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Jose Velarde business unfinished
(Article published in the March 12, 2001 issue of TODAY, Business Section)

People Power 2 did not end the saga of the Jose Velarde investment management account with Equitable PCI Bank. Depending on how the interested parties play their cards in the coming days, the Php 500,000,000 investment portfolio could end up with the government, with Mr. Estrada. It could vanish into thin air, even.

The known dramatis personae of the unfolding drama are Joseph Ejercito Estrada, who signed the account documents as "Jose Velarde"; William Gatchalian, owner of Wellex Group, Inc., said beneficiary of the account on Erap’s directive; and the Philippine Government, which by now must have subjected the account to constructive distraint. It had previously immobilized Erap’s account with Citibank before its forfeiture as ill-gotten wealth.

The active ingredient that binds these elements is the nature of the investment management account. As stated by Kissa Ocampo, on interpellation by then Senator-Judge Juan Ponce Enrile, the account is not a trust, but instead, an agency. It is governed by the terms and conditions of instrument establishing the relationship, and, by the Civil Code provisions on Agency (Arts. 1868 to 1932).


The $572-million question

Kissa Ocampo testified that, as of the second day of her testimony (02 January 2001), the loan was still outstanding but the interest was updated. Mr. Gatchalian, or properly, Wellex Group, Inc., may, at this time, be tempted not to pay the principal on time. After all, who will complain?

If Erap instructed the Bank to collect, then he would be confirming Kissa Ocampo’s testimony that Jose Velarde and Joseph Ejercito Estrada are one and the same. This would then confirm that he owns the combo savings/current account, also in Equitable PCI Bank, in the name of Jose Velarde.

Since the account balance, amounting to more than Php 572 million as of end of 1999 and grossly disproportionate to his legitimate income, was not reflected in the Statement of Assets and Liabilities filed in the year 2000, Erap would be handing Ombudsman Aniano Desierto his first class ticket to a place in history.

So, let us assume, purely for academic discussion, that Wellex Group, Inc. has not paid, or if not due, will not pay back the money lent on maturity date. What is Equitable PCI Bank, the investment manager, to do?

The sample investment management form (Appendix 24, Manual of Regulations for Banks) which presumably was the model for the agreement signed by the former President, grants the investment manager the power "to collect and receive matured securities, dividends, profits, interest and all other sums accruing to or due to the Portfolio".

In truth, although the agreement calls it a power, collection of the amount due is a duty since Article 1887 of the Civil Code mandates that "in the execution of the agency, the agent shall act in accordance with the instructions of the principal".

Neither a borrower nor lender be

This the Bank complied with when it lent the money to Wellex upon the written instructions of Erap when he opened the account. But Article 1887 further provides that "in default thereof [instructions of the principal], he shall do all that a good father of a family would do, as required by the nature of the business". Obviously, to collect a loan when due is what a good father of the family would do. Lacking instructions for an extension of the time to pay (known as a roll-over in the fund management industry), the prudent thing to do is to enforce collection.

This may be done judicially, by filing a collection case in court, or, extra-judicially, by foreclosing on the security given by Mr. Gatchalian to secure the loan. We learn from Kissa that the collateral for the loan granted by the account initially consisted in Waterfront shares and later on Wellex shares. If the shares were given as security by way of pledge, the Bank may foreclose on the shares and have them sold at public auction, in accordance with Articles 2112 to 2114 of the Civil Code.

An important matter to remember, however, is that, in accordance with Article 2115, the foreclosure sale of the shares will extinguish the obligation to pay the loan, whether or not the proceeds of the sale are more or less than the amount due, plus interest and expenses. If instead of a pledge, a chattel mortgage was constituted on the shares, the bank may still go after the deficiency in case the proceeds of the foreclosure sale are less than the amounts due.

To collect or not to collect

Instead of an extrajudicial foreclosure, the Bank may also opt to file a collection suit against the borrower. In effect, by so doing, it will relinquishing its security lien on the shares. However, its hold on the shares may be immediately restored if the Bank, at the time it files a collection suit, is able to successfully convince the court to issue a writ of attachment on the shares given as collateral (and more besides, if the value of the shares are not enough to pay off the obligation) as security for any judgment that may be rendered in its favor.

But what if Mr. William Gatchalian were to be able to prove that Mr. Joseph Ejercito Estrada in fact also owed money (of the same amount as that lent by the Jose Velarde investment management account) to the Wellex Group, Inc?

For discussion purposes, what if Erap did go to Mr. Gatchalian (as he could very well do per Article 1924, "the agency is revoked if the principal directly manages the business entrusted to the agent, dealing directly with third persons") and generated an obligation to Wellex equivalent to the amount due to the investment management account.

The Government would find itself holding an empty bag with respect to Erap’s accounts in Equitable PCI Bank. Compensation or set-off would take place by operation of law, resulting in the extinguishment of Wellex Group Inc.’s obligation to pay back the Php 500- million lent by the investment management account. The Waterfront shares and the Wellex shares, given in addition, would have to be returned to Mr. Gatchalian.

As for the combo account, we know by now (as a result of the opening of the second envelope) that as of November 13, 2000, it had a zero balance.

Constructive distraint

So, what was the use (assuming there was) of the constructive distraint of the funds in the Jose Velarde investment management account? According to the National Internal Revenue Code, "the constructive distraint of personal property shall be effected by requiring the taxpayer or any person having possession or control of such property to sign a receipt covering the property distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the same in any manner whatever, without the express authority of the Commissioner".

Note that it binds the person having control of the property distrained. That the writ of constructive distraint was served (if it was served) on Equitable PCI Bank is proof that, in the mind of the Government, the person having control of property distrained is the bank. Hence, it will not in any way be limiting the acts of Erap and his friend, William.

What seems called for appears to be an immediate filing by the government of a forfeiture case on the Jose Velarde investment management account for being ill-gotten wealth under Republic Act No. 1379. If successful, this case would bar the set-off that Erap and his friend may be tempted to pull off, since a constructive trust, which by nature retroacts to the date the funds were illegally acquired, is impressed on all ill-gotten property, thereby negating the proposition that the parties to the obligation sought to be set-off are mutual creditors and debtors to each other.

So sue who?

As for Equitable PCI Bank, the sooner it brings the uncollected debt to court, the better for it. For once placed in custodia legis, persons claiming any right to the portfolio or its investments must present themselves to the court and press their suit in the light of day.

It can sit back and relax as the parties fight it out, and may even have the good fortune of watching Jaime Dichaves, who had asked the Bank to course through him all the other bank transactions of Jose Velarde, squirm at the prospect of having to explain why he claimed to be Jose Velarde. That could soothe to some extent the pain that Jaime Dechaves had heretofore inflicted on it.