LOAN FUNCTION A Basic Concepts

1. Grant, Purpose and Requirement of Loans a. Grant of Loans

SEC. 39, GBL: A bank shall grant loans and other credit accommodations only in amounts and for the periods of time essential for the effective completion of the operations to be financed. Such grant of loans and other credit accommodations shall be consistent with safe and sound banking practices.

b. Purpose of Loans

SEC. 39, GBL: The purpose of all loans and other credit accommodations shall be stated in the application and in the contract between the bank and the borrower. If the bank finds that the proceeds of the loan or other credit accommodation have been employed, without its approval, for purposes other than those agreed upon with the bank, it shall have the right to terminate the loan or other credit accommodation and demand immediate repayment of the obligation.

c. Requirement of Loans

SEC. 40, GBL: Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.

Toward this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or other credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation.

In formulating rules and regulations under this Section, the Monetary Board shall recognize the peculiar characteristics of micro financing, such as cash flow-based lending to the basic sectors that are not covered by traditional collateral.

Cases

United Coconut Planters Bank v Ramos, 415 SCRA 596 (2003) FACTS

UCPB granted a P2.8M loan to Zamboanga Development Corp. (ZDC) with VIvencio Ramos and the Spouses Teofilo Ramos, Sr. and Amelita Ramos as sureties. Teofilo Ramos Sr. was the Executive officer of Iglesia ni Kristo. ZDC defaulted on its obligation. UCPB filed a collection suit and obtained a favorable judgment. A writ of execution was issued for the enforcement of the decision ordering Sheriff Villapana to levy and attach all the real and personal properties belonging to ZDC and the Ramoses to satisfy the judgment.

To help the Sheriff implement the writ, UCPB through its employees ascertained if defendants (ZDC et al) had any leviable real and personal property. UCPB produced a copy of a Tax Declaration covering a property in Quezon City under the name of Teofilo C. Ramos, President and Chairman of Ramdustrial Corp. married to Rebecca E. Ramos. UCPB informed the Sheriff of the existence of such property and caused the annotation of a notice of levy on the title thereof.

Meanwhile, Ramdustrial Corporation applied for a loan with UCPBusing the same property as collateral. Ramdustrial intended to use the proceeds of the loan as additional capital to participate in a bidding project. Teofilo C. Ramos was informed that there was an annotation on said property, because of which the bank had to hold in abeyance any action on its loan application. Teofilo C. Ramos was of course surprised. He sent a letter to the Sheriff to have the annotation cancelled or else appropriate legal action will be taken.

The loan was eventually approved. Business was not good so Teofilo C. Ramos and Rebecca Ramos again applied for a loan with Planters Dev’t Bank to pay their obligations with UCPB. Again they encountered problems with the approval of the loan due to the annotation on their property which until now has not been cancelled. Spouses Ramos again demanded UCPB to have the annotation cancelled. UCPB told the spouses to file a motion to cancel said annotation and UCPB promised that the will not oppose. The annotation was eventually cancelled. Still spouses Ramos filed an action for damages against UCPB.

ISSUES

(1) Whether the petitioner acted negligently in causing the annotation of levy on the title of the respondent? YES.

(2) Whether the respondent was the real party-in-interest as plaintiff to file an action for damages against the petitioner considering that the loan applicant with UCPB and PDB was RAMDUSTRIAL CORPORATION? YES.

(3) Whether the respondent is entitled to damages? YES. HELD

(1) It bears stressing that the petitioner is a banking corporation, a financial institution with power to issue its promissory notes intended to circulate as money (known as bank notes); or to receive the money of others on general deposit, to form a joint fund that shall be used by the institution for its own benefit, for one or more of the purposes of making temporary loans and discounts, of dealing in notes, foreign and domestic bills of exchange, coin bullion, credits, and the remission of money; or with both these powers, and with the privileges, in addition to these basic powers, of receiving special deposits, and making collection for the holders of negotiable paper, if the institution sees fit to engage in such business.[25] In funding these businesses, the bank invests the money that it holds in trust of its depositors. For this reason, we have held that 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.[26] In approving the loan of an applicant, the bank concerns itself with proper informations regarding its debtors. The petitioner, as a bank and a financial institution engaged in the grant of loans, is expected to ascertain and verify the identities of the persons it transacts business with.[27] In this case, the petitioner knew that the sureties to the loan granted to ZDC and the defendants in Civil Case No. 94-1822 were the Spouses Teofilo Ramos, Sr. and Amelita Ramos. The names of the Spouses Teofilo Ramos, Sr. and Amelita Ramos were specified in the writ of execution issued by the trial court.

The petitioner has access to more facilities in confirming the identity of their judgment debtors. It should have acted more cautiously, especially since some uncertainty had been reported by the appraiser whom the petitioner had tasked to make verifications. It appears that the petitioner treated the uncertainty raised by appraiser Eduardo C. Reniva as a flimsy matter. It placed more importance on the information regarding the marketability and market value of the property, utterly disregarding the identity of the registered owner thereof.

(2) It must be underscored that the registered owner of the property which was unlawfully levied by the petitioner is the respondent. As owner of the property, the respondent has the right to enjoy, encumber and dispose of his property without other limitations than those established by law. The owner also has a right of action against the holder and possessor of the thing in order to recover it.[32] Necessarily, upon the annotation of the notice of levy on the TCT, his right to use, encumber and dispose of his property was diminished, if not negated. He could no longer mortgage the same or use it as collateral for a loan.

Arising from his right of ownership over the said property is a cause of action against persons or parties who have disturbed his rights as an

owner.[33] As an owner, he is one who would be benefited or injured by the judgment, or who is entitled to the avails of the suit[34] for an action for damages against one who disturbed his right of ownership.

Hence, regardless of the fact that the respondent was not the loan applicant with the UCPB and PDB, as the registered owner of the property whose ownership had been unlawfully disturbed and limited by the unlawful annotation of notice of levy on his TCT, the respondent had the legal standing to file the said action for damages. In both instances, the respondent’s property was used as collateral of the loans applied for by Ramdustrial Corporation. Moreover, the respondent, together with his wife, was a surety of the aforesaid loans.

While it is true that the loss of business opportunities cannot be used as a reason for an action for damages arising from loss of business opportunities caused by the negligent act of the petitioner, the respondent, as a registered owner whose right of ownership had been disturbed and limited, clearly has the legal personality and cause of action to file an action for damages. Not even the respondent’s failure to have the annotation cancelled immediately after he came to know of the said wrongful levy negates his cause of action.

(3) For the award of moral damages to be granted, the following must exist: (1) there must be an injury clearly sustained by the claimant, whether

physical, mental or psychological;

(2) there must be a culpable act or omission factually established;

(3) the wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant; and

(4) the award for damages is predicated on any of the cases stated in Article 2219 of the Civil Code.[35]

In the case at bar, although the respondent was not the loan applicant and the business opportunities lost were those of Ramdustrial Corporation, all four requisites were established. First, the respondent sustained injuries in that his physical health and cardio-vascular ailment were aggravated; his fear that his one and only property would be foreclosed, hounded him endlessly; and his reputation as mortgagor had been tarnished. Second, the annotation of notice of levy on the TCT of the private respondent was wrongful, arising as it did from the petitioner’s negligent act of allowing the levy without verifying the identity of its judgment debtor. Third, such wrongful levy was the proximate cause of the respondent’s misery. Fourth, the award for damages is predicated on Article 2219 of the Civil Code, particularly, number 10 thereof

Liable for Attorneys fees but no exemplary damages.

Banco De Oro-EPCI Inc v JAPRL Development Corporation, 551 SCRA 342 (2008)

FACTS

JPRL obtained a P230M loan from Banco de Oro but soon after defaulted on its obligations. It was later discovered that the loan was obtained by JPRL by fraudulently bloating its sales revenue. Upon knowing of this fraud, BDO demanded immediate payment of JPRL’s outstanding obligations.

Banco de Oro tried to attach the properties of JPRL but was unsuccessful in all its attempt since no proper officer of JPRL could be found and served with summonses.

Meanwhile, JPRL filed two applications for corporate rehabilitation. The first was denied while the second was granted. By virtue of the granted rehabilitation, all proceedings against JPRL. Banco de Oro appealed the case alleging that JPRL maliciously evaded the service of summonses to prevent the court from acquiring jurisdiction. Furthermore, they employed bad faith to delay proceedings by cunningly exploiting procedural technicalities to avoid payment of their obligation.

ISSUES

Whether there was malice and bad faith on the part of JPRL by avoiding service of summons? Whether the court acquired jurisdiction even of the summons were served only to administrative officers of JPRL and not to the officers enumerated in the Corp Code?

HELD

The Makati RTC may proceed to hear Civil Case No. 03-991 only against Arollado if there is no ground to go after JAPRL and RFC (as will later be discussed). A creditor can demand payment from the surety solidarily liable with the corporation seeking rehabilitation.

Respondents abused procedural technicalities (albeit unsuccessfully) for the sole purpose of preventing, or at least delaying, the collection of their legitimate obligations. Their reprehensible scheme impeded the speedy dispensation of justice. More importantly, however, considering the amount involved, respondents utterly disregarded the significance of a stable and efficient banking system to the national economy.

Banks are entities engaged in the lending of funds obtained through deposits[45] from the public.[46] They borrow the public's excess money (i.e., deposits) and lend out the same.[47] Banks therefore redistribute wealth in the economy by channeling idle savings to profitable investments. Banks operate (and earn income) by extending credit facilities financed primarily by deposits from the public.[48] They plough back the bulk of said deposits into the economy in the form of loans.[49] 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.

Protecting the integrity of the banking system has become, by large, the responsibility of banks. The role of the public, particularly individual borrowers, has not been emphasized. Nevertheless, we are not unaware of the rampant and unscrupulous practice of obtaining loans without intending to pay the same.

In this case, petitioner alleged that JAPRL fraudulently altered and falsified its financial statements in order to obtain its credit facilities. Considering the amount of petitioner's exposure in JAPRL, justice and fairness dictate that the Makati RTC hear whether or not respondents indeed committed fraud in securing the credit accomodation.

A finding of fraud will change the whole picture. In this event, petitioner can use the finding of fraud to move for the dismissal of the rehabilitation case in the Calamba RTC.

The protective remedy of rehabilitation was never intended to be a refuge of a debtor guilty of fraud.

Meanwhile, the Makati RTC should proceed to hear Civil Case No. 03-991 against the three respondents guided by Section 40 of the General Banking Law which states:

Section 40. Requirement for Grant of Loans or Other Credit Accommodations. Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling his commitments to the bank.

Towards this end, a bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditures and such information as may be prescribed by law or by rules and regulations of the Monetary Board to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the Bureau of Internal Revenue. Should such statements prove to be false or incorrect in any material detail, the bank may terminate any loan or credit accommodation granted on the basis of said statements and shall have the right to demand immediate repayment or liquidation of the obligation.

In formulating the rules and regulations under this Section, the Monetary Board shall recognize the peculiar characteristics of microfinancing, such as

cash flow-based lending to the basic sectors that are not covered by traditional collateral. (emphasis supplied)

Under this provision, banks have the right to annul any credit accommodation or loan, and demand the immediate payment thereof, from borrowers proven to be guilty of fraud. Petitioner would then be entitled to the immediate payment of P194,493,388.98 and other appropriate damages.

2. Prohibited Transactions

SEC. 55.1 (C): No director, officer, employee, or agent of any bank shall –

(c) Accept gifts, fees, or commissions or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank;

SEC. 55.1 (D): Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the bank or any bank;

SEC. 55.2: No borrower of a bank shall -

(a) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank;

(b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof;

(c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or

(d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application.

3. MB Regulation

a. Unsecured Loans

SEC. 41, GBL: Unsecured Loans or Other Credit

Accommodations. – The Monetary Board is hereby

authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks.

b. Other Security Requirements

SEC. 42, GBL: Other Security Requirements for Bank

Credits. - The Monetary Board may, by regulation, prescribe

further security requirements to which the various types of bank credits shall be subject, and, in accordance with the authority granted to it in Section 106 of the New Central Bank Act, the Board may by regulation, reduce the maximum ratios established in Sections 36 and 37 of this Act, or, in special cases, increase the maximum ratios established therein.

SEC. 106, NCBA: Required Security Against Bank Loans. — In order to promote liquidity and solvency of the banking system, the Monetary Board may issue such regulations as it may deem necessary with respect to the maximum permissible maturities of the loans and investments which the banks may make, and the kind and amount of security to be required against the various types of credit operations of the banks.

c. Terms and Conditions

SEC. 43, GBL: Authority to Prescribe Terms and Conditions

of Loans and Other Credit Accommodations. - The Monetary

Board, may, similarly in accordance with the authority granted to it in Section 106 of the New Central Bank Act, and taking into account the requirements of the economy for the effective utilization of long-term funds, prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action. d. Renewal or Extension

SEC. 48, GBL: Renewal or Extension of Loans and Other

Credit Accommodations. – The Monetary Board may, by

regulation, prescribe the conditions and limitations under which a bank may grant extensions or renewals of its loans and other credit accommodations.

e. Provisions for Losses and Write-Offs

SEC. 49, GBL: Provisions for Losses and Write-Offs. - All debts due to any bank on which interest is past due and unpaid for such period as may be determined by the

Monetary Board, unless the same are welt-secured and in the process of collection shall be considered bad debts within the meaning of this Section.

The Monetary Board may fix, by regulation or by order in a specific case, the amount of reserves for bad debts or doubtful accounts or other contingencies.