I

A contracted B to renovate his commercial building. B ordered construction materials from C and
received delivery thereof. The following day, A went to D Bank to apply for a loan to pay the
construction materials. As security for the loan, A was made to execute a trust receipt. One year later,
after A failed to pay the balance on the loan, d Bank charged him with violation of the Trust Receipts
Law.

a. What is a Trust Receipt? (5 points)

It is any transaction between the entruster and entrustee: 1. Whereby the entruster who owns
or holds title or security interests over certain specified goods, documents or instrument (GDI),
releases the same to the possession of entrustee upon the latter’s execution of a TR agreement.
2. Wherein the entrustee binds himself to hold the GDI in trust for the entruster and, in case of
default: a. to sell or otherwise dispose such GDI with the obligation to turn over to the entruster
the proceeds to the extent of the amount owing to it or b. to turn over the GDI itself if not sold
or otherwise disposed of in accordance with the terms and conditions specified in the TR.

b. Will the case against A prosper? Reason briefly. (5 points)

The case of estafa against A will not prosper.

Jurisprudence dictates that TR transactions are intended to aid in financial importers and retail
dealers who do not have sufficient funds or resources to finance the importation or purchase of
merchandise and who may not be able to acquire credit except through utilization, as collateral,
of the merchandise imported or purchased. The transactions contemplated under the Trust
Receipts Law mainly involved acquisition of goods for the sale thereof. The transaction is
properly called a simple loan with the trust receipt as merely a collateral or security for the loan.

PD 115 does not apply in this case because the proceeds of the loan are used to renovate C's
commercial building. This is contrary to the purpose of the Trust Receipt Law.

II

XYZ Corporation entered into a contract with AB Construction Corp. for the latter to construct and
build a sugar mill within six (6) months. They agreed that in case of delay, AB Construction Corp. will
pay XYZ Corporation P100,000 for every day of delay. To ensure payment of the agreed amount of
damages, AB Construction Corp. secured from DEF Bank a confirmed and irrevocable letter of credit
which was accepted by XYZ Corporation in due time. One week before the expiration of the six (6)
month period, AB Construction Corp. requested for an extension of time to deliver claiming that the
delay was due to the fault of XYZ Corporation. A controversy as to the cause of the delay which
involved the workmanship of the building ensued. The controversy remained unresolved. Despite the
controversy, XYZ Corporation presented a claim against DEF Bank by executing a draft against the
letter of credit.
 a. Can DEF Bank refuse payment due to the unresolved controversy? Explain. (5 points)

No, DEF Bank cannot refuse payment.

The Doctrine of Independence provides that the obligation of the issuing bank to pay the beneficiary
does not depend on the fulfillment or non-fulfillment of the contract supporting the letter of credit.

In this case, because of the letter of credit, DEF bank cannot refuse payment because its obligation is
separate from the corporation. The only instance where DEF Bank can refuse payment is when XYZ
Corporation was not able to strictly comply with the letter of credit

b. Explain the “rule on strict compliance” and the “fraud exception principle” in the treatment of
letters of credit (5 points).

The documents tendered by the seller/beneficiary must strictly conform to the terms of the L/C.
The tender of documents must include all documents required by the letter. It is not a question
of whether or not it is fair or equitable to require submission of documents but whether or not
the documents were agreed upon. Thus, a correspondent bank which departs from what has
been stipulated under the L/C acts on its own risk and may not thereafter be able to recover
from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary

The “Fraud Exception Principle” is the exception to the Independence Principle. It provides that
the untruthfulness of a certificate accompanying a demand for payment under a standby letter
of credit may qualify as fraud sufficient to support an injunction against payment. Under the
fraud exception principle, the beneficiary may be enjoined from collecting on the letter of
credit if the beneficiary committed fraud by substituting fraudulent documents even if on
their face the documents complied with the requirements. This principle refers to fraud in
relation with the independent purpose or character of the L/C and not only fraud in the
performance of the obligation or contract supporting the letter of credit.

III

Mayaman Bank, which has a net worth of P1 Billion, extended a loan to Mayutang Properties
Inc. amounting to P270 Million. The loan was secured by a mortgage over a vast commercial
lot in the Fort Bonifacio Global City, appraised at P350 Million. After audit, the Bangko Sentral
ng Pilipinas gave notice that the loan to Mayutang Properties exceeded the single borrower's
limit of 25% of the bank's net worth under a recent BSP Circular. In light of other previous
similar violations of the credit limit requirement, the BSP advised Mayaman Bank to reduce
the amount of the loan to Mayutang Properties under pain of severe sanctions. When
Mayaman Bank informed Mayutang Properties that it intended to reduce the loan by P50
Million, Mayutang Properties countered that the bank should first release a part of the
collateral worth P50 Million. Mayaman Bank rejected the counter-proposal, and referred the
matter to you as counsel. How would you advise Mayaman Bank to proceed, with its best
interest in mind? (5 points)
I would advise Mayaman Bank that the mortgage cannot be partially released. The collateral in this case
is a single commercial lot located in Fort Bonifacio City and is essentially indivisible in
character.Therefore, Celestial Properties cannot ask for a partial release of the mortgage so long as the
loan has not been completely paid.

V
Patricia entrusted her title over the lot where she is residing to Patrick, her nephew, for
safekeeping because of her poor eyesight. Patrick, a gambler, prepared a Special Power of
Attorney empowering him to mortgage the lot. Patricia’s signature was forged. With the
help of Patria who represented herself as Patricia, XYZ Bank granted a loan to Patrick
secured by a mortgage on Patricia’s lot. Due to non-payment, XYZ Bank foreclosed the
mortgage and was declared the highest bidder. Title was later registered in the name of the
bank. When Patricia was notified that she should vacate the premises, she filed a complaint
to nullify the loan with mortgage, the auction sale and the title of XYZ Bank on the ground
that the bank is not a mortgagee in good faith. Decide the case with reasons. (10 points)

Patricia’s  complaint is with merit. 

According to the doctrine of “mortgagee  in good faith”, in situations where the mortgagor’s title
is fraudulent, the mortgage contract and any foreclosure sale arising therefrom will still be given
effect by reason of public policy since buyers or mortgagees dealing with property covered by a
Torrens Certificate of Title are not required to go beyond what appears on the face of the title.
However, this rule does not apply to banks which are required to observe a higher standard of
diligence. A bank cannot assume that simply because the title offered as security is on its face
free of any encumbrances or lien, it is relieved of the responsibility of taking further steps to
verify the title and inspect the properties to be mortgaged.  As held in Arguelles v. Malarayat
Rural Banks, it is the standard practice of banks before approving a loan, to send representatives
to the premises of the land offered as collateral to investigate its real owners.
Therefore, in the case at bar, the loan with mortgage, the auction sale, and the title of XYZ Bank
shall be nullified because the mortgage was executed without the consent of the owner, the bank
failed to survey the mortgaged premise and find out that it was being occupied by the owner, and
the bank did not verify Patrick’s real identity which led them to believe that she is Patricia.

VI
X obtained a loan for Php50Million from SSS Bank. The collateral is his vacation house in
Baguio City under a real estate mortgage. X needed more funds for his business so he again
borrowed another Php10Million, this time from BBB Bank, another bank, using the same
collateral. The loan secured from SSS Bank fell due and X defaulted.
 
(A) If SSS Bank forecloses the real estate mortgage, what rights, if any, are left with BBB
Bank as mortgagee also? (2%)
 
BBB Bank, as junior mortgagee, would have a right to redeem the foreclosed property, together
with X, his successors in interest, any judicial or judgement creditor of X, or any other person or
entity having a lien on the vacation house subsequent to the real estate mortgage in favour of
SSS Bank (i.e., other junior mortgagees, if any)(Sec. 6, Act 3135)
 
(B) If the value of the Baguio property is less than the amount of loan, what would be the
recourse of SSS Bank? BBB Bank? (2%)
 
 In case of a deficiency, SSS bank could file suit to claim for the deficiency. BBB Bank could file
an ordinary action to collect its loan from X. if it does so, it would be deemed to have waived its
mortgage lien. If the judgement in the action to collect is favorable to BBB Bank, and it becomes
final and executory , BBB Bank could enforce the said judgement by execution. It could even
levy execution on the same mortgaged property, but it would not have priority over the latter.
(Caltex Philippines v. IAC, et al., G.R. No. 74730, August 25,1989)
 
(C) If the value of the property is more that the amount of the loan, who will benefit from
the excess value of the property? (2%) 
If the value of the property is more that the amount of the loan, the excess could benefit and be
claimed by BBB Bank, any judicial or judgement creditor of X, any other junior mortgagee, and
X.
 
(D) If X defaulted with its loan in favor of BBB Bank but fully paid his loan with SSS Bank,
can BBB Bank foreclose the real mortgage executed in its favor? (2%)
  
If X defaulted in respect of his loan from BBB Bank but fully paid his loan from SSS Bank, BBB
Bank could now foreclose the mortgaged property as it would be the only remaining mortgagee
of the same.
 
(E) Does X have any legal remedy after the foreclosure in the event that later on he has the
money to pay for the loan? (1%)
 
Yes, X could redeem the property within one (1) year from the date of registration of the sheriff’s
certificate of foreclosure sale.
 
(F) If SSS Bank and BBB Bank abandon their rights under the real estate mortgage, is
there any legal recourse available to them? (1%)
 SSS Bank and BBB Bank could each file an ordinary action to collect its loan from X.
VII
 In consideration of a loan obtained from ABC Bank on May 25, 2021, Juan executed a
security agreement over his electronic, non-intermediated shares of stock with XYZ
Corporation. ABC Bank perfected its security interest over the shares of stock by
registration on the same date. On May 31, 2021, Juan obtained another loan, this time from
DEF Bank, secured by a security interest over the same shares of stock. DEF Bank
perfected its security interest on the same loan date by executing a control agreement.
Andres, another creditor of Juan, thereafter perfected his own security interest over the
same shares stock by registration on June 2, 2021. The security interest was for a loan
incurred by Juan on May 24, 2021. On June 9, 2021, GHI Bank, also an old creditor of
Juan, perfected its security interest over the same shares of stock by notation of the same
with the books of XYZ Corporation. This was for loan incurred last May 23, 2021.
Considering the dates of the loans and the dates and modes of perfection of the security
interests, determine the order of priority of each security interest under the Personal
Property Security Act (PPSA) in the event Juan defaulted on all of his loans. (8 points)

 In this case, under the PPSA, the order of priority of each security interests over the electronic,
non-intermediated shares of stocks by Juan are as follows:

1) GHI bank, perfected its security interest over the shares of

stocks by notation of the same witht the books of XYZ
Corporation
2) DEF Bank, perfected its security interest over the shares
of stocks by executing a control agreement
3) ABC Bank, perfected its security interest over the shares
of stocks by registration on May 25, 2021
4) Andres, perfected its security interest over the shares
of stocks by registration on June 2, 2021

VIII
X obtained a Php10Million loan from BBB Banking Corporation. The loan is secured by
Real Estate Mortgage on his vacation house in Tagaytay City. The original Deed of Real
Estate Mortgage for the Php10Million was duly registered. The Deed of Real Estate
Mortgage also provides that "The mortgagor also agrees that this mortgage will secure the
payment of additional loans or credit accommodations that may be granted by the
mortgagee ... " Subsequently, because he needed more funds, he obtained another
Php5Million loan. On due dates of both loans, X failed to pay the Php5Million but fully
paid the Php10Million. BBB Banking Corporation instituted extrajudicial foreclosure
proceedings.
a. Will the extrajudicial foreclosure prosper considering that the additional Php5Million
was not covered by the registration? (5 points)
YES. It has long been settled that mortgages given to secure future advancements are valid and legal
contracts; that the amounts named as consideration in said contract do not limit the amount for which
the mortgage may stand as security, if from the four corners of the instrument the intent to secure
future and other indebtedness can be gathered. A mortgage given to secure advancement is a
continuing security and is not discharged by repayment of the amount named in the mortgage, until the
full amount of the advancements is paid (Mojica v. CA, G.R. No. 94247, September 11, 1991).

c. What is the meaning of a "dragnet clause" in a Deed of Real Estate Mortgage? (3 points)

A dragnet clause is a mortgage provision which is specifically phrased to subsume all debts of
past or future origin. It is a valid and legal undertaking, and the amounts specified as
consideration in the contracts do not limit the amount for which the pledge or mortgage stands
as security, if from the four corners of the instrument, the intent to secure future and other
indebtedness can be gathered. A pledge or mortgage given to secure future advancements is a
continuing security and is not discharged by the repayment of the amount named in the
mortgage until the full amount of all advancements shall have been paid.

IX
a. State the required threshold under FRIA to initiate a petition for voluntary rehabilitation
proceedings for corporations. (1 point)

c. Corporation – a majority vote of the board of directors or trustees and authorized by the vote of the
stockholders representing at least twothirds (2/3) of the outstanding capital stock

b. What about the required threshold to initiate involuntary rehabilitation proceedings? (1

point)

SEC. 13. Circumstances Necessary to Initiate Involuntary Proceedings. — Any

creditor or group of creditors with a claim of, or the aggregate of whose claims is, at
least One million pesos (Php1,000,000.00) or at least twenty-five percent (25%) of the
subscribed capital stock or partners’ contributions, whichever is higher, may initiate
involuntary proceedings against the debtor by filing a petition for rehabilitation with
the court if:

(a) there is no genuine issue of fact or law on the claim/s of the petitioner/s, and that
the due and demandable payments thereon have not been made for at least sixty (60)
days or that the debtor has failed generally to meet its liabilities as they fall due; or

(b) a creditor, other than the petitioner/s, has initiated foreclosure proceedings against
the debtor that will prevent the debtor from paying its debts as they become due or
will render it insolvent.
 c. What is the required threshold to file a petition for pre-negotiated rehabilitation? (1 point)
SEC. 76. Petition by Debtor. — An insolvent debtor, by itself or jointly with any
of its creditors, may file a verified petition with the court for the approval of a
pre-negotiated Rehabilitation Plan which has been endorsed or approved by
creditors holding at least two-thirds (2/3) of the total liabilities of the debtor,
including secured creditors holding more than fifty percent (50%) of the total
secured claims of the debtor and unsecured creditors holding more than fifty
percent (50%) of the total unsecured claims of the debtor. 

d. What are the minimum requirements/ thresholds for an out-of-court restricting agreement
(OCRA)? (1 point)

e. SEC. 84. Minimum Requirements of Out-of-Court or Informal Restructuring

Agreements and Rehabilitation Plans. — For an out-of-court or informal
restructuring/workout agreement or Rehabilitation Plan to qualify under this
chapter, it must meet the following minimum requirements:

f. (a) The debtor must agree to the out-of-court or informal restructuring/workout

agreement or Rehabilitation Plan;

g. (b) It must be approved by creditors representing at least sixty-seven percent

(67%) of the secured obligations of the debtor;

h. (c) It must be approved by creditors representing at least seventy-five percent

(75%) of the unsecured obligations of the debtor; and

i. (d) It must be approved by creditors holding at least eighty-five percent (85%)

of the total liabilities, secured and unsecured, of the debtor.

e. What is the court’s “cram-down” power under FRIA? (3 points)

A restructuring/workout agreement or Rehabilitation Plan that is approved pursuant to an

informal workout framework (out of court or informal restructuring agreements) shall have the
same legal effect as confirmation of a Plan under Section 69 of FRIA.
X

DMP Corporation (DMP) obtained a loan of P20 million from National Bank (NB) secured by a
real estate mortgage over a 63,380-square-meter land situated in Baguio City. Due to the
Asian Economic Crisis, DMP experienced liquidity problems disenabling it from paying its loan
on time. For that reason, NB sought the extra judicial foreclosure of the said mortgage by
filing a petition for sale on June 30, 2003. On September 4, 2003, the mortgaged property was
sold at public auction, which was eventually awarded to NB as the highest bidder. That same
day, the Sheriff executed a Certificate of Sale in favor of NB. On October 21, 2003, DMP filed a
Petition for Rehabilitation before the Regional Trial Court (RTC). Pursuant to this, a Stay Order
was issued by the RTC on October 27, 2003. On the other hand, NB caused the recording of the
Sheriff’s Certificate of Sale on December 3, 2003 with the Register of Deeds of Baguio City. NB
executed an Affidavit of Consolidation of Ownership and had the same annotated on the title
of DMP. Consequently, the Register of Deeds cancelled DMP’s title and issued a new title in
the name of NB on December 10, 2003. NB also filed on March 17, 2004 an Ex-Parte Petition
for Issuance of Writ of Possession before the RTC of Baguio City. After hearing, the RTC issued
on September 6, 2004 an Order directing the Issuance of the Writ of Possession, which was
issued on October 4, 2004. DMP claims that all subsequent actions pertaining to the Baguio
property should have been held in abeyance after the Stay Order was issued by the
rehabilitation court. Is DMP correct? (5 points)

No. DMP is not correct. Since the foreclosure of the mortgage and the issuance of the certificate
of sale in favor of the mortgagee were done prior to the appointment of a Rehabilitation
Receiver and the issuance of the Stay Order, all the actions taken with respect to the foreclosed
mortgaged property which were subsequent to the issuance of the Stay Order were not affected
by the Stay Order. Thus, after the redemption period expired without the mortgagor redeeming
the foreclosed property, the mortgagee becomes the absolute owner of the property and it was
within its right to ask for consolidation of title and the issuance of new title in its favor. The writ
of possession procured by the mortgagee despite the subsequent issuance of Stay Order in the
rehabilitation proceeding instituted is also valid.

XI
Tessie owned a modest grocery business in Laguna. Because of the economic downturn, she
incurred huge financial liabilities. She remained afloat only because of the properties inherited
from her parents who had both come from landed families in Laguna. Her main creditor was
Puresilver Company (Puresilver), the principal supplier of the merchandise sold in her store.
To secure her credit with Puresilver, she executed a real estate mortgage with a dragnet
clause involving her family's assets worth several millions of pesos. Nonetheless, Tessie, while
generally in the black, now faces a situation where she is unable to pay her liabilities as they
fall due in the ordinary course of business. What will you advise her to do to resolve her dire
financial condition? Explain your answer. (5 points)

XII

ABC Bank extended a loan of PhP 50 million to Mario secured by a real estate mortgage
(REM) on a large tract of land. The covering Transfer Certificate of Title (TCT) of the property
mortgaged did not indicate any encumbrance or lien on it, and the bank was able to obtain a
certified true copy of the TCT from the Register of Deeds showing that the owner's copy
submitted to the bank was a genuine title. The Loan Agreement provided an escalation clause
which stated that, at the anniversary date of the loan, ABC Bank was granted the option to
increase the interest rate whenever there would be an increase in the Bangko Sentral ng
Pilipinas' prevailing rates. Three years later, Mario received a formal notice from ABC Bank
raising the interest rate of the loan based on the escalation clause provided for in the Loan
Agreement. Mario refused to pay based on the increased interest rate that was effected
without his consent. ABC Bank insists on the binding effect of the escalation clause appearing
on their Loan Agreement. Mario subsequently defaulted on the loan and vanished. Thus, ABC
Bank extrajudicially foreclosed on the REM, and was the highest bidder at the public auction
sale. It was only then that the bank determined that there were actually two separate TCTs
issued for the property and one of which was in the name of Maria who occupied the property
after having bought it earlier from Mario.

(a) Can ABC Bank unilaterally increase the interest rates on the loan? (5 points)
(b) Is ABC Bank a mortgagee buyer in good faith? Is it preferred over Maria? (5 points)

BONUS

1. On December 4, 2003, RED Corporation executed a real estate mortgage in favor of BLUE
Bank. RED Corporation defaulted in the payment of its loan. Consequently, on June 4,
2004, BLUE Bank extrajudicially foreclosed the property. Being the highest bidder in the
auction sale conducted, the Bank was issued a Certificate of Sale which was registered on
August 4, 2004. Does RED Corporation still have the right to redeem the property as of
September 14, 2007? Reason briefly.

No, RED Corporation has lost its right to redeem the property. Juridical persons whose property
is sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property until
registration of the certificate of sale with the Register of Deeds, which shall in no case be more
than 3 months after foreclosure, whichever is earlier.

2. Distinguish the “right of redemption” from “equity of redemption”.

The equity of redemption is different from the right of redemption. Equity of redemption is the
right of the mortgagor after judgment in a judicial foreclosure to redeem the property by paying
to the court the amount of the judgment debt before the sale or confirmation of the sale. On
the other hand, right of redemption is the right of the mortgagor to redeem the property sold at
an extra-judicial foreclosure by paying to the buyer in the foreclosure sale the amount paid by
the buyer within one year from such sale.

B
1. Differentiate the contract of “antichresis” from a “usufruct”. (5 points)
 2. Based on existing jurisprudence, what is the difference between a “standby letter of credit”
and a “surety” contract. (5 points)

Professor John F. Dolan, the noted authority on letters of credit, sheds more light on
the issue:

The standby credit is an attractive commercial device for many of the same reasons
that commercial credits are attractive. Essentially, these credits are inexpensive and
efficient. Often they replace surety contracts, which tend to generate higher costs than
credits do and are usually triggered by a factual determination rather than by the
examination of documents.

Because parties and courts should not confuse the different functions of the surety
contract on the one hand and the standby credit on the other, the distinction between
surety contracts and credits merits some reflection. The two commercial devices share
a common purpose. Both ensure against the obligor's nonperformance. They function,
however, in distinctly different ways.

Traditionally, upon the obligor's default, the surety undertakes to complete the obligor's
performance, usually by hiring someone to complete that performance. Surety
contracts, then, often involve costs of determining whether the obligor defaulted (a
matter over which the surety and the beneficiary often litigate) plus the cost of
performance. The benefit of the surety contract to the beneficiary is obvious. He knows
that the surety, often an insurance company, is a strong financial institution that will
perform if the obligor does not. The beneficiary also should understand that such
performance must await the sometimes lengthy and costly determination that the
obligor has defaulted. In addition, the surety's performance takes time.

The standby credit has different expectations. He reasonably expects that he will
receive cash in the event of nonperformance, that he will receive it promptly, and that
he will receive it before any litigation with the obligor (the applicant) over the nature of
the applicant's performance takes place. The standby credit has this opposite effect of
the surety contract: it reverses the financial burden of parties during litigation.

In the surety contract setting, there is no duty to indemnify the beneficiary until the
beneficiary establishes the fact of the obligor's performance. The beneficiary may have
to establish that fact in litigation. During the litigation, the surety holds the money and
the beneficiary bears most of the cost of delay in performance.

In the standby credit case, however, the beneficiary avoids that litigation burden and
receives his money promptly upon presentation of the required documents. It may be
that the applicant has, in fact, performed and that the beneficiary's presentation of
those documents is not rightful. In that case, the applicant may sue the beneficiary in
tort, in contract, or in breach of warranty; but, during the litigation to determine
whether the applicant has in fact breached the obligation to perform, the beneficiary,
not the applicant, holds the money. Parties that use a standby credit and courts
construing such a credit should understand this allocation of burdens. There is a
tendency in some quarters to overlook this distinction between surety contracts and
standby credits and to reallocate burdens by permitting the obligor or the issuer to
litigate the performance question before payment to the beneficiary. 42