CONSOLIDATED BANK AND TRUST CORP v.

CA
AND L.C DIAZ In its defense, Solidbank contends that
246 SCRA 193 (2003) under their banking rules, they are authorized
Carpio, J. to honor withdrawals if presented with the
passbook; that when the P300k was withdrawn,
FACTS: the passbook was presented. Further, the
withdrawer presented a withdrawal slip which
Solidbank (formerly known as Consolidated bore the signatures of the representatives of LC
Bank and Trust Corp) is a domestic banking Diaz.
corporation organized and existing under
Philippine laws and L.C. Diaz is a professional The RTC ruled in favor of Solidbank. It found
partnership engaged in the practice of LC Diaz to be negligent in handling its passbook.
accounting. The loss of the P300k was not the result of
Solidbank’s negligence.
L.C. Diaz opened a savings account with
Solidbank. Mercedes Macaraya, its cashier, The Court of Appeals reversed the decision.
filled up a deposit slips for cash and check Solidbank's negligence was the proximate
savings and instructed their messenger, Ismael cause of the unauthorized withdrawal. The CA
Calapre to deposit the money with Solidbank used the rules on quasi-delict; Article 2176 of
and gave to Calapre the passbook. the Civil Code.The appellate court held that
the three elements of a quasi-delict are present
Calapre went to Solidbank and presented in this case, namely: (a) damages suffered by
the two deposit slips and the passbook. The the plaintiff; (b) fault or negligence of the
teller acknowledged receipt of the deposit by defendant, or some other person for whose
returning to Calapre the stamped duplicate acts he must respond; and (c) the connection
copies of the two deposit slips with the words of cause and effect between the fault or
DUPLICATE and SAVING TELLER 6 SOLIDBANK negligence of the defendant and the damage
HEAD OFFICE. Due to a long line and the fact incurred by the plaintiff.
that Calapre still needs to deposit a certain
amount in another bank, Calapre left the firm’s ISSUE:
passbook with Solidbank. But when Calapre
returned, the passbook is already missing. Whether or not the relations between
Apparently, the teller returned the passbook to Solidbank and LC Diaz, the depositor, is
someone else. Calpre reported the incident to governed by quasi-delict in determining the
LC Diaz. liability of Solidbank.

On the following day, LC Diaz made a

formal request ordering Solidbank not to honor HELD:
any transaction concerning their account with
them until the firm is able to acquire a new NO. Solidbank is liable for the loss of the
passbook. It appears however that yesterday P300k but it's liability is grounded on culpa
afternoon, the amount of P300,000.00 was contractual.
already withdrawn from the firm’s account. The
withdrawal slip for the P300,000 bore the The contract between the bank and its
signatures of the authorized signatories of L.C. depositor is governed by the provisions of the
Diaz, however, they denied signing the Civil Code on simple loan (Article 1980, Civil
withdrawal slip. A certain Noel Tamayo Code). There is a debtor-creditor relationship
received the P300,000 between the bank and its depositor. The bank
is the debtor and the depositor is the creditor.
L.C. Diaz demanded from Solidbank the The depositor lends the bank money and the
return of its money but Solidbank refused. L.C. bank agrees to pay the depositor on demand.
Diaz filed a Complaint for Recovery of a Sum of The savings deposit agreement between the
Money against Solidbank . bank and the depositor is the contract that
determines the rights and obligations of the beyond those required of non-bank debtors
parties. under a similar contract of simple loan. The
General Banking Law in no way modified
Under their contract, it is the duty of LC Diaz Article 1980 of the Civil Code.
to secure its passbook. However, this duty is also
applicable to Solidbank when it gains
possession of said passbook which it did when
the messenger left it to the bank’s possession
through the bank’s teller. The act of the teller
returning the passbook to someone else other
than Calapre, the firm’s authorized messenger,
is a clear breach of contract. Such negligence
binds the bank under the principle of
respondeat superior or command responsibility.

No contract of trust between bank and

depositor

The Supreme Court emphasized that the

contractual relation between the bank and the
depositor is that of a simple loan. This is despite
the wording of Section 2 of Republic Act 8791
(The General Banking Law of 2000) which states
that the State recognizes the “fiduciary nature
of banking that requires high standards of
integrity and performance. That “the bank is
under obligation to treat the accounts of its
depositors with meticulous care, always having
in mind the fiduciary nature of their
relationship.”

This fiduciary relationship means that the

bank’s obligation to observe “high standards of
integrity and performance” is deemed written
into every deposit agreement between a bank
and its depositor. The fiduciary nature of
banking requires banks to assume a degree of
diligence higher than that of a good father of a
family.

However, the fiduciary nature of a

bank-depositor relationship does not convert
the contract between the bank and its
depositors from a simple loan to a trust
agreement, whether express or implied.
Failure by the bank to pay the depositor is
failure to pay a simple loan, and not a breach
of trust.

In short, the General Banking Act simply

imposes on the bank a higher standard of
integrity and performance in complying with its
obligations under the contract of simple loan,
 New Sampaguita Builders Construction Inc. v. restructuring of the loan account and refer the
PNB matter to its legal counsel for legal action.
435 SCRA 565 (2004) Sampaguita did not heed on PNB’s warning
Panganiban, J. and as a result, PNB sent demand letters to
Sampaguita asking it to settle its past due loan
FACTS: account.

New Sampaguita Builders Construction Sampaguita nevertheless failed to pay

Inc. (Sampaguita) secured a commercial loan their loan obligations within the timeframe
with the PNB in an aggregate amount of 8M given them and as a result, PNB foreclosed the
pesos using or mortgaging the real estate real estate mortgage and sold at public
properties registered in the name of the auction the mortgaged properties of Spouses
President and Chairman of the Board, Eduardo Dee with PNB being declared the highest
Dee. The loan was further secured by the joint bidder for the amount of P10,334,000.00.
and several signatures of Spouses Dee who
signed as accommodation-mortgagors since PNB informed Sampaguita that the
all the collaterals were owned by them and proceeds of the sale were not sufficient to
registered in their names. cover its total claim amounting
to P12,506,476.43, and thus demanded from
Sampaguita also executed 3 promissory the latter the deficiency of plus interest and
notes due on different payment dates other charges, until the amount [was] fully paid.
amounting to a total of P8M. The first promissory
note had 19.5% interest rate. The 2nd and 3rd Sampaguita refused to pay the above
had 21.5%. A uniform clause therein permitted deficiency claim which compelled PNB to
PNB to increase the rate “within the limits institute the instant Complaint for the collection
allowed by law at any time depending on of its deficiency claim.
whatever policy it may adopt in the future”
without even giving prior notice to petitioners. RTC found that Sampaguita was
There was also a clause in the promissory note automatically entitled to the debt relief
that stated that if the same is not paid 2 years package of PNB and ruled that the latter had
after release then it shall be converted to a no cause of action against the former. The CA
medium-term loan- and the interest rate for however reversed the ruling saying Sampaguita
such loan would apply. was not entitled thus ordered them to pay the
deficiency.
Later on, Sampaguita failed to comply
with its obligations under the promissory notes. On appeal, respondent assailed the
They sent a letter to PNB requesting for a 90-day decision dismissing its deficiency claim on the
extension for the payment of interests and mortgage debt. It also challenged the ruling of
restructuring of its loan for another term. the lower court that Petitioner NSBCIs loan
Subsequently, Sampaguita tendered payment account was bloated, and that the
to PNB of three (3) checks aggregating P1M. inadequacy of the bid price was sufficient to
set aside the auction sale.
Eduardo Dee later tendered four (4)
post-dated Interbank checks ISSUE:
aggregating P1,111,306.67 in favor of PNB. 1. W/N the loan accounts are bloated;
However, 2 checks were dishonored by the 2. W/N the extrajudicial foreclosure and
drawee bank and returned due to a stop subsequent claim for deficiency are
payment order from petitioners. valid and proper.

PNBs Mr. Carcamo wrote Eduardo Dee HELD:

informing him that unless the dishonored 1. Bloated accounts
checks [were] made good, said PNB branch
shall recall its recommendation for the
The Court holds that petitioners accessory duty can be no implied waiver of a right when there
to pay interest did not give respondent is no clear, unequivocal and decisive act
unrestrained freedom to charge any rate other showing such purpose. Besides, the statements
than that which was agreed upon. No interest were not letters of information sent to secure
shall be due, unless expressly stipulated in their conformity; and even if we were to
writing. It would be the zenith of farcicality to presume these as an offer, there was no
specify and agree upon rates that could be acceptance. No one receiving a proposal to
subsequently upgraded at whim by only one modify a loan contract, especially interest -- a
party to the agreement. vital component -- is obliged to answer the
proposal.
The unilateral determination and imposition of
increased rates is violative of the principle of
mutuality of contracts ordained in Article Furthermore, respondent did not follow the
1308 of the Civil Code. One-sided impositions stipulation in the Promissory Notes providing for
do not have the force of law between the the automatic conversion of the portion that
parties, because such impositions are not remained unpaid after 730 days -- or two years
based on the parties essential equality. from date of original release -- into a
medium-term loan, subject to the applicable
Although escalation clauses[ are valid in interest rate to be applied from the dates of
maintaining fiscal stability and retaining the original release. The Court applied 12% interest
value of money on long-term contracts, giving rate instead for beaing a forbearance of
respondent an unbridled right to adjust the money.
interest independently and upwardly would
completely take away from petitioners the right
to assent to an important modification in their 2. Extrajudicial Foreclosure Valid, But
agreement and would also negate the Deficiency Claims Excessive
element of mutuality in their contracts. The
clause cited earlier made the fulfillment of the Respondent aptly exercised its option to
contracts dependent exclusively upon the foreclose the mortgage, after petitioners had
uncontrolled will of respondent and was failed to pay all the Notes in full when they fell
therefore void. Besides, the pro forma due. The extrajudicial sale and subsequent
promissory notes have the character of proceedings are therefore valid, but the
a contract dadhesion, where the parties do alleged deficiency claim cannot be
not bargain on equal footing, the weaker recovered.
partys [the debtors] participation being
reduced to the alternative to take it or leave it. After the foreclosure and sale of the
mortgaged property, the Real Estate Mortgage
Circular No. 905 nor PD 1684, which further is extinguished. Although the mortgagors,
amended the Usury Law, authorized either being third persons, are not liable for any
party to unilaterally raise the interest rate deficiency in the absence of a contrary
without the others consent. Rates found to stipulation, the action for recovery of such
be iniquitous or unconscionable are void, as if it amount -- being clearly sureties to the principal
there were no express contract thereon. Above obligation -- may still be directed against
all, it is undoubtedly against public policy to them. However, respondent may impose only
charge excessively for the use of money. the stipulated interest rates of 19.5 percent and
21.5 percent on the respective availments --
It cannot be argued that assent to the subject to the 12 percent legal rate revision
increases can be implied either from the June upon automatic conversion into medium-term
18, 1991 request of petitioners for loan loans -- plus 1 percent attorney’s fees, without
restructuring or from their lack of response to additional charges on penalty, insurance or
the statements of account sent by any increases thereof.
respondent. Such request does not indicate
any agreement to an interest increase; there
 To summarize, to give full force to the Truth
in Lending Act, only the interest rates of 19.5
percent and 21.5 percent stipulated in the
Promissory Notes may be imposed by
respondent on the respective availments. After
730 days, the portions remaining unpaid are
automatically converted into medium-term
loans at the legal rate of 12 percent. In all
instances, the simple method of interest
computation is followed. Payments made by
petitioners are applied and pro-rated
according to basic legal principles. Charges on
penalty and insurance are eliminated, and 1
percent attorney’s fees imposed upon the total
unpaid balance of the principal and interest as
of the date of public auction. The P2 million
deficiency claim therefore vanishes, and a
refund of P3,686,101.52 arises.
 Development Bank of the Philippines v. law because the details required under the law
Felipe Arcilla, Jr. were disclosed in the promissory notes, the
462 SCRA 599/ G.R. No. 161397 (2005) deed, and notices sent to Arcilla. RTC ruled in
Callejo, Sr., J. favor of Arcilla. On appeal, CA reversed the
decision of RTC.
FACTS:
ISSUE:
Atty. Felipe Arcilla, Jr. (Arcilla) was
employed by Development Bank of the Whether or not DBP complied with the
Philippines (DBP). DBP and Arcilla executed a disclosure requirement of RA No. 3765 and CB
Deed of Conditional Sale over a parcel of land, Circular No. 158, s. of 1978
as well as the house to be constructed thereon,
for P160,000. Arcilla borrowed the said amount HELD:
from DBP and obliged himself to pay the loan in
25 years, with 9% interest per annum. DBP YES. Section 1 of RA No. 3765 provides that
obliged itself to transfer the title of the property prior to the consummation of a loan
upon payment of loan. It was agreed that transaction, the bank, as creditor, is obliged to
should Arcilla decided to avail optional furnish a client with a clear statement, in writing,
retirement, he could elect to continue paying setting forth, to the extent applicable and in
the loan, provided that the loan would be accordance with the rules prescribed by
converted into a regular estate loan account Monetary Board, the following information: a)
with the prevailing interest assigned on real cash price or delivered price of property or
estate loans. Arcilla was notified of the periodic service; b) amount to be credited as down
release of his loan. Arcilla opted to resign. DBP payment or trade in; c) difference between the
informed him that his balance will be two amounts mentioned; d) charges,
converted to regular housing loan, thus, individually itemized, which are paid or to be
balance of P186,364.15. Arcilla signed three (3) paid in connection with the transaction but not
promissory notes and was obliged to pay incident to the extension of credit; e) total
service charge and interest. He also agreed to amount to be financed; f) finance charges in
the reservation by the DBP of its right to pesos and centavos; and g) percentage that
increase (with notice to him) the rate of the finance charge bears to the total amount
interest, as well as other fees and charges. DBP to be financed expressed as simple annual rate
granted additional cash advance of P32,000 on the unpaid balance. Under the circular, the
upon Arcilla’s request. A Supplement to the information required by RA No. 3765 shall be
Conditional Sale Agreement was executed in included in the contract covering the credit
which Arcilla and DBP agreed on 9% interest for transaction or other document to be
the cash advance. The additional advance acknowledged and signed by debtor. If
was consolidated, as agreed by the parties, to borrower was not informed of the data
the outstanding balance of Arcilla’s original required, lender will have no right to collect
advance with 9% interest per annum. However, such charges or increases thereof. But, such
Arcilla failed to pay. DBP rescinded the deed failure will not affect the validity or
and informed Arcilla of his chance to enforceability of any contract or transaction.
repurchase the property by paying the full
amount. Arcilla failed to respond. In the present case, DBP failed to disclose
Consequently, property was advertised for the required information in the disclosure
bidding. statement form authorized by Central Bank, but
it did so in the loan transaction documents
Arcilla filed a complaint with RTC alleging between it and Arcilla. There is no evidence
that DBP failed to furnish him with the disclosure that DBP sought to collect any interest,
statement required by RA No. 3765 and CB charges, or penalty other than those disclosed
Circular No. 158 prior to execution of the deed in the said documents. The Court ruled that
and conversion of his loan account. DBP Arcilla was sufficiently informed of the terms
claimed that it substantially complied with the and the requisite charges necessarily included
in the subject loan. It must be stressed that the
Truth in Lending Act was enacted to protect
citizens from lack of awareness on the true cost
of credit to the user by using a full disclosure of
such cost with view of preventing the
uninformed used of credit to the detriment of
national economy. Records disclosed that the
information were readily available in the
promissory notes Arcilla executed and signed.
As a lawyer, he would not be so gullible to sign
documents without knowing fully well the legal
implications and consequences of his actions.
 Heirs of Zoilo Espiritu v. Sps. Landrito
520 SCRA 383 (2007) HELD:
Chico-Nazario, J.
NO. The Real Estate Mortgage executed
FACTS: between the parties specified that the
principal indebtedness shall earn interest at the
Sps. Landrito obtained a loan from the Sps. legal rate. The agreement contained no other
Espiritu the amount of P350,000.00 payable in provision on interest or any fees or charges
three months secured by a real estate incident to the debt. The Spouses Espiritu
mortgage. From the P350,000.00 that the alleged that the parties had agreed on the
Landritos were supposed to receive, P17,500.00 interest and charges imposed amounting to
(5% of the principal debt) was deducted as P559,125.00 on the original principal of P350,000
interest for the first, and P7,500.00 was further which accumulated over only two years and
deducted as service fee. Thus, they actually one month. These charges are not found in any
received a net amount of P325,000.00. The written agreement between the parties. The
agreement, however, provided that the records fail to show any computation on how
principal indebtedness earns interest at the much interest was charged and what other
legal rate. fees were imposed. Not only did lack of
transparency characterize the aforementioned
After failing to pay the principal amount agreements, the interest rates and the service
and interests, both parties agreed to extend charge imposed, at an average of 6.39% per
the loan agreement but it was restructured in month, are excessive.
such a way that the unpaid interest became
part of the principal, thus increasing the In enacting Republic Act No. 3765, known
principal to P385,000. as the Truth in Lending Act, the State seeks to
protect its citizens from a lack of awareness of
The loan remained unpaid, as a the true cost of credit by assuring the full
consequence Sps. Espiritu foreclosed the disclosure of such costs. Section 4, in
mortgage and eventually sold the property to connection with Section 3(3) of the said law,
Sps. Espiritu as the lone bidder at the auction gives a detailed enumeration of the specific
sale. Upon failure of Sps. Landrito to redeem information required to be disclosed, among
the property, Sps. Espiritu consolidated which are the interest and other charges
ownership over said property and registered it incident to the extension of credit. Section 6 of
in their name. Sps. Landrito filed an action for the same law imposes on anyone who willfully
annulment/reconveyance of title against Sps. violates these provisions, sanctions which
Espiritu alleging that, as creditors and include civil liability, and a fine and/or
mortgagees, they imposed interest rates that imprisonment.
are shocking to one’s moral senses.
The omission of the Sps. Espiritu in specifying
The trial court dismissed the complaint and in the contract the interest rate which was
upheld the validity of the foreclosure sale. The actually imposed, in contravention of the law,
CA, in its assailed Decision, fixed the interest manifested bad faith.
rate of the loan between the parties at 12% per
annum, and ordered the Sps. Espiritu to
reconvey the subject property to the Sps.
Landrito conditioned upon the payment of the
loan.
ISSUE:

Whether or not the CA erred in finding that

Sps. Espiritu unilaterally imposed on Sps.
Landrito the allegedly unreasonable interests
on the mortgage loans.
 Republic v. Glasgow Credit and Collection removing, dissipating, disposing of the funds in
Services, Inc. the said account with CSBI, and restrained CSBI
542 SCRA 95/GR No. 170281 (2008) from allowing any transaction on said account.
Corona, J.
ISSUE
FACTS
Whether or not the complaint for civil forfeiture
The Republic filed a complaint for civil was correctly dismissed on the grounds of
forfeiture of assets (with urgent plea for improper venue, insufficiency in form and
issuance of TRO and/or writ of preliminary substance.
injunction) against the bank deposits
maintained by Glasgow in Citystate Savings HELD
Bank Inc. The case was filed pursuant to RA
9160 (the Anti-Money Laundering Act of 2001) NO. It was improperly dismissed.
as events point that said bank account is The petition of the Republic was granted.
related to unlawful activities of Estafa and
violation of Securities Regulation Code, and (1) The complaint was filed in the proper
that the deposit was subject of suspicious venue.
transaction reports. Under Section 3, Title II of the Rule
of Procedure in Cases of Civil Forfeiture,
The RTC Manila issued a 72-hour TRO, the venue of civil forfeiture cases is any
and the issuance of a writ of preliminary RTC of the judicial region where the
injunction was granted. However, summons to monetary instrument, property or
Glasgow was returned unserved as it could no proceeds representing, involving, or
longer be found at its last known address. Also, relating to an unlawful activity or to a
the alias summons was returned unserved. money laundering offense are located.
Pasig City, where the account sought to
Later on, the OSG received a copy of be forfeited in this case is situated, is
Glasgow’s Motion to Dismiss (By Way of Special within the National Capital Judicial
Appearance) contending that the court had Region (NCJR). Clearly, the complaint
no jurisdiction over its person as summons had for civil forfeiture of the account may be
not yet been served, that the complaint was filed in any RTC of the NCJR. Since the
premature and stated no cause of action as RTC Manila is one of the RTCs of the
there was still no conviction for estafa or other NCJR, it was a proper venue of the
criminal violations implicating Glasgow, and Republic’s complaint for civil forfeiture of
that there was failure to prosecute on the part Glasgows account.
of the Republic.
(2) The complaint was sufficient in form and
The Republic asserted that prior substance.
conviction for unlawful activity was not a First, the complaint conformed
precondition to the filing of a civil forfeiture with Section 4, Title II of the Rule of
case and that its complaint alleged ultimate Procedure in Cases of Civil Forfeiture
facts sufficient to establish a cause of action. providing for the contents of the petition
for civil forfeiture namely (a) name and
The trial court dismissed the case on the address of the respondent; (b)
following grounds: (1) improper venue (it should description with reasonable particularity
have been filed in the RTC of Pasig where CSBI, of the monetary instrument, property, or
the depository bank of the account sought to proceeds, and their location; (c) the
be forfeited, was located); (2) insufficiency in acts of omissions prohibited by and the
form and substance and failure to prosecute. specific provisions of the Anti-Money
Hence, the Republic filed a petition before the Laundering Act, as amended, which are
Supreme Court raising questions of law. The SC alleged to be grounds relied upon for
issued a TRO restraining Glasgow from the forfeiture; (d) reliefs prayed for.
 Second, Section 12(a) of RA 9160 activities of estafa and violation of the
in relation to Rule 12.2 of the Revised Securities Regulation Code.
Implementing Rules and Regulations of
RA 9160 states that there are two
conditions when applying for civil
forfeiture: (a) when there is suspicious
transaction report or a covered
transaction report deemed suspicious
after investigation by the AMLC and; (b)
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.

It is the preliminary seizure of the

property in question which brings it
within the reach of the judicial process. It
is actually within the court’s possession
when it is submitted to the process of the
court. The injunctive writ issued removed
the account from the effective control
of either Glasgow or CSBI or their
representatives or agents and subjected
it to the process of the court.

Since said account 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.

Third, Section 6 of RA 9160, as

amended, in relation to Rule 6.1 of the
Revised IRR and Section 27 of the Rule of
Procedure in Cases of Civil Forfeiture,
provides that the finding of guilt for an
unlawful activity is not an essential
element of civil forfeiture. Hence,
whether or not there is truth in the
allegation that said account contains
the proceeds of unlawful activities is an
evidentiary matter that may be proven
during trial. The complaint, however, did
not even have to show or allege that
Glasgow was implicated in a conviction
for, or the commission of, the unlawful
 RET. LT. GEN. JACINTO C. LIGOT, ERLINDA Y. issuance of a Freeze Order against the
LIGOT, PAULO Y. LIGOT, RIZA Y. LIGOT, and properties of the Ligots and Yambao.
MIGUEL Y. LIGOT v. REPUBLIC OF THE Accordingly, the CA issued a freeze order
PHILIPPINES, represented by the ANTI-MONEY against the Ligots’ and Yambao’s various bank
LAUNDERING COUNCIL accounts, web accounts and vehicles, valid for
692 SCRA 509 a period of 20 days from the date of issuance.
BRION, J. Thereafter, the Republic filed an Urgent Motion
for Extension of Effectivity of Freeze Order which
FACTS: was later granted by the CA.

The Anti-Money Laundering Council ISSUE:

(AMLC), filed an Urgent Ex-Parte Application for (a) WON there is a probable cause to
the issuance of a freeze order with the CA support the issuance of a freeze order.
against certain monetary instruments and (b) WON freeze order can be issued for an
properties of the petitioners, pursuant to indefinite period.
Section 10 of Republic Act (RA) No. 9160. The
Ombudsman’s complaint alleges that Lt. Gen. RULING:
Ligot served in the Armed Forces of the
Philippines (AFP) for 33 years and 2 months, as a (a) YES. Probable cause exists to support the
cadet until his retirement. Upon the issuance of a freeze order
Ombudsman’s investigation, it declared that The legal basis for the issuance of a freeze
the assets registered in Lt. Gen. Ligot’s name, as order is Section 10 of RA No. 9160, as amended
well as those in his wife’s and children’s names, by RA No. 9194, which states:
to be illegally obtained and unexplained Section 10. Freezing of Monetary Instrument or
wealth. The investigation also revealed that Lt. Property. – The Court of Appeals, upon
Gen. Ligot and his family had other properties application ex parte by the AMLC and after
and bank accounts, not declared in his SALN. determination that probable cause exists that
any monetary instrument or property is in any
The Ombudsman’s investigation also way related to an unlawful activity as defined
looked into Mrs. Ligot’s younger brother, in Section
Edgardo Tecson Yambao. The records of the There are only two requisites for the issuance of
SSS revealed that Yambao had been a freeze order: (1) the application ex parte by
employed in the private sector from 1977 to the AMLC and (2) the determination of
1994. Based on his contributions to the SSS, probable cause by the CA. The probable
Yambao did not have a substantial salary cause required for the issuance of a freeze
during his employment. Moreover, the order differs from the probable cause required
certification from the Bureau of Internal for the institution of a criminal action, and the
Revenue stated that Yambao had no record of latter was not an issue before the CA nor is it an
any annual Individual Income. Despite issue before us in this case.
Yambao’s lack of substantial income, the
records show that he has real properties and As defined in the law, the probable cause
vehicles registered in his name. The Office of required for the issuance of a freeze order
the Ombudsman further observed that in the refers to "such facts and circumstances which
documents it examined, Yambao declared would lead a reasonably discreet, prudent or
three of the Ligots’ addresses as his own. cautious man to believe that an unlawful
From these circumstances, the Ombudsman activity and/or a money laundering offense is
concluded that Yambao acted as a dummy about to be, is being or has been committed
and/or nominee of the Ligot spouses, and all and that the account or any monetary
the properties registered in Yambao’s name instrument or property subject thereof sought to
actually belong to the Ligot family. be frozen is in any way related to said unlawful
activity and/or money laundering offense."
The Republic filed an Urgent Ex-Parte
Application with the appellate court for the
 The existence of an unlawful activity that Notably, the Senate deliberations on RA
would justify the issuance and the extension of No. 9160 even suggest the intent on the part of
the freeze order has likewise been established our legislators to make the freeze order
in this case. From the ex parte application and effective until the termination of the case,
the Ombudsman’s complaint, we glean that Lt. when necessary. The silence of the law,
Gen. Ligot himself admitted that his income however, does not in any way affect the
came from his salary as an officer of the AFP. Court’s own power under the Constitution to
Yet, the Ombudsman’s investigation revealed "promulgate rules concerning the protection
that the bank accounts, investments and and enforcement of constitutional rights xxx
properties in the name of Lt. Gen. Ligot and his and procedure in all courts." Pursuant to this
family are grossly disproportionate to Lt. Gen. power, the Court issued A.M. No. 05-11-04-SC,
Ligot’s income, as well as the lack of any limiting the effectivity of an extended freeze
evidence that the Ligots have other sources of order to six months – to otherwise leave the
income, the CA properly found that probable grant of the extension to the sole discretion of
cause exists that these funds have been the CA, which may extend a freeze order
illegally acquired. indefinitely or to an unreasonable amount of
time – carries serious implications on an
b. NO. A freeze order, however, cannot be individual’s substantive right to due process.
issued for an indefinite period As correctly noted by the petitioners, a freeze
order is meant to have a temporary effect.
A freeze order is an extraordinary and
interim relief issued by the CA to prevent the To stress, the evils caused by the law’s
dissipation, removal, or disposal of properties silence on the freeze order’s period of
that are suspected to be the proceeds of, or effectivity compelled this Court to issue the
related to, unlawful activities as defined in Rule in Civil Forfeiture Cases. Specifically, the
Section 3(i) of RA No. 9160. The primary Court fixed the maximum allowable extension
objective of a freeze order is to temporarily on the freeze order’s effectivity at six months.
preserve monetary instruments or property that Thus, as a rule, the effectivity of a freeze order
are in any way related to an unlawful activity or may be extended by the CA for a period not
money laundering, by preventing the owner exceeding six months. Before or upon the lapse
from utilizing them during the duration of the of this period, ideally, the Republic should have
freeze order. The relief is pre-emptive in already filed a case for civil forfeiture against
character, meant to prevent the owner from the property owner with the proper courts and
disposing his property and thwarting the State’s accordingly secure an asset preservation order
effort in building its case and eventually filing or it should have filed the necessary
civil forfeiture proceedings and/or prosecuting information. Otherwise, the property owner
the owner. should already be able to fully enjoy his
property without any legal process affecting it.
Upon the Court’s examination of the However, should it become completely
Anti-Money Laundering Act of 2001, from the necessary for the Republic to further extend the
point of view of the freeze order that it duration of the freeze order, it should file the
authorizes, shows that the law is silent on the necessary motion before the expiration of the
maximum period of time that the freeze order six-month period and explain the reason or
can be extended by the CA. The final sentence reasons for its failure to file an appropriate case
of Section 10 of the Anti-Money Laundering Act and justify the period of extension sought. The
of 2001 provides, "the freeze order shall be for a freeze order should remain effective prior to the
period of twenty (20) days unless extended by resolution by the CA, which is hereby directed
the court." In contrast, Section 55 of the Rule in to resolve this kind of motion for extension with
Civil Forfeiture Cases qualifies the grant of reasonable dispatch.
extension "for a period not exceeding six
months" "for good cause" shown. In the present case, the Republic has not
offered any explanation why it took six years
(from the time it secured a freeze order) before
a civil forfeiture case was filed in court, despite
the clear tenor of the Rule in Civil Forfeiture
Cases allowing the extension of a freeze order
for only a period of six months. All the Republic
could proffer is its temporal argument on the
inapplicability of the Rule in Civil Forfeiture
Cases; in effect, it glossed over the
squarely-raised issue of due process. Under
these circumstances, we cannot but conclude
that 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.
 BANK OF THE PHILIPPINE ISLANDS v. DE RENY BPI to take the necessary precaution to insure
FABRIC INDUSTRIES, INC., et al. that the goods shipped under the covering
35 SCRA 256 (1970) letters of credit conformed with the item
CASTRO, J. appearing therein.

FACTS ISSUE
Whether or not BPI and/or its foreign
De Reny Fabric Industries, Inc. (De Reny), correspondent banks BPI insures that the goods
through its president and secretary, applied to shipped conform to the L/Cs.
the Bank of Philippine Islands (BPI) for four
irrevocable commercial letters of credit to HELD
cover the purchase by the De Reny of NO.
“dye-stuffs of various colors” from its American
supplier, the J.B. Distributing Company (JBDC). First, the letter of credit agreements show
All the applications were approved, and the that the parties agreed that BPI shall not be
corresponding letter of credit agreements were responsible for differences in character, quality,
executed. De Reny made partial peso deposits quantity, condition or value of the property
to BPI as each letter of credit was opened. from that expressed in their documents (here,
the dyestuff).
By virtue of these transactions, BPI issued
irrevocable commercial letters of credit Second, absent such provision, Art. 10 of
addressed to its correspondent banks in the the Uniform Customs and Practices for
United States, with uniform instructions for them Commercial Documentary Credits Fixed for the
to notify JBDC, that the banks have been Thirteenth Congress of International Chamber
authorized to negotiate JBDC’s sight drafts up of Commerce, of which the Philippines is a
to the amounts mentioned therein, signatory, states that in documentary credit
respectively, if accompanied, upon operations, all parties concerned deal in
presentation, by a full set of negotiable clean documents and not in goods. The bank is not
“on board” ocean bills of lading, covering the required to verify the goods themselves-- the
merchandise appearing in the letters of credit, bank was only tapped in order to allow
that is, dyestuffs of various colors. JBDC drew engagement in international business. Such is a
upon, presented to and negotiated with these custom applicable to commercial transactions
banks all abovementioned documents; and that will apply regardless of the lack of provision
collected the full value of the drafts as in the contract and in our laws.
appeared in the letters of credit. Thus, the Therefore, BPI cannot be liable on the
correspondent banks debited the account of agreement due to both contract provisions
BPI with them the full value of the drafts plus and a custom taken as part of our law.
commission thereon.

De Reny made partial payments to BPI as

each shipment arrived in the Philippines.
However, the payments were discontinued
when it was established that the goods that
arrived in Manila were colored chalks instead
of dyestuffs. De Reny also refused to take
possession of the goods, prompting BPI to
deposit the goods to a bonded warehouse
and paying the costs of the same.

BPI filed a collection suit against De Reny.

The lower court decided in favor of BPI. Hence,
this appeal by De Reny. De Reny submits it was
the duty of the foreign correspondent banks of
 Philippine Banking Corporation v. Choa acts/omissions or solvency of insurers or any
Tiek Seng (CA Decision) other person. The Decision of the CFI of Manila
No. 45233-R; 23 CAR (2S) 1045; November was affirmed, with addition of Attorney’s Fees in
29, 1978 an amount equivalent to 10% of the
CA Justice Gopengco indebtedness awarded to PBC.

FACTS: A Letter of Credit is distinct and separate

On October 10, 1966, Choa Tiek Seng of from the contract between the Importer and
Seng’s Commercial Enterprises, applied for an Exporter. Banks deal in documents, and not in
irrevocable Letter of Credit ($ 4,875) on a merchandise to be exported/shipped to the
shipment of 1,200 cartons of raisins in favor of Importer. Therefore, a defect in the goods or its
Mutual International Inc., which was opened non-arrival is not the kind of risk a bank bargains
by PBC through its correspondent, the for when it issues a commercial credit. The
Crocker-Citizens National Bank. Such performance of a Sales Contract between the
correspondent bank debited PBC’s account in Buyers and Seller is not a condition precedent
the amount of $ 4,884.75, representing a Sight of the credit or of the Buyer’s agreement to
Draft plus commissions and ither charges. A reimburse. Thus, evidence of non-performance
Debit Advice, together with the shipping of the contract, which was the cause for the
documents, was transmitted to PBC. Despite Letter of Credit being given, is immaterial and
demands by PBC, Seng refused to pay his inadmissible. After submission of the shipping
obligation amounting to P 17,180.42. documents called for in the Letter of Credit to
Seng for payment, the obligation of the latter
Seng’s refusal to pay for the raisins was to pay arises.
based on his claim that the Letter of Credit
required that the draft be accompanied by a
set of 2 original “on board” Bills of Lading in
negotiable form and that there was no
sufficient evidence the cargo was actually on
board the ship. He also claimed that PBC’s
correspondent bank improvidently accepted,
negotiated and paid the Sight Draft, and that
he never received the shipment.

The CFI of Manila ordered Seng to pay PBC

P15,325.12 with interest at the rate of 9% per
annum, plus P 100 as commission.

ISSUE:
W/N a commercial bank that issues a Letter
of Credit covering an importation of
merchandise warrants the quantity and quality
of the merchandise or the genuineness of the
shipping documents.

HELD:
No, banks assume no liability for the
form/sufficiency/accuracy/genuineness/legal
effect of any documents, or for the conditions
stipulated in the documents; nor do they
assume any liability for the
description/quantity/quality/condition/packin
g/delivery/value/existence of the goods
represented thereby, or for the good faith or
 FEATI BANK & TRUST COMPANY v. CA and of the lower court. FBTC then filed a MR but was
Bernardo Villaluz denied. Hence, this petition for review.
196 SCRA 576 (1991)
Gutierrez, Jr., J. ISSUE
WON the FBTC should be held liable under the
FACTS letter of credit despite non-compliance by the
beneficiary with the terms thereof.
Bernardo Villaluz agreed to sell to the then
defendant Axel Christiansen, a ship and HELD
merchandise broker, 2,000 cubic meters of
lauan logs. After inspection, Christiansen issued NO, FBTC should not be held liable. It is a
purchase order No. 76171. Upon the instruction settled rule in commercial transactions
of the consignee (Hanmi Trade Development, involving letters of credit that the documents
Ltd.), the Security Pacific National Bank issued tendered must strictly conform to the terms of
Irrevocable Letter of Credit No. IC-46268 the letter of credit. The incorporation of the
available at sight in favor of Villaluz for the sum Uniform Customs and Practice for
of $54,000.00, the total purchase price of the Documentary Credit (U.C.P.) in the letter of
lauan logs. credit resulted in the applicability of the said
rules in the governance of the relations
The letter of credit was mailed to the FBTC between the parties.
with the instruction to the latter that it "forward
the enclosed letter of credit to the beneficiary." Under the Articles 3, 7 and 8 of the U.C.P.,
The letter of credit further provided that the the bank may only negotiate, accept or pay, if
draft to be drawn is on Security Pacific National the documents tendered to it are on their face
Bank and that it be accompanied by certain in accordance with the terms and conditions of
documents including a certification from the documentary credit. And since a
Christiansen. It is also incorporated by correspondent bank, like the petitioner,
reference in the letter of credit is the Uniform principally deals only with documents, the
Customs and Practice for Documentary Credits absence of any document required in the
(1962 Revision). documentary credit justifies the refusal by the
correspondent bank to negotiate, accept or
The logs were thereafter loaded on a vessel pay the beneficiary, as it is not its obligation to
but Christiansen refused to issue the look beyond the documents.
certification despite repeated requests by the
private respondent. The logs however were still The Court also held that the trial court
shipped and received by consignee, to whom appears to have overlooked the fact that an
Christiansen sold the logs. Because of the irrevocable credit is not synonymous with a
absence of the certification by Christiansen, confirmed credit.
the FBTC refused to advance the payment on
the letter of credit until such credit lapsed. In an irrevocable credit, the issuing bank
may not without the consent of the beneficiary
Villaluz instituted an action for mandamus (seller) and the applicant (buyer) revoke his
and specific performance against Christiansen undertaking under the letter. On the other
and FBTC before the then CFI-Rizal. While the hand, in a confirmed letter of credit, the
case was still pending trial, Christiansen left the correspondent bank gives an absolute
Philippines without informing the Court and his assurance to the beneficiary that it will
counsel. Hence, Villaluz, filed an amended undertake the issuing bank's obligation as its
complaint to make the FBTC solidarily liable own according to the terms and conditions of
with Christiansen. the credit.
The trial court ruled in favor of the private Another error which the lower court and the CA
respondent and ordered the defendants made was to confuse the obligation assumed
(Christiansen and FBTC) to pay the plaintiff, by the petitioner. In commercial transactions
jointly and severally. CA affirmed the decision involving letters of credit, the functions
assumed by a correspondent bank are property which has been conferred upon the
classified according to the obligations taken up person for the benefit of another. The mere
by it. The correspondent bank may be called a opening of a letter of credit, it is to be noted,
notifying bank 1 , a negotiating bank 2 , or a does not involve a specific appropriation of a
confirming bank3. sum of money in favor of the beneficiary.

In this case, the letter merely provided that Granting that a trust has been created, still,
the petitioner "forward the enclosed original the petitioner may not be considered a trustee.
credit to the beneficiary”. Considering the As the petitioner is only a notifying bank, its
aforesaid instruction to the petitioner by the acceptance of the instructions of the issuing
issuing bank, it is indubitable that the petitioner bank will not create estoppel on its part
is only a notifying bank and not a confirming resulting in the acceptance of the trust.
bank as ruled by the courts below. Since the
petitioner was only a notifying bank, its The Court also held that FBTC is not a
responsibility was solely to notify and/or transmit guarantor of the issuing bank. The concept of
the documentary of credit to the private guarantee vis-a-vis the concept of an
respondent and its obligation ends there. It irrevocable credit are inconsistent with each
follows therefore that when the petitioner other.
refused to negotiate with the private
respondent, the latter has no cause of action As a mere notifying bank, not only does the
against the petitioner for the enforcement of petitioner not have any contractual
his rights under the letter. In order that the relationship with the buyer, it has also nothing
petitioner may be held liable under the letter, to do with the contract between the issuing
there should be proof that the petitioner bank and the buyer regarding the issuance of
confirmed the letter of credit. the letter of credit. The relationship between
The records are, however, bereft of any the issuing bank and the notifying bank Iis more
evidence which will disclose that the petitioner similar to that of an agency. As an agent of the
has confirmed the letter of credit. The only issuing bank, it has only to follow the instructions
evidence in this case is the loan exteded by the of the issuing bank and to it alone is it obligated
petitioner to private respondent. The loan and not to buyer with whom it has no
agreement between them to be construed as contractual relationship.
an act of confirmation is rather far-fetched, for
it depends principally on speculative Finally, even if the Court assumes that the
reasoning. There must have been an absolute petitioner is a confirming bank, the petitioner
assurance on the part of the petitioner that it cannot be forced to pay the amount under the
will undertake the issuing bank's obligation as its letter. This is because there was a failure on the
own. part of the private respondent to comply with
the terms of the letter of credit.
FBTC is also not a trustee in relation to the
plaintiff (private respondent) as the beneficiary The failure to submit the certification was
of the letter of credit. The concept of a trust fatal to his case. The U.C.P. which is
presupposes the existence of a specific incorporated in the letter of credit ordains that
the bank may only pay the amount specified
1
under the letter if all the documents tendered
A notifying bank is a correspondent bank which assumes no liability
are on their face in compliance with the credit.
except to notify and/or transmit to the beneficiary the existence of the
letter of credit. (no contractual relationship with seller/benificiary) It is not tasked with the duty of ascertaining the
.
2
reason or reasons why certain documents have
A negotiating bank is a correspondent bank which buys or discounts
a draft under the letter of credit. Its liability is dependent upon the stage
not been submitted, as it is only concerned
of the negotiation. If before negotiation, it has no liability with respect to with the documents. Thus, whether or not the
the seller but after negotiation, a contractual relationship will then prevail buyer has performed his responsibility towards
between the negotiating bank and the seller. (no contractual relationship
with seller/benificiary) the seller is not the bank's problem.
3
A confirming bank, the correspondent bank assumes a direct
obligation to the seller and its liability is a primary one as if the
correspondent bank itself had issued the letter of credit.
WHEREFORE, the COURT RESOLVED to GRANT the
petition and hereby NULLIFIES and SETS ASIDE
the decision of the Court of Appeals.
 Insular Bank of Asia and America v. from IBAA but the latter took the position that,
Intermediate Appellate Court as a mere guarantor of the Mendozas who are
G.R. No. 74834 November 17, 1988 the principal debtors, its remaining outstanding
Melencio-Herrera, J.
obligation under the two (2) standby L/Cs was
FACTS: only P30,100.60. Later, IBAA corrected the
previously mentioned amount and demanded
Sometime in 1976 and 1977 spouses Ben S. refund because the partial payment by the
Mendoza and Juanita M. Mendoza (the Mendozas have the effect of reducing its
Mendozas, for brevity), obtained two (2) loans liability as guarantor or surety under the terms
from Philippine American Life Insurance Co. of the standby L/Cs in question.
(Philam Life) in the total amount of P600,000.00
to finance the construction of their residential On April 1980, the real estate mortgage,
house at Mandaue City. The said loans, with a which secured the two (2) standby L/Cs, was
14% nominal interest rate, were to be extrajudicially foreclosed by, and sold at public
liquidated in equal amortizations over a period auction to petitioner IBAA as the lone and
of five (5) years. highest bidder. Philam life then filed a suit
against the Mendozas and IBAA.
To secure payment, Philam Life required
that amortizations be guaranteed by an The trial court rendered a decision in favor
irrevocable standby letter of credit of a of IBAA and took position that IBAA “as surety”
commercial bank. Thus, the Mendozas was discharged of its liability to the extent of
contracted with petitioner Insular Bank of Asia the payment made by the Mendozas, as the
and America (IBAA) for the issuance of two (2) principal debtors, to the creditor, Philam Life.
irrevocable standby Letters of Credit in favor of However, the Intermediate appellate court
Philam Life for the total amount of P600,000.00. (now CA) reversed the Trial Court and ruled
that IBAA's liability was not reduced by virtue of
These two (2) irrevocable standby L/Cs the payments made by the Mendozas.
were, in turn, secured by a real estate
mortgage for the same amount on the ISSUE:
property of Respondent Spouses in favor of Whether or not the partial payments made
IBAA. by the MENDOZAS (as principal obligors) would
have the corresponding effect of reducing the
The Mendozas failed to pay Philam Life the liability of the petitioner IBAA as guarantor or
amortization that fell due on I June 1978 so that surety under the terms of the standby LCs in
Philam Life informed IBAA that it was declaring question.
both loans as "entirely due and demandable"
and demanded payment of P492,996.30. HELD:
However, IBAA contested the propriety of
calling in the entire loan. NO. IBAA’s liability under the terms of the
letters of credit is separate and independent
Because the Mendozas defaulted again on from that of the liability of the principal obligors.
their other amortization, Philam Life again
informed IBAA that it was declaring the entire In construing the terms of a Letter of Credit,
balance outstanding on both loans as in other contracts, it is the intention of the
"immediately due and payable." Philam Life parties that must govern.
then demanded the payment of P274,779.56
 "Letters of credit and contracts for the P255,364.95 representing its clean loans to the
issuance of such letters are subject to the same Mendozas plus accrued interest besides the
rules of construction as are ordinary fact that it now has the foreclosed property.
commercial contracts. They are to receive a
reasonable and not a technical construction As between IBAA and the Mendozas,
and although usage and custom cannot therefore, there has been full liquidation. The
control express terms in letters of credit, they remaining obligation of P222,000.00 on the loan
are to be construed with reference to all the of the Mendozas, therefore, is now IBAA's sole
surrounding facts and circumstances, to the responsibility to pay to Philam Life by virtue of its
particular and often varying terms in which absolute and irrevocable undertaking under
they may be expressed, the circumstances and the standby L/Cs. Specially so, since the
intention of the parties to them, and the usages promissory notes executed by the Mendozas in
of the particular trade of business favor of IBAA authorized the sale of the
contemplated." mortgaged security for the purpose of applying
their proceeds to payments of their obligations
The terms of the standby Letters of Credit to IBAA.
states that such letters secure the payment of
any obligation of the Mendozas to Philam Life
including all interests, surcharges and expenses
thereon but not to exceed P600,000.00. But
while they are a security arrangement, they are
not converted thereby into contracts of
guaranty.

The standby L/Cs are, "in effect an absolute

undertaking to pay the money advanced or
the amount for which credit is given on the
faith of the instrument." They are primary
obligations and not accessory contracts. Being
separate and independent agreements, the
payments made by the Mendozas cannot be
added in computing IBAA's liability under its
own standby letters of credit. Payments made
by the Mendozas directly to Philam Life are in
compliance with their own prestation under the
loan agreement.

As to the liability of the Mendozas to IBAA, it

bears recalling that the Mendozas had
executed a Real Estate Mortgage as security to
IBAA for any payment that the latter may remit
to Philam Life on the strength of said Letters of
Credit; and that IBAA had recovered from the
Mendozas the amount of P432,386.07 when it
foreclosed on the mortgaged property of said
spouses. In addition, IBAA had recovered
 Bank of America, NT & SA v. CA
228 SCRA 357 (1994) The RTC ruled in favor of Inter-Resin
Vitug, J. because Bank of America was careless and
negligent in not communicating with Bank of
FACTS Ayudhya as to the authenticity of the letter of
credit, among others. The CA sustained the
Bank of America, NT & SA, Manila (advising decision.
bank) received an Irrevocable Letter of Credit
from Bank of Ayudhya (issuing bank) for ISSUES
General Chemicals Ltd., Thailand (buyer),
covering $2,782,000 for the sale of ropes and (1) W/N Bank of America has warranted
agricultural files with Inter-Resin Industrial the genuineness and authenticity of the
Corporation (beneficiary). letter of credit and, corollarily, whether
it has acted merely as an advising bank
Upon receiving a letter-advice, Inter-Resin (2) W/N Inter-Resin has actually shipped
sent Atty. Tanay to Bank of America to confirm the ropes specified by the letter of
the letter of credit, but the bank did not do so, credit; and
explaining that the letter of credit would not (3) W/N Bank of America may recover
have been transmitted if it were not genuine. against Inter-Resin under the draft
executed in its partial availment of the
Thereafter, Inter-Resin sought partial letter of credit.
availment under the letter of credit for
$1,320,600 covering the shipment of rope. After HELD
confirming that Inter-Resin’s documents
conformed to the conditions under the letter of (1) YES. It cannot seriously be disputed,
credit, Bank of America issued a cashier’s looking at this case, that Bank of
check worth the *peso equivalent of the said America has, in fact, only been an
amount. Later on, Inter-Resin presented advising, not confirming, bank, and this
another set of documents to the Bank of much is clearly evident, among other
America for a second availment under the things, by the provisions of the letter of
letter of credit. credit itself, the petitioner bank's letter of
advice, its request for payment of
Bank of America advised the Bank of advising fee, and the admission of
Ayudhya of said availment. However, the Inter-Resin that it has paid the same.
former received word from the latter that the That Bank of America has asked
letter of credit was fraudulent. They stopped Inter-Resin to submit documents
processing Inter-Resin’s documents. After required by the letter of credit and
investigation, they found that Inter-Resin’s vans eventually has paid the proceeds
contained not ropes but waste materials. thereof, did not obviously make it a
confirming bank. The fact, too, that the
Inter-Resin was charged with estafa draft required by the letter of credit is to
through falsification of commercial documents, be drawn under the account of General
but the prosecutor eventually dismissed it Chemicals (buyer) only means the same
because there was no prima facie evidence to had to be presented to Bank of
warrant prosecution. Ayudhya (issuing bank) for payment. It
may be significant to recall that the
Bank of America sued Inter-Resin to recover letter of credit is an engagement of the
*P10,219,093.20 on the partial availment of the issuing bank, not the advising bank, to
now disowned letter of credit. On the other pay the draft.
hand, Inter-Resin claimed that not only was it
entitled to retain P10,219,093.20 on its first As an advising or notifying bank, Bank of
shipment but also to the balance $1,461,400.00 America did not incur any obligation
covering the second shipment. more than just notifying Inter-Resin of the
 letter of credit issued in its favor, let
alone to confirm the letter of credit. The
bare statement of the bank employees,
aforementioned, in responding to the
inquiry made by Atty. Tanay, Inter-Resin's
representative, on the authenticity of
the letter of credit certainly did not have
the effect of novating the letter of credit
and Bank of America's letter of advise,
nor can it justify the conclusion that the
bank must now assume total liability on
the letter of credit.

As advising bank, Bank of America is

bound only to check the "apparent
authenticity" of the letter of credit, which
it did.

(2) That Inter-Resin sent waste instead of its

products, is really of no consequence. In
the operation of a letter of credit, the
involved banks deal only with
documents and not on goods described
in those documents.

(3) YES. This kind of transaction is what is

commonly referred to as a discounting
arrangement. This time, Bank of America
has acted independently as a
negotiating bank, thus saving Inter-Resin
from the hardship of presenting the
documents directly to Bank of Ayudhya
to recover payment. (Inter-Resin, of
course, could have chosen other banks
with which to negotiate the draft and
the documents.) As a negotiating bank,
Bank of America has a right to recourse
against the issuer bank and until
reimbursement is obtained, Inter-Resin,
as the drawer of the draft, continues to
assume a contingent liability thereon.
Transfield Philippines, Inc. v. Luzon Hydro Corp., until actual completion of the project pursuant
443 SCRA 307 (2004) to the turnkey contract.
Tinga, J.
-Also, LHC served notice that it would call on
FACTS: the securities for payment of liquidated
damages for the delay.
-Transfield and Luzon Hydro Corporation
entered into a Turnkey contract whereby -Hence, Transfield filed a complaint for
Transfield, as turnkey contractor, undertook to injunction against LHC and the banks.
construct, on a turnkey basis, a 70 Megawatt
Hydro-Electric power station at the Bakun River -RTC denied the request. CA, issued a TRO.
in the provinces of Benguet and Ilocos Sur. However, it failed to act on the request for
preliminary injunction until the TRO expired. The
-Transfield was given the sole responsibility for appellate court then expressed conformity with
the design, construction, commissioning, testing the trial courts decision that LHC could call on
and completion of the project (target date is the Securities pursuant to the first principle in
June 2000). credit law that the credit itself is independent of
the underlying transaction. Hence, this petition.
-The turnkey contract entitled Transfield to
claim extensions of time for reasons ISSUE:
enumerated in the turnkey contract, among
which are variations, force majeure and delays Whether or not LHC can collect from the
caused by LHC itself. letters of credit despite the pending arbitration
case and invoke the independence principle in
-To secure performance of Transfield’s letters of credit
obligation on or before target completion
date, Transfield opened in favor of LHC two HELD:
stand-by letters of credit.
YES. Transfield’s argument that any dispute
-In the course of construction of the project, must first be resolved by the parties, whether
Transfield sought various extension of time to through negotiations or arbitration, before the
complete the project. The extensions were beneficiary is entitled to call on the letter of
requested allegedly due to several factors credit in essence would convert the letter of
which prevented the completion of the project credit into a mere guarantee. Jurisprudence
on the target date, such as force majeure has laid down a clear distinction between a
occasioned by typhoon Zeb, barricades and letter of credit and a guarantee in that the
demonstration. LHC denied the requests. settlement of a dispute between the parties is
not a pre-requisite for the release of funds
-Arbitration proceeding were initiated. under a letter of credit. In other words, the
argument is incompatible with the very nature
-Asserting that LHC had no right to call on the of the letter of credit. If a letter of credit is
securities until the resolution of disputes before drawable only after settlement of the dispute
the arbitration tribunals, Transfield warned the on the contract entered into by the applicant
banks that any transfer, release or disposition of and the beneficiary, there would be no
the securities in favor of LHC would constrain it practical and beneficial use for letters of credit
to hold them liable for damages. in commercial transactions.

-Despite warning, however, the banks informed As beneficiary of the letter of credit, LHC is
Transfield that they would pay on the securities entitled to invoke the independence principle.
if and when LHC calls on them.
- The so-called “independence principle”
-Subsequently, LHC declared Transfield in assures the seller or the beneficiary of prompt
default and demanded payment for the delay payment independent of any breach of the
main contract and precludes the issuing bank electric power station, the performance of
from determining whether the main contract is which is secured by a standby letter of credit,
actually accomplished or not. Under this the resort to arbitration by the applicant/
principle, banks assume no liability or contractor to arbitration to determine if the
responsibility for the form, sufficiency, latter is guilty of delay does not preclude the
accuracy, genuineness, falsification or legal beneficiary to draw on the letter of credit upon
effect of any documents, or for the general the issuance of certificate of default because
and/or particular conditions stipulated in the whether or not the issuance of certification of
documents or superimposed thereon, nor do default amounted to fraud was not raised in
they assume any liability or responsibility for the the lower court and the parties did not stipulate
description, quantity, weight, quality, condition, that all dispute regarding delay should first be
packing, delivery, value or existence of the settled through arbitration before the
goods represented by any documents, or for beneficiary would be allowed to call upon the
the good faith or acts and/or omissions, letter of credit. If drawing upon the letter of
solvency, performance or standing of the credit was wrongful due to the non-existent of
consignor, the carriers, or the insurers of the the fact of default, the right of the applicant to
goods, or any other person whomsoever. seek indemnification for damages it suffered
would not normally be foreclosed pursuant to
The independent nature of the letter of credit general principle of law.
may be:
(a) independence in toto where the credit is
independent from the justification aspect and
is a separate obligation from the underlying
agreement like for instance a typical standby;
or
(b) independence may be only as to the
justification aspect like in a commercial letter of
credit or repayment standby, which is identical
with the same obligations under the underlying
agreement. In both cases the payment may
be enjoined if in the light of the purpose of the
credit the payment of the credit would
constitute fraudulent abuse of the credit.

-The “fraud exception principle” is an

exception to the independence principle. The
untruthfulness of a certificate accompanying a
demand for payment under a standby letter of
credit may qualify as fraud sufficient to support
an injunction against payment. The remedy for
fraudulent abuse is an injunction. However,
injunction should not be granted unless:
(a) there is a clear proof of fraud;
(b) the fraud constitutes fraudulent abuse of
the independent purpose of the letter of credit
and not only fraud in the main agreement; and
(3) irreparable injury might follow if injunction is
not granted or the recovery of damages would
be seriously damaged.

-Where the applicant entered into a Turnkey

contract whereby it undertook to construct, on
a turnkey basis, a seventy (70) megawatt hydro