Why Banco Filipino Failed: September 2011

Friday, September 23, 2011

Legal Travails of a Bank Minority Shareholder

Editor's Note: This blog was inspired by the spectacular failure of Banco Filipino Savings and Mortgage Bank for the second time in its 38 years of existence. This blog post and other blog posts like it attempt to describe why the bank failed. But it also attempts to assess what other Philippine Banks have the potential to fail in the not too distant future. To see blog posts on other banks, click on the Banco Filipino Graphic at the top of the blog or click on the blog archive on the right hand column, or simply go to bancofilipinofailure.blogspot.com.

Background

In 2003, minority Banco Filipino shareholder and sister of Banco Filipino Vice Chairman Albert C. Aguirre, Ana Marie Aguirre Koruga, asked the Bangko Sentral ng Pilipinas (BSP) to investigate Banco Filipino. She claimed that Banco Filipino's management had:

engaged in unsafe, unsound, and even fraudulent banking practices;
engaged in self-dealing;
violated banking laws prohibiting or limiting DOSRI transactions;
put the bank and its depositors in jeopardy.

The minority shareholder, who holds a direct and indirect 10% stake in the bank, sued not just Banco Filipino's board and management but also both the BSP and the Monetary Board to replace the current board and management and place the bank under receivership.

Needless to say, Ms. Koruga's legal efforts to assert her shareholder rights went nowhere despite elevating her claims all the way to the Supreme Court.

Eight years after her first complaint was filed, on March 17, 2011, the BSP declared the bank closed and placed it under receivership. Furthermore, the BSP declared that Banco Filipino had engaged in a "Ponzi Scheme" that funded withdrawals using later deposits. On April 1, 2011, the BSP filed criminal charges against the directors and officers of the bank for numerous violations of central bank laws and unsound banking practices.

Written below is a detailed timeline of the legal process she undertook as well as the resulting legal decisions.

Incidents Prior to the Filing of the Complaint before the Regional Trial Court

In a Letter-Complaint to the Monetary Board of the Bangko Sentral ng Pilipinas (“BSP”) dated 21 April 2003, as amended on 23 April, Koruga, thru counsel, complained about the real estate acquisitions of Banco Filipino Savings and Mortgage Bank (“Banco Filipino”), which prejudiced its minority shareholders, creditors, and depositors. The Monetary Board was requested to investigate such real estate acquisitions and to place Private Defendants under preventive suspension.

On 6 June 2003, Banco Filipino commented on said letters, averring that:

the loans granted to the Borrower Corporations were in accordance with Banco Filipino’s pursuit of its main business, which is mortgage lending.

Banco Filipino’s DOSRI loans as of 31 October 2002 constituted 53% only of the total allowable limit as per the regulations of the BSP

The Borrower Corporations relatively have high paid up capital and networth, and are active and operational.

That payment of the loan by dacion en pago is generally accepted in the banking industry

In a letter dated 14 May 2003, Koruga, thru counsel, demanded to the members of the board of directors of Banco Filipino to reverse the loans and the corresponding payments thereto by dacion en pago which were extended to the following corporations: a) Glamor World, Inc.; b) Filipino Vastland, Inc.; c) Filipino Ventures Co.; d) Taurus Land, Inc.; and e) BF Homes Depot. Koruga averred that these loans, disguised as purchases of real property of Banco Filipino, were intended to accommodate Albert Aguirre, the beneficial owner of the foregoing corporations, while depriving Banco Filipino of its liquidity needs.

Not getting any response, Kuroga, in a Letter dated 19 June 2003 tendered a final demand for the board of directors to comply with the 14 May 2003 letter within five (5) days.

In a Letter dated 26 May 2003, Koruga, thru counsel, informed the Board of Directors and the Corporate Secretary, Francisco A. Rivera, of Banco Filipino that Koruga would be proceeding to the bank’s premises on 6 June 2003, in order to inspect the records and all documents related to the loan obtained by BF Homes Depot.

In a Letter dated 4 June 2003, the Corporate Secretary informed Plaintiff’s counsel that the request for inspection was denied after a meeting held by the executive committee. The reason cited was that Koruga used previously obtained information, directly or indirectly, for media purposes which caused abnormal withdrawal of deposits in December 2002 and continued to adversely affect the bank up to that time.

In a Letter addressed to the board of directors dated 27 June 2003, counsel for Koruga brought to the board’s attention the letter issued by Defendant Corporate Secretary dated 4 June 2003 denying Plaintiff the right to inspect the records, and requested the members to individually confirm if they authorized Mr. Rivera’s actions and statements.

In a Letter dated 6 June 2003, Koruga, thru counsel, informed the board of directors that she would be proceeding to the bank’s premises on 16 June 2003, in order to inspect the records and all documents related to the loans obtained by Filipino Vastland, Inc.; Glamor World, Inc.; Taurus Land, Inc.; and Tierrasud, Inc..

In a Letter dated 11 June 2003, the Corporate Secretary informed Koruga that the Executive Committee did not favorably consider her notice for inspection because the pertinent records were protected under the confidentiality rules of the BSP. It was further stated that the committee took note again of the fact that Koruga improperly used previously obtained information.

On 20 August 2003, Koruga filed a COMPLAINT (With Prayer fort Appointment of Mangament Committee and for Inscription of Records), dated 13 July 2003 and docketed as Civil Case No. 03-985, against the Board of Directors of Banco Filipino (“Private Defendants”) and the Members of the Monetary Board of the Bangko Sentral ng Pilipinas (“Public Defendants”). The Complaint alleged the following:

That Private Defendants engaged in unlawful self-dealing and conflicts of interest in Banco Filipino’s disguised acquisitions of unsaleable real property that unduly benefitted Defendant Aguirre, who is the beneficial owner of the corporations that were granted loan accommodations: BF Home Depot, Filipino Vastland, Glamor World, Taurus Land, Tierrasud, Pro-Managers (“Borrower/Dummy Corporations”). As the corresponding payment of these loans were effected by way of dacion en pago, Banco Filipino’s cumulative interest income was effectively diminished;

That Private Defendants violated the right of Koruga, as stockholder, to inspect the corporate records of Banco Filipino;

That Public Defendants have not acted on the Plaintiff’s valid , just and actionable complaint dated April 21 and 23, 2003.

Koruga then prayed for the following reliefs:

that Banco Filipino be placed under conservatorship, and thereafter, receivership, if justified;

that a management committee be created;

that the loans disguised as acquisitions of unsaleable real estate be rescinded;

that Koruga be allowed to inspect and/or copy documents relating to the subject loans;

that the audited financial statements for the year 2002 be issued;

that a cease and desist order be issued against Private Defendants enjoining them from further granting financial accommodations to corporations that are known to be owned or controlled by Aguirre;

that an order be issued piercing the corporate veils created by Aguirre in setting up the 6 borrower corporations;

that an order be issued directing Public Defendants to suspend or permanently disqualify the Private Defendants to act as bank directors/officers.

On 26 August 2003, summonses were served upon Defendants Arcenas, Aguirre, Paguio, and Rivera.

Defendant Montano and Banzon filed their identical Answer Ad Cautelam with Compulsory Counterclaims (With Prayer to Set Case for Hearing on Special and Affirmative Defenses) dated 8 September 2003. Defendants argued that:

the loan applications of the borrower corporations were subjected to extensive and rigid profile and credit investigation.

assuming that the loans are DOSRI loans, these are not entirely prohibited as the records show that the DOSRI loans as of 31 October 2002 constituted only 53% of the total allowable limit for DOSRI loans in accordance with the regulations of the BSP.

Koruga’s request for inspection was justifiably denied, as Koruga used previously obtained information for media purposes that put Banco Filipino in a bad light, thus triggering massive withdrawals by the public.

the Complaint is a nuisance or harassment suit.

there is Forum shopping, as there is an earlier and pending complaint filed before the BSP

the trial court does not have jurisdiction considering the nature of the reliefs sought and the defective service of summons upon the defendants;

indispensable parties i.e. Banco Filipino, the borrower corporations, are not impleaded.

Montano likewise prayed for a hearing on the Special and Affirmative Defenses set in his Answer.

Defendant Abad filed Answer with Compulsory Counterclaims dated 11 September 2003.

Defendant Abad filed his Answer dated 11 September 2003. Defendant also filed his Motion for Preliminary Hearing on the Jurisdictional Mattes Raised as Grounds to Warrant Dismissal of the Complaint. Abad moved for a preliminary hearing on jurisdictional matters raised as Special and Affirmative Defenses, on the following grounds:

That the Monetary Board of the BSP has primary jurisdiction, considering that the subject matter of the suit relates to and directly affects a banking institution and its Board of Directors/Management.

That Koruga violated the rule against forum shopping, as the Complaint deals with matters and raises the same issues that are presently pending with the Monetary Board, pursuant to the letters dated 21 & 23 April 2003 sent by Koruga to the BSP.

That the Complaint is a nuisance or harassment suit, considering that Koruga’s shareholdings in Banco Filipino is “di minimis” i.e., 0.0115%

That the complaint is essentially a petition for mandamus, disguised as an intra-corporate suit, as it was prayed that the Court issue special orders directed against the Public Defendants, to act in accordance with their declared duties, authorities or prerogatives. As certain requirements for a mandamus case are not complied with, hence, the Complaint should be dismissed.

That the Complaint suffers from a jurisdictional defect as there is non-joinder of the following indispensable parties, i.e. Banco Filipino, the Borrower Corporations, and the Monetary Board.

That there is invalid service of summons on Defendant Abad

Defendants Arcenas, Aguirre, Paguio and Rivera filed their Answer dated 12 September 2003. Defendants argued:

that the Court has no jurisdiction over the persons of the Defendants as there was improper service of summonses;

that the instant Complaint is a harassment or nuisance suit, as can be deduced from the miniscule shareholdings of Koruga;

that there is failure to implead an indispensable party, Banco Filipino, which would be prejudiced in the event that the reliefs prayed for in the complaint are granted;

that the grant of the loans lies within the power of the board of directors and covered by the “business judgment” rule, by reason of which the courts are not empowered to intervene;

that the loans and the corresponding payments thereof by dacion were evaluated by the Loans Department and the approving authorities of Banco Filipino in accordance with its standard procedure and guidelines;

that the denial to inspect corporate records was justified as Koruga improperly used previously obtained information.

Defendants Samson and Hernandez filed their Answer Ad Cautelam (With Motion for Preliminary Hearing on Jurisdictional Matters) dated 12 September 2003. Defendants contended:

that jurisdiction lies with the Monetary Board, considering the reliefs sought by Koruga;

that Banco Filipino and the Borrower Corporations, being indispensable parties, were not impleaded;

that the court has no jurisdiction over their persons as there was defective service of summonses;

that Koruga engaged in forum shopping;

that the Complaint is a nuisance or harassment suit;

that the Complaint is a veiled suit for mandamus.

Public Defendants, thru the Office of the Solicitor General, filed their Answer dated 18 September 2003. Public Defendants alleged that the Monetary Board had acted upon the complaint brought by Koruga as a Report of Examination (ROE) was prepared by the Supervision and Examination Department (SED) of the BSP. In the ROE, certain exceptions were noted, such as dacion payments and out of the ordinary expenses. Allegedly, in accordance with its established procedures, the Reply of Banco Filipino regarding the noted exceptions in the ROE is currently being awaited. Public Defendants also put up the following special and affirmative defenses:

that only the Monetary Board can place a bank under conservatorship or receivership;

that the case is in the nature of a mandamus suit, and the Monetary Board is being compelled to do acts which require the exercise of discretion;

that Koruga violated the doctrine of exhaustion of administrative remedies as a complaint was filed before the regular courts without awaiting the outcome of the Complaint filed before the BSP;

that the Monetary Board has primary jurisdiction over the case in view of its expertise or special knowledge on the monetary and banking system.

Koruga filed a Request for Admission and Interrogatories dated 18 September 2003, directed to Defendants Abad, Samson, Hernandez, Dupasquier, San Lim, & Buenaventura.

Koruga filed a Motion for Production of Documents dated 24 September 2003. The following documents are sought to be produced or allowed to be examined/copied:

Those relating to loans granted by Banco Filipino to the Borrower Corporations

Those relating to the Credit Initiation Process for the Borrower Companies

Those relating to the Loan Processing conducted for the loans applied for by the Borrower Companies.

Those relating to the Loan Account Management and Administration of the Borrowing Companies

Those relating to the Substitution of Collateral proposed for the security of the loans released in favor of the Borrower Companies

Those relating to the Remedial Management Efforts made and/or proposed for the loans released in favor of the Borrower Companies

Those relating to the payment through dacion en pago proposed and/or accepted by Banco Filipino for the loans released in favor of the Borrower Companies

Those relating to the Payment of the loans made by the Borrower Companies through dacion en pago.

Those relating to the financial standing and/or liquidity of Banco Filipino

Memorandum of Agreement between the BSP and Banco Filipino concerning the extinguishment of payment of Banco Filipino’s obligations to the BSP

Those relating to the Liquidity Assistance provided by the BSP to Banco Filipino in the year 2002

Letter dated 06 June 2003, issued by Banco Filipino’s EVP/Corporate Secretary to BSP Director Candon B. Guerrero.

Interrogatories dated 24 September 2003 were served upon Defendants Arcenas, Aguirre, Samson, Paguio, Banzon, Abad, Hernandez, and Rivera, wherein information as to the property of Banco Filipino Head Office located at 101 Paseo de Roxas corner de la Rosa Street, Legaspi Village, Makati City, was sought for. Interrogatories dated 29 September 2003 seeking the same information were served upon Defendants Tiu, San Lim, & Dupasquier.

Koruga filed a Manifestation and Motion Ad Cautelam dated 29 September 2003 stating that the Interrogatories dated 24 September 2003 were served upon the Defendants and that such service is without prejudice to the Motion to Declare Defendants in Default dated 18 September 2003, as the Answer dated 12 September 2003 was not verified and there was no showing that Defendants Arcenas, Paguio and Rivera were authorized by Defendant Aguirre to represent him in the case

Koruga made a Request for Subpoena Duces Tecum dated 30 September 2003 for Jason Martinez, a reporter of “Biznews Financial Gazette” to appear at the hearing on 10 October 2003 and to produce the Report of Examiners (ROE) of the BSP concerning Banco Filipino.

Defendants Arcenas, Aguirre, Paguio and Rivera filed a Motion to Quash Subpoena dated 6 October 2003, contending that a subpoena cannot be used for discovery, and that the issuance of a subpoena duces tecum is an exercise of jurisdiction by the court, which it does not have in the first place.

Defendants Arcenas, Aguirre, Paguio, and Rivera filed their Opposition to Motion for Production of Documents dated 30 September 2003. Defendants argued that discovery was premature as the court had to resolve first the issues pertaining to its jurisdiction and the Complaint’s susceptibility to dismissal.

Defendants Arcenas, Aguirre, Paguio, and Rivera filed their Opposition to Motion to Declare Defendants in Default dated 30 September 2003, alleging that they had not been properly served with summons. Hence, the reglementary period for filing an Answer did not yet commenced against them.

Defendants Samson and Hernandez filed their Motion to Quash Subpoena and Opposition (To: Motion for Production of Documents addressed to public defendants) dated 1 October 2003. Defendants argued that the jurisdictional objections raised in their Answer Ad Cautelam must first be resolved, and that the production of the subject documents is prohibited by law by reason of the sensitive nature of information relating to banks.

Koruga filed her Consolidated Comment/Opposition (to Motions for Preliminary Hearing dated 08, 11 and 12 September 2003) dated 2 October 2003, wherein she argued that the preliminary hearing on Special and Affirmative defenses prayed for by Defendants Banzon, Abad, Samson, and Hernandez is in the nature of a Motion to Dismiss which is a prohibited pleading under the Intra-Corporate Rules.

Public Defendants filed their Opposition to Motion for Production (Re Report of Examination) dated 2 October 2003, wherein they averred that the copies of the ROE has already been transmitted to the Corporate Secretary of Banco Filipino, and that accordingly, the request for its production should be directed to the authorized repository of the Bank’s records, communications and correspondences, and not to Public Defendants. Public Defendants also alleged that the ROE is confidential in nature.

Defendant Tiu filed his Answer with Compulsory Counterclaims dated 5 October 2003, wherein he alleged that he had voiced his opposition to the payment of the loans by way of dacion en pago, especially when the corporations involved are perceived to be sister companies. As to the violation of Koruga’s right to inspection, Tiu countered that he was not a member of the Executive Committee that denied the request.

Koruga served Interrogatories dated 6 October 2003 upon the Public Defendants.

Defendants Arcenas, Aguirre, Paguio, and Rivera filed their Motion to Resolve Grounds for Dismissal dated 6 October 2003, wherein they asked the court to resolve the issues raised in their Answer, as these are already ripe for adjudication.

Defendants Samson and Hernandez filed their Objections (To: Request for Admission and Interrogatories) dated 6 October 2003, wherein the Defendants questioned the court’s jurisdiction and pointed out that the Complaint’s susceptibility to dismissal. Defendants also alleged that the admissions sought are prohibited by law.

Defendants Samson and Hernandez filed their Reply (Re: Motion for Preliminary Hearing on Jurisdictional Matters) dated 8 October 2003, wherein they attempted to persuade the court to frontally meet the alleged jurisdictional issues pending before it.

Koruga filed her Plaintiff’s Reply to Public Defendants’/Monetary Board’s “Opposition to Motion for Production (Re: Report of Examination)” dated 02 October 2003 dated 9 October 2003, wherein she argued that the subject documents are covered by the right of the people to information for these are official records or paper pertaining to official acts.

Koruga filed her Reply to “Opposition” filed by Private Defendants Samson and Hernandez Re: Production of ROE dated 9 October 2003.

Defendants Arcenas, Aguirre, Paguio, and Rivera filed their Opposition to Motion for Production of Documents dated 9 October 2003, wherein they contended that before any discovery may be undertaken the issues raised in their Answer must first be resolved, that Koruga’s resort to discovery is premature, and that the motion seeking production of documents is tantamount to a fishing expedition.

Defendants Aguirre, Arcenas, Paguio, and Rivera filed their Opposition to Motion Ad Cautelam (To Serve Interrogatories) dated 9 October 2003. Defendants once again pointed out the alleged that the court lack jurisdiction over their persons by reason of the defective service of summonses.

Defendant Dupasquier filed his Answer dated 9 October 2003. Dupasquier argued that the court failed to acquire jurisdiction over his person as summons was defectively served; that plaintiff engaged in forum shopping; and that the documents sought to be discovered are immaterial or irrelevant.

Defendant Tommy Pea San Lim filed his Answer dated 9 October 2003, wherein he alleged that he is not one of the erring directors referred to in the Complaint as he either registered his objections to, or abstained from voting on, the corporate acts complained of.

Koruga filed a Motion for Production of Documents dated 13 October 2003. Such request for production of documents directed to Defendants Dupasquier, San Lim and Tiu. Interrogatories dated 13 October 2003 were also served on the same Defendants.

Public Defendants filed their Comment/Opposition to Motion for Production of Documents dated 13 October 2003, wherein they alleged that they have no custody of the subject documents or that the documents are confidential.

Defendants Arcenas, Aguirre, Paguio, and Rivera filed their Comment on/Opposition to Plaintiff’s Latest Motion for Production of Documents dated October 15 2003, wherein Defendants averred once again that before any discovery may be undertaken it was expedient upon the trial court to resolve the issues that were raised in their Answer.

Defendant Banzon filed his Objection to Interrogatories dated 15 October 2003, wherein he averred that the interrogatories are premature, as there is still one pending incident yet to be resolved by the trial court, at least insofar as he is concerned, i.e. the Motion to Set Case for Preliminary Hearing on the Special and Affirmative Defenses.

Defendant Banzon filed his Motion to Suspend Proceedings dated 16 October 2003, in view of the several pending incidents before the court, i.e. Koruga’s Motion for the Production of Documents, Motion to Declare Defendants in Default, and Interrogatories; and the Defendants’ Motions to Set Case for Preliminary Hearing. Banzon also submitted that the issue of whether the case is a harassment or nuisance suit must first be threshed out by the court.

Public Defendants filed their Consolidated Opposition and Motion to Quash (Re Requests for Admissions and Interrogatories) dated 20 October 2003, wherein they argued that the subject documents are confidential and that the Monetary Board is the one vested with jurisdiction over the subject matter of the Complaint. Public Defendants also averred that they were currently looking into the alleged irregularities complained of.

Defendant Tiu filed her Consolidated Objections/Comments and/or Opposition to Interrogatories and Motion for Production of Documents dated 23 October 2003.

Defendant Dupasquier filed his Comment and/or Opposition (To Plaintiff’s Request for Written Interrogatories dated 13 October 2003) with Motion to Strike (Plaintiff’s Pre-mature and Improper Request for Written Interrogatories dated 13 October 2003) dated 24 October 2003. Dupasquier argued that the legal issues raised in his Answer should be resolved first before discovery requests are granted, and that the matters sought to be discovered are privileged in nature.
Koruga filed her Plaintiff’s Consolidated Reply to the Respective Oppositions of Defendants to Plaintiff’s Resort to Various Modes of Discovery dated 21 November 2003, wherein she argued:

that the BSP has no jurisdiction to adjudicate rights of stockholders;

that the BSP is not empowered to grant the following reliefs prayed for in the Complaint: a) to award damages, b) to pierce the corporate veils of the Borrower Corporations, and c) to require restitution;

that service of summonses at the principal office of Banco Filipino was proper, considering that the Defendants were being sued in their respective capacities as directors and/or officers;

that Banco Filipino need not be impleaded as an indispensable party, as only the acts of the Private Defendants are complained of under the Intra-Corporate Rules;

that the Borrower Corporations need not be impleaded, as no injury would be caused if the Court would grant Koruga’s prayer of “mutual restitution between Banco Filipino and the Borrower Corporations;

that the Complaint does not present a nuisance or harassment suit, as there is a bona fide intra-corporate controversy, with Koruga being prevented from exercising her right as a stockholder to inspect the corporate books and records of Banco Filipino;

that Koruga, as a stockholder, is entitled to examine the Report of Examination transmitted to Banco Filipino, which forms part of its “corporate books and records”

that the Defendants’ claim of confidentiality are bare and sweeping.

Defendant Banzon filed his Manifestation (to Plaintiff’s Consolidated Reply) dated 10 December 2003, wherein he reiterated the following arguments: a) that there was defective service of summons; b) that Banco Filipino is an indispensable party and therefore should have been impleaded; c) that the instant case is a nuisance suit and should be dismissed. Defendant thus prayed that Koruga’s resort to various modes of discovery be denied and that the pending issue of whether the Complaint is a nuisance suit be resolved first before the trial court further proceed with the case.

Koruga filed Counter-Manifestation to Banzon’s “Manifestation” (dated 10 December 2003) dated 19 January 2004.

On 24 February 2004, Koruga filed her Motion to Admit Supplemental Complaint. In her Supplemental Complaint dated 23 February 2004, Defendant Aguirre was once again linked to five additional Borrower Corporations: Acamac, Acamac Finance, Ekistics, Southland, and Tierra Hermosa, which had obtained loans from Banco de Oro in the accumulated principal amount of Php 250 million as of February 1985. In 1993, Banco de Oro waived the pertinent interests, charges, and penalties thereby benefitting Aguirre in the amount of P775.70 million or nearly 20% of Banco Filipino’s capital. Koruga went on to allege that Aguirre, when he became Vice-President of Banco Filipino in 1998, unduly exercised influence in order for the loans of the additional 5 borrower corporations be restructured, of which he still had beneficial ownership. Thus, Koruga prayed that the Court issue an Order:

that the corporate veils of the additional 5 borrower companies be pierced;

that the approval and restructuring of the loans of the five additional borrower companies and the waiver of penalties, interests and charges be declared as violations of banking laws against self-dealing and self-interest;

that Aguirre be directed to reimburse the amounts released in connection with the restructuring of the loans, and the waiver of penalties, interests and charges;

that Mr. Aguirre be disqualified from further acting as a director of Banco Filipino.

Defendants Banzon and Montano filed their Opposition (To Motion to Admit Supplemental Complaint) dated 8 March 2004, wherein they argued that Koruga’s motion should be denied because the questioned transactions purportedly happened years before the filing of the Complaint.

Defendants Arcenas, Aguirre, Paguio and Rivera filed their Opposition to Motion to Admit Supplemental Complaint dated 9 March 2004. Aside from other technical grounds, Defendants assailed the motion on due process considerations, as the five additional borrower corporations, which corporate veils are sought to be pierced, are not impleaded. Defendants also sought the court to first resolve the previous issues e.g. lack of jurisdiction of the court and propriety of the Complaint to be dismissed, which were raised in their Answer, before the trial court act on Koruga’s Supplemental Complaint.

Defendants Samson and Hernandez filed their Opposition (Re: Plaintiff’s Motion to Admit Supplemental Complaint) dated 12 March 2004. Aside from the arguments already stated in the Opposition of Defendants Arcenas, et al., they set up the defense of res judicata, as the grievances presented in the Koruga’s Supplemental Complaint were already ventilated in the 1991 case of Banco Filipino Savings & Mortgage Bank vs. Monetary Board (204 SCRA 767 [1991]), wherein the Supreme Court found that “there was no showing whatsoever that the bank had persisted in committing unlawful bank practices and that the respondent Board had attempted to take effective action on the bank’s alleged activities.”

On 30 March 2004, Koruga filed a Motion for Leave to Withdraw Supplemental Complaint, manifesting therein that the allegations in the Supplemental Complaint are now intended to be treated as evidentiary matters in support of the allegations set forth in the main Complaint.

Thru an Order dated 19 August 2004, the Court denied the two Motions for Preliminary Hearing separately filed by: a) Defendant Abad, and b) Defendants Samson and Fernandez. Said motions asked the court to conduct preliminary hearings on the affirmative defenses raised in their respective Answers. The trial court found merit in Koruga’s argument that the conduct of such a preliminary hearing is tantamount to filing a motion to dismiss, which is prohibited under the Interim Rules of Procedure Governing Intra-corporate Disputes.

Defendants Samson and Hernandez filed their Motion for Reconsideration (Re: Order dated 19 August 2004) dated 15 September 2004.

On 24 August 2004, the trial court issued a Notice, setting the pre-trial conference on 28 October 2004.

Defendants Arcenas, Aguirre, Paguio, and Rivera filed a Manifestation and Motion dated 28 September 2004, wherein they prayed that the Court first resolve their Motion to Resolve Grounds for Dismissal and hold in abeyance, for the meantime, the conduct of the pre-trial conference for practical reasons, because the proceedings would be void in the event that the Court is found to be without jurisdiction.

In an Order dated 18 October 2004, the trial court denied Defendant Arcenas, Aguirre, Paguio, and Rivera’s Manifestation and Motion, and deferred resolution of the affirmative defenses raised by the Defendants. The trial court reasoned that if a preliminary hearing on the affirmative defenses would be conducted, it is as if a Motion to Dismiss was filed, which is a prohibited pleading under the Interim Rules of Procedure on Intra-corporate Controversies.

Defendants Arcenas, Aguirre, Paguio, and Rivera filed a Motion for Reconsideration (of the Order dated 18 October 2004) dated 9 November 2004. Defendants argued that although a motion to dismiss is a prohibited pleading, there is no prohibition in the Interim Rules for the trial court to resolve grounds for a motion to dismiss pleaded in their Answer. Hence, the Court may rule on such grounds.

On 6 October 2004, Defendants Arcenas, Aguirre and Paguio filed a Motion to Resolve Grounds for Dismissal, wherein they moved the trial court to resolve the following issues raised in their Answer: a) lack of jurisdiction over their person; b) lack of jurisdiction over the subject matter of the action; c) forum shopping; and d) instant case is a nuisance or harassment suit.

Defendants Banzon and Montano filed their Joint Manifestation [Re: Unresolved Pre-trial Issues Raised as Special and Affirmative Defenses] and Joint Comment [Re: Manifestation and Motion of Defendants Arcenas, Aguirre, Paguio, and Rivera] dated 8 October 2004, wherein they averred that the setting of the pre-trial conference is premature, considering that there are still pending and unresolved prejudicial issues, such as: a) whether or not Koruga’s suit is a harassment or nuisance suit; b) whether or not Koruga violated the rule against forum shopping.

Defendants Banzon and Montano filed their Joint Pre-trial Brief dated 20 October 2004.

Defendants Samson and Hernandez filed their Pre-trial Brief (ad cautelam) dated 22 October 2004.

Defendant Tiu filed his Pre-trial Brief on 23 October 2004.

On 25 October 2004, Koruga filed her Pre-trial Brief, enumerating therein her proposed issues: a) whether she is entitled to an inspection of the books of Banco Filipino; b) Whether the assets of Banco Filipino have been dissipated; c) Whether a Management Committee should be organized; d) Whether public defendants may and/or should be compelled to impose administrative measures on private defendants such as disqualification or suspension, or place Banco Filipino under receivership or conservatorship; e) Whether plaintiff is entitled to damages as prayed for.

Public Defendants filed their Pre-trial Brief. Among their proposed issues are the following: a) Whether or not the trial court has jurisdiction to compel the Monetary Board to place Banco Filipino under conservatorship or receivership without violating the principle of separation of powers; b) Whether or not the Honorable Court has jurisdiction to compel the Monetary Board to preventively suspend any of the Private Defendants or disqualify any of them from serving as directors or officers of Banco Filipino.

Defendant Lim filed his Pre-trial Brief dated 8 November 2004.

In an Order dated 11 November 2004, the trial court rescheduled the pre-trial conference to 14 December 2004.

Thru a Constancia dated 14 December 2004, the trial court reset the pre-trial conference to January 27 and February 10, 2005

Defendants Banzon and Montano filed their Joint Reiteration of Manifestation dated 8 October 2004 [re: Unresolved Pre-trial Issues Raised as Special and Affirmative Defenses]’ and Joint Comment [Re: Motion for Reconsideration of Defendants Arcenas, Aguirre, Paguio and Rivera dated 9 November 2004] dated 25 November 2004. Defendants reiterated that the motion to resolve the issue of whether the Complaint is a nuisance or harassment suit, is allowed under the Interim Rules of Procedure for Intra-Corporate Controversies.

On 6 December 2004, Koruga filed a Manifestation that said Joint Reiteration is a disguised Motion for Reconsideration which is prohibited under the Interim Rules.

In an Order dated 18 January 2005, the trial court denied the Motion for Reconsideration of Defendants Arcenas, Aguirre, Paguio, and Rivera, subject of which is the Order dated 18 October 2004, as the issues raised by Defendants have already been passed upon.

In an Order dated 18 January 2005, the trial court denied the Motion for Reconsideration of Defendants Samson and Hernandez, subject of which is the Order dated 19 August 2004. The court noted that the grounds relied upon by Defendants revolves around the propriety of conducting a preliminary hearing prior to the pre-trial conference. The court then declared once again that when a preliminary hearing is conducted, it is as if a motion to dismiss was filed, and such motion is prohibited under the Interim Rules.

In an Order dated 18 January 2005, the trial court denied Defendant Banzon and Montano’s prayer to set the case for preliminary hearing on the affirmative defenses set forth in their Answers ad Cautelam.

In an Order dated 18 January 2005, the trial court deferred action on Koruga’s Motion for Production of Document until after the pre-trial conference.

In an Order dated 18 January 2005, the trial court denied Koruga’s Motion to Declare Defendants in Default.

Defendants Arcenas, Aguirre, Paguio, and Rivera filed their Pre-trial Brief dated 25 January 2005.

On 22 February 2005, the trial court issued a Notice of Pre-trial, setting the case for pre-trial on June 2 and 9, 2005.

Defendants filed a Manifestation and Motion dated 4 March 2005 stating that they have a pending application for a Writ of Preliminary Injunction with the Court of Appeals.

Koruga, thru counsel, wrote a letter to the Philippine Stock Exchange (PSE) and the Securities and Exchange Commission (SEC) dated 23 May 2005, pointing out the failure of Banco Filipino to submit its annual audited financial statements and to hold its annual stockholders’ meeting for the last three years. The PSE, in its letter dated 6 June 2005, informed Koruga that it already issued an indefinite trading suspension on the shares of Banco Filipino on 20 December 2002, pending clarification on the implementation of a previous board and stockholders’ resolution on its capital increase through a rights issuance. The SEC, on its part, stated that:

it has imposed an aggregate penalty of P324,024.78 on Banco Filipino for its failure to file its 2002 and 2003 annual reports.

Banco Filipino paid the same amount on 12 November 2003 and on 13 July 2004, but still failed to submit said reports.

For such failure, a show cause letter was sent to Banco Filipino on 6 May 2005.

Banco Filipino’s secondary license could not be suspended since its equity shares were exempt securities under Section 5 of the Revised Securities Act.

other administrative actions against Banco Filipino are being considered

Koruga filed her Ex Parte Motion to Set Case for Pre-trial dated 1 August 2005, wherein she alleged that there was no more legal impediment for the resumption of the proceedings, as the Court of Appeals already lifted the Writ of Injunction issued on 09 May 2005 and remanded the case to the trial court for further proceedings.

On 22 August 2005, Koruga filed a Manifestation stating that the trial court can now proceed with the setting of the pre-trial as the filing of the Petition for Review by Defendants Arcenas, et al. contesting the CA Decision does not stay the trial court proceedings. Koruga also contended that the concept of “judicial courtesy”, relied upon by Defendants, no longer applies as Section 7, Rule 65 of the 1997 Rules of Civil Procedure states that such petition “shall not interrupt the course of the principal case unless a restraining order or a writ of preliminary injunction has been issued against the public respondent from further proceeding in the case.”

In an Order dated 25 August 2005, the trial court set the case for pre-trial conference on 20 October 2005, in the event that there is no order or resolution by the Supreme Court restraining the trial court from taking further proceedings in the case.

Thru a Notice dated 13 October 2005, the trial court reset the pre-trial to 1 December 2005.

Defendant Abad filed her Pre-trial Brief dated 19 October 2005.

On 14 November 2005, Koruga filed her Opposition to Urgent Motion to Reset Pre-Trial Date. Koruga pointed out the snail-pace of the proceedings, as two years had already passed since the filing of the Complaint and yet not even a single pre-trial hearing had been held. Koruga then cited the reasons for the delays as: a) the accommodation of the court to Atty. Aportadera’s request for the re-setting of the pre-trial; b) the filing of a Petition for Certiorari by Defendants Arcenas, Aguirre, Paguio, and Rivera. Koruga then prayed that Atty. Aportadera’s another request for the postponement of the Pre-trial, premised on his scheduled trip to the US, be denied as being clearly dilatory.

On 1 December 2005, the pre-trial conference was held. In the course thereof, an Order was given in open court directing Koruga to file a motion within 10 days regarding matters which she averred to be appropriate subjects of summary proceedings. In view thereof, the trial court suspended the pre-trial conference for the meantime.

On 16 January 2006, Koruga filed her First Motion for Separate Judgment, in line with her manifestation during the pre-trial conference that there are certain subject matters which are already ripe for a summary proceeding, such as Defendants’ failure to submit the audited financial statements for 2002, 2003, 2004. Koruga pointed out Defendants’ lame excuse on why Banco Filipino cannot furnish its financial statements. Allegedly, the auditors of Banco Filipino had not yet submitted the same. Koruga argued that Defendants cannot pass the blame to their auditors as the Manual of Regulations for Banks explicitly provides a period within which said reports must be filed. Koruga then prayed that the audited financial statements for the fiscal year 2002 be released.

Defendants Arcenas, Aguirre, Paguio, and Rivera filed their Opposition to First Motion for Separate Judgment dated 30 January 2006, arguing therein that rendition of a separate judgment will not be proper as Defendants’ evidence relating to the issue of the release of the audited financial statements still has to be presented to the court. Defendants also argued that it is Banco Filipino, which was not even impleaded in the Complaint, that has the obligation under the Manual of Regulations for Banks and the General banking Law, to submit the audited financial statements to the BSP, and not the Defendants as members of the Board of Directors, as Banco Filipino has a separate juridical personality.

Defendants Banzon, Montano, and Abad filed their Opposition to Plaintiff’s First Motion for Separate Judgment [Dated January 11, 2006], dated 3 February 2006. Defendants argued that:

such motion was premature and improper, as a summary judgment is only possible after the pre-trial stage;

that a genuine issue exists as to obviate rendition of a summary judgment;

that Koruga has no cause of action, as Banco Filipino’s obligation to submit audited financial statements pertains to the BSP, and not to Koruga;

that the obligation to submit audited financial statements rests on Banco Filipino, and not on Defendants, who are only directors and officers of Banco Filipino.

On 26 January 2006, Koruga filed a Second Motion for Separate Judgment regarding the issue of her right to inspect and/or reproduce the corporate records of Banco Filipino. Koruga averred that the Defendants’ refusal to allow inspection and reproduction as premised on the allegation that she improperly used previously acquired information, is unsubstantiated. Koruga cited the case of Gokongwei vs. Securities and Exchange Commission (GR No. L-45911, April 11, 1979), where the Supreme Court held that the burden of proof to show that inspection is improper rests on the corporation. Koruga then prayed that a partial judgment be rendered ordering Private Defendants to permit her to inspect and copy all documents relating to any loans or collateral pertinent to the 6 borrower corporations.

Defendants Arcenas, Aguirre, Paguio and Rivera filed their Opposition to Second Motion for Separate Judgment 31 January 2006, arguing that a summary judgment will not be proper as it is premature, considering that the Court still had to evaluate Defendants’ evidence as to their allegation that Koruga’s improper used previously obtained information. Defendants also averred that they have evidence to substantiate such claim.

Defendants Banzon, Montano and Abad filed their Opposition to Plaintiff’s Second Motion for Separate Judgment [Dated January 11, 2006], dated 3 February 2006, arguing therein that rendition of a partial judgment is appropriate only after the pre-trial stage. Defendants also contended that a genuine issue exists to preclude rendition of a summary judgment, as Koruga’s right to inspect the corporate records of Banco Filipino was vehemently disputed by the Defendants as reflected in their Pre-trial Briefs and their declarations in the Pre-trial conferences. Defendants posited that such issue should be threshed out in a full-blown trial.

In an Order dated 19 January 2006, the trial court set the next pre-trial conference on 16 March 2006.

Defendants Samson and Hernandez filed their Consolidated Opposition (Re: Plaintiff’s Motions for Separate Judgment) -with- Counter-Motion for Separate Judgment on Prejudicial Issues Raised in the Answer dated 9 February 2006. Defendants argued that:

the two motions for separate judgment are prohibited pleadings under A.M. No. 01-2-04-SC.

the two motions merge into one the supposed separate personalities of Banco Filipino, which is not even impleaded in the Complaint, and its directors/officers

there cannot be a separate judgment as there is a genuine issue

By reason of her miniscule shareholdings, Koruga’s right to inspection was justifiably denied in accordance with the case of Gonzales vs. Philippine National Bank (G.R. No. L-33320, May 30, 1983 [122 SCRA 489]), wherein the Supreme Court emphasized that those invoking inspection rights must be acting in good faith and for a legitimate purpose.

In their Counter-Motion, Defendants asked the Court to first resolve the multiple jurisdictional defects in the Complaint, which are the proper subjects of a separate judgment as these only involve questions of law.

Public Defendants filed their Comment dated 16 February 2006 stating that the relief sought (1st and 2nd motion for inspection of corporate records and issuance of financial statements) is a provisional remedy which could not be granted by the trial court as the BSP is the one that has jurisdiction over the main case. Public Defendants also alleged that under the New Central Bank Act and the General Banking law of 2000, the Monetary Board of the BSP does not authorize the performance of the acts sought out by the motions of Koruga.

On 28 February 2006, Koruga filed a Motion, for the purpose of having the trial court allow the use of discovery procedures i.e. deposition of Witnesses Tomas Gomez, and Jerome and Joseph Velhagen. Koruga prayed that the trial court issue an Order requesting the DFA to render assistance in the taking of said depositions.

Defendants Banzon, Montano, and Abad filed their Opposition to: Plaintiff’s Motion [Dated February 27, 2006] dated 2 March 2006, pointing out that Koruga failed to state the purpose, the grounds relied upon, and the relevancy for the intended deposition taking.

Defendants Arcenas, Aguirre, Paguio and Rivera filed their Opposition to Motion (Dated February, 2006) dated 8 March 2006. Defendants argued that the contemplated deposition taking is not sanctioned by the Rules of Court, as deposition is a pretrial discovery device by which one party asks oral questions of the other party or of a witness of the other party. Defendants pointed out that the witnesses are that of the plaintiff, Koruga, and neither the adverse parties to the plaintiff nor witnesses of her adverse party. Defendants added that the presentation of testimonial evidence shall be done in open court. Defendants also complained about the expenses and other difficulties that their counsel will incur to travel to the US if the deposition would be push sanctioned.

Defendants Samson and Hernandez filed their Opposition (Re: Plaintiff’s Motion dated 27 February 2006) dated 10 March 2006, averring that before Koruga could file further motions or ask for further reliefs, their Consolidated Opposition (Re: Plaintiff’s Motion for Separate Judgment) with Counter-Motion for Separate Judgment on Separate Judgment on Prejudicial Issues Raised in the Answer should be resolved first, as the pending incidents of the case are already piling up. Defendants also brought to the attention of the court the two petitions pending with the Supreme Court and thus asked for the trial court’s deference to proceed with the case.

Proceedings before the Court of Appeals

Defendants Arcenas, Aguirre, Paguio, and Rivera filed a Petition under Rule 65 with the Court of Appeals dated 31 January 2005 and docketed as CA-G.R. SP No. 88422, assailing the 18 October 2004 and 18 January 2005 interlocutory orders of the trial court. The Petition alleged that the Respondent Judge:

has no jurisdiction over the subject matter, which jurisdiction is vested by law in the Bangko Sentral ng Pilipinas (BSP);

has no jurisdiction over the persons of the defendants on account of the improper and invalid service of the summons;

committed grave abuse of discretion in refusing to resolve the questions raised against his jurisdiction and insisting to proceed instead to conduct a pre-trial conference in said case;

committed grave abuse of discretion in refusing to dismiss the case on the indubitable grounds of litis pendentia and forum shopping;

committed grave abuse of discretion in finding, without any elaboration whatsoever, no merit to the claim that the instant case is a nuisance or harassment suit.

Petitioners also applied for the issuance of a Writ of Preliminary Injunction, allegedly to prevent a “run on the bank” and its eventual closure. Petitioners stressed that the trial court must first resolve the grounds for dismissal raised in their respective Answers before any resort to discovery will be granted by the trial court, as doing so is tantamount to an exercise of jurisdiction, which the trial court is alleged to be wanting of.

On 9 February 2005, thru a Resolution, the Court of Appeals issued a Temporary Restraining Order (TRO), effective for 60 days, enjoining the Respondent Judge from conducting further proceedings in Civil Case No. 03-985, as doing so will probably result in a violation of the rights of Petitioners (the Defendants in Civil Case No. 03-985) and that to avoid the findings of the Court of Appeals from being renered ineffectual.

Koruga filed her Comment to the Petition on 7 March 2005 and stated therein that the trial court did not commit grave abuse of discretion because the 18 October 2004 and 18 January 2005 Orders of the trial court were in compliance with the Interim Rules which prohibits the filing of a motion to dismiss. The holding of a preliminary hearing is tantamount to a filing of a motion to dismiss.

Defendants Banzon and Montano filed a Manifestation with Motion for Leave to be Joined as Co-petitioners dated 7 March 2005. Defendants moved to be joined as Co-Petitioners with Petitioners Arcenas, Aguirre, Paguio and Rivera.

Koruga filed her Opposition to the Manifestation and Motion dated 31 March 2005, stating therein the following grounds as to why the Petitioner’s application for a Writ of Preliminary Injunction should be denied, to wit:

that Petitioners failed to establish a right that is entitled to protection by a Writ of Preliminary Injunction

that the trial court did not act with grave abuse of discretion when it assumed jurisdiction over the case and issued the October 18, 2004 and Januray 18, 2005 Orders;

that the Petitioners still have the statutory remedy of appeal

that there will be no irreparable injury to Private Respondents.

The Court of Appeals, in a Resolution dated 18 April 2005, granted the Writ of Preliminary Injunction, in order not to render ineffectual the final resolution that may be arrived at by said Court.

On 20 July 2005, the Court of Appeals promulgated its Decision in CA-G.R. SP No. 88422. The Court found that respondent judge did not commit grave abuse of discretion in issuing the assailed Order dated 18 October 2004, and thus remanded the case to the court a quo for further proceedings. The Court of Appeals ratiocinated that under the Interim Rules, a Motion to dismiss is a prohibited pleading, and a preliminary hearing on the grounds therefore alleged as defenses in a defendant’s answer would be a convenient way to circumvent this explicit prohibition under the Interim Rules. The Court further stated that while grounds for a motion to dismiss under the Rules of Court may be included as defenses in a defendant’s answer, the Interim rules, unlike the Rules of Court, does not provide that a preliminary hearing may be had thereon. With the conduct of a preliminary hearing not being a matter of right but rather subject to the discretion of the court, respondent judge had no duty to conduct a preliminary hearing on petitioners’ ground for dismissal.

Proceedings before the Supreme Court

Prior to the Court of Appeal’s promulgation of its Decision, Koruga filed a Petition for Certiorari and Prohibition dated 20 June 2005 and docketed as SC G.R. No. 168332. Koruga alleged that the Court of Appeals gravely abused its discretion when it issued the Writ of Preliminary Injunction, without factual or legal basis, because:

the Court of Appeals effectively arrogated unto itself the authority to determine the merits of Private Respondent’s Grounds for Dismissal in obvious disregard of the trial court’s original and exclusive jurisdiction over the issues;

It issued the assailed Resolution despite the fact that the Petition filed by the Private Respondents was fatally flawed, as an order denying a motion to dismiss being interlocutory and is not subject to appeal and is immune to an extraordinary petition for certiorari;
It issued the 18 April 2005 Order without stating the right to be protected, even if Private Respondents did not show or prove the existence of a right which may be protected by injunctive relief.

Arcenas, Aguirre, Paguio, and Rivera filed their Comment on the Petition dated 17 August 2005.

Banzon and Montano filed their Comment dated 27 January 2006, averring that Koruga’s petition is now moot and academic in view of the Court of Appeal’s Decision in CA-G.R. SP No. 88422 which dissolved the writ of preliminary injunction.

Koruga filed her Reply (to the Comment of Banzon and Montano) dated 20 June 2006.

Arcenas, Aguirre, Paguio and Rivera filed before the Supreme Court their Petition for Review on Certiorari dated 12 August 2005 and docketed as S.C. GR No. 169053, which assailed the 20 July 2005 Decision of the Court of Appeals. They alleged that such Decision constitutes a denial of due process when the Court of Appeals did not find grave abuse of discretion on the part of the trial court in: (a) exercising jurisdiction by simply refusing to resolve clearly valid objections thereto; (b) not dismissing the case on grounds of litis pendentia and forum shopping; (c) finding that the case below is not a harassment/nuisance suit, without any discussion whatsoever of the reasons for such finding.

Koruga filed her Comment with Ad Cautelam Motion for Time to File Extended Comment dated 17 August 2005.

Koruga filed her Extended Comment dated 19 December 2005.

Banzon and Montano filed their Opposition to Extended Comment dated 20 January 2006.

Koruga filed a Manifestation and Motion for Consolidation of SC GR No. 168332 and SC GR No. 169053 dated 24 August 2005. In a Resolution dated 26 September 2005, the Supreme Court ordered said consolidation.

Arcenas, Aguirre, Paguio, and Rivera filed their Motion for Resolution (of the Application for Temporary Restraining Order And/Or Writ of Preliminary Injunction) dated 8 March 2006. They averred that the need for such resolution of their application for a TRO and/or writ of preliminary injunction is grounded on the trial court’s Order dated 25 August 2005 wherein it signified its intention to proceed with the case if there is no Order or Resolution from the Supreme Court barring it from doing so.

The Supreme Court, thru a Resolution dated 13 March 2006, issued a Temporary Restraining Order (TRO), commanding the RTC Presiding Judge to desist from proceeding with the hearing of Civil Case No. 03-985.

Koruga filed a Motion to Lift Temporary Restraining Order dated 3 May 2006, stating therein that there is no basis for the issuance of the TRO, as there was no material allegation of irreparable injury or a bank run or damages in the amount of Php 1.4 billion.

Arcenas, et al. filed their Opposition (to Motion to Lift Temporary Restraining Order) dated 22 June 2006.

On 5 July 2006, the Supreme Court, in a Resolution, denied Koruga’s Motion to Lift Temporary Restraining Order.

In a Resolution dated 6 September 2006, the Supreme Court directed all parties to submit their respective Memoranda. Arcenas, et al. filed their Memorandum dated 5 December 2006. Koruga filed her Memorandum dated 14 December 2006. Banzon and Montano filed their Memorandum dated 12 January 2007.

On 19 June 2009, the Supreme Court promulgated its Decision and held that Koruga’s Petition in GR No. 168332 has become moot and academic, as the assailed writ of preliminary injunction issued by the Court of Appeals on 18 April 2005, had effectively been dissolved by the Court of Appeal in its Decision promulgated on 20 July 2005. The Supreme Court also found that the BSP has jurisdiction over the case, as the acts complained of relate to the conduct of the banking business of Banco Filipino. The Supreme Court recognized that it is the BSP delegated by the Government with the task of ensuring that the financial interests of those who deal with banks and banking institutions, as depositors or otherwise, are amply protected. Citing the charter of the BSP, the Supreme Court stated that the BSP is the instrumentality of the government authorized to administer the monetary, banking, and credit system of the Philippines. The Decision also noted that the BSP is empowered to undertake the necessary actions against any banking institution if its continued operation would cause prejudice to its depositors, creditors, or the general public. In consequence, the Supreme Court set aside the Decision of the Court of Appeals dated 20 July 2005 in CA-G.R. SP No. 88422, made permanent the Temporary Restraining Order issued on 13 March 2006, and dismissed Civil Case No. 03-985 pending before the Regional Trial Court of Makati City.

Koruga filed a Motion for Reconsideration and Motion to Inhibit dated 28 July 2009, grounded on the argument that the RTC has jurisdiction as the case involves an intra-corporate controversy. Koruga moved that the ponente inhibit himself, given his close relationship with Amelita Villarosa, a Banco Filipino Officer.

Arcenas, et al. filed their Comment on Ana Maria A. Koruga’s Motion for Reconsideration dated 26 October 2009.

Banzon, Montano and Abad filed their Comment on the Motion for Reconsideration dated 3 November 2009

Thru a Resolution dated 18 November 2009, the Supreme Court denied Koruga’s motion.

On 19 June 2009, Entry of Judgment was made.

Wednesday, September 21, 2011

The Texas Ratio of Select Philippine Banks

The Texas Ratio is a measure of a bank's credit problems. The higher the Texas ratio, the more severe the bank's credit troubles. The Texas Ratio was developed by Gerald Cassidy and other analysts at RBC Capital Markets as an early warning system to identify potential problem banks. According to Investopedia.com, it was originally applied to banks in Texas in the 1980s. Mr. Cassidy noticed that when problem assets grew to more than 100% of capital, most of the Texas banks in that precarious position ended up going under. A similar pattern occurred in the New England banking sector during the recession of the early 1990s.

The Texas Ratio is calculated by dividing the bank's distressed assets (Non-performing Loans + Acquired Real Estate, plus Deferred Charges such as unbooked losses) by the sum of its tangible common equity capital and allowances for impairment and credit losses.

Tangible common equity is the subset of shareholders' equity that strips out preferred shares or other forms of hybrid equity capital as well as goodwill or other intangible assets. It measures a company's financial strength because it indicates how much equity the common stockholders would have left in the event of a company's liquidation. A bank's tangible common equity plus its allowances for impairment and credit losses indicates the size of the bank's capital cushion, or its ability to absorb losses. Banks tended to fail when their Texas Ratio reached 1:1; or 100% of the bank's capital cushion.

The following table indicates the Texas Ratio for selected Philippine banks using the figures indicated in their audited financial statements as of December 31, 2010. The exceptions to this are Asiatrust Development Bank, whose last published audited financial statement was as of June 30, 2009, and Bank of Commerce, Land Bank of the Philippines, and Philippine Veterans Bank, whose last published audited financial statements were as of December 31, 2009.

Bank	Texas Ratio
Philippine Bank of Communications	14.99
Export and Industry Bank	8.84
United Coconut Planters Bank	5.53
Planters Development Bank	2.98
Asiatrust Development Bank	2.51
Bank of Commerce	1.13
Rizal Commercial Banking Corporation	1.09
Philippine Veterans Bank	1.01
Philippine National Bank	0.70
Union Bank of the Philippines	0.70
Security Bank Corporation	0.69
Allied Banking Corporation	0.65
Asia United Bank	0.63
Rural Bank of Makati	0.58
Metropolitan Bank and Trust Company	0.54
BDO Unibank, Inc.	0.44
Development Bank of the Philippines	0.39
Bank of the Philippine Islands	0.36
Land Bank of the Philippines	0.34
Philippine Trust Company	0.34
Philippine Savings Bank	0.23
China Banking Corporation	0.20
Citystate Savings Bank	0.09

As indicated in the table above, eight banks have a Texas Ratio greater than 1:1. Of these, five banks have Texas Ratios greater than 2:1. The top three banks on the above list have Texas Ratios greater than 5:1, which indicates extremely severe credit problems at these banks.

Recent Developments

Bank of Commerce:

In May 2009, San Miguel Corporation's property arm and retirement fund have acquired a 51% stake in Bank of Commerce with an additional equity infusion of PHP 2 billion. As of December 31, 2010, Bank of Commerce's Capital Funds was increased to PHP 12.5 billion from PHP 6.7 billion in year-end 2009.

Export and Industry Bank (EIB):

On July 30, 2010, the board of Export and Industry Bank (EIB)approved the sale of all EIB's bank assets to Banco De Oro Unibank, Inc. As of April 13, 2011, PDIC gave its approval for the transaction.

Philippine Bank of Communications:

On July 27, 2011, the group of Roberto Ongpin acquired a 97.28% stake in Philippine Bank of Communications from the Chung, Luy, and Nubla families for PHP 4.68 billion.

Disclaimer:

This list only serves as a screening guide. It is not a definitive guide and must be taken in the context of other factors. Readers are suggested to make their own investigations and verify the figures presented. Both BSP and PDIC have their own problem bank screening systems that are much more sophisticated in scope and design, given that they have more access to information over the banks they regulate.

Monday, September 12, 2011

LBC Development Bank bites the dust, Are there other LBC's out there waiting to implode?

Background

Last Friday, September 9, 2011, the Monetary Board ordered the Araneta -controlled LBC Development Bank (LBC Bank) to be closed and placed under receivership of the Philippine Deposit Insurance Corporation. According to the BSP, LBC Bank was insolvent, it had unsustainable operations that were detrimental to depositors and creditors, and it violated a cease and desist order on unsafe and unsound practices. Around 320,000 depositors were affected, some of whom were the relatives of OFWs who were in the process of receiving much-needed remittances from their loved ones abroad. This happened in less than six months after Banco Filipino's spectacular failure in March 2011.

The Philippine Deposit Insurance Corporation (PDIC) advised consumers to wisely choose the banks where they will deposit their money. The trouble is, most depositors don't and can't read financial statements before they open a bank account. The regulators, whose job is to safeguard the public's money, have a problem bank list that they do not divulge to the public, for fear of sparking another bank run. So who can the public turn to, to advise them where to put their money? No one, except the banks themselves who will always promote their self-interests. This analysis is an attempt to fill in that knowledge gap, by screening out the weaker banks that seem ready to implode at any given moment.

LBC Development Bank

LBC Bank bears many similarities to Banco Filipino. Initial media reports indicated that LBC Bank offered relatively high interest rates to depositors.

LBC's audited financial statements are unavailable. They are not on the BSP website and LBC Bank's own website http://www.lbcbank.com.ph has been taken down

A quick perusal of its December 2010 published statement of condition on the BSP website indicates that, like Banco Filipino, it had a very high proportion of illiquid assets (http://www.bsp.gov.ph/banking/psoc_tb/LBC%20DB.htm). Over 50 percent of its asset base consisted of assets that are not relevant to banking operations, namely, acquired real estate (PHP 167.39 million), and a whopping PHP 3.2 billion in other assets. The “other assets” bucket can be comprised of many things such as goodwill, deferred tax assets, or even unbooked losses. In other words, around PHP 3.3 billion of LBC's PHP 6.4 billion in assets was in non-earning assets.

You could argue that acquired real estate can be sold and, if acquired some time ago, can be sold at a profit. But selling real estate is not the bank's business, making money on loans is. The high proportion on non-earning assets on LBC Bank's books show that LBC Bank's ability to make money through loans was severely hampered. Another problem associated with holding such assets is liquidity. If the bank has liquidity problems, it will be often forced to sell assets and quickly. A quick sale of real estate often means a big discount, and if the real estate is sold below book value, the bank will incur a loss and the loss will eat into the bank's capital. Other assets such as goodwill, which often reflects the premium a company pays to buy the equity of another company, can be impaired if the acquired company's economic prospects are diminished. Deferred tax assets, which appear on a company's books due to losses in previous years, may have to be written down if it becomes clear that the company will not make enough future taxable profit to utilize the tax loss. Other assets, just as in Banco Filipino's case, can also consist of unbooked losses. If this is the case, then the value of those assets is plainly zero.

Moreover, LBC Bank's non-earning assets of PHP 3.3 billion is roughly six times the bank's equity of PHP 550 million. A 10 percent drop in the value of those non-earning assets will reduce the value of the bank's equity by 60%. A 20 percent drop in the value of its non-earning assets will more than wipe out the value of the bank's equity.

In 2009, LBC Bank was already in roughly the same financial condition. In 2009, LBC Bank already had a high proportion of its asset base in non-earning assets - PHP 2.5 billion in non-earning assets out of a total asset base of PHP 5.5 billion and these non-earning assets were already almost five times its equity base of PHP 539 million.

Given this scenario, LBC Bank had already been a zombie bank, neither living nor dead. Its large non-earning assets severely limited its ability to make loans and money. But through the use of relatively high interest rates, it was able to attract enough deposits (deposit growth of PHP 961 million in 2010) to keep alive for another year.

List of Local Philippine Banks with a High % of Non-Earning Assets to Total Assets As of December 2010
Bank	Total Assets (In PHP Millions)	Non-Earning Assets (In PHP Millions)*	Total Stockholders' Equity (In PHP Millions)	Non-Earning Assets/ Total Assets (In %)**
Bank of Calape	12	9	6	75%
LBC Development Bank	6,391	3,323	548	52%
Export and Industry Bank***	31,003	15,225	1,410	49%
Inter-Asia Development Bank	88	32	3	36%
The Palawan Bank	287	93	10	32%
Pridestar Development Bank	123	34	66	27%
GSIS Family Bank	3,575	833	690	23%
Sampaguita SLA, Inc.	118	27	60	23%
Philippine Bank of Communications****	43,802	10,080	4,777	23%
Opportunity Microfinance Bank	484	98	119	20%

List of Local Philippine Banks with a High % of Non-Earning Assets to Total Stockholders Equity As of December 2010
Bank	Total Assets (In PHP Millions)	Non-Earning Assets (In PHP Millions)*	Total Stockholders' Equity (In PHP Millions)	Non-Earning Assets/ Total Stockholders' Equity (In %)**
Legaspi Savings Bank	1,912	335	26	1291%
Export and Industry Bank***	31,003	15,225	1,410	1080%
Inter-Asia Development Bank	88	32	3	1066%
The Palawan Bank	287	93	10	914%
LBC Development Bank	6,391	3,323	548	606%
Philippine Bank of Communications****	43,802	10,080	4,777	211%
United Coconut Planters Bank	179,470	28,684	14,244	201%
Planters Development Bank	50,755	6,702	3,706	181%
Bank of Calape	12	9	6	160%
Hiyas Savings and Loan Bank	1,237	204	141	144%
Equicom SB	3,998	486	399	122%
GSIS Family Bank	3,575	833	690	121%
Philippine National Bank	299,787	32,290	30,773	105%

List of Local Philippine Banks with both High Non-Earning Assets as a % of Total Assets and Total Stockholders Equity As of December 2010
Bank	Total Assets (In PHP Millions)	Non-Earning Assets (In PHP Millions)*	Total Stockholders' Equity (In PHP Millions)
Philippine Bank of Communications**	43,802	10,080	4,777
Export and Industry Bank***	31,003	15,225	1,410
Bank of Calape	12	9	6
LBC Development Bank	6,391	3,323	548
GSIS Family Bank	3,575	833	690
The Palawan Bank	287	93	10
Inter-Asia Development Bank	88	32	3

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