfeiture Cases does not
apply to the present case because the CA had already resolved the issues regarding
the extension of the freeze order.

Issue: WON the extended freeze order of the CA violates the provision of RA 9160
which provides that the freeze order could be extended for a maximum period of six
months.

Held:

Yes. The extended period of the freeze order granted by the CA not only violated the
provision of RA 9160, but the constitutional right of the petitioners as well.

By reason of the extended freeze order, the petitioners were not able to enjoy their
property for a period of 6 years from the issuance of the freeze order. Despite demand
of the court for an explanation and reason why such freeze order was granted even
beyond the general rule, that effectivity of a freeze order may be extended by the CA
for a period not exceeding six months, no such reason was given by the CA.

The six-month extension period is ordinarily sufficient for the government to act
against the suspected money launderer and to file the appropriate forfeiture case
against him, and is a reasonable period as well that recognizes the property owner’s
right to due process. In this case, the period of inaction of six years, under the
circumstances, already far exceeded what is reasonable.

the freeze order over the Ligots’ properties has been in effect since 2005, while the
civil forfeiture case – per the Republic’s manifestation – was filed only in 2011 and
the forfeiture case under RA No. 1379 – per the petitioners’ manifestation – was filed
only in 2012. This means that the Ligots have not been able to access the properties
subject of the freeze order for six years or so simply on the basis of the existence of
probable cause to issue a freeze order, which was intended mainly as an interim
preemptive remedy.

as a rule, the effectivity of a freeze order may be extended by the CA for a period not
exceeding six months. Before or upon the lapse of this period, ideally, the Republic
should have already filed a case for civil forfeiture against the property owner with
the proper courts and accordingly secure an asset preservation order or it should
have filed the necessary information.47 Otherwise, the property owner should already
be able to fully enjoy his property without any legal process affecting it. However,
should it become completely necessary for the Republic to further extend the
duration of the freeze order, it should file the necessary motion before the expiration
of the six-month period and explain the reason or reasons for its failure to file an
appropriate case and justify the period of extension sought. The freeze order should
remain effective prior to the resolution by the CA, which is hereby directed to resolve
this kind of motion for extension with reasonable dispatch.

The continued extension of the freeze order beyond the six-month period violated the
Ligot’s right to due process; thus, the CA decision should be reversed.
Cases on Financing Company Act
Section 3
PROJECT BUILDERS vs. CA, INDUSTRIAL FINANCE CORP.
(G.R. No. 9943, June 19, 2001)

Facts:
1. This is a collection suit filed by the Industrial Finance Corporation against the
Petitioners, arising from an alleged deficiency after the extra-judicial
foreclosure.
2. RTC dismissed the complaint . CA overturned the ruling.
3. Industrial Finance Corporation (IFC) granted a credit line to the Petitioner,
the developer builder of Jovan Condominium Bldg, for an amount of
2,000,000.00 which were later on increased to 5,000,000. And the
Petitioner assigned 20 contracts to sell with accounts receivable from its
condominium unit buyers to the IFC, with recourse to assignor and on a non-
collection basis.
4. As a security a deed of Real Estate Mortgage was executed
5. Upon failure of payment, they foreclosed the real property and the highest
bidder was the plaintiff in the amount of 3,500,000.00
6. It was redeemed after 1 year but the plaintiff claimed that there was still a
deficiency
7. On the other hand, Petitioner denied its liability on the ground that it was just
a simple loan
8. “The terms and conditions of the Agreement dated June 15, 1976 (Exh. ‘B’)
which are material to the present appeal state as follows:
“’1. That the Assignor assigned all its rights and interests on several Contracts to
Sell executed by Assignor and the latter’s customers.
‘2. That the Assignor requested the Assignee to increase the former’s credit line to
FIVE MILLION (P5,000,000.00) PESOS, Phil. Currency, which was granted by the
Assignee subject to the following terms and conditions:
‘a. It is hereby agreed that the credit line of P5,000,000.00 granted includes the
amount already assigned/discounted by Assignor to Assignee as stated in
paragraph 1 of this Agreement.
‘b. This assignment/discounting of the Contracts to Sell shall be with recourse to
Assignor and on a non-collection basis.
‘c. That Assignee will execute a Real Estate Mortgage on 3 lots described as Transfer
Certificate of Title Nos. 491702, 491703 and 491704 of the Registry of Deeds of Rizal
to secure the faithful performance of the terms and conditions of this agreement and
the Contracts to Sell assigned or which may be assigned to Assignee.
‘d. Should there be a default on the part of the Assignor to pay Assignee or should
Assignor fail to pay Assignee the amount or amounts due to Assignee arising from
the assignment of the accounts receivables or remit to Assignee a lesser amount, the
Assignor and/or PABLO MALASARTE, ROLANDO L. JUSTO, LEANDRO D.
ENRIQUEZ, TEODORO G. BANAS, GALICANO A. CALAPATIA, JR. shall jointly and
severally in their personal capacities upon demand by the Assignee, repurchase the
Contracts to Sell or installment papers assigned and/or discounted by Assignor in
favor of Assignee and/or pay Assignee the remaining balance of the amount of the
receivables discounted and/or assigned by Assignor to Assignee.
‘e. That the Performance Bond covering the condominium building ‘Jovan’ located
in Mandaluyong, Rizal shall be endorsed and delivered by Assignor to Assignee.
‘f. That the Assignor shall comply with all the terms and conditions specified on the
said Contracts to Sell, executed by the assignor and its individual purchaser or
customers, and assigned/discounted to Assignee whether the assignment is on a
with or without recourse basis.
‘g. Should it become necessary for the assignee to take any legal action, the Assignor
shall pay to the Assignee as attorney’s fee allowed by the Rules of Court in the sum
equivalent to Twenty (20%) per cent of the total indebtedness then unpaid, plus
whatever legal costs incurred, and that any legal action arising out of this
agreement may be instituted in the courts of the City of Manila.’”[1]

Issue: whether or not the agreement forged by petitioners and private respondent is
a simple loan or a financing transaction governed by the provisions of Republic Act
No. 5980.[5]

Other Issues:
1.) Whether Republic Act No. 5980 (Financing Company Act) is intended for the
benefit of financing companies or for the protection of public interests;
2.) Whether or not the above-mentioned Act should be made to apply, even when
the design or scheme to make it appear that there was a purchase of receivables or
credit is only a subterfuge to evade Republic Act No. 3765 (Truth in Lending Act),
particularly Section 4 thereof, and compound exorbitant interests under the guise of
‘purchase discount;’
3.) Whether or not said Republic Act No. 5980 should govern the transaction
between petitioners and private respondent which in reality was bilateral, not
trilateral, and respondent financing company was not really subrogated in the place
of the supposed seller or assignor; and
4.) If said Republic Act No. 5980 should govern the transaction of the parties, should
petitioners still answer for any deficiency after the mortgage with which they
guaranty the collection of the assigned credit, had been foreclosed?”[4]

Held:
PETITION IS DENIED. CA’s Ruling is AFFIRMED

RATIONALE:
1. private respondent is a financing company as so defined by the Financing Company
Act.
(a) “Financing companies,” x x x organized for the purpose of extending credit
facilities to consumers and to industrial, commercial, or agricultural enterprises,
either by discounting or factoring commercial papers or accounts receivable, or
by buying and selling contracts, leases, chattel mortgages, or other evidences of
indebtedness or by leasing of motor vehicles, heavy equipment and industrial
machinery, business and office machines and equipment, appliances and other
movable property.”[6]
2. An assignment of credit is an act of transferring, either onerously or gratuitously,
the right of an assignor to an assignee who would then be capable of proceeding
against the debtor for enforcement or satisfaction of the credit. The transfer of rights
takes place upon perfection of the contract,[8] and ownership of the right, including
all appurtenant accessory rights, is thereupon acquired by the assignee. The
assignment binds the debtor only upon acquiring knowledge of the assignment but he
is entitled, even then, to raise against the assignee the same defenses he could set up
against the assignor. Where the assignment is on account of pure liberality on the
part of the assignor, the rules on donation would likewise be pertinent; where
valuable consideration is involved, the assignment partakes of the nature of a
contract of sale or purchase.[9]
3. An insistence of petitioners that the subject transaction should be considered a
simple loan since private respondent did not communicate with the debtors,
condominium unit buyers, to collect payment from them, is untenable. In an
assignment of credit, the consent of the debtor is not essential for its
perfection,[10] his knowledge thereof or lack of it affecting only the efficaciousness or
inefficaciousness of any payment he might make.
4. “What the law requires in an assignment of credit is not the consent of the debtor
but merely notice to him. A creditor may, therefore, validly assign his credit and its
accessories without the debtor’s consent (National Investment and Development Co.
v. De los Angeles, 40 SCRA 489 [1971]). The purpose of the notice is only to inform
the debtor that from the date of the assignment, payment should be made to the
assignee and not to the original creditor.”[13]
5. The assignment, it might be pointed out, was “with recourse,” and default in the
payment of installments had been duly established when petitioner corporation
foreclosed on the mortgaged parcels of land. The resort to foreclosure of the
mortgaged properties did not preclude private respondent from collecting interest
from the assigned Contracts To Sell from the time of foreclosure to the redemption of
the foreclosed property. The imposition of interest was a mere enforcement or
exercise of the right to the ownership of the credit or receivables which the parties
stipulated in the 1976 financing agreement. Thus -
“f. That the Assignor shall comply with all the terms and conditions specified on the
said Contracts to Sell, executed by the assignor and its individual purchaser or
customers, and assigned/discounted to Assignee
6. Petitioners’ claim that private respondent is proscribed from imposing interest and
other charges beyond the limits set out by the Financing Company Act lacks
merit. The law states:
“SEC. 5. Limitation on purchase discount, fees, service and other Charges. ---
In the case of assignments of credit or the buying of installment papers, accounts
receivables and other evidences of indebtedness by financing companies, the
purchase discount, exclusive of interest and other charges, shall be limited to
fourteen (14%) per cent of the value of the credit assigned or the value of the
installment papers, accounts receivable and other evidence of indebtedness
purchased based on a period of twelve (12) months or less, and to one and one-sixth
(1 1/6%) per cent for each additional month or fraction thereof in excess of twelve
months, regardless of the terms and conditions of the assignment or purchase.”
Clearly, the 14% ceiling provided for purchase discount is exclusive of interest and
other charges. A purchase discount is distinct from interest. The term purchase
discount refers to the difference between the value of the receivable purchased or
credit assigned, and the net amount paid by the finance company for such purchase
or assignment, exclusive of fees, service charges, interests and other charges incident
to the extension of credit,[16] and it is akin to “time price differential,” or the increase
in price to cover the expense generally entailed by transactions on credit.[17] There is
thus no impingement of the Usury Law even when the controversy might have arisen
prior to the adoption by the Central Bank Monetary Board on 03 December 1982 of
its Resolution No. 224 on interest ceilings.
BELTRAN vs. PAIC FINANCE CORPORATION
(G.R. No. 83113, May 19, 1992)

Facts:
1. This is a consolidated case, brought to the court to determine the real nature of the
commercial transaction between the parties.
Initially, SESCO sold the Performance Analyzer SUN 1115 to the Beltran spouses as
evidenced by SESCO's Sales Invoice No. 050 dated 15 July 1980. 5 Accompanying this
Sales Invoices was a Certificate of Warranty issued by SESCO in favor of the Beltrans,
also dated 15 July 1980. 6 Thereupon, delivery of the Performance Analyzer was made
to the Beltrans, as indicated in the Sales Invoice and in the delivery receipt dated 15
July 1980. 7 As downpayment fort his purchase, the Beltrans paid SESCO the total
amount of P29,672.11.
2. Next, SESCO sold to PAIC the same equipment it had earlier sold to the Beltran
spouses. The sale to PAIC is evidenced by SESCO's Sales Invoice No. 050 dated 3
September 1980 and issued in the name of both PAIC and the Beltrans as vendees.
For this transaction, PAIC paid SESCO the amount of P91,751.60. A delivery receipt
covering the SUN 1115 and dated 3 September 1980 was issued in the name
of both PAIC and the Beltrans. A close examination of the records will, however,
show that PAIC never took physical possession of the SUN 1115, since on the stated
date of delivery to PAIC, the SUN 1115 was already physically in the hands of the
Beltrans.
3. Shortly after the transaction between SESCO and PAIC, a lease contract dated 19
September 1990 was entered into between PAIC and the Beltrans. The lease
agreement provided for a fixed monthly rental payment for a period of thirty-six (36)
months. It is important to note that under this lease contract, the lessor PAIC
undertook no warranty of the fitness, design and condition of, or of the quality or
capacity of, the leased Performance Analyzer SUN 1115. The relevant provision of the
lease agreement reads as follows:
2.1. –– Warranties; Negation –– Lessor not being the manufacturer of the
Equipment, nor manufacturer's agent, makes no warranty or representation, either
expressed or implied, as to the fitness, design or condition of, or as to the quality or
capacity of the material, equipment or workmanship in the Equipment, nor any
warranty that the equipment will satisfy the requirements of any law, rule,
specification or contract which provides for specific machinery or operation, or
special methods, it being agreed that all such risks as between the Lessor and the
Lessee are to be borne by the Lessee at its sole risk and expense. No oral agreement,
guaranty, promise, condition, representation or warranty shall be binding; all prior
conversations, agreements, or representations related hereto and/or to the
Equipment are integrated herein, and no modification hereof shall be binding unless
in writing signed by Lessor. All repairs, parts, supplies, accessories, equipment and
device, furnished or added to any Equipment under lease shall become the property
of the Lessor.The Lessee also agrees that each Equipment under lease is of a design,
capacity and size selected and approved by the Lessee, and the Lessee is satisfied that
the same is suitable for its purposes. The Lessor shall not be liable to the Lessee for
any loss, damage or expense of any kind or nature, caused directly or indirectly, by
any Equipment under lease, or the use or maintenance thereof, or the repairs,
servicing or adjustments thereto, or by any delay or failure to provide the same, or by
any interruption of service or loss of use thereof or for any loss of business or damage
whatever and however the same may have been caused. (Emphasis supplied)
The lease contract also provided that "the lessee shall have no option to purchase or
otherwise acquire title or ownership of any of the leased equipment and shall have
only he right to use the same under and subject to the terms and conditions of [the]
lease."
4. Pursuant to the lease agreement, another delivery receipt was issued, this time in
the name of the Beltrans by PAIC, and dated 2 September 1980. It may be noted that
this delivery receipt dated 2 September 1980 was in fact dated a day earlier than the
date when SESCO, per its own documentation, delivered the equipment to PAIC.
5. Since the Beltrans were in possession of the SUN 1115 before PAIC, per SESCO's
documentation, purchased the same from SESCO, it necessarily follows that the
Beltrans, rather than PAIC, had selected and inspected the equipment.
6. The amount paid by PAIC to SESCO represented the discounted value of the total
amount receivable by SESCO from the Beltrans. 8 At the time of the sale by SESCO to
PAIC, the amount receivable by SESCO from the Beltrans (i.e., the balance of the
purchase price of the equipment remaining after application of the downpayment)
was P107,327.89 (P137,000.00 - P29,672.11 = P107,327.89).
7. The rental payments stipulated in the lease contract between PAIC and the
Beltrans were so computed as to cover the amount paid by PAIC to SESCO plus the
financing charges. 9
8. Although the lease contract gave no option to the Beltrans to purchase or to
acquire the SUN 1115, the declarations of the parties in their different
pleadings 10 afford clear indication that the parties had contemplated that the
ownership of the SUN 1115 would pass to the Beltrans after the end of the lease
period. It was not, therefore, anticipated by the parties that the SUN 1115 would be
returned to the lessor PAIC. PAIC was not in the business of leasing out machinery or
equipment and did not maintain a warehouse or workshop nor service and
maintenance personnel for the repair and servicing of machinery or equipment.
9. PAIC’s contention , in its petition, mainly alleges that the Court of Appeals erred in
applying the provisions of the Civil Code in the construction of its contract with the
Beltran spouses. PAIC maintains that the Court of Appeals should have applied
instead the provisions of R.A. No. 5980 entitled "An Act Regulating the Organization
and Operation of Financing Companies," in characterizing the relationship between
PAIC and the spouses Beltran. It is argued that the contract of lease is actually
a financial lease governed by Section 3 (a) of R.A. No. 5980; that under such scheme,
PAIC under took no warranty as to the fitness, design or condition of, or as to the
quality or capacity of the equipment.
10. The Beltrans asserted against PAIC and against SESCO two (2) principal claims.
The first claim was for rescission of the lease agreement with PAIC, which had
obligated the Beltrans to make monthly payments to PAIC, for failure of PAIC to
render the SUN 1115 fit for the purpose for which the Beltrans wanted it in the first
place. The second was a claim to recover the downpayment that the Beltrans had
made to SESCO on the purchase price of the SUN 1115.
11. The judgment of the trial court was affirmed by the Court of Appeals in a decision
dated 30 June 1987. In that decision, however, the Court of Appeals held the
transaction between the Beltrans and PAIC to be one of sale rather than a lease.

Issue:
WON the real nature of the commercial transactions entered into by these parties is
one of a lease contract or a sale contract?

HELD:
AFFIRMED CA’s Ruling. A sale and a financing arrangement.
RATIONALE:
1. We believe that the Court of Appeals was substantially correct in holding that
the principal transactions were two-fold: firstly, a sale of the SUN No. 1115
from SESCO to PAIC/the Beltrans and, secondly, a financing arrangement
that would permit the ultimate users of the SUN 1115 — the Beltrans — to use
that equipment and pay for it by installments, spread out over thirty-six (36)
months. Their consistencies in the details of the documentation of the
 transactions may be seen to be due, not so much to "simulation" of the "real
agreement of the parties" but rather to the fact that the financing company
was chosen and the financing arrangement concluded sometime after the
original sale transaction between SESCO and the Beltrans. That original
transaction was in effect remodelled or restructured to conform with
the financing arrangement, which took the form of a financial lease. A
financial lessor, like all lessors, is legal owner of the thing leased. Accordingly,
SESCO documented a sale to PAIC; because the SUN 1115 had earlier been
sold to the Beltrans, the SESCO invoice was modified and made out to both
PAIC and the Beltrans. The possession originally held by the Beltrans in
concept of owner, was transmuted into possession by the Beltrans in concept
of lessee.
2. Considering all the circumstances listed earlier, and bearing in mind the
economic and legal nature and objectives of a financing lease, we conclude
and so hold that the financial lease between PAIC and the Beltrans was a valid
and enforceable contract as between the two (2) contracting parties. The
Beltrans are therefore bound to pay to PAIC all the rental payments which
accrued and are due and payable under that contract.
3. At the same time, PAIC is entitled to require SESCO to respond under its
solidary guarantee of the obligations of the Beltrans under the lease contract.
PAIC may thus opt to recover from either the Beltrans or SESCO alone, or
from both the Beltrans and SESCO solidarily at the same time
4. Should PAIC recover fully or partially the amounts due from the Beltrans, we
believe and so hold that the Beltrans are entitled to reimbursement from
SESCO of such amounts as they shall have been compelled to pay PAIC. In
addition, the Beltrans are entitled to recover from SESCO the downpayment
they had previously made to SESCO on the SUN 1115, and as well to require
SESCO to take back that equipment. These rights of the Beltrans flow from
their rescission of the contract of sale covering the SUN 1115 for failure of
SESCO to make good on its warranty against defects in materials and
workmanship set out in its "Warranty Certificate," and on its warranty against
hidden defects which render the thing sold "unfit for the use of which it is
intended" under the general law on sales. 13
5. It is clear to the Court that it is SESCO who must bear the legal consequences
of its failure to make good on the warranty it had given as vendor of the SUN
1115. SESCO received the full value of the SUN 1115: (a) the downpayment
from the Beltrans; and (b) the balance of the purchase price from PAIC. The
record shows that PAIC had not breached any of its undertakings to the
Beltrans under the financial lease. Upon the other hand, the Beltrans, because
of failure of the equipment warranty given by SESCO, could not benefit either
from the purchase of the equipment or from the financial lease. Clearly, it
would be inequitable and unconscionable to permit SESCO to hold on to the
purchase price and to shift the burden of its own failure either to the ultimate
buyers or to the company which financed the bulk of the purchase price.

6. In this jurisdiction, financial leases as a species of secured financing are of

fairly recent vintage. Financial leases, while they are complex arrangements,
cannot be casually dismissed as "simulated contracts." To the contrary, they
are genuine or legitimate contracts which have been accorded statutory and
administrative recognition. Section 3 (a) of Republic Act No. 5980, as
amended by Presidential Decrees Nos. 1454 and 1793, known as the
"Financing Company Act," defines financing companies in the following
manner:
Financing companies, hereinafter called companies, are corporations, or
partnerships, except those regulated by the Central Bank of the Philippines, the
Insurance Commissioner and the Cooperatives Administration Office, which are
primarily organized for the purpose of extending credit facilities to consumers and
toindustrial, commercial, or agricultural enterprises, either by discounting or
factoring commercial papers or accounts receivables, or by buying and selling
contracts, leases, chattel mortgages, or other evidences of indebtedness, or by
leasing motor vehicles, heavy equipment and industrial machinery, business and
officemachines and equipment, appliances and other movable
property. 11 (Emphasis supplied)

7. Section 1, paragraph 1 of the Revised Rules and Regulations Implementing

the Provisions of the Financing Company Act, as amended, adopted jointly by
the Securities and Exchange Commission and the Monetary Board of the
Central Bank of the Philippines, defines leasing in the following terms:
1. "LEASING" shall refer to financial leasing which is a mode of extending
credit through a non-cancellable contract under which the lessor
purchases or acquires at the instance of the lesseeheavy equipment,
motor vehicles, industrial machinery, appliances, business and office
machines, and other movable property in consideration of the periodic
payment by the lessee of a fixed amount of money sufficient to amortize
at least 70% of the purchase price or acquisition cost, including
anyincidental expenses and a margin of profit, over the lease period. The
contract shall extend over an obligatory period during which the lessee
has the right to hold and use the leased property and shall bear the cost of
repairs, maintenance, insurance and preservation thereof, but with no
obligation or option on the part of the lessee to purchase the leased
property at the end of the lease contract. (Emphasis supplied)

8. The basic purpose of a financial leasing transaction is to enable the

prospective buyer of equipment, who is unable to pay for such equipment in
cash in one lump sum, to lease such equipment in the meantime for his use, at
a fixed rental sufficient to amortize at least 70% of the acquisition cost
(including the expenses and a margin of profit for the financial lessor) with
the expectation that at the end of the lease period, the buyer/financial lessee
will be able to pay any remaining balance of the purchase price.

9. a financing company is not a buyer or seller of goods; it is not a trading

company. Neither is it an ordinary leasing company; it does not make its
profit by buying equipment and repeatedly leasing out such equipment to
different users thereof. But a financial lease must be preceded by a purchase
and sale contract covering the equipment which becomes the subject matter
of the financial lease. The financial lessor takes the role of the buyer of
equipment leased. And so the formal or documentary tie between the seller
and the real buyer of the equipment, i.e., the financial lessee, is apparently
severed. In economic reality, however, that relationship remains. The sale of
the equipment by the supplier thereof to the financial lessor and the latter's
legal ownership thereof are intended to secure the repayment over time of the
purchase price of the equipment, plus financing charges, through the payment
of lease rentals; that legal title is the upfront security held by the financial
lessor, a security probably superior in some instances to a chattel mortgagee's
lien.
INTERNATIONAL HARVESTER MACLEOD INC vs. MEDINA
(G.R. No. 53623, March 22, 1990)

Facts:
-­‐ Petition for certiorari assailing the decision of the lower court declaring that
petitioner is imposing and collecting finance charges without authority from
the SEC.
-­‐ Petitioner IHMI is in the business of sale of automotive products and
machineries from which respondent purchased 24 engine trucks on
instalment, upon which the former imposed and collected the total sum of
P325,596.79 as finance charges on the instalment sales.
-­‐ Trial court, in its decision, noted that: "there simply cannot be any room for
doubt but that the defendant (IHMI) imposed and collected the amount of
P325,596.79 purely as financing charges and this is conclusive of the fact that
it did engage in the business of a financing company without authority from
the Securities and Exchange Commission in gross violation of R.A. 5980
o “it is clear that defendant had no authority to impose and collect
financing charges for accounts arising from sales in installment
transactions. It had no authority and power to self-finance the
accounts resulting from its sales in installment of its product since it is
not a financing company and had no authority from the Securities and
Exchange Commission. Being ultra vires, its acts cannot be validated.”

Issue:
Whether by imposing and collecting finance charges in connection with the
installment sale of its trucks, IHMI, which is admittedly not a financing company,
violated R.A. 5980 by engaging in the business of a financing company without
requisite authority from the Securities and Exchange Commission.

Held:
No, RA 5980 not violated.

RATIO:
-­‐ Main argument of the appellant IHMI is that the type of "financing" involved
in its business of selling trucks and machinery on installment, is not the
business of financing defined in Section 3, R.A. 5980 which means "extending
credit facilities to consumers and to industrial, commercial or agricultural
enterprises, either by discounting or factoring commercial papers or accounts
receivables, or by buying and selling contracts, leases, chattel mortgages, or
other evidence of indebtedness, or by leasing of motor vehicles, heavy
equipment and industrial machinery, business and office machines and
equipment, appliances and other movable property. . . .”
-­‐ Evidently, the financing transaction that is regulated by R.A. 5980 involves
the buying, discounting, or factoring of promissory notes and sales on credit
or installment. IHMI only extended credit to Medina by allowing him to pay
for the 24 truck engines in installment.
o While the increased price of the sale included a "financing charge,"
that charge was simply another name for the interest to be paid by the
installment buyer (Medina) on the deferred payment of the purchase
price of the vehicles sold and delivered to him by IHMI.
-­‐ The use of the words "finance charge," "financing" or "finance operation" in
the documents prepared, and letters sent, by IHMI to Medina, was in
compliance with R.A. 3765 (Truth in Lending Act) which requires a creditor
(or seller) to fully disclose to the debtor (or buyer) the true cost of credit "with
 a view of preventing the uninformed use of credit to the detriment of the
national economy.
-­‐ IHMI used the word "finance charge" instead of "interest" in the Retail Notes
Analysis which it delivered to Medina, because that is the term used in the
Truth in Lending Act (Sec. 4, subpar. 6, R.A. 3765).
-­‐ IHMI correctly pointed out that its transaction with Medina differs from a
financing transaction under R.A. 5980, in that there were only two parties in
its transaction with Medina, namely: IHMI and Medina, while in a financing
transaction under R.A. 3765, there are three (3) parties involved, namely: (1)
the installment buyer, (2) the seller, and (3) the financing company. The
buyer executes a note or notes for the unpaid balance of the price of the thing
purchased by him on installment. The seller assigns the notes or discounts
them with a financing company which is subrogated in the place of the seller,
as creditor of the installment buyer.
o No financing company stepped into the shoes of IHMI as assignee or
purchaser of IHMI's credit against Medina. Medina himself, not a
financing company, paid IHMI for the truck engines. Medina made his
installment payments or amortizations to IHMI, not to a financing
company.
-­‐ Since IHMI's business of selling trucks in installment is not the business of a
financing company under R.A. 5980, IHMI did not need SEC authorization to
engage in it.
PCI LEASING AND FINANCE, INC. vs. TROJAN METAL INDUSTRIES
INC.
(G.R. No. 176381, December 15, 2010)

Facts:
-­‐ Respondent Trojan Metal Industries, Inc. (TMI) came to petitioner PCI
Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of extending a loan,
PCILF offered to buy various equipment TMI owned, upon which the latter
accepted. The parties immediately executed deeds of sale evidencing TMI’s
sale to PCILF of the various equipment in the total amount of P 2,865,070.00
-­‐ PCILF and TMI then entered into a lease agreement, whereby the latter leased
from the former the various equipment it previously owned. Pursuant to the
lease agreement, TMI issued postdated checks representing 24 monthly
instalments.
o A guaranty deposit in the amount of P1,030,350.00 was also required
of TMI which would serve as security for the performance of the
obligation; to be automatically forfeited should TMI return the leases
equipment before the expiration of the agreement.
o Furthermore, spouses Walfrido and Elizabeth Dizon, as TMI’s
President and Vice-President, respectively executed in favor of PCILF
a Continuing Guaranty of Lease Obligations which stated that they
would pay whatever obligations would be due in the event TMI fails to
fulfill them.
-­‐ In need of more money, TMI used the leased equipment as collateral to be
able to obtain an additional loan from another company. Unfortunately,
PCILF considered this a violation of the lease agreement, and asked TMI for
payment of its outstanding obligations. (partial payments of TMI had reached
P1,717,091.00)
-­‐ PCILF filed with RTC a complaint for recovery of sum of money and personal
prop. with prayer for issuance of writ of replevin.
-­‐ RTC issued replevin and directed the sheriff to take custody of the leased
equipment. Some time thereafter PCILF sold the same to a third party for
P1,025,000.00
-­‐ Respondents, in their answer, claimed that it was a simulated financial lease,
and prayed that they be allowed to reform the lease agreement to reflect the
true agreement between the parties.
-­‐ RTC: Ruled in favour of PCILF; the lease agreement must be presumed valid
as the law between the parties even if some of its provisions constituted
unjust enrichment on the part of PCILF. Respondent TMI appealed.
-­‐ CA DECISION: the sale with lease agreement was in fact a loan secured by
chattel mortgage and set aside the decision of the RTC. It directed the PCILF
to pay TMI, by way of refund, the amount of P1,166,826.52

Issue:
WON the sale with lease agreement the parties entered into was a financial lease or a
loan secured by the chattel mortgage.

Held:
Transaction was a loan secured by a chattel mortgage.

RATIO:
-­‐ Petitioner PCILF contends that the transaction between the parties was a sale
and leaseback financing arrangement where the client sells movable property
to a financing company, which then leases the same back to the client.
-­‐ Respondents counter that from the very beginning, transfer to PCILF of
ownership over the subject equipment was never the intention of the parties.
-­‐ SC: In a true financial leasing, whether under RA 5980 or RA 8556, a finance
company purchases on behalf of a cash-strapped lessee the equipment the
latter wants to buy but, due to financial limitations, is incapable of doing so.
The finance company then leases the equipment to the lessee in exchange for
the latter’s periodic payment of a fixed amount of rental.
o since the transaction between PCILF and TMI involved equipment
already owned by TMI, it cannot be considered as one of financial
leasing, as defined by law, but simply a loan secured by the various
equipment owned by TMI.
-­‐ Financial leasing contemplates the extension of credit to assist a buyer in
acquiring movable property which he can use and eventually own.
-­‐ The transaction between the parties was simply a loan secured by chattel
mortgage. Thus upon TMI's default, PCI was entitled to seize the mortgaged
equipment, not as owner but as creditor-mortgagee for the purpose of
foreclosing the chattel mortgage.
o PCI's sale to a third party of the mortgaged equipment and collection
of the proceeds of the sale can be deemed in the exercise of its right to
foreclose the chattel mortgage as creditor-mortagee.
PCI LEASING AND FINANCE INC. vs. GIRAFFE-X CREATIVE IMAGING
INC.
(GR 142618, July 12, 2007)

Facts:
-On December 4, 1996, petitioner PCI LEASING and respondent GIRAFFE entered
into a Lease Agreement, whereby the former leased out to the latter one (1) set of
Silicon High Impact Graphics and accessories worth P3,900,00.00 and one (1) unit
of Oxberry Cinescan 6400-10 worth P6,500,000.00.
- A year into the life of the Lease Agreement, GIRAFFE defaulted in its monthly
rentalpayment
obligations. And following a three month default, PCI LEASING addressed a formal
pay-or-surrender-equipment type of demand letter dated February 24, 1998 to
GIRAFFE.
- The demand went unheeded.
- PCI Leasing instituted a case against GIRAFFE. PCI prayed for the issuance of a
writ of replevin for the recovery of the leased property
- Upon PCI LEASING’s posting of a replevin bond, the trial court issued a writ of
replevin, paving the way for PCI LEASING to secure the seizure and delivery of the
equipment covered by the basic lease agreement.
- Instead of an answer, GIRAFFE filed a Motionto Dismiss,arguing that the seizure of
the two (2) leased equipment stripped PCI LEASING of its cause of action.
-GIRAFFE argues that, pursuant to Article 1484 of the Civil Code on installment sales
of personal property, PCI LEASING is barred from further pursuing any claim arising
from the lease agreement and the companion contract documents, adding that the
agreement between the parties is in reality a lease of movables with option to buy.
-GIRAFFE asserts in its Motion to Dismiss that the civil complaint filed by PCI
LEASING is proscribed by the application to the case of Articles 1484 and 1485,
supra, of the Civil Code.
- PCI Leasing on the other hand maintains that its contract with GIRAFFE is a
straight lease without an option to buy.
- petitioner contends that the financial leasing arrangement it concluded with the
respondent represents a straight lease covered by R.A. No. 5980, the Financing
Company Act, as last amended by R.A. No. 8556, otherwise known as Financing
Company Act of 1998, and is outside the application and coverage of the Recto Law.
To the petitioner, R.A. No. 5980 defines and authorizes its existence and business.
-the trial court granted GIRAFFE’s motion to dismiss
- motion for reconsideration was denied, hence
this petition for review.

Issue:
Whether OR NOT the financial leasing Arrangement represents a straight lease
covered by R.A. No. 5980, the Financing Company Act, as last amended by R.A. No.
8556, otherwise known as
Financing Company Act of 1998, and is outside the application and coverage of the
Recto Law?

Held:
Petition denied. Trial Court’s decision affirmed

Ratio:
R.A. No. 5980, in its original shape and as amended, partakes of a supervisory or
regulatory legislation, merely providing a regulatory framework for the organization,
registration, and regulation of the operations of financing companies. As couched, it
does not specifically define the rights and obligations of parties to a financial leasing
arrangement. In fact, it does not go beyond defining commercial or transactional
financial leasing and other financial leasing concepts.

Petitioner foists the argument that the Recto Law, i.e., the Civil Code provisions on
installment sales of movable property, does not apply to a financial leasing agreement
because such agreement, by definition, does not confer on the lessee the option to
buy the property subject of the financial lease. To the petitioner, the absence of an
option-to-buy stipulation in a financial leasing agreement, as understood under R.A.
No. 8556, prevents the application thereto of Articles 1484 and 1485 of the Civil
Code.

We are not persuaded.

The Court can allow that the underlying lease agreement has the earmarks or made to
appear as a financial leasing, a term defined in Section 3(d) of R.A. No. 8556 as -

a mode of extending credit through a non-cancelable lease contract under which the
lessor purchases or acquires, at the instance of the lessee, machinery, equipment, …
office machines, and other movable or immovable property in consideration of the
periodic payment by the lessee of a fixed amount of money sufficient to amortize at
least seventy (70%) of the purchase price or acquisition cost, including any incidental
expenses and a margin of profit over an obligatory period of not less than two (2)
years during which the lessee has the right to hold and use the leased property … but
with no obligation or option on his part to purchase the leased property from the
owner-lessor at the end of the lease contract.

A financing arrangement has a purpose which is at once practical and salutary. R.A.
No. 8556 was, in fact, precisely enacted to regulate financing companies’ operations
with the end in view of strengthening their critical role in providing credit and
services to small and medium enterprises and to curtail acts and practices prejudicial
to the public interest, in general, and to their clienteles, in particular. As a regulated
activity, financing arrangements are not meant to quench only the thirst for profit.
They serve a higher purpose, and R.A. No. 8556 has made that abundantly clear.

We stress, however, that there is nothing in R.A. No. 8556 which defines the rights
and obligations, as between each other, of the financial lessor and the lessee. In
determining the respective responsibilities of the parties to the agreement, courts,
therefore, must train a keen eye on the attendant facts and circumstances of the case
in order to ascertain the intention of the parties, in relation to the law and the written
agreement. Likewise, the public interest and policy involved should be considered. It
may not be amiss to state that, normally, financing contracts come in a standard
prepared form, unilaterally thought up and written by the financing companies
requiring only the personal circumstances and signature of the borrower or lessee;
the rates and other important covenants in these agreements are still largely imposed
unilaterally by the financing companies. In other words, these agreements are usually
one-sided in favor of such companies. A perusal of the lease agreement in question
exposes the many remedies available to the petitioner, while there are only the
standard contractual prohibitions against the respondent. This is characteristic of
standard printed form contracts.

-The PCI LEASING- GIRAFFE lease agreement is in reality a lease with an option to
purchase the equipment. This has been made manifest by the actions of the petitioner
itself, foremost of which is the declarations made in its demand letter to the
respondent. There could be no other explanation than that if the respondent paid the
balance, then it could keep the equipment for its own; if not, then it should return
them. This is clearly an option to purchase given to the respondent. Being so, Article
1485 of the Civil
Code should apply.
VICENTE ONG LIM SING JR. vs. FEB LEASING AND FINANCE CORP
(G.R. No. 168115, June 8, 2007)

Facts:
FEB Leasing and Finance Corp entered into a lease agreement of equipment and
motor vehicles with JVL Food Products. Vicente Ong Lim Sing, Jr. executed an
Individual Guarantee Agreement with FEB regarding faithful compliance with the
terms of the lease agreement.

JVL defaulted on its obligation. By 2000, the arrears of JVL amounted to

P3,414,468.75. Due to the continuous nonpayment despite numerous demands, FEB
filed a complaint for sum of money, damages, and replevin against JVL and Lim. JVL
and Lim argued before the court that the lease contract was actually a sale on
installment basis. They further argued that the contract was a contract of adhesion.
The trial court rendered a ruling In favor of Lim and JVL.

The trial court, through logic, ruled that Lim cannot be a mere lessee because of he
had an insurable interest over the items. It has also been held that the test of
insurable interest in property is whether the assured has a right, title or interest
therein that he will be benefited by its preservation and continued existence or suffer
a direct pecuniary loss from its destruction or injury by the peril insured against. If
Lim and JVL were to be regarded as only a lessee, logically the lessor who asserts
ownership will be the one directly benefited or injured and therefore the lessee is not
supposed to be the assured as he has no insurable interest.

FEB appealed the decision before the Court of Appeals. The appellate court rendered
judgment in favor of FEB. It reversed the earlier decision of the RTC of Manila and
ordered Lim and JVL to pay FEB the amount due plus damages. Unsatisfied with the
decision, JVL and Lim appealed the case before the Supreme Court.

Issue:
Whether or not a financial lease agreement was executed by JVL and FEB.

Held:
The Supreme Court dismissed the petition of Lim and affirmed the decision of
the Court of Appeals. According to the Court, the agreement was indeed a financial
lease agreement and not a sale by installment basis.

The Lease Contract with corresponding Lease Schedules with Delivery and
Acceptance Certificates is, in point of fact, a financial lease within the purview of R.A.
No. 8556. Section 3(d) thereof defines “financial leasing” as:

[A] mode of extending credit through a non-cancelable lease contract under which
the lessor purchases or acquires, at the instance of the lessee, machinery, equipment,
motor vehicles, appliances, business
and office machines, and other movable or immovable property in
consideration of the periodic payment by the lessee of a fixed amount of
money sufficient to amortize at least seventy (70%) of the purchase price or
acquisition cost, including any incidental expenses and a margin of profit over an
obligatory period of not less than two (2) years during which the lessee has the
right to hold and use the leased property with the right to expense the lease rentals
paid to the lessor and bears the cost of repairs, maintenance, insurance and
preservation thereof, but with no obligation or option on his part to purchase the
leased property from the owner-lessor at the end of the lease contract.
FEB leased the subject equipment and motor vehicles to JVL in consideration of a
monthly periodic payment of P170,494.00. The periodic payment by petitioner is
sufficient to amortize at least 70% of the purchase price or acquisition cost of the said
movables in accordance with the Lease Schedules with
Delivery and Acceptance Certificates. “The basic purpose of a financial leasing
transaction is to enable the prospective buyer of equipment, who is unable to pay for
such equipment in cash in one lump sum, to lease such equipment in the meantime
for his use, at a fixed rental sufficient to amortize at least 70% of the acquisition cost
(including the expenses and a margin of profit for the financial lessor) with the
expectation that at the end of the lease period the buyer/financial lessee will be able
to pay any remaining balance of the purchase price.”

The allegation of petitioner that the rent for the use of each movable constitutes the
value of the vehicle or equipment leased is of no moment. The law on financial lease
does not prohibit such a circumstance and this alone does not make the transaction
between the parties a sale of personal property on installment. In fact, the value of
the lease, usually constituting the value or amount of the property involved, is a
benefit allowed by law to the lessor for the use of the property by the lessee for
the duration of the lease. It is recognized that the value of these movables
depreciates through wear and tear upon use by the lessee.

The Court also ruled that the lessee, herein petitioner, had an insurable
interest in the items even if he was only a lessee. Section 17 of the Insurance Code
provides that the measure of an insurable interest in property is the extent to which
the insured might be damnified by loss or injury thereof. It cannot be denied that JVL
will be directly damnified in case of loss, damage, or destruction of any of the
properties leased.
Section 12
PCI LEASING AND FINANCE, INC., vs. UCPB GENERAL INSURANCE
CO., INC., respondent.
(G.R. No. 162267, July 4, 2008)

Facts:
On October 19, 1990 at about 10:30 p.m., a Mitsubishi Lancer owned by United
Coconut Planters Bank was traversing the Laurel Highway, Barangay Balintawak,
Lipa City. The car was insured with plantiff-appellee [UCPB General Insurance Inc.],
then driven by Flaviano Isaac with Conrado Geronimo, the Asst. Manager of said
bank, was hit and bumped by an 18-wheeler Fuso Tanker, owned by defendants-
appellants PCI Leasing & Finance, Inc. allegedly leased to and operated by
defendant-appellant Superior Gas & Equitable Co., Inc. (SUGECO) and driven by its
employee, defendant appellant Renato Gonzaga.
The impact caused heavy damage to the Mitsubishi Lancer car resulting in an
explosion of the rear part of the car. The driver and passenger suffered physical
injuries. However, the driver defendant-appellant Gonzaga continued on its way to
its destination and did not bother to bring his victims to the hospital.
Plaintiff-appellee paid the assured UCPB the amount of P244,500.00 representing
the insurance coverage of the damaged car.
As the 18-wheeler truck is registered under the name of PCI Leasing, repeated
demands were made by plaintiff-appellee for the payment of the aforesaid amounts.
However, no payment was made.
PCI Leasing and Finance, Inc.,interposed the defense that it could not be held liable
for the collision, since the driver of the truck, Gonzaga, was not its employee, but that
of its co-defendant Superior Gas & Equitable Co., Inc. (SUGECO). In fact, it was
SUGECO, and not petitioner, that was the actual operator of the truck, pursuant to a
Contract of Lease signed by petitioner and SUGECO. PCI, however, admitted that it
was the owner of the truck in question.
RTC ruled in favor of UCPB. CA affirmed.

Issue:
WON petitioner, as a financing company, is absolved from liability by the enactment
of Republic Act (R.A.) No. 8556, or the Financing Company Act of 1998.

Held:
Petition DENIED.
Petitioner's argument that the enactment of R.A. No. 8556, especially its addition of
the new Sec. 12 to the old law, is deemed to have absolved petitioner from liability,
fails to convince the Court.
These developments, indeed, point to a seeming emancipation of financing
companies from the obligation to compensate claimants for losses suffered from the
operation of vehicles covered by their lease. Such, however, are not applicable to
petitioner and do not exonerate it from liability in the present case.
The new law, R.A. No. 8556, notwithstanding developments in foreign jurisdictions,
do not supersede or repeal the law on compulsory motor vehicle registration. No part
of the law expressly repeals Section 5(a) and (e) of R.A. No. 4136, as amended,
otherwise known as the Land Transportation and Traffic Code, to wit:
Sec. 5. Compulsory registration of motor vehicles. - (a) All motor vehicles and trailer
of any type used or operated on or upon any highway of the Philippines must be
registered with the Bureau of Land Transportation (now the Land Transportation
Office, per Executive Order No. 125, January 30, 1987, and Executive Order No. 125-
A, April 13, 1987) for the current year in accordance with the provisions of this Act.
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(e) Encumbrances of motor vehicles. - Mortgages, attachments, and other
encumbrances of motor vehicles,in order to be valid against third parties must be
recorded in the Bureau (now the Land Transportation Office). Voluntary transactions
or voluntary encumbrances shall likewise be properly recorded on the face of all
outstanding copies of the certificates of registration of the vehicle concerned.
Cancellation or foreclosure of such mortgages, attachments, and other encumbrances
shall likewise be recorded, and in the absence of such cancellation, no certificate of
registration shall be issued without the corresponding notation of mortgage,
attachment and/or other encumbrances.
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Neither is there an implied repeal of R.A. No. 4136. As a rule, repeal by implication is
frowned upon, unless there is clear showing that the later statute is so irreconcilably
inconsistent and repugnant to the existing law that they cannot be reconciled and
made to stand together. There is nothing in R.A. No. 4136 that is inconsistent and
incapable of reconciliation.
Thus, the rule remains the same: a sale, lease, or financial lease, for that matter that
is not registered with the Land Transportation Office still does not bind third persons
who are aggrieved in tortious incidents, for the latter need only to rely on the public
registration of a motor vehicle as conclusive evidence of ownership. A lease such as
the one involved in the instant case is an encumbrance in contemplation of law,
which needs to be registered in order for it to bind third parties. Under this policy,
the evil sought to be avoided is the exacerbation of the suffering of victims of tragic
vehicular accidents in not being able to identify a guilty party. A contrary ruling will
not serve the ends of justice. The failure to register a lease, sale, transfer or
encumbrance, should not benefit the parties responsible, to the prejudice of innocent
victims.
The non-registration of the lease contract between petitioner and its lessee precludes
the former from enjoying the benefits under Section 12 of R.A. No. 8556.