Bankingalliedlaws29aug2020

BANKING & ALLIED LAWS (Updated: 29 August 2020) ©l. p. ignacio

engaged in a loan transaction or banking but is purely a purchase of receivables at a discount. 1.3. Banks and financial intermediaries

I. Banking Institutions Banks 1.1. Definition (Sec. 3.1, RA No. 8791 [General Banking Law of 2000 (GBL)]) Case: BDO-EPCI, Inc. v. JAPRL Dev’t. Corp, GR No. 179901, 14 April 2008 - Banks operate (and earn income) by extending credit facilities financed primarily by deposits from the public. They plough back the bulk of said deposits into the economy in the form of loans. Since banks deal with the public’s money, their viability depends largely on their ability to return those deposits on demand. For this reason, banking is undeniably imbued with public interest. Consequently, much importance is given to sound lending practices and good corporate governance.

Case: First Planters Pawnshop, Inc. v. CIR, 560 SCRA 606 [2008]) - RA No. 8791 or the General Banking Law of 2000 provides that banks shall refer to entities engaged in the lending of funds obtained in the form of deposits. Financial intermediaries are defined as “persons or entities whose principal functions include lending, investing or placement of funds or evidence of indebtedness or equity deposited with them, acquired by them, or otherwise coursed through them, either for their own account or for the account of others. 1.4. Authority to engage in banking (Sec. 6, GBL) 1.5. Requisites/conditions to engage in banking (Sec. 8, GBL) 1.6. The SEC and banks (Sec. 14, GBL)

*Shadow banking - Shadow banking activities include lending by unregulated individuals, entities charging higherthan-market interest rates, sale of dubious securities and other investment products, as well as in-house financing by real estate developers. Shadow banking threatens the financial stability of households and the economy as a whole.

1.7. Minimum capital stock requirements (BSP Circular No. 257 dated 15 August 2000) 1.8. The activities and services of banks (Secs. 53 and 29, GBL) 1.9. May banks acquire real estate? (Secs. 51 & 52, GBL)

1.2. The essence of banking 2. Classification of banks (Section 3.2., GBL) Cases: a. Republic v. Security Credit & Acceptance Corp, 19 SCRA 58 (1967) - A financial institution obtaining deposits from the public, which was lent to persons deemed suitable by it, is engaged in banking. b. Bañas v. Asia-Pacific Finance Corp., 18 Oct. 2000 - An investment firm that purchased a promissory note on discount, which was secured by a Chattel Mortgage and a Continuing Undertaking, for purposes of reinvesting, is not

universal banks commercial banks thrift banks (Thrift Banks - Act RA No. 7906) c.1. savings and mortgage banks c.2. stock savings and loan associations c.3. private development banks rural banks (Rural Banks Act – RA No. 7353) cooperative banks (Cooperative Code – RA No. 6938) islamic bank (RA No. 6848) others 1

g.1. Development Bank of the Philippines (EO No. 81, as amended) g.2. Land Bank of the Philippines (RA No. 3844, Secs. 74-100A) 2.1. Universal bank vs. Commercial bank 2.2. Unibank as investment house? (Sec. 23 GBL) 2.3. Unibank and investment in allied and nonallied enterprises (Sec. 24, GBL) 2.4. Commercial bank and investment in nonallied enterprises (Sec. 30, GBL) 3. Other banking services (Sec. 53.3., GBL) 3.1. Security Broker? (Sec. 53.2, GBL) 3.2. Insurance? (Sec. 54, GBL) 4. Prohibited transactions/acts (Sec. 55, GBL) 4.1. Disclosure of funds and properties in the custody of banks (Sec. 55.1[b], GBL) 4.2. Outsourcing of inherent banking functions (Sec. 55.1[e], GBL; BSP Circular No. 268, 05 Dec. 2000) 4.3. Employment of casual or non-regular personnel (Sec. 55.4, GBL) 4.4. Prohibited transaction and Republic Act No. 9510 (An Act Establishing the Credit Information System and other purposes: Approved 31 October 2008) - RA No. 9510 which aims to provide a credit information system to directly address the needs for reliable credit information concerning the credit standing and track record of borrowers, shall not impair the SBD, FCDA, GBL and AMLA and/or client funds and investments in government securities or funds. (Secs. 1 and 12) 5. The significance of banks in the economic life of the country Case: (1997)

- The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life’s savings to the bank of his choice, knowing that they will be safe in its custody and will even earn interest for him. The ordinary person, with equal faith, usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business entities, the bank is a trusted and active associate that can help in the running of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks. b. Sandejas v. Ignacio, Jr., 541 SCRA 61 (2007) - The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society—banks have attained a ubiquitous presence among people, who have come to regard them with respect and even gratitude and most of all, confidence, and it is for this reason, banks should guard against injury attributable to negligence or bad faith on its part. c. Security and Trust Co. v. RCBC, 577 SCRA 407, 30 Jan. 2009 - The banking system has become an indispensable institution in the modern world and plays a vital role in the economic life of every civilized society—it is important that banks should guard against injury attributable to negligence or bad faith on its part. 6. The business of banking is imbued with public interest

a. Simex v. CA, 183 SCRA 360 2

Cases: (2007)

a. Omengan v. PNB, 512 SCRA 305

- The business of a bank is one affected with public interest, for which reason the bank should guard against loss due to negligence or bad faith. In approving the loan of an applicant, the bank concerns itself with proper information regarding its debtors.

c. Bank of America NT & SA v. Phil. Racing Club, 594 SCRA 301 [30 July 2009] - In instances where both parties are at fault, this Court has consistently applied the doctrine of last clear chance in order to assign liability. 7. Quasi-banks (Sec.4 [last par.], GBL) 7.1. Deposit substitutes (Sec. 95, RA 7653, The New Central Bank Act [NCBA])

b. BPI v. CA, 512 SCRA 620 (2007) - As businesses affected with public interest, and because of the nature of their functions, banks are under obligation to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship. c. BDO-EPCI, Inc. v. JAPRL Dev’t. Corp, GR No. 179901, 14 April 2008 - Banks operate (and earn income) by extending credit facilities financed primarily by deposits from the public. They plough back the bulk of said deposits into the economy in the form of loans. Since banks deal with the public’s money, their viability depends largely on their ability to return those deposits on demand. For this reason, banking is undeniably imbued with public interest. Consequently, much importance is given to sound lending practices and good corporate governance.

The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public (the term ‘public’ means borrowing from twenty [20] or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer (Banco de Oro v. Republic, 745 SCRA 361, 13 January 2015). 8. The organization and ownership of banks (Secs. 8-19, GBL) 8.1. Stockholdings (Secs. 12-14, GBL) 8.2. The required number of board of directors (Secs. 15-18, GBL) 8.1.a. Independent director (Sec. 15, GBL)

6.1. Banking and common carriers and last clear chance Case: a. Solidbank/Metrobank v. Tan, 520 SCRA 123 (2007) b. Gonzales v. PCIB, 643 SCRA 180 (23 Feb. 2011) - Like a common carrier whose business is imbued with public interest, a bank should exercise extraordinary diligence to negate its liability to the depositors. - The Court finds no compelling reason to disallow the application of the provision on common carriers in this case if only to emphasize the fact that banking institutions have the duty to exercise the highest degree of diligence when transacting with the public.

*Board of Directors. The provisions of the Corporation Code to the contrary notwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members of the board of directors of bank, two (2) of whom shall be independent directors. An "independent director" shall mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests (Sec. 15, GBL). However, in case of a bank merger or consolidation, the number of directors shall not exceed twenty-one (21) (Sec. 17, GBL). In the Manual of Regulation for Banks (MORB X141.2 [2013]), an independent director shall refer to a person who 3

(1) is not or has not been an officer or employee of the bank, its subsidiaries or affiliates or related interests during the past three (3) years counted from the date of his election; (2) is not a director or officer of the related companies of the institution’s majority stockholder; (3)) is not a stockholder with shares of stock sufficient to elect one (1) seat in the board of directors of the institution, or in any of its related companies or of its majority corporate shareholders; (4) is not a relative, legitimate or common-law of any director, officer or stockholder holding shares of stock sufficient to elect one seat in the board of the bank or any of its related companies. For this purpose, relatives refer to the spouse, parent, child, brother, sister, parent-inlaw, son-/daughter-in-law, and brother-/sister-in-law; (5) is not acting as a nominee or representative of any director or substantial shareholder of the bank, any of its related companies or any of its substantial shareholders; and (6) is not retained as professional adviser, consultant, agent or counsel of the institution, any of its related companies or any of its substantial shareholders, either in his personal capacity or through his firm; is independent of management and free from any business or other relationship, has not engaged and does not engage in any transaction with the institution or with any of its related companies or with any of its substantial shareholders, whether by himself or with other persons or through a firm of which he is a partner or a company of which he is a director or substantial shareholder, other than transactions which are conducted at arm’s length and could not materially interfere with or influence the exercise of his judgment.

the SEC for public and listed companies shall apply to all types of banks.

An independent director of a bank may only serve as such for a total of five (5) consecutive years: Provided, That the maximum term and any “cooling off” period prescribed by

8.4.b. Regulations of compensation and benefits (Sec. 18, GBL)

8.1.b. Foreigner as member of the board (Sec. 15[2nd par.], GBL) *Non-Filipino citizens as board members. NonFilipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank. (Sec. 15, GBL; Sec. 7, RA 7721) 8.3. Ownership of individuals w/in the 4th degree of consanguinity or affinity (Sec. 12, GBL) 8.3.a. Family groups and related interests (Secs. 12, GBL) *Stockholdings of Family Groups or Related Interests. Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or commonlaw, shall be considered family groups or related interests and must be fully disclosed in all transactions by such an individual with the bank (Sec. 12, GBL). There is no limitation in the stockholdings/ownership of family groups or related interests. They are, however, required to make a full disclosure of all transactions made with the bank. *Corporate Stockholdings. Two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank (Sec. 13, GBL). 8.4. The BSP and bank officials/employees 8.4.a. Prescription and review of qualifications (Sec. 16, GBL) The fit and proper rule (Sec. 16, GBL)

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8.5. Prohibition on public officials (Sec. 19, GBL; Sec. 5, Rural Banks Act [RBA]; Sec. 10, Guidelines for the Organizations of Cooperative Banks) 8.6. Foreign ownership of banks and foreign banks 8.6.a. Foreign individuals corporations (Sec. 11, GBL)

and

non-bank

8.6.b. Foreign banks and ownership of local banks (Sec. 73, GBL) *RA No. 10641: An Act Allowing the Full Entry of Foreign Banks in the Philippines, amending for the purpose RA No. 7721 (effective 07 Aug. 2014) *Foreign banks. The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any one of the following” modes of entry: (i) by acquiring, purchasing or owning up to one hundred percent (100%) of the voting stock of an existing bank; (ii) by investing in up to one hundred percent (100%) of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking authority. (Sec. 2, RA 7721, Foreign Banks Liberalization Act [FBLA] as amended by RA No. 10641: An Act Allowing the Full Entry of Foreign Banks in the Philippines, amending for the purpose RA No. 7721 [effective 07 August 2014]) ΦThe 100% ownership of banks may cause a possible violation of the Constitutional ban against foreigners to acquire or hold lands of the public domain (Section 7, Art. XII, 1987 Constitution). One of the businesses of banking is the foreclosure of mortgaged realty where a bank may participate in the bidding and be awarded the mortgaged realty for being the highest bidder. The bank will eventually become the absolute owner of the realty by consolidating and registering the title in its name after the expiration of the right to redeem. To

avoid this possibility, Section 9 of RA No. 10641 provided that foreign banks which are authorized to do banking business in the Philippines shall be allowed to bid and take part in foreclosure sales of real property mortgaged to them, as well as to avail of enforcement and other proceedings, and accordingly take possession of the mortgaged property, for a period not exceeding five (5) years from actual possession: Provided, That in no event shall title to the property be transferred to such foreign bank. In case said bank is the winning bidder, it shall, during the said five (5)-year period, transfer its rights to a qualified Philippine national, without prejudice to a borrower’s rights under applicable laws. Should the bank fail to transfer such property within the five (5)-year period, it shall be penalized one half (1/2) of one percent (1%) per annum of the price at which the property was foreclosed until it is able to transfer the property to a qualified Philippine national. *Ownership of foreign individuals or non-bank corporations. Foreign individuals and non-bank corporations may only own or control up to forty percent (40%) of the voting stock of a domestic bank (Sec. 11 GBL). 100% ownership of the voting stock of a Philippine Bank is allowed only to foreign banks (Sec. 73, GBL). The Controlling Stockholders Rule (BSP Circular No. 256) Control test – the nationality of a corporation is determined by the controlling stockholders. 8.6.c. Foreign ownership in thrift banks (Sec. 8, Thrift Banks Act [TBA]) *Foreign ownership in thrift banks (Sec. 8, Thrift Banks Act [TBA]). Forty percent (40%) of the voting stock of a thrift bank shall be owned by Philippine citizens. In case of a merger or consolidation with a foreign holding, foreign ownership is limited to sixty percent (60%). 8.6.d. Foreign ownership in rural banks (Sec. 4, Rural Banks Act [RBA]) 5

*RA No. 10574--Foreign Equity Bill - Foreigners may now own up to 60% of voting stocks in rural banks. *Foreign ownership in rural banks. In Section 4 of the Rural Banks Act (RBA) the capital stock of any rural bank shall be fully owned and held directly or indirectly by citizens of the Philippines or corporations, associations or cooperatives qualified under Philippine laws to own and hold such capital stock. This is now amended by RA No. 10574, the Foreign Equity Bill, approved on 24 May 2013. Foreigners may now own up to 60% of voting stocks in rural banks. 8.6.e. Foreign banks (Secs. 72-78, GBL; RA No. 7721 [Foreign Banks Liberalization Act (FBLA)]) 8.6.f. The license of foreign banks (Sec. 78, GBL) 8.6.g. Laws governing foreign banks (Sec. 77, GBL) 8.6.h. Summons and other legal processes against a foreign bank (Sec. 76, GBL). 8.6.i. The branches of a foreign bank (Sec. 74, GBL) 9. Off-shore Banking unit (Section 1b, PD 1034) 9.1. Offshore banking (Sec. 1a, PD 1034) II. The Bangko Sentral Ng Pilipinas (BSP) (RA No. 7653 – the New Central Bank Act [NCBA]) 1. Responsibility and primary objective (Sec. 3, Art 1, NCBA; Sec. 5, GBL) The Constitution expressly grants the Bangko Sentral ng Pilipinas (BSP), as the country's central monetary authority, the power of supervision over the operation of banks, while leaving with Congress the authority to define the BSP's regulatory powers over the operations of finance companies and other institutions performing similar functions (Bank of Commerce v. Planters

Development Bank, 681 SCRA 521, 24 September 2012). The BSP is not simply a corporate entity but qualifies as an administrative agency created, pursuant to constitutional mandate, to carry out a particular government function (ibid). The PDIC and investigation of banks Court is of the view that the Monetary Board approval is not required for the Philippine Deposit Insurance Corporation (PDIC) to conduct an investigation on the Banks (PDIC v. Phil. Countryside Rural Bank, Inc., 640 SCRA 322 [2011]). *Section 9(b-1) of the PDIC Charter empowers the PDIC to conduct an investigation of a bank and to appoint examiners who shall have the power to examine any insured bank.  Such investigators are authorized to conduct investigations on frauds, irregularities and anomalies committed in banks, based on an examination conducted by the PDIC and the BSP or on complaints from depositors or from other government agencies (PDIC v. Phil. Countryside Rural Bank, Inc., 640 SCRA 322 [2011]). The Supreme Court ruled that the power of the PDIC to conduct examination and investigation, although used interchangeably, are distinct. It was further ruled that an examination of banks requires the prior consent of the Monetary Board, whereas an investigation based on an examination report, does not. “x x x the process of examination covers a wider scope than that of investigation. Examination involves an evaluation of the current status of a bank and determines its compliance with the set standards regarding solvency, liquidity, asset valuation, operations, systems, management, and compliance with banking laws, rules and regulations.  Investigation, on the other hand, is conducted based on specific findings of certain acts or omissions which are subject of a complaint or a Final Report of Examination.  Clearly, investigation does not involve a general evaluation of the status of a bank.  An 6

investigation zeroes in on specific acts and omissions uncovered via an examination, or which are cited in a complaint.  An examination entails a review of essentially all the functions and facets of a bank and its operation.  It necessitates poring through voluminous documents, and requires a detailed evaluation thereof.  Such a process then involves an intrusion into a bank’s records.  In contrast, although it also involves a detailed evaluation, an investigation centers on specific acts of omissions and, thus, requires a less invasive assessment. The practical justification for not requiring the Monetary Board approval to conduct an investigation of banks is the administrative hurdles and paperwork it entails, and the correspondent time to complete those additional steps or requirements. As in other types of investigation, time is always of essence, and it is prudent to expedite the proceedings if an accurate conclusion is to be arrived at, as an investigation is only as precise as the evidence on which it is based.  The promptness with which such evidence is gathered is always of utmost importance because evidence, documentary evidence in particular, is remarkably fungible.  A PDIC investigation is conducted to “determine[e] whether the allegations in a complaint or findings in a final report of examination may properly be the subject of an administrative, criminal or civil action.”  In other words, an investigation is based on reports of examination and an examination is conducted with prior Monetary Board approval. Therefore, it would be unnecessary to secure a separate approval for the conduct of an investigation.  Such would merely prolong the process and provide unscrupulous individuals the opportunity to cover their tracks. Indeed, while in a literary sense, the two terms may be used interchangeably, under the PDIC Charter, examination and investigation refer to two different processes.  To reiterate, an examination of banks requires the prior consent of the Monetary Board, whereas an investigation based on an examination report, does not.” (PDIC v. Phil. Countryside Rural Bank, Inc., 640 SCRA 322 [2011])

Open market operation Open market operation is a monetary tool where the BSP publicly buys or sells government securities from (or to) banks and financial institutions in order to expand or contract the supply of money (Bank of Commerce v. Planters Dev’t. Bank, 681 SCRA 521). Open market operation is a monetary policy instrument that the BSP employs, among others, to regulate the supply of money in the economy to influence the timing, cost and availability of money and credit, as well as other financial factors, for the purposes of stabilizing the price level (ibid.) 2. Supervision and examination of banks (Sec. 25, Art. IV, NCBA; Sec. 4 and sub-sections, GBL; Sec. 7, GBL) Cases: a. BSP-MB v. AntonioValenzuela, 602 SCRA 698, 02 Oct. 2009 - There is no provision of law, no section in the procedures of the Bangko Sentral ng Pilipinas (BSP) that shows that the BSP is required to give banks copies of the Reports of Examination. - Sec. 28 of Republic Act 7653, or the New Central Bank Act, which governs examinations of banking institutions, provides that the Report of Examination (ROE) shall be submitted to the MB – the bank examined is not mentioned as a recipient of the ROE. b. Busuego v. CA, 394 SCRA 473 - The BSP, through the MB, is the government agency charged with the responsibility of administering the monetary, banking and credit system of the country and is granted the power of supervision and examination of banks and non-bank financial institutions performing quasibanking functions. This authority includes jurisdiction over savings and loan associations. c. Koruga v. Arcenas, Jr., 590 SCRA 49, 19 June 2009 -The Law vests in the Bangko Sentral ng Pilipinas (BSP) the supervision over operations and activities of banks. -Allegations regarding questionable loans are not ordinary intra-corporate matters; rather, they 7

involve banking activities which are, by law, regulated and supervised by the BSP. -The authority to determine whether a bank is conducting business in an unsafe or unsound manner is also vested in the Monetary Board.

d. CB v. Morfe, 20 SCRA 507 - There is no need to identify the victims as violations of banking laws constitute a general pattern of the business organization and what is sought to be protected is the public against actual as well as potential injuries.

2.1. Supervision of banks (Sec. 4, GBL) *The supervisory powers of the BSP, which include visitorial power, maybe grouped into three (3): (i) Issuance of rules; (ii) Examination and investigation; and (iii) Enforcement of prompt corrective action. (The General Banking Law Annotated, by the BSP, 2011, p. 50) 2.2. Supervision of affiliates and subsidiaries (Sec. 7, GBL) 2.2.a. Affiliates and subsidiaries (Sec. 25, NCBA) 2.3. Restraining order/injunctions on the supervision & examination of banks (Sec. 25, NCBA) Cases: a. Vivas v. Monetary Board of the BSP, 703 SCRA 290, 07 August 2013 - Any act of the Monetary Board placing a bank under conservatorship, receivership or liquidation may not be restrained or set aside except on a petition for certiorari b. Banco Filipino v. CB, 204 SCRA 767 - Courts cannot interfere with, or issue TRO/injunction in the investigation or examination of banks by the BSP as a rule, except only in cases where there is bad faith and arbitrary actions. c. Perez v. Monetary Board, 20 SCRA 592 - A private individual can cause the prosecution of violations of banking laws since it constitutes a public offense and the prosecution is a matter of public interest.

2.4. Bank closure an exercise of police power; it is final and executory. Power of MB to close banks It is settled that “[t]he power and authority of the Monetary Board to close banks and liquidate them thereafter when public interest so requires is an exercise of the police power of the State” (Apex Bancrights Holdings, Inc v. BSP, 841 SCRA 436, 02 October 2017). The “actions of the Monetary Board in proceedings on insolvency are explicitly declared by law to be ‘final and executory.’ They may not be set aside, or restrained, or enjoined by the courts, except upon ‘convincing proof that the action is plainly arbitrary and made in bad faith (Apex Bancrights Holdings, Inc v. BSP, 841 SCRA 436, 02 October 2017). Case: a. BSP-MB v. Antonio-Valenzuela, 602 SCRA 698, 02 Oct. 2009 - Under the law, the sanction of closure could be imposed upon a bank by the Bangko Sentral ng Pilipinas (BSP) even without notice and hearing – this “close now, hear later” scheme is grounded on practical and legal considerations to prevent unwarranted dissipation of the bank’s assets and as a valid exercise of police power to protect depositors, creditors, stockholders, and the general public. - Judicial review enters the picture only after the MB has taken action – it cannot prevent such action by the MB. - The threat of the imposition of sanctions, even of closure, does not violate the right to due process, and cannot be the basis for a writ of preliminary injunction. b. Rural Bank of San Miguel Inc. v. MB, 516 SCRA 154 [2007] 8

- It is well settled that the closure of a bank may be considered as an exercise of police power; action of the monetary board on this matter is final and executory - The purpose of the law is to make the closure of a bank summary and expeditious in order to protect public interest; prior notice and hearing are no longer required before a bank can be closed.

institution (Apex Bancrights Holdings, Inc. v. BSP & PDIC, GR NO. 214866, 02 October 2017). III. Conservatorship, receivership and liquidation of banks (Secs. 29-34, Art. IV, NCBA; Secs. 67-70, GBL) 1. Conservatorship Definition

c. Miranda v. PDIC, 501 SCRA 288 [2006]). - The power and authority of the Monetary Board to close banks and liquidate them thereafter when public interest so requires is an exercise of the police power of the State. - The action of the Monetary Board in proceedings on insolvency are explicitly declared by law to be final and executory – they may not be set aside, or restrained, or enjoined by the courts, except upon convincing proof that the action is plainly and arbitrary and made in bad faith. Close now, hear later doctrine. The “close now, hear later” doctrine is justified as a measure for the protection of the public interest. Swift action is called for on the part of the BSP when it finds that a bank is in dire straits. Thus, MB may forbid a bank from doing business and place it under receivership without prior notice and hearing, whenever, upon report of the head of the supervising or examining department, the MB finds that a bank or quasibank: (a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided, that this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; (b) has insufficient realizable assets, as determined by the BSP, to meet its liabilities; or (c) cannot continue in business without involving probable losses to its depositors or creditors; or (d) has willfully violated a cease and desist order under Section 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the

1.2. Basis of placing a conservatorship (Sec. 29, NCBA)

bank

under

1.3. The conservator 1.3.a. Who is a conservator? (Secs. 29 & 30, NCBA) Case: CB v. CA, 208 SCRA 652) - A conservator is a person appointed, after a bank is placed under conservatorship, to take over the management of the bank and shall assume exclusive powers to oversee every aspect of the bank’s operation and affairs. 1.3.b. Powers of the conservator (Sec. 29, NCBA) Case: First Bank v. CA, 252 SCRA 259 - The conservator cannot revoke perfected and enforceable contracts. This will be an infringement of the non-impairment clause guaranteed by the Constitution. Personality conservatorship

of

bank

under

A bank retains its juridical personality even if placed under conservatorship; it is neither replaced nor substituted by the conservator who shall only take charge of the assets, liabilities and the management of the institution (Balayan Bay Rural Bank, Inc. v. National Livelihood Dev’t. Corp., 771 SCRA 139, 21 September 2015). 1.4. Duration of conservatorship (Sec. 29, NCBA)

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1.5. Questions and restraining orders on conservatorship (Secs. 29 & 30, NCBA) Cases: a. BSP-MB v. Antonio-Valenzuela, 602 SCRA 698, 02 Oct. 2009 - The actions of the MB under Secs. 29 and 30 of Republic Act 7653 “may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction.” b. Banco Filipino v. CB, 204 SCRA 767 - The action of the MB in placing a bank under conservatorship, receivership or liquidation is final and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction (see also Sec. 29). c. Central Bank v. CA, 106 SCRA 143 - While the closure and liquidation of a bank is an exercise of police power, the validity of such exercise is subject to judicial inquiry. 2. Receivership and Liquidation 2.1. What is receivership? Case: Central Bank v. CA, 220 SCRA 536 - Receivership is the summary closure of a bank by the BSP without prior notice and hearing after a finding that the continuance in business would involve probable loss to its depositors and creditors. 2.2. Instances when a bank maybe placed under receivership (Sec. 30, NCA) 2.2.a. Bank holiday (Sec. 53 [last par.], GBL) 2.2.b. Insolvency of banks (Sec. 30b, NCBA) Insolvency and closure of banks: effect

Case: Barrameda vda. de Ballesteros v. Rural Bank of Canman, Inc., 636 SCRA 119, 24 November 2010. - After the Monetary Board has declared that a bank is insolvent and has ordered it to cease operations, the Board becomes the trustee of its assets for the equal benefit of all creditors, including depositors. 2.3. Powers of a receiver (Sec. 30, NCBA; Sec. 10b, RA 3591, as amended [PDIC Law]) Cases: a. Villanueva v. CA, 244 SCRA 395 (1995) - The bank officers/directors have no power over the bank and its operation when a receiver is appointed. Where upon insolvency of a bank a receiver is appointed, the bank’s assets pass beyond its control into the possession and control of the receiver, and the appointment of the receiver operates to suspend the authority of the bank and its directors and officer over its property and effects, such authority being reposed in the receiver, and in this respect, the receivership is equivalent as an injunction to restrain bank officers from intermeddling with the property of the bank in any way. b. Abacus v. Manilabank, 06 April 2005 - When a bank is placed under receivership, its officers, including its acting president, are no longer authorized to transact business in connection with the bank’s assets and property. c.

Manalo

v.

CA,

08

October 2002 - The appointment of a receiver does not dissolve the bank as a corporation nor does it interfere with the exercise of corporate rights. Banks under liquidation retain their corporate personality. The bank can sue and be sued but any case should be initiated and prosecuted through the liquidator. 2.4. Effects of receivership Cases: a. Aguilar v. Manila Banking Corp., 502 SCRA 354 (2006) - When a bank is placed under receivership, it would not be able to do new business, that is, to grant new loans or to accept new deposits but 10

the receiver is in fact obliged to collect debts owing to the bank, which debts form part of the assets of the bank. Provident Savings Bank v. CA, 222 SCRA 125 [1993]. - The BSP forbids the bank under receivership from doing business, which includes the foreclosure of mortgage, and the period during which a bank is placed under receivership and prohibited from doing business is considered as fuerza mayor. - When a bank is prohibited from continuing to do business by the Central Bank and a receiver is appointed for such bank, that bank would not be able to do new business, i.e., to grant new loans or to accept new deposits. However, the receiver of the bank is in fact obliged to collect debts owing to the bank, which debts form part of the assets of the bank. The receiver must assemble the assets and pay the obligation of the bank under receivership, and take steps to prevent dissipation of such assets. Accordingly, the receiver of the bank is obliged to collect preexisting debts due to the bank, and in connection therewith, to foreclose mortgages securing such debts. 2.5. Action of the receiver in case a bank cannot be rehabilitated (Sec. 30, NCBA) Case: Sps. Larrobis v. Veterans Bank, 01 Oct. 2004 - When a bank is declared insolvent and placed under receivership, the Central Bank through the Monetary Board, determines whether to proceed with the liquidation or reorganization of the financially distressed bank. 2.6. The assets of the bank under receivership and liquidation (Secs. 30 & 31, NCBA; Sec. 10b, RA 3591 [PDIC], as amended) The properties of an insolvent bank are not transferred by operation of law to the statutory receiver/liquidator but rather these assets are just held in trust to be distributed to its creditors after the liquidation proceedings in accordance with the rules on concurrence and preference of credits (Balayan

Bay Rural Bank, Inc. v. National Livelihood Dev’t. Corp., 771 SCRA 139, 21 September 2015). Cases: a. Lipana v. Dev’t Bank of Rizal, 154 SCRA 257 - The assets of the insolvent banking institution are held in trust for the benefit of all creditors, and after its insolvency, one cannot obtain an advantage or preference over another by an attachment, execution or otherwise. b. Phil. Veterans Bank v. NLRC, 26 Oct. 1999 - The assets of the bank shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the bank was placed under receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution (see also Sec. 30, NCBA). Role of PDIC in case of bank closure As the fiduciary of the properties of a closed bank, the Philippine Deposit Insurance Corporation (PDIC) may prosecute or defend the case by or against the said bank as a representative party while the bank will remain as the real party-ininterest pursuant to Section 3, Rule 3 of the Revised Rules of Court (Balayan Bay Rural Bank, Inc. v. National Livelihood Dev’t. Corp., 771 SCRA 139, 21 September 2015). Receivership & liquidation ** Banks closed by the Monetary Board shall no longer be rehabilitated (@ 12 [a] PDIC Charter, as amended by RA 10846, 11 June 2016) Whenever a bank has been under receivership by the MB, the PDIC shall be designated as receiver and it shall proceed with the liquidation of the closed bank (Sec. 30, NCBA as amended by RA 11211, 14 February 2019) In no case shall a bank be reopened and permitted to resume business after 11

being placed under PDIC Charter).

liquidation

(Sec.

12[a]

- The bank is no longer obligated/liable to pay interests on bank deposits during its closure.

2.7. Remedy of depositors in case of liquidation proceedings

***However, the BSP can collect interests and other appropriate charges on all loans and advances it extends to a bank, notwithstanding such closure, receivership or liquidation (Sec. 85, NCBA).

Case: Provident Savings Bank v. CA, 222 SCRA 125 - The remedy of the depositors is to intervene in the liquidation proceedings. There will be no preference even if the claimant-depositor obtained a writ of preliminary attachment. 2.8. Principal role of the liquidation court Case: PCGG v. Sandiganbayan, 455 SCRA 526 - The principal role of the court in a liquidation of a bank is to assist the Central Bank (now the BSP) in determining claims of creditors against the bank—the role of the court is not strictly as a court of justice but as an agent to assist the Central Bank in determining claims of creditors. 2.9. Liquidation proceedings cannot be summary in nature. Case: In Re: Petition for liquidation of Rural Bank of Bokod (Benguet) v. BIR, 511 SCRA 123 [2006] - Liquidation proceedings cannot be summary in nature – it requires the holding of hearings and presentation of evidence of the parties concerned. 2.10. Liquidation does not diminish power of liquidator Case: Bacolor v. BF Savings, 515 SCRA 79 [2007] - A bank’s closure does not diminish the authority and powers of the designated liquidator to effectuate and carry on the administration of the bank. 2.11. The payment of interests on bank loans and deposits in case of closure of banks (Sec. 85, NCBA) Case: Fidelity Savings Bank v. Cenzon, 184 SCRA 141

2.12. Nature of liquidation Case: Phil. Veterans Bank Union v. Vega, 360 SCRA 33, 28 June 2001 - Liquidation, in corporation law, connotes a winding up or setting with creditors and debtors. It is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to case, discharging liabilities and dividing surplus or loss. On the opposite end of the spectrum is rehabilitation which connotes a reopening or reorganization. Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. - The concept of liquidation is diametrically opposed or contrary to the concept of rehabilitation, such that both cannot be undertaken at the same time. To allow the liquidation proceedings to continue would seriously hinder the rehabilitation. 2.13. Voluntary liquidation (Sec. 68, GBL) 2.14. Dissolution of a corporation by the SEC is a totally different proceeding from the receivership and liquidation of a bank by the BSP. Case: In Re: Petition for liquidation of Rural Bank of Bokod (Benguet) v. BIR, GR No. 158261, 18 Dec. 2006 (511 SCRA 123) - Liquidation proceedings cannot be summary in nature – it requires the holding of hearings and presentation of evidence of the parties concerned. IV. Bank Deposits 12

1. Kinds of bank deposits 2. Nature of bank deposits (relate to Arts. 1933, 1953, 1962, and 1980 of the Civil Code) (*Loan – A contract whereby one of the parties delivers to another money or other consumable thing upon the condition that the same amount of the same kind and quality shall be paid [Art. 1933, Civil Code]. **Deposit – The delivery of a thing for safekeeping with the obligation to return the very same thing upon demand [Art. 1962, Civil Code]) Cases: a. People v. Ong, 204 SCRA 942 - All kinds of deposits whether fixed or current are to be treated as loans and are to be covered by the law on loans*. b. BPI v. CA, 232 SCRA 302 - Deposits are in the nature of irregular deposits**, they are really loans because they earn interest. c. Tan Tiong Tick v. American Apothecaries, 65 Phil 417 (1938) - Money deposited in banks, whether fixed, savings and current, are really loans to a bank because the bank can use the same for its ordinary transactions and for banking business in which it is engaged. d. Guingona v. City Fiscal, 128 SCRA 577 - While banks have the obligation to return the amount deposited, they have no obligation to return or deliver the same money deposited in the same denomination as was deposited. Thus, estafa will not prosper. e. Serrano v. CA, 96 SCRA 96 - There is a creditor and debtor relationship established with the bank as debtor and the depositor as creditor. 2.1. Ownership of bank deposits (relate to Arts. 1953 and 1980 of the Civil Code) Case: (2008)

- It is beyond doubt that tellers, cashiers, bookkeepers and other employees of a bank who came into possession of the monies deposited therein enjoy the confidence reposed in them by their employer. Banks, on the other hand, where monies are deposited, are considered the owners thereof. This is very clear not only from the express provisions of the law, but from established jurisprudence. The relationship between banks and depositors has been held to be that of creditor and debtor. Articles 1953 and 1980 of the New Civil Code provide as follows: “Article 1953: A person who receives a loan of money or any fungible thing acquires ownership thereof, and is bound to pay to the creditor an equal amount of the same kind and quality. Article 1980: Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning loan.” 2.2. Set-off of bank deposits Cases: a. Associated Bank v. Tan, GR No. 156940, 14 Dec. 2004 - A bank generally has a right of setoff over the deposits therein for the payment of any withdrawals on the part of a depositor. The right of a collecting bank to debit a client's account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence b. Equitable PCI Bank v. Ng Sheung Ngor, 541 SCRA 223 (2007) - The relationship between a bank and its depositor is that of creditor and debtor—a bank has the right to set-off the deposits in its hands for the payment of a depositor’s indebtedness. c. Premier Dev’t. Bank v. Flores, 574 SCRA 66 Dec. 2008 - For compensation to apply, among other requisites, the two debts must be liquidated and demandable already.

People v. Puig, 563 SCRA 564 3. The relationship of banks and its depositors 13

Duty of bank Cases: a. Serrano v. CA, 96 SCRA 96 - There is a creditor and debtor relationship established with the bank as debtor and the depositor as creditor. b. PBCOM v. CA, 269 SCRA 695; BPI v. IAC, 206 SCRA 408 - The relationship is fiduciary* in nature. (*Fiduciary – One assumes to act as an agent for another and the other reposes confidence in him, although there is no written contract or no contract at all [Miguel v. CA, 29 SCRA 760 (1969)].) c. Consolidated Bank v. CA, 410 SCRA 562, 11 Sept. 2003 - The 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. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family. Section 2 of RA 8791 prescribes the statutory diligence required of from banks—that banks must observe “high standards of integrity and performance” in servicing their depositors. 3.1. The nature of the relationship of banks and its depositors (Section 2, GBL) Case: BPI v. Lifetime Marketing Corp., GR No. 176434, 25 June 2008; Associated Bank v. Tan, 446 SCRA 282 [2004]. - The fiduciary nature of banking, previously imposed by case law, is now enshrined in Republic Act No. 8791 or the General Banking Law of 2000. Section 2 thereof specifically says that the state recognizes the fiduciary nature of banking that requires high standards of integrity and performance

The bank has a duty not to release the deposits unreasonably early after a third party makes known his adverse claim to the bank deposit (Serfino v. FEBTC, 683 SCRA 380). 4. The diligence required and damages in dealing/handling bank deposits Cases: a. BPI v. CA, 326 SCRA 641 (2000) - A bank should exercise its functions and treat the accounts of their clients not only with the diligence of a good father of a family but it should do so with the highest degree of care considering the fiduciary nature of their relationships with their depositors (also PBCOM v. CA, 269 SCRA 695 [1997]). b. Citytrust v. IAC, 232 SCRA 559 - The depositor expects the bank to treat his account with utmost fidelity, whether such account consists only of a few hundred pesos or millions. This is especially true since the bank is engaged in business impressed with public interest and it is its duty to protect in return many clients and depositors who transact business with it. - The bank is liable when the deposit of P31,500.00 to cover six postdated checks was not credited to the account of the depositor because of the omission of one “zero” in the account number. c. BPI v. IAC, 206 SCRA 408 - 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. - While a bank’s negligence may not have been attended with malice and bad faith, nevertheless it caused serious anxiety, embarrassment and humiliation to the depositors for which they are entitled to recover reasonable moral damages. - The new accounts’ teller erroneously used the old account of a depositor instead of the newly opened joint account of the depositor and his spouse, leading to the dishonor of two checks issued by the depositor. 14

d. Reyes v. CA, 15 August 2001 - HOWEVER, the higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors. e. Moran v. CA, 230 SCRA 799 (1994) - A bank is liable for failure to honor/pay a check of a merchant/trader when the deposit is sufficient. Conversely, a bank is NOT liable for its refusal to pay a check on account of insufficient of funds, notwithstanding the fact that a deposit maybe made later in the day. Before a depositor may maintain a suit to recover a specific amount from his bank, he must first show that he had on deposit sufficient deposits to meet his demand. f. Philbank v. CA, 269 SCRA 695 (1997) - A bank is liable for damages when a bank teller validates an incomplete duplicate deposit slip [the duplicate deposit slip lacks the name of the account holder].

pater familias or a good father of a family . The highest degree of diligence is expected. j. BPI v. Casa Montessori, 430 SCRA 261 (2004) - By the nature of its functions, a bank is required to take meticulous care of the deposits of its clients, who have the right to expect high standards of integrity and performance from it. Among its obligations in furtherance thereof is knowing the signatures of its clients. Depositors are not estopped from questioning wrongful withdrawals, even if they have failed to question those errors in the statements sent by the bank to them for verification. k. Gonzales v. PCIB, 643 SCRA 180 (23 Feb. 211) - Like a common carrier whose business is imbued with public interest, a bank should exercise extraordinary diligence to negate its liability to the depositors. 4.1. Test in determining whether the bank acted negligently

g. Go v. IAC, 197 SCRA 22 - A bank officer’s gross negligence--allowing an impostor to negotiate treasury checks--which causes inconvenience, humiliation and embarrassment to a depositor entitles the latter to an award of damages.

Case: UCPB v Ramos, 415 SCRA 596 (2003) - The constant test is— “Did the defendant in doing the negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the same situation?”

h. Prudential Bank v. CA, 328

4.2. The loss: borne by the one whose negligence was the proximate cause of the loss

SCRA 264 - Malice or bad faith need not be proved sufficiently. As long as the bank has committed a serious mistake and the bank’s negligence was a result of lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business as banking, it is liable for moral damages. i. PSBank v. Chowking Food Corp., 557 SCRA 318 (2008) - It cannot be overemphasized that the banking business is impressed with public interest. Of paramount importance is the trust and confidence of the public in general in the banking industry. Consequently, the diligence required of banks is more than that of a Roman

Case: BPI v. Casa Montessori Internationale, 430 SCRA 261 (2004) - In both law and equity, when one of two innocent persons “must suffer by the wrongful act of a third person, the loss must be borne by the one whose negligence was the proximate cause of the loss or who put it into the power of this person to perpetrate the wrong. Proximate cause is determined by the facts of the case. “It is that cause which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred.”

15

4.3. Mitigation of liability in case of contributory negligence

allocated the damages on a 60-40 ratio with the bigger share to be borne by PNB.

Case: CB v. Citrytrust, GR No. 141835, 04 Feb. 2009 - Citytrust’s failure to timely examine its account, cancel the checks and notify petitioner of their alleged loss/theft should mitigate petitioner’s liability, in accordance with Article 2179 of the Civil Code which provides that if the plaintiff’s negligence was only contributory, the immediate and proximate cause of the injury being the defendant’s lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded.

Is the ruling of the appellate court proper?

Case: F.F. Cruz & Co., Inc. opened savings/current or socalled combo account and dollar savings account with PNB at its Timog Avenue Branch. Its President Felipe Cruz (or Felipe) and Secretary-Treasurer Angelita A. Cruz (or Angelita) were the named signatories for the said accounts. While both Felipe and Angelita were out of the country, applications for cashiers and managers checks bearing Felipe’s signature were presented to and both approved by the PNB. The amounts of the checks were then debited by the PNB against the combo account of FFCruz, which later questioned the transaction and demanded PNB to credit the amounts debited. PNB was found negligent in not properly verifying the genuineness of the signatures appearing on the two applications for managers check as evidenced by the lack of the signature of the bank verifier thereon. Had this procedure been followed, the forgery would have been detected. This was the proximate cause of the loss. FFCruz was also found guilty of contributory negligence because it clothed its accountant/bookkeeper Caparas with apparent authority to transact business with PNB. In addition, FFCruz failed to timely examine its monthly statement of account and report the discrepancy to PNB within a reasonable period of time to prevent or recover the loss. Due to the contributory negligence of FFCruz, it mitigated PNB’s liability. The appellate court

YES. PNB was indeed negligent in the handling of FFCruzs combo account, specifically, with respect to PNBs failure to detect the forgeries in the subject applications for managers check which could have prevented the loss. The banking business is impressed with public trust. A higher degree of diligence is imposed on banks relative to the handling of their affairs than that of an ordinary business enterprise. Thus, the degree of responsibility, care and trustworthiness expected of their officials and employees is far greater than those of ordinary officers and employees in other enterprises. Here, PNB failed to meet the high standard of diligence required by the circumstances to prevent the fraud. Where the bank’s negligence is the proximate cause of the loss and the depositor is guilty of contributory negligence, the allocation of the damages between the bank and the depositor is on a 60-40 ratio. (PNB vs. FF Cruz, GR No.173259, 25 July 2011) 4.4. Diligence in the selection and supervision of bank employees a valid defense? Cases: a. PCIBank v. CA, 350 SCRA 446 (2001); Westmont Bank v. de la Rosa-Ramos, 684 SCRA 429, 24 October 2012 - A bank’s liability is not merely vicarious but primary; the defense of exercise of due diligence in the selection and supervision of its employees is of no moment. - By the very nature of the work of banks, the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees. b. PNB v. Rodriguez, 566 SCRA 513 [26 September 2008] - The trustworthiness of bank employees is indispensable to maintain the stability of 16

banking industry—banks are enjoined to be extra vigilant in the management and supervision of their employees. 4.5. Liability of banks for negligence in the loss of check deposited by client and the application of the provisions of common carriers in banking institutions Case: Solidbank Corporation, et al. vs. Sps. Tan, G.R. No. 167346, April 2, 2007 (520 SCRA 123) - Like a common carrier whose business is also imbued with public interest, a bank should exercise extraordinary diligence to negate its liability - The Court finds no compelling reason to disallow the application of the provision on common carriers in this case if only to emphasize the fact that banking institutions have the duty to exercise the highest degree of diligence when transacting with the public. Statutory obligation of banks to conduct a credit check on all of its borrowers A bank is statutorily required to conduct a credit check on all of its borrowers (i.e., that the debtor is capable of fulfilling his commitments before granting a loan or other credit accommodations), even though it is made under a loan accommodation scheme, applying Section 40 of RA No. 8791 (General Banking Law of 2000). This is however, intended to cover loans by third persons and those extended to directors, officers, stockholders and their related interests. It does not cover salary loans extended to bank employees and is not inconsistent with the fiduciary obligation of banks. This is so because there are other ways of securing payment of said salary loans other than ascertaining whether the borrowing employee has the capacity to pay the loan (Hongkong Bank Independent Labor Union (HBILU) v. HSBC Ltd., GR No. 218930, 28 February 2018). 5. Legislative inquiry and right to privacy of financial transactions.

Case: Standard Chartered Bank (Philippine Branch), et al. vs. Senate Committee on Banks, Financial Institutions and Currencies, 541 SCRA 456, December 27, 2007 - With respect to the right of privacy which petitioners claim respondent has violated, suffice it to state that privacy is not an absolute right. While it is true that Section 21, Article VI of the Constitution, guarantees respect for the rights of persons affected by the legislative investigation, not every invocation of the right to privacy should be allowed to thwart a legitimate congressional inquiry. In Sabio v. Gordon (504 SCRA 704 [2006]), we have held that the right of the people to access information on matters of public concern generally prevails over the right to privacy of ordinary financial transactions. In that case, we declared that the right to privacy is not absolute where there is an overriding compelling state interest. Employing the rational basis relationship test, as laid down in Morfe v. Mutuc (22 SCRA 424 [1968], there is no infringement of the individual’s right to privacy as the requirement to disclosure information is for a valid purpose, in this case, to ensure that the government agencies involved in regulating banking transactions adequately protect the public who invest in foreign securities. Suffice it to state that this purpose constitutes a reason compelling enough to proceed with the assailed legislative investigation. 6. Secrecy of bank deposits (RA No. 1405, as amended, Secrecy of Bank Deposits [SBD]; relate to: Sections 55(b) & 55.4, GBL) 6.1. The purpose of RA 1405 (Sec. 2, SBD) Cases: 1. BSB Group Inc. v. Sally Go, GR No. 168644, 16 Feb. 2010 - R.A. 1405 has two allied purposes. It hopes to discourage private hoarding and the same time encourage the people to deposit their money in banking institutions, so that it may be utilized by way of authorized loans and thereby assist in economic development. Owing to this piece of legislation, the confidentiality of bank deposits remains to be a basic state policy in the Philippines. Section 2 of the law institutionalized this policy by characterizing as absolutely 17

confidential in general all deposits of whatever nature with banks and other financial institutions in the country. 2. Subido Pagente Certeza Mendoza and Binay Law Offices v. CA, G.R. No. 216914, 06 December 2016 - Because of the Bank Secrecy Act, the confidentiality of bank deposits remains a basic state policy in the Philippines. Subsequent laws, including the AMLA, may have added exceptions to the Bank Secrecy Act, yet the secrecy of bank deposits still lies as the general rule. It falls within the zones of privacy recognized by our laws. The framers of the 1987 Constitution likewise recognized that bank accounts are not covered by either the right to information under Section 7, Article III or under the requirement of full public disclosure under Section 28, Article II. Unless the Bank Secrecy Act is repealed or amended, the legal order is obliged to conserve the absolutely confidential nature of Philippine bank deposits. - Any exception to the rule of absolute confidentiality must be specifically legislated. Section 2 of the Bank Secrecy Act itself prescribes exceptions whereby these bank accounts may be examined by "any person, government official, bureau or office"; namely when: (1) upon written permission of the depositor; (2) in cases of impeachment; (3) the examination of bank accounts is upon order of a competent court in cases of bribery or dereliction of duty of public officials; and (4) the money deposited or invested is the subject matter of the litigation. Section 8 of R.A. Act No. 3019, the Anti-Graft and Corrupt Practices Act, has been recognized by this Court as constituting an additional exception to the rule of absolute confidentiality, and there have been other similar recognitions as well. 6.2. What deposits are covered? (Sec. 2, SBD)

Are trust accounts covered? Case: Ejercito v. Sandiganbayan, GR Nos. 157294-95, 30 Nov. 2006 - Sec. 2 of RA 1405 is broad enough to cover trust accounts. The phrase of “whatever nature” proscribes any restrictive interpretation of “deposits.” Moreover, it is clear from Sec. 2 of RA 1405 that, generally, the law applies not only to money which is deposited but also to those which are invested. This further shows that the law was not intended to apply only to “deposits” in the strict sense of the word. Otherwise, there would have been no need to add the phrase “or invested.” Safety deposit boxes? *A safety deposit box is a lockbox stored in a bank’s vault to secure a customer’s valuables. It usually takes two (2) keys, one held by the bank and one held by the customer, to open the box (Black’s Law Dictionary, 8th ed., 2009). *The provisions of Art. 1975 of the Civil Code shall apply to contracts for the rent of safety deposit boxes. Cases: a. CA-Agro v. CA, 219 SCRA 426 (1993) - Safety deposit boxes are not strictly deposits; it is a special kind of deposit. The safety deposit box is for hire and for the mutual benefit of the parties concerned. It is not a lease under Art. 1643 of the Civil Code because the full and absolute possession and control of the safety deposit box was not given to the joint renters. b. Sia v. CA, 222 SCRA 24 (1993) - The prevailing rule in American jurisprudence – that the relation between a bank renting out safe deposit boxes and its customers with respect to the contents of the box is that of bailor and bailee, the bailment being for hire and mutual benefit has been adopted in this jurisdiction. 6.3. Persons banned from looking into bank deposits (Sec. 2, SBD) Relate to: AMLA (RA No. 9160 as amended by RA No. 9194), RA No. 9372 18

(Human Security Act [HSA]), RA No. 10168 and PDIC Law (RA 33591 as amended by RA No. 9576) Case: Marquez v. Desierto, GR No. 135882, 27 June 2001 - Under Sec. 15 (8) of RA No. 6770, the Ombudsman may examine and have access to bank accounts and records. But the powers of the Ombudsman are restricted as follows: a. Only in-camera inspection is allowed; b. There must be a pending case before a court of competent jurisdiction; c. The account must be clearly identified; d. The inspection is limited to the account subject of the court case; e. The bank personnel and account holder must be notified to be present during the inspection. IN CAMERA (Lat. “in chambers”): refers to a hearing or inspection of documents that takes place in private, often in a judge’s chambers. Depending on the circumstances, these can be either on or off record, though they are usually recorded. In camera hearings often take place concerning delicate evidentiary matters, to shield a jury from bias caused by certain matters, or to protect the privacy of the people involved and are common in cases of guardianship, adoptions and custody disputes alleging child abuse. A legal proceeding is “in camera” when a hearing is held before the judge in his/her private chambers or when the public is excluded from the courtroom. IN CAMERA PROCEEDING: Trial or proceeding in a place not open to the public, usually in a judge’s chambers. IN CAMERA INSPECTION: A judge’s private inspection of a document before ruling on whether that document is admissible or may be used for trial. 6.4. Exceptions to the SBD (Sec. 2, SBD) a. Written permission of the depositor (Sec. 2, SBD);

c. Upon order of a competent court in cases of bribery or dereliction of duty of public officials (Sec. 2, SBD) - Cases of unexplained wealth are similar to cases of bribery or dereliction of duty (PNB v. Gancayco, 122 Phil 503 [1965]; BF v. Purisima, 161 SCRA 576; RA No. 3019). - Plunder is analogous to bribery (Ejercito v. Sandiganbayan, GR Nos. 157294-95, 30 Nov. 2006; RA No. 7080). *In anti-graft cases, inquiry extends to property not legitimately acquired, even if concealed, held or recorded in the name of third persons, relatives, or other persons. d. In cases where the money deposited or invested is the subject matter of litigation* Sec. 2, SBD; Mellon Bank v. Magsino, 190 SCRA 633; UCPB v. CA, 321 SCRA 563 [1999]). *The subject matter of litigation cannot be limited to the bank accounts under the name of the accused alone, but must include those accounts to which the money purportedly acquired illegally or a portion thereof was alleged to have been transferred (Ejercito v. Sandiganbayan, supra.) *Subject matter of litigation as used in RA 1405 – The phrase “subject matter of the action” is consistent with the term “subject matter of the litigation” as the latter is used in RA 1405 (Unionbank v. CA, 321 SCRA 563 [1999]). The subject of the action is the matter or thing with respect to which the controversy has arisen, concerning which the wrong has been done, and this ordinarily is the property, or the contract and its subject matter, or the thing in dispute (Yusingco v. Ong Hing Lian, 42 SCRA 590 [1971]). e. In case of inquiry of the BIR of banks accounts of a decedent for estate tax purposes or in case of a tax compromise (Sec. 6[F], NIRC of 1997 [RA No. 3696]). (RA No. 10021)

b. In cases of impeachment (Sec. 2, SBD). 19

f. Incidental disclosures of unclaimed balances under the Unclaimed Balances Law [Act. No. 3696]. g. In cases falling under the Anti-Money Laundering Act (AMLA) [RA No. 9160 as amended by RA No. 9194, RA 10167 & RA 10365] & RA 10927, the Revised Implementing Rules and Regulations [RIRR]), and the Casino Implementing Rules and Regulations (CIRR) of RA 10927

with any banking institution or non-bank financial institution and their subsidiaries and affiliates when it has been established that probable cause exists that the deposits or investments involved, including related accounts, are in any way related to any of the following unlawful activities: (a) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended;

1) Inquiry of bank deposits WITH court order - Bank inquiry order maybe availed of ex parte premised on the existence of probable cause for violation of an unlawful activity under Sec. 3 (i) or money laundering offense under Sec. 4 of the AMLA. - inquiry includes related accounts which shall refer to accounts, the funds and sources of which originated from and/or are materially linked to the monetary instruments(s) or property(ies) subject of the freeze order(s). - The Court of Appeals shall act on the application to inquire into or examine any deposit or investment with any banking institution or non-bank financial institution within twenty-four (24) hours from filing of the application. (RA 10167) - The authority to inquire into or examine the main account and the related accounts shall comply with the requirements of Article III, Sections 2 and 3 of the 1987 Constitution (RA 10167). Likewise, the constitutional injunction against ex post facto laws and bills of attainder shall be respected in the implementation of the AMLA (RA 10365). 2) inquiry WITHOUT a court-order

of

bank

deposits

Inquiry of bank deposits by the AMLC (Rule 11, Sec. 2, 2018 RIRRR) The AMLC shall issue an ex parte order authorizing the AMLC Secretariat to inquire into or examine any particular deposit or investment account, including related accounts,

(b) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic Act No. 9165, otherwise known as the Comprehensive Dangerous Drugs Act of 2002; (c) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended; (d) Felonies or offenses of a nature similar to those mentioned in Rule 11, Sections 2.1 (a), (b) and (c), which are punishable under the penal laws of other countries; (e) Terrorism and conspiracy to commit terrorism as defined and penalized under Republic Act No. 9372; and (f) Financing of terrorism under Section 4 and offenses punishable under Sections 5, 6, 7 and 8 of the TFPSA. What is the basis of bank inquiry? - When it has been established that there is probable cause that the deposits or investments, including related accounts involved, are related to an unlawful activity as defined in Section 3(i) or a money laundering offense under Section 4. (RA 10167) - Bank inquiry maybe made in the event of violation of the AMLA and does not presuppose the pre-existence of a money laundering offense case already filed in court. The phrase in Section 11, RA 9160, “upon order of any competent court in cases of violation of this Act,” 20

should be interpreted to mean “in the event there are violations” of the AMLA, and not that there are already cases pending in court for such violations. (Republic v. Eugenio, Jr. (545 SCRA 384 [2008]) h. The examination of a bank account based on Sec. 10, Rule 57 of the Rules of Court (the examination of a party whose property is attached and persons indebted to a defendant or controlling his property) (Oñate v. Abrogar, 230 SCRA 181 [1994]); i. In cases falling under the Human Security Act (Sec. 27, RA No. 9372); j. The PDIC and/or the BSP may inquire into or examine deposit accounts and all information related thereto in case there is a finding of unsafe or unsound banking practice (Sec. 8, RA No. 3591 [PDIC Law], as amended by RA No. 9576, June 1, 2009)

disclosure upon the written permission of the depositor. b. BSB Group v. Sally Go, GR No. 168644, 16 Feb. 2010 - The testimony of the bank representative of Security Bank regarding the checks and the account comes within the purview of an impermissible inquiry into a bank deposit account the privacy and confidentiality of which is protected by RA 1405, the Bank Secrecy Law. The checks and the account is NOT the subject matter of litigation. The criminal Information is for qualified theft in the amount of P1,534,235.50 and makes no factual allegation that in some material way involves the checks subject of the testimonial and documentary evidence. Neither do the allegations in the Information make mention of the supposed bank account in which the funds represented by the checks have allegedly been kept. Waiver of bank secrecy

k. The AMLC (Anti-money Laundering Council), in cases falling under the Terrorism Financing Prevention and Suppression Act of 2012 (RA 10168), is authorized to inquire into or examine deposits and investments with any banking institution or non-bank financial institution and their subsidiaries and affiliates without a court order. Cases: a. GSIS v. CA, 651 SCRA 661, 08 June 2011 - RA No. 1405 provides for four (4) exceptions when records of deposits may be disclosed. These are under any of the following instances: a) upon written permission of the depositor, (b) in cases of impeachment, (c) upon order of a competent court in the case of bribery or dereliction of duty of public officials or, (d) when the money deposited or invested is the subject matter of litigation, and (e) in cases of violation of the Anti-Money Laundering Act, the AntiMoney Laundering Council (AMLC) may inquire into a bank account upon order of any competent court. On the other hand, the lone exception to the disclosure of foreign currency deposits, under Republic Act No. 6426, is a

The provision on the waiver of the confidentiality of petitioner’s bank deposits was merely inserted in the agreement. It is clear therefore that petitioner is not bound by the said provision since it was without the express consent of petitioner who was not party and signatory to the said agreement (Doña Adela Export International, Inc. v. Trade and Investment Development Corporation [TIDCORP], 750 SCRA 429, 11 February 2015). BIR Memorandum Circular No. 13-15: Supplemental Information Return (SIR) A self-employed taxpayer to disclose information on his gross income/ receipts that were subject to final withholding taxes. There is a requirement to disclose information relating to an individual’s bank account. 6.5. SBD and the right to information and public disclosure Case: 384 (2008)

Republic v. Eugenio, 545 SCRA 21

- Because of the Bank Secrecy Act, the confidentiality of bank deposits remains a basic state policy in the Philippines. Subsequent laws, including the AMLA, may have added exceptions to the Bank Secrecy Act, yet the secrecy of bank deposits still lies as a general rule. It falls within the zones of privacy recognized by our laws. The framers of the 1987 Constitution likewise recognized that bank accounts are not covered by either the right to information under Section 7, Article III or under the requirement of full public disclosure under Section 28, Article II. Unless the Bank Secrecy Act is repealed or amended, the legal order is obliged to conserve the absolutely confidential nature of Philippine bank deposits. 6.6. SBD and Republic Act No. 9510 (An Act Establishing the Credit Information System and other purposes: Approved 31 October 2008)

preceding section shall be inadmissible for any purpose in any proceeding.” - The authority to inquire into or examine the main account and the related accounts shall comply with the requirements of Article III, Sections 2 and 3 of the 1987 Constitution (RA 10167). Likewise, the constitutional injunction against ex post facto laws and bills of attainder shall be respected in the implementation of the AMLA (RA 10365). 6.8. SBD and the Anti-Money Laundering Act [AMLA] (RA No. 9160 as amended by RA No. 9194, RA 10167 & RA 10365 and its implementing rules & regulations) Inquiry of bank deposits 1) Inquiry of bank deposits WITH

- RA No. 9510 which aims to provide a credit information system to directly address the needs for reliable credit information concerning the credit standing and track record of borrowers, shall not impair the SBD, FCDA, GBL and AMLA and/or client funds and investments in government securities or funds. (Secs. 1 and 12)

court order

6.7. Evidentiary value of information obtained in violation of the SBD

- inquiry includes related accounts which shall refer to accounts, the funds and sources of which originated from and/or are materially linked to the monetary instruments(s) or property(ies) subject of the freeze order(s). - The Court of Appeals shall act on the application to inquire into or examine any deposit or investment with any banking institution or non-bank financial institution within twenty-four (24) hours from filing of the application. (RA 10167)

*There is nowhere in RA 1405 that provides that an unlawful examination of bank accounts shall render the evidence obtained therefrom inadmissible in evidence. Section 5 of RA 1405 only states that “[a]ny violation of this law will subject the offender upon conviction, to an imprisonment of not more than five years or a fine of not more than twenty thousand pesos or both, in the discretion of the court.” (Ejercito v. Sandiganbayan, supra). *In RA No. 10167, it is provided that inquiry or examination of bank accounts shall comply with the requirements of Article III, Sections 2 and 3 of the 1987 Constitution which are incorporated by reference. Art. III, Sec. 3(2) reads: “Any evidence obtained in violation of this or the

- Bank inquiry order maybe availed of ex parte premised on the existence of probable cause for violation of an unlawful activity under Sec. 3 (i) or money laundering offense under Sec. 4 of the AMLA.

- The authority to inquire into or examine the main account and the related accounts shall comply with the requirements of Article III, Sections 2 and 3 of the 1987 Constitution (RA 10167). Likewise, the constitutional injunction against ex post facto laws and bills of attainder shall be respected in the implementation of the AMLA (RA 10365). 22

2) inquiry WITHOUT a court-order

of

bank

deposits

Inquiry of bank deposits by the AMLC (Rule 11, Sec. 2, 2018 RIRRR) The AMLC shall issue an ex parte order authorizing the AMLC Secretariat to inquire into or examine any particular deposit or investment account, including related accounts, with any banking institution or non-bank financial institution and their subsidiaries and affiliates when it has been established that probable cause exists that the deposits or investments involved, including related accounts, are in any way related to any of the following unlawful activities: (a) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended; (b) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic Act No. 9165, otherwise known as the Comprehensive Dangerous Drugs Act of 2002; (c) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended; (d) Felonies or offenses of a nature similar to those mentioned in Rule 11, Sections 2.1 (a), (b) and (c), which are punishable under the penal laws of other countries; (e) Terrorism and conspiracy to commit terrorism as defined and penalized under Republic Act No. 9372; and (f) Financing of terrorism under Section 4 and offenses punishable under Sections 5, 6, 7 and 8 of the TFPSA.

including related accounts involved, are related to an unlawful activity as defined in Section 3(i) or a money laundering offense under Section 4. (RA 10167) - Bank inquiry maybe made in the event of violation of the AMLA and does not presuppose the pre-existence of a money laundering offense case already filed in court. The phrase in Section 11, RA 9160, “upon order of any competent court in cases of violation of this Act,” should be interpreted to mean “in the event there are violations” of the AMLA, and not that there are already cases pending in court for such violations. (Republic v. Eugenio, Jr. (545 SCRA 384 [2008]) Case: Republic v. Eugenio, Jr. (545 SCRA 384 [2008]) - Bank inquiry maybe made in the event of violation of the AMLA and does not presuppose the pre-existence of a money laundering offense case already filed in court. The phrase in Section 11, RA 9160, “upon order of any competent court in cases of violation of this Act,” should be interpreted to mean “in the event there are violations” of the AMLA, and not that there are already cases pending in court for such violations. - Forfeiture proceedings are actions in rem— service may be made by publication. What is required of covered persons in cases of occurrence of covered and suspicious transactions? - Covered persons shall report to the AMLC all covered transactions and suspicious transactions within five (5) working days from occurrence thereof, unless the AMLC prescribes a different period not exceeding fifteen (15) working days. Lawyers and accountants acting as independent legal professionals are not required to report covered and suspicious transactions if the relevant information was obtained in circumstances where they are subject to professional secrecy or legal professional privilege. (RA 10365)

What is the basis of bank inquiry? - When it has been established that there is probable cause that the deposits or investments, 23

Is there a violation of the secrecy of bank deposits law and similar laws when reporting covered or suspicious transactions? - NONE. When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees, shall not be deemed to have violated the secrecy of bank deposits law and similar laws (Rule 9.3.c., RIRR). - In fact, no administrative, criminal or civil proceedings shall lie against any person for having made a covered or suspicious transaction report in the regular performance of his duties and in good faith, whether or not such reporting results in any criminal prosecution under this Act or any other Philippine law (Rule 9.3.e). This is known as the SAFE HARBOR PROVISION. - When reporting covered or suspicious transactions to the AMLC, covered persons and their officers and employees are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person or entity, the media, the fact that a covered or suspicious transaction has been reported or is about to be reported, the contents of the report, or any other information in relation thereto. Neither may such reporting be published or aired in any manner or form by the mass media”, electronic mail, or other similar devices. In case of violation thereof, the concerned officer and employee of the covered person and media shall be held criminally liable. (RA 10365) 6.9. SBD and RA No. 9372 (Human Security Act [HSA]) The justices of the Court of Appeals (CA) specially designated as special court to handle antiterrorism cases may authorize in writing any police or law enforcement officer and the members of his/her team duly authorized in writing by the anti-terrorism council (ATC) to: (a) Examine or cause the examination of, the deposits, placements, trust accounts, assets and records in a bank or financial institution; and (b) Gather or cause the gathering of any relevant information about such deposits, placements, trust accounts, assets, and records from the bank or financial institution.

The bank or financial institution concerned shall not refuse to allow such examination or to provide the desired information, when so ordered by and served with the written order of the CA (Sec. 27, HSA). 7. Foreign currency deposits 7.1. Absolutely confidential in nature (Sec. 8, Foreign Currency Deposits Act [FCDA] [relate to Section 55(b), GBL, & Sec. 11, AMLA] *In no instance shall foreign currency deposits be examined, inquired or looked into by any person, government official, bureau or office whether judicial or administrative or legislative, or any other entity, whether public or private. Cases: a. Intengan v. CA, 15 Feb. 2002, 377 SCRA 63 - There is only a single exception to the secrecy of foreign currency deposits, that is, disclosure is allowed only upon a written permission of the depositor. b. GSIS v. CA, 651 SCRA 661, 08 June 2011 - RA No. 1405 provides for four (4) exceptions when records of deposits may be disclosed. These are under any of the following instances: a) upon written permission of the depositor, (b) in cases of impeachment, (c) upon order of a competent court in the case of bribery or dereliction of duty of public officials or, (d) when the money deposited or invested is the subject matter of litigation, and (e) in cases of violation of the Anti-Money Laundering Act, the AntiMoney Laundering Council (AMLC) may inquire into a bank account upon order of any competent court. On the other hand, the lone exception to the disclosure of foreign currency deposits, under Republic Act No. 6426, is a disclosure upon the written permission of the depositor. (NOTE: There are FIVE (5) additional exceptions now: 1) Sec. 11 of the AMLA as amended by RA No. 10167; 2) the Human Security Act [RA 9372]; 3) Sec. 5, RA No. 3591 [PDIC Law] as amended by RA No. 9576; 4) RA No. 10168 [Terrorism Financing Prevention & Suppression Act of 2012] 24

AND 5) In case of inquiry of the BIR of banks accounts of a decedent for estate tax purposes or in case of a tax compromise (Sec. 6[F], NIRC of 1997 [RA No. 3696]). (RA No. 10021) c. Benedicto v. CA, 364 SCRA 334 (2001) - Sec. 2 of the FCDA speaks of “deposit with such Philippine banks in good standing, as may . . . be designated by the Central Bank for the purpose” and does not cover foreign currency accounts maintained in foreign banks.

order of the court. A bank is not duty bound to inquire into the legality of the writ of execution and notice of garnishment issued against the funds of a depositor. A bank is in no position to question the legality of the garnishment since it is not a party to the case. It has neither personality nor the intent to assail or controvert the orders of the court. It has no choice but to obey the same as it has no standing at all to impugn the validity of the judgment rendered in favor of the judgment creditor or the processes issued in execution of such judgment.

d. Chinabank v. CA, GR No. 140687, 18 Dec. 2006 - A depositor, in cases of bank deposits, is one who pays money into the bank in the usual course of business, to be placed to his credit and subject to his check or the beneficiary of the funds held by the bank as trustee.

c. PCIB v. Balmaceda, 658 SCRA 33 - A bank does not have a unilateral right to freeze the account of a depositor based on its mere suspicion that the funds therein were proceeds of some shady transaction.

8. Garnishment of bank deposits

Case: Fernandez v. Aniñon, GR No. 138967, 24 April 2007 - It is in the nature of joint accounts that anyone of the depositors has access to the entire funds therein and therefore subject to garnishment on account of the liability of one of them—if, afterwards, there should be squabbling amongst the supposed joint depositors as to the share of each, they can sort it out amongst themselves.

Cases: a. China Bank v. Ortega, 49 SCRA 356 (1973) - The garnishment of bank deposit of a defendant does not involve examination or inquiry into the deposit, but is merely to inform the court whether defendant has a deposit in the bank, which may be garnished. It does not violate RA 1405. - There is no real inquiry in case of garnishment, and if the existence of the deposit is disclosed, the disclosure is purely incidental to the execution process. - The notice of garnishment does not order any inquiry or examination of the amount deposited. The garnishment simply orders that the amount deposited be left intact for the time being until further orders of the court. It was not the intention of the lawmakers by enacting RA 1405 to place bank deposits beyond the reach of execution to satisfy a final judgment. b. RCBC v. de Castro, 168 SCRA 49 - The bank is not liable to reimburse the depositor for releasing the money to the sheriff even if afterwards the order directing the payment to the sheriff is reversed and set aside. The bank merely dutifully complied with the

8.1. Garnishment of joint accounts

8.2. Foreign currency deposits exempt from garnishment (Section 8, RA 6426, as amended Foreign Currency Deposits Act [FCDA]) *Foreign currency deposits are exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body. Cases: a. Salvacion et al., v. CB, 278 SCRA 27 - The provision of RA No. 6426 (FCDA) which prohibits garnishment of foreign currency deposits is INAPPLICABLE to a foreign transient. The FCDA applies to accounts of lenders and investors. b. Van Twest v. CA, 230 SCRA 42, 10 February 1994 25

- Only the owner of the foreign currency deposit is entitled to the confidentiality provisions of Sec. 8 of RA No. 6426 (FCDA). 8.3. Government funds and properties may not be seized under writs of execution or garnishment to satisfy such judgments (Republic vs. Hidalgo, et al., 534 SCRA 619, Oct. 4, 2007; Comm. Of Public Highways v. San Diego, 31 SCRA 616, 18 Feb. 1970; Republic v. Palacio, 23 SCRA 899, 29 May 1968). 8.4. Assets of institutions under receivership or liquidation are deemed in custodia legis and are exempt from any order of garnishment, levy, attachment or execution (Sec. 30, NCBA). IV. Bank Accounts and Loans

1.2. organizational accounts a) single/sole proprietorship b) partnership c) corporation d) unregistered or unincorporated associations **Certificate of deposit - A certificate of deposit is defined as a “written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created (Prudential Bank v. CIR, 654 SCRA 702, 27July 2011). It need not be in a specific form (ibid.).

1. Classification of bank accounts 1.1. individual accounts a) single name individual account b) joint “and” account (Arts. 484 and 485, Civil Code) c) joint “and/or” account (Art 2010, Civil Code; Rivera v. People’s Bank, 73 Phil 546) Cases: a. Fulton Iron Works v. China Bank, 55 Phil 208 b. Jai Alai v. Bank of PI, 66 SCRA 29 Joint Account A joint account is one that is held jointly by two (2) or more natural persons, or by two or more juridical persons or entities (Apique v. Fahnenstich, 765 SCRA 399, 05 August 2015). The common banking practice is that regardless of who puts the money into the account, each of the named account holder has an undivided right to the entire balance, and any of them may deposit and/or withdraw, partially or wholly, the funds without the need or consent of the other, during their lifetime (ibid.).

2. Presumption when money is deposited in the individual name of a person Case: 55 Phil 208

Fulton Iron Works v. Chinabank,

3. “AND” Accounts (Arts. 484 and 485, Civil Code) 4. Anonymous accounts, accounts under a fictitious or assumed name (Art. 380, Civil Code; Art. 178, RPC; Sec. 9a, AMLA; CA No. 142 as amended by RA No. 6085) 5. Accounts of minors (Sec. 22, Thrift Banks Act; Sec. 1, PD 734) 6. Numbered accounts (Sec. 9a, AMLA; Sec. 9.1.g., RIRR) 7. Accounts of married women 8. DOSRI accounts (Sec. 36, GBL; Sec. 26, NCBA) 8.1. Related Interests (MORB-Manual of Regulations of Banks-X326.1(e) 2009) 8.2. Waiver of the SBD (Sec. 26, NCBA) 8.3. Ceiling/limitation of DOSRI loans (Sec. 36, GBL) 8.4. Sanctions (Sec. 36, GBL) 26

Cases: a. Republic v. Sandiganbayan (First Division), 649 SCRA 47, 12 April 2011 - The loans, assuming that they were of a Directors, Officers, Stockholders and their Related Interests (DOSRI) nature without the benefit of the required approvals or in excess of the Single Borrower’s Limit, would not be void for that reason—instead, the bank or the officers responsible for the approval and grant of the DOSRI loan would be subject only to sanctions under the law.

b. Go v. BSP, GR No. 178429, 23 October 2009 -The language of the law is broad enough to encompass either the act of borrowing or guaranteeing, or both. Under Section 83, RA 337, the following elements must be present to constitute a violation of its first paragraph: 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; 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 second paragraph of Section 83, RA 337 does not provide for an exception to a violation of the first paragraph thereof, nor does it constitute as an element of the offense charged. Section 83 of RA 337 actually imposes three restrictions: approval, reportorial, and ceiling requirements. c. Soriano v. People, GR No. 162336, 01 Feb. 2010 - A bank officer violates the DOSRI law when he acquires bank funds for his personal benefit, even if such acquisition was facilitated by a fraudulent loan application. Directors, officers, stockholders, and their related interests cannot

be allowed to interpose the fraudulent nature of the loan as a defense to escape culpability for their circumvention of Section 83 of Republic Act (RA) No. 337. - The prohibition in Section 83 is broad enough to cover various modes of borrowing. It covers loans by a bank director or officer which are made either: (1) directly, (2) indirectly, (3) for himself, (4) or as a 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 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. ***DOSRI loans are not prohibited; they are merely restricted or regulated, i.e. certain ceilings/limits have to be observed and certain procedural and reportorial requirements have to be complied with. ***DOSRI is also known as: self-dealing transaction, insider lending or related party lending.

27

***Rationale of DOSRI restrictions: 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 (Go v. BSP, 604 SCRA 322, 29 October 2009). 7. Single Borrower’s Limit (SBD) [Sec. 35.1, GBL; BSP Circular No. 425] Primary purpose: To avoid the concentration of risk in one or few borrowers. 7.1. Networth (Sec. 24, GBL) 7.2. Increase of SBL (Sec. 35.2, GBL) 8. Limit on loans/credit accommodations against real estate and chattels (Secs. 37 & 38, GBL) Case: Central Bank vs. CA, 139 SCRA 46, 03 October 1985 - It is the obligation of bank’s officials and employees that before they approve the loan application of their customers, they must investigate the existence and valuation of the properties being offered as a loan security. x x x If ever bank officials and employees totally rely on the representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in case the collateral turns out to be over-valued. The representation made by the customer is immaterial to the bank’s responsibility to conduct its own investigation. V. Bank Reserves (Sections 94-98, NCBA) 1. Primary Reserves 2. Secondary reserves 3. Computation (Sec. 100, NCBA) 4. Exemption from attachment and other purposes (Sec. 103, NCBA)

VI. Foreclosure and redemption (Sec. 47, GBL) Cases: a. Huerta Alba Resort, Inc. v. CA, 339 SCRA 534 (2000); b. Rosales v. Suba, 408 SCRA 664, 12 August 2003

- There is no right of redemption from a judicial foreclosure of mortgage, except foreclosure of mortgage by banks or banking institutions (also GSIS v. CFI, 175 SCRA 19 [1989]). - Where the foreclosure is judicially affected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale, ‘when confirmed by an order of the court, x x x shall operate to divest the rights of all parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as may be allowed by law.’ Such rights exceptionally ‘allowed by law’ (i.e., even after the confirmation by order of the court) are those granted by the charter of the Philippine National Bank (Act Nos. 2747 and 2938), and the General Banking Act (RA No. 337). These laws confer to the mortgagor, his successors in interest or any judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure—after confirmation by the court of the foreclosure sale—which may be exercised within a period of one (1) year, counted from the date of registration of the certificate of sale in the Registry Property. c. Bernardez v. Reyes, 201 SCRA 648 (1991); - The period to redeem property sold extrajudicially following the foreclosure of mortgage is one (1) year from the registration of the sheriff’s certificate of foreclosure sale.***

d. Unionbank v. CA, GR No. 134068, 25 June 2001 e. Ponce de Leon v. RFC, 36 SCRA 289 - When the mortgagee is a bank or a banking or credit institution, the redemption price is that which is stipulated in the mortgage document or the outstanding obligation of the mortgage plus interest and expenses. f. Sps. Estanislao, Jr. v. CA, GR No. 143687, 31 July 2001 - The redemption amount includes the assessment of taxes paid by the purchaser and the interest on the auction price that should be 28

computed from the date of the registration of the certificate of sale. ***In case the mortgagor is a juridical person Section 47, RA 8791, the General Banking Law of 2000 provides: “Notwithstanding Act 3135, juridical persons x x x shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after the foreclosure, whichever is earlier.” ***Sec. 47 of the GBL (RA 8791) amended Act 3135 on redemption involving juridical persons as mortgagors. The difference in the treatment of juridical persons and natural person was based on the nature of the properties foreclosed—whether these are used as residence, for which the more liberal one-year redemption period is retained, or used for industrial or commercial purposes, in which case a shorter term is deemed necessary to reduce the period of uncertainty in the ownership of property and enable mortgagee-banks to dispose sooner of these acquired assets (Goldenway Merchandising Corp. v. Equitable PCI Bank, 693 SCRA 439, 13 March 2013). VII. Trust Operation of Banks (Secs. 79-93, GBL) 1. Entities allowed to engage in trust business (Sec. 79, GBL) 2. The prudent-man rule (Sec. 80, GBL) 3. The self-dealing rule (Sec. 80, 2nd par., GBL) 4. Requirements to engage in trust operations (Secs. 82-84, GBL) 5. Powers of the trust entity (Sec. 83, GBL; Art. 1440, Civil Code) 6. Claims against trust assets (Sec. 92, GBL) VIII. The Truth in Lending Act [TLA] (RA No. 3765) (relate to BSP Circular 754) 1. Purpose of the TLA (Sec. 4, TLA) The Truth in Lending Act, or Republic Act No. 3765, was enacted “to protect citizens from a

lack of awareness of the true cost of credit to the user by using a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy (Silos v. PNB, 728 SCRA 617, 02 July 2014). Case: UCPB vs. Sps. Beluso, G.R. No. 159912, August 17, 2007 - The rationale of this provision is to protect users of credit from a lack of awareness of the true cost thereof, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like. The law thereby seeks to protect debtors by permitting them to fully appreciate the true cost of their loan, to enable them to give full consent to the contract, and to properly evaluate their options in arriving at business decisions. 2. Effect of non-compliance with TLA (Sec. 6b, TLA)

Cases: a. Consolidated Bank v. CA, 246 SCRA 193 (1995) - All banks and non-bank financial intermediaries authorized to engage in quasi-banking functions are required to strictly adhere to the provisions of RA No. 3765 otherwise known as the “Truth in Lending Act” and shall make true and effective cost of borrowing an integral part of every loan contract. The promissory notes signed by the borrowers do not contain any stipulation on the payment of handling charges. Hence, the bank cannot collect the same. b. New Sampaguita Builders (NSBCI) v. PNB, 435 SCRA 565 (2004) - The effect, when the borrower is not clearly informed of the Disclosure Statements—prior to the consummation of the availment—is that the lender will have no right to collect upon such charge or increases thereof, even if stipulated in the Notes. c. DBP v. Arcilla, Jr., 462 SCRA 599 (30 June 2005) 29

- 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 enforcement of any contract or transaction. IX. The unclaimed balances law [UBL] (Act 3936) Unclaimed balance (Sec. 1, UBL) & Escheat proceedings (Sec. 1, UBL)

Cases: a. RCBC v. Hi-Tri Dev’t. Corp., 672 SCRA 514, 13 June 2012 - Escheat proceeding refer to the judicial process in which the state, by virtue of its sovereignty, steps in and claims abandoned left vacant, or unclaimed property, without there being an interested person having a legal claim thereto. - Escheat is not a proceeding to penalize depositors for failing to deposit to or withdraw from their accounts. - In case the bank complies with the provisions of the law and the unclaimed balances are eventually escheated to the Republic, the bank shall not thereafter be liable to any person for the same and any action which may be brought by any person against any bank for unclaimed balances so deposited shall be defended by the Solicitor General without cost to such bank. b. Republic v. CA, 345 SCRA 63 (2000) - The publication of the list of unclaimed balances is essential and is intended to safeguard the right of the depositors, their heirs and successors to due process. The fact that the government is in a tight financial situation is not a justification to dispense with the elementary rule of due process. X. The Phil. Deposit Insurance Corp. (RA No. 3591, as amended by RA No. 9302 & RA No. 9576 [April 29, 2009])

1.

Purpose of the PDIC (Sec. 1, RA No. 3591)

*The purpose of the PDIC is to protect the depositing public in the event of bank closure (PDIC v. Citibank, NA, 669 SCRA 191). The PDIC was created by RA No. 3591 on 22 June 1963 as an insurer of deposits in all banks entitled to the benefits of insurance under the PDIC Charter to promote and safeguard the interests of the depositing public by way of providing permanent and continuing insurance coverage of all insured deposits (Chagani v. PDIC, GR No. 230037, 19 March 2018; So v. PDIC, GR No. 19 March 2018). To insure deposit of all banks which are entitled to the benefits of insurance. It shall, as a basic policy, promote and safeguard the interests of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits (Sec. 1, RA No. 3591, as amended). The purpose of the PDIC is to protect the depositing public in the event of a bank closure (PDIC v. Citibank, N.A., 669 SCRA 191, 11 Apr 2012). The primary purpose of the PDIC is to act as insurer, as a co-regulator of banks, and as receiver and liquidator of closed banks (PDIC v. Phil. Countryside Rural Bank, Inc. 640 SCRA 322, 24 Jan. 2011). The PDIC may likewise conduct an investigation of banks. It was decided in a case that the Monetary Board approval is not required for the PDIC to conduct an investigation on banks (PDIC v. Phil. Countryside Rural Bank, Inc., 640 SCRA 322 [2011]). Functions of PDIC Deposit Insurer Co-regulator of Banks Receiver and Liquidator of Closed Banks * conduct an investigation of banks Cases: a. PDIC v. Phil. Countryside Rural Bank, Inc. 640 SCRA 322, 24 Jan. 2011

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- The primary purpose of the PDIC is to act as insurer, as a co-regulator of banks, and as receiver and liquidator of closed banks. b. PDIC v. Citibank, N.A., 669 SCRA 191, 11 April 2012 - The purpose of the PDIC is to protect the depositing public in the event of a bank closure. The PDIC and investigation of banks Court is of the view that the Monetary Board approval is not required for the Philippine Deposit Insurance Corporation (PDIC) to conduct an investigation on the Banks (PDIC v. Phil. Countryside Rural Bank, Inc., 640 SCRA 322 [2011]). 2. PDIC Board: composition, authority, qualification and term of office (Sec. 2) 3.

3) opened in accordance with established forms and requirements of the BSP and/or PDIC (Chagani v. PDIC, GR No. 230037, 19 March 2018). exlcuded deposits Investment products such as bonds, securities and trust accounts; Deposit accounts which are unfunded, fictitious or fraudulent; Deposit products constituting or emanating from unsafe and unsound banking practices; Deposits that are determined to be proceeds of an unlawful activity as defined under the AMLA. 5. The risk insured against (Sec. 14; Sec. 30, NCBA) 6. 16)

Payment of insured deposits (Secs. 14-

Deposit under the PDIC (Sec. 4f) 6.a. Period to claim insured deposits (Sec.

3.a. Accounts or transactions that will not be paid by the PDIC 3.b. Actions of the PDIC are final and executory; petition for certiorari.

16e)

4. Insured deposits (Sec. 4g) *Banks shall indicate the coverage of the PDIC in each passbook, certificate of time deposit and/or cover of checkbook for demand deposit/NOW accounts stating among other things, the maximum amount of insurance (MORB, X262.2 [2009]).

8. Actions of the PDIC shall not be restrained or enjoined (Sec. 22)

*Funds placed by a foreign bank in its Philippine Branch are not insurable deposits under the PDIC Charter and as such are not subject to the assessment for insurance premiums (PDIC v. Citibank, GR No. 170290, 11 April 2012). legitimate deposit Sec. 2d of PDIC Regulatory Issuance No. 2011-02 states that for deposit to be considered as legitimate, it should be 1) received by the bank in the usual course of business; 2) recorded in the books of the bank as such;

7. Splitting of loan/account (Sec. 21(f)5)

deposits/fictitious

8.a. Instance when the Supreme Court (SC) may issue restraining order or injunction (Sec. 22 par. 3) 8.b. Effect of issuing restraining order/injunction in violation of Sec. 22 Cases: a. PDIC v. CA, 283 SCRA 462 (1997) - The deposits that are insured by the PDIC are those deposits made in the usual course of business. b. PDIC v. CA, 402 SCRA 194 (2003) - The liability of the PDIC for insured deposits is statutory and under RA NO. 3591, as amended, such liability rests upon the existence of deposits with the insured bank, NOT on the negotiability of the certificate evidencing the deposit. 31

- The fact that the certificate states that the certificates are insured by the PDIC does NOT ipso facto make the latter liable for the same should the contingency insured against arise. The deposit liability of the PDIC is determined by the provisions of RA No. 3519, and the statements in the certificates that the same are insured by the PDIC are not binding upon the latter. - In order that a claim for deposit insurance with the PDIC may prosper, the law requires that a corresponding deposit be placed in the insured bank. This is implicit from a reading of the provisions of RA 3519, i.e. Sections 1 and 10(c). *ALL banks are members of the PDIC Membership of banks to PDIC is mandatory; hence, all operating banks are members of PDIC. *Banks closed by the MB shall no longer be rehabilitated Banks closed by the MB shall no longer be rehabilitated (Sec. 12a, PDIC Charter as amended) Whenever a bank has been put under receivership by the MB, the PDIC shall be designated as receiver and it shall proceed with the liquidation of the closed bank (Sec. 30, NCBA as amended by RA 11211 [14 Feb.2019]). In no case shall a bank be re-opened and permitted to resume banking business after being placed under liquidation (Sec. 12a, PDIC Charter)

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