Special Commercial Laws Cases

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Circle

2016

UNIVERSITY OF SANTO TOMAS Digested by: DC 2016 Members

Editors: Tricia Lacuesta Lorenzo Luigi Gayya Cristopher Reyes Macky Siazon Janine Arenas Ninna Bonsol Lloyd Javier

SPECIAL COMMERCIAL

LAWS

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Conservatorship

90

Closure

92

Receivership

100

Liquidation

104

Law on Secrecy of Bank Deposits

Purpose

111

Prohibited Acts

112

Deposits Covered

113

Exceptions

115

Garnishment of Deposits, Including Foreign Deposits 125 Anti-Money Laundering Act

Unlawful Activities or Predicate Crimes 129

Freezing of Monetary Instrument or Property 131 MISCELLANEOUS TOPICS

PDIC 132

Truth in Lending 134

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Definition and Nature of Letters of Credit

BANK OF AMERICA, NT & SA v. CA, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE DOE

G.R. No. 105395, December 10, 1993, VITUG, J.

A letter of credit is a financial device developed to facilitate commercial transactions. Banks play different roles in such transactions, each of which carries different rights and liabilities; if a bank is an advising bank based on the provisions in the letter of credit, and other documents presented as evidence, it incurs no liability under the letter of credit as its only role is to inform a possible client of the existence of the letter of credit, nothing more. Facts:

Bank of America entered into an Irrevocable Letter of Credit purportedly issued by Bank of Ayudhya for the account of General Chemicals Ltd. to cover the sale of plastic ropes and agricultural files, with Bank of America as the advising bank and Inter-Resin as the beneficiary. Bank of America wrote Inter-Resin of the foregoing and transmitted the letter of credit. Inter-Resin then sought to confirm the letter of credit, but Bank of America did not, as they explained that there was no need for confirmation because the letter would not be transmitted if it were not genuine.

Relying on this, Inter-Resin sought to avail of the letter of credit, using it to ship rope to General Chemicals. Bank of America then issued checks in favor of Inter-Resin, after which it informed Bank of Ayudhya of the availment of the letter of credit, seeking reimbursement in the process. Bank of Ayudhya declared the letter of credit fraudulent, so Bank of America stopped the processing of Inter-Resin's documents.

Issue:

Whether or not Bank of America incurred any liability to the beneficiary (Inter-Resin) under the letter of credit.

Ruling:

NO.Bank of America merely acted as an advising bank. A letter of credit is a financial device developed by merchants to facilitate commercial transactions. It was developed as an attempt to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying.

To break the impasse, the buyer (here, General Chemicals) may be required to contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the letter, the issuing bank (here, Bank of Ayudhya) can authorize the seller (here, Inter-Resin) to draw drafts and engage to pay them upon presentment along with tender of documents required by the letter of credits (such documents are those evidencing the shipment). Once the credit is established, the seller ships the goods to the buyer and in the process the required shipping documents. To get paid, the seller executes a draft and presents it together with the required documents to the issuing bank. The issuing bank redeems the draft and pays cash to the seller if it finds that the documents submitted by the seller conform with what the letter of credit requires. The bank then obtains possession of the documents upon paying the seller. The transaction is completed when the buyer reimburses the issuing bank

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and acquires the documents entitling him to the goods. Under this arrangement, the seller gets paid only if he delivers the documents of title over the goods, while the buyer acquires said documents and control over the goods only after reimbursing the bank.

One of the types of letters of credit is the commercial letter of credit, as in this case. A commercial letter of credit is a contractual agreement between a bank, known as the issuing bank, on behalf of one of its customers, authorizing another bank, known as the advising or confirming bank, to make payment to the beneficiary. The issuing bank, on the request of its customer, opens the letter of credit. The issuing bank makes a commitment to honor drawings made under the credit. The beneficiary is normally the provider of goods and/or services. Essentially, the issuing bank replaces the bank's customer as the payor.

What makes letters of credit attractive is the independence of the engagement of the issuing bank to pay the seller of the draft and the presentment of required shipping documents from any breach of the main sales contract. The bank determines compliance only by the examination of shipping documents, without looking at the main contract.

In modern commerce, the rights and liabilities of banks in letters of credit depend on its role in the transaction. In this case, the conflict is on the role of Bank of America. If it is the issuing bank, it may be liable for the letter of credit as it handles payment of the draft to the seller. If it is an advising bank, it is not liable on the transaction as its sole role is to inform the seller of the existence of the credit. Indicia of its role as an advising bank can be found on the letter of credit itself (e.g. the draft that will be used for payment would be partly the engagement of the Bank of Ayudhya, which is the issuing bank), a letter of advice (and related fees that were paid by Inter-Resin), and a letter expressly stating that Bank of America has no engagement under the letter of credit). Given this, it is not liable on the letter of credit.

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PRUDENTIAL BANK v. IAC, PHILIPPINE RAYON MILLS INC., ANACLETO R. CHI G.R. No. 74886, December 8, 1992, DAVIDE, JR. J.

Liability on a letter of credit is created through the honouring of drafts or other demands for payment upon compliance with the conditions specified in the credit. When this occurs, a bank substitutes its own promise to pay (and would later pay a certain seller) in place of a customer (who would ‘reimburse’ the bank).

Facts:

Philippine Rayon Mills (PRMI) entered into a contract with Nissho Co., Ltd of Japan for the importation of textile machineries.. PRMI applied for a commercial letter of credit (LOC) with Prudential Bank and Trust Company in favor of Nissho. Against this LOC, sight drafts were drawn and issued by Nissho, which were all paid by the Prudential Bank through its correspondent in Japan, the Bank of Tokyo. These drafts were accepted by PRMI through its president, Anacleto Chi. Upon arrival of machineries, Prudential Bank indorsed the shipping documents to PRMI, which accepted delivery of the same.

PRMI executed, by prior arrangement with PB, a trust receipt (TC) which was signed by Anacleto Chi in his capacity as President. At the back of the trust receipt is a printed form to be accomplished by 2 sureties who are jointly and severally liable to the PB should PRMI fail to pay the total amount or any portion of the drafts.

PRMI ceased business operation. The obligation of PRMI from the LOC and TC remained unpaid and unliquidated. Demands were made but yielded no result.

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Prudential Bank then instituted an action for collection against PRMI and Analceto Chi.

Issue:

WhetherPRMI is liable on the basis of the letter of credit. Ruling:

YES. A letter of credit is an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a LOC, the bank merely substitutes its own promise to pay for one of its customers who in return promised to pay the bank the amount of funds mentioned (in this case, PRMI, in order to make purchases with Nissho).

In this case, the drawee (the bank that would honor the drafts) was Prudential Bank. It was to Prudential Bank that the drafts were presented for payment-- in this case, sight drafts payable on demand (the presentment). When the sight drafts were presented, based on the engagement in the letter of credit, Prudential Bank would make payments to the seller, Nissho, and would be reimbursed by the buyer, PRMI. In this regard, PRMI is liable on the basis of the letter of credit.

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FEATI BANK and TRUST COMPANY v. COURT OF APPEALS and BERNARDO E. VILLALUZ

G.R. No. 94209, April 30, 1991, GUTIERREZ, Jr. J.

A letter of credit, though possibly used as collateral, is an undertaking in itself, distinct from the other contracts related to it (e.g. sale). A breach in a related contract generally does not create liability in other contracts—one such exception to this rule is when a corresponding bank takes the role of a confirming bank in the transaction, as the bank assumes a direct and primary obligation as if it had issued the letter of credit.

Facts:

Bernando Villaluz agreed to sell to Axel Christiansen lauan logs. Upon inspecting the logs, Christiansen issued a purchase order. To pay for the logs, upon the instructions of the consignee, Hanmi Trade Development, the Security Pacific National Bank of Los Angeles (SPNB) issued an Irrevocable Letter of Credit available at sight in favor of Villaluz for the purchase price of the logs. The letter of credit was mailed to Feati Bank and Trust Company (Feati Bank) with the instruction that it be forwarded to the beneficiary.

The draft would be drawn on SPNB, and that for it to be honored, it must be accompanied with several documents, including a certification from Christiansen stating that the logs have been approved before shipment in line with the purchase order.

The logs were loaded on the shipping vessel and inspected by customs inspectors, who all certified the good condition and exportability of the logs. Notwithstanding the favorable conditions, Christiansen refused to issue the certification required by the letter of credit in spite of requests made by Villaluz. Without the certification, Feati Bank refused to advance the payment on the letter of credit. As Christiansen kept up his refusal to issue the needed certification, the letter of the credit lapsed, while the logs reached their consignee.

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Villaluz then filed a case against Christiansen and Feati Bank in order to compel the execution of the required certification, and to hold the two liable-- in particular, Feati Bank for releasing the funds to Christiansen in spite of non-compliance with the requirements in the letter of credit.

Issue(s):

Whether Feati Bank is liable under the letter of credit despite non-compliance with its terms.

Ruling:

NO. Two things should be considered here (per BPI v Nery, Art. 2 of Code of Commerce, and the Uniform Customs and Practice for Documentary Credits): first, in commercial transactions involving letters of credit, the functions assumed by correspondent banks depend on the obligations taken up by them. If the bank is a notifying bank, its only obligation is to transmit to the beneficiary the existence of the letter of credit. If a negotiating bank, it purchases and discounts drafts under the letter of credit, and it would be liable depending on the stage of the negotiation-- if prior to negotiation, there is no liability to the seller but after that, it would breach its contract with the seller. If a confirming bank, the correspondent bank assumes a direct and primary obligation to assume the obligation as if the corresponding bank had issued the letter of credit.

Second, a letter of credit (especially an irrevocable letter of credit) is a contract independent from the contract between the buyer and the seller, and the credit agreement between the issuing bank and the buyer. Breaches and liabilities in one contract may not affect the other contracts. That is, while it provides security for commercial transactions, it is not an accessory contract (such as a guaranty)-- it is a contract with obligations within itself, some of which are related to those in other contracts (e.g. the letter of credit is used in order to facilitate a sale, but the letter of credit is not the sale contract-- it is a contract that can be used as part of the means of payment). Treating the contract as an accessory destroys the independence of the banks responsibility from the contract upon which it was opened.

Feati Bank's sole involvement is that of a notifying bank. It forwarded the letter of credit from SPNB to the beneficiary (the seller). Villaluz claims that Feati is a confirming bank, that it would carry out SPNB's obligation as if it is own since there was a prior loan agreement that anticipated the letter of credit (characterizing it as a confirmation and as an accessory). However, the law requires that the undertaking be absolutely spelled out in order for a bank to be considered confirming. Neither can Feati be considered a negotiating bank with liability, as there did not seem to be any negotiation that would create a contractual relationship. Without these, it does appear that Feati Bank really only advised Villaluz of the letter of credit, and entered into no other obligation with him. It is not privy to whatever agreements Villaluz may have had with Christiansen. Apparently, Villaluz had a contract akin to one with services with Christiansen, which the latter breached when he refused to issue the certification. However, his unjustified refusal is a matter between the two men, and not the bank.

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MWSS v. HON. REYNALDO DAWAY and MAYNILAD WATER SERVICES G.R. No. 160732, June 21, 2004, AZCUNA, J.

Except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its

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issuance, since a letter of credit constitutes a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein.

Facts:

MWSS granted Maynilad, under a Concession Agreement, a twenty-year period to conduct various services for the existing MWSS water delivery and sewerage services in the West Zone Service Area, for which Maynilad undertook to pay the corresponding concession fees on the dates agreed upon in the said agreement. Among the means they relied upon are foreign loans. To secure Maynilad's performance of obligations under the agreement, Maynilad was required to put up a bond, bank guarantee, or other security acceptable to MWSS. To meet this requirement, Maynilad arranged for a three-year credit facility with foreign banks, led by Citicorp International Ltd., for the issuance of an Irrevocable Standby Letter of Credit in favor of MWSS.

Months after the arrangement, Maynilad and MWSS had difficulties negotiating possible solutions to Maynilad's supposed losses given the PHP's depreciation against the USD, even leading to unilateral suspension of payment of concession fees. They eventually reached an agreement.

In spite of that agreement, Maynilad served upon MWSS a Notice of Event of Termination, claiming that MWSS failed to comply with its obligations under the Concession Agreement and their agreed-upon amendments. MWSS challenged this, leading to an award in favor of MWSS.

As a result, MWSS submitted a written notice to Citicorp, as agent of the foreign banks, that by virtue of Maynilad's failure to perform its obligations under the Concession agreement, it would draw on the mentioned letter of credit. Prior to this, Maynilad filed a petition for rehabilitation which resulted in Stay Orders that would conflict with the letter of credit.

Issue:

Whether MWSS may draw on the letter of credit in spite of the stay order. Ruling:

YES. As stated in Feati Bank v. CA, an irrevocable letter of credit is not a guaranty--that is, not an accessory contract, but a primary obligation by a bank or other person made at the request of a customer that the issuer shall honor drafts or other demands of payment upon compliance with conditions specified in the credit. What distinguishes a letter of credit from other accessory contracts is that an issuing bank is to pay the seller upon presentment of the draft and required shipping documents. In effect, an undertaking to pay at sight conditioned upon delivery of the required documents.

This should be read alongside the rule on rehabilitation stay orders. Stay orders prevent the enforcement of claims against the debtor, and guarantees and sureties who are not solidarily liable with the debtor.

The claim is one against the participating banks. Based on the letter of credit (in fact, explicit in its terms), they have a primary, direct, definite and absolute undertaking to pay that is not conditioned on prior exhaustion of the debtor's assets: a surety. As such, the doctrine in Traders Royal Bank v CA applies: the claims can be pursued separately from and independently of the rehabilitation case.

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RELIANCE COMMODITIES v. DAEWOO INDUSTRIAL CO., LTD. G.R. No. L-100831, December 17, 1993, FELICIANO, J.

Letters of credit transactions are composed of at least three distinct relationships concretized in a contract or set thereof. Such relationships may form obligations that exist and are enforceable separately.

Facts:

Reliance Commodities and Daewoo entered into a contract of sale under the terms of which Daewoo would ship and deliver foundry pig iron. Pursuant to this, Daewoo shipped from Korea the said stock, but when the cargo arrived in Manila, it came out short.

Months later, another set of contracts were made, with the final contract including a provision on payment through an irrevocable letter of credit in favor of Daewoo. To accomplish this, Reliance filed with Chinabank an application for a letter of credit in favor of Daewoo. Such was endorsed to the Iron and Steel Authority for approval, but was denied. Because of the denial, Reliance had to submit purchase orders from end-users to support its application for a letter of credit, but did not make its target. Daewoo rejected the proposed letter of credit.

As it turned out, the failure of Reliance to open the letter of credit was due to its exceeding its foreign exchange allocation. Daewoo was forced to sell the pig iron to another buyer at a lower price in order to recoup some of its losses, and then requested payment for the amount represented by the short delivery. The request failed, leading to an action for damages with the trial court.

Issue:

Whether or not the failure of Reliance (an importer) to open a letter of credit on the terms agreed upon makes it liable to Daewoo (exporter) for damages.

Ruling:

YES. A letter of credit transaction is a composite of at least three distinct but intertwined relationships being concretized in the contract: the account party or buyer or importer to the beneficiary of the letter of credit (export or seller)-- here, Reliance agrees to pay Daewoo based on the terms of the contract; the account party and the issuing bank (the Application)-- Reliance tried to apply to Chinabank for the letter of credit, and had the letter of credit been approved, they would reimburse the bank for amounts paid by that bank pursuant to the letter of credit; and the issuing bank and the beneficiary, in order to support the contract; finally, the account party and the beneficiary to, inter alia, pay certain monies to each other. Other parties may be included, but the foregoing are indispensable. Note that these relationships represent different obligations that have separate lifespans.

This case is centered on the contractual relation between the importer and exporter (the first one). Although the contract refers to a letter of credit, it was not meant to be a condition precedent-- only a mode of payment. The contract had already been perfected. Consequently, the rights and obligations embodied in the contract now arise regardless of the failure of the application for the letter of credit-- it was enforceable.

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The letter of credit was the mechanism of payment for the pig iron. When an issuing bank undertakes to accept or pay the drafts presented, the bank in effect issues a loan to the account party. This feature, along with the bank's undertaking to accept the beneficiary's drafts drawn on the bank, is what makes a letter of credit a mode of payment.

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CHARLES LEE, CHUA SIOK SUY, MARIANO SIO, ALFONSO YAP, RICHARD VELASCO and ALFONSO CO v. CA, PHILIPPINE BANK OF COMMUNICATIONS

G.R. No. 117914, February 1, 2002, DE LEON, JR, J.

A letter of credit is not a negotiable instrument, which does not allow the pertinent presumptions to apply, but instruments issued in conjunction with a letter of credit, such as bank drafts, may be negotiable.

Facts:

Charles Lee, as President of MICO Metals (MICO) wrote private respondent Philippine Bank of Communications (PBCom) requesting for a grant of a discounting loan/credit line in the sum of three million pesos for the purpose of carrying out MICO’s line of business as well as to maintain its volume of business. On the same day, Charles Lee requested for another discounting loan/credit line of three million pesos from PBCom for the purpose of opening letters of credit and trust receipts. The proceeds of the loans were credited to their checking account with the Philippine Bank of Communications (PBCom). Lee and several other officers of the company executed surety agreements as part of the security for the loans.

Sometime after, MICO then filed applications for domestic and foreign letters of credit. When the applications were approved, trust receipts were executed in favor of PBCom, and in the case of the foreign letters of credit, bills of lading and commercial invoices. These facilities were availed of by their beneficiaries, and drafts were issued and later accepted by MICO.

MICO was eventually unable to repay their debts, leading to foreclosure of a real estate mortgage also used as security, but that was not enough to completely pay the obligation (there were still remaining trust receipts liabilities, for example). PBCom then demanded settlement with Lee and the other sureties, but they refused to acknowledge their obligations. Aggrieved, PBCom filed a complaint with prayer for writ of preliminary attachment before the RTC of Manila. Failure of delivery was one of the defences considered by the RTC in ruling in favour of MICO. In the CA, the Court relied on two presumptions to overturn the ruling: (1) that a negotiable instrument is deemed prima facie issued for valuable consideration and every person whose signature appears thereon is a party for value, and (2) that an instrument sets out the true agreement of the parties thereto and that it was executed for valuable consideration.

Issue:

Whether the CA erred in treating the letters of credit and trust receipts as negotiable instruments.

Ruling:

YES. Two presumptions were established by PBCom when it presented several documents, including letters of credit, trust receipts, and drafts. First, that a negotiable instrument is deemed prima facie issued for valuable consideration and that every person whose signature appears thereon to be a party for value. While letters of credit and trust

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receipts are not negotiable instruments, bank drafts executed in connection with letters of credit, which are distinct instruments, are negotiable. Second, that sufficient consideration was given in a contract.

The documents allowed these presumptions to arise (particularly on the drafts, since they were negotiable instruments), creating not merely a prima facie case but actual proof of a solidary obligation between MICO and Lee (as well as the other sureties that signed). They establish that the agreements were availed of, and the proceeds were delivered to MICO.

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BANK OF COMMERCE v. TERESITA S. SERRANO G.R. No. 151895, February 16, 2005, QUISUMBING, J.

A letter of credit is a distinct from a trust receipt, creating separate obligations and liabilities.

Facts:

Via Moda International, represented by Teresita Serrano, obtained an export packing loan from Bank of Commerce (BOC), secured by a Deed of Assignment over an irrevocable transferable letter of credit. Serrano executed in favor of BOC a promissory note for the amount of the loan. Afterward, Via Moda opened a deposit account for the loan's proceeds.

Sometime after, BOC issued to Via Moda the subject irrevocable letter of credit for the purchase and importation of fabric and textile products from Tiger East Fabric Co. Ltd. of Taiwan. To secure the release of the goods covered, Serrano, in representation of Via Moda, executed a trust receipt covering the shipment. The goods were shipped by Via Moda to its proper consignee. However, the proceeds of the goods were not credited to the trust receipt, but were applied to the export packing loan.

BOC then sent a demand letter to Via Moda for the payment of the obligation on the trust receipts, or return of the goods covered. The demand was not heeded, leading to an estafa case against Serrano. After an RTC ruling in favor of BOC, the CA acquitted Serrano and said that she was not civilly liable.

Issue:

Whether Serrano is civilly liable based on the non-payment of the trust receipt. Ruling:

NO. A letter of credit is a separate document from a trust receipt. While the trust receipt may have been executed as security on the letter of credit, the two documents involve different undertakings and obligations. The former is an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. In contrast, the latter is one where the entruster, who holds an absolute title or security interests over certain goods, documents or instruments, released the same to the entrustee, who executes a trust receipt binding himself to hold the goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents and instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster, or as appears in the trust receipt, or return the

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goods, documents or instruments themselves if they are unsold, or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt.

To BOC, Serrano has to account for two obligations: the guarantee clause in the letter of credit, and the trust receipt. In the case of the former, the issue was never raised until the SC, and was not considered by it. In the case of the latter, there was nothing on the trust receipt that showed that Serrano was personally liable, or that she guaranteed the obligation. Serrano merely represented Via Moda, which has a separate personality from her. Without reason to justify the piercing of the veil of corporate fiction, the obligation on the trust receipt could not pertain to her.

Moreover, the SC agreed with the CA in finding that there was no misappropriation or conversion by Serrano of the proceeds of the sale in the good subject of the trust receipt because it was BOC that unilaterally applied the proceeds to the export packing loan. It should not create liability on Serrano who did not take part or have any knowledge thereof. Hence, Serrano is not liable.

Laws Governing of Letters of Credit

BANK OF THE PHILIPPINE ISLANDS v. DE RENY FABRIC INDUSTRIES G.R. No. L-24821, October 16, 1970, CASTRO, J.

In the absence of provision in our local laws, letters of credit are governed by established usage and customs in commerce (e.g. Uniform Customs and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of International Chamber of Commerce).

Facts:

De Reny Fabric Industries, through its president and secretary, applied to BPI for four irrevocable commercial letters of credit to cover the purchase by the corporation of dyestuffs of various colors from, JB. The applications were approved, and the letters of credit were executed. Under these agreements, the president and secretary bound themselves personally as joint and solidary debtors with the corporation.

By virtue of these transactions, BPI issued irrevocable commercial letters of credit addressed to its correspond banks in the US, with instructions to inform the American supplier that they have been authorized to negotiate the latter's sight drafts up to the amountsmentioned therein, respectively, if accompanied, upon presentation, by a full set of negotiable clean "on board" ocean bills of lading, covering the dyestuff. JB availed of these facilities; with those availments, the correspondent banks then debited BPI's account with them.

When the shipments arrived in the Philippines, De Reny made partial payments but these were discontinued when it turned out the goods were actually colored chalk instead of dyestuff. De Reny refused to take possession of the goods, leading to BPI depositing the same in a bonded warehouse, and the present case for collection. One of De Reny's defenses is that BPI has the duty to take the necessary precautions to insure that the goods shipped under the covering letters of credit conformed with the item appearing therein. Any losses that accrued should be burdened by BPI.

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Whether BPI insures that the goods shipped conform to the letters of credit. Ruling:

NO. First, the letter of credit agreements show that the parties agreed that BPI shall not be responsible for differences in character, quality, quantity, condition or value of the property from that expressed in their documents (here, the dyestuff). Second, absent such provision, Art. 10 of the Uniform Customs and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of International Chamber of Commerce, of which the Philipines is a signatory, states that in documentary credit operations, all parties concerned deal in documents and not in goods. The bank is not required to verify the goods themselves-- the bank was only tapped in order to allow engagement in international business. Such is a custom applicable to commercial transactions that will apply regardless of the lack of provision in the contract and in our laws.

BPI cannot be liable on the agreement due to both contract provisions and a custom taken as part of our law.

Kinds of Letters of Credit

INSULAR BANK of ASIA and AMERICA v. INTERMEDIATE APPELLATE COURT, THE PHILIPPINE AMERICAN LIFE INSURANCE CO., SPS. MENDOZA

G.R. No. 74834, November 17, 1988, MELENCIO-HERRERA, J.

A standby letter of credit is a definite undertaking to pay a money advanced or an amount for which credit is given on the faith of the instrument—in effect, a security, but not an accessory contract. They are distinct obligations from the original loan which they secure.

Facts:

The spouses Mendoza obtained two loans from Philam Life to finance the construction of their house. To secure payments, Philam Life required that amortizations be guaranteed by an irrevocable standby letter of credit of a commerical bank, leading the Mendozas to apply for the issuance of two such letters of credit from Insular Bank of Asia and America. Such letters of credit were in turn secured by a real estate mortgage in favor of the spouses' property.

The Mendozas failed to pay their loan, so that Philam Life informed Insular Bank that it was declaring both loans as entirely due and demandable, and demanded their payment. IBAA contested the propriety of calling in the entire loan, so Philam Life desisted and resumed availing of the letters of credit by drawing on them for five more amoritzations.

As time passed, the Mendozas still defaulted on their amortization, leading to another declaration that the entire balance be immediately due and demandable. Philam Life also demanded payment from Insular Bank, but it argued that it was a mere guarantor of the Mendozas, and that its obligation was much less than what Philam Life demanded. It even demanded a refund as the Mendozas made partial payments that reduced their liability.

While this went on, the real estate mortgage was foreclosed. Soon after, Philam Life sued the spouses and Insular Bank for the recovery of the supposed balance.

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Issue:

Whether or not partial payments made by the principal debtors (Mendoza spouses) would reduce the liability of the guarantor (Insular Bank) under the terms of the standby letter of credit.

Ruling:

NO. In construing the terms of a letter of credit, as in other contracts, it is the intention of the parties that must govern, also considering the usages of the particular trade of business contemplated. The standby letter of credit secures the payment of any obligation of the debtor to the creditor. However, while they are security arrangements, they are not contracts of guaranty. Rather, they are primary, independent contracts that underline absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument.

Because of this, partial payments made by the Mendozas cannot be used in computing Insular Bank's liability under its own standby letter of credit. Their obligation is distinct from the Mendoza's, although they are related.

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TRANSFIELD PHILIPPINES INC. v. LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK CORPORATION

G.R. No. 146717, November 22, 2004, TINGA, J.

A standby letter of credit, while a security arrangement, is not an accessory contract such as guaranty. Obligations to pay arise upon proof that the principal obligor has failed to meet his obligation, without need of other proceedings.

Facts:

Transfield and Luzon Hydro Corporation (LHC) entered into a Turnkey contract whereby Transfield undertook to construct a hydro-electric power station (project). To secure performance of its obligation, Transfield opened in favor of LHC 2 standby letters ofcredit (securities), one with Australia and New Zealand Banking Group Limited (ANZ Bank) and one with Security Bank Corporation (SBC).

Transfield sought various extensions of time to complete the project, due to factors such as force majeure occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the requests. LHC filed before the Construction Industry Arbitration Commission (CIAC) a Request for Arbitration. Transfield filed the same with the International Chamber of Commerce (ICC).

Foreseeing that LHC would call on the securities, Transfield advised ANZ Bank and SBC (banks) of the arbitration proceedings, and that LHC had no right to call on the securities until resolution of the disputes. Transfield warned the banks that any transfer or release of the securities in favor of LHC would make the banks liable for damages

LHC sent notice to Transfield that it failed to comply with its obligation to complete the project. LHC then declared Transfield in default/delay. LHC served notice that it would call on the securities for the payment of damages for the delay. In response, Transfield filed a comlaint for injunction, seeking to restrain LHC from calling on the securities.

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Issue:

Whether the beneficiary may call on the letters of credit. Ruling:

YES. To start, there is a distinction between a commercial credit and a standby credit. The former is a letter of credit that refers to the payment of money under a contract of sale, and is payable upon presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. Meanwhile, the latter is an undertaking to pay for non-performance of an agreement, and is payable upon showing that the principal obligor has not performed the related contract. Such letters of credit are separate contracts from the contracts by which they are based, even if such contracts are referenced in the credit (the independence principle).

The letter of credit in this case is a standby letter of credit. By its nature, it is practically ministerial for LHC to call on the securities upon Transfield's default. To require a prior negotiation or arbitration would be to convert the same into a guarantee, which is not the nature of a letter of credit. Note that the securities admit their liability.

Moreover, LHC's right is not only rooted in the law and usages in business, but the contract itself. All in all, Transfield cannot pursue the injunction.

_____________________________________________________________________________________________ _________________________________

PHILIPPINE VIRGINIA TOBACCO ADMINISTRATIONv.HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of Rizal, Branch IV (Quezon City) and TIMOTEO A. SEVILLA, doing business under the name and style of PHILIPPINE

ASSOCIATED RESOURCES and PRUDENTIAL BANK AND TRUST COMPANY G.R. No.L-27829, August 19, 1988, Paras, J.

An irrevocable letter of credit cannot, during its lifetime, be cancelled or modified without the express permission of the beneficiary.

Facts:

Timoteo Sevilla, proprietor and General Manager of the Philippine Associated Resources (PAR) entered into a contract for the importation of kilos of Virginia leaf tobacco and Farmer’s tobacco. Due to prevailing export or world market price under which Sevilla will be exporting at a loss, the parties agreed that Sevilla shall open an irrevocable letter of credit with the Prudential Bank and Trust Co. (Prudential Bank) in favor of Philippine Virginia Tobacco Administration (PVTA)

While Sevilla was trying to negotiate the reduction of the procurement cost of the PVTA tobacco already exported, PVTA prepared two (2) drafts to be drawn against the said letter of credit for the amounts which have become due and payable. Sevilla filed an injunction against the release of funds with Prudential Bank which was not granted byJudge Delos Angeles. Consequently, Judge Delos Angeles issued an order directing Prudential Bank to make the questioned release of funds from the letters of credit.

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Whether the respondent judgeacted with grave abuse of discretion in releasing the funds from the letters of credit.

Ruling:

YES. Respondent Judge violated the irrevocability of the letter of credit issued by respondent Bank in favor of petitioner. An irrevocable letter of credit cannot during its lifetime be cancelled or modified Without the express permission of the beneficiary (Miranda and Garrovilla, Principles of Money Credit and Banking, Revised Edition, p. 291). Consequently, if the finding the trial on the merits is that respondent Sevilla has alleged unpaid balance due the petitioner, such unpaid obligation would be unsecured.

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FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION) v. THE COURT OF APPEALS, and BERNARDO E. VILLALUZ

G.R. No. 94209, April 30, 1991, Gutierrez, Jr., J.

The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank.In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit.A

negotiating bank, on the other hand, is a correspondent bank which buys or discounts a

draft under the letter of credit. In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit

Facts:

Bernardo Villaluz agreed to sell Lauan logs to Axel Christiansen which the latter will sell to Hanmi Trade Development, Inc. in Korea. Thereafter, Security Pacific National Bank of Los Angeles (Issuing bank) issued an irrevocable letter of credit in favor of Villaluz. Thereafter, the issuing bank instructed Feati Bank & Trust Company (Corresponding bank) through an email to forward the enclosed letter of credit to Villaluz. The said letter of credit provided terms and conditions which include a certification from Christiansen that logs have been approved prior to its shipment in accordance with the latter’s purchasing order. Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary Credits.

Subsequently, when the logs were loaded on the ship after passing the inspection, Christiansen refused to issue the said certification, hence, when Villaluz presented the other documents in compliance with the terms and conditions, Feati refused payment on the letter of credit.

Since the demands by Villaluz for Christiansen to execute the certification proved futile, the former, instituted an action for mandamus and specific performance against Christiansen andFeatibefore Court of First Instance (CFI) of Rizal. It ruled that Feati assumed the very same undertaking as the issuing bank under the terms of an irrevocable letter of credit by accepting the instructions from the issuing bank. The Court of Appeals affirmed the CFI decision on the ground that when Featiaccepted its role as the notifying and negotiating bank for and in behalf of the issuing bank, it in effect accepted a trust reposed on it, and became a trustee in relation to plaintiff as the beneficiary of the letter of credit.Thus, Feati cannot be allowed to deny its commitment and liability under the letter of credit.

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Whether a correspondent bank should be held liable under the letter of credit despite non-compliance by the beneficiary with the terms thereof.

Ruling:

NO.Since Featiwas only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of credit to the private respondent and its obligation ends there.

The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to accept the draft drawn under the documentary credit.

A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability.

In order that the petitioner may be held liable under the letter, there should be proof that the petitioner confirmed the letter of credit.

The records are, however, bereft of any evidence which will disclose that the petitioner has confirmed the letter of credit.

There must have been an absolute assurance on the part of the petitioner that it will undertake the issuing bank's obligation as its own.

Parties to a Letter of Credit

RELIANCE COMMODITIES, INC.v.DAEWOO INDUSTRIAL CO., LTD. G.R. No.L-100831, December 17, 1993, Feliciano, J.

The primary purpose of the letter of credit is to substitute for and therefore support the agreement of the buyer/importer to pay money under a contract or other arrangement. It creates in the seller/exporter a secure expectation of payment.

Facts:

Reliance Commodities, Inc. entered a contract of sale with Daewoo Industrial Co., Ltd. whereby the latter shall deliver 2,000 metric tons of foundry pig iron at a certain price. Both parties likewise agreed that Reliance shall secure a letter of credit (L/C) in favor of Daewoo. Consequently, Reliance failed to secure the L/C having exceeded its foreign exchange allocation and to raise purchase orders for 2,000 metric tons as required by the Iron and Steel Authority (ISA).

Corollarily, when the goods were shipped, it fell short of 135 metric tons of foundry pig iron prompting Reliance to file for damages against Daewoo. However, the latter contended that Reliance breached their contract for failure to secure the L/C hence should be liable for damages. The trial court ruled that Reliance is guilty of breach of contract while Daewoo must pay for the amount representing the value of the short delivered goods plus interest. Reliance filed an appeal contending that the opening of the L/C is a condition

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precedent to the effectivity of the contract between therefore it should not be held liable. The Court of Appeals found no merit in Reliance’s contention. Hence, this petition was filed. Issue:

Whether the failure of an importer (Reliance) to open a letter of credit as a condition for another contract make it liable.

Ruling:

YES.A letter of credit transaction may be seen to be a composite of at least three (3) distinct but intertwined relationships being concretized in a contract:

(a) One contract relationship links the party applying for the L/C (the account party or buyer or importer) and the party for whose benefit the L/C is issued (the beneficiary or seller or exporter). In this contract, the account party, here Reliance, agrees, among other things and subject to the terms and conditions of the contract, to pay money to the beneficiary, here Daewoo.

(b) A second contract relationship is between the account party and the issuing bank. Under this contract, (sometimes called the "Application and Agreement" or the

"Reimbursement Agreement"), the account party among other things, applies to the issuing bank for a specified L/C and agrees to reimburse the bank for amounts paid by that bank pursuant to the L/C.

(c) The third contract relationship is established between the issuing bank and the beneficiary, in order to support the contract.

We believe and so hold that failure of a buyer seasonably to furnish an agreed letter of credit is a breach of the contract between buyer and seller. Where the buyer fails to open a letter of credit as stipulated, the seller or exporter is entitled to claim damages for such breach. Damages for failure to open a commercial credit may, in appropriate cases, include the loss of profit which the seller would reasonably have made had the transaction been carried out.

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PRUDENTIAL BANKv.INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and ANACLETO R. CHI

G.R. No. 74886, December 8, 1992, Davide, Jr., J.

“Commercial letters of credit have come into general use in international sales

transactions where much time necessarily elapses between the sale and the receipt by a purchaser of the merchandise, during which interval great price changes may occur. Buyers and sellers struggle for the advantage of position. The seller is desirous of being paid as surely and as soon as possible, realizing that the vendee at a distant point has it in his power to reject on trivial grounds merchandise on arrival, and cause considerable hardship to the shipper. Letters of credit meet this condition by affording celerity and certainty of payment.”

Facts:

Philippine Rayon Mills entered into a contract with Nissho Co., Ltd. of Japan for the importation of textile machineries. To effect its payment, Rayon applied for a commercial letter of credit with Prudential Bank and Trust Company in favor of Nissho which was granted. After the drafts were drawn, Prudential Bank through its correspondent in Japan, paid the amount of the machineries pursuant to the L/C. Consequently, Rayon ceased its business operation and sold the textile machineries while the drafts remained unpaid in spite of Prudential Bank’s demands. Hence, Prudential Bank filed an action for collection of the principal amount against Rayon. However, the latter interposed the defense that the drafts were not presented to it for acceptance therefore its liability to reimburse did not arise. On the other hand, Prudential Bank averred that the drafts, being sight drafts, did not require presentment for acceptance to Rayon. The trial court ruled in favor of the latter on the ground that since the drafts were not presented and accepted, no valid demand for payment can be made.

Issue:

Whether or not the presentment for acceptance of the drafts was indispensable to make Philippine Rayon liable.

Ruling:

NO. A letter of credit is defined as an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Through a letter of credit, the bank merely substitutes its own promise to pay for one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon. In the instant case then, the drawee was necessarily the herein petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is necessary only in the cases expressly provided for in Section 143 of the Negotiable Instruments Law (NIL).

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A different conclusion would violate the principle upon which commercial letters of credit are founded because in such a case, both the beneficiary and the issuer, Nissho Company Ltd. and the petitioner, respectively, would be placed at the mercy of Philippine Rayon even if the latter had already received the imported machinery and the petitioner had fully paid for it.

_____________________________________________________________________________________________ _________________________________

RODZSSEN SUPPLY CO. INC. v. FAR EAST BANK & TRUST CO. G.R. No. 109087, May 9, 2001, Panganiban, J.

When both parties to a transaction are mutually negligent in the performance of their obligations, the fault of one cancels the negligence of the other. Thus, their rights and obligations may be determined equitably. No one shall enrich oneself at the expense of another.

Facts:

Rodzssen Supply Inc. applied for and obtained an irrevocable Letter of Credit from Far East Bank and Trust Company Inc. in favor of Ekman and Company Inc., in order to finance the purchase of five (5) units of hydraulic loaders in the amount of P190,000. For the first three (3) hydraulic loaders that were delivered, the bank paid the amount specified in the letter of credit. Five months after the expiration of the L/C, Far East paid Ekman the amount of the last two (2) hydraulic loaders which were voluntarily received by Rodzssen. After four years (4), Far East sought for the payment of the 2 hydraulic loaders against Rodzssen but to no avail. Hence, it filed a complaint to recover its value. Rodzssen contended that Far East acted in bad faith when it paid Ekman for the 2 hydraulic loaders from Ekman in spite of the expiration of the L/C. Hence, Rodzssen was no longer bound to reimburse Far East under the subject L/C.

Issue:

Whether or not it is proper for a banking institution to pay a letter of credit which has long expired or been cancelled.

Ruling:

NO. The subject Letter of Credit had become invalid upon the lapse of the period fixed therein.Thus, respondent should not have paid Ekman; it was not obliged to do so. In the same vein, of no moment was Ekmans presentation, within the prescribed period, of all the documents necessary for collection, as the Letter of Credit had already expired and had in fact been cancelled.

Indeed, equitable considerations behoove us to allow recovery by respondent. True, it erred in paying Ekman, but petitioner itself was not without fault in the transaction. It must be noted that the latter had voluntarily received and kept the loaders since October 1979.

Petitioner claims that it accepted the late delivery of the equipment, only because it was bound to accept it under the company’s trust receipt arrangement with respondent bank.

(20)

Granting that petitioner was bound under such arrangement to accept the late delivery of the equipment, we note its unexplained inaction for almost four years with regard to the status of the ownership or possession of the loaders. Bewildering was its lack of action to validate the ownership and possession of the loaders, as well as its stolidity over the purported failed sales transaction. Significant too is the fact that it formalized its offer to return the two pieces of equipment only after respondents demand for payment, which came more than three years after it accepted delivery.

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RAMON L. ABAD v. HON. COURT OF APPEALS & THE PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK

G.R. No.L-42735, January 22, 1990, Grino-Aquino, J.

The marginal deposit requirement for letters of credit has been discontinued, except in those cases where the applicant for a letter of credit is not known to the bank or does not maintain a good credit standing therein.

Facts:

TOMCO, Inc., now known as Southeast Timber Co. (Phils.), Inc., applied for, and was granted by the Philippine Commercial and Industrial Bank (PCIB), a domestic letter of credit for P 80,000 in favor of Oregon Industries, Inc., to pay for one Skagit Yarder with accessories. PCIB paid to Oregon Industries the cost of the machinery with recourse, presentment and notice of dishonor waived, and with date of maturity on January 4, 1964.

After making the required marginal deposit of P28,000 on November 5, 1963, TOMCO, Inc. signed and delivered to the bank a trust receipt acknowledging receipt of the merchandise in trust for the bank. In consideration of the release to TOMCO, Inc. by PCIB of the machinery covered by the trust receipt, petitioner Ramon Abad signed an undertaking entitled, "Deed of Continuing Guaranty" appearing on the back of the trust receipt, whereby he promised to pay the obligation jointly and severally with TOMCO, Inc.Except for TOMCO's P28,000 marginal deposit in the bank, no payment has been made to PCIB by either TOMCO, Inc. or its surety, Abad, on the P80,000 letter of credit.

The bank sued TOMCO, Inc. and Abad. TOMCO did not deny its liability to PCIB under the letter of credit but it alleged that inasmuch as it made a marginal deposit of P28,000, this amount should have been deducted from its principal obligation.The trial court rendered judgment in favor of PCIB, which was affirmed by CA.

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Issue:

Whether or not the debtor (or its surety) is entitled to deduct the debtor's cash marginal deposit from the principal obligation under a letter of credit and to have the interest charges computed only on the balance of the said obligation.

Ruling:

YES. It is only fair then that the importer's marginal deposit (if one was made, as in

this case), should be set off against his debt, for while the importer earns no interest on his marginal deposit, the bank, apart from being able to use said deposit for its own purposes, also earns interest on the money it loaned to the importer. It would be onerous to compute interest and other charges on the face value of the letter of credit which the bank issued, without first crediting or setting off the marginal deposit which the importer paid to the bank. Compensation is proper and should take effect by operation of law because the requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the concurrent amount (Art. 1290, Civil Code). Although Abad is only a surety, he may set up compensation as regards what the creditor owes the principal debtor, TOMCO (Art. 1280, Civil Code).

It is not farfetched to assume that the bank used TOMCO's marginal deposit to partially fund the P80,000 letter of credit it issued to TOMCO, hence, the interests and other charges on said letter of credit should be levied only on the balance of P52,000 which was the portion that was actually funded or loaned by the bank from its own funds. Requiring the importer to pay interest on the entire letter of credit without deducting first him marginal deposit, would be a clear case of unjust enrichment by the bank.

_____________________________________________________________________________________________ _________________________________

THE CONSOLIDATED BANK AND TRUST CORPORATION (SOLIDBANK) v. THE COURT OF APPEALS, CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and SPOUSE

G.R. No. 114286. April 19, 2001, Ynares-Santiago, J.

The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such agreements are contracts of

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adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of banks.

Facts:

Continental Cement Corporation applied and obtained a letter of credit with Consolidated Bank and Trust Corporation to purchase bunker fuel oils from Petrophil Corporation. Thereafter, Continental paid a marginal deposit. Consequently, Petrophil delivered directly to Continental’s powerplant the bunker fuels oil. Subsequently, Continental executed a trust receipt for the amount Consolidated Bank. Claiming that Continental failed to turn over the goods covered by the trust receipt or the proceeds thereof, Consolidated Bank filed a complaint for sum of money with application for preliminary attachmentbefore the Regional Trial Court (RTC) of Manila. In answer to the complaint, respondents averred that the transaction between them was a simple loan and not a trust receipt transaction, and that that the marginal deposit it made should not be deducted outright from the amount of the letter of credit.

Issues:

1. Whether or not the contention of Continental Cement Corporation that the marginal deposit should be applied only after computing the principal and accrued interest is tenable.

2. Whether the transaction with Continental Cement Corporation is a trust receipt transaction. Ruling:

1. NO. petitioners contention that the marginal deposit made by respondent Corporation should not be deducted outright from the amount of the letter of credit is untenable. Petitioner argues that the marginal deposit should be considered only after computing the principal plus accrued interests and other charges. However, to sustain petitioner on this score would be to countenance a clear case of unjust enrichment, for while a marginal deposit earns no interest in favor of the debtor-depositor, the bank is not only able to use the same for its own purposes, interest-free, but is also able to earn interest on the money loaned to respondent Corporation. Indeed, it would be onerous to compute interest and other charges on the face value of the letter of credit which the petitioner issued, without first crediting or setting off the marginal deposit which the respondent Corporation paid to it. Compensation is proper and should take effect by operation of law because the requisites in Article 1279 of the Civil Code are present and should extinguish both debts to the concurrent amount.

Hence, the interests and other charges on the subject letter of credit should be computed only on the balance of P681,075.93, which was the portion actually loaned by the bank to respondent Corporation.

2. NO. The transaction is a simple loan. The recent case of Colinares v. Court of Appeals appears to be foursquare with the facts obtaining in the case at bar. There, we found that inasmuch as the debtor received the goods subject of the trust receipt before the trust receipt itself was entered into, the transaction in question was a simple loan and not a trust receipt agreement. Prior to the date of execution of the trust receipt, ownership over the goods was already transferred to the debtor. This situation is inconsistent with what normally obtains in a pure trust receipt transaction, wherein the goods belong in ownership to the bank and are only released to the importer in trust after the loan is granted.

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In the case at bar, as in Colinares, the delivery to respondent Corporation of the goods subject of the trust receipt occurred long before the trust receipt itself was executed. Further, the oil was used up by respondent Corporation in its normal operations. On the other hand, the subject trust receipt was only executed nearly two months after full delivery of the oil was made to respondent Corporation.

_____________________________________________________________________________________________ _________________________________

BANK OF AMERICA, NT & SA v.COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO TRAJANO, JOHN DOE AND JANE DOE

G.R. No. 105395 December 10, 1993, Vitug, J.

Between the seller and the negotiating bank there is the usual relationship existing between a drawer and purchaser of drafts. Unless drafts drawn in pursuance of the credit are indicated to be without recourse therefore, the negotiating bank has the ordinary right of recourse against the seller in the event of dishonor by the issuing bank. The fact that the correspondent and the negotiating bank may be one and the same does not affect its rights and obligations in either capacity, although a special agreement is always a possibility. Facts:

General Chemicals, Ltd. Of Thailand applied for a letter of credit from the Bank of Ayudhya in favor of Inter-Resin Industrial Corporation for the sale of plastic ropes and agricultural files. Thereafter, Inter-Resin sought the services of Bank of America (BA) as its advising bank in relation to the letter of credit. Consequently, BA received through registered mail an irrevocable letter of credit allegedly from Bank of Ayudyha. Hence, it informed Inter-Resin of the said letter of credit. To ensure the authenticity of the letter of credit, Inter-Resin sent its attorney to BA for confirmation. BA failed to confirm its authenticity however its bank employee explained that there is no need for confirmation because the letter of credit would not have been transmitted if it were not genuine.

Subsequently, Inter-Resin made a partial availment of the L/C. Upon compliance with the required documents, BA issued in favor Inter-Resin a cashier’s check. Sometime after, when Inter-Resin pursued for the second availment of the L/C, BA received a telex from Bank of Ayudhya declaring the L/C as fraudulent. BA sought the assistance of the National Bureau of Investigation (NBI) which discovered that the vans exported by Inter-Resin did not contain plastic ropes but plastic strips, wrappers, rages, and waste materials. BA sued Inter-Resin for the recovery of the peso equivalent of the draft for on the partial availment of the now disowned letter of credit.

Issue:

Whether Bank of America may recover the amount it paid to Inter-Resin for the latter’s partial availment of the disowned letter of credit.

Ruling:

YES.Bringing the letter of credit to the attention of the seller is the primordial obligation of an advising bank. The view that Bank of America should have first checked the authenticity of the letter of credit with bank of Ayudhya, by using advanced mode of business communications, before dispatching the same to Inter-Resin finds no real support in U.C.P. Article 18 of the U.C.P. states that: "Banks assume no liability or responsibility for the consequences arising out of the delay and/or loss in transit of any messages, letters or

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documents, or for delay, mutilation or other errors arising in the transmission of any telecommunication…" As advising bank, Bank of America is bound only to check the "apparent authenticity" of the letter of credit, which it did. Clarifying its meaning, Webster's Ninth New Collegiate Dictionary explains that the word "APPARENT suggests appearance to unaided senses that is not or may not be borne out by more rigorous examination or greater knowledge."

May Bank of America then recover what it has paid under the letter of credit when the corresponding draft for partial availment thereunder and the required documents were later negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is commonly referred to as a discounting arrangement. This time, Bank of America has acted independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting the documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of course, could have chosen other banks with which to negotiate the draft and the documents.) As a negotiating bank, Bank of America has a right to recourse against the issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a contingent liability thereon.

While bank of America has indeed failed to allege material facts in its complaint that might have likewise warranted the application of the Negotiable Instruments Law and possible then allowed it to even go after the indorsers of the draft, this failure, nonetheless, does not preclude petitioner bank's right (as negotiating bank) of recovery from Inter-Resin itself. Inter-Resin admits having received from bank of America on the letter of credit and in having executed the corresponding draft. The payment to Inter-Resin has given, as aforesaid, Bank of America the right of reimbursement from the issuing bank, Bank of Ayudhya which, in turn, would then seek indemnification from the buyer (the General Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however, Bank of America may now turn to Inter-Resin for restitution.

_____________________________________________________________________________________________ _________________________________

FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING CORPORATION) v. THE COURT OF APPEALS, and BERNARDO E. VILLALUZ

G.R. No. 94209, April 30, 1991, Gutierrez, Jr., J.

The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank. In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. A

negotiating bank, on the other hand, is a correspondent bank which buys or discounts a

draft under the letter of credit. In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit

Facts:

Bernardo Villaluz agreed to sell Lauan logs to Axel Christiansen which the latter will sell to Hanmi Trade Development, Inc. in Korea. Thereafter, Security Pacific National Bank of Los Angeles (Issuing bank) issued an irrevocable letter of credit in favor of Villaluz. Thereafter, the issuing bank instructed Feati Bank & Trust Company (Corresponding bank) through an email to forward the enclosed letter of credit to Villaluz. The said letter of credit provided terms and conditions which include a certification from Christiansen that logs have been approved prior to its shipment in accordance with the latter’s purchasing order. Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for Documentary Credits.

Special Commercial Laws Cases

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