Banks; Diligence Required

MERCANTILE LAW QUESTION 1992

Placido, a bank depositor, left his checkbook on his desk at his house. Unknown to him, a visitor at the time, noticing the same, took a check therefrom, filled it up in the amount of P3,000.00 and succeeded in encashing the check on the same day. Placido’s account was thereby debited in the same amount.

Discovering the erroneous debit, Placido demanded that the bank credit him with a like amount. The bank refused on the ground that Placido was negligent in leaving his checkbook on his desk so that he could not put up the defense of forgery or want of authority under the NIL.

The Facts disclose that even to the naked eye, there were marked differences between Placido’s signature and the one in the check forged by the visitor. As between Placido and the bank, who should bear the loss? Explain.

SUGGESTED ANSWER:

The bank should bear the loss. A drawee bank must exercise the highest diligence in safeguarding the accounts of its client-depositors. The bank is also charged with genuineness of the signatures of its current account holders. But what can be more striking is that there were marked differences between Placido’s signature and the one in the check forged by the visitor. Certainly, Placido was not negligent in leaving his checkbook in his own desk (PNB v Quimpo 158 SCRA 582)

Banks; Conservator vs. Receiver

MERCANTILE LAW QUESTION 2006

Distinguish between the role of a conservator and that of a receiver of a bank.

SUGGESTED ANSWER:

The Conservator is appointed for a period not exceeding one (1) year, to take charge of the assets, liabilities, and the management of a bank or a quasi-bank in a state of continuing inability, or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors. On the other hand, the Receiver is appointed to manage a bank or quasi-bank that is unable to pay its liabilities in the ordinary course of business, or has insufficient realizable assets to meet its liabilities, or cannot continue in business without probable losses to its depositors or creditors; or has willfully violated a final cease and desist order, involving acts or transactions amounting to fraud or a dissipation of the assets of the institution. The main purpose of the Receiver is to recommend the rehabilitation or liquidation of the bank

Banks; Classifications of Banks

MERCANTILE LAW QUESTION 2002

There are six (6) classes of banks identified in the General Banking Law of 2000. Name at least four (4) of them and explain the distinguishing characteristic or function of each one.

SUGGESTED ANSWER:

Any four (4) of the following six (6) classes of banks identified in the General Banking Law of 2002, to wit:

1              Universal Banks – These are those which used to be called expanded commercial banks and the operations of which are now primarily governed by the General Banking Law of 2002. They can exercise the powers of an investment house and invest in non-allied enterprises. They have the highest capitalization requirement.

2              Commercial Banks – These are ordinary or regular commercial banks, as distinguished from a universal bank. They have a lower capitalization requirement than universal banks and cannot exercise the powers of an investment house and invest in non-allied enterprises.

3              Thrift Banks – These banks (such as savings and mortgage banks, stock savings and loan associations, and private development banks) may exercise most of the powers and functions of a commercial bank except that they cannot, among others, open current or check accounts without prior Monetary Board approval, and they cannot issue letters of credit. Their operations are governed primarily by the Thrift Banks Act of 1995 (RA 7906).

4              Rural Banks – these are those which are organized primarily to extend loans and other credit facilities to farmers, fishermen or farm families, as well as cooperatives, merchants, and private and public employees and whose operations are primarily governed by the Rural Banks Act of 1992 (RA 7353).

5              Cooperative Banks – these are those which are organized primarily to provide financial and credit services to cooperatives and whose operations are primarily governed by the Cooperative Code of the Philippines (RA 6938).

6              Islamic Banks – these are those which are organized primarily to provide financial and credit services in a manner or transaction consistent with the Islamic Shari’ah. At present, only the Al Amanah Islamic Investment Bank of the Philippines has been organized as an Islamic Bank

Banks: Secrecy of Bank Deposits; Garnishment

MERCANTILE LAW QUESTION 2004

CDC maintained a savings account with CBank. On orders of the MM Regional Trial Court, the Sheriff garnished P50,000 of his account, to satisfy the judgment in favor of his creditor, MO. CDC complained that the garnishment violated the Law on the Secrecy of Bank Deposits because the existence of his savings account was disclosed to the public. Is CDC's complaint meritorious or not? Reason briefly.

SUGGESTED ANSWER:

No. CDC's complaint is not meritorious. It was held in China Banking Corporation v. Ortega, 49 SCRA 355 (1973) that peso deposits may be garnished and the depositary bank can comply with the order of garnishment without violating the Law on the Secrecy of Bank Deposits. Execution is the goal of litigation as it is its fruit. Garnishment is part of the execution process. Upon service of the notice of garnishment on the bank where the defendant deposited funds, such funds become part of the subject matter of litigation. 

Banks: Collateral Security

MERCANTILE LAW QUESTION 2002

Andrew is engaged in the business of building low-cost housing units under contracts with real estate developers. He applied for a loan of P3 Million from Ready Credit Bank (the Bank), which required Andrew to provide collateral security for it. Andrew offered to assign to the Bank his receivables amounting to P4 million from Home Builders Development Corporation (the Obligor). The Bank accepted the offer. Accordingly, Andrew obtained the loan and he executed a promissory note undertaking to pay the loan in full in one lump sum on September 1, 2002, together with interest thereon at the rate of 20% per annum. At the same time, Andrew executed a Deed of Assignment in favor of the Bank assigning to the Bank his receivables from the Obligor. The deed of assignment read:

 “I, Andrew Lee, hereby assign, transfer and convey, absolutely and unconditionally, to Ready Credit Bank (hereinafter called the Bank) all of my right, title and interest in and to my accounts receivable from Home Builders Development Corporation (hereinafter called the Obligor) arising from delivery of housing units with a total contract price of P4,000,000.00, the description and contract value of which are attached hereto as Annex A (hereinafter called the Receivables).”

“In the event that I shall be unable to pay my outstanding indebtedness owned to the Bank, the Bank shall have the right, without any further formality or act on its part, to collect the Receivables from the Obligor and to apply the proceeds thereof toward payment of my said indebtedness.”

Andrew failed to pay the loan on its due date on September 1, 2002. When the Bank attempted to collect from the Obligor, the Bank discovered that the latter had already closed operations and liquidated all its assets. The Bank sued Andrew for collection, but Andrew moved to dismiss the complaint on the ground that the debt had already been paid by reason of his execution of the aforesaid Deed of Assignment which, being absolute and unconditional, was in essence a dacion en pago. The Bank opposed the motion, contending that the Deed of Assignment was only  a security for a loan. If you were the Judge, how would you resolve the motion to dismiss filed by Andrew? Explain 

SUGGESTED ANSWER:

(Since the question is outside the scope of the Bar Examination, it is recommended that the candidate be given full credit of 5%, whatever may be his answer, and he be given a bonus if he made an answer in the following manner:)

The motion to dismiss should be granted. The simple absolute and unconditional conveyance embodied in the deed of assignment would be operative, and the assignment would constitute essentially a mode of payment or dacion en pago. 

Banks: Applicability: Foreign Currency Deposit Act & Secrecy of Bank Deposits

MERCANTILE LAW QUESTION 2005

Hi Yielding Corporation filed a complaint against five of its officers for violation of Section 31 of the Corporation Code. The corporation claimed that the said officers were guilty of advancing their personal interests to the prejudice of the corporation, and that they were grossly negligent in handling its affairs. Aside from documents and contracts, the corporation also submitted in evidence records of the officers’ U.S. Dollar deposits in several banks overseas - Boston Bank, Bank of Switzerland, and Bank of New York.

For their part, the officers filed a criminal complaint against the directors of Hi Yielding Corporation for violation of Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act of the Philippines. The officers alleged that their bank deposits were illegally disclosed for want of a court order, and that such deposits were not even the subject of the case against them. 

a) Will the complaint filed against the directors of Hi Yielding Corporation prosper? Explain. 

SUGGESTED ANSWER:

No, because the Foreign Currency Deposit Act (R.A. No. 6426), including its punitive provisions, refers to foreign currency deposits accounts constituted within the Philippines. It has no application at all to accounts, even though they are banks, opened and constituted abroad.

 b) Was there a violation of the Secrecy of Bank  Deposits Law (Republic Act No. 1405)? Explain.

SUGGESTED ANSWER:

No, because the punitive provisions of the Secrecy of Bank Deposits Law (R.A. No. 1405), including the statutory exemptions provided therein, are not applicable to FCDU accounts, even when constituted locally. (Intengan v. Court of Appeals, G.R. No. 128996, February 15, 2002)

Theory of Cognition vs. Theory of Manifestation

MERCANTILE LAW QUESTION 1997

The Civil Code adopts the theory of cognition, while the Code of Commerce generally recognizes the theory of manifestation, in the perfection of contracts. How do these two theories differ?

SUGGESTED ANSWER:

Under the theory of cognition, the acceptance is considered to effectively bind the offeror only from the time it came to his knowledge. Under the theory of manifestation, the contract is perfected at the moment when the acceptance is declared or made by the offeree. 

Distinguish joint account from partnership.

MERCANTILE LAW QUESTION 2000

SUGGESTED ANSWER:

The following are the distinctions between joint account and partnership:

(1) A partnership has a firm name while a joint account has none and is conducted in the name of the ostensible partner.

(2) While a partnership has juridical personality and may sue or be sued under its firm name, a joint account has no juridical personality and can sue or be sued only in the name of the ostensible partner.

(3) While a partnership has a common fund, a joint account has none.

(4) While in a partnership, all general partners have the right of management, in a joint account, the ostensible partner manages its business operations.

(5) While liquidations of a partnership may, by agreement, be entrusted to a partner or partners, in a joint account liquidation thereof can only be done by the ostensible partner.

What is a joint account?

MERCANTILE LAW 2000

SUGGESTED ANSWER:

A joint account is a transaction of merchants where other merchants agree to contribute the amount of capital agreed upon, and participating in the favorable or unfavorable results thereof in the proportion they may determine. 

What do you understand by the term “commercial transaction”? Is it essential that at least one party to a contract be a merchant in order to consider such a commercial transaction?

MERCANTILE LAW QUESTION 2003

SUGGESTED ANSWER:

A “Commercial transaction” is defined as ...... It is not essential that at least one party to the commercial transaction be a merchant. What is essential is that the transaction evince an intent to engage in commerce or trade