CRED TRANS Digest Pool | Atty.

Sarona SY 2015-2016

I.
II.

sssaaafffddddPART I: CONCEPT OF
CREDIT TRANSACTIONS

the agreement is not for a price certain.

PART II: LOAN (Articles 1933 1961)

ISSUE: Whether or not the contractual

relationship between Pajuyo and Guevarra
was that of a commodatum.

Concept
Commodatum
PAJUYO VS. CA

FACTS: In June 1979, petitioner Pajuyo paid

P400 to a certain Perez for the rights over a
250-square meter lot in Quezon City. Pajuyo
then constructed a house on the lot and he and
his family lived in the house from 1979 to 1985.
On 8 December 1985, Pajuyo and private
respondent Guevarra executed a Kasunduan
or agreement. Pajuyo, as owner of the house,
allowed Guevarra to live in the house for free
provided Guevarra would maintain the
cleanliness and orderliness of the house.
Guevarra promised that he would voluntarily
vacate the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra
of his need of the house and demanded that
Guevarra vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against
Guevarra with the MTC.
Guevarra claimed that Pajuyo had no valid title
or right of possession over the lot because the
lot is within the 150 hectares set aside by
Proclamation No. 137 for socialized housing.
Guevarra pointed out that from December
1985 to September 1994, Pajuyo did not show
up or communicate with him. Guevarra insisted
that neither he nor Pajuyo has valid title to the
lot (both were squatters).

HELD: No. In a contract of commodatum, one

of the parties delivers to another something not
consumable so that the latter may use the
same for a certain time and return it.
Essential features of commodatum:
it is gratuitous.
the use of the thing belonging to
another is for a certain period
Thus, the bailor cannot demand the return of
the thing loaned until after expiration of the
period stipulated, or after accomplishment of
the use for which the commodatum is
constituted.
If the bailor should have urgent need of the
thing, he may demand its return for temporary
use. If the use of the thing is merely tolerated
by the bailor, he can demand the return of the
thing at will, in which case the contractual
relation is called a precarium, which is a kind of
commodatum.
The
Kasunduan
reveals
that
the
accommodation accorded by Pajuyo to
Guevarra was not essentially gratuitous.
While the Kasunduan did not require Guevarra
to pay rent, it obligated him to maintain the
property in good condition. The imposition of
this obligation makes the Kasunduan a
contract different from a commodatum.

MTC rendered its decision in favor of Pajuyo.

Pajuyo allowed Guevarra to use the house
only by tolerance. Thus, Guevarras refusal to
vacate the house on Pajuyos demand made
Guevarras continued possession of the house
illegal. RTC affirmed the MTC decision in toto.

The effects of the Kasunduan are also different

from that of a commodatum. Case law on
ejectment has treated relationship based on
tolerance as one that is akin to a landlordtenant relationship where the withdrawal of
permission would result in the termination of
the lease. The tenants withholding of the
property would then be unlawful.

CA reversed the MTC and RTC rulings and

declared that Pajuyo and Guevarra illegally
occupied the contested lot which the
government owned. CA also declared that
Pajuyo and Guevarra are in pari delicto or in
equal fault. Moreover, the Kasunduan is not a
lease contract but a commodatum because

Even assuming that the relationship

between Pajuyo and Guevarra is one of
commodatum, Guevarra as bailee would
still have the duty to turn over possession
of the property to Pajuyo, the bailor. The
obligation to deliver or to return the thing
received attaches to contracts for safekeeping,

or contracts of commission, administration and

commodatum.

Doronilla issued 3 postdated checks, all of

which were dishonored.

Guevarra
freely
entered
into
the
Kasunduan. Guevarra cannot now impugn
the Kasunduan after he had benefited from
it. The Kasunduan binds Guevarra.

Vives received a letter from Doronilla assuring

him that his money was intact and would be
returned to him. Doronilla issued a postdated
check for P212k in favor of Vives. However,
upon presentment to the drawee bank, the
check was dishonored. Doronilla requested
Vives to present the same check on a later
date but it was again dishonored.

The Kasunduan is not void for purposes of

determining who between Pajuyo and
Guevarra has a right to
physical
possession of the contested property. The
Kasunduan is the undeniable evidence of
Guevarras recognition of Pajuyos better right
of physical possession. Guevarra is clearly a
possessor in bad faith. The absence of a
contract would not yield a different result, as
there would still be an implied promise to
vacate.
PRODUCERS BANK VS. CA
FACTS: Sometime in 1979, private respondent
Vives was asked by his neighbor and friend
Sanchez to help her friend, Col. Doronilla, in
incorporating his business (Sterela). Sanchez
asked Vives to deposit in a bank a certain
amount of money in the bank account of
Sterela for purposes of its incorporation. She
assured Vives that he could withdraw his
money from said account within a months time.
Vives, Sanchez, Doronilla and a certain
Dumagpi, Doronillas private secretary, met and
discussed the matter. Relying on the
assurances and representations of Sanchez
and Doronilla, Vives issued a check in the
amount of P200k in favor of Sterela which was
subsequently deposited under Sterela's
account.
Subsequently, Vives learned that Sterela was
no longer holding office in the address
previously given to him. He went to the Bank to
verify if their money was still intact. Atienza,
the assistant manager, informed them that part
of the money had been withdrawn by Doronilla,
and that only P90k remained therein. He
likewise told them that they could not withdraw
the remaining amount because it had to
answer for some postdated checks issued by
Doronilla.
Sterela, through Doronilla, obtained a loan of
P175k from the Bank. To cover payment,

Vives referred the matter to a lawyer, who

made a written demand upon Doronilla for the
return of his clients money. Doronilla issued
another check but was again dishonored for
insufficiency of funds.
Vives instituted an action for recovery of sum
of money in the RTC against Doronilla,
Sanchez, Dumagpi and Producers Bank. He
also filed criminal actions against Doronilla,
Sanchez and Dumagpi in the RTC.
RTC rendered a decision in favor of Vives. CA
affirmed the decision of the RTC in Toto.
Petitioner contends that the transaction
between private respondent and Doronilla is a
simple loan (mutuum) since all the elements of
a mutuum are present: first, what
was
delivered by private respondent to Doronilla
was money, a consumable thing; and second,
the transaction was onerous as Doronilla was
obliged to pay interest, as evidenced by the
check issued by Doronilla in the amount of
P212k, or P12k more than what Vives
deposited in Sterelas bank account.
ISSUE: Whether or not the transaction
between Doronilla and Vives was one of
simple loan or mutuum.
HELD: No, it was a commodatum.
Article 1933 of the Civil Code distinguishes
between the two kinds of loans in this wise:
By the contract of loan, one of the parties
delivers to another, either something not
consumable so that the latter may use the
same for a certain time and return it, in which
case the contract is called a commodatum; or
money or other consumable thing, upon the
condition that the same amount of the same
kind and quality shall be paid, in which case

the contract is simply called a loan or

mutuum.
Commodatum is essentially gratuitous. Simple
loan may be gratuitous or with a stipulation to
pay interest. In commodatum, the bailor retains
the ownership of the thing loaned, while in
simple loan, ownership passes to the borrower.
The foregoing provision seems to imply that if
the subject of the contract is a consumable
thing, such as money, the contract would be a
mutuum. However, there are some instances
where a commodatum may have for its
object a consumable thing.
Article 1936 of the Civil Code provides:
Consumable goods may be the subject of
commodatum if the purpose of the contract is
not the consumption of the object, as when it is
merely for exhibition.
Thus, if consumable goods are loaned only for
purposes of exhibition, or when the intention of
the parties is to lend consumable goods and
to have the very same goods returned at
the end of the period agreed upon, the loan
is a commodatum and not a mutuum.
The rule is that the intention of the parties
thereto
shall
be
accorded
primordial
consideration in determining the actual
character of a contract. The evidence shows
that Vives agreed to deposit his money in the
savings account of Sterela for the purpose of
making it appear that said firm had sufficient
capitalization for incorporation, with the
promise that the amount shall be returned
within 30 days.
Vives merely accommodated Doronilla by
lending his money without consideration, as a
favor to Sanchez. It was however clear to the
parties to the transaction that the money would
not be removed from Sterelas savings account
and would be returned to Vives after 30 days.
Doronillas attempts to return the amount
did not convert the transaction from a
commodatum into a mutuum because such
was not the intent of the parties and
because the additional P12k corresponds
to the fruits of the lending of the P200k.

Article 1935 of the Civil Code expressly states

that the bailee in commodatum acquires the

use of the thing loaned but not its fruits.
Hence, it was only proper for Doronilla to
remit the interest.
Neither does the Court agree with petitioners
contention that it is not solidarily liable for the
return of private respondents money
because it was not privy to the transaction
between Doronilla and Vives.
Under Article 2180 of the Civil Code,
employers shall be held primarily and
solidarily liable for damages caused by their
employees acting within the scope of their
assigned tasks.
Atienzas acts of helping Doronilla, a
customer of the petitioner, were obviously
done in furtherance of petitioners interests. It
was established that the transfer of funds
from Sterelas savings account to its current
account could not have been accomplished
by Doronilla without the invaluable
assistance of Atienza, and that it was their
connivance which was the cause of private
respondents loss.

Under Article 2180 of the Civil Code, petitioner

is liable for private respondents loss and is
solidarily liable with Doronilla and Dumagpi for
the return of the P200k since it is clear that
petitioner failed to prove that it exercised due
diligence to prevent the unauthorized
withdrawals from Sterela's savings account.

MINA VS. PASCUAL

FACTS: Francisco Fontanilla and Andres
Fontanilla were brothers. Francisco acquired a
lot in Laoag, the property having been awarded
to him through its purchase at a public auction.
Andres, with the consent of his brother
Francisco, erected a warehouse on a part of
the said lot.
Francisco, the former owner of the lot, being
dead, the plaintiffs, Alejandro Mina, et al., were
recognized as his heirs. Andres, the former
owner of the warehouse, also having died, the
children of Ruperta Pascual were recognized
(though it is not said how) and consequently
are entitled to the said building.
The plaintiffs and the defendants are the
owners of the warehouse, while the plaintiffs

are undoubtedly, the owners of the part of the

lot occupied by that building, as well as of the
remainder thereof.
This was the state of affairs when on May 6,
1909, Ruperta Pascual, as the guardian of her
minor children (defendants), petitioned the CFI
for authorization to sell "the 6/7 of the one-half
of the warehouse, of 14 by 11 meters, together
with its lot."
The plaintiffs opposed the petition of Ruperta
Pascual for the reason that the latter had
included the lot occupied by the warehouse,
which they claimed was their exclusive
property.
The plaintiffs requested the court to decide the
question of the ownership of the lot before it
pass upon the petition for the sale of the
warehouse. But the court before determining
the matter of the ownership of the lot occupied
by the warehouse, ordered the sale of the
building.
The warehouse, together with the lot, was sold
to Cu Joco (P2890) at a public auction.
The plaintiffs insisted upon a decision of the
question of the ownership of the lot, and the
court decided it by holding that the land
belonged to the owner of the warehouse which
had been built thereon thirty years before.
The plaintiffs appealed and this court reversed
the judgment of the lower court and held that
the appellants were the owners of the lot in
question. When the judgment became final
and executory, a writ of execution was issued
and the plaintiffs were given possession of the
lot; but soon thereafter the trial court annulled
this possession for the reason that it affected
Cu Joco, who had not been a party to the suit
in which that writ was served.
It was then that the plaintiffs commenced the
present action for the purpose of having the
sale of the said lot declared null and void and
of no force and effect.
An agreement was had add to the facts, the
ninth paragraph of which is as follows:

9. That the herein plaintiffs excepted to the

judgment and appealed therefrom to the

Supreme Court which found for them by

holding that they are the owners of the lot in
question, although there existed and still
exists a commodatum by virtue of which the
guardianship (meaning the defendants) had
and has the use, and the plaintiffs the
ownership, of the property, with no finding
concerning the decree of the lower court that
ordered the sale.
ISSUE: Whether or not there is a contract of
commodatum.
HELD: No. Although both litigating
parties may have agreed in their idea of
the commodatum, it is not, a question of
fact but of law. The denomination given by
them to the use of the lot granted by
Francisco Fontanilla to his brother, Andres
Fontanilla, is not acceptable.
Contracts are not to be interpreted in
conformity with the name that the parties
thereto agree to give them, but must be
construed, duly considering their constitutive
elements, as they are defined and
denominated by law.

By the contract of loan, one of the parties

delivers to the other, either anything not
perishable, in order that the latter may use
it during the certain period and return it to
the former, in which case it is called
commodatum . . . (art. 1740, Civil Code).
It is, therefore, an essential feature of the
commodatum that the use of the thing
belonging to another shall for a certain
period.
Francisco Fontanilla did not fix any definite
period or time during which Andres Fontanilla
could have the use of the lot whereon the latter
was to erect a stone warehouse of
considerable value, and so it is that for the past
30 years of the lot has been used by both
Andres and his successors in interest.
The present contention of the plaintiffs that Cu
Joco, now in possession of the lot, should pay
rent for it at the rate of P5 a month, would
destroy the theory of the commodatum
sustained by them, since, according to the
second paragraph of the aforecited article
1740,
"commodatum
is
essentially

gratuitous,"
With that expectation in view, it appears more
likely that Francisco intended to allow his
brother Andres a surface right; but this right
supposes the payment of an annual rent, and
Andres had the gratuitous use of the lot.

FELIX DE LOS SANTOS VS AGUSTINA

JARRA (1910 CASE)
FACTS: Felix de los Santos brought suit
against Agusitina Jarra (the administratrix of
the estate of Magdaleno Jimenea, he alleges
that Jimenea borrowed and obtained from the
plaintiff 10 first class carabos, to be used at the
animal power mill of Jimeneas hacienda,
without recompense or remuneration for the
use of it and under the sole condition that they
should be returned to the owner as soon as the
work at the mill was terminated. Jimenea
however, did not return the carabaos even
though de los Santos claimed their return after
the work at the mill was finished.
Jimenea died in 1904 (before the suit) and
Jarra was appointed by the CFI as
administratrix of his estate.
De los Santos presented his claim to the
commissioners of the estate of Jimenea for
return of the carabaos. (for the carabaos to be
exluded from the estate of Jimenea). The
commissioners rejected his claim, and thus a
lawsuit ensued.
Jarra answered and said that it was true that
the late Jimenea asked the plaintiff to loan him
ten carabaos, but that he only
obtained
THREE (3) second-class carabaos, which
were afterwards sold by the Delos Santos to
Jimenea. (Basically Jarra denied all the
allegations in the complaint)

of witnesses that Santos, sent in charge of

various persons, the 10 carabaos requested by
Jimenea (it was revealed that Jimenea is the
father in law of de los Santos). Also, de los
Santos produced 2 letters proving
that
Jimenea received them in the presence of said
persons (brother of Jimenea) who saw the
animals arrive at the hacienda. FOUR of the
carabaos died of rinderpest and thus the
judgment appealed from only deals with 6
carabaos.
THE ALLEGED PURCHASE of 3 carabaos by
Jimenea from his son-in-law Santos is not
evidenced by any trustworthy evidence.
Therefore, it is not true.
From the foregoing, it may be logically inferred
that the carabaos loaned or given on
commodatum to the deceased Jimenea were
ten in number, that 6 survived and that these
carabaos have not been returned to the owner
delos Santos, and lastly, that the 6 carabaos
were not the property of the deceased nor any
of his descendants, it is the duty of the
administratrix to return them or indemnify the
owner for the value.
ISSUE: W/N the contracts is one of a
commodatum.
HELD: YES. The carabaos were given on
commodatum as these were delivered to be
used by defendant. Upon failure of defendant
to return the cattle upon demand, he is under
the obligation to indemnify the plaintiff by
paying him their value. Since the 6 carabaos
were not the property of the deceased or of
any of his descendants, it is the duty of the
administratrix of the estate to either return
them or indemnify the owner thereof of their
value.

The case came up for trial and the court

rendered judgment against Jarra and ordering
her to return to de los Santos 6 second-class
and third class carabaos. The value of which
was 120 each so 720 pesos. Jarra moved for a
new trial on the ground that the findings of fact
were openly and manifestly contrary to the
weight of the evidence.

It was not part of Jimeneas estate. Therefore

Agustina Jarra should exclude it or indemnify
De los Santos for the reasons above set
forth, by which the errors assigned to the
judgment appealed from have been refuted,
and considering that the same is in accordance
with the law and the merits of the case, it is our
opinion that it should be affirmed and we do
hereby affirm it with the costs against
appellant.

The record however, discloses that it has been

fully proven from the testimonies of a number

RATIO: The ratio differentiates a loan from

commodatum. Art 1740. (Old civil code) By the

contract of loan, one of the parties delivers
to the other, either anything not perishable
(in the new civil code its consumable), in
order that the latter may use it during a
certain period and return it to the former, in
which case it is called commodatum, or
money or any other perishable thing, under the
condition to return an equal amount of the
same kind and quality, in which case it is
merely called a loan.
Commodatum is essentially gratuitous.
A simple loan may be gratuitous, or made
under a stipulation to pay interest.
Art 1741. The bailor retains ownership of the
thing loaned the bailee acquires the use
thereof, but not its fruits; if any compensation
is involved, to be paid by the person requiring
the use, the agreement ceases to be a
commodatum.
Art 1742. The obligations and rights which
arise from the commodatum pass to the heirs
of both contracting parties, unless the loan has
been made in consideration for the person of
the bailee, in which case his heirs shall not
have the right to continue using the thing
loaned.
The carabaos delivered to be used were not
returned by Jiminea upon demand. There is no
doubt that Jarra is under the obligation to
indemnify delos Santos.
Article 101. Those who in fulfilling their
obligations are guilty of fraud, negligence or
delay.
The obligation of the bailee or of his
successors to return either the thing loaned or
its value is sustained by the tribunal of Spain,
which said in its decision - (Mentioned
jurisprudence):
legal
doctrine
touching
commodatum as follows:
Although it is true that in a contract of
commodatum the bailor retains the
ownership of thing loaned at the expiration
of the period, or after the use for which it
was loaned has been accomplished, it is
the imperative duty of the bailee to return
the thing itself to its owner, or to pay him
damages if through the fault of the bailee

the thing should have been lost or injured

REPUBLIC OF THE PHILIPPINES VS. JOSE

BAGTAS, FELICIDAD BAGTAS,
ADMINISTRATRIX OF THE INTESTATE
ESTATE LEFT BY JOSE BAGTAS
FACTS: On May 8, 1948, Jose Bagtas
borrowed from the Bureau of Animal Industry 3
bulls for 1 year for breeding purposes, subject
to breeding fee for 10% of the book value of
the bulls. Upon the expiration of the contract,
Bagtas asked for a renewal for another year.
The renewal granted was only for 1 bull.
Bagtas offered to buy the bulls at book value
less depreciation, but the Bureau told him that
he should either return the bulls or pay for their
book value. Bagtas failed to pay the book
value, and so the Republic commenced an
action with the CFI Manila to order the return of
the bulls of the payment of book value.
Felicidad Bagtas, the surviving spouse and
administratrix of the decedents estate, stated
that the 2 bulls have already been returned in
1952, and that the remaining one died of
gunshot during a Huk raid. As regards the two
bulls, is was proven that they were returned
and thus, there is no more obligation on the
part of the appellant. As to the bull not
returned, Felicidad contends that the obligation
is extinguished since the contract is that of a
commodatum and that the loss through
fortuitous event should be borne by the owner.
ISSUE: Whether, depending on the nature of
the contract, the respondent is liable for the
death of the bull
HELD: A contract of commodatum is
essentially gratuitous. If the breeding fee be
considered a compensation, then the contract
would be a lease of the bull. Under article 1671
of the Civil Code the lessee would be subject
to the responsibilities of a possessor in bad
faith, because she had continued possession
of the bull after the expiry of the contract. And
even if the contract be commodatum, still the
appellant is liable, because article 1942 of the
Civil Code provides that a bailee in a contract
of commodatum . . . is liable for loss of the things, even if it
should be through a fortuitous event:
(2) If he keeps it longer than the period
stipulated . . .

(3) If the thing loaned has been

delivered with appraisal of its value,
unless there is a stipulation
exempting
the
bailee
from
responsibility in case of a fortuitous
event.
The loan of one bull was renewed for another
period of one year to end on 8 May 1950. But
the appellant kept and used the bull until
November 1953 when during a Huk raid it was
killed by stray bullets. Furthermore, when lent
and delivered to the deceased husband of the
appellant the bulls had each an appraised
book value. It was not stipulated that in case of
loss of the bull due to fortuitous event the late
husband of the appellant would be exempt
from liability.
Special proceedings for the administration and
settlement of the estate of the deceased Jose
V. Bagtas having been instituted in the Court of
First Instance of Rizal (Q-200), the money
judgment rendered in favor of the appellee
cannot be enforced by means of a writ of
execution but must be presented to
the
probate court for payment by the appellant, the
administratrix appointed by the court.

CATHOLIC VICAR VS. CA

FACTS: 1962: Catholic Vicar Apostolic of the
Mountain Province (Vicar), petitioner, filed with
the court an application for the registration of
title over lots 1, 2, 3 and 4 situated in
Poblacion Central, Benguet, said lots being
used as sites of the Catholic Church, building,
convents, high school building, school
gymnasium, dormitories, social hall and
stonewalls.
1963: Heirs of Juan Valdez and Heirs of
Egmidio Octaviano claimed that they have
ownership over lots 1, 2 and 3. (2 separate civil
cases)
1965: The land registration court confirmed the
registrable title of Vicar to lots 1, 2, 3 and 4.
Upon appeal by the private respondents
(heirs), the decision of the lower court was
reversed. Title for lots 2 and 3 were cancelled.

VICAR filed with the Supreme Court a petition for

review on certiorari of the decision of the Court of
Appeals dismissing his application for

registration of Lots 2 and 3.

During trial, the Heirs of Octaviano
presented one (1) witness, who testified on
the alleged ownership of the land in question
(Lot 3) by their predecessor-in-interest,
Egmidio Octaviano; his written demand to
Vicar for the return of the land to them; and
the reasonable rentals for the use of the land
at P10,000 per month.
On the other hand, Vicar presented the
Register of Deeds for the Province of
Benguet, Atty. Sison, who testified that the
land in question is not covered by any title in
the name of Egmidio Octaviano or any of the
heirs. Vicar dispensed with the testimony of
Mons. Brasseur when the heirs admitted that
the witness if called to the witness stand,
would testify that Vicar has been in
possession of Lot 3, for 75 years
continuously and peacefully and has
constructed permanent structures thereon.
ISSUE: WON Vicar had been in possession
of lots 2 and 3 merely as bailee borrower in
commodatum, a gratuitous loan for use.

HELD: YES. Private respondents were able to

prove that their predecessors' house was
borrowed by petitioner Vicar after the church
and the convent were destroyed. They never
asked for the return of the house, but when
they allowed its free use, they became bailors
in commodatum and the petitioner the bailee.
The bailees' failure to return the subject matter
of commodatum to the bailor did not mean
adverse possession on the part of
the
borrower. The bailee held in trust the property
subject matter of commodatum. The adverse
claim of petitioner came only in 1951 when it
declared the lots for taxation purposes. The
action of petitioner Vicar by such adverse claim
could not ripen into title by way of ordinary
acquisitive prescription because of the
absence of just title.
The Court of Appeals found that petitioner
Vicar did not meet the requirement of 30 years
possession for acquisitive prescription over
Lots 2 and 3. Neither did it satisfy the
requirement of 10 years possession for
ordinary acquisitive prescription because of the
absence of just title. The appellate court did
not believe the findings of the trial court that

Lot 2 was acquired from Juan Valdez by

purchase and Lot 3 was acquired also by
purchase from Egmidio Octaviano by petitioner
Vicar because there was absolutely no
documentary evidence to support the same
and the alleged purchases were never
mentioned in the application for registration.

MARGARITA QUINTOS and ANGEL A.

ANSALDO vs. BECK
FACTS: BECK was a tenant of the Quintos
and as such occupied the latter's house on M.
H. del Pilar street, No. 1175. On January 14,
1936, upon the novation of the contract of
lease between them, the former gratuitously
granted to the latter the use of the furniture
subject to the condition that the BECK would
return them to the Quintos upon the latter's
demand. Quintos sold the property to Maria
Lopez and Rosario Lopez and on September
14, 1936, these three notified BECK of the
conveyance, giving him sixty days to vacate
the premises under one of the clauses of the
contract of lease. There after Quintos required
BECK to return all the furniture transferred to
him for them in the house where they were
found.
On November 5, 1936, BECK, through another
person, wrote to Quintos reiterating that she
may call for the furniture in the ground floor of
the house. On the 7th of the same month, he
wrote another letter to Quintos informing her
that he could not give up the three gas heaters
and the four electric lamps because he would
use them until the 15th of the same month
when the lease in due to expire. Quintos
refused to get the furniture in view of the fact
that BECK had declined to make delivery of all
of them. On November 15th, before vacating
the house, the BECK deposited with the Sheriff
all the furniture belonging to Quintos and they
are now on deposit in the warehouse situated
at No. 1521, Rizal Avenue, in the custody of
the said sheriff.
ISSUE 1: WON BECK complied with his
obligation to return the furniture upon the
Quintos demand. NO.
HELD 1: The contract entered into between
the parties is one of commadatum, because

under it Quintos gratuitously granted the use of

the furniture to BECK, reserving for herself the
ownership thereof; by this contract he bound
himself to return the furniture to Quintos, upon
the latters demand (clause 7 of the contract,
Exhibit A; articles 1740, paragraph 1, and 1741
of the Civil Code). The obligation voluntarily
assumed by BECK to return the furniture upon
demand, means that he should return all of
them to Quintos at the latter's residence or
house. BECK did not comply with this
obligation when he merely placed them at the
disposal of the Quintos, retaining for his benefit
the three gas heaters and the four eletric
lamps. The provisions of article 1169 of the
Civil Code cited by counsel for the parties are
not squarely applicable. The trial court,
therefore, erred when it came to the legal
conclusion that the Quintos failed to comply
with her obligation to get the furniture when
they were offered to her.
ISSUE 2: WON Quintos is bound to bear the
deposit fees. NO.
HELD 2: As BECK had voluntarily undertaken
to return all the furniture to the Quintos, upon
the latter's demand, the Court could not legally
compel her to bear the expenses occasioned
by the deposit of the furniture at the BECK's
behest. The latter, as bailee, was not entitled
to place the furniture on deposit; nor was
Quintos under a duty to accept the offer to
return the furniture, because he wanted to
retain the three gas heaters and the four
electric lamps.
As to the value of the furniture, we do not
believe that Quintos is entitled to the payment
thereof by BECK in case of his inability to
return some of the furniture because under
paragraph 6 of the stipulation of facts, BECK
has neither agreed to nor admitted the
correctness of the said value. Should he fail to
deliver some of the furniture, the value thereof
should be later determined by the trial Court
through evidence which the parties may desire
to present.
ISSUE 3: WON Quintos is entitled to the costs
of litigation. YES.
HELD 3: The costs in both instances should be
borne by BECK because the plaintiff is the
prevailing party (section 487 of the Code of

Civil Procedure). He was the one

who
breached the contract of commodatum, and
without any reason he refused to return and
deliver all the furniture upon demand. In these
circumstances, it is just and equitable that he
pay the legal expenses and other judicial costs
which the plaintiff would not have otherwise
defrayed.
POLICY: Commodatum is a contract where
the bailor delivers to the bailee a nonconsumable thing so that the latter may use it
for a certain time and return the identical thing.

III.

Mutuum

BPI INVESTMENT CORPORATION vs. HON.

COURT OF APPEALS and ALS
MANAGEMENT & DEVELOPMENT
CORPORATION
FACTS: Frank Roa obtained a loan at an
interest rate of 16.25% per annum from Ayala
Investment and Development Corporation
(AIDC), the predecessor of petitioner BPIIC,
for the construction of a house on his lot in
New Alabang Village, Muntinlupa. Said house
and lot were mortgaged to AIDC to secure the
loan. Sometime in 1980, Roa sold the house
and lot to private respondents ALS
and
Antonio Litonjua for P850,000. They paid
P350,000 in cash and assumed the P500,000
balance of Roas indebtedness with AIDC.
AIDC, however, was not willing to extend the
old interest rate to ALS and proposed to grant
them a new loan of P500,000 to be applied to
Roas debt and secured by the same property,
at an interest rate of 20% per annum and
service fee of 1% per annum on the
outstanding principal balance payable within
ten years in equal monthly amortization.
Consequently, on March 1981, ALS executed
a mortgage deed containing the above
stipulations with the provision that payment of
the monthly amortization shall commence on
May 1, 1981.
On August 1982, ALS and Litonjua updated
Roas arrearages by paying BPIIC the sum of
P190,601.35. This reduced Roas principal
balance to P457,204.90 which, in turn, was
liquidated when BPIIC applied thereto the

proceeds of ALSs loan of P500,000.

On September 13, 1982, BPIIC released to
ALS P7,146.87, purporting to be what was left
of their loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure
proceedings against ALS on the ground that
they failed to pay the mortgage indebtedness
which from May 1, 1981 to June 30, 1984,
amounted to P475,585.31.
ALS and Litonjua filed a civil case against
BPIIC. They alleged, among others, that they
were not in arrears in their payment, but in fact
made an overpayment as of June 30, 1984.
They maintained that they should not be made
to pay amortization before the actual release of
the P500,000 loan in August and September
1982. Further, out of the P500,000 loan, only
the total amount of P464,351.77 was released
to ALS.
RTC favored ALS and Litonjua. CA affirmed in
toto.
CA reasoned that a simple loan is perfected
only upon the delivery of the object of the
contract. The contract of loan between BPIIC
and ALS & Litonjua was perfected only on
September 13, 1982, the date when BPIIC
released the purported balance of the
P500,000 loan after deducting therefrom the
value of Roas indebtedness. Thus, payment of
the monthly amortization should commence
only a month after the said date, as can be
inferred from the stipulations in the contract.
This, despite the express agreement of the
parties that payment shall commence on May
1, 1981. From October 1982 to June 1984, the
total amortization due was only P194,960.43.
Evidence showed that ALS had an
overpayment. Therefore, there was no basis
for BPIIC to extrajudicially foreclose the
mortgage.
BPIIC contends among others that CA erred in
ruling that because a simple loan is perfected
upon the delivery of the object of the contract,
the loan contract in this case was perfected
only on September 13, 1982. BPIIC claims that
a contract of loan is a consensual contract, and
a loan contract is perfected at the time the
contract of mortgage is executed conformably
with SCs ruling in Bonnevie v. CA, 125 SCRA

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

122.
ISSUE: WON a contract of loan is a
consensual contract. NO, A CONTRACT OF
LOAN IS A REAL CONTRACT.
HELD: A loan contract is not a consensual
contract but a real contract. It is perfected only
upon the DELIVERY of the object of the
contract. BPIIC misapplied Bonnevie. The
contract in Bonnevie declared by this Court as
a perfected consensual contract falls under the
first clause of Article 1934, CC. It is an
accepted promise to deliver something by way
of simple loan. A perfected consensual
contract, as shown above, can give rise to an
action for damages. However, said contract
does not constitute the real contract of loan
which requires the delivery of the object of the
contract for its perfection and which gives rise
to obligations only on the part of the borrower.
In the present case, the loan contract between
BPI, on the one hand, and ALS and Litonjua,
on the other, was perfected only on September
13, 1982, the date of the second release of the
loan. Following the intentions of the parties on
the
commencement
of
the
monthly
amortization, as found by the CA, ALSs
obligation to pay commenced only on October
13, 1982, a month after the perfection of the
contract. A contract of loan involves a
reciprocal obligation, wherein the obligation or
promise of each party is the consideration for
that of the other.
As averred by ALS, the promise of BPIIC to
extend and deliver the loan is upon the
consideration that ALS and Litonjua shall pay
the monthly amortization commencing on May
1, 1981, one month after the supposed release
of the loan. It is a basic principle in reciprocal
obligations that neither party incurs in delay, if
the other does not comply or is not ready to
comply in a proper manner with what is
incumbent upon him. Only when a party has
performed his part of the contract can he
demand that the other party also fulfills his own
obligation and if the latter fails, default sets in.
Consequently, petitioner could only demand for
the payment of the monthly amortization after
September 13, 1982 for it was only then when
it complied with its obligation under the loan
contract. Therefore, in computing the amount

10

due as of the date when BPIIC extrajudicially

caused the foreclosure of the mortgage, the
starting date is October 13, 1982 and not May
1, 1981.
Other points raised by BPIIC in connection with
this issue, such as the date of actual release of
the loan and whether ALS were the cause of
the delay in the release of the loan, are factual.
CA decision was affirmed but with modification
as to the award of damages.

YONG CHAN KIM vs. PEOPLE OF THE

PHILIPPINES, HON. EDGAR D. GUSTILO
Presiding Judge, RTC, 6th Judicial Region,
Branch 28 Iloilo City and COURT OF
APPEALS (13th Division), SOUTHEAST
ASIAN FISHERIES DEVELOPMENT
CENTER AQUACULTURE DEPARTMENT
(SEAFDEC)
FACTS: Petitioner Yong Chan Kim was
employed as a Researcher at the Aquaculture
Department of the Southeast Asian Fisheries
Development Center (SEAFDEC) with head
station at Tigbauan, Province of Iloilo. As Head
of the Economics Unit of the Research
Division, he conducted prawn surveys which
required him to travel to various selected
provinces in the country where there are
potentials for prawn culture.
On 15 June 1982, petitioner was issued Travel
Order No. 2222 which covered his travels to
different places in Luzon from 16 June to 21
July 1982, a period of thirty five (35) days.
Under this travel order, he received P6,438.00
as cash advance to defray his travel expenses.
Within the same period, petitioner was issued
another travel order, T.O. 2268, requiring him
to travel from the Head Station at Tigbauan,
Iloilo to Roxas City from 30 June to 4 July
1982, a period of five (5) days. For this travel
order, petitioner received a cash advance of
P495.00.
On 14 January 1983, petitioner presented both
travel orders for liquidation, submitting Travel
Expense Reports to the Accounting Section.
When the Travel Expense Reports were
audited, it was discovered that there was an
overlap of four (4) days (30 June to 3 July

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

1982) in the two (2) travel orders for which

petitioner collected per diems twice. In sum,
the total amount in the form of per diems and
allowances charged and collected by petitioner
under Travel Order No. 2222, when he did not
actually and physically travel as represented
by his liquidation papers, was P1,230.00.
Petitioner was required to comment on the
internal auditor's report regarding the alleged
anomalous claim for per diems. In his reply,
petitioner denied the alleged anomaly, claiming
that he made make-up trips to compensate for
the trips he failed to undertake under T.O.
2222 because he was recalled to the head
office and given another assignment.
In September 1983, two (2) complaints for
Estafa were filed against the petitioner before
the Municipal Circuit Trial Court at Guimbal,
Iloilo.
ISSUE: Whether or not petitioner can be held
criminally liable on the ground of failure to
liquidate her traveling expenses. NO.
RULING: It is undisputed that petitioner
received a cash advance from private
respondent SEAFDEC to defray his travel
expenses under T.O. 2222. It is likewise
admitted that within the period covered by T.O.
2222, petitioner was recalled to the head
station in Iloilo and given another assignment
which was covered by T.O. 2268. The dispute
arose when petitioner allegedly failed to return
P1,230.00 out of the cash advance which he
received under T.O. 2222. For the alleged
failure of petitioner to return the amount of
P1,230.00, he was charged with the crime of
Estafa under Article 315, par. 1(b) of the
Revised Penal Code.
In order that a person can be convicted under
the above-quoted provision, it must be proven
that he had the obligation to deliver or return
the same money, good or personal property
that he had received. Was petitioner under
obligation to return the same money (cash
advance) which he had received? We believe
not.
Liquidation simply means the settling of
indebtedness. An employee, such as herein
petitioner, who liquidates a cash advance is in
fact paying back his debt in the form of a loan

11

of money advanced to him by his employer, as

per diems and allowances.
Similarly, as stated in the assailed decision of
the lower court, "if the amount of the cash
advance he received is less than the amount
he spent for actual travel . . . he has the right to
demand reimbursement from his employer the
amount he spent coming from his personal
funds.
In other words, the money advanced by either
party is actually a loan to the other. Hence,
petitioner was under no legal obligation to
return the same cash or money, i.e., the bills or
coins, which he received from the private
respondent.
Article 1933 and Article 1953 of the Civil
Code define the nature of a simple loan.
Art. 1933. By the contract of loan, one
of the parties delivers to another, either
something not consumable so that the
latter may use the same for a certain
time and return it, in which case the
contract is called a commodatum; or
money or other consumable thing, upon
the condition that the same amount of
the same kind and quality shall be paid,
in which case the contract is simply
called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a
stipulation to pay interest.
In commodatum the bailor retains the
ownership of the thing loaned, while in
simple loan, ownership passes to the
borrower.
Art. 1953. A person who receives a
loan of money or any other fungible
thing acquires the ownership thereof,
and is bound to pay to the creditor an
equal amount of the same kind and
quality.
The ruling of the trial judge that ownership of
the cash advanced to the petitioner by private
respondent was not transferred to the latter is
erroneous. Ownership of the money was
transferred to the petitioner.

Since ownership of the money (cash advance)

was transferred to petitioner, no fiduciary
relationship was created. Absent this fiduciary
relationship between petitioner and private
respondent, which is an essential element of
the crime of estafa by misappropriation or
conversion, petitioner could not have
committed estafa.
Additionally, it has been the policy of private
respondent that all cash advances not
liquidated are to be deducted correspondingly
from the salary of the employee concerned.
The evidence shows that the corresponding
salary deduction was made in the case of
petitioner vis-a-vis the cash advance in
question.
(Failure of bank to return the amount
deposited, not a case of estafa)

SPOUSES ANTONIO and LOLITA TAN vs.

CARMELITO VILLAPAZ
FACTS: On February 6, 1992, respondent
Villapaz issued a Philippine Bank of
Communications (PBCom) crossed check in
the amount of P250,000.00, payable to the
order of petitioner Tony Tan. On that date, the
check was deposited at the drawee bank,
PBCom Davao City branch at Monteverde
Avenue, to the account of petitioner Antonio
Tan also at said bank.
On November 7, 1994 respondent filed a
Complaint for sum of money against the
spouses, alleging that on February 6, 1992, the
spouses went to his place of business at
Malita, Davao and obtained a loan of
P250,000.00, hence, his issuance of the
February 6, 1992 PBCom crossed check which
loan was to be settled interest-free in six (6)
months.
On the maturity date of the loan or on August
6, 1992, petitioner Antonio Tan failed to settle
the same, and despite repeated demands,
petitioners never did, drawing Villapaz to file
the complaint; and on account of the willful
refusal of petitioners to honor their obligation,
he suffered moral damages in the amount of
P50,000.00, among other things.
The spouses denied having gone to Malita

and having obtained a loan from respondent,

alleging that the check was issued by
respondent in Davao City on February 6, 1992
"in exchange for equivalent cash"; they never
received from respondent any demand for
payment, be it verbal or written, respecting the
alleged loan; since the alleged loan was one
with a period payable in six months, it should
have been expressly stipulated upon in writing
by the parties but it was not, hence, the
essential requisite for the validity and
enforceability of a loan is wanting; and the
check is inadmissible to prove the existence of
a loan for P250,000.00.
Petitioners maintain that they did not secure
a loan from respondent, insisting that they
encashed in Davao City respondent's February
6, 1992 crossed check; in the ordinary course
of business, prudence dictates that a contract
of loan must be in writing as in fact the New
Civil Code provides that to be enforceable
"contracts where the amount involved
exceed[s] P500.00 must appear in writing even
a private one," hence, respondent's "selfserving" claim does not suffice to prove the
existence of a loan; respondent's allegation
that no memorandum in writing of the
transaction was executed because he and they
are "kumpadres" does not inspire belief for
respondent, being a businessman himself, was
with more reason expected to be more
prudent; and the mere encashment of the
check is not a contractual transaction such as
a sale or a loan which ordinarily requires a
receipt and that explains why they did not
issue a receipt when they encashed the check
of respondent.
Petitioners furthermore maintain that they were
financially stable on February 6, 1992 as
shown by the entries of their bank passbook
hence, there was no reason for them to go to a
distant place like Malita to borrow money.
The lower Court gave four reasons for ruling
out a loan:
(a) the defense of spouses Tan that they did not
go to Villapaz's place on February 6, 1992,
date the check was given to them;
(b) Spouses Tan could not have borrowed money
on that date because from January to March,
1992, they had an average daily deposit of
P700,000 and on February 6, 1992, they had
P1,211,400.64 in the bank, hence,

they had "surely no reason nor logic" to borrow

money from Villapaz;
(c) the alleged loan was not reduced in writing and
the check could not be a competent evidence
of loan.
ISSUE: Whether or not the transaction in
dispute was a contract of loan and not a mere
matter of check encashment as found by the
trial court. YES.
HELD: The four-fold reasoning cannot be
sustained. They are faulty and do not accord
either with law or ordinary conduct of men. For
one thing, the first two given reasons partake
more of alibi and speculation, hence, deserve
scant consideration. For another, the last two
miss the applicable provisions of law.
The existence of a contract of loan cannot be
denied merely because it is not reduced in
writing. Surely, there can be a verbal loan.
Contracts are binding between the parties,
whether oral or written. The law is explicit that
contracts shall be obligatory in whatever form
they may have been entered into, provided all
the essential requisites for their validity are
present. A loan (simple loan or mutuum) exists
when a person receives a loan of money or
any other fungible thing and acquires the
ownership thereof. He is bound to pay to the
creditor the equal amount of the same kind and
quality.
Contracts are perfected by mere consent,
and from that moment the parties are bound
not only to the fulfillment of what has been
expressly stipulated but also to all the
consequences which, according to their nature,
maybe in keeping with good faith, usage and
law.
The lower Court misplaced its reliance on
Article 1358 of the Civil Code providing that to
be enforceable, contracts where the amount
involved exceed five hundred pesos, must
appear in writing. Such requirement, it has
been held, is only for convenience, not for
validity. It bears emphasis that at the time
Villapaz delivered the crossed-check to the
petitioner spouses, Villapaz had no account
whatsoever with them. Spouses' contention
that they did not obtain any loan but merely
exchanged the latter's check for cash is not
borne by any evidence.

That apart from the check, no written proof

of the grant of the loan was executed was
credibly explained by respondent when he
declared that petitioners' son being his
godson, he, out of trust and respect,
believed that the crossed check sufficed to
prove their transaction.

The checks were delivered to Rs agents who

turned them over to R, except 23 checks
amounting to P98k. Due to failure to receive
full amount, R filed case against P.

As for petitioners' reliance on Art. 1358[22]

of the Civil Code, the same is misplaced for
the requirement that contracts where the
amount involved exceeds P500.00 must
appear in writing is only for convenience.

ISSUE: WoN the rate to be used is 6%.

At all events, a check, the entries of which

are no doubt in writing, could prove a loan
transaction.

PNB VS. CA AND IBARROLA

FACTS: Province of Isabela issued several
checks drawn against its account with PNB
(P) in favor of Lyndon Pharmaceuticals
Laboratories, a business operated by
Ibarrola (R), as payments for the purchase of
medicines.

Trial Court, CA and SC ordered PNB to pay;

however, all 3 courts failed to specify the legal
rate of interest 6% or 12%.

HELD: YES. This case does not involve a loan,

forbearance of money or judgment involving a
loan or forbearance of money as it arose from
a contract of sale whereby R did not receive
full payment for her merchandise.
When an obligation arises from a contract of
purchase and sale and not from a contract of
loan or mutuum, the applicable rate is 6% per
annum as provided in Art. 2209 of the NCC
and not the rate of 12% per annum as provided
in (CB) Cir. No. 416.
The rate of 12% interest referred to in Cir. 416
applies only to: Loan or forbearance of money,

or to cases where money is transferred from

one person to another and the obligation to
return the same or a portion thereof is
adjudged.
Any other monetary judgment which does not
involve or which has nothing to do with loans
or forbearance of any money, goods or credit
does not fall within its coverage for such
imposition is not within the ambit of the
authority granted to the Central Bank.
When an obligation not constituting a loan or
forbearance of money is breached then an
interest on the amount of damages awarded
may be imposed at the discretion of the court
at the rate of 6% per annum in accordance
with Art. 2209 of the Civil Code. Indeed, the
monetary judgment in favor of private
respondent does not involve a loan or
forbearance of money, hence the proper
imposable rate of interest is six (6%) per cent.
Therefore, the proper rate of interest referred
to in the judgment under execution is only 6%.
This interest shall be computed from the time
of the filing of the complaint considering that
the amount adjudged (P98,691.90) can be
established with reasonable certainty. Said
amount being merely the uncollected balance
of the purchase price covered by the 23
checks encashed and appropriated by
Ibarrola's agents. However, once the judgment
becomes final and executory, the "interim
period from the finality of judgment awarding a
monetary claim and until payment thereof, is
deemed to be equivalent to a forbearance of
credit."

provisions in the contract.

In a letter in 2000, Spouses demanded the
return of the amount within 15 days from
receipt. In reply, Estores promised to return the
same within 120 days. Spouses agreed but
imposed an interest of 12% annually. Estores
still failed despite demands.
Spouses filed a complaint with the RTC against
Estores and Roberto Arias (allegedly acted as
Estores agent).
In Answer, Estores said they were willing to
pay the principal amount but without the
interest as it was not agreed upon. That since
the Conditional Deed of Sale provided only for
the return of the downpayment in case of
breach, they cant be liable for legal interest as
well.
RTC ruled saying that the Spouses are entitled
to the interest but only at 6% per annum and
also entitled to attys fees. On appeal, CA said
that the issue to resolve is whether it is proper
to impose interest for an obligation that does
not involve a loan or forbearance of money in
the absence of stipulation of the parties. CA
affirmed RTC.
That interest should start on date of formal
demand by Spouses to return the money not
when contract was executed as stated by the
RTC; That Arias not be solidarily liable as he
acted as agent only and did not expressly bind
himself or exceeded his authority.

*6% from filing of complaint until full payment

before finality of judgment.
*12% from finality of judgment.
HERMOJINA ESTORES VS. SPOUSES
ARTURO AND LAURA SUPANGAN

Estores contends: Not bound to pay interest

because the deed only provided for the return
of the downpayment in case of failure to
comply with her obligations; That atty fees not
proper because both RTC and CA sustained
her contention that 12% interest was uncalled
for so it showed that Spouses did not win.

FACTS: In Oct. 1993, Hermojina Estores and

Spouses Supangan entered into a Conditional
Deed of Sale where Estores offered to sell, and
Spouses offered to buy a parcel of land in
Cavite for P4.7M.

Spouses contend: It is only fair that interest be

imposed because Estores failed to return the
amount upon demand and used the money for
her benefit.

After almost 7 years and despite the payment

of P3.5M by the Spouses, Estores still failed to
comply with her obligation to handle the
peaceful transfer of ownership as stated in
5

Estores failed to relocate the house outside the

perimeter of the subject lot and complete the
necessary documents.

As to the fees, they claim that they were forced

to litigate when Estores unjustly held the

amount.
ISSUES: Is the imposition of interest and
attorneys fees is proper? YES
Interest based on Art 2209 of CC (6%) or under
Central Bank Circular 416 (12%)? 12%
HELD: Interest may be imposed even in the
absence of stipulation in the contract.
Article 2210 of the Civil Code expressly provides
that interest may, in the discretion of the court, be
allowed upon damages awarded for breach of
contract.
Estores failed on her obligations despite demand.
She admitted that the conditions were not
fulfilled and was willing to return the full
amount of P3.5M but hasnt done so she is
now in default.
The interest at the rate of 12% is applicable
in the instant case.
Gen Rule: the applicable interest rate shall be
computed in accordance with the stipulation of
the parties
Exc: if no stipulation, applicable rate of interest
shall be 12% per annum when obligation
arises out of a loan or forbearance of money,
goods or credits. In other cases, it shall be 6%
In this case, no stipulation was made.
Contract involved in this case is not a loan
but a Conditional Deed of Sale.
No question that the obligations were not
met and the return of money not made
Even if transaction was a Conditional Deed
of Sale, the stipulation governing the return
of the money can be considered as a
forbearance of money which requires 12%
interest
In Crismina Garments, Inc. v. Court of Appeals,
Forbearance-- contractual obligation of lender or
creditor to refrain during a given period of time,
from requiring the borrower or debtor to repay
a loan or debt then due and payable.

In such case, forbearance of money, goods or

credits will have no distinct definition from a loan.
However, the phrase forbearance of money,

goods or credits is meant to have a separate

meaning from a loan, otherwise there would
have been no need to add that phrase as a
loan is already sufficiently defined in the Civil
Code
Forbearance of money, goods or credits should
therefore refer to arrangements other than loan
agreements, where a person acquiesces to the
temporary use of his money, goods or credits
pending happening of certain events or
fulfillment of certain conditions.
Estores unwarranted withholding of the money
amounts to forbearance of money which can be
considered as an involuntary loan so rate is
12% starting in Sept. 2000
The award of attorneys fees is
warranted. No doubt that the Spouses were
forced to litigate to protect
their
interest, i.e., to
recover
their money. The
amount of
P50,000.00 ismore appropriate.

PAN PACIFIC vs EQUITABLE PCI BANK

FACTS: Pan Pacific is
contracting
mechanical

engaged in
works
on

airconditioning system. They entered into a

contract of mechanical works with respondent
for the total consideration for
the
whole
project was P23,311,410.30. The Contract
stipulated that Pan Pacific shall be entitled to a
price adjustment in case of increase in labor
costs and prices of materials under paragraphs
70.1 and 70.2 of the General Conditions for the
Construction of PCIB Tower II Extension.
Pan Pacific commenced the mechanical works
in the project site. In 1990, labor costs and
prices of materials escalated. On 5 April 1991,
in accordance with the escalation clause, Pan
Pacific
claimed
a
price
adjustment
of P5,165,945.52. Respondents asked for a
reduction in the price adjustment. To show
goodwill, Pan Pacific reduced the price
adjustment toP4,858,548.67.
On 28 April 1992, respondent asked that the
price adjustment should
be
pegged
at P3,730,957.07, based on the DOLE Labor
Indices and the General Conditions of their
contract.
Due to the extraordinary increases in the costs
of labor and materials, Pan Pacifics

operational capital was becoming inadequate

for the project. However, respondent withheld
the payment of the price adjustment under the
escalation clause despite Pan Pacifics
repeated demands.
Instead, respondent offered Pan Pacific a loan
of P1.8 million. Pan Pacific was constrained to
execute a promissory note in the amount
of P1.8 million as a requirement for the loan.
Pan Pacific also posted a surety bond.
The P1.8 million was released directly to
laborers and suppliers and not a single
centavo was given to Pan Pacific.
Pan Pacific made several demands for
payment on the price adjustment but
respondent merely kept on promising to
release the same. Meanwhile, the P1.8
million loan matured and respondent
demanded payment plus interest and penalty.
Pan Pacific refused to pay the loan. Pan
Pacific insisted that it would not have incurred
the loan if respondent released the price
adjustment on time. Pan Pacific alleged that
the promissory note did not express the true
agreement of the parties. Pan Pacific
maintained that the P1.8 million was to be
considered as an advance payment on the
price adjustment. Therefore, there was really
no consideration for the promissory note;
hence, it is null and void from the beginning.
Respondent stood firm that it would not release
any amount of the price adjustment to Pan
Pacific but it would offset the price adjustment
with Pan Pacifics
outstanding
balance
of P3,226,186.01, representing the loan,
interests, penalties and collection charges.
Pan Pacific refused the offsetting but agreed to
receive
the
reduced
amount
of P3,730,957.07 as recommended by the
TCGI Engineers for the purpose of extrajudicial
settlement, less P1.8 million and P414,942 as
advance payments.
On 6 May 1994, petitioners filed a complaint
for declaration of nullity/annulment of the
promissory note, sum of money, and damages
against the respondent with the RTC. On 12
April 1999, the RTC declared the promissory
note as null and void and ordered Pan Pacific
to pay P1,389,111.10 REPRESENTING
UNPAID BALANCE OF THE ADJUSTMENT

PRICE, AND INTEREST AT THE LEGAL RATE

OF TWELVE (12%) PERCENT PER ANNUM
The
CA
removed
the
deduction
ofP126,903.97 because it represented the final
payment on the basic contract price. Hence,
the
CA
ordered
respondent
to
pay P1,516,015.07 to petitioners, with interest
at the legal rate of 12% per annum starting 6
May 1994.
On MR he CA increased the loan rate to 18%,
rate of equitable PCI.
ISSUE: Whether the CA, in awarding the
unpaid balance of the price adjustment, erred
in fixing the interest rate at 12% instead of the
18% bank lending rate. YES
HELD: The CA went beyond the intent of the
parties by requiring respondent to give its
consent to the imposition of interest before
petitioners can hold respondent liable for
interest at the current bank lending rate. This is
erroneous. A review of Section 2.6 of the
Agreement and Section 60.10 of the General
Conditions shows that the consent of the
respondent is not needed for the imposition of
interest at the current bank lending rate, which
occurs upon any delay in payment.
Article 1956 of the Civil Code, which refers to
monetary interest, specifically mandates that
no interest shall be due unless it has been
expressly stipulated in writing. Therefore,
payment of monetary interest is allowed only if:
(1) there was an express stipulation for the
payment of interest; and
(2) the agreement for the payment of interest was
reduced in writing. The concurrence of the two
conditions is required for the payment of
monetary interest.
The consent of the respondent is not needed in
order to impose interest at the current bank
lending rate.
Under Article 2209 of the Civil Code, the
appropriate measure for damages in case of
delay in discharging an obligation consisting of
the payment of a sum of money is the payment
of penalty interest at the rate agreed upon in
the contract of the parties. In the absence of a
stipulation of a particular rate of penalty

interest, payment of additional interest at a rate

equal to the regular monetary
interest
becomes due and payable. Finally, if no
regular interest had been agreed upon by the
contracting parties, then the damages payable
will consist of payment of legal interest which is
6%, or in the case of loans or forbearances of
money, 12% per annum. It is only when the
parties to a contract have failed to fix the rate
of interest or when such amount is
unwarranted that the Court will apply the 12%
interest per annum on a loan or forbearance of
money.
The written agreement entered into between
petitioners and respondent provides for an
interest at the current bank lending rate in case
of delay in payment and the promissory note
charged an interest of 18%.
To prove petitioners entitlement to the 18%
bank lending rate of interest, petitioners
presented the promissory note prepared by
respondent bank itself. This promissory note,
although declared void by the lower courts
because it did not express the real intention of
the parties, is substantial proof that the bank
lending rate at the time of default was 18% per
annum. Absent any evidence of fraud, undue
influence or any vice of consent exercised by
petitioners against the respondent, the interest
rate agreed upon is binding on them.

As of January 4, 1997, respondent found that

the petitioners still had an outstanding balance
of P1,364,151.00, to which respondent applied
a 4% monthly interest.
On August 28, 1997, respondent filed a
complaint for sum of money to enforce the
unpaid balance, plus 4% monthly interest. The
petitioners admitted the loan of P1,240,000.00,
but denied the stipulation on the 4% monthly
interest, arguing that the interest was not
provided in the promissory note. Pantaleon
also denied that he made himself personally
liable and that he made representations that
the loan would be repaid within six (6) months.
RTC found that the respondent issued a check
for P1M in favor of the petitioners for a loan
that would earn an interest of 4% or
P40,000.00 per month, or a total of
P240,000.00 for a 6-month period. RTC
ordered the petitioners to jointly and severally
pay the respondent the amount of
P3,526,117.00 plus 4% per month interest
from February 11, 1999 until fully paid.
Petitioners appealed to CA insisting that there
was no express stipulation on the 4% monthly
interest. CA favored respondent but noted that
the interest of 4% per month, or 48% per
annum, was unreasonable and should be
reduced to 12% per annum. MR denied hence
this petition.

PRISMA CONSTRUCTION &

DEVELOPMENT CORPORATION and
ROGELIO S. PANTALEON vs ARTHUR F.
MENCHAVEZ

ISSUE: Whether the parties agreed to the 4%

monthly interest on the loan. If so, does the
rate of interest apply to the 6-month payment
period only or until full payment of the loan?

FACTS: December 8, 1993, Pantaleon,

President and Chairman of the Board of
PRISMA, obtained a P1M loan from the
respondent,
with
monthly
interest
of
P40,000.00 payable for 6 months, or a total
obligation of P1,240,000.00 payable within 6
months.

RULING: Interest due should be stipulated in

writing; otherwise, 12% per annum APPLIES.

To secure the payment of the loan, Pantaleon

issued a promissory. Pantaleon signed the
promissory note in his personal capacity and
as duly authorized by the Board of Directors of
PRISMA. The petitioners failed to completely
pay the loan within the 6-month period.

Obligations arising from contracts have the

force of law between the contracting parties
and should be complied with in good faith.
When the terms of a contract are clear and
leave no doubt as to the intention of the
contracting parties, the literal meaning of its
stipulations governs. Courts have no authority
to alter the contract by construction or to make
a new contract for the parties; a courts duty is
confined to the interpretation of the contract
the parties made for themselves without regard
to its wisdom or folly, as the court cannot
supply material stipulations or read into the

contract words the contract does not contain. It

is only when the contract is vague and
ambiguous that courts are permitted to resort
to the interpretation of its terms to determine
the parties intent.

The facts show that the parties agreed to the

payment of a specific sum of money of
P40,000.00 per month for six months, not to a
4% rate of interest payable within a 6-month
period.

In the present case, the respondent issued a

check for P1M. In turn, Pantaleon, in his
personal capacity and as authorized by the
Board, executed the promissory note. Thus,
the P1M loan shall be payable within 6 months.
The loan shall earn an interest of P40,000.00
per month, for a total obligation of
P1,240,000.00 for the six-month period. We
note that this agreed sum can be computed at
4% interest per month, but no such rate of
interest was stipulated in the promissory note;
rather a fixed sum equivalent to this rate was
agreed upon.

No issue on the excessiveness of the

stipulated amount of P40,000.00 per month
was ever put in issue by the petitioners; they
only assailed the application of a 4% interest
rate, since it was not agreed upon.

Article 1956 of the Civil Code specifically

mandates that no interest shall be due unless
it has been expressly stipulated in writing. The
payment of interest in loans or forbearance of
money is allowed only if: (1) there was an
express stipulation for the payment of interest;
and (2) the agreement for the payment of
interest was reduced in writing. The
concurrence of the two conditions is required
for the payment of interest at a stipulated rate.
The collection of interest without any
stipulation in writing is prohibited by law.
The interest of P40,000.00 per month
corresponds only to the six-month period of the
loan, or from January 8, 1994 to June 8, 1994,
as agreed upon by the parties in the
promissory note. Thereafter, the interest on the
loan should be at the legal interest rate of 12%
per annum.
When the obligation is breached, and it
consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the
interest due should be that which may have
been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from
the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall
be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of
Article 1169 of the Civil Code.

It is a familiar doctrine in obligations and

contracts that the parties are bound by the
stipulations, clauses, terms and conditions they
have agreed to, which is the law between
them, the only limitation being that these
stipulations, clauses, terms and conditions are
not contrary to law, morals, public order or
public policy. The payment of the specific sum
of money of P40,000.00 per month was
voluntarily agreed upon by the petitioners and
the respondent. There is nothing from the
records and, in fact, there is no allegation
showing that petitioners were victims of fraud
when they entered into the agreement with the
respondent.
Therefore, as agreed by the parties, the loan of
P1M shall earn P40,000.00 per month for a
period of 6 months, for a total principal and
interest amount of P1,240,000.00. Thereafter,
interest at the rate of 12% per annum shall
apply. The amounts already paid by the
petitioners during the pendency of the suit,
amounting toP1,228,772.00 as of February 12,
1999, should be deducted from the total
amount due, computed as indicated above. We
remand the case to the trial court for the actual
computation of the total amount due.

EASTERN SHIPPING LINES, INC. vs. HON.

COURT OF APPEALS AND MERCANTILE
INSURANCE COMPANY, INC
FACTS: This is an action against defendants
shipping company, arrastre operator and
broker-forwarder for damages sustained by a
shipment while in defendants' custody, filed by
the insurer-subrogee who paid the consignee
the value of such losses/damages.

On December 4, 1981, two fiber drums of

riboflavin were shipped from Yokohama, Japan
for delivery vessel "SS EASTERN COMET"
owned by defendant Eastern Shipping Lines.
The shipment was insured under plaintiff's
Marine Insurance Policy No. 81/01177 for
P36,382,466.38.
Upon arrival of the shipment in Manila on
December 12, 1981, it was discharged unto
the custody of defendant Metro Port Service,
Inc. The latter excepted to one drum, said to
be in bad order, which damage was unknown
to plaintiff.
On January 7, 1982 defendant Allied
Brokerage Corporation received the shipment
from defendant Metro Port Service, Inc., one
drum opened and without seal.
On January 8 and 14, 1982, defendant Allied
Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The
latter excepted to one drum which contained
spillages, while the rest of the contents was
adulterated/fake.
Plaintiff contended that due to the
losses/damage sustained by said drum, the
consignee suffered losses totaling P19,032.95,
due to the fault and negligence of defendants.
Claims were presented against defendants
who failed and refused to pay the same.
As a consequence of the losses sustained,
plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine
insurance policy, so that it became subrogated
to all the rights of action of said consignee
against defendants
The Court, among others, ordered defendants
to pay plaintiff, jointly and severally The
amount of P19,032.95, with the present legal
interest of 12% per annum from October 1,
1982, the date of filing of this complaints, until
fully paid (the liability of defendant Eastern
Shipping, Inc. shall not exceed US$500 per
case or the CIF value of the loss, whichever is
lesser, while the liability of defendant Metro
Port Service, Inc. shall be to the extent of the
actual invoice value of each package, crate
box or container in no case to exceed
P5,000.00 each, pursuant to Section 6.01 of
the Management Contract)

ISSUE:
1. Whether or not a claim for damage
sustained on a shipment of goods can be a
solidary, or joint and several, liability of the
common carrier, the arrastre operator and
the customs broker. YES
2. Whether the payment of legal interest on an
award for loss or damage is to be computed
from the time the complaint is filed or from
the date the decision appealed from is
rendered.
3. Whether the applicable rate of interest,
referred to above, is twelve percent (12%) or
six percent (6%). 6%
HELD:
1. Solidary. Since it is the duty of the
ARRASTRE to take good care of the goods
that are in its custody and to deliver them in
good condition to the consignee, such
responsibility also devolves upon the
CARRIER. Both the ARRASTRE and the
CARRIER are therefore charged with the
obligation to deliver the goods in good
condition to the consignee.

The common carrier's duty to observe the

requisite diligence in the shipment of goods
lasts from the time the articles are surrendered
to or unconditionally placed in the possession
of, and received by, the carrier for
transportation until delivered to, or until the
lapse of a reasonable time for their acceptance
by, the person entitled to receive them (Arts.
1736-1738, Civil Code; Ganzon vs. Court of
Appeals, 161 SCRA 646; Kui Bai vs. Dollar
Steamship Lines, 52 Phil. 863). When the
goods shipped either are lost or arrive in
damaged condition, a presumption arises
against the carrier of its failure to observe that
diligence, and there need not be an express
finding of negligence to hold it liable.
2. It may not be unwise, by way of clarification
and reconciliation, to suggest the following
rules of thumb for future guidance.
I. When an obligation, regardless of its source,
i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can
be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of
recoverable damages.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

II. With regard particularly to an award of interest

in the concept of actual and compensatory
damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of
money, i.e., a loan or forbearance of money,
the interest due should be that which may have
been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from
the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall
be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of
Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan
or forbearance of money, is breached, an
interest on the amount of damages awarded
may be imposed at the discretion of the
court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated
claims or damages except when or until the
demand can be established with reasonable
certainty. Accordingly, where the demand is
established with reasonable certainty, the
interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty
cannot be so reasonably established at the
time the demand is made, the interest shall
begin to run only from the date the judgment of
the court is made (at which time the
quantification of damages may be deemed to
have been reasonably ascertained). The actual
base for the computation of legal interest shall,
in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and executory,
the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above,
shall be 12% per annum from such finality until
its satisfaction, this interim period being
deemed to be by then an equivalent to a
forbearance of credit.
3. The legal interest to be paid is SIX
PERCENT (6%) on the amount due computed
from the decision, dated 03 February 1988, of
the court a quo. A TWELVE PERCENT (12%)
interest, in lieu of SIX PERCENT (6%), shall be
imposed on such amount upon finality of this
decision until the payment thereof.

20

NOTE: The Central Bank Circular imposing the

12% interest per annum applies only to loans
or forbearance of money, goods or credits, as
well as to judgments involving such loan or
forbearance of money, goods or credits, and
that the 6% interest under the Civil Code
governs when the transaction involves the
payment of indemnities in the concept of
damage arising from the breach or a delay in
the performance of obligations in general.
Observe, too, that in these cases, a common
time frame in the computation of the 6%
interest per annum has been applied, i.e., from
the time the complaint is filed until the
adjudged amount is fully paid.

PILIPINAS BANK vs. COURT OF APPEALS

FACTS: Private respondent Lilia Echaus filed
a complaint against petitioner and its president,
Constantino Bautista, for collection of a sum of
money. The complaint alleged: (1) that
petitioner and Greatland Realty Corporation
executed a "Dacion en Pago," wherein
Greatland conveyed to petitioner several
parcels of land in consideration of the sum of
P7,776,335.69; (2) that Greatland assigned
P2,300,000.00 out of the total consideration of
the Dacion en Pago, in favor of private
respondent; and (3) that notwithstanding her
demand for payment, petitioner in bad faith,
refused and failed to pay the said amount
assigned to her.
The trial court ordered petitioner and its codefendant, jointly and severally, to pay private
respondent P2,300,000.00 the total amount
assigned by Greatland in her favor out of the
P2,300,000.00 liability of defendant Pilipinas to
Greatland plus legal interest from the dates of
assignments until fully paid.
On March 22, 1985, petitioner appealed the
decision of the trial court to the Court of
Appeals. On the same day, private respondent
filed a motion for Immediate Execution
Pending Appeal which the trial court granted.
Petitioner complied with the writ of execution
pending appeal by issuing two manager's
checks in the total amount of P5,517,707.00
and which was encashed by the private
respondent.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

On June 28, 1990, the Court of Appeals

rendered a decision in CA-G.R. No. CV-06017,
which modified the judgment and ordered
Pilipinas Bank to pay 2,300,000,00 Pesos,
representing the total amount assigned by
Greatland to her, with interest at the legal rate
starting July 24, 1981, date when demand was
first made.
On September 4, 1990, petitioner filed a
motion in the trial court praying that private
respondent to refund to her the excess
payment of P1,898,623.67 with interests at
6%.
Private respondent opposed the motion of
petitioner with respect to the rate of interest to
be charged on the amount of P2,300,000.00.
According to private respondent, the legal
interest on the principal amount of
P2,300,000.00 due her should be 12% per
annum pursuant to CB Circular No. 416 and
not 6% per annum as computed by petitioner.
On October 12, 1990, the trial court, while
ordering the refund to petitioner of the excess
payment, fixed the interest rate due on the
amount of P2,300.000.00
at
12% per
annum as proposed by private respondent,
instead of 6% per annum as proposed by
petitioner.
The Court of Appeals was of the theory that
the action in Civil Case No. 239-A filed by
private respondent against petitioner "involves
forbearance of money, as the principal award
to plaintiff-appellee (private respondent) in the
amount of P2,300.000.00 was the overdue
debt of defendant-appellant to her since July
1981. The case is, in effect, a simple collection
of the money due to plaintiff-appellee, as the
unpaid creditor from the defendant bank, the
debtor" (Resolution, p.3; Rollo, p. 33). Applying
Central Bank Circular No. 416, the Court of
Appeals held that the applicable rate of interest
is 12% per annum.
Petitioner argues that the applicable law is
Article 2209 of the Civil Code, not the Central
Bank Circular No. 416. Said Article 2209
provides:
Art. 2209. If the obligation consists in the
payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages,

21

there being no stipulation to the contrary,

shall be the payment of the interest agreed
upon, and in the absence of stipulation, the
legal interest, which is six per cent per
annum.
ISSUE: Whether or not the legal rate of
interest on the amount of P2,300,000.00
adjudged to be paid by petitioner to private
respondent is 12% per annum.
RULING: Presidential Decree No. 116
authorized the Monetary Board to prescribe the
maximum rate or rates of interest for the loan
or renewal thereof or the forbearance of any
money, goods or credits and amended the
Usury Law (Act No. 2655) for that purpose.
As amended, the Usury Law now provides:
Sec. The rate of interest for the loan or
forbearance of any money, goods, or
credits and the rate allowed in judgments,
in the absence of express contract as to
such rate of interest, shall be six per
centum per annum or such rate as may be
prescribed by the Monetary Board of the
Central Bank of the Philippines for that
purpose in accordance with the authority
hereby granted.
Sec. 1-a. The Monetary Board is hereby
authorized to prescribe the maximum rate
or rates of interest for the loan or renewal
thereof or the forbearance of any money,
goods or credits, and to charge such rate
or rates whenever warranted by prevailing
economic and social conditions:Provided,
That such changes shall not be made
oftener that once every twelve months.
In the exercise of the authority herein
granted, the Monetary Board may
prescribe higher maximum rates for
consumer loans or renewals thereof as
well as such loans made by pawnshops,
finance companies and other similar credit
institutions although the rates prescribed
for these institutions need not necessarily
be uniform.
Acting on the authority vested on it by the
Usury Law, as amended by P.D. No. 116, the
Monetary Board of Central Bank issued
Central Bank Circular No. 416, which provides:

By virtue of the authority granted to it

under Section 1 of Act 2655, as amended,
otherwise known as the "Usury Law" the
Monetary Board in its Resolution No. 1622
dated July 29, 1974, has prescribed that
the rate of interest for the loan, or
forbearance of any money, goods, or
credits and the rate allowed in judgments,
in the absence of express contract as to
such rate of interest, shall be twelve (12%)
per cent per annum. This Circular shall
take effect immediately.
Note that Circular No. 416, fixing the rate of
interest at 12% per annum, deals with (1)
loans; (2) forbearance of any money, goods or
credit; and (3) judgments.
What then is the nature of the judgment
ordering petitioner to pay private respondent
the amount of P2,300,000.00?
The said amount was a portion of the
P7,776,335.69 which petitioner was obligated
to pay Greatland as consideration for the sale
of several parcels of land by Greatland to
petitioner. The amount of P2,300,000.00 was
assigned by Greatland in favor of private
respondent. The said obligation therefore
arose from a contract of purchase and sale
and not from a contract of loan or mutuum.
Hence, what is applicable is the rate of 6% per
annum as provided in Article 2209 of the Civil
Code of the Philippines and not the rate of
12% per annum as provided in Circular No.
416.
Petitioner next contends that, consistent with
its thesis that Circular No. 416 applies only to
judgments involving the payment of loans or
forbearance of money, goods and credit, the
Court of Appeals should have ordered private
respondent to pay interest at the rate of 12%
on the overpayment collected by her pursuant
to the advance execution of the judgment.
We sustain petitioner's contention as correct.
Private respondent was paid in advance the
amount of P5,517,707.00 by petitioner to the
order for the execution pending appeal of the
judgment of the trial court. On appeal, the
Court of Appeals reduced the total damages to
P3,619,083.33,
leaving
a
balance
of
P1,898,623.67 to be refunded by private
respondent to petitioner. In an execution

pending appeal, funds are advanced by the

losing party to the prevailing party with the
implied obligation of the latter to repay former,
in case the appellate court cancels or reduces
the monetary award.
In the case before us, the excess amount
ordered to refunded by private respondent falls
within the ruling in Viloria and Buiser that
Circular No. 416 applies to cases where
money is transferred from one person to
another and the obligation to return the same
or a portion thereof is subsequently adjudged.

CHUA vs. TIMAN

FACTS: In February and March 1999,
petitioners Salvador and Violeta Chua granted
respondents Rodrigo, Ma. Lynn and Lydia
Timan the following loans: a) P100,000;
b) P200,000;
c) P150,000;
d)
P107,000;
e) P200,000; and f) P107,000. These loans
were evidenced by promissory notes with
interest of 7% per month, which was later
reduced to 5% per month.
Respondents paid the loans initially at 7%
interest rate per month until September 1999
and then at 5% interest rate per month from
October to December 1999. Sometime in
March 2000, respondents offered to pay the
principal amount of the loans through a
Philippine National Bank managers check
worth P764,000, but petitioners refused to
accept the same insisting that the principal
amount of the loans totalled P864,000.
On
May
3,
2000,
respondents
deposited P864,000 with the Clerk of Court of
the RTC of Quezon City. Later, they filed a
case for consignation and damages which was
released to the petitioners.
The RTC rendered a decision in favor of
respondents which was affirmed by the CA. It
ruled that the original stipulated interest rates
of 7% and 5% per month were excessive. It
further ordered petitioners to refund to
respondents all interest payments in excess of
the legal rate of 1% per month or 12% per
annum.

The Court of Appeals declared illegal the

stipulated interest rates of 7% and 5%
per

month for being excessive, iniquitous,

unconscionable and exorbitant. Accordingly,
the Court of Appeals reduced the stipulated
interest rates of 7% and 5% per month
(equivalent to 84% and 60% per annum,
respectively) to a fair and reasonable rate of
1% per month or 12% per annum. The Court of
Appeals also ordered petitioners to refund to
respondents all interest payments in excess of
12% per annum.
Petitioners aver that the stipulated interest of
5% monthly and higher cannot be considered
unconscionable because these rates are not
usurious by virtue of Central Bank (C.B.)
Circular No. 905-82 which had expressly
removed the interest ceilings prescribed by the
Usury Law. Petitioners add that respondents
were in pari delicto since they agreed on the
stipulated interest rates of 7% and 5% per
month. They further aver they honestly
believed that the interest rates they imposed
on respondents loans were not usurious.
ISSUE: Whether or not the original stipulated
interest rates of 7% and 5%, equivalent to 84%
and 60% per annum, are unconscionable
RULING: Yes. The stipulated interest rates of
7% and 5% per month imposed on
respondents loans must be equitably reduced
to 1% per month or 12% per annum. We need
not unsettle the principle we had affirmed in a
plethora of cases that stipulated interest rates
of 3% per month and higher are excessive,
iniquitous, unconscionable and exorbitant.
Such stipulations are void for being contrary to
morals, if not against the law. While C.B.
Circular No. 905-82, which took effect on
January 1, 1983, effectively removed the
ceiling on interest rates for both secured and
unsecured loans, regardless of maturity,
nothing in the said circular could possibly be
read as granting carte blanche authority to
lenders to raise interest rates to levels which
would either enslave their borrowers or lead to
a hemorrhaging of their assets.
Petitioners cannot also raise the defenses of in
pari delicto and good faith. The defense of in
pari delicto was not raised in the RTC, hence,
such an issue cannot be raised for the first
time on appeal. The defense of good faith must
also fail because such an issue is a question of
fact which may not be properly raised in a

petition for review under Rule 45 of the Rules

of Civil Procedure which allows only questions
of law.
As well set forth in Medel:
We agree that the stipulated rate of
interest at 5.5% per month
on
the P500,000.00 loan is excessive,
iniquitous, unconscionable and exorbitant.
However, we can not consider the rate
"usurious" because this Court has
consistently held that Circular No. 905 of
the Central Bank, adopted on December
22, 1982, has expressly removed the
interest ceilings prescribed by the Usury
Law and that the Usury Law is now "legally
inexistent."
In Security Bank and Trust Company vs.
Regional Trial Court of Makati, it was held that
CB Circular No. 905 "did not repeal nor in any
way amend the Usury Law but simply
suspended the latters effectivity." "Usury has
been legally non-existent in our jurisdiction.
Interest can now be charged as lender and
borrower may agree upon."
Nevertheless, we find the interest at 5.5% per
month, or 66% per annum, stipulated upon by
the parties in the promissory note iniquitous or
unconscionable, and, hence, contrary to
morals ("contra bonos mores"), if not against
the law. The stipulation is void.

DIO vs. SPOUSES JAPOR

FACTS: Herein respondents Spouses Virgilio
Japor and Luz Roces Japor were the owners
of an 845.5 square-meter residential lot
including its improvements. Adjacent to the
Japors lot is another lot owned by respondent
Marta Japor.
On August 23, 1982, the respondents obtained
a loan of P90,000 from the Quezon
Development Bank (QDB), and as security
therefor, they mortgaged the two lots as
evidenced by a Deed of Real Estate Mortgage
duly executed by and between
the
respondents and QDB.
On December 6, 1983, respondents and QDB
amended the Deed of Real Estate Mortgage
increasing respondents loan to P128,000.

The respondents failed to pay their aforesaid

loans. However, before the bank could
foreclose on the mortgage, respondents, thru
their broker, one Lucia G. Orian, offered to
mortgage their properties to petitioner Teresita
Dio. Petitioner prepared a Deed of Real Estate
Mortgage, whereby respondents mortgaged
anew the two properties already mortgaged
with QDB to secure the timely payment of
a P350,000 loan that respondents had from
petitioner Dio.
Under the terms of the deed, respondents
agreed to pay the petitioner interest at the rate
of five percent (5%) a month, within a period of
two months or until April 14, 1989. In the event
of default, an additional interest equivalent to
five percent (5%) of the amount then due, for
every month of delay, would be charged on
them.
The respondents failed to settle their obligation
to petitioner on April 14, 1989, the agreed
deadline for settlement.
On August 27, 1991, petitioner made written
demands upon the respondents to pay their
debt.
Despite repeated demands, respondents did
not pay, hence petitioner applied for
extrajudicial foreclosure of the mortgage.
Meanwhile, on February 24,
1992,
respondents filed an action for Fixing of
Contractual Obligation with Prayer for
Preliminary
Mandatory
Injunction/
Restraining Order, praying that the Deed of
Real Estate Mortgage dated February 13, 1989
be declared null and void, and the plea that the
trial court fix the contractual obligations of the
Japors with Dio.
On May 8, 1996, the bidding invoving the
properties was conducted, with petitioner Dio
as the sole bidder, purchased the properties
for P3,500,000.
The appellate court affirmed the decision of the
trial court with respect to the validity of the
Deed of Real Estate Mortgage, but modified
the interest and penalty rates for being
unconscionable and exorbitant.

ISSUE: Whether or not the stipulations on

interest and penalty in the Deed of Real Estate
Mortgage is contrary to morals, if not illegal
and were respondents entitled to any "surplus"
on the auction sale price
RULING: On the main issue, petitioner
1
contends that The Usury Law has been
rendered ineffective by Central Bank Circular
No. 905, series of 1982 and accordingly, usury
has become legally non-existent in this
jurisdiction,
thus,
interest
rates
may
accordingly be pegged at such levels or rates
as the lender and the borrower may agree
upon.
Respondents

admit
they
owe petitioner P350,000
and do not question any lawful interest on their
loan but they maintain that the Deed of Real
Estate Mortgage is null and void since it did not
state the true intent of the parties, which
limited the 5% interest rate to only two (2)
months from the date of the loan and which
did not provide for
penalties and other
charges in the event of default or delay.
Respondents vehemently contend that they
never consented to the said stipulations and
hence, should not be bound by them.
On the first issue, we are constrained to
rule against the petitioners contentions.
Central Bank Circular No. 905, which took
effect on January 1, 1983, effectively removed
the ceiling on interest rates for both secured
and unsecured loans, regardless of maturity.
However, nothing in said Circular grants
lenders carte blanche authority to impose
interest rates, which would result in the
enslavement of their borrowers or to the
hemorrhaging of their assets. While a
stipulated rate of interest may not technically
and necessarily be usurious under Circular No.
905, usury now being legally non-existent in
our jurisdiction, nonetheless, said rate may be
equitably reduced should the same be found to
be iniquitous, unconscionable, and exorbitant,
and hence, contrary to
morals (contra
bonos mores), if not against the law. What is
iniquitous, unconscionable, and
exorbitant
shall depend upon the factual circumstances of
each case.
In the instant case, the Court of Appeals found
that the 5% interest rate per month and 5%

penalty rate per month for every month of

default or delay is in reality interest rate at
120% per annum. This Court has held that a
stipulated interest rate of 5.5% per month or
66% per annum is void for being iniquitous or
unconscionable. We have likewise ruled that
an interest rate of 6% per month or 72% per
annum is
outrageous and inordinate.
Conformably to these precedent cases, a
combined interest and penalty rate at 10% per
month or 120% per annum, should be deemed
iniquitous, unconscionable, and inordinate.
Hence, we sustain the appellate court when it
found the interest and penalty rates in the
Deed of Real Estate Mortgage in the present
case excessive, hence legally impermissible.
Reduction is legally called for now in rates of
interest and penalty stated in the mortgage
contract.
What then should the interest and penalty
rates be?
The evidence shows that it was indeed the
respondents who proposed the 5% interest
rate per month for two (2) months. Having
agreed to said rate, the parties are now
estopped from claiming otherwise. For the
succeeding period after the two months,
however, the Court of Appeals correctly
reduced the interest rate to 12% per
annumand the penalty rate to 1% per month, in
accordance with Article 2227 of the Civil Code.
But were respondents entitled to the "surplus"
of P2,247,326 as a result of the "overpricing"
in the auction?
We note that the "surplus" was the result of the
computation by the Court of Appeals of
respondents outstanding liability based on a
reduced interest rate of 12% per annum and
the reduced penalty rate of 1% per month.
In the instant case, however, there is no
"surplus" to speak of. In adjusting the interest
and penalty rates to equitable and
conscionable levels, what the Court did was
merely to reflect the true price of the land in the
foreclosure sale. The amount of the petitioners
bid merely represented the true amount of the
mortgage debt. No surplus in the purchase
price was thus created to which the
respondents as the mortgagors have a vested
right.

** The interest rate for the subject loan

owing to QDB is hereby fixed at five percent
(5%) for the first two (2) months following the
date of execution of the Deed of Real Estate
Mortgage, and twelve percent (12%) for the
succeeding period. The penalty rate
thereafter shall be fixed at one percent (1%)
per month. Petitioner Teresita Dio is
declared free of any obligation to return to
the respondents, the Spouses Virgilio Japor
and Luz Roces Japor and Marta Japor, any
surplus in the foreclosure sale price. There
being no surplus, after the court
below
had
applied
our
ruling in Sulit,
respondents could not legally claim any
overprice from the petitioner, much less the
amount of P2,247,326.00.

DARIO NACAR vs GALLERY FRAMES

AND/OR FELIPE BORDEY, JR.
FACTS: Petitioner Dario Nacar filed a
complaint for constructive dismissal before
the National Labor Relations Commission
(NLRC) against Gallery Frames (GF) and/or
Felipe Bordey, Jr.

On October 15, 1998, the Labor Arbiter

rendered a Decision in favor of petitioner and
found that he was dismissed from employment
without a valid or just cause and was never
afforded due process. Thus, petitioner was
awarded backwages and separation pay in lieu
of
reinstatement,
in the amount
of
P158,919.92,
computed
only
up
to
promulgation of this decision. Length of service
was 8 yrs and 1 day.
On November 5, 2002, petitioner filed a Motion
for Correct Computation, praying that his
backwages be computed from the date of his
dismissal on January 24, 1997 up to the finality
of the Resolution of the Supreme Court on May
27, 2002. Upon recomputation, NLRC arrived
at an updated amount in the sum of
P471,320.31.
Respondents filed a Motion to Quash Writ of
Execution, arguing that no more recomputation
is required after the decision becomes final
and executory, the same cannot be altered or
amended anymore. Denied. Reappealed and a
recomputation was granted but only in the
amount of P147,560.19.

Nacar then filed a Motion praying for the recomputation of the monetary award to include
the appropriate interests.
The Labor Arbiter granted the motion, but
reasoned that it is the October 15, 1998
Decision that should be enforced considering
that it was the one that became final and
executory. However, the Labor Arbiter
reasoned that since the decision states that the
separation pay and backwages are computed
only up to the promulgation of the said
decision, it is the amount of P158,919.92 that
should be executed. Thus, since petitioner
already received P147,560.19, he is only
entitled to the balance of P11,459.73.
Nacar appealed to the CA. Denied. It opined
that since petitioner no longer appealed the
October 15, 1998 Decision of the Labor
Arbiter, which already became final and
executory, a belated correction thereof is no
longer allowed. The CA stated that there is
nothing left to be done except to enforce the
said judgment.
ISSUE: WON a re-computation in the course
of execution of the labor arbiter's original
computation of the awards made is legally
proper. YES
HELD: Computation should start from the time
Nacar was illegally dismissed until judgment
has become final and executory on May 27,
2013. Moreover, a recomputation is necessary
and is not a violation of the principle of
immutability
of
final
judgments.
The
recomputation of the consequences of illegal
dismissal upon execution of the decision does
not constitute an alteration or amendment of
the final decision being implemented. The
illegal dismissal ruling stands; only the
computation of monetary consequences of the
dismissal is affected.
As to the payment of legal interest, the
guidelines laid down in the case of Eastern
Shipping Lines are accordingly modified to
embody BSP-MB Circular No. 799, as follows:
I. When an obligation, regardless of its source,
i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can
be held liable for damages. The provisions
under Title XVIII on Damages of the Civil

Code govern in determining the measure of

recoverable damages. II. With regard
particularly to an award of interest in the
concept of actual and compensatory damages,
the rate of interest, as well as the accrual
thereof, is imposed, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the
interest due should be that which may have
been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest
from the time it is judicially demanded. In
the absence of stipulation, the rate of
interest shall be 6% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan
or forbearance of money, is breached, an
interest on the amount of damages
awarded may be imposed at the discretion
of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on
unliquidated claims or damages, except
when or until the demand can be
established with reasonable certainty.
Accordingly, where the demand is
established with reasonable certainty, the
interest shall begin to run from the time the
claim is made judicially or extrajudicially
(Art. 1169, Civil Code), but when such
certainty cannot be so reasonably
established at the time the demand is
made, the interest shall begin to run only
from the date the judgment of the court is
made (at which time the quantification of
damages may be deemed to have been
reasonably ascertained). The actual base
for the computation of legal interest shall, in
any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and
executory, the rate of legal interest,
whether the case falls under paragraph 1
or paragraph 2, above, shall be 6% per
annum from such finality until its
satisfaction, this interim period being
deemed to be by then an equivalent to a
forbearance of credit.

The Decision of the CA is reversed and set

aside. The case is remanded back to the LA
for the proper recomputation.
* The rate of interest starting July 1, 2013 is
6% per annum (since the original case was
decided in 2002, 12% int was still applied) and
applies
prospectively.
Computation
of
backwages and separation pay should start
from the time an employee is illegally
dismissed to the time judgment has become
final and executory. Interest of such amount
acrrues until full payment is made.

ECE REALTY AND DEVELOPMENT, INC.,

VS. HAYDYN HERNANDEZ
FACTS: Haydn filed a complaint for specific
performance with damages against EMIR and
ECE Realty due to the failure of the
respondents to deliver a condominium unit
which he purchased from them. The
respondents allegedly promised to turn over to
him the unit by December 31, 1999, but failed
to do so. Worse, he learned that the actual
area was only 26 square meters, not 30 square
meters as indicated in their contract to sell, and
the
company
refused
to
grant
his
corresponding reduction in the purchase price;
instead the companies told him to settle his
arrears in amortizations. He learned later that
that company sold Unit 808 to a third party.
In their defense, the respondent faulted
complainant for unjustifiably refusing to accept
delivery of the condominium unit; that they
were forced to cancel the contract to sell
because of the refusal of the complainant to
settle his past arrears.
The HLURB ruled in favor of the complainant
and ordered the company to reimburse the
respondent the amount of P452,551.65, plus
legal interest, from the filing of the complaint,
and to pay the respondent P50,000.00 as
moral damages, P50,000.00 as attorneys
fees, and P50,000.00 as exemplary damages.
[11]
The company appealed the case all the way to
the CA and eventually to the Supreme Court.
ISSUE: W/N ECE should
reimburse Hernandez

be

liable

to

RULING: YES. The Supreme Court affirmed

the ruling of the lower four and tribunals, with a
slight modification of the legal interest
imposable:
Article 2209 of the New Civil Code provides
that If the obligation consists in the payment of
a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no
stipulation to the contrary, shall be the payment
of the interest agreed upon, and in the
absence of stipulation, the legal interest, which
is six per cent per annum. There is no doubt
that ECE incurred in delay in delivering the
subject condominium unit, for which reason the
trial court was justified in awarding interest to
the respondent from the filing of his complaint.
There being no stipulation as to interest, under
Article 2209 the imposable rate is six percent
(6%) by way of damages, following the
guidelines laid down in the landmark case of
Eastern Shipping Lines v. Court of Appeals:
II.With regard particularly to an award of interest
in the concept of actual and compensatory
damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it
consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the
interest due should be that which may have
been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest
from the time it is judicially demanded. In
the absence of stipulation, the rate of
interest shall be 12% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan
or forbearance of money, is breached, an
interest on the amount of damages
awarded may be imposed at the discretion
of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on
unliquidated claims or damages except
when or until the demand can be
established with reasonable certainty.
Accordingly, where the demand is
established with reasonable certainty, the
interest shall begin to run from the time the

claim is made judicially or extrajudicially

(Art. 1169, Civil Code) but when such
certainty cannot be so reasonably
established at the time the demand is
made, the interest shall begin to run only
from the date the judgment of the court is
made (at which time the quantification of
damages may be deemed to have been
reasonably ascertained). The actual base
for the computation of legal interest shall, in
any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and
executory, the rate of legal interest,
whether the case falls under paragraph 1
or paragraph 2, above, shall be 12% per
annum from such finality until its
satisfaction, this interim period being
deemed to be by then an equivalent to a
forbearance of credit.
The term forbearance, within the context of
usury law, has been described as a contractual
obligation of a lender or creditor to refrain,
during a given period of time, from requiring
the borrower or debtor to repay the loan or
debt then due and payable.
Eastern Shipping Lines, Inc. synthesized the
rules on the imposition of interest, if proper,
and the applicable rate, as follows: The 12%
per annum rate under CB Circular No. 416
shall apply only to loans or forbearance of
money, goods, or credits, as well as to
judgments involving such loan or forbearance
of money, goods, or credit, while the 6% per
annum under Art. 2209 of the Civil Code
applies when the transaction involves the
payment of indemnities in the concept of
damage arising from the breach or a delay in
the performance of obligations in general, with
the application of both rates reckoned from
the time the complaint was filed until the
[adjudged] amount is fully paid. In either
instance, the reckoning period for the
commencement of the running of the legal
interest shall be subject to the condition that
the courts are vested with discretion,
depending on the equities of each case, on the
award of interest. (Emphasis ours)
Thus, from the finality of the judgment
awarding a sum of money until it is satisfied,
the award shall be considered a forbearance of

credit, regardless of whether the award in fact

pertained to one. Pursuant to Central Bank
Circular No. 416 issued on July 29, 1974, in
the absence of written stipulation the interest
rate to be imposed in judgments involving a
forbearance of credit was twelve percent (12%)
per annum, up from six percent (6%) under
Article 2209 of the Civil Code. This was
reiterated in Central Bank Circular No. 905,
which suspended the effectivity of the Usury
Law beginning on January 1, 1983.
But since July 1, 2013, the rate of twelve
percent (12%) per annum from finality of the
judgment until satisfaction has been brought
back to six percent (6%). Section 1 of
Resolution No. 796 of the Monetary Board of
the Bangko Sentral ng Pilipinas dated May 16,
2013 provides: The rate of interest for the loan
or forbearance of any money, goods or credits
and the rate allowed in judgments, in the
absence of an express contract as to such rate
of interest, shall be six percent (6%) per
annum. Thus, the rate of interest to be
imposed from finality of judgments is now back
at six percent (6%), the rate provided in Article
2209 of the Civil Code.

ANTONIO TAN v. COURT OF APPEALS and

the CULTURAL CENTER OF THE
PHILIPPINES
FACTS: On May 14, 1978 and July 6, 1978,
petitioner Antonio Tan obtained two (2) loans
each
in
the
principal
amount
of
(P2,000,000.00), or in the total principal
amount of Four Million Pesos (P4,000,000.00)
from respondent Cultural Center of the
Philippines (CCP) evidenced by two (2)
promissory notes with maturity dates on May
14, 1979 and July 6, 1979, respectively.
Petitioner defaulted but after a few partial
payments he had the loans restructured by
respondent CCP, and petitioner accordingly
executed a promissory note on August 31,
1979 in the amount of (P3,411,421.32) payable
in five (5) installments. Petitioner Tan failed to
pay any installment on the said restructured
loan of (P3,411,421.32), the last installment
falling due on December 31, 1980.
In a letter dated January 26, 1982, petitioner
requested and proposed to respondent CCP a
mode of paying the restructured loan, i.e., (a)

twenty percent (20%) of the principal amount

of the loan upon the respondent giving its
conformity to his proposal; and (b) the balance
on the principal obligation payable in thirty-six
(36) equal monthly installments until fully paid.
On October 20, 1983, petitioner again sent a
letter to respondent CCP requesting for a
moratorium on his loan obligation until the
following year allegedly due to a substantial
deduction in the volume of his business and on
account of the peso devaluation. No favorable
response was made to said letters. Instead,
respondent CCP, through counsel, wrote a
letter dated May 30, 1984 to the petitioner
demanding full payment, within ten (10) days
from receipt of said letter, of the petitioners
restructured loan which as of April 30, 1984
amounted to (P6,088,735.03).
On August 29, 1984, respondent CCP filed in
the RTC of Manila a complaint for collection of
a sum of money against the petitioner after the
latter failed to settle his said restructured loan
obligation. The petitioner interposed the
defense that he merely accommodated a
friend, Wilson Lucmen, who allegedly asked for
his help to obtain a loan from respondent CCP.
Petitioner claimed that he has not been able to
locate Wilson Lucmen.
While the case was pending in the trial court,
the petitioner filed a Manifestation wherein he
proposed to settle his indebtedness to
respondent CCP by proposing to make a down
payment of (P140,000.00) and to issue twelve
(12) checks every beginning of the year to
cover installment payments for one year, and
every year thereafter until the balance is fully
paid. However, respondent CCP did not agree
to the petitioners proposals and so the trial of
the case ensued.
TC: Ruled in favor of CCP. CA: Affirmed trial
courts decision.
ISSUE (1): Whether there are contractual and
legal bases for the imposition of the penalty,
interest on the penalty and attorneys fees.
YES
HELD 1: The petitioner imputes error on the
part of the appellate court in not totally
eliminating the award of attorneys fees and in
not reducing the penalties considering that the
petitioner, contrary to the appellate courts

findings, has allegedly made partial payments

on the loan. And if penalty is to be awarded,
the petitioner is asking for the non- imposition
of interest on the surcharges inasmuch as the
compounding of interest on surcharges is not
provided in the promissory note marked Exhibit
A. The petitioner takes exception to the
computation of the private respondent whereby
the interest, surcharge and the principal were
added together and that on the total sum
interest was imposed. Petitioner also claims
that there is no basis in law for the charging of
interest on the surcharges for the reason that
the New Civil Code is devoid of any provision
allowing the imposition of interest on
surcharges.
We find no merit in the petitioners contention.
Article 1226 of the New Civil Code provides
that:
In obligations with a penal clause, the penalty
shall substitute the indemnity for damages and
the payment of interests in case of noncompliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid
if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is
demandable in accordance with the provisions
of this Code.
In the case at bar, the promissory note (Exhibit
A) expressly provides for the imposition of
both interest and penalties in case of default
on the part of the petitioner in the payment of
the subject restructured loan. The pertinent
portion of the promissory note (Exhibit A)
imposing interest and penalties provides that:
xxx xxx xxx
With interest at the rate of FOURTEEN per
cent (14%) per annum from the date hereof
until paid. PLUS THREE PERCENT (3%)
SERVICE CHARGE.
In case of non-payment of this note at
maturity/on demand or upon default of
payment of any portion of it when due, I/We
jointly and severally agree to pay additional
penalty charges at the rate of TWO per cent
(2%) per month on the total amount due until
paid, payable and computed monthly. Default

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

of payment of this note or any portion thereof

when due shall render all other installments
and all existing promissory notes made by us
in favor of the CULTURAL CENTER OF THE
PHILIPPINES
immediately
due
and
demandable.
xxx xxx xxx
The stipulated fourteen percent (14%) per
annum interest charge until full payment of the
loan constitutes the monetary interest on the
note and is allowed under Article 1956 of the
New Civil Code. On the other hand, the
stipulated two percent (2%) per month penalty
is in the form of penalty charge which is
separate and distinct from the monetary
interest on the principal of the loan.
Penalty on delinquent loans may take different
forms. In Government Service Insurance
System v. Court of Appeals, this Court has
ruled that the New Civil Code permits an
agreement upon a penalty apart from the
monetary interest. If the parties stipulate this
kind of agreement, the penalty does not
include the monetary interest, and as such the
two are different and distinct from each other
and may be demanded separately.
The penalty charge of two percent (2%) per
month in the case at bar began to accrue from
the time of default by the petitioner. There is no
doubt that the petitioner is liable for both the
stipulated monetary interest and the stipulated
penalty charge. The penalty charge is also
called penalty or compensatory interest.
ISSUE (2): whether interest may accrue on the
penalty or compensatory interest without
violating the provisions of Article 1959 of the
New Civil Code. YES

30

penalty. He claims that since there is no law

that allows imposition of interest on penalties,
the penalties should notearn interest. But as
we have already explained, penalty clauses
can be in the form of penalty or compensatory
interest. Thus, the compounding of the penalty
or compensatory interest is sanctioned by and
allowed pursuant to the above-quoted
provision of Article 1959 of the New Civil Code
considering that:
First, there is an express stipulation in the
promissory note (Exhibit A) permitting the
compounding of interest. The fifth paragraph of
the said promissory note provides that: Any
interest which may be due if not paid shall be
added to the total amount when due and shall
become part thereof, the whole amount to bear
interest at the maximum rate allowed by law.
Therefore, any penalty interest not paid, when
due, shall earn the legal interest of twelve
percent (12%) per annum, in the absence of
express stipulation on the specific rate of
interest, as in the case at bar.
Second, Article 2212 of the New Civil Code
provides that Interest due shall earn legal
interest from the time it is judicially demanded,
although the obligation may be silent upon this
point. In the instant case, interest likewise
began to run on the penalty interest upon the
filing of the complaint in court by respondent
CCP on August 29, 1984. Hence, the courts a
quo did not err in ruling that the petitioner is
bound to pay the interest on the total amount
of the principal, the monetary interest and the
penalty interest.

HELD 2: Art. 1959. Without prejudice to the

provisions of Article 2212, interest due and
unpaid shall not earn interest. However, the
contracting parties may by stipulation capitalize
the interest due and unpaid, which as added
principal, shall earn new interest.

In the case at bar, however, equity cannot be

considered inasmuch as there is a contractual
stipulation in the promissory note whereby the
petitioner
expressly
agreed
to
the
compounding of interest in case of failure on
his part to pay the loan at maturity. Inasmuch
as the said stipulation on the compounding of
interest has the force of law between the
parties and does not appear to be inequitable
or unjust, the said written stipulation should be
respected.

According to the petitioner, there is no legal

basis for the imposition of interest on the
penalty charge for the reason that the law only
allows imposition of interest on monetary
interest but not the charging of interest on

The said statement of account also shows that

the amounts stated therein are net of the
partial payments amounting to a total of
(P452,561.43) which were made during the
period from May 13, 1983 to September 30,

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

1983. The petitioner now seeks the reduction

of the penalty due to the said partial payments.
The principal amount of the promissory note
(Exhibit A) was (P3,411,421.32) when the
loan was restructured on August 31, 1979. As
of August 28, 1986, the principal amount of the
said restructured loan has been reduced to
(P2,838,454.68). Thus, petitioner contends that
reduction of the penalty is justifiable pursuant
to Article 1229 of the New Civil Code which
provides that: The judge shall equitably
reduce the penalty when the principal
obligation has been partly or irregularly
complied with by the debtor. Even if there has
been no performance, the penalty may also be
reduced by the courts if it is iniquitous or
unconscionable. Petitioner insists that the
penalty should be reduced to ten percent
(10%) of the unpaid debt in accordance with
Bachrach Motor Company v. Espiritu.
There appears to be a justification for a
reduction of the penalty charge but not
necessarily to ten percent (10%) of the unpaid
balance of the loan as suggested by petitioner.
Inasmuch as petitioner has made partial
payments which showed his good faith, a
reduction of the penalty charge from two
percent (2%) per month on the total amount
due, compounded monthly, until paid can
indeed be justified under the said provision of
Article 1229 of the New Civil Code.
In other words, we find the continued monthly
accrual of the two percent (2%) penalty charge
on the total amount due to be unconscionable
inasmuch as the same appeared to have been
compounded monthly.
Considering
petitioners
several
partial
payments and the fact he is liable under the
note for the two percent (2%) penalty charge
per month on the total amount due,
compounded monthly, for twenty-one (21)
years since his default in 1980, we find it fair
and equitable to reduce the penalty charge to a
straight twelve percent (12%) per annum on
the total amount due starting August 28, 1986,
the date of the last Statement of Account.

SEBASTIAN SIGA-AN vs ALICIA

VILLANUEVA
FACTS: Respondent Alicia Villanueva filed a

31

complaint for sum of money against petitioner

Sebastian Siga-an alleging that she was a
businesswoman engaged in supplying office
materials and equipment to the Philippine Navy
Office (PNO) while petitioner was a military
officer and comptroller of the
PNO.
Respondent
claimed
that
petitioner
approached her inside the PNO and offered to
loan her the amount of P540,000.00. Since she
needed capital for her business transactions
with the PNO, she accepted petitioners
proposal. The loan agreement was not
reduced in writing. Also, there was no
stipulation as to the payment of interest for the
loan.
Respondent issued a check
worth
P500,000.00 as partial payment of the loan,
another check of P200,000.00 as payment of
the remaining balance of the loan. Petitioner
told her that since she paid a total amount of
P700,000.00 for theP540,000.00 worth of loan,
the excess amount of P160,000.00 would be
applied as interest for the loan. Not satisfied
with the amount applied as interest, petitioner
pestered her to pay additional interest and
threatened to block or disapprove her
transactions with the PNO if she would not
comply. Thus she paid additional amounts for
the loan. The total amount paid to petitioner for
the
loan
and
interest
accumulated
toP1,200,000.00.
Respondent consulted a lawyer and her lawyer
told her that petitioner could not validly collect
interest because there was no agreement
between her and petitioner regarding payment
of interest thus she made overpayment to
petitioner so she sent a demand letter to
petitioner asking for the return of the excess
amount of P660,000.00. But petitioner ignored
her claim for reimbursement.
ISSUE: WON respondent
reimbursement? YES

is

entitled

to

HELD: Interest is a compensation fixed by the

parties for the use or forbearance of money.
This is referred to as monetary interest.
Interest may also be imposed by law or by
courts as penalty or indemnity for damages.
This is called compensatory interest. The right
to interest arises only by virtue of a contract or
by virtue of damages for delay or failure to pay
the principal loan on which interest is

demanded.
Article 1956 of the Civil Code, which refers to
monetary interest, specifically mandates that
no interest shall be due unless it has been
expressly stipulated in writing. Payment of
monetary interest is allowed only if:
(1) there was an express stipulation for the
payment of interest; and
(2) the agreement for the payment of interest was
reduced in writing.
The concurrence of the two conditions is
required. Thus, we have held that collection of
interest without any stipulation therefor in
writing is prohibited by law.
Petitioner and respondent did not agree on the
payment of interest for the loan. Neither was
there convincing proof of written agreement
between the two regarding the payment of
interest.
As to the contention of petitioner that
respondent executed a promissory note: the
presented promissory note was in her
handwriting because Siga-an told her to copy it
and she did because she feared the threats of
Sigaan to block her deals with the PhilNavy.
And as to the alleged admission in the BP 22
cases that they had agreed on the payment of
interest at the rate of 7%, respondent merely
testified that after paying the total amount of
loan, petitioner ordered her to pay interest.
Respondent did not categorically declare in the
same case that she and respondent made an
express stipulation in writing as regards
payment of interest at the rate of 7%.
An interest may be imposed even in the
absence of express stipulation, verbal or
written, regarding payment of interest under Art
2209 of CC that if the obligation consists in the
payment of a sum of money, and the debtor
incurs delay, a legal interest of 12% per annum
may be imposed as indemnity for damages if
no stipulation on the payment of interest was
agreed upon. It only applies to compensatory
interest and not to monetary interest. The case
at bar involves petitioners claim for monetary
interest. Further, said compensatory interest is
not chargeable in the instant case because it
was not duly proven that respondent defaulted
in paying the loan.

The principle of solutio indebiti applies where

(1) a payment is made when there exists no
binding relation between the payor, who has
no duty to pay, and the person who received
the payment; and (2) the payment is made
through mistake, and not through liberality or
some other cause. Respondent was under no
duty to make such payment because there was
no express stipulation in writing to that effect.
There was no binding relation between
petitioner and respondent as regards the
payment of interest. The payment was clearly
a mistake. Since petitioner received something
when there was no right to demand it, he has
an obligation to return it.
POLICY: No interest shall be due unless it
has been expressly stipulated in writing.

PART III: USURY LAW

SOLIDBANK vs PERMANENT HOMES
FACTS: PERMANENT HOMES is a real
estate development company, and to finance
its housing project known as the Buena Vida
Townhomes
located
within
Merville
Subdivision, Paraaque City, it applied and
was subsequently granted by SOLIDBANK
with an Omnibus Line credit facility in the
total amount of SIXTY MILLION PESOS. Of
the entire loan, FIFTY NINE MILLION as time
loan for a term of up to three hundred sixty
(360) days, with interest thereon at prevailing
market rates, and
subject
to
monthly
repricing. The remaining ONE MILLION was
available for domestic bills purchase.
To secure the aforesaid loan, PERMANENT
HOMES initially mortgaged three (3)
townhouse units within the Buena Vida project
in Paraaque. At the time, however, the instant
complaint was filed against SOLIDBANK, a
total of 36 townhouse units were mortgaged
with said bank.
Of the 60 million available to PERMANENT
HOMES, it availed of a total of 41.5 million
pesos, covered by three (3) promissory notes,
which contain the following provisions, thus:
xxx 5.
We/I irrevocably authorize
Solidbank to increase or decrease at any
time the interest rate agreed in this Note or

Loan on the basis of, among others, prevailing

rates in the local or international capital
markets. For this purpose, We/I authorize
Solidbank to debit any deposit or placement
account with Solidbank belonging to any one of
us. The adjustment of the interest rate shall be
effective from the date indicated in the written
notice sent to us by the bank, or if no date is
indicated, from the time the notice was sent.
6. Should We/I disagree to the interest rate
adjustment, We/I shall prepay all amounts due
under this Note or Loan within thirty (30) days
from the receipt by anyone of us of the written
notice. Otherwise, We/I shall be deemed to
have given our consent to the interest rate
adjustment.
Contrary, however, to the specific provisions
as afore- quoted, there was a standing
agreement by the parties that any increase
or decrease in interest rates shall be
subject to the mutual agreement of the
parties.
For the first loan availment of PERMANENT
HOMES on March 20, 1997, in the amount of
19.6 MILLION, from the initial interest rate
of14.25% per annum (p.a.), the rate was
increased to 30% p.a. on January 16, 1998.
For the second loan availment in the amount of
18 million, the rate was initially pegged at
15.75% p.a. on June 24, 1997 increased 30%
p.a.from January 22, 1998 to February 20,
1998.
For the third loan availment on July 15, 1997,
in the amount of 3.9 million, the interest rate
was initially pegged at 35% p.a., decreased at
29% p.a. for the month of February.
It is Permanents stand that SOLIDBANK
unilaterally and arbitrarily accelerated the
interest rates without any declared basis of
such increases, of which PERMANENT
HOMES had not agreed to, or at the very least,
been informed of. This is contrary to their
earlier agreement that any interest rate
changes will be subject to mutual agreement of
the parties. PERMANENT HOMES further
admits that it was not able to protest such
arbitrary increases at the time they were
imposed by SOLIDBANK, for fear that
SOLIDBANK might cut off the credit facility it
extended to PERMANENT HOMES.

Permanent filed a case before the trial court

seeking the following: (1) the annulment of
the increases in interest rates on the loans it
obtained from SOLIDBANK, on the ground
that it was violative of the principle of
mutuality of agreement of the parties, as
enunciated in Article 1409 of the New Civil
Code, (2) the fixing of the interest rates at
the applicable interest rate, and (3) for the
trial court to order SOLIDBANK to make an
accounting of the payments it made, so as to
determine
the
amount
of
refund
PERMANENT is entitled to, as well as to
order SOLIDBANK to release the remaining
available balance of the loan it extended to
PERMANENT. In addition, Permanent prays
for the payment of compensatory, moral and
exemplary damages. SOLIDBANK, on the
other hand, avers that PERMANENT
HOMES has no cause of action against it, in
view of the pertinent provisions of the
Omnibus Credit Line and the promissory
notes
agreed
to
and
signed
by
PERMANENT HOMES.
Thus,in accordance with
said
provisions, SOLIDBANK was authorized to,
upon due notice, periodically adjust the

interest rates on PERMANENT HOMES loan

availments during the monthly interest
repricing dates, depending on the changes in
prevailing interest rates in the local and
international capital markets.
SOLIDBANK, to establish its defense,
presented its lone witness, Mr. Cesar Lugtu,
who testified to the effect that, contrary to
PERMANENT HOMES assertions that it was
not promptly informed of the repriced interest
rates, SOLIDBANKs officers verbally advised
PERMANENT HOMES of the repriced rates at
the start of the period, and even added that
their transaction[s] were based on trust. Aside
from these allegations, however, no written
memorandum or note was presented by
SOLIDBANK to support their assertion that
PERMANENT HOMES was timely advised of
the repriced interests.
The trial court promulgated its Decision in favor
of Solidbank. Permanent filed an appeal before
the appellate court. The appellate court
granted the appeal, and set aside the trial
courts ruling. The appellate court not only
recognized the validity of escalation clauses,
but also underscored the necessity of a basis

for the increase in interest rates and of the

principle of mutuality of contracts.

admitted that it did not promptly send

Permanent written repriced rates, but rather
verbally advised Permanents officers over
the phone at the start of the period.

ISSUE: WON the increases in the interest

rates on Permanents loans are void for having
been unilaterally imposed without basis. YES.
HELD: The Usury Law had been rendered
legally ineffective by Resolution No. 224 dated
3 December 1982 of the Monetary Board of the
Central Bank, and later by Central Bank
Circular No. 905 which took effect on 1
January 1983. These circulars removed the
ceiling on interest rates for secured and
unsecured loans regardless of maturity. The
effect of these circulars is to allow the parties
to agree on any interest that may be charged
on a loan. The virtual repeal of the Usury Law
is within the range of judicial notice which
courts are bound to take into account.
Although interest rates are no longer subject to
a ceiling, the lender still does not have an
unbridled license to impose increased
interest rates. The lender and the borrower
should agree on the imposed rate, and such
imposed rate should be in writing.
The stipulations, contained in the 3 promissory
notes on interest rate repricing are valid
because (1) the parties mutually agreed on
said stipulations; (2) repricing takes effect only
upon Solidbanks written notice to Permanent
of the new interest rate; and (3) Permanent
has the option to prepay its loan if Permanent
and Solidbank do not agree on the new
interest rate. The phrases irrevocably
authorize, at any time and adjustment of the
interest rate shall be effective from the date
indicated in the written notice sent to us by the
bank, or if no date is indicated, from the time
the notice was sent, emphasize that
Permanent should receive a written notice
from Solidbank as a condition for the
adjustment of the interest rates.
Solidbanks range of lending rates were
consistent with prevailing rates in the local or
international capital markets. The interest rate
repricing happened at the height of the Asian
financial crises in late 1997, when banks
clamped down on lendings because of higher
credit risks across industries, particularly the
real estate industry.
The

SC

also

recognize

that Solidbank

Solidbank did not present any written

memorandum to support its allegation that it
promptly advised Permanent of the change in
interest rates. Solidbank advised Permanent
on the repriced interest rate applicable for the
30-day interest period only after the period had
begun. Permanent presented a tabulation
which showed that Solidbank either did not
send a billing statement, or sent a billing
statement 6 to 33 days late. Solidbanks
computation of the interest due from
Permanent should be adjusted to take effect
only upon Permanents receipt of the
written notice from Solidbank.

PART IV: DEPOSIT (Articles 1962 2009)

I.

Deposit in General and its Different

Kinds
BPI vs IAC
FACTS: The original parties to the case were
Zshornack and Commercial Bank and Trust
Company of the Phils (Comtrust). In 1980, BPI
absorbed Comtrust through a merger and was
substituted as party to the case.
Zshornack and his wife maintained in Comtrust
a dollar savings account and a peso current
account. On Dec 8, 1975, Zshornack delivered
to the bank $3000 for safekeeping. When he
requested the return of the money, Comtrust
explained that the sum was disposed of in this
manner: US$2,000.00 was sold on December
29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's
current account per deposit slip accomplished
by Garcia; the remaining US$1,000.00 was
sold on February 3, 1976 and the peso
proceeds amounting to P8,350.00 were
deposited to his current account per deposit
slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was
properly credited to Zshornack's current
account at prevailing conversion rates, BPI

now posits another ground to defeat

private

respondent's claim. It now argues that the

contract embodied in the document is the
contract of depositum (as defined in Article
1962, New Civil Code), which banks do not
enter into. The bank alleges that Garcia
exceeded his powers when he entered into the
transaction. Hence, it is claimed, the bank
cannot be liable under the contract, and the
obligation is purely personal to Garcia.
ISSUE: WON the contract between petitioner
and respondent bank is a deposit. YES.
HELD: The document which embodies the
contract states that the US$3,000.00 was
received by the bank for safekeeping. The
subsequent acts of the parties also show that
the intent of the parties was really for the bank
to safely keep the dollars and to return it to
Zshornack at a later time, Thus, Zshornack
demanded the return of the money on May 10,
1976, or over five months later.
The above arrangement is that contract
defined under Article 1962, New Civil Code,
which reads:
Art. 1962. A deposit is constituted from the
moment a person receives a thing belonging to
another, with the obligation of safely keeping it
and of returning the same. If the safekeeping
of the thing delivered is not the principal
purpose of the contract, there is no deposit but
some other contract.
Note that the object of the contract between
Zshornack and COMTRUST was foreign
exchange. Hence, the transaction was covered
by Central Bank Circular No. 20, Restrictions
on Gold and Foreign Exchange Transactions,
promulgated on December 9, 1949, which was
in force at the time the parties entered into the
transaction involved in this case. Under the
said circular, safekeeping of the greenbacks
without selling them to Central Bank within 1
business day from receipt, is a transaction
which is not authorized.
As earlier stated, the document and the
subsequent acts of the parties show that they
intended the bank to safekeep the foreign
exchange, and return it later to Zshornack, who
alleged in his complaint that he is a Philippine
resident. The parties did not intended to sell
the US dollars to the Central Bank within one

business day from receipt. Otherwise, the

contract of depositum would never have been
entered into at all.
Since the mere safekeeping of the greenbacks,
without selling them to the Central Bank within
one business day from receipt, is a transaction
which is not authorized by CB Circular No. 20,
it must be considered as one which falls under
the general class of prohibited transactions.
Hence, pursuant to Article 5 of the Civil Code,
it is void, having been executed against the
provisions of a mandatory/prohibitory law.
More importantly, it affords neither of the
parties a cause of action against the other.
"When the nullity proceeds from the illegality of
the cause or object of the contract, and the act
constitutes a criminal offense, both parties
being in pari delicto, they shall have no cause
of action against each other. . ." [Art. 1411,
New Civil Code.] The only remedy is one on
behalf of the State to prosecute the parties for
violating the law.
Therefore, Zshornack cannot recover under
this cause of action.

II.

Voluntary Deposit
CALIBO, JR. VS COURT OF APPEALS

FACTS: In 1985, Mike Abella rented a house

owned by Atty. Dionisio Calibo, Jr. Meanwhile,
Dr. Pablo Abella, Mikes father, entrusted to
Mike a tractor. Pablo delivered the tractor to
Mike in order for the latter to safe-keep the
same.
In November 1986, Mike defaulted in his rental
payments to Calibo. Calibo repeatedly
demanded payments but Mike failed to pay.
However, Mike assured Calibo that he will
soon pay and Mike used his fathers tractor as
a security. Hence, Calibo took possession of
the tractor. Later, Mike advised Calibo that he
can sell the tractor as payment for his debts.
Pablo learned of the foregoing and so he
contacted Calibo. He offered to pay a portion
of Mikes debt and in return Calibo must return
the tractor. Calibo refused and he wanted
Pablo to guarantee all of Mikes debt which
Pablo does not want. Eventually, to redeem his
tractor, Pablo filed a replevin suit against

Calibo, which Pablo won.

On appeal, Calibo invoked that the replevin
should not have been granted as there was a
valid contract of pledge between him and Mike;
and that Mike was Pablos agent because
Pablo was aware of the fact that Mike pledged
the tractor to him. In the alternative, Calibo
invoked that if theres no contract of pledge,
there is at least a contract of deposit since
Mike himself left the tractor with him in the
concept of an innkeeper.
ISSUE: Whether or not the arguments of
Calibo are valid.
HELD: No. There is no contract of pledge.
The elements of a contract of pledge are as
follows:
1. the pledge is constituted to secure the
fulfillment of a principal obligation;
2. the pledgor be the absolute owner of the thing
pledged; and
3. the person constituting the pledge has the free
disposal of his property, and in the absence
thereof, that he be legally authorized for the
purpose.
In this case, element number 2 is missing.
Mike is not the absolute owner of the tractor.
There is no contract of agency between Pablo
and Mike.
It was proven in court that Pablo only left the
tractor in his sons possession only for the
purpose of safekeeping. Pablo was not aware
that his son pledged it to Calibo and he never
authorized his son to do so.
There is no contract of deposit between Mike
and Calibo.
There is no deposit where the principal
purpose for receiving the object is not
safekeeping. In this case, Calibo himself
admitted in court that Mike delivered the tractor
to him as security for Mikes debts.
The judgment ordering Calibo to return the
tractor to Pablo was affirmed by the Supreme
Court.

CHAN VS. MACEDA, JR.

FACTS: On July 28, 1976, Bonifacio S.
Maceda, Jr., herein respondent, obtained a
P7.3 million loan from the Development Bank
of the Philippines for the construction of his
New Gran Hotel Project in Tacloban City.
Thereafter,
on
September
29,
1976,
respondent entered into a building construction
contract with Moreman Builders Co., Inc.,
(Moreman). They agreed that the construction
would be finished not later than December 22,
1977.
Respondent purchased various construction
materials and equipment in Manila. Moreman,
in turn, deposited them in the warehouse of
Wilson and Lily Chan, herein petitioners. The
deposit was free of charge. Unfortunately,
Moreman failed to finish the construction of the
hotel at the stipulated time. Hence, on
February 1, 1978, respondent filed with the
then Court of First Instance (CFI, now Regional
Trial Court), Branch 39, Manila, an action for
rescission and damages against Moreman,
docketed as Civil Case No. 113498.
Meanwhile, during the pendency of the case,
respondent ordered petitioners to return to him
the construction materials and equipment
which Moreman deposited in their warehouse.
Petitioners, however, told them that Moreman
withdrew those construction materials in 1977.
Hence, on December 11, 1985, respondent
filed with the Regional Trial Court, Branch 160,
Pasig City, an action for damages with an
application for a writ of preliminary attachment
against petitioners,7 docketed as Civil Case
No. 53044.
ISSUES:
1. Has respondent presented proof that the
construction materials and equipment were
actually in petitioners' warehouse when he
asked that the same be turned over to him?
NO
2. If so, does respondent have the right to
demand the release of the said materials and
equipment or claim for damages? NO
HELD: Under Article 1311 of the Civil Code,
contracts are binding upon the parties (and
their assigns and heirs) who execute them.
When there is no privity of contract, there is

likewise no obligation or liability to speak about

and thus no cause of action arises.
Specifically, in an action against the
depositary, the burden is on the plaintiff to
prove the bailment or deposit and the
performance of conditions precedent to the
right of action. A depositary is obliged to return
the thing to the depositor, or to his heirs or
successors, or to the person who may have
been designated in the contract.
In the present case, the record is bereft of any
contract of deposit, oral or written, between
petitioners and respondent. If at all, it was only
between petitioners and Moreman. And
granting arguendo that there was indeed a
contract of deposit between petitioners and
Moreman, it is still incumbent upon respondent
to prove its existence and that it was executed
in his favor. However, respondent miserably
failed to do so. The only pieces of evidence
respondent presented to prove the contract of
deposit were the delivery
receipts.
Significantly, they are unsigned and not duly
received or authenticated by either Moreman,
petitioners or respondent or any of their
authorized representatives. Hence, those
delivery receipts have no probative value at all.
While our laws grant a person the remedial
right to prosecute or institute a civil action
against another for the enforcement or
protection of a right, or the prevention or
redress of a wrong, every cause of action excontractu must be founded upon a contract,
oral or written, express or implied.
Moreover, respondent also failed to prove that
there were construction materials and
equipment in petitioners' warehouse at the time
he made a demand for their return.
Considering that respondent failed to prove (1)
the existence of any contract of deposit
between him and petitioners, nor between the
latter and Moreman in his favor, and (2) that
there were construction materials in petitioners'
warehouse at the time of respondent's demand
to return the same, we hold that petitioners
have no corresponding obligation or liability to
respondent with respect to those construction
materials.
Anent the issue of damages, petitioners are
still not liable because, as expressly provided
for in Article 2199 of the Civil Code, actual or

compensatory damages cannot be presumed,

but must be proved with reasonable degree of
certainty. A court cannot rely on speculations,
conjectures, or guesswork as to the fact and
amount of damages, but must depend upon
competent proof that they have been suffered
by the injured party and on the best obtainable
evidence of the actual amount thereof. It must
point out specific facts which could afford a
basis for measuring whatever compensatory or
actual damages are borne.
Considering our findings that there was no
contract of deposit between petitioners and
respondent or Moreman and that actually there
were no more construction materials or
equipment in petitioners' warehouse when
respondent made a demand for their return, we
hold that he has no right whatsoever to claim
for damages.

SIA v. CA
FACTS: Herein petitioner and respondent
entered into a contract denominated as a
Lease Agreement whereby the former rented a
safety deposit box owned by the latter .
Petitioner placed in the deposit box her stamp
collection which was subsequently lost and
damaged due to a flood that took place in 1985
and 1986. The defendant bank rejected the
petitioner s claim for compensation for his
damaged stamps collection, so, the plaintiff
instituted an action for damages against the
defendant bank.
The bank alleged that the contract was that of
lease and its liability was limited to the exercise
of the diligence to prevent the opening of the
safe by any person other than the Renter, his
authorized agent or legal representative; The
Bank is not a depository of the contents of the
safe and it has neither the possession nor the
control of the same. The Bank has no interest
whatsoever in said contents, except as herein
provided, and it assumes absolutely no liability
in connection therewith.
RTC ruled in favor of petitioner. CA reversed
the decision.
ISSUE: Is SBTC liable for damages and loss?
YES

HELD: SBTC is a Depository Notwithstanding

the Contract of Lease.
In the recent case CA Agro-Industrial
Development Corp. vs. Court of Appeals, the
Court held that the use of a safety deposit box
is not a contract of lease and that it is actually
a special kind of deposit.
The prevailing rule in American jurisprudence
that the relation between a bank renting out
safe deposit boxes and its customer with
respect to the contents of the box is that of a
bailor and bailee, the bailment for hire and
mutual benefit has been adopted in this
jurisdiction, thus:
In the context of our laws which authorize
banking institutions to rent out safety deposit
boxes, it is clear that in this jurisdiction, the
prevailing rule in the United States has been
adopted. Section 72 of the General Banking
Act [R.A. 337, as amended] pertinently
provides:
"Sec. 72. In addition to the operations
specifically authorized elsewhere in this Act,
banking institutions other than building and
loan associations may perform the following
services:
(a) Receive in custody funds, documents, and
valuable objects, and rent safety deposit boxes
for the safequarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted
under subsections (a), (b) and (c) of this
section asdepositories or as agents. . .
."(emphasis supplied)
Note that the primary function is still found
within the parameters of a contract of deposit,
i.e., the receiving in custody of funds,
documents and other valuable objects for
safekeeping. The renting out of the safety
deposit boxes is not independent from, but
related to or in conjunction with, this principal
function. A contract of deposit may be entered
into orally or in writing (Art. 1969, Civil Code]
and, pursuant to Article 1306 of the Civil Code,
the parties thereto may establish such
stipulations, clauses, terms and conditions as
they may deem convenient, provided they are
not contrary to law, morals, good customs,
public order or public policy. The depositary's
responsibility for the safekeeping of the objects
deposited in the case at bar is governed by
Title I, Book IV of the Civil Code. Accordingly,

the depositary would be liable if, in performing

its obligation, it is found guilty of fraud,
negligence, delay or contravention of the tenor
of the agreement [Art. 1170, id.]. In the
absence of any stipulation prescribing the
degree of diligence required, that of a good
father of a family is to be observed [Art. 1173,
id.]. Hence, any stipulation exempting the
depositary from any liability arising from the
loss of the thing deposited on account of fraud,
negligence or delay would be void for being
contrary to law and public policy.
Condition 13 and 14 of the Contract of Lease
are Void.
Conditions 13 and l4 of the questioned contract
of lease of the safety deposit box, which read:
"13. The bank is a depositary of the contents of
the safe and it has neither the possession nor
control of the same.
"14. The bank has no interest whatsoever in
said contents, except as herein expressly
provided, and it assumes absolutely no liability
in connection therewith."
are void as they are contrary to law and public
policy. Said provisions are inconsistent with the
respondent Bank's responsibility as a
depositary under Section 72 (a) of the General
Banking Act.
Furthermore, condition 13 stands on a wrong
premise and is contrary to the actual practice
of the Bank. It is not correct to assert that the
Bank has neither the possession nor control of
the contents of the box since in fact, the safety
deposit box itself is located in its premises and
is under its absolute control; moreover, the
respondent Bank keeps the guard key to the
said box.
As stated earlier, renters cannot open their
respective boxes unless the Bank cooperates
by presenting and using this guard key. Clearly
then, to the extent above stated, the foregoing
conditions in the contract in question are void
and ineffective. It has been said:
"With respect to property deposited in a safedeposit box by a customer of a safe-deposit
company, the parties, since the relation is a
contractual one, may by special contract define
their respective duties or provide for increasing
or limiting the liability of the deposit company,
provided such contract is not in violation of law
or public policy. It must clearly appear that
there actually was such a special contract,

however, in order to vary the ordinary

obligations implied by law from the relationship
of the parties; liability of the deposit company
will not be enlarged or restricted by words of
doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from
liability for loss of the contents by its own fraud
or negligence or that, of its agents or servants,
and if a provision of the contract may be
construed as an attempt to do so, it will be held
ineffective for the purpose. Although it has
been held that the lessor of a safe-deposit box
cannot limit its liability for loss of the contents
thereof through its own negligence, the view
has been taken that such a lessor may limit its
liability to some extent by agreement or
stipulation.
SBTC is Negligent.
Respondent cannot invoke fortuitous event
under Article 1174by reason of its negligence .
SBTC's negligence aggravated the injury or
damage to the stamp collection. SBTC was
aware of the floods of 1985 and 1986; it also
knew that the floodwaters inundated the room
where Safe Deposit Box No. 54 was located. In
view thereof, it should have lost no time in
notifying the petitioner in order that the box
could have been opened to retrieve the
stamps, thus saving the same from further
deterioration and loss. In this respect, it failed
to exercise the reasonable care and prudence
expected of a good father of a family, thereby
becoming a party to the aggravation of the
injury or loss.
Accordingly,
the
aforementioned
fourth
characteristic of a fortuitous event is absent
Article 1170 of the Civil Code is therefore
applicable ;
Those who in the performance of their
obligation are guilty of fraud, negligence, or
delay, and those who in any manner
contravene the tenor thereof, are liable for
damages.

CA AGRO-INDUSTRIAL DEVELOPMENT
CORP. vs CA and SECURITY BANK AND
TRUST COMPANY
FACTS: On July 3, 1979, petitioner through its
president Sergio Aguirre, and spouses Ramon

and Paula Pugao entered into an agreement

where the former purchased from the latter two
parcels of land for P350,625. P75,725 was
paid as downpayment while the balance was
covered by three postdated checks. Among the
terms and conditions of said agreement were
that the titles to the lots shall be transferred to
the petitioner upon full payment of the
purchase price and that the owner's copies of
the certificates of title shall be deposited in a
safety deposit box. The same could be
withdrawn only upon the joint signatures of
petitioner and spouses Pugaos upon full
payment of the purchase price.
Petitioner and spouses Pugaos then rented
safety deposit box no. 1448 of respondent
Security Bank and Trust Company and for this
purpose both signed a contract of lease which
contained the following conditions:
13. The bank is not a depositary of the contents of
the safe and it has neither the possession nor
control of the same.
14. The bank has no interest whatsoever in said
contents, except herein expressly provided,
and it assumes absolutely no liability in
connection therewith.
Thereafter, a certain Mrs. Margarita Ramos
offered to buy from the petitioner the two lots
and demanded the execution the deed of sale
which necessarily entailed the production of
the certificates of title. However, when the
safety deposit box was open, the box yielded
no such certificates. The delay in the
reconstitution of the title compelled Mrs.
Ramos to withdraw her offer and as a
consequence, petitioner allegedly suffered a
loss which forced the latter to file a complaint
for damages against Security Bank and Trust
Company.
The Court of First Instance (Regional Trial
Court) decided in favor of respondent bank
citing paragraph 13 and 14 of the contract of
lease which exonerates the bank from any
liability. The Court of Appeals in turn affirmed
the decision of the trial court on the theory that
the contract executed between petitioner and
respondent bank is a contract of lease (Article
1643) by virtue of which respondent bank was
divested of any possession nor control over the
safety deposit box.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

ISSUE: Is the contractual relation between

petitioner and respondent bank one of bailor
and bailee or one of lessor and lessee? bailor
and bailee
HELD: The contract in the case at bar is a
special kind of deposit.
The Court agrees with the petitioner that the
contract for the rent of the safety deposit box is
not an ordinary contract of lease. However, the
Court cannot fully subscribe to the view that
the same contract is to be strictly governed by
the provisions of the Civil Code on deposit. It
cannot be characterized as a contract of lease
because the full and absolute possession and
control of the safety deposit box was not given
to the joint renters. The guard key remained
with the bank and without this, the renters
cannot open the safety deposit box. On the
other hand, the respondent bank could not
likewise open the box without the renter's key.
Thus, Article 1643 and Article 1975 which was
invoked by the Court of Appeals does not
apply in the present case.
We observe, however, that the deposit theory
itself does not altogether find unanimous
support even in American jurisprudence. We
agree with the petitioner that under the latter,
the prevailing rule is that the relation between
a bank renting out safe-deposit boxes and its
customer with respect to the contents of the
box is that of a bail or and bailee, the bailment
being for hire and mutual benefit. This is just
the prevailing view because:
There is, however, some support for the view
that the relationship in question might be more
properly characterized as that of landlord and
tenant, or lessor and lessee. It has also been
suggested that it should be characterized as
that of licensor and licensee. The relation
between a bank, safe-deposit company, or1.
storage company, and the renter of a safedeposit box therein, is often described as
contractual, express or implied, oral or written,
in whole or in part. But there is apparently no
jurisdiction in which any rule other than that
applicable to bailments governs questions of
the liability and rights of the parties in respect
of loss of the contents of safe-deposit boxes.
In the context of Philippine laws

which

40

authorize banking institutions to rent out safety

deposit boxes, it is clear that in this jurisdiction,
the prevailing rules in the United States has
been adopted. Section 72 of the General
Banking Act provides:
Sec. 72. In addition to the operations
specifically authorized elsewhere in this Act,
banking institutions other than building and
loan associations may perform the following
services:
(a) Receive in custody funds,
documents, and valuable objects, and rent
safety deposit boxes for the safeguarding of
such effects.
xxx xxx xxx
The banks shall perform the services
permitted under subsections (a), (b) and (c) of
this section as depositories or as agents. . .
.(emphasis supplied)
It is to be noted that the primary function is still
found within the parameters of a contract of
deposit, i.e., the receiving in custody of funds,
documents and other valuable objects for
safekeeping. The renting out of the safety
deposit boxes is not independent from, but
related to or in conjunction with, this principal
function. . A contract of deposit may be
entered into orally or in writing and, pursuant to
Article 1306 of the Civil Code, the parties
thereto may establish such stipulations,
clauses, terms and conditions as they may
deem convenient, provided they are not
contrary to law, morals, good customs, public
order or public policy. Accordingly, the
depositary would be liable if, in performing its
obligation, it is found guilty of fraud,
negligence, delay or contravention of the tenor
of the agreement.
N.B.
In the absence of any stipulation prescribing the
degree of diligence required, that of a good
father of a family is to be observed. Hence, any
stipulation exempting the depositary from any
liability arising from the loss of the thing
deposited on account of fraud, negligence or
delay would be void for being contrary to law
and public policy. Thus, conditions 13 and 14
of the questioned contract of lease of the
safety deposit box are void as they are
contrary to law and public

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

policy.
2.
Although the contract
between
petitioner
and
respondent
bank
was
considered as a contract of deposit, the Court
still affirmed the CA's decision to dismiss the
case because no competent proof was
presented to show that respondent bank was
aware of the agreement between the petitioner
and spouses Pugaos to the effect that the
certificates of title were withdrawable from the
safety deposit box only upon both parties' joint
signatures. Also, no evidence was submitted to
reveal that the loss of the certificates of title
was due to fraud or negligence of the
respondent bank.

SILVESTRA BARON vs PABLO DAVID

G.R. Nos. L-26948 and L-26949 (October 8,
1927)
FACTS: Silvestra Baron and Guillermo Baron,
plaintiffs in the present case are the aunt and
uncle respectively of Pablo David, the
defendant, who is engaged in running a rice
mill in the municipality of Magalang, in the
Province of Pampanga.
In the months of March, April and May 1920,
Silvestra placed a quantity of palay in Pablo's
mill which amounted to 1,012 cavans and 24
kilos. During the same period, Guillermo
placed 1,865 cavans and 43 kilos of palay in
the same milll. On January 17, 1921, a fire
occurred that destroyed the rice mill and its
contents owned and in the possession of Pablo
David. Silvestra and Guillermo now seek to
recover the value of such palays as they both
claim that the palay they delivered was sold to
Pablo. Pablo, on the other hand, claims that
the palay was deposited subject to future
withdrawal by the depositors or subject to
some future sale which was never effected.
Pablo therefore seeks to relieved himself from
all responsibility by virtue of the fire.
ISSUES:
1) What is the nature of the contract between the
parties?
2) Whether or not Pablo David is liable for the
value of the palays
HELD:
1) The contract between the parties is a

41

contract of commodatum.
Under Article 1768 of the Civil Code, when the
depository has the permission to make use of
the thing deposited, the contract loses the
character of mere deposit and becomes a loan
or a commodatum; and of course by
appropriating the thing, the bailee becomes
responsible for its value. In the present case,
the parties agreed that Pablo was at liberty to
convert it into rice and dispose of it at his
pleasure. It was insignificant whether the
contract between the parties is that of a sale
or a deposit for even supposing that the palay
may have been delivered in the character of
deposit subject to future sale or withdrawal at
plaintiff's election because it was understood
that Pablo might mill the palay and he has in
fact appropriated it to his own use, therefore he
is bound to account for its value.
2) Pablo David is liable for the value of the
palay.
It should be stated that the palay in question
was place by the plaintiffs in the defendant's
mill with the understanding that the defendant
was at liberty to convert it into rice and dispose
of it at his pleasure. The mill was actively
running during the entire season, and as palay
was daily coming in from many customers and
as rice was being constantly shipped by the
defendant to Manila, or other rice markets, it
was impossible to keep the plaintiffs' palay
segregated. In fact the defendant admits that
the plaintiffs' palay was mixed with that of
others. In view of the nature of the defendant's
activities and the way in which the palay was
handled in the defendant's mill, it is quite
certain that all of the plaintiffs' palay, which
was put in before June 1, 1920, been milled
and disposed of long prior to the fire of January
17, 1921.
Considering the fact that the defendant had
thus milled and doubtless sold the plaintiffs'
palay prior to the date of the fire, it result that
he is bound to account for its value, and his
liability was not extinguished by the occurrence
of the fire.

ANGEL JAVELLANA vs JOSE LIM, ET AL.,

G.R. No. 4015 (August 24, 1908)
FACTS: On October 30, 1906, Angel Javellana
filed a complaint with the Court of First

Instance against Jose Lim and Ceferino

Domingo Lim and be sentenced jointly and
severally to pay the sum of P2.686.58 with
interest at the rate of 15 per cent per annum.
It was alleged that on May 26, 1897, the
defendants executed and subscribed a
document in favor of the plaintiff reading as
follows:
We have received from Angel Javellana, as a
deposit without interest, the sum of two
thousand six hundred and eighty-six cents of
pesos fuertes, which we will return to the said
gentleman, jointly and severally, on the 20th of
January, 1898. Jaro, 26th of May, 1897.
Signed Jose Lim.
Signed:
Ceferino
Domingo Lim.
When the obligation became due, the
defendants begged the plaintiff for
an
extension of time for the payment thereof,
agreeing to pay interest at the rate of 15 per
cent, to which the latter accepted. On May 15,
1902, the defendants paid on account of
interest due the sum of P1,000, with the
exception of either capital or interest, had
thereby been subjected to loss and damages.
The defendants admitted the statements of the
plaintiff relative to the payment of P1,102.16
made on November 15, 1902, not as payment
of interest but on account of the principal, and
denied that there had been any agreement as
to the extension of the time of payment and the
payment of interest at the rate of 15 per cent
per annum.
ISSUE: Whether or not the contract between
the parties is a contract of deposit
HELD: The contract between the parties is a
contract of loan. The document of
indebtedness inserted in the complaint stated
that the plaintiff left on deposit with the
defendants a given sum of money which they
were jointly and severally obliged to return on a
certain date fixed in the document; but
nevertheless it was acknowledged at the date
thereof, November 15, 1902, the amount
deposited had not yet been returned to the
plaintiff, whereby he was subject to losses and
damages. When the return was
again
stipulated with the further agreement that the
amount deposited should bear interest at the
rate of 15 per cent per annum, from the
aforesaid date of January 20, and that the

1,000 pesos paid to the plaintiff on the 15th of

May, 1900, according to the receipt issued by
him to the defendants, would be included, and
that the said rate of interest would obtain until
the defendants on the 20th of May, 1897, it is
called a deposit consisted, and they could
have accomplished the return agreed upon by
the delivery of a sum equal to the one received
by them.
For this reason, it is understood that the
defendants were lawfully authorized to make
use of the amount deposited, which they have
done, as shown when they asked for an
extension of the time to return the amount,
inasmuch as they have subjected the plaintiff
to losses and damages for not complying with
what was stipulated and being aware that they
had used the money that they received
apparently as a deposit, they promised to pay
the interest from the date named until the time
when the refund should be made. Such
conduct on the part of the defendants is
unquestionable evidence that the transaction
was not a deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that

The depository cannot make use of the thing

deposited without the express permission of
the depositor.
Otherwise he shall be liable for losses and
damages.
Article 1768 also provides that
When the depository has permission to make
use of the thing deposited, the contract loses
the character of a deposit and becomes a loan
or bailment.
The permission shall not be presumed, and its
existence must be proven.
When on one of the latter days of January,
1898, Jose Lim went to the office of the plaintiff
asking for an extension of one year, and
agreed to pay interest at the rate of 15 per cent
per annum, it was because, as a matter of fact,
he did not have in his possession the amount
deposited, he having made use of the same in
his business and for his own profit; and the
plaintiff, by granting them the extension,
evidently confirmed the express permission
previously given to use and dispose of the

amount deposited, which, in accordance with

the loan, to all intents and purposes
gratuitously, until the 20th of January, 1898,
and from that dated with interest at 15 per cent
per annum until its full payment, deducting
from the total amount of interest the sum of
1,000 pesos, in accordance with the provisions
of article 1173 of the Civil Code.
Notwithstanding that it does not appear that
Jose Lim signed the document executed in the
presence of three witnesses on the 15th of
November, 1902, by Ceferino Domingo Lim on
behalf of himself and the former, nevertheless,
the said document has not been contested as
false, either by a criminal or by a civil
proceeding, nor has any doubt been cast upon
the authenticity of the signatures of the
witnesses who attested the execution of the
same; and from the evidence in the case one
is sufficiently convinced that the said Jose Lim
was perfectly aware of and authorized his joint
co-debtor to liquidate the interest, to pay the
sum of 1,000 pesos, on account thereof, and to
execute the aforesaid document No. 2. A true
ratification of the original document of deposit
was thus made, and not the least proof is
shown in the record that Jose Lim had ever
paid the whole or any part of the capital stated
in the original document.
There was no renewal of the contract
deposited converted into a loan, because, as
has already been stated, the defendants
received said amount by virtue of real loan
contract under the name of a deposit, since the
so-called bailees were forthwith authorized to
dispose of the amount deposited. This they
have done, as has been clearly shown.
COMPAIA AGRICOLA VS. NEPOMUCENO
FACTS: On March 17, 1927, the registered
partnerships, Mariano Velasco & Co., Mariano
Velasco, Sons, & Co., and Mariano Velasco &
Co., Inc., were declared insolvent by the Court
of First Instance of Manila.
On the 16th day of April, 1927, the Compania
Agricola de Ultramar filed a claim against one
of the insolvents Mariano Velasco & Co.,
claiming the sum of P10,000, with the agreed
interest thereon at the rate of 6 per cent per
annum from April 5, 1918, until its full payment
was a deposit with said Mariano Velasco & Co.

and asked the court to declare it a preferred

claim.
The assignee of the insolvency answered the
claim by interposing a general denial.
On September 23, 1929, the court rendered a
decision declaring that the alleged deposit was
a preferred claim for the sum mentioned, with
interest at 6 per cent per annum from April 5,
1918, until paid. From this decision the
assignee appealed.
The evidence presented by the claimant
Compania Agricola de Ultramar consisted of a
receipt in writing, and the testimony of Jose
Velasco who was manager of Mariano Velasco
& Co. at the time the note was executed. The
receipt reads as follows:
MANILA, P. I., April 5, 1918.
Received from the "Compania Agricola de
Ultramar" the sum of ten thousand Philippine
pesos as a deposit at the interest of six per
cent annually, for the term of three months
from date.
In witness thereof, I sign the present.
MARIANO VELASCO & CO.
By (Sgd.) JOSE VELASCO
Manager.
P10,000.00.
In his testimony, Jose Velasco stated that his
signature on the receipt was authentic and that
he received the said sum of P10,000 from the
appellee and deposited it with the bank in the
current account of Mariano Velasco & Co.
ISSUE: WON the claim filed is that of a deposit
or a loan? LOAN
HELD: The Supreme Court reiterated the
ruling in the case of Gavieres vs. De Tavera (1
Phil., 17) which had a very similar facts to the
present case. The court held that the
transaction therein involved was a loan and not
a deposit. The court said:
Although in the document in question a
deposit is spoken of, nevertheless from an
examination of the entire document it
clearly appears that the contract was a loan
and that such was the intention of the

parties. It is unnecessary to recur to

the

cannons of interpretation to arrive at this

conclusion.
The
obligation
of
the
depository to pay interest at the rate of 6
per cent to the depositor suffices to cause
the obligation to be considered as a loan
and makes it likewise evident that it was the
intention of the parties that the depository
should have the right to make use of the
amount deposited, since it was stipulated
that the amount could be collected after
notice of two months in advance. Such
being the case, the contract lost the
character of a deposit and acquired that of
a loan. (Art.1768, Civil Code.)
Article 1767 of the Civil Code provides that
"The depository cannot make use of the thing
deposited without the express permission of
the depositor." "Otherwise he shall be liable for
losses and damages."
Article 1768 also provides that "When the
depository has permission to make use of the
thing deposited, the contract loses the
character of a deposit and becomes a loan or
bailment." "The permission not be presumed,
and its existence must be proven."
Moreover it may be inferred that there was no
renewal of the contract of deposit converted
into a loan, because, as has already been
stated, the defendants received said amount
by virtue of a real loan contract under the
name of a deposit, since the so-called
bailees were forthwith authorized to
dispose of the amount deposited. This they
have done, as has been clearly shown.
The ten thousand pesos delivered by the
appellee to Mariano Velasco & Co. cannot be
regarded as a technical deposit. But the
appellee argues that it is at least an "irregular
deposit." This argument is, we think,
sufficiently answered in the case of Rogers vs.
Smith, Bell & Co. (10 Phil., 319). There this
court
said:
Manresa, in his Commentaries on the Civil
Code (vol. 11, p. 664), states that there are
three points of difference between a loan and
an irregular deposit. The first difference which
he points out consists in the fact that in an
irregular deposit the only benefit is that which
accrues to the depositor, while in a loan the
essential cause for the transaction is the

necessity

of

the

borrower.

Nor does the contract in question fulfill the

third requisite indicated by Manresa, which is,
that in an irregular deposit, the depositor can
demand the return of the article at any time,
while a lender is bound by the provisions of the
contract and cannot seek restitution until the
time for payment, as provided in the contract,
has arisen. It is apparent from the terms of this
documents that the plaintiff could not demand
his money at any time. He was bound to give
notice of his desire for its return and then to
wait for six months before he could insist upon
payment.
In the present case the transaction in
question was clearly not for the sole benefit
of the Compania Agricola de Ultramar; it
was evidently for the benefit of both
parties. Neither could the alleged depositor
demand payment until the expiration of the
term of three months.
For the reasons stated, the appealed judgment
is reversed, and we hold that the transaction in
question must be regarded as a loan, without
preference.

ROGERS VS. SMITH

FACTS: Plaintiff Jose Rogers
(Rogers)
brought this action in the CFI city of Manila
upon the following document:(the subject
document of the case) No. 1418. $12,000.
The sum of pesos twelve thousand has been
deposited with us, received from Jose Rogers,
which sum we will pay on the last day of the six
months after the presentation of this document,
to the order of Mr. Jose Rogers. Manila,
February 17, 1876. SMITH, BELL & CO.
The said sum of twelve thousand pesos shall
bear interest at the rate of eight per centum
(8%) per annum from this date, February 17,
1876.
SMITH, BELL & CO.
When this document was delivered by the
defendants Smith, Bell & CO. (Smith) to

Rogers, 12,000 pesos in silver were worth

more than 12,000 pesos in gold.

The only question in the case is, whether upon

these documents Rogers is entitled to recover
12,000 pesos or 24,000 pesos. CFI held that
he was entitled to recover only 12,000 pesos.
Rogers has appealed. Rogers delivered to
Smith, in consideration of the execution of the
document, 12,000 in gold.
Soon thereafter Rogers moved to Barcelona
and has since resided there. Smith remitted
the interest to him every three months at the
rate of 8 per cent per annum until the 30th day
of January, 1888, when they notified him that
thereafter the interest would be 6 per cent.
Rogers accepted this reduction and interest
and that rate was remitted to him by Smith until
the 10th of February, 1904. This interest was
remitted in silver; that is to say, every three
months the Smith took 180 pesos in silver and
with it bought exchange on Barcelona or other
European point converted into pesetas. Rogers
received these payments in silver without any
protest whatever until the 10th day
of
February, 1904.
In his letter of that date, he called the attention
of the Smith to the fact that by the new
American law in force in the Philippines the
gold standard had been introduced and that by
reason thereof he was entitled to receive his
interest in gold, in view of the fact that when he
delivered the money to the Smith in 1876 he
delivered it in gold coin.
In another letter of the 15th of December,
1904, he expressly refers to the act of
Congress of March 2, 1903, and to the
subsequent proclamations of the GovernorGeneral relating to coinage.
Rogers claims that, having paid to Smith
12,000 pesos in gold coin, he is now entitled to
receive from them the value of 12,000 pesos in
gold coin; that is to say, 24,000 pesos in silver.
It is necessary to determine in the first place
the nature of the contract evidenced by the
document of the 17th of February, 1876.

ISSUE: WON the document is an evidence of

an ordinary loan which created between the
Rogers and the Smith the simple relation of
debtor and creditor. YES

HELD: The document is an evidence of

ordinary loan.
Rogers repeatedly calls it a deposit, that is,
that the ownership of the particular coin which
was delivered by him to Smith did not pass to
Smith but remained in him and that Smith was
bound to return to him the identical coin which
they had received. It is apparent that no such
claim could be maintained in view of that part
of the instrument which provides for the
payment of interest. But while not a deposit in
the strict sense of the word, the document
evidences what is known as an "irregular
deposit."
The
Supreme
Court
cited Manresa's
discussion on the differences of a loan and an
irregular
deposit
namely:
1. in irregular deposit the benefit accrues
to the depositor alone whereas in loan
the benefit is for both parties, the
essential cause is the necessity of the
borrower;
2. in irregular deposit the depositor has a
preference over other creditors
whereas in loan there is no such
preference;
3. in irregular deposit the depositor can
demand the return of the article at any
time whereas in loan the parties are
bound by the contract.
In the first difference, the contract in question
does not fulfill this requirement of an irregular
deposit. It is very apparent that is was not for
the sole benefit of Rogers. It like any other loan
of money was for the benefit of both parties.
The benefit which Smith, Bell & Co. received
was the use of the money; the benefit which
Rogers received was the interest of his money.
In the letter which Smith, Bell & Co. on the
30th of June, 1888, notified the plaintiff of the
reduction of the interest, they said: "We call
your attention to this matter in order that you
may if you think best employ your money in
some other place."
The second difference which exists, according
to Manresa, between an irregular deposit and
a loan lies in the fact that in an irregular
deposit the depositor has a preference over

other creditors in the distribution of the debtor's

property. It is apparent, therefore, that this
document does not state those requisites
which are essential to an irregular deposit.
Nor does the contract in question fulfill the third
requisite, which is, in an irregular deposit, the
depositor can demand the return of the article
at any time, while a lender is bound by the
provisions of the contract and cannot seek
restitution until the time for payment, as
provided in the contract, has arisen. It is
apparent from the terms of this document that
the plaintiff could not demand his money at any
time. He was bound to give notice of his desire
for its return and then to wait for six months
before he could insist upon payment.
From the above discussions, it is very apparent
that is was not for the sole benefit of Rogers.
Like any other loan it was for the benefit of
both parties. The benefit of Smith
Bell
Company was the use of the money while Jose
Rogers' benefit was the interest on his money.
Also, he was not able to demand for the money
at any time for he is supposed to give notice
and wait for six months first before payment.
Thus, the transaction is that of an ordinary loan
and not an irregular deposit.

BPI v. CA
FACTS: Private respondents Eastern Plywood
Corporation (Eastern) and Benigno D. Lim
(Lim), held one joint bank account with the
Commercial Bank and Trust Co. (CBTC), the
predecessor-in-interest of petitioner Bank of
the Philippine Islands (BPI).
Sometime in March 1975, a joint checking
account with Lim in the amount of P120,000.00
was opened by Mariano Velasco with funds
withdrawn from the account of Eastern and/or
Lim.
Velasco died. At the time of his death, the
outstanding balance of the account stood at
P662,522.87.
On 5 May 1977, by virtue of an Indemnity
Undertaking executed by Lim one-half of this
amounts was provisionally released and
transferred to one of the bank accounts of
Eastern with CBTC. Thereafter, Eastern

obtained a loan of P73,000.00 from CBTC as

"Additional Working Capital,". Eastern issued a
negotiable promissory note for P73,000.00
payable on demand to the order of CBTC with
interest at 14% per annum. The note was
signed by Lim. The loan is wholly/partly
secured by the Hold-Out on a 1:1 on C/A No.
2310-001-42, which refers to the joint account
of Velasco and Lim with a balance of
P331,261.44. In addition, Eastern and Lim, and
CBTC signed another document entitled
"Holdout Agreement,"
On the other hand, a case for the settlement of
Velasco's estate was filed. In the said case, the
whole balance of P331,261.44 in the aforesaid
joint account of Velasco and Lim was being
claimed as part of Velasco's estate. The
intestate court granted motion of the heirs of
Velasco to withdraw the balance and
authorized the heirs to divide among
themselves the amount withdrawn.
CBTC was merged with BPI. BPI filed a
complaint against Lim and Eastern demanding
payment of the promissory note for
P73,000.00. Defendants Lim and Eastern, in
turn, filed a counterclaim against BPI for the
return of the balance in the disputed account
subject of the Holdout Agreement and the
interests thereon after deducting the amount
due on the promissory note.
RTC dismissed the complaint and CA affirmed
the decision.
BPIs CONTENTION: BPI alleged that the
Holdout Agreement in question was subject to
a suspensive condition stated therein, viz., that
the "P331,261.44 shall become a security for
respondent Lim's promissory note only if
respondents' Lim and Eastern Plywood
Corporation's interests to that amount are
established as a result of a final and definitive
judicial action or a settlement between and
among the contesting parties thereto." Hence,
BPI asserts, the Court of Appeals erred in
affirming the trial court's decision dismissing
the complaint on the ground that it was the
duty of CBTC to debit the account of the
defendants to set off the amount of P73,000.00
covered by the promissory note.
EASTERN and LIMs CONTENTION: Eastern
and Lim dispute the "suspensive condition"

argument of the petitioner that they are rightful

owners of the money in question, the
suspensive condition does not find any
application in this case and the bank had the
duty to set off this deposit with the loan.
ISSUES:
1. WON BPI can demand payment of the loan of
P73,000.00 despite the existence of the
Holdout Agreement? YES
2. WON BPI is still liable to the private
respondents on the account subject of the
Holdout Agreement after its withdrawal by the
heirs of Velasco? YES
HELD:
ISSUE 1: It is clear in paragraph 02 of the
Holdout Agreement that CBTC, or BPI as its
successor-in-interest, had every right to
demand that Eastern and Lim settle their
liability under the promissory note. It cannot be
compelled to retain and apply the deposit in
Lim and Velasco's joint account to the payment
of the note. What the agreement conferred on
CBTC was a power, not a duty. Generally, a
bank is under no duty or obligation to make the
application. To apply the deposit to the
payment of a loan is a privilege, a right of setoff which the bank has the option to exercise.
Also, paragraph 05 of the Holdout Agreement
itself states that notwithstanding
the
agreement, CBTC was not in any way
precluded from demanding payment from
Eastern and from instituting an action to
recover payment of the loan. What it provides
is an alternative, not an exclusive, method of
enforcing its claim on the note. Its suit for the
enforcement of the note was then in order and
it was error for the trial court to dismiss it on
the theory that it was set off by an equivalent
portion in C/A No. 2310-001-42 which BPI
should have debited. The "suspensive
condition" theory of the petitioner is, therefore,
untenable.
ISSUE 2: The Court of Appeals correctly
decided on the counterclaim. The counterclaim
of Eastern and Lim for the return of the
P331,261.44 was equivalent to a demand that
they be allowed to withdraw their deposit with
the bank. Article 1980 of the Civil Code
expressly provides that "[f]ixed, savings, and
current deposits of money in banks and similar
institutions shall be governed by the provisions

concerning simple loan."

In Serrano vs. Central Bank of the
Philippines, we held that bank deposits are
in the nature of irregular deposits; they are
really loans because they earn interest. The
relationship then between a depositor and a
bank is one of creditor and debtor. The
deposit under the questioned account was
an ordinary bank deposit; hence, it was
payable on demand of the depositor.
The account was proved and established to
belong to Eastern even if it was deposited in
the names of Lim and Velasco. As the real
creditor of the bank, Eastern has the right to
withdraw it or to demand payment thereof. BPI
cannot be relieved of its duty to pay Eastern
simply because it already allowed the heirs of
Velasco to withdraw the whole balance of the
account. The petitioner should not have
allowed such withdrawal because it had
admitted in the Holdout Agreement the
questioned ownership of the money deposited
in the account.
Moreover, the order of the court merely
authorized the heirs of Velasco to withdraw the
account. BPI was not specifically ordered to
release the account to the said heirs; hence, it
was under no judicial compulsion to do so.
Because the ownership of the
deposit
remained undetermined, BPI, as the debtor,
had no right to pay to persons other than those
in whose favor the obligation was constituted
or whose right or authority to receive payment
is indisputable. Payment made by the debtor to
the wrong party does not extinguish the
obligation as to the creditor who is without fault
or negligence, even if the debtor acted in
utmost good faith and by mistake as to the
person of the creditor, or through error induced
by fraud of a third person. The payment then
by BPI to the heirs of Velasco, even if done in
good faith, did not extinguish its obligation to
the true depositor, Eastern.

METROBANK VS BA FINANCE
FACTS: Lamberto Bitanga obtained from
respondent BA Finance a loan, to secure
which, he mortgaged his car to respondent BA
Finance. Bitanga had the mortgaged car
insured by respondent Malayan Insurance.

The car was stolen. On Bitanga's claim,

Malayan Insurance issued a check payable to
the order of "BA Finance Corporation and
Lamberto Bitanga", drawn against China Bank.
The check was crossed with the notation "For
Deposit Payees' Account Only." Without the
indorsement or authority of his co-payee BA
Finance, Bitanga deposited the check to his
account with the Asian Bank, now merged with
herein
petitioner
Metrobank.
Bitanga
subsequently withdrew the entire proceeds of
the check. In the meantime, Bitanga's loan
became past due, but despite demands, he
failed to settle it.
BA Finance eventually learned of the loss of
the car and of Malayan Insurance's issuance of
a crossed check payable to it and Bitanga, and
of Bitanga's depositing it in his account at
Asian Bank and withdrawing the entire
proceeds thereof. BA Finance thereupon
demanded the payment of the value of the
check from Asian Bank but to no avail,
prompting it to file a complaint before the RTC
for sum of money and damages against Asian
Bank and Bitanga, alleging that, inter alia, it is
entitled to the entire proceeds of the check.
The RTC, holding that Asian Bank was
negligent in allowing Bitanga to deposit the
check to his account and to withdraw the
proceeds thereof, without his co-payee BA
Finance having indorsed it or authorized him to
indorse it in its behalf, found Asian Bank and
Bitanga jointly and severally liable to BA
Finance following Section 41 of the NIL. The
appellate court affirmed the RTC's decision
and held that BA Finance has a cause of
action against it even if the subject check had
not been delivered to BA Finance by the issuer
itself. Hence, this petition.
ISSUE: WON the petitioner is liable for the full
value of the check. YES
HELD: The SC held that Sec 41 of the NIL
provides: "Where an instrument is payable to
the order of two or more payees or indorsees
who are not partners, all must indorse unless
the one indorsing it has no authority to indorse
for the others. Bitanga alone endorsed the
crossed check, and the petitioner allowed the
deposit and release of the proceeds thereof,
despite the absence of authority of Bitanga's
co-payee BA Finance to endorse it on its

behalf. The payment of an instrument over a

missing indorsement is the equivalent of
payment on a forged indorsement or an
unauthorized indorsement in itself in the case
of joint payees. Clearly, petitioner, through its
employee, was negligent when it allowed the
deposit of the crossed check, despite the lone
endorsement of Bitanga, ostensibly ignoring
the fact that the check did not, it bears
repeating, carry the indorsement of BA
Finance.

REYES vs CA
FACTS: In view of the 20th Asian Racing
Conference to be held in Sydney, Australia, the
Philippine Racing Club, Inc. (PRCI) sent 4
delegates to the said conference. Petitioner
Gregorio Reyes, as VP for finance racing
manager, treasurer, and directory of PRCI,
sent Godofredo Reyes, the club's chief cashier,
to Far East Bank and Trust Company
(respondent) to apply for a foreign exchange
demand draft in Australian dollars (AU$
1,610.00).
Mr. Yasis, bank's assistant cashier, first denied
the application for the reason that respondent
bank did not have an Australian dollar account
in any bank in Sydney. Since Godofredo asked
if there could be a way for respondent bank to
accommodate PRCI's urgent need to remit
AUS$ to SYdney, Yasis informed him of
another way of effecting the requested
remittance.
The respondent bank would draw a demand
draft against Westpac-Sydney and have the
latter reimburse itself from the US$ account of
the respondent in Westpac-New York. This
arrangement has been customarily resorted to
since the 1960s and the procedure has proven
to be problem-free.
July 28, 1988, the respondent bank approved
the said application of PRCI and issued
Foreign Exchange Demand Draft(FXDD) No.
209968 in the sum applied for payable to the
order of the 20th Asian Racing Conference
Secretariat of
Sydney, Australia, and
addressed to Westpac-Sydney as the drawee
bank.
August 10, 1988, upon due presentment of the

FXDD the same was dishonored, with the

notice of dishonor stating; "xxx No account
held with Westpac." Meanwhile, on August 16,
1988, Wespac-New York sent a cable to
respondent bank informing the latter that its
dollar account in the sum of AU$ 1,610.00 was
debited. The respondent bank informed
Wespac-New York requesting the latter to
honor the reimbursement claim of WestpacSydney. Upon its second presentment for
payment, FXDD No. 209968 was again
dishonored by Westpac-Sydney for the same
reason.
When the petitioner Gregorio Reyes arrived in
Sydney in the morning of September 18, 1988,
he went directly to the lobby of Hotel Regent
Sydney to register as a conference delegate.
At the registration desk, the conference
secretariat said that he could not register
because the FXDD for his registration fee had
been dishonored for the second time. The
same situation was experienced by his wife
Consuelo who is a member of the House of
Rep representing the District of Makati, Metro
Manila.
The petitioners filed a complaint for damages
against FEBTC. Claiming that as a result of the
dishonor of the said demand draft, they were
exposed to unnecessary shock, social
humiliation, and deep mental anguish in a
foreign country, and in the presence of an
international audience. RTC and CA ruled in
favor of the respondent.
ISSUE: WON the respondent bank was
negligent. NO
HELD: The facts as found by the courts a quo
show that respondent bank did not cause an
erroneous transmittal of its SWIFT cable
message to Westpac-Sydney. It was the
erroneous decoding of the cable message on
the part of Westpac-Sydney mistakenly read
the printed figures in the SWIFT cable
message of respondent bank as "MT799"
instead of as "MT199". As a result, WestpacSydney construed the said cable message as
a format for letter of credit, and not for a
demand draft. The figure before '99' can still be
distinctly seen as number '1' and not number
'7' is in a slanting position while the line of a '1'
id in a 1 horizontal position. Thus, the number
'1' in 'MT199' cannot be construed as '7'.

The degree of diligence required of banks, is

more than that of a good father of a family
where the fiduciary nature of their
relationship with their depositors is
concerned. In other words, banks are duty
bound to treat the deposit accounts of their
depositors with the highest degree of care.
But the said ruling applies only to cases
where bank act under their fiduciary
capacity, that is, as depositary of the
deposits of their depositors. But the same
higher degree of diligence is not expected to
be exerted by banks in
commercial
transactions that do not involve their
fiduciary relationship with their depositors.
Respondent bank was not required to exert
more than the diligence of a good father of a
family in regard to the sale and issuance of
the subject FXDD. The case at bar does not
involve the handling of the petitioner's
deposit. Instead, the relationship involved
was that of a buyer and seller, that is,
between the respondent bank as the seller
of the subject foreign exchange demand
draft, and PRCI as the buyer of the same,
with the 20th Asian Racing conference
Secretariat in Sydney, Australia as the payee

thereof. The FXDD was intended for the

payment of the registration fees of the
petitioners as delegates of the PRCI.
The evidence shows that the respondent bank
did everything within its power to prevent the
dishonor of the subject FXDD. The erroneous
reading of its cable message to WestpacSydney by an employee of the latter could not
have been foreseen by the respondent bank.
Being unaware that its employee erroneously
read the said cable message, Westpac-Sydney
merely stated that the respondent bank has no
deposit account with it to cover for the amount
AU$ 1,610.00 indicated in the FXDD. Thus, the
respondent bank had the impression that
Westpac-New York had not yet made available
the amount for reimbursement to WestpacSydney despite the fact that respondent bank
has a sufficient deposit dollar acct with
Westpac-New York. That was the reason why
the respondent bank had to re-confirm and
repeatedly notify Westpac-New York to debit
its (respondent bank's) deposit dollar with it
and to transfer or credit the corresponding
amount to Westpac-Sydney to cover the
amount of the said demand draft.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

NOTE: The degree of diligence required of

banks, is more than that of a good father of a
family where the fiduciary nature of their
relationship with their depositors is concerned.

GUINGONA VS CITY FISCAL

FACTS: From March 20, 1979 to March 1981,
David invested with the Nation Savings and
Loan Association (NSLA) the sum of P
1,145,546.20 on nine deposits, P 13,531.94 on
savings account deposits (jointly with his sister,
Denise Kuhne), US$10,000 on time deposit,
US$15,000 under a receipt and guarantee of
payment and US$50,000 under a receipt dated
June 8, 1980 (jointly with Denise Kuhne), that
David was induced into making the aforestated
investments by Robert Marshal an Australian
national who was allegedly a close associate
of petitioner Guingona Jr., then NSLA
President.
NSLA was placed under receivership by the
Central Bank, so that David filed claims
therewith for his investments and those of his
sister; On June 1981, Guingona and Martin,
upon David's request, assumed the bank's
obligation to David by executing a joint
promissory note in favor of private respondent
acknowledging
an
indebtedness
of
P1,336,614.02
and
US$75,000. This
promissory note was based on the statement
of account as of June 30, 1981 prepared by
the private respondent. The amount of
indebtedness assumed appears to be bigger
than the original claim because of the added
interest and the inclusion of other deposits of
private respondent's sister in the amount of
P116,613.20.

50

the Office of the City Fiscal. David charged

petitioners with estafa and violation of Central
Bank Circular No. 364 and related regulations
on foreign exchange transactions.
Petitioners moved to dismiss the charges
against them for lack of jurisdiction because
David's claims allegedly comprised a purely
civil obligation, but the motion was denied.
After the presentation of David's principal
witness, petitioners filed this petition for
prohibition and injunction because:
a. The production of various documents showed
that the transactions between David and NSLA
were simple loans i.e., civil obligation which
were novated when Guingona and Martin
assumed them
ISSUE: WON the contracted perfected was a
contract of simple loan. YES
HELD: It must be pointed out that when private
respondent David invested his money on nine.
and savings deposits with the aforesaid bank,
the contract that was perfected was a contract
of simple loan or mutuum and not a contract of
deposit. Thus, Article 1980 of the New Civil
Code provides that:
Article 1980. Fixed, savings, and
current deposits of-money in banks and
similar institutions shall be governed by
the provisions concerning simple loan.
In the case of Central Bank of the Philippines
vs. Morfe, the SC said:
It should be noted that fixed, savings,
and current deposits of money in banks
and similar institutions are hat true
deposits. are considered simple loans
and, as such, are not preferred credits.

On July 17, 1981, petitioners Guingona and

Martin agreed to divide the said indebtedness,
and the petitioner Guingona executed another
promissory note antedated to June 17, 1981
whereby he personally acknowledged an
indebtedness of P668,307.01 and US$37,500
in favor of private respondent. On July 22,
1981, David received a report from the Central
Bank that only P305,821.92 of those
investments were entered in the records of
NSLA.

This Court also declared in the recent case

of Serrano vs. Central
Bank
of
the
Philippines (96 SCRA 102 [1980]) that:
Bank deposits are in the nature of
irregular deposits. They are really
'loans because they earn interest. All
kinds of bank deposits, whether fixed,
savings, or current are to be treated as
loans and are to be covered by the law
on loans. Current and saving deposits,
are loans to a bank because it can use
the same.

On Dec 1981, David filed I.S. No. 81-31938 in

Hence, the relationship between the private

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

respondent and the Nation Savings and Loan

Association is that of creditor and debtor;
consequently, the ownership of the amount
deposited was transmitted to the Bank upon
the perfection of the contract and it can make
use of the amount deposited for its banking
operations, such as to pay interests on
deposits and to pay withdrawals. While the
Bank has the obligation to return the amount
deposited, it has, however, no obligation to
return or deliver the same money that was
deposited. And, the failure of the Bank to
return the amount deposited will not constitute
estafa through misappropriation punishable
under Article 315, par. l(b) of the Revised
Penal Code, but it will only give rise to civil
liability.
The nature of simple loan is defined in Articles
1933 and 1953 of the Civil Code.
"Art. 1933. By the contract of loan,
one of the parties delivers to another,
either something not consumable so
that the latter may use the same for a
certain time- and return it, in which case
the contract is called a commodatum;
or money or other consumable thing,
upon the condition that the
same amount of the same kind
and quality shall he paid in which case
the contract is simply called a loan or
mutuum. "Commodatum is essentially
gratuitous. "Simple loan may be
gratuitous or with a stipulation to pay
interest.
"In commodatum the bailor retains the
ownership of the thing loaned while in
simple loan, ownership passes to the
borrower.
"Art. 1953. A person who receives a
loan of money or any other fungible
thing acquires the ownership thereof,
and is bound to pay to the creditor an
equal amount of the same kind and
quality."
It can be readily noted from the above-quoted
provisions that in simple loan (mutuum), as
contrasted to commodatum the borrower
acquires ownership of the money, goods or
personal property borrowed Being the owner,
the borrower can dispose of the thing
borrowed (Article 248, Civil Code) and his act
will not be considered misappropriation thereof'
(Yam vs. Malik).

51

But even granting that the failure of the bank to

pay the time and savings deposits of private
respondent David would constitute a violation
of paragraph 1(b) of Article 315 of the Revised
Penal Code, nevertheless any
incipient
criminal liability was deemed avoided, because
when the aforesaid bank was placed under
receivership by the Central Bank, petitioners
Guingona and Martin assumed the obligation
of the bank to private respondent David,
thereby resulting in the novation of the original
contractual obligation arising from deposit into
a contract of loan and converting the original
trust relation between the bank and private
respondent David into an ordinary debtorcreditor relation between the petitioners and
private respondent. Consequently, the failure
of the bank or petitioners Guingona and Martin
to pay the deposits of private respondent
would not constitute a breach of trust but would
merely be a failure to pay the obligation as a
debtor.
NOTE: While the bank has the obligation to
return the amount deposited, it has, however,
no obligation to return or deliver the same
money that was deposited.

PROVINCE OF BATAAN VS. VILLAFUERTE

(G.R. No. 129995, October 19, 2001)
FACTS: In its order, the lower court directed
that petitioner Province of Bataan to remit to
said court whatever lease rentals petitioner
may receive from lessees 7-R Port and Marina
Port Services, and that such lease rentals be
placed under a special time deposit with the
Land Bank for the account of the RTC-Balanga
Branch 4, in escrow, for the person or persons,
natural or juridical, who may be adjudged
lawfully entitled thereto. The order denied
herein petitioners motion for reconsideration of
the 28 July, 1993 order.
Pursuant to Presidential Decree No. 464,
otherwise known as the Real Property Tax
Code of 1974, the Provincial Treasurer of
Bataan advertised for auction sale
the
BASECO property due to real estate tax
delinquency amounting to P7,914,281.72,
inclusive of penalties. At the auction sale, no
bidder vied for said property as a result of
which, the Provincial Treasurer of Bataan
adjudged the property to, and acquired the

same for, and in the name of herein petitioner

Province of Bataan. Upon the expiration of the
one-year redemption period, and without the
owner exercising its right to redeem the subject
property, the Provincial Government of Bataan
consolidated
its
title
thereon;
the
corresponding certificates of title were then
issued in the name of herein petitioner
Province of Bataan.
Eventually, petitioner, thru then Provincial
Governor Enrique T. Garcia, entered into a tenyear contract of lease with 7-R Port Services,
Inc., whereby portions of the BASECO property
including facilities and improvements thereon,
were leased to the latter for a minimum
escalating annual rental of P18 million.
Petitioner forged another contract of lease with
Marina Port Services, over a ten- hectare
portion of the BASECO property. Private
respondent filed for annulment of sale,
principally assailing the validity of the tax
delinquency sale of the BASECO property in
favor of petitioner Province of Bataan. PCGG
filed for writ of preliminary injunction to enjoin
herein petitioner from entering into a lease
contract with Marina Port Services, Inc.
(Marina), or any other entity, and/or from
implementing/enforcing such lease contract, if
one has already been executed, and to
maintain the status quo until further orders
from the Court.
The lower court denied the motion ratiocinating
that the lease contract with Marina was already
a fait accompli when the motion was filed, and
that Marina was not a party to the suit for not
having been impleaded as party-defendant.
The PCGG filed with the lower court an
Urgent Motion to Deposit Lease Rentals,
alleging inter alia that the rentals amounting to
Hundreds of Millions of Pesos are in danger
of being unlawfully spent, squandered and
dissipated to the great and irreparable damage
of plaintiffs who are the rightful owners of the
property leased.
The lower court granted the PCGGs urgent
motion and ordered the defendant Province of
Bataan to remit to the court the lease rentals it
may receive from the defendant 7-R Port
Services and the Marina Port Services from
the receipt of this order. It also ordered the
clerk of court to deposit the amount under

special time deposit with the Land Bank in the

name or account of the Court to be held in trust
for the person, natural or juridical, who may
lawfully be entitled thereto.
ISSUE: Whether or not the deposit of rentals in
escrow was proper. YES
HELD: In the main, petitioner insists that the
issuance of the escrow order by the trial court
was patently irregular, if not downright
anomalous, reasoning that nowhere in the
Revised Rules of Court is the trial court, or any
court for that matter, authorized to issue such
escrow order, whether as a provisional or
permanent remedy. According to petitioner,
the escrow orders in question are null and
void ab initio for having been issued absent
any legal basis and are merely calculated to
prejudice the petitioner province without any
practical or worthwhile, much less legal
objective.
The court does not agree. An escrow fills a
definite niche in the body of the law; it has a
distinct legal character. The usual definition is
that an escrow is a written instrument which by
its terms imports a legal obligation and which is
deposited by the grantor, promisor, or obligor,
or his agent with a stranger or third party, to be
kept by the depositary until the performance of
a condition or the happening of a certain event,
and then to be delivered over to the grantee,
promisee, or obligee.
While originally, the doctrine of escrow applied
only to deeds by way of grant, or as otherwise
stated, instruments for the conveyance of land,
under modern theories of law, the term escrow
is not limited in its application to deeds, but is
applied to the deposit of any written instrument
with a third person. Particular instruments
which have been held to be the subject of an
escrow include bonds or covenants, deeds,
mortgages, oil and gas leases, contracts for
the sale of land or for the purchase of personal
property, corporate
stocks
and
stock
subscriptions, promissory notes or other
commercial paper, insurance applications and
policies, contracts for the settlement of willcontest cases, indentures of apprenticeship,
receipts
assigning
concessions
and
discontinuances and releases of causes of
action. Moreover, it is no longer open to
question that money may be delivered in

escrow.
X X X the impugned orders appear to us as a
fair response to the exigencies and equities of
the situation.
Parenthetically, it is not disputed that even
before the institution of the case, the Province
of Bataan has been utilizing the rental
payments on the Baseco Property to meet its
financial
requirements.
To
us,
this
circumstance adds a more compelling
dimension for the issuance of the assailed
orders. X X X
Applying the foregoing principles and
considering the peculiarities of the instant
case, the lower court, in the course of
adjudicating and resolving the
issues
presented in the main suit, is clearly
empowered to control the proceedings therein
through the adoption, formulation and issuance
of orders and other ancillary writs, including the
authority to place the properties in custodia
legis, for the purpose of effectuating its
judgment or decree and protecting further the
interests of the rightful claimants of the subject
property.
To trace its source, the courts authority
proceeds from its jurisdiction and power to
decide, adjudicate and resolve the issues
raised in the principal suit. Stated differently,
the deposit of the rentals in escrow with the
bank, in the name of the lower court, is only
an incident in the main proceeding. To be
sure, placing property in litigation under judicial
possession, whether in the hands of a receiver,
and administrator, or as in this case, in a
government bank is an ancient and accepted
procedure. Consequently, we find no cogency
to disturb the questioned orders of the lower
court and in effect uphold the propriety of the
subject escrow orders.

III.

Necessary Deposit
YHT REALTY VS. CA
(451 SCRA 638, G.R. No. 126780, February
17, 2005)

FACTS: McLoughlin (private respondent), an

Australian businessman, regularly stayed at
Sheraton Hotel during

trips to Philippines. McLoughlin became friends

with Tan, who convinced the former to transfer
from Sheraton Hotel to Tropicana Hotel were
(petitioners) Lainez, Payam and Lopez. Lopez
served as manager while Lainez and Payam
had custody of the keys for the safety deposit
boxes of Tropicana Hotel.
The procedure for the safety deposit box at
Tropicana Hotel was that it can be opened by 2
keys only. 1 key is given to the registered hotel
guest while the other key is held by the hotel
management.
McLoughlin deposited $15,000 (US) and
$10,000 (AUS) as well as letters, bankbooks,
credit cards and a checkbook in the safety
deposit box during his stay at Tropicana Hotel.
After his trips abroad, McLoughlin discovered
that some cash and valuables he deposited in
the safety deposit box were missing.
McLoughlin immediately confronted Lainez and
Payam. Both admitted that Tan opened the
safety deposit box with the key assigned to
him.
When McLoughlin confronted Tan, she
admitted to have stolen the key with the
assistance of Lopez, Payam and
Lainez. A promissory note was written by
Lopez, promising to pay the amount of $4,000
(AUS) and $2,000 (US).
McLoughlin insisted that Tropicana Hotel be
responsible for the loss. However, Lopez
refused and relied on the conditions for renting
the safety deposit box which provides that the
hotel is free from any liability arising from loss
should the key be lost and to return the key
and execute the release in favor of the hotel
upon giving up the use of the box.
McLoughlin filed a case against petitioners.
RTC ruled in favor of McLoughlin, making
petitioners jointly and severally liable for the
losses plus damages. The hotel conditions
were ruled not valid for being contrary to Art
2003 of the NCC and public policy. The CA
also ruled in favor of McLoughlin.
ISSUE: Whether or not YHT Corporation is
jointly and severally liable for the losses
suffered by McLoughlin? YES.

HELD: SC appreciated the facts found and

proven by the lower court that McLoughlin
indeed deposited such cash and valuables as
he claimed.
The evidence also revealed that the hotel
guest alone cannot open the safety deposit
box without the assistance of the hotel
management or its employees. In case of loss
of any item deposited, it is inevitable to
conclude that the management had at least a
hand in the consummation of the taking, unless
the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez,
who were employees of Tropicana, had
custody of the master key of the management
when the loss took place. They even admitted
that they assisted Tan on 3 separate occasions
in opening McLoughlins safety deposit box.
It is proved that Tropicana had prior knowledge
that a person aside from the registered guest
had access to the safety deposit box. Yet the
management failed to notify McLoughlin of the
incident and waited for him to discover the
taking before it disclosed the matter to him.
Therefore, Tropicana
should
be held
responsible for the damage suffered by
McLoughlin by reason of the negligence of its
employees.
Tans acts should have prompted the
management to investigate her relationship
with McLoughlin. Then, petitioners would have
exercised due diligence required of them.
Failure to do so warrants the conclusion that
the management had been remiss in
complying with the obligations imposed upon
hotel-keepers under the law.
Under Art 1170 of NCC, those who, in the
performance of their obligations, are guilty of
negligence, are liable for damages. As to who
shall bear the burden of paying damages, Art
2180 Par (4) of NCC provides that the owners
and managers of an establishment are likewise
responsible for damages caused by their
employees in the service of the branches in
which the latter are employed or on the
occasion of their functions.
Also, this Court has ruled that if an employee is
found negligent, it is presumed that the
employer was negligent in selecting and/or

supervising him for it is hard for the victim to

prove the negligence of such employer.
Thus, given the fact that the loss of
McLoughlins money was consummated
through the negligence of Tropicanas
employees in allowing Tan to open the safety
deposit box without the guests consent, both
the assisting employees and YHT Realty
Corporation itself, as owner and operator of
Tropicana, should be held solidarily liable
pursuant to Article 2193.
Also, Art 2003 is controlling which provides
that the hotel-keeper cannot free himself from
responsibility by posting notices to the effect
that he is not liable for the articles brought by
the guest. Any stipulation between the hotelkeeper and the guest whereby the
responsibility of the former as set forth in
Articles 1998 to 2001 is suppressed or
diminished shall be void.
Petitioners contend that McLoughlins case
was mounted on the theory of contract, but the
trial court and the appellate court upheld the
grant of the claims of the latter on the basis of
tort. There is nothing anomalous in how the
lower courts decided the controversy for this
Court has pronounced a jurisprudential rule
that tort liability can exist even if there are
already contractual relations. The act that
breaks the contract may also be tort.

DURBAN APARTMENTS VS. PIONEER

(639 SCRA 441, G.R. No. 179419, January
12, 2011)
FACTS: On July 22, 2003, Pioneer Insurance
and Surety Corporation, by right
of
subrogation, filed [with the RTC of Makati City]
a Complaint for Recovery of Damages against
Durban
Apartments
Corporation,
doing
business under the name and style of City
Garden Hotel, and [defendant before the RTC]
Vicente Justimbaste.
Respondents contention:
Respondent averred that it is the insurer for
loss and damage of Jeffrey Sees Suzuki
Grand Vitara in the amount of P1,175,000.
On April 30, 2002, See arrived and checked in
at the City Garden Hotel in Makati corner

Kalayaan Avenues, Makati City before

midnight, and its parking attendant, defendant
Justimbaste got the key to said Vitara from
See to park it.

was See himself who parked his Vitara within

the premises of the hotel as evidenced by the
valet parking customers claim stub issued to
him.

On May 1, 2002 (1am) the Hotel Chief

Security Officer informed him that his car was
carnapped while it was parked unattended at
the parking area of Equitable PCI Bank along
Makati Ave.

Defendant Justimbaste saw the Vitara

speeding away from the place where it was
parked; he tried to run after it, and blocked its
possible path but to no avail.

See then reported the incident to the

Operations Division of Makati City Police AntiCarnapping unit and then conducted
investigation. The car has not yet been
recovered since July 23, 2002.

RTC ruled in favor of respondent and ordered

Durban Apartment to pay respondent the sum
of P1, 163, 250.00. CA affirmed the decision of
RTC. Hence, present petition.
ISSUE: Whether or not petitioner is liable to
respondent for the loss of Sees vehicle.YES.

Respondent paid P1,163,250 money claim of

See and mortagee ABN AMRO Savings Bank
as indemnity for the loss of the car. The car
was lost due to the negligence of Durban
Apartments and Justimbaste because it was
discovered that this was the second time that a
similar incident of carnapping happened in the
valet parking service of Durban Apartments
and no necessary precautions were taken to
prevent its repetition.
Defendant
Justimbaste
and
Durban
Apartments failed and refused to pay Pioneers
valid, just, and lawful claim despite written
demands.
Petitioners contention:
See did not check in at its hotel, on the
contrary, he was a guest of a certain Ching
Montero x x x; defendant x x x Justimbaste did
not get the ignition key of Sees Vitara, on the
contrary, it was See who requested a parking
attendant to park the Vitara at any available
parking space, and it was parked at the
Equitable Bank parking area, which was within
Sees view, while he and Montero were waiting
in front of the hotel.
They made a written denial of the demand of
[respondent] Pioneer Insurance for want of
legal basis; valet parking services are provided
by the hotel for the convenience of its
customers looking for a parking space near the
hotel premises; it is a special privilege that it
gave to Montero and See; it does not include
responsibility for any losses or damages to
motor vehicles and its accessories in the
parking area; and the same holds true even if it

HELD: In this case, respondent substantiated

the allegations in its complaint, i.e., a contract
of necessary deposit existed between the
insured See and petitioner.
On this score, we find no error in the following
disquisition of the appellate court. The records
also reveal that upon arrival at the City Garden
Hotel, See gave notice to the doorman and
parking attendant of the said hotel, x x x
Justimbaste, about his Vitara when he
entrusted its ignition key to the latter. x x x
Justimbaste issued a valet parking customer
claim stub to See, parked the Vitara at the
Equitable PCI Bank parking area, and placed
the ignition key inside a safety key box while
See proceeded to the hotel lobby to check in.
The Equitable PCI Bank parking area became
an annex of City Garden Hotel when the
management of the said bank allowed the
parking of the vehicles of hotel guests thereat
in the evening after banking hours.
Article 1962, in relation to Article 1998, of the
Civil Code defines a contract of deposit and a
necessary deposit made by persons in hotels
or inns:
Art. 1962. A deposit is constituted from the
moment a person receives a thing belonging to
another, with the obligation of safely keeping it
and returning the same. If the safekeeping of
the thing delivered is not the principal purpose
of the contract, there is no deposit but some
other contract.
Art. 1998. The deposit of effects made by
travelers in hotels or inns shall also be

regarded as necessary. The keepers of hotels

or inns shall be responsible for them as
depositaries, provided that notice was given to
them, or to their employees, of the effects
brought by the guests and that, on the part of
the latter, they take the precautions which said
hotel-keepers or their substitutes advised
relative to the care and vigilance of their
effects.
Plainly, from the facts found by the lower
courts, the insured See deposited his
vehicle for safekeeping with petitioner,
through the latters employee, Justimbaste.
In turn, Justimbaste issued a claim stub to
See. Thus, the contract of deposit was
perfected from Sees delivery, when he
handed over to Justimbaste the keys to his
vehicle, which Justimbaste received with
the obligation of safely keeping and
returning it. Ultimately, petitioner is liable
for the loss of Sees vehicle.
POLICY: A deposit is constituted from the
moment a person receives a thing belonging to
another, with the obligation of safely keeping it
and returning the same.

IV.

Sequestration or Judicial Deposit

LOS BAOS RURAL BANK VS AFRICA

FACTS: Pacita Africa is the widow of Alberto

Africa and the rest of her co-petitioners are
their children.
In June 1989, the Register of Deeds was razed
by
fire,
destroying
some
of
its
records/documents among which was the
original TCT covering a parcel of land
registered in the name of petitioner Pacita. The
aforesaid property was part of the conjugal
property of petitioner Pacita and her late
husband Alberto Africa.
On request of Pacita, private respondent Macy
Africa, the common-law wife of petitioner
Antonio Africa, worked for the reconstitution of
the TCT. While the reconstituted title was in
her possession, Macy allegedly forged, or
caused the forgery of, Pacitas signature on a
Deed of Absolute Sale purporting to transfer

ownership of the subject property to Macy. On

the strength of the forged Deed of Absolute
Sale, Macy was able to cause the issuance of
a TCT in her name, without the knowledge of
any of herein petitioners.
In March 1994, petitioners discovered that the
subject property was mortgaged by Macy to
the respondent bank. To protect their interests
over the subject property, petitioners lodged an
action in court against Macy and
the
respondent bank for Annulment of Title, Deed
of Absolute Sale and Deed of Mortgage.
The respondent bank in utter bad faith,
foreclosed the subject property on June 11,
1996 without due notice to the petitioners,
prompting the petitioners to amend [their]
complaint, this time incorporating therein a
prayer for the issuance of a temporary
restraining order and/or writ of preliminary
injunction, to stop the respondent bank from,
among others, consolidating title to the subject
property.
Petitioner argues that respondents do not have
a right to the relief demanded, because they
merely have possession of the property, as the
9
legal title is in the name of Macy Africa.
Furthermore, it claims that the consolidation of
title in its name does not constitute an
"invasion of a right that is material and
substantial.
On the other hand, respondents maintain that
they would suffer great irreparable damage if
the writ of preliminary injunction is not
11
granted.
They likewise contend that if
petitioner is allowed to consolidate its title to
the subject property, they would lose their
ancestral home, a loss that would result in
unnecessary and protracted proceedings
involving third parties.
ISSUE: Whether the appellate court erred in
issuing a writ of preliminary injunction to stop
petitioners consolidation of its title to the
subject property.

HELD:
Main Issue:
Propriety of Preliminary Injunction
We agree with respondents.
The grounds for the issuance of a writ

of

preliminary injunction are enumerated in Rule

58, Section 3 of the Revised Rules of Court,
which reads as follows:
"Sec. 3. Grounds for issuance of preliminary
injunction. A preliminary injunction may be
granted when it is established;
(a)That the applicant is entitled to the relief
demanded, and the whole or part of such relief
consists in restraining the commission or
continuance of the act or acts complained of,
or in requiring the performance of an act or
acts, either for a limited period or perpetually;
(b)That the commission, continuance or nonperformance of the act or acts complained of
during the litigation would probably work
injustice to the applicant; or
(c)That a party, court, agency or a person is
doing, threatening, or is attempting to do, or is
procuring or suffering to be done, some act or
acts probably in violation of the rights of the
applicant respecting the subject of the action or
proceeding, and tending to render
the
judgment ineffectual."
Injunction is a preservative remedy aimed at
no other purpose than to protect the
13
complainants substantive rights and interests
14
during the pendency of the principal action. A
preliminary injunction, as the term itself
15
suggests, is merely temporary. It is to be
resorted to only when there is a pressing
necessity to avoid injurious consequences that
cannot be remedied under any standard of
compensation.
Moreover, injunction, like other equitable
remedies, should be issued only at the
instance of a suitor who has sufficient interest
in or title to the right or the property sought to
17
be protected. It is proper only when the
plaintiff appears to be entitled to the relief
18
demanded in the complaint. In particular, the
existence of the right and the violation thereof
must appear in the allegations of the
19
complaint and must constitute at least a
prima facie showing of a right to the final
20
relief. Thus, there are two requisite conditions
for the issuance of a preliminary injunction,
namely, (1) the right to be protected exists
prima facie, and (2) the acts sought to be
21
enjoined are violative of that right. It must be
proven that the violation sought to be
prevented would cause an irreparable injustice.
Further, while a clear showing of the right is

necessary, its existence need not be

22
conclusively established. In fact, the evidence
required to justify the issuance of a writ of
preliminary injunction in the hearing thereon
need not be conclusive or complete. The
evidence need only be a "sampling" intended
merely to give the court an idea of the
justification for the preliminary injunction,
pending the decision of the case on the
23
merits. Thus, to be entitled to the writ,
respondents are only required to show that
they have the ostensible right to the final relief
prayed for in their Complaint.
First Requisite: Existence of the Right
In the case at bar, we find ample justification
for the issuance of a writ of preliminary
25
injunction. Evidently, the question on whether
or not respondents possess the requisite right
hinges on the prima facie existence of their
26
legal title to the subject property. They have
shown that they have that right, and that it is
directly threatened by the act sought to be
enjoined.
First, Respondent Pacita Africa is the
registered owner of the subject property. Her
ownership is evidenced by the reconstituted
Transfer Certificate of Title.
30

Second, the validity of the Deed of Sale

dated December 29, 1992, is still in dispute
because Respondent Pacita Africa claims that
her signature was forged by the vendee, Macy
3
Africa.

Third, there is doubt as to the validity of the

mortgage in favor of petitioner, because there
exists on record two TCTs covering the
32
mortgaged property: (1) TCT No. 81519
registered in the name of Pacita Africa and (2)
33
TCT No. 81519 registered in the name of
Macy Africa.
If indeed the Deed of Sale is a forgery, no
parcel of land was ever transferred to the
34
purported buyer who, not being the owner,
could not have validly mortgaged the
35
property. Consequently, neither has petitioner
-- the buyer and mortgagee of the same lot -36
ever acquired any title thereto. Significantly,
no evidence was presented by petitioner to
controvert these allegations put forward by
respondents. Clearly then, on the basis of the
evidence presented, respondents possess the

right to prevent petitioner from consolidating

the title in its name. The first requisite -- the
existence of a right to be protected -- is thus
37
present.
Second Requisite: Violation of Applicants
Right
As to the second requisite, what is sought to
be enjoined by respondents is
the
consolidation of the title to the subject property
in petitioners name. After having discovered
that the property had been mortgaged to
petitioner, respondents filed on June 12, 1994
an action for Annulment of Title, Deed of Sale,
and Mortgage to protect their rights over the
38
property.
This notwithstanding, petitioner
39
foreclosed it on June 11, 1996. To enjoin
petitioner from consolidating the title in its
name, respondents then filed an Amended
40
Complaint, praying for a writ of preliminary
injunction.
Unless legally stopped, petitioner may
consolidate title to the property in its name and
enjoy the unbridled freedom to dispose of it to
third persons, to the damage and prejudice of
41
respondents. What respondents stand to lose
42
is material and substantial. They would lose
their ancestral home even without the benefit
43
of a trial. Clearly, the act sought to be
enjoined is violative of their proprietary right
44
over the property.
A writ of preliminary injunction is issued
precisely to preserve threatened or continuous
irremediable injury to some of the parties
before their claims can be thoroughly studied
45
and adjudicated. Denial of the application for
the writ may make the Complaint of
respondents moot and academic. Furthermore,
it would render ineffectual a final judgment in
their favor or, at the very least, compel them to
litigate needlessly with third persons who may
46
have acquired an interest in the property.
47
Such a situation cannot be countenanced.
Lis Pendens
Petitioner further contends that respondents
are not entitled to the relief prayed
for,
because they caused a notice of lis pendens to
be annotated at the back of TCT No. 81519,
registered in the name of Macy P. Africa; thus,
that notice provided ample protection of their
48
rights and interests.

We are not persuaded. A notice of lis pendens

serves as an announcement to the whole world
that a particular real property is in litigation and
as a warning that those who acquire an
interest in the property do so at their own risk -they gamble on the result of the litigation over
49
it.
However, the cancellation of such notice may
be ordered by the court that has jurisdiction
50
over it at any given time. Its continuance or
removal -- like the continuance or the removal
of a preliminary attachment or injunction -- is
not contingent on the existence of a final
judgment on the action and ordinarily has no
51
effect on the merits thereof. Thus, the notice
of lis pendens does not suffice to protect
52
herein respondents rights over the property.
It does not provide complete and ample
protection.
Status Quo Ante
Petitioner further claims that the RTC erred in
enjoining the foreclosure sale of the subject
53
property. It argues that the foreclosure may
no longer be enjoined, because it has long
54
been effected since 1996. We agree with
petitioner.
It is a well-entrenched rule that consummated
55
acts can no longer be restrained by injunction
whose sole objective is to preserve the status
quo until the merits of the case are fully
56
heard. Status quo is defined as the last actual
peaceful uncontested situation that precedes a
controversy, and its preservation is the office of
57
an injunctive writ.
In the instant case, the status quo was the
situation of the parties at the time of the filing
58
of the Amended Complaint with a prayer for a
writ of preliminary injunction. It was that point
at which petitioner had already foreclosed the
subject property and, hence, could no longer
be enjoined from going on with the foreclosure.
However, the last actual uncontested status
that preceded the controversy was when the
property in dispute was still registered in the
name of Macy Africa, petitioner not having
59
consolidated in its name the title thereto.
Thus, the issuance of the writ would no doubt
60
preserve the status quo.
We cannot rule on the allegation of petitioner
that this case is a "scam perpetrated by private

61

respondents" to defraud it. The truth or the

falsity of that assertion cannot be ascertained
by this Court at this time. Verily, we refrain
from expressing any opinion on the merits of
the case, pending a full consideration of the
evidence that would be presented by the
parties.

PART V: WAREHOUSE RECEIPTS LAW

PART VI: TRUST RECEIPTS LAW
PART VII: GUARANTY & SURETYSHIP
(Articles 2047-2084)
I. Nature and Extent
ESCAO & SILOS V. ORTIGAS, JR.
FACTS: On April 28, 1980, Private
Development Corporation of the Philippines
(PDCP) entered into a loan agreement with
Falcon Minerals, Inc. (Falcon) amounting to
$320,000.00 subject to terms and conditions.
On the same day, three (3) stockholder-officers
of Falcon: Ortigas Jr., George A. Scholey, and
George T. Scholey executed an Assumption of
Solidary Liability to assume in their individual
capacity, solidary liability with Falcon for due
and punctual payment of the loan contracted
by Falcon with PDCP. Two (2) separate
guaranties were executed to guarantee
payment of the same loan by other
stockholders and officers of Falcon, acting in
their personal and individual capacities.
One guaranty was executed by Escao, Silos,
Silverio, Inductivo and Rodriguez. Two years
later, an agreement was developed to cede
control of Falcon to Escao, Silos and Matti.
Contracts were executed whereby Ortigas,
George A. Scholey, Inductivo and the heirs of
then already deceased George T. Scholey
assigned their shares of stock in Falcon to
Escao, Silos and Matti.
An Undertaking dated June 11, 1982 was
executed by the concerned parties, namely:
with Escao, Silos and Matti as sureties and
Ortigas, Inductivo and Scholeys as obligors.
Falcon eventually availed of the sum of
$178,655.59 from the credit line extended by
PDCP. It would also execute a Deed of Chattel
Mortgage over its personal properties to further

secure
the
loan.
However,
Falcon
subsequently defaulted in its payments. After
PDCP foreclosed on the chattel mortgage,
there remained a subsisting deficiency of Php
5,031,004.07 which falcon did not satisfy
despite demands.
ISSUE: Whether the obligation to repay is
solidary, as contended by respondent and the
lower courts, or merely joint as argued by
petitioners.
HELD: The obligation to repay is only jointly as
declared by the Court. In case there is a
concurrence of two or more creditors or of two
or more debtors in one and the same
obligation, Article 1207 of the Civil Code states
that among them, there is a solidary liability
only when the obligation expressly so states,
or when the law or the nature of the obligation
requires solidarity. Article 1210 supplies
further caution against the broad interpretation
of solidarity by providing: The indivisibility of
an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply
indivisibility. These Civil Code provisions
establish that in case of concurrence of two or
more creditors or of two or more debtors in one
and the same obligation, and in the absence of
express and indubitable terms characterizing
the obligation as solidary, the presumption is
that the obligation is only joint. It thus becomes
incumbent upon the party alleging that the
obligation is indeed solidary in character to
prove such fact with a preponderance of
evidence. Note that Article 2047 itself
specifically calls for the application of the
provisions on joint and solidary obligations to
surety ship contracts. Article 1217 of the Civil
Code thus comes into play, recognizing the
right of reimbursement from a co-debtor (the
principal debtor, in case of suretyship) in favor
of the one who paid (i.e. the surety).
However, a significant distinction still lies
between a joint and several debtor, on one
hand, and a surety on the other. Solidarity
signifies that the creditor can compel any one
of the joint and several debtors or the surety
alone to answer for the entirety of the principal
debt. The difference lies in the respective
faculties of the joint and several debtor and the
surety to seek reimbursement for the sums
they paid out to the creditor. In the case of joint
and several debtors, Article1217 makes plain

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

that the solidary debtor who effected the

payment to the creditor may claim from his codebtors only the share which corresponds to
each, with the interest for the payment already
made. Such solidary debtor will not be able to
recover from the co-debtors the full amount
already paid to the creditor, because the right
to recovery extends only to the proportional
share of the other co-debtors, and not as to the
particular proportional share of the solidary
debtor who already paid. In contrast, even as
the surety is solidarily bound with the principal
debtor to the creditor, the surety who does pay
the creditor has the right to recover the full
amount paid, and not just any proportional
share, from the principal debtor or debtors.
Such right to full reimbursement falls within the
other rights, actions and benefits which pertain
to the surety by reason of the subsidiary
obligation assumed by the surety.
Decision: Petitioners and Matti are jointly
liable to Ortigas, Jr. in the amount of P1.3M;
Legal interest of 12% per annum on P 1.3M
computed from March 14, 1994. Assailed
rulings are affirmed. Costs against petitioners.
Note: A guarantor who binds himself in solidum
with the principal debtor under the provisions of
the second paragraph does not become a
solidary co-debtor to all intents and purposes.
SURETY
Outside of the liability he
assumes to pay the debt
before the property of
the principal debtor has
been exhausted
Has the right to recover
the full amount paid, and
not just any proportional
share, from the principal
debtor or debtors.
Subsidiary

SOLIDARY CODEBTOR
Solidarity signifies that
the creditor can compel
any one of the joint and
several debtors or the
surety alone to answer
for the entirety of the
principal debt.
May claim from his codebtors only the share
which corresponds to
each, with the interest
for the payment already
made.
Solidary

ASSET BUILDERS VS STRONGHOLD

60

Asset Builders Corp (ABC) obligee, petitioner

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

Lucky
Star
Drilling
&
Construction
Corporation (Lucky Star) - obligor
Stronghold Insurance Company (Stronghold)
surety, respondent
FACTS: ABC entered into an agreement
with Lucky Star as part of the completion of
its project to construct the ACG Commercial
Complex. Lucky Star was to supply labor,
materials, tools, and equipment including
technical supervision to drill one (1)
exploratory production well on the project
site.
To guarantee faithful compliance with their
agreement, Lucky Star engaged respondent
Stronghold which issued two (2) bonds in
favor of petitioner ABC.
ABC paid Lucky Star P575,000.00 as
advance payment, representing 50% of the
contract price. Lucky Star, thereafter,
commenced the drilling work.
On agreed completion date, Lucky Star
managed to accomplish only 10% of the
drilling work. ABC sent a demand letter to
Lucky Star for the immediate completion of

60

the drilling work. However, Lucky Star failed to

fulfill its obligation.
ABC sent Notice of Rescission of Contract with
Demand for Damages to Lucky Star and a
Notice of Claim for payment to Stronghold to
make good its obligation under its bonds.
Despite notice, ABC did not receive any reply
either from Lucky Star or Stronghold,
prompting it to file its Complaint for Rescission
with Damages against both before the RTC.
RTC rendered the assailed decision ordering
Lucky Star to pay ABC but absolving
Stronghold from liability. Relevant parts of the
decision reads: The surety bond and
performance bond executed by defendants
Lucky Star and Stronghold Insurance are in the
nature of accessory contracts which depend
for its existence upon another contract. Thus,
when the agreement between the plaintiff
Asset Builders and defendant Lucky Star was
rescinded, the surety and performance bond
were automatically cancelled.
Thus, Asset Builders filed this present petition
for review on certiorari assailing decision of
RTC which orders defendant Lucky Star to pay

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

petitioner Asset Builders the sum of

P575,000.00 with damages, but absolving
respondent Stronghold Insurance of any
liability on its Surety Bond and Performance
Bond.
ISSUE: Whether or not respondent insurance
company, as surety, can be held liable under
its bonds.
HELD: Yes. As provided in Article 2047, the
surety undertakes to be bound solidarily with
the principal obligor. That undertaking makes
a surety agreement an ancillary contract as it
presupposes the existence of a principal
contract. Although the contract of a surety is in
essence secondary only to a valid principal
obligation, the surety becomes liable for the
debt or duty of another although it possesses
no direct or personal interest over the
obligations nor does it receive any benefit
therefrom.
Let
it
be
stressed
that
notwithstanding the fact that the surety
contract is secondary to the principal
obligation, the surety assumes liability as a
regular party to the undertaking.
Suretyship, in essence, contains two types of
relationship the principal relationship
between the obligee (petitioner) and the obligor
(Lucky Star), and the accessory surety
relationship between the principal (Lucky Star)
and the surety (respondent). In this
arrangement, the obligee accepts the suretys
solidary undertaking to pay if the obligor does
not pay. Such acceptance, however, does not
change in any material way the obligees
relationship with the principal obligor. Neither
does it make the surety an active party to the
principal obligee-obligor relationship. Thus,
the acceptance does not give the surety the
right to intervene in the principal contract. The
suretys role arises only upon the obligors
default, at which time, it can be directly held
liable by the obligee for payment as a solidary
obligor.
In the case at bench, when Lucky Star failed to
finish the drilling work within the agreed time
frame despite petitioners demand for
completion, it was already in delay. Due to this
default, Lucky Stars liability attached and, as a
necessary consequence, respondents liability
under the surety agreement arose.

61

Undeniably, when Lucky Star reneged on its

undertaking with the petitioner and further
failed to return the P575,000.00 downpayment
that was already advanced to it, respondent,
as surety, became solidarily bound with Lucky
Star for the repayment of the said amount to
petitioner.
Contrary to the trial courts ruling, respondent
insurance company was not automatically
released from any liability when petitioner
resorted to the rescission of the principal
contract for failure of the other party to perform
its undertaking. Precisely, the liability of the
surety arising from the surety contracts comes
to life upon the solidary obligors default. It
should be emphasized that petitioner had to
choose rescission in order to prevent further
loss that may arise from the delay of the
progress of the project. Without a doubt,
Lucky Stars unsatisfactory progress in the
drilling work and its failure to complete it in due
time amount to non-performance of its
obligation.
In fine, respondent should be answerable to
petitioner on account of Lucky Stars nonperformance of its obligation as guaranteed by
the performance bond.
Finally, Article 1217 of the New Civil Code
acknowledges the right of reimbursement from
a co-debtor (the principal co-debtor, in case of
suretyship) in favor of the one who paid (the
surety). Thus, respondent is entitled to
reimbursement from Lucky Star for the amount
it may be required to pay petitioner arising from
its bonds.

CASTELLVI DE HIGGINS VS SELLNER

(L-158025, November 5, 1920)
FACTS: Higgins filed an action to recover
against Sellner the sum of P10,000. The basis
of the action is a letter written by defendant
George C. Sellner to John T. Macleod, agent
for Mrs. Horace L. Higgins, on May 31, 1915,
of the following tenor:
DEAR SIR: I hereby obligate and bind
myself, my heirs, successors and
assigns that if the promissory note
executed the 29th day of May, 1915 by
the Keystone Mining Co., W.H. Clarke,

and John Maye, jointly and severally, in

your favor and due six months after
date for Pesos 10,000 is not fully paid
at maturity with interest, I will, within
fifteen days after notice of such default,
pay you in cash the sum of P10,000
and interest upon your surrendering to
me the three thousand shares of stock
of the Keystone Mining Co. held by you
as security for the payment of said
note.
Respectfully,
(Sgd.) GEO. C. SELLNER.
Higgins contends that he is a surety while
Sellner contends that he is a guarantor.
ISSUE: What is the status of the
GUARANTY.

transaction?

HELD: In the original Spanish of the Civil Code

now in force in the Philippine Islands, Title XIV
of Book IV is entitled "De la Fianza." The
Spanish word "fianza" is translated in the
Washington and Walton editions of the Civil
Code as "security." "Fianza" appears in the
Fisher translation as"suretyship." The Spanish
word "fiador" is found in all of the English
translations of the Civil Code as "surety." The
law of guaranty is not related of by that name
in the Civil Code, although indirect reference to
the same is made in the Code of Commerce.
In terminology at least, no distinction is made
in the Civil Code between the obligation of a
surety and that of a guarantor.
A surety and a guarantor are alike in that
each promises to answer for the debt or
default of another. A surety and a guarantor
are unlike in that the surety assumes liability
as a regular party to the undertaking, while
the liability as a regular party to upon an
independent agreement to pay the
obligation if the primary pay or fails to do
so. A surety is charged as an original
promissory; the engagement of the
guarantor is a collateral undertaking. The
obligation of the surety is primary; the
obligation of the guarantor is secondary.
Turning back again to our Civil Code, we first
note that according to article 1822 "By fianza
(security or suretyship) one person binds
himself to pay or perform for a third person in

case the latter should fail to do so." But "If the

surety binds himself in solidum with the
principal debtor, the provisions of Section
fourth, Chapter third, Title first, shall be
applicable." What the first portion of the cited
article provides is, consequently, seen to be
somewhat akin to the contract of guaranty,
while what is last provided is practically
equivalent to the contract of suretyship. When
in subsequent articles found in section 1 of
Chapter II of the title concerning fianza, the
Code speaks of the effects of suretyship
between surety and creditor, it has, in
comparison with the common law, the effect of
guaranty between guarantor and creditor. The
civil law suretyship is, accordingly, nearly
synonymous with the common law guaranty;
and the civil law relationship existing between
codebtors liable in solidum is similar to the
common law suretyship.
It is perfectly clear that the obligation
assumed by SELLNER was simply that of a
guarantor, or, to be more precise, of the fiador
whose responsibility is fixed in the Civil Code.
The letter of Mr. Sellner recites that if the
promissory note is not paid at maturity, then,
within fifteen days after notice of such default
and upon surrender to him of the three
thousand shares of Keystone Mining Company
stock, he will assume responsibility. Sellner is
not bound with the principals by the same
instrument executed at the same time and on
the same consideration, but his responsibility is
a secondary one found in an independent
collateral agreement. Neither is Sellner jointly
and severally liable with the principal debtors.
With particular reference, therefore, to
assignments of error, Sellner is a guarantor
within the meaning of the provisions of the Civil
Code.
There is also an equitable aspect to the case
which reenforces this conclusion. The note
executed by the Keystone Mining Company
matured on November 29, 1915. Interest on
the note was not accepted by the makers until
September 30, 1916. When the note became
due, it is admitted that the shares of stock used
as collateral security were selling at par; that
is, they were worth pesos 30,000. Notice that
the note had not been paid was not given to
and when the Keystone Mining Company stock
was worthless. Sellner, consequently, through

the laches of plaintiff, has lost possible chance

to recoup, through the sale of the stock, any
amount which he might be compelled to pay as
a surety or guarantor. The "indulgence," as this
word is used in the law of guaranty, of the
creditors of the principal, as evidenced by the
acceptance of interest, and by failure promptly
to notify the guarantor, may thus have served
to discharge the guarantor.

PALMARES VS CA
(288 SCRA, 422, G.R. No. 126490, March 31,
1998)
FACTS: Pursuant to a promissory note dated
March 13, 1990, private respondent M.B.
Lending Corporation extended a loan to the
spouses Osmea and Merlyn Azarraga,
together with petitioner Estrella Palmares, in
the amount of P30,000.00 payable on or
before May 12, 1990, with compounded
interest at the rate of 6% per annum to be
computed every 30 days from the date thereof.
On four occasions after the execution of the
promissory note and even after the loan
matured, petitioner and the Azarraga spouses
were able to pay a total of P16,300.00, thereby
leaving a balance of P13,700.00. No payments
were made after the last payment on
September 26, 1991.
Consequently, on the basis of petitioner's
solidary liability under the promissory note,
Respondent Corporation filed a complaint
against petitioner Palmares as the lone party
defendant, to the exclusion of the principal
debtors, allegedly by reason of the insolvency
of the latter.
In her Amended Answer with Counterclaim,
petitioner alleged that sometime in August
1990, immediately after the loan matured, she
offered to settle the obligation with respondent
corporation but the latter informed her that they
would try to collect from the spouses Azarraga
and that she need not worry about it; that there
has already been a partial payment in the
amount of P17,010.00; that the interest of 6%
per month compounded at the same rate per
month, as well as the penalty charges of 3%
per month, are usurious and unconscionable;
and that while she agrees to be liable on the
note but only upon default of the principal
debtor, respondent corporation acted in bad

faith in suing her alone without including the

Azarragas when they were the only ones who
benefited from the proceeds of the loan.
ISSUE: Where a party signs a promissory note
as a co-maker and binds herself to be jointly
and severally liable with the principal debtor in
case the latter defaults in the payment of the
loan, is such undertaking of the former deemed
to be that of a surety as an insurer of the debt,
or of a guarantor who warrants the solvency of
the debtor? SURETY
HELD: The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the
guarantor binds himself to the creditor to fulfill
the obligation of the principal debtor in case
the latter should fail to do so.
If a person binds himself solidarily with the
principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a
suretyship.
It is a cardinal rule in the interpretation of
contracts that if the terms of a contract are
clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of
its stipulation shall control. In the case at bar,
petitioner expressly bound herself to be
jointly and severally or solidarily liable with
the principal maker of the note. The terms
of the contract are clear, explicit and
unequivocal that petitioner's liability is that
of a surety.
A surety is an insurer of the debt, whereas a
guarantor is an insurer of the solvency of the
debtor. A suretyship is an undertaking that the
debt shall be paid; a guaranty, an undertaking
that the debtor shall pay. Stated differently, a
surety promises to pay the principal's debt if
the principal will not pay, while a guarantor
agrees that the creditor, after proceeding
against the principal, may proceed against the
guarantor if the principal is unable to pay. A
surety binds himself to perform if the principal
does not, without regard to his ability to do so.
A guarantor, on the other hand, does not
contract that the principal will pay, but simply
that he is able to do so. In other words, a
surety undertakes directly for the payment and
is so responsible at once if the principal debtor
makes default, while a guarantor contracts to

pay if, by the use of due diligence, the debt

cannot be made out of the principal debtor.
In a desperate effort to exonerate herself from
liability, petitioner erroneously invokes the rule
on strictissimi juris, which holds that when the
meaning of a contract of indemnity or guaranty
has once been judicially determined under the
rule of reasonable construction applicable to all
written contracts, then the liability of the surety,
under his contract, as thus interpreted and
construed, is not to be extended beyond its
strict meaning. The rule, however, will apply
only after it has been definitely ascertained that
the contract is one of suretyship and not a
contract of guaranty. It cannot be used as an
aid in determining whether a party's
undertaking is that of a surety or a guarantor.
Prescinding
from
these
jurisprudential
authorities, there can be no doubt that the
stipulation contained in the third paragraph of
the controverted suretyship contract merely
elucidated on and made more specific the
obligation of petitioner as generally defined in
the second paragraph thereof. Resultantly, the
theory advanced by petitioner, that she is
merely a guarantor because her liability
attaches only upon default of the principal
debtor, must necessarily fail for being
incongruent with the judicial pronouncements
adverted to above.
In this regard, we need only to reiterate the
rule that a surety is bound equally and
absolutely with the principal, and as such is
deemed an original promisor and debtor from
the beginning. It will further be observed that
petitioner's
undertaking
as
co-maker
immediately follows the terms and conditions
stipulated between respondent corporation, as
creditor, and the principal obligors. A surety is
usually bound with his principal by the same
instrument, executed at the same time and
upon the same consideration; he is an original
debtor, and his liability is immediate and direct.
A surety usually enters into the
same
obligation as that of his principal, and the
signatures of both usually appear upon the
same instrument, and the same consideration
usually supports the obligation for both the
principal and the surety.
There is no merit in petitioner's contention that
the complaint was prematurely filed because

the principal debtors cannot as yet be

considered in default, there having been no
judicial or extrajudicial demand made by
respondent
corporation.
Significantly,
paragraph (G) of the note states that "should I
fail to pay in accordance with the above
schedule of payment, I hereby waive my right
to notice and demand." Hence, demand by the
creditor is no longer necessary in order that
delay may exist since the contract itself already
expressly so declares. As a surety, petitioner is
equally bound by such waiver.
Even if it were otherwise, demand on the
sureties is not necessary before bringing suit
against them, since the commencement of the
suit is a sufficient demand. On this point, it may
be worth mentioning that a surety is not even
entitled, as a matter of right, to be given notice
of the principal's default. Inasmuch as the
creditor owes no duty of active diligence to
take care of the interest of the surety, his mere
failure to voluntarily give information to the
surety of the default of the principal cannot
have the effect of discharging the surety. The
surety is bound to take notice of the principal's
default and to perform the obligation. He
cannot complain that the creditor has not
notified him in the absence of a special
agreement to that effect in the contract of
suretyship.
A creditor's right to proceed against the surety
exists independently of his right to proceed
against the principal.
Under Article 1216 of the Civil Code, the
creditor may proceed against any one of the
solidary debtors or some or all of them
simultaneously. The rule, therefore, is that if
the obligation is joint and several, the creditor
has the right to proceed even against the
surety alone. Since, generally, it is not
necessary for the creditor to proceed against a
principal in order to hold the surety liable,
where, by the terms of the contract, the
obligation of the surety is the same that of the
principal, then soon as the principal is in
default, the surety is likewise in default, and
may be sued immediately and before any
proceedings are had against the principal.
Perforce, in accordance with the rule that, in
the absence of statute or agreement otherwise,
a surety is primarily liable, and with the rule
that his proper remedy is to pay the debt and

pursue the principal for reimbursement, the

surety cannot at law, unless permitted by
statute and in the absence of any agreement
limiting the application of the security, require
the creditor or obligee, before proceeding
against the surety, to resort to and exhaust his
remedies against the principal, particularly
where both principal and surety are equally
bound.
We agree with respondent corporation that its
mere failure to immediately sue petitioner on
her obligation does not release her from
liability. Where a creditor refrains from
proceeding against the principal, the surety is
not exonerated. In other words, mere want of
diligence or forbearance does not affect the
creditor's rights vis-a-vis the surety, unless the
surety requires him by appropriate notice to
sue on the obligation. Such gratuitous
indulgence of the principal does not discharge
the surety whether given at the principal's
request or without it, and whether it is yielded
by the creditor through sympathy or from an
inclination to favor the principal, or is only the
result of passiveness. The neglect of the
creditor to sue the principal at the time the debt
falls due does not discharge the surety, even if
such delay continues until the principal
becomes insolvent. And, in the absence of
proof of resultant injury, a surety is not
discharged by the creditor's mere statement
that the creditor will not look to the surety, or
that he need not trouble himself. The
consequences of the delay, such as the
subsequent insolvency of the principal, or the
fact that the remedies against the principal
may be lost by lapse of time, are immaterial.
The raison d'tre for the rule is that there is
nothing to prevent the creditor from proceeding
against the principal at any time. At any rate, if
the surety is dissatisfied with the degree of
activity displayed by the creditor in the pursuit
of his principal, he may pay the debt himself
and become subrogated to all the rights and
remedies of the creditor.
It may not be amiss to add that leniency shown
to a debtor in default, by delay permitted by the
creditor without change in the time when the
debt might be demanded, does not constitute
an extension of the time of payment, which
would release the surety. In order to constitute
an extension discharging the surety, it should

appear that the extension was for a definite

period, pursuant to an enforceable agreement
between the principal and the creditor, and that
it was made without the consent of the surety
or with a reservation of rights with respect to
him. The contract must be one which
precludes the creditor from, or at least hinders
him in, enforcing the principal contract within
the period during which he could otherwise
have enforced it, and which precludes the
surety from paying the debt.
None of these elements are present in the
instant case. Verily, the mere fact that
respondent corporation gave the principal
debtors an extended period of time within
which to comply with their obligation did not
effectively absolve here in petitioner from the
consequences of her undertaking. Besides, the
burden is on the surety, herein petitioner, to
show that she has been discharged by some
act of the creditor, herein respondent
corporation, failing in which we cannot grant
the relief prayed for.
As a final issue, petitioner claims that
assuming that her liability is solidary, the
interests and penalty charges on the
outstanding balance of the loan cannot be
imposed for being illegal and unconscionable.
Petitioner
additionally theorizes
that
respondent corporation intentionally delayed
the collection of the loan in order that the
interests
and
penalty
charges
would
accumulate. The statement, likewise traversed
by said respondent, is misleading.

MACHETTI VS HOSPICIO DE SAN JOSE

(G.R. No. L-16666, April 10, 1922)
FACTS: Machetti undertook to construct a
building for Hospicio de San Jose. In such
written agreement, Macheti obtained the
guarantee of Fidelity and Surety Company of
the Philippine Islands.
Machetti undertook the construction with the
supervision of the Hospicio architect. Machetti
was paid for the work with the exception of P4,
978 to which the former filed a complaint. A
counterclaim with damages was field by
Hospicio alleging that the work has not been
carried out in accordance with the
specifications provided in the agreement.

remedy against Machetti.

Machetti was thereafter declared as insolvent
and the proceeding was suspended.
Hospicio filed a motion asking that Fidelity be
made a cross defendant and that the
proceeding continue as against such company.
The Court granted the motion and Hospicio
sought to recover from Fidelity the amount of
P12, 800 as guaranty. The Court ruled in favor
of Hospicio hence this present appeal.
ISSUE: WON recourse can be had against
Fidelity as guaranty? NO (not yet)
HELD: (Discussion centered on the difference
of surety and guaranty)
It appear that the contract is the guarantor's
separate undertaking in which the principal
does not join, that its rests on a separate
consideration moving from the principal and
that although it is written in continuation of the
contract for the construction of the building, it is
a collateral undertaking separate and distinct
from the latter. All of these circumstances are
distinguishing features of contracts
of
guaranty.
Now, while a surety undertakes to pay if the
principal does not pay, the guarantor only
binds himself to pay if the principal cannot pay.
The one is the insurer of the debt, the other an
insurer of the solvency of the debtor. This
latter liability is what the Fidelity and Surety
Company assumed in the present case. The
undertaking is perhaps not exactly that of a
fianza under the Civil Code, but is a perfectly
valid contract and must be given the legal
effect if ordinarily carries. The Fidelity and
Surety Company having bound itself to pay
only the event its principal, Machetti,
cannot pay it follows that it cannot be
compelled to pay until it is shown that
Machetti is unable to pay. Such ability may
be proven by the return of a writ of execution
unsatisfied or by other means, but is not
sufficiently established by the mere fact that he
has been declared insolvent in insolvency
proceedings under our statutes, in which the
extent of the insolvent's inability to pay is not
determined until the final liquidation of his
estate.
Therefore, Hospicio much first exhaust all its

GILAT SATELLITE NETWORKS LTD. v.

UNITED COCONUT PLANTERS BANK
GENERAL INSURANCE CO., INC.
FACTS: On September 15, 1999, One Virtual
placed with GILAT a purchase order
for
various
telecommunications
equipment,
accessories, spares, services and software, at
a total purchase price of US$ 2,128,250.00. Of
the said purchase price for the goods
delivered, One Virtual promised to pay a
portion thereof totalling US$1.2 Million in
accordance with the payment schedule dated
22 November 1999. To ensure the prompt
payment of this amount, it obtained defendant
UCPBs surety bond dated 3 December 1999,
in favor of GILAT.
During the period between September 1999
and June 2000, GILAT shipped and delivered
to One Virtual the purchased products and
equipment, as evidenced by airway bills/Bill of
Lading. All of the equipment, including the
software components for which payment was
secured by the surety bond, was shipped by
GILAT and duly received by One Virtual. Under
an endorsement dated December 23, 1999,
the surety issued, with One Virtuals conformity,
an amendment to the surety bond, Annex A
thereof, correcting its expiry date from May 30,
2001 to July 30, 2001.
One Virtual failed to pay GILAT the amount of
US$ 400,000.00 on the due date of May 30,
2000 in accordance with the payment schedule
to the surety bond, prompting GILAT to write
the surety defendant UCPB on June 5, 2000, a
demand letter for payment of the said amount
of US$400,000.00. No part of the amount set
forth in this demand has been paid to date by
either One Virtual or defendant UCPB. One
Virtual likewise failed to pay on the succeeding
payment installment date of 30 November
2000 of the surety bond, prompting GILAT to
send a second demand letter dated January
24, 2001, for the payment of the full amount of
US$1,200,000.00 guaranteed under the surety
bond, plus interests and expenses and which
letter was received by the defendant surety on
January 25, 2001. However, defendant UCPB
failed to settle the amount of US$1,200,000.00
or a part thereof, hence, the instant complaint.

Gilat filed a Complaint against respondent

UCPB to recover the amounts supposedly
covered by the surety bond, plus interests and
expenses.
ISSUES:
1. WON the CA erred in dismissing the case
and ordering petitioner and One Virtual to
arbitrate.
2. WON petitioner is entitled to legal interest
due to the delay in the fulfillment by
respondent of its obligation under the
Suretyship Agreement.
HELD:
Suretyship Agreement
The existence of a suretyship agreement does
not give the surety the right to intervene in the
principal contract, nor can an arbitration clause
between the buyer and the seller be invoked
by a non-party such as the surety.
Petitioner alleges that arbitration laws mandate
that no court can compel arbitration, unless a
party entitled to it applies for this relief. This
referral, however, can only be demanded by
one who is a party to the
arbitration
agreement. Considering that neither petitioner
nor One Virtual has asked for a referral, there
is no basis for the CAs order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil
Code clearly provide that the creditor may
proceed against the surety without having first
sued the principal debtor. Even the Surety
Agreement itself states that respondent
becomes liable upon mere failure of the
Principal to make such prompt payment. Thus,
petitioner should not be ordered to make a
separate claim against One Virtual (via
arbitration)
before
proceeding
against
respondent.
On the other hand, respondent maintains that
a surety contract is merely an accessory
contract, which cannot exist without a valid
obligation. Thus, the surety may avail itself of
all the defenses available to the principal
debtor and inherent in the debt that is, the right
to invoke the arbitration clause in the Purchase
Agreement.
We agree with petitioner.

In suretyship, the oft-repeated rule is that a

suretys liability is joint and solidary with that of
the principal debtor. This undertaking makes a
surety agreement an ancillary contract, as it
presupposes the existence of a principal
contract. Nevertheless, although the contract
of a surety is in essence secondary only to a
valid principal obligation, its liability to the
creditor or promise of the principal is said to be
direct, primary and absolute; in other words, a
surety is directly and equally bound with the
principal. He becomes liable for the debt and
duty of the principal obligor, even without
possessing a direct or personal interest in the
obligations constituted by the latter. Thus, a
surety is not entitled to a separate notice of
default or to the benefit of excussion. It may in
fact be sued separately or together with the
principal debtor.
After a thorough examination of the pieces of
evidence presented by both parties, the RTC
found that petitioner had delivered all the
goods to One Virtual and installed them.
Despite these compliances, One Virtual still
failed to pay its obligation, triggering
respondents liability to petitioner as the
formers surety. In other words, the failure of
One Virtual, as the principal debtor, to fulfill its
monetary obligation to petitioner gave the latter
an immediate right to pursue respondent as
the surety.
Consequently, we cannot sustain respondents
claim that the Purchase Agreement, being the
principal contract to which the Suretyship
Agreement
is
accessory,
must
take
precedence over arbitration as the preferred
mode of settling disputes.
First, the acceptance of a surety agreement
does not change in any material way the
creditors relationship with the principal debtor
nor does it make the surety an active party to
the principal creditor-debtor relationship. In
other words, the acceptance does not give the
surety the right to intervene in the principal
contract. The suretys role arises only upon the
debtors default, at which time, it can be directly
held liable by the creditor for payment as a
solidary obligor. Hence, the surety remains a
stranger to the Purchase Agreement. We
agree with petitioner that respondent cannot
invoke in its favor the arbitration clause in the
Purchase Agreement, because it is not a party

to that contract. An arbitration agreement being

contractual in nature, it is binding only on the
parties thereto, as well as their assigns and
heirs.
Second, Section 24 of Republic Act No.
928542 is clear in stating that a referral to
arbitration may only take place if at least one
party so requests not later than the pre-trial
conference, or upon the request of both parties
thereafter. Respondent has not presented
even an iota of evidence to show that either
petitioner or One Virtual submitted its
contesting claim for arbitration.
Third, sureties do not insure the solvency of
the debtor, but rather the debt itself. They are
contracted precisely to mitigate risks of
nonperformance on the part of the obligor. This
responsibility necessarily places a surety on
the same level as that of the principal debtor.
The effect is that the creditor is given the right
to directly proceed against either principal
debtor or surety. This is the reason why
excussion cannot be invoked. To require the
creditor to proceed to arbitration would render
the very essence of suretyship nugatory and
diminish its value in commerce. If the surety is
dissatisfied with the degree of
activity
displayed by the creditor in the pursuit of his
principal, he may pay the debt himself and
become subrogated to all the rights and
remedies
of
the
creditor.
Interest; Delay
Interest, as a form of indemnity, may be
awarded to a creditor for the delay incurred by
a debtor in the payment of the latters
obligation, provided that the delay is
inexcusable.
Anent the issue of interests, petitioner alleges
that it deserves to be paid legal interest of 12%
per annum from the time of its first demand on
respondent on 5 June 2000 or at most, from
the second demand on 24 January 2001
because of the latters delay in discharging its
monetary obligation. Citing Article 1169 of the
Civil Code, petitioner insists that the delay
started to run from the time it demanded the
fulfilment of respondents obligation under the
suretyship contract. Significantly, respondent
does not contest this point, but instead argues
that it is only liable for legal interest of 6% per
annum from the date of petitioners last

demand on 24 January 2001.

We sustain petitioner. Article 2209 of the Civil
Code is clear: if an obligation consists in the
payment of a sum of money, and the debtor
incurs a delay, the indemnity for damages,
there being no stipulation to the contrary, shall
be the payment of the interest agreed upon,
and in the absence of stipulation, the legal
interest.
Delay arises from the time the obligee judicially
or extrajudicially demands from the obligor the
performance of the obligation, and the latter
fails to comply. Delay, as used in Article 1169,
is synonymous with default or mora, which
means delay in the fulfilment of obligations. It
is the nonfulfillment of an obligation with
respect to time.52 In order for the debtor (in
this case, the surety) to be in default, it is
necessary that the following requisites be
present: (1) that the obligation be demandable
and already liquidated; (2) that the debtor
delays performance; and (3) that the creditor
requires the performance judicially or
extrajudicially.
Having held that a surety upon demand fails to
pay, it can be held liable for interest, even if in
thus paying, its liability becomes more than the
principal obligation. The increased liability is
not because of the contract, but because of the
default and the necessity of judicial collection.
However, for delay to merit interest, it must
be inexcusable in nature.
As to the issue of when interest must accrue,
our Civil Code is explicit in stating that it
accrues from the time judicial or extrajudicial
demand is made on the surety. This ruling is in
accordance with the provisions of Article 1169
of the Civil Code and of the settled rule that
where there has been an extra-judicial demand
before an action for performance was filed,
interest on the amount due begins to run, not
from the date of the filing of the complaint, but
from the date of that extra-judicial demand.
Considering that respondent failed to pay its
obligation on 30 May 2000 in accordance with
the Purchase Agreement, and that the
extrajudicial demand of petitioner was sent on
5 June 2000, we agree with the latter that
interest must start to run from the time
petitioner sent its first demand letter (5 June
2000), because the obligation was already due
and demandable at that time.

WILLEX PLASTIC, INC. V. CA,

INTERNATIONAL CORPORATE BANK
(1996)
Doctrine: It is never necessary that a guarantor
or surety should receive any part or benefit, if
such there be, accruing to his principal
FACTS: 1978: Inter-Resin took out a loan
from Manila Bank. As additional security, InterResin and
Investment
Underwriting
(IUCP) executed a Continuing Surety
Agreement stating that they are liable to Manila
Bank solidarily for the loan taken out by InterResin.
1979: Inter-Resin and Willex Plastic executed
a Continuing Guarantee for the loan which
Inter-Resin
obtained
from
Investment
Underwriting to the extent of P5M.
1981: Investment Underwriting (IUCP) paid
Manila Bank P4M to satisfy Inter-Resins 1978
Obligation.
Investment
Underwriting
(IUCP)
then
demanded payment of the P4M from both
Inter-Resin and Willex.
Inter-Resin
paid
IUCP
P600K
the proceeds of its fire insurance

from

Willex denied obligation, it alleged that it is

only a guarantor of the principal, hence its
liability was only secondary to the principal
and that it did not receive consideration nor
benefit from the contract between the bank and
Inter-Resin.
Willex insisted that IUCP should pursue InterResin and apply to the loan the assets of the
latter first before going after it.
Willex further alleged that it is guarantor of a
loan to Manila Bank and not to Interbank,
hence the Continuing Guaranty cannot be
retroactive applied as contracts of suretyship
contemplates future dealing.
ISSUE: WON Willex is liable as guarantor for
the loans obtained by Inter-Resin to IUCP?
Yes

HELD: Intent is controlling: clear from the

evidence that the Continuing Guarantee
executed by Willex with Inter-Resin would
cover sums obtained (in the past retroactive)
and/or to be obtained by Inter-Resin Industrial
from Interbank.
Although a contract of suretyship is ordinarily
not to be construed as retrospective, in the end
the intention of the parties as revealed by the
evidence is controlling apply it to the 1978
loan.
Guarantor or surety is bound by the
same consideration that makes the contract
effective between the principal parties thereto.
. . . It is never necessary that a guarantor or
surety should receive any part or benefit, if
such there be, accruing to his principal.

RCBC VS. HON. JOSE P. ARRO

31 July 1982
FACTS: Private respondent Residoro Chua,
with
Enrique
Go,
Sr.,
executed
a
comprehensive surety agreement to guaranty,
above all, any existing or future indebtedness
of Davao Agricultural Industries Corporation
(Daicor), and/or induce the bank at anytime or
from time to time to make loans or advances or
to extend credit to said Daicor, provided that
the liability shall not exceed at any time
Php100,000.00.
A promissory note for Php100,000.00 (for
additional capital to the charcoal buy and sell
and the activated carbon importation business)
was issued in favor of petitioner RCBC payable
a month after execution. This was signed by
Go in his personal capacity and in behalf of
Daicor. Respondent Chua did not sign in said
promissory note. As the note was not paid
despite demands, RCBC filed a complaint for a
sum of money against Daicor, Go and Chua.
The complaint against Chua was dismissed
upon his motion, alleging that the complaint
states no cause of action against him as he
was not a signatory to the note and hence he
cannot be held liable. This was so despite
RCBCs
opposition,
invoking
the
comprehensive surety agreement which it
holds to cover not just the note in question but
also every other indebtedness that Daicor may

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

incur from petitioner bank. RCBC moved for

reconsideration of the dismissal but to no avail.
ISSUE: WON respondent Chua may be held
liable with Go and Daicor under the promissory
note, even if he was not a signatory to it, in
light of the provisions of the comprehensive
surety agreement wherein he bound himself
with Go and Daicor, as solidary debtors, to pay
existing and future debts of said corporation.
HELD: Yes, he may be held liable. The
comprehensive surety agreement executed by
Chua and Go, as president and general
manager, respectively, of Daicor, was to cover
existing as well as future obligations which
Daicor may incur with RCBC. This was only
subject to the proviso that their liability shall not
exceed at any one time the aggregate principal
amount of Php100,000.00. (Par.1 of said
agreement).
The agreement was executed to induce
petitioner Bank to grant any application for a
loan Daicor would request for. According to
said agreement, the guaranty is continuing and
shall remain in full force or effect until the bank
is notified of its termination.
During the time the loan under the promissory
note was incurred, the agreement was still in
full force and effect and is thus covered by the
latter agreement. Thus, even if Chua did not
sign the promissory note, he is still liable by
virtue of the surety agreement. The only
condition necessary for him to be liable under
the agreement was that Daicor is or may
become liable as maker, endorser, accept or or
otherwise.
The comprehensive surety agreement signed
by Go and Chua was as an accessory
obligation dependent upon the principal
obligation, i.e., the loan obtained by Daicor as
evidenced by the promissory note. The surety
agreement unequivocally shows that it was
executed to guarantee future debts that may
be incurred by Daicor with petitioner, as
allowed under NCC Art.2053.
A guaranty may also be given as security for
future debts, the amount of which is not yet
known; there can be no claim against the
guarantor until the debt is liquidated. A
conditional obligation may also be secured.

70

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

ATOK CORPORATION vs. COURT OF

APPEALS, SANYU CORPORATION,
DANILO E. ARRIETA, NENITA B.
ARRIETA, PABLITO BERMUNDO and
LEOPOLDO HALILI
FACTS: SANYU as principal and Sanyu
Trading along with individual private
stockholders of SC(Halili and Bermundo) as
sureties, executed in the
continuing
Suretyship Agreement in favor of ATOK as
creditor. Under this Agreement, Sanyu
Trading and Halili and Bermudo jointly and
severally unconditionally guarantee to ATOK
CORPORATION the full, faithful and prompt
payment and discharge of any and all
indebtedness of SANYU.
The word "indebtedness" is used herein in
its most comprehensive sense and includes
any and all advances, debts, obligations and
liabilities of Principal or any one or more of
them,here[to]fore, now or hereafter made,
incurred or created, whether voluntary or
involuntary and however arising, whether

70

direct or acquired by the Creditor by

assignment or succession, whether due or not
due, absolute or contingent, liquidated or
unliquidated, determined or undetermined and
whether the Principal may be may be liable
individually of jointly with others, or whether
recovery upon such indebtedness may be or
hereafter become barred by any statute of
limitations, or whether such indebtedness may
be or otherwise become unenforceable.
SANYU assigned its trade receivables (P125K)
in consideration of receipt from ATOK of the
amount of P105,000.00.
Later, additional trade receivables were
assigned by SANYU to ATOK with a total face
value of P100,378.45.
Subsequently Atok commenced action against
SANYU, the Arrieta spouses, Pablito
Bermundo and Leopoldo Halili to collect the
sum of P120,240.00 plus penalty charges
amounting to P0.03 for every peso due and
payable for each month starting from 1
September 1983.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

ATOK alleged that SANYU had failed to collect

and remit the amount due under the trade
receivables.
SANYU et al sought dismissal of Atok's claim
upon the ground that such claim had
prescribed under Article 1629 of the Civil Code
and for lack of cause of action. The private
respondents contended that the Continuing
Suretyship Agreement, being an accessory
contract, was null and void since, at the time of
its execution, SANYU had no pre-existing
obligation due to ATOK.
ISSUE: Whether the individual private
respondents may be held solidarily liable with
SANYU under the provisions of the Continuing
Suretyship Agreement. YES
OR Whether that Agreement must be held null
and void as having been executed without
consideration and without a pre-existing
principal obligation to sustain it. NO
HELD: It is true that a serious guaranty or a
suretyship agreement is an accessory contract
in the sense that it is entered into for the
purpose of securing the performance of
another obligation which is denominated as the
principal obligation. It is also true that Article
2052 of the Civil Code states that "a guarantee
cannot exist without a valid obligation." This
legal proposition is not, however, like most
legal principles, to be read in an absolute and
literal manner and carried to the limit of its
logic.
Art. 2052. A guaranty cannot exist without a
valid obligation.
Nevertheless,
a
guaranty
may
be
constituted to guarantee the performance
of a voidable or an unenforceable contract.
It may also guaranty a natural obligation."
Art. 2053. A guaranty may also be given as
security for future debts, the amount of
which is not yet known; there can be no
claim against the guarantor until the debt is
liquidated. A conditional obligation may
also be secured.
In National Rice and Corn Corporation v. Jose
A. Fojas
and
Alto
Surety
Co .,
Inc., appellant Fojas questions the validity of
the additional bonds on the theory that when

71

they were executed, the principal obligation

referred to in said bonds had not yet been
entered into, as no copy thereof was attached
to the deeds of suretyship. This defense is
untenable, because in its complaint the NARIC
averred, and the appellant did not deny that
these bonds were posted to secure the
additional credit that Fojas has applied for, and
the credit increase over his original contract
was sufficient consideration for the bonds. That
the latter were signed and filed before the
additional credit was extended by the NARIC is
no ground for complaint. Article 1825 of the
Civil Code of 1889, in force in 1948, expressly
recognized that "a guaranty may also be given
as security for future debts the amount of
which is not yet known."
In Rizal Commercial Banking Corporation
v. Arro, the Court was confronted again with
the same issue, that is, whether private
respondent was liable to pay a promissory note
dated 29 April 1977 executed by the principal
debtor in the light of the provisions of a
comprehensive surety agreement which
petitioner bank and the private respondent had
earlier entered into on 19 October 1976. Under
the comprehensive surety agreement, the
private respondents had bound themselves as
solidary debtors of the Diacor Corporation not
only in respect of existing obligations but also
in respect of future ones. In holding private
respondent surety (Residoro Chua) liable
under the comprehensive surety agreement,
the Court said that the surety agreement which
was earlier signed by Enrique Go, Sr. and
private respondent, is an accessory obligation,
it being dependent upon a principal one, which,
in this case is the loan obtained by Daicor as
evidenced by a promissory note. What
obviously induced petitioner bank to grant the
loan was the surety agreement whereby Go
and Chua bound themselves solidarily to
guaranty the punctual payment of the loan at
maturity. By terms that are unequivocal, it can
be clearly seen that the surety agreement was
executed to guarantee future debts which
Daicor may incur with petitioner, as is legally
allowable under the Civil Code.
In both Case Laws, the Court rejected the
distinction which the Court of Appeals in the
case at bar sought to make with respect to
Article 2053, that is, that the "future debts"
referred to in that Article relate to "debts

already existing at the time of the constitution

of the agreement but the amount of which is
unknown," and not to debts not yet incurred
and existing at that time. Of course, a surety is
not bound under any particular principal
obligation until that principal obligation is born.
But there is no theoretical or doctrinal difficulty
inherent in saying that the suretyship
agreement itself is valid and binding even
before the principal obligation intended to be
secured thereby is born, any more that there
would be in saying that obligations which are
subject to a condition precedent are valid and
binding before the occurrence of the condition
precedent.
Comprehensive
or
continuing
surety
agreements are in fact quite common place in
present day financial and commercial practice.
A bank or a financing company which
anticipates entering into a series of credit
transactions with a particular company,
commonly requires the projected principal
debtor to execute a continuing surety
agreement along with its sureties. By executing
such an agreement, the principal places itself
in a position to enter into the projected series
of transactions with its creditor; with such
surety agreement, there would be no need to
execute a separate surety contract or bond for
each financing or credit accommodation
extended to the principal debtor. As we
understand it, this is precisely what happened
in the case at bar.

JACINTO UY DIO and NORBERTO UY vs.

HON. COURT OF APPEALS and
METROPOLITAN BANK AND TRUST
COMPANY
FACTS: In 1977, Uy Tiam Enterprises and
Freight Services, thru its representative Uy
Tiam, applied for and obtained credit
accommodations
(LOC
and
TRA)
METROBANK in the sum of P700,000.00. To
secure
the
aforementioned
credit
accommodations Uy and Dio executed
separate Continuing Suretyships, where
Norberto UY agreed to pay METROBANK any
indebtedness of UTEFS up to the aggregate
sum of P300,000.00 while Jacinto Uy Dio
agreed to be bound up to the aggregate sum of
P800,000.00. This obligation was settled and
paid by UTEFS.

Again in 1979, UTEFS secured another

credit accommodation which was fully
settled. They then applied and obtained an
irrevocable letter of credit in the sum of
P815, 600.00, covered UTEFS' purchase of
"8,000 Bags Planters Urea and 4,000 Bags
Planters 21-0-0." It was applied for and
obtain by
UTEFS
without the
participation of Norberto Uy and Jacinto
Uy Dio as they did not sign the
document denominated as "Commercial
Letter of Credit and Application." Also,
they were not asked to execute any
suretyship to guarantee its payment.
Neither did METROBANK nor UTEFS
inform them that the 1979 Letter of Credit
has been opened and the Continuing
Suretyships separately executed in
February, 1977 shall guarantee its
payment.
UTEFS
executed
and
delivered
to
METROBANK the Trust Receipt whereby the
former acknowledged receipt in trust from
the latter of the aforementioned goods from
Planters Products which amounted to
P815,
Being the entrusted, the former agreed
to deliver to METROBANK the

entrusted goods in the event of nonsale or, if sold, the proceeds of the
sale thereof, on or before September
2, 1979.
However, UTEFS did not acquiesce to the
obligatory stipulations in the trust receipt.
METROBANK sent letters to the said principal
obligor and its sureties, Uy and Uy Dio,
demanding payment of the amount due.
Dio denied his liability saying that he cannot
be held liable for the 1979 credit
accommodation because it is a new obligation
contracted without his participation. Besides,
the 1977 credit accommodation which he
guaranteed has been fully paid. Accordingly,
the Continuing Suretyships executed in 1977
cannot be availed of to secure Uy Tiam's Letter
of Credit obtained in 1979 because a guaranty
cannot exist without a valid obligation. It was
further argued that they cannot be held liable
for the obligation contracted in 1979 because
they are not privies thereto as it was
contracted without their participation.
METROBANK contends that the terms and
conditions embodied in the comprehensive

suretyships separately executed by suretiesdefendants, the bank argued that suretiesmovants bound themselves as solidary
obligors of defendant Uy Tiam to both existing
obligations and future ones based on Article
2053
ISSUE: Whether petitioners are liable as
sureties for the 1979 obligations of Uy Tiam to
METROBANK by virtue of the Continuing
Suretyship Agreements they separately signed
in 1977. YES but only for the amount or limit
stated in the surety contract
HELD: A continuing guaranty is one which
covers all transactions, including those arising
in the future, which are within the description or
contemplation of the contract, of guaranty, until
the expiration or termination thereof. A
guaranty shall be construed as continuing
when by the terms thereof it is evident that the
object is to give a standing credit to the
principal debtor to be used from time to time
either indefinitely or until a certain period,
especially if the right to recall the guaranty is
expressly reserved. Hence, where the contract
of guaranty states that the same is to secure
advances to be made "from time to time" the
guaranty will be construed to be a continuing
one.
The use of particular words and expressions
such as payment of "any debt," "any
indebtedness," "any deficiency," or "any sum,"
or the guaranty of "any transaction" or money
to be furnished the principal debtor "at any
time," or "on such time" that the principal
debtor may require, have been construed to
indicate a continuing guaranty.
The Court looked into the provisions of the
Surety entered by Dio.
It shows that the suretyship agreement are
continuing in nature. Petitioners do not deny
this; in fact, they candidly admitted it. Neither
have they denied the fact that they had not
revoked the suretyship agreements. The
purpose of the execution of the Continuing
Suretyships was to induce appellant to grant
any application for credit accommodation
(letter of credit/trust receipt) UTEFS may
desire to obtain from appellant bank. By its
terms, each suretyship is a continuing one

which shall remain in full force and effect until

the bank is notified of its revocation.
The Continuing Suretyship Agreements CAN
be made applicable to the 1979 obligation
even if the latter was not yet in existence when
the agreements were executed in 1977, as
stated in Art 2053 par 2.
The limit of the petitioners respective liabilities
must be determined from the suretyship
agreement each had signed. The Continuing
Suretyship Agreements signed by petitioner
Dio and petitioner Uy fix the aggregate
amount of their liability, at any given time, at
P800,000.00 and P300,000.00, respectively. It
is also stated in the contract that they are
bound to pay for the interest and for a
reasonable amount of cost of suit in case of
judicial proceedings. The law is clear that a
guarantor may bond himself for less, but not
for more than the principal debtor, both as
regards the amount and the onerous nature of
the conditions.
Thus, by express mandate of the Continuing
Suretyship Agreements which they had signed,
petitioners separately bound themselves to pay
interest, expenses, attorney's fees and costs.
Even without such stipulations, the petitioners
would, nevertheless, be liable for the interest
and judicial costs.
Article 2055 of the Civil Code provides that
A guaranty is not presumed; it must be express
and cannot extend to more than what is
stipulated therein. If it be simple or indefinite, it
shall comprise not only the principal obligation,
but also all its accessories, including the
judicial costs, provided with respect to the
latter, that the guarantor shall only be liable for
those costs incurred after he has been
judicially required to pay. Interest
and
damages are included in the term accessories.
However, such interest should run only from
the date when the complaint was filed in court.
Even attorney's fees may be imposed
whenever appropriate, pursuant to Article 2208
of the Civil Code.

FORTUNE MOTORS (PHILS.)

CORPORATION and EDGAR L.
RODRIGUEZA vs. THE HONORABLE

COURT OF APPEALS and FILINVEST

CREDIT CORPORATION

SOUTH CITY HOMES vs. BA

FACTS: Fortune Motors Corporation (Phils.)
has been availing of the credit facilities of
plaintiff-appellant BA Finance Corporation. On
January 17, 1983, Joseph L. G. Chua,
President of Fortune Motors Corporation,
executed in favor of plaintiff-appellant a
Continuing Suretyship Agreement, in which he
"jointly
and
severally
unconditionally"
guaranteed the "full, faithful and prompt
payment and discharge of any and all
indebtedness" of Fortune Motors Corporation
to BA Finance Corporation.

FACTS: In 1981, Joseph Chua and Edgar

Rodrigueza
executed
separate
surety
agreements in favor of Fortune Motors (Phils.)
Corporation to cover obligations incurred by
Fortune Motors whether they be enforced or
thereafter made (from the time of said surety
contracts).
In 1982, Fortune Motors secured cars from
Canlubang Automotive Resources Corporation
(CARCO) via trust receipts and drafts made by
CARCO. These were assigned to Filinvest
Credit Corporation. Later Filinvest, when the
obligation matured, demanded payment from
Fortune Motor as well as from Chua and
Rodrigueza. No payment was made. A case
was filed. Rodrigueza averred that the surety
agreement was void because when it was
signed in 1981, the principal obligation (1982)
did not yet exist.
ISSUE: Whether surety can exist even if there
was no existing indebtedness at the time of its
execution. YES
HELD:
Surety
May
Secure
Future
Obligations
The case at bench falls on all fours with Atok
Finance Corporation vs. Court of Appeals
which reiterated our rulings in National Rice
and Corn Corporation (NARIC) vs. Court of
Appeals and Rizal Commercial Banking
Corporation vs. Arro.
Future obligations can be covered by a surety.
Comprehensive
or
continuing
surety
agreements are in fact quite commonplace in
present day financial and commercial practice.
A bank or financing company which anticipates
entering into a series of credit transactions with
a particular company, commonly requires the
projected principal debtor to execute a
continuing surety agreement along with its
sureties. By executing such an agreement, the
principal places itself in a position to enter into
the projected series of transactions with its
creditor; with such suretyship agreement, there
would be no need to execute a separate surety
contract or bond for each financing or credit
accommodation extended to the principal
debtor.

C.

On February 3, 1983, Palawan Lumber

Manufacturing Corporation plaintiff-appellant a
Continuing Suretyship Agreement in which,
said corporation "jointly and severally
unconditionally" guaranteed the "full, faithful
and prompt payment and discharge of any and
all indebtedness of Fortune Motors Corporation
to BA Finance Corporation. On the same date,
South City Homes, Inc. represented by Edgar
Rodrigueza and Aurelio F. Tablante, likewise
executed a Continuing Suretyship Agreement
in which said corporation "jointly and severally
unconditionally" guaranteed the "full, faithful
and prompt payment and discharge of any and
all
indebtedness"
of
Fortune
Motors
Corporation to BA Finance Corporation.
Upon failure of the defendant-appellant
Fortune Motors Corporation to pay
the
amounts due under the drafts and to remit the
proceeds of motor vehicles sold or to return
those remaining unsold in accordance with the
terms of the trust receipt agreements, BA
Finance Corporation sent demand letter to
Edgar C. Rodrigueza, South City Homes, Inc.,
Aurelio
Tablante,
Palawan
Lumber
Manufacturing Corporation, Joseph L. G.
Chua, George D. Tan and Joselito C. Baltazar.
Since the defendants-appellants failed to settle
their outstanding account with plaintiffappellant, the latter filed on December 22,
1983 a complaint for a sum of money with
prayer for preliminary attachment.
On January 19, 1984, the defendants filed a
Motion to Dismiss. Therein, they alleged that
conventional subrogation effected a novation
without the consent of the debtor (Fortune

Motors Corporation) and thereby extinguished

the latter's liability; that pursuant to the trust
receipt transaction, it was premature under P.
D. No. 115 to immediately file a complaint for a
sum of money as the remedy of the entruster is
an action for specific performance; that the
suretyship agreements are null and void for
having been entered into without an existing
principal obligation; and that being such
sureties does not make them solidary debtors.
ISSUE: Whether the suretyship agreement is
valid
HELD: On the first issue, petitioners assert
that the suretyship agreement they signed is
void because there was no principal obligation
at the time of signing as the principal obligation
was signed six (6) months later. The Civil
Code, however, allows a suretyship agreement
to secure future loans even if the amount is not
yet known.
Article 2053 of the Civil Code provides that:
"Art. 2053. A guaranty may also be given as
security for future debts, the amount of which
is not yet known. x x x"
In Fortune Motors (Phils.) Corporation v. Court
of Appeals we held:
"To fund their acquisition of new vehicles
(which are later retailed or resold to the
general public), car dealers normally enter into
wholesale automotive financing schemes
whereby vehicles are delivered by the
manufacturer or assembler on the strength of
trust receipts or drafts executed by the car
dealers, which are backed up by sureties.
These trust receipts or drafts are then
assigned
and/or
discounted
by
the
manufacturer to/with financing companies,
which assume payment of the vehicles but with
the corresponding right to collect such
payment from the car dealers and/or the
sureties. In this manner, car dealers are able to
secure delivery of their stock-in-trade without
having to pay cash therefor; manufacturers get
paid without any receivables/ collection
problems; and financing companies earn their
margins with the assurance of payment not
only from the dealers but also from the
sureties. When the vehicles are eventually
resold, the car dealers are supposed to pay the
financing companies and the business goes
merrily on. However, in the event the car

dealer defaults in paying the financing

company, may the surety escape liability on
the legal ground that the obligations were
incurred subsequent to the execution of the
surety contract?
"x x x Of course, a surety is not bound under
any particular principal obligation until that
principal obligation is born. But there is no
theoretical or doctrinal difficulty inherent in
saying that the suretyship agreement itself is
valid and binding even before the principal
obligation intended to be secured thereby is
born, any more than there would be in saying
that obligations which are subject to
a
condition precedent are valid and binding
before the occurrence of the condition
precedent.
"Comprehensive
or
continuing
surety
agreements are in fact quite commonplace in
present day financial and commercial practice.
A bank or financing company which anticipates
entering into a series of credit transactions with
a particular company, commonly requires the
projected principal debtor to execute a
continuing surety agreement along with its
sureties. By executing such an agreement, the
principal places itself in a position to enter into
the projected series of transactions with its
creditor; with such suretyship agreement, there
would be no need to execute a separate surety
contract or bond for each financing or credit
accommodation extended to the principal
debtor."

PACIFIC BANKING CORPORATION vs. IAC

FACTS: On October 24, 1975, Celia Syjuco
Regala, applied for and obtained from the
plaintiff the issuance and use of Pacificard
credit card, under the Terms and Conditions
Governing the Issuance and Use of Pacificard.
On the same date, the defendant-appelant
Robert Regala, Jr., spouse of defendant Celia
Regala, executed a "Guarantor's Undertaking
in favor of the appellee Bank, whereby the
latter agreed "jointly and severally of Celia
Aurora Syjuco Regala, to pay the Pacific
Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities
due and incurred by said Celia Aurora Syjuco
Regala with the use of the Pacificard, or
renewals thereof, issued in her favor by the

Pacific Banking Corporation". It was also

agreed that "any changes of or novation in the
terms and conditions in connection with the
issuance or use of the Pacificard, or any
extension of time to pay such obligations,
charges or liabilities shall not in any manner
release me/us from responsibility hereunder, it
being understood that I fully agree to such
charges, novation or extension, and that this
understanding is a continuing one and shall
subsist and bind me until the liabilities of the
said Celia Syjuco Regala have been fully
satisfied or paid.
The defendant Celia Regala, as such
Pacificard holder, had purchased goods and/or
services on credit under her Pacificard, for
which the plaintiff advanced the cost
amounting to P92,803.98 at the time of the
filing of the complaint.
In view of defendant Celia Regala's failure to
settle her account for the purchases made thru
the use of the Pacificard, a written demand
was sent to the latter and also to the defendant
Roberto Regala, Jr. under his "Guarantor's
Undertaking."
Private respondent Roberto Regala, Jr. was
made liable only to the extent of the monthly
credit limit granted to Celia Regala, i.e., at
P2,000.00 a month and only for the advances
made during the one year period of the card's
effectivity counted from October 29, 1975 up to
October 29, 1976
ISSUE: What is the extent of Robertos
liability?
HELD: It is true that under Article 2054 of the
Civil Code, "(A) guarantor may bind himself for
less, but not for more than the principal debtor,
both as regards the amount and the onerous
nature of the conditions. 2 It is likewise not
disputed by the parties that the credit limit
granted to Celia Regala was P2,000.00 per
month and that Celia Regala succeeded in
using the card beyond the original period of its
effectivity, October 29, 1979. We do not agree
however, that Roberto Jr.'s liability should be
limited to that extent. Private respondent
Roberto Regala, Jr., as surety of his wife,
expressly bound himself up to the extent of the
debtor's (Celia) indebtedness
likewise
expressly waiving any "discharge in case of

any change or novation of the terms and

conditions in connection with the issuance of
the Pacificard credit card." Roberto, in fact,
made his commitment as a surety a continuing
one, binding upon himself until all the liabilities
of Celia Regala have been fully paid. All these
were
clear
under
the
"Guarantor's
Undertaking" Roberto signed, thus:
. . . Any changes of or novation in the terms
and conditions in connection with the issuance
or use of said Pacificard, or any extension of
time to pay such obligations, charges or
liabilities shall not in any manner release
me/us from the responsibility hereunder, it
being understood that the undertaking is a
continuing one and shall subsist and bind
me/us until all the liabilities of the said Celia
Syjuco Regala have been fully satisfied or
paid. (p. 12, supra; emphasis supplied)
Private respondent Roberto Regala, Jr. had
been made aware by the terms of the
undertaking of future changes in the terms and
conditions governing the issuance of the credit
card to his wife and that, notwithstanding, he
voluntarily agreed to be bound as a surety. As
in guaranty, a surety may secure additional
and future debts of the principal debtor the
amount of which is not yet known.
The application by respondent court of the
ruling in Government v. Tizon, supra is
misplaced. It was held in that case that:
. . . although the defendants bound themselves
in solidum, the liability of the Surety under its
bond would arise only if its co-defendants, the
principal obligor, should fail to comply with the
contract. To paraphrase the ruling in the case
of Municipality of Orion vs. Concha, the liability
of the Surety is "consequent upon the liability"
of Tizon, or "so dependent on that of the
principal debtor" that the Surety "is considered
in law as being the same party as the debtor in
relation to whatever is adjudged, touching the
obligation of the latter"; or the liabilities of the
two defendants herein "are so interwoven and
dependent as to be inseparable." Changing the
expression, if the defendants are held liable,
their liability to pay the plaintiff would be
solidary, but the nature of the Surety's
undertaking is such that it does not incur
liability unless and until the principal debtor is
held liable.

A guarantor or surety does not incur liability

unless the principal debtor is held liable. It is in
this sense that a surety, although solidarily
liable with the principal debtor, is different from
the debtor. It does not mean, however, that the
surety cannot be held liable to the same extent
as the principal debtor. The nature and extent
of the liabilities of a guarantor or a surety is
determined by the clauses in the contract of
suretyship.

MOLINO vs. SECURITY DINERS

FACTS: The Security Diners International
Corporation ("SDIC') operates a credit card
system under the name of Diners Club through
which it extends credit accommodation to its
cardholders for the purchase of goods and
payment of services from its member
establishments to be reimbursed later on by
the cardholder upon proper billing. There are
two types of credit cards issued: one, the
Regular (Local) Card which entitles the
cardholder to purchase goods and pay
services from member establishments in an
amount not exceeding P10,000.00; and two,
the Diamond (Edition) Card which entitles the
cardholder to purchase goods and pay
services from member establishments in
unlimited amounts. One of the requirements for
the issuance of either of these cards is that an
applicant should have a surety.
On July 24, 1987, Danilo A. Alto applied for a
Regular (Local) Card with SDIC. He got as his
surety his own sister-in-law Jeanette Molino
Alto. Thus, Danilo signed the printed
application form and Jeanette signed the
Surety Undertaking.
On the basis of the completed and signed
Application Form and Surety Undertaking, the
SDIC issued to Danilo Diners Card No.
36510293216-0006. The latter used this card
and initially paid his obligations to SDIC. On
February 8, 1988, Danilo wrote SDIC a letter
requesting it to upgrade his Regular (Local)
Diners Club Card to a Diamond (Edition) one.
As a requirement of SDIC, Danilo secured from
Jeanette her approval. The latter obliged and
so on March 2, 1988, she signed a Note which
states:

"This certifies that I, Jeanette D. Molino,

approve of the request of Danilo and
Gloria Alto with Card No. 3651-203216
0006 and 3651-203412-5007 to upgrade
their card from regular to diamond
edition."
Danilo's request was granted and he was
issued a Diamond (Edition) Diners Club Card.
He used this card and made purchases from
member establishments. On October 1, 1988
Danilo had incurred credit charged plus
appropriate interest and service charges in the
aggregate amount of P166,408.31. He
defaulted in the payment of this obligation.
SDIC demanded of Danilo and Jeanette to pay
said obligation but they did not pay. So, on
November 9, 1988, SDIC filed an action to
collect said indebtedness against Danilo and
Jeanette.
Defendant Danilo Alto failed to file an Answer.
Petitioner was left as the lone defendant, sued
in her capacity as surety of Danilo.
In the Answer petitioner claimed that her
liability under the Surety Undertaking was
limited to P10,000.00 and that she did not
expressly and categorically agree to act as
surety for Danilo in an amount higher than
P10,000.00.
Petitioner posits that she did not expressly give
her consent to be bound as surety under the
upgraded card. She points out that the note
she signed, marked as Exhibit "C", registering
her approval of the request of Danilo Alto to
upgrade his card, renders the Surety
Undertaking she signed under the terms of the
previous card "without probative value,
immaterial and irrelevant as it covers only the
liability of the surety in the use of the regular
credit card by the principal debtor x x x. " She
argues further that because the principal
debtor, Danilo Alto, was not held liable, having
been dropped as a defendant, she could not
be said to have incurred liability as surety.
ISSUE: Whether petitioner is liable as surety
under the Diamond card revolves around the
effect of the upgrading by Danilo Alto of his
card.

HELD: There is no doubt that the upgrading

was a novation of the original agreement
covering the first credit card issued to Danilo
Alto, basically since it was committed with the
intent of canceling and replacing the said card.
However, the novation did not serve to release
petitioner from her surety obligations because
in the Surety Undertaking she expressly
waived discharge in case of change or
novation in the agreement governing the use of
the first credit card.
The nature and extent of petitioner's
obligations are set out in clear and
unmistakable terms in the Surety Undertaking.
Thus:
2. She declared that "any change or novation
in the Agreement or any extension of time
granted by SECURITY DINERS to pay such
obligation, charges, and fees, shall not release
(her) from this Surety Undertaking";
We cannot give any additional meaning to the
plain language of the subject undertaking. The
extent of a surety's liability is determined by the
language of the suretyship contract or bond
itself.
This case is no different from Pacific Banking
Corporation vs. IAC, supra, correctly applied
by the Court of Appeals, which involved a
Guarantor's Undertaking (although thus
denominated, it was in substance a contract of
surety signed by the husband for the credit
card application of his wife. Like herein
petitioner, the husband also argued that his
liability should be limited to the credit limit
allowed under his wife's card but the Court
declared him liable to the full extent of his
wife's indebtedness. Thus:
We need not look elsewhere to determine
the nature and extent of private respondent
Roberto Regala, Jr.'s undertaking. As a
surety he bound himself jointly and severally
with the debtor Celia Regala "to pay the
Pacific Banking Corporation upon demand,
any and all indebtedness, obligations,
charges or liabilities due and incurred by
said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in
(her) favor by Pacific Banking Corporation. x
x x.
xxx
xxx
xxx

It is likewise not disputed by the parties that

the credit limit granted to Celia Regala was
P2,000.00 per month and that Celia Regala
succeeded in using the card beyond the
original period of its effectivity, October 29,
1979. We do not agree, however, that
Roberto Jr.'s liability should be limited to
that extent. Private respondent Roberto
Regala, Jr., as surety of his wife, expressly
bound himself up to the extent of the
debtor's (Celia's) indebtedness likewise
expressly waiving any "discharge in case of
any change or novation of the terms and
conditions in connection with the issuance
of the Pacificard credit card." Roberto, in
fact, made his commitment as a surety a
continuing one, binding upon himself until all
the liabilities of Celia Regala have been fully
paid. All these were clear under the
"Guarantor's Undertaking" Roberto signed,
thus:
"x x x Any changes of or novation in the
terms and conditions in connection with
the issuance or use of said Pacificard,
or any extension of time to pay such
obligations, charges or liabilities shall
not in any manner release me/us from
the responsibility hereunder, it being
understood that the undertaking is a
continuing one and shall subsist and
bind me/us until all the liabilities of the
said Celia Syjuco Regala have been
fully satisfied or paid."
As a last-ditch measure, petitioner asseverates
that, being merely a surety, a pronouncement
should first be made declaring the principal
debtor liable before she herself can be
proceeded against. The argument, which is
hinged upon the dropping of Danilo as
defendant in the complaint, is bereft of merit.
The Surety Undertaking expressly provides
that petitioner's liability is solidary. A surety is
considered in law as being the same party as
the debtor in relation to whatever is adjudged
touching the obligation of the latter, and their
liabilities are interwoven as to be inseparable.
Although the contract of a surety is in essence
secondary only to a valid principal obligation,
his liability to the creditor is direct, primary and
absolute; he becomes liable for the debt and
duty of another although he possesses no
direct or personal interest over the obligations

nor does he receive any benefit therefrom.

There being no question that Danilo Alto
incurred debts of P166,408.31 in credit card
advances, an obligation shared solidarily by
petitioner, respondent was certainly within its
rights to proceed singly against petitioner, as
surety and solidary debtor, without prejudice to
any action it may later file against Danilo Alto,
until the obligation is fully satisfied. This is so
provided under Article 1216 of the Civil Code:
The creditor may proceed against any one
of the solidary debtors or some or all of
them simultaneously. The demand made
against one of them shall not be an obstacle
to those which may be subsequently
directed against the others, so long as the
debt has not been fully collected.
Petitioner is a graduate of business
administration, and possesses considerable
work experience in several banks. She knew
the full import and consequence of the Surety
Undertaking that she executed. She had the
option to withdraw her suretyship when Danilo
upgraded his card to one that permitted
unlimited purchases, but instead she approved
the upgrading. While we commiserate in the
financial predicament she now faces, it is also
evident that the liability she incurred is only the
legitimate consequence of an undertaking that
she freely and intelligently obliged to.

GATEWAY ELECTRONICS CORPORATION

and GERONIMO B. DELOS REYES, JR., VS.
ASIANBANK CORPORATION
(574 SCRA 698, G.R. No. 172041, December
18, 2008)
FACTS: Petitioner Gateway Electronics
Corporation (Gateway) is a domestic
corporation that used to be engaged in the
semi-conductor business. During the period
material, petitioner Geronimo delos Reyes, Jr.
was its president and one Andrew delos Reyes
its executive vice-president. In July 1996,
Geronimo and Andrew executed separate but
almost identical deeds of suretyship for
Gateway in favor of respondent Asianbank
Corporation (Asianbank). Asianbank later
extended to Gateway several export packing
loans in the total aggregate amount of USD ~
1.7Million. This loan package was later
consolidated with a Dollar Promissory Note

(PN) for the amount of USD ~1.7Million (same

amount as above) and secured by a chattel
mortgage over Gateways equipment for USD
2 million.
Gateway initially made payments on its loan
obligations, but eventually defaulted. Upon
Gateways request, Asianbank extended the
maturity dates of the loan several times. On
July 15 and 30, 1999, Gateway issued two
checks as payment for its arrearages and
interests for the periods June 30 and July 30,
1999; However, both checks were dishonored
for insufficiency of funds. Asianbanks
demands for payment made upon Gateway
and its sureties went unheeded such that as of
November 23, 1999, Gateways obligation to
Asianbank, inclusive of principal, interest, and
penalties, totaled USD ~2.2Million.
Thus, Asianbank later filed with the RTC
Makati a complaint for a sum of money against
Gateway, Geronimo, and Andrew.
RTC held Gateway, Geronimo and Andrew
jointly and severally liable to pay Asianbank.
Gateway, Geronimo and Andrew appealed to
the CA.
During the appeal, Gateway filed a petition for
voluntary insolvency with the RTC Cavite in
which Asianbank was listed as one of the
creditors.
CA affirmed the decision of the RTC Makati.
Gateway, Geronimo and Andrew filed MR
stating that RTC Cavite had issued an Order
declaring Gateway insolvent.
ISSUES:
1. WON Geronimo is liable as surety to pay
Asianbank YES
2. WON Geronimo should be liable to pay
notwithstanding
the order of insolvency of the SEC YES
HELD:
1. Gateway may be discharged from
Liability but not Geronimo
Under this issue, SC discussed the effect of
the issuance of an order declaring Gateway
insolvent under the Insolvency Law. Here, SC
ruled that in accordance with said law, the
issuance of the insolvency order had the effect
of automatically staying the civil action for a

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

80

sum of money filed by Asianbank against

Gateway. In net effect, the proceedings before
the CA, but only insofar as the claim against
Gateway was concerned, was, or ought to
have been, suspended after the date of the
order. But according to SC, Geronimos liability
is a different story. Suretyship is covered by
Article 2047 of the CC, which states:

debt covered by the deed on suretyship,

subject to the rule prohibiting double
recovery from the same cause. This legal
postulate becomes all the more logical in
case of an insolvency situation where, as
here, the insolvency court is bereft of
jurisdiction over the sureties of
the
principal debtor.

By guaranty a person, called the guarantor,

binds himself to the creditor to fulfill the
obligation of the principal debtor in case the
latter should fail to do so. If a person binds
himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of
this Book shall be observed. In such case the
contract is called a suretyship.
xxx
A creditors right to proceed against the surety
exists independently of his right to proceed
against the principal. Under Article 1216 of the
CC, the creditor may proceed against any
one of the solidary debtors or some or all of
them simultaneously.

As Asianbank aptly points out, A SUIT

AGAINST THE SURETY, INSOFAR AS THE
SURETYS
SOLIDARY
LIABILITY
IS
CONCERNED, IS NOT AFFECTED BY AN
INSOLVENCY PROCEEDING INSTITUTED
BY OR AGAINST THE PRINCIPAL DEBTOR.

The rule, therefore, is that if the obligation is

joint and several, the creditor has the right to
proceed even against the surety alone. Since,
generally, it is not necessary for the creditor to
proceed against a principal in order to hold the
surety liable, where, by the terms of the
contract, the obligation of the surety is the
same as that of the principal, then soon as
the principal is in default, the surety is
likewise in default, and may be sued
immediately and before any proceedings are
had against the principal. Perforce, x x x a
surety is primarily liable, and with the rule
that his proper remedy is to pay the debt
and
pursue
the
principal
for
reimbursement, the surety cannot at law,
unless permitted by statute and in the absence
of any agreement limiting the application of the
security, require the creditor or obligee,
before proceeding against the surety, to
resort to and exhaust his remedies against
the principal, particularly where both principal
and surety are equally bound.
Clearly, Asianbanks right to collect payment
for the full amount from Geronimo, as surety,
exists independently of its right against
Gateway as principal debtor; it could thus
proceed against one of them or file separate
actions against them to recover the principal

The same principle holds true with respect to

the surety of a corporation in distress which is
subject of a rehabilitation proceeding before
the Securities and Exchange Commission
(SEC). A surety of the distressed corporation
can be sued separately to enforce his liability
as such, notwithstanding an SEC order
declaring the former under a state of
suspension of payment.
2. Geronimos Argument: As things stand, his
liability, as compared to that of Gateway, is
contextually more onerous and burdensome,
precluded as he is from seeking recourse
against the insolvent corporation. From this
premise, Geronimo claims that since
Gateway cannot, owing to the order of
insolvency, be made to pay its obligation,
he, too, being just a surety, cannot also be
made to pay, obviously having in mind Art.
2054 of the CC, as follows:
A guarantor may bind himself for less, but not
for more than the principal debtor, both as
regards the amount and the onerous nature of
the conditions. Should he have bound himself
for more, his obligations shall be reduced to
the limits of that of the debtor.
SCs Ruling:
Provision does not free surety from
liability. Liability may be less, but not free.
Art. 2054 pronounces the rule that the
obligation of a guarantor may be less, but
cannot be more than the obligation of the
principal debtor. The rule, however, cannot
possibly be stretched to mean that a
guarantor or surety is freed from liability as

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

such guarantor or surety in the event the

principal debtor becomes insolvent or is
unable to pay the obligation. This
interpretation would defeat the
very
essence of a suretyship contract which, by
definition, refers to an agreement whereunder
one person, the surety, engages to be
answerable for the debt, default, or miscarriage
of another known as the principal. Geronimos
position that a surety cannot be made to pay
when the principal is unable to pay is clearly
erroneous and must be rejected.
* When a creditor goes after a debtor and its
surety, and then the debtor is subsequently
declared insolvent by the court/SEC, such
declaration of insolvency neither invalidates
the suretyship nor does it mean that the surety
is no longer liable to pay for the amount owed
by the debtor to the creditor.

SECURITY BANK AND TRUST COMPANY,

Inc. vs. RODOLFO M. CUENCA,
(341 SCRA 781, G.R. No. 138544, October 3,
2000)
FACTS: Sta. Ines Melale (Sta. Ines) is a
corporation engaged in logging operations. It
was a holder of a Timber License Agreement
issued by DENR. November 10, 1980, Security
Bank and Trust Co. granted Sta. Ines Melale
Corporation [SIMC] a credit line in the amount
of P8,000,000.00 to assist the latter in meeting
the additional capitalization requirements of its
logging operations.
The Credit Approval Memorandum expressly
stated that the P8M Credit Loan Facility shall
be effective until 30 November 1981. To
secure the payment of the amounts drawn by
SIMC from the above-mentioned credit line,
SIMC executed a Chattel Mortgage over some
of its machinery and equipment in favor of
SBTC. As additional security for the payment
of the loan, Rodolfo M. Cuenca executed an
Indemnity Agreement dated 17 December
1980 in favor of SBTC whereby he solidarily
bound himself with SIMC stating by virtue of
aforesaid credit accommodation(s) including
the substitutions, renewals, extensions,
increases, amendments, conversions and
revivals
of
the
aforesaid
credit
accommodation(s).

81

On 26 November 1981, four (4) days prior to

the expiration of the period of effectivity of the
P8M-Credit Loan Facility, SIMC made a first
drawdown from its credit line with SBTC in the
amount of P6,100,000.00 To cover said
drawdown, SIMC duly executed promissory
note. Sometime in 1985, Cuenca resigned as
President and Chairman of the Board of
Directors of defendant-appellant Sta. Ines.
Subsequently, the shareholdings of Cuenca in
Sta. Ines were sold at a public auction.
Subsequently, appellant SIMC repeatedly
availed of its credit line and obtained six (6)
other loans from SBTC in the aggregate
amount P6,369,019.50 which were covered by
promissory
notes.
SIMC,
however,
encountered
difficulty
in
making
the
amortization payments on its loans and
requested SBTC for a complete restructuring
of its indebtedness. SBTC accommodated
SIMCs request and signified its approval in a
letter dated 18 February 1988 wherein SBTC
and defendant appellant Sta. Ines, without
notice to or the prior consent of Cuenca,
agreed to restructure the past due obligations
of Sta. Ines. Security Bank agreed to extend to
Sta. Ines loans amounting to 8.8M and 3.4M. It
should be pointed out that in restructuring Sta.
Ines obligations to Security Bank, Promissory
Note in the amount P6,100,000.00, which was
the only loan incurred prior to the expiration of
the P8M-Credit Loan Facility on 30 November
1981 and the only one covered by the
Indemnity Agreement dated 19 December
1980. Pursuant to the agreement to restructure
its past due obligations to Security Bank, Sta.
Ines thus executed the 2 more promissory
notes (total: 12.2M), both dated 09 March 1988
in favor of Security Bank.
To formalize their agreement to restructure the
loan obligations of Sta. Ines, Security Bank
and Sta. Ines executed a Loan Agreement
dated 31 October 1989 the purpose of which is
The First Loan shall be applied to liquidate the
principal portion of the Borrowers present total
outstanding indebtedness to the Lender (the
indebtedness) while the Second Loan shall be
applied to liquidate the past due interest and
penalty portion of the Indebtedness. SIMC
defaulted in the payment of its restructured
loan obligations to SBTC despite demands
made upon appellant SIMC and CUENCA.

Appellants individually and collectively refused

to pay the SBTC. Thus, SBTC filed a complaint
for collection of sum of money on 14 June
1993, resulting after trial on the merits in a
decision by the court a quo, x x x from which
Cuenca appealed.
The CA ruled that the 1989 Loan Agreement
had novated the 1980 credit accommodation
earlier granted by the bank to Sta. Ines. It
noted that the 1989 Loan Agreement had been
executed without notice to, much less consent
from, Cuenca who at the time was no longer a
stockholder of the corporation. It further held
that the restructuring of Sta. Ines obligation
under the 1989 Loan Agreement was
tantamount to a grant of an extension of time
to the debtor without the consent of the surety.
Under Article 2079 of the Civil Code, such
extension extinguished the surety.
ISSUE: WON the liability of Mr. Cuenca was
extinguished by the extension granted to the
debtor.
HELD: YES.
RELEASE
WITHOUT
CONSENT
OF
GUARANTOR
The 1989 Loan
Agreement
expressly
stipulated that its purpose was to liquidate,
not to renew or extend, the outstanding
indebtedness. Moreover, respondent did not
sign or consent to the 1989 Loan
Agreement, which had allegedly extended the
original P8 million credit facility. Hence, his
obligation as a surety should be deemed
extinguished, pursuant to Article 2079 of the
Civil Code, which specifically states that [a]n
extension granted to the debtor by the creditor
without the consent of the guarantor
extinguishes the guaranty. x x x. In an earlier
case, the Court explained the rationale of this
provision in this wise: The theory behind
Article 2079 is that an extension of time given
to the principal debtor by the creditor without
the suretys consent would deprive the surety
of his right to pay the creditor and to be
immediately subrogated to the creditors
remedies against the principal debtor upon the
maturity date. The surety is said to be entitled
to protect himself against the contingency of
the principal debtor or the indemnitors
becoming insolvent during the extended
period.

It is emphasized that an essential alteration

in the terms of the Loan Agreement without
the consent of the surety extinguishes the
latters obligation. As the Court held in
National Bank
v. Veraguth, [i]t is fundamental in the law of
suretyship that any agreement between the
creditor and the principal debtor which
essentially varies the terms of the principal
contract, without the consent of the surety,
will release the surety from liability.
While respondent held himself liable for the
credit accommodation or any modification
thereof, such clause should be understood in
the context of the P8 million limit and the
November 30, 1981 term. It did not give the
bank or Sta. Ines any license to modify
the nature and scope of the original credit
accommodation, without informing or
getting the consent of respondent who
was solidarily liable.
Taking the banks submission to the extreme,
respondent (or his successors) would be
liable for loans even amounting to, say, P100
billion obtained 100 years after the expiration

of the credit accommodation, on the ground

that he consented to all alterations and
extensions thereof. Indeed, it has been held
that a contract of surety cannot extend to
more than what is stipulated. It is strictly
construed against the creditor, every doubt
being resolved against enlarging the liability of
the surety. In the absence of an unequivocal
provision that respondent waived his right to be
notified of or to give consent to any alteration
of the credit accommodation, we cannot
sustain petitioners view that there was such a
waiver.
It should also be observed that the Credit
Approval Memorandum clearly shows that the
bank did not have absolute authority to
unilaterally change the terms of the loan
accommodation. Indeed, it may do so only
upon notice to the borrower.
The present controversy must be distinguished
from Philamgen v. Mutuc, in which the Court
sustained a stipulation whereby the surety
consented to be bound not only for the
specified period, but to any extension
thereafter made, an extension x x x that could
be had without his having to be notified.

In that case, the surety agreement contained

this unequivocal stipulation: It is hereby further
agreed that in case of any extension of
renewal of the bond, we equally bind ourselves
to the Company under the same terms and
conditions as herein provided without the
necessity of executing another indemnity
agreement for the purpose and that we hereby
equally waive our right to be notified of any
renewal or extension of the bond which may
be granted under this indemnity agreement.
In the present case, there is no such express
stipulation. At most, the alleged basis of
respondents waiver is vague and uncertain. It
confers no clear authorization on the bank or
Sta. Ines to modify or extend the original
obligation without the consent of the surety or
notice thereto.
NOVATION
Clearly, the requisites of novation are present
in this case. The 1989 Loan Agreement
extinguished the obligation obtained under the
1980 credit accomodation. This is evident from
its explicit provision to liquidate the principal
and the interest of the earlier indebtedness, as
the following shows:
1.02. Purpose. The First Loan shall be applied
to liquidate the principal portion of the
Borrowers
present
total
outstanding
Indebtedness
to
the
Lender
(the
Indebtedness) while the Second Loan shall
be applied to liquidate the past due interest
and penalty portion of the Indebtedness.
Furthermore, several incompatibilities between
the 1989 Agreement and the 1980 original
obligation demonstrate that the two cannot
coexist. While the 1980 credit accommodation
had stipulated that the amount of loan was not
to exceed P8 million, the 1989 Agreement
provided that the loan was P12.2 million. The
periods for payment were also different.
Since the 1989 Loan Agreement had
extinguished
the
original
credit
accommodation, the Indemnity Agreement, an
accessory
obligation,
was
necessarily
extinguished also, pursuant to Article 1296 of
the Civil Code, which provides that when the
principal obligation is extinguished in
consequence of a novation, accessory
obligations may subsist only insofar as they

may benefit third persons who did not

their consent.

give

CONTINUING SURETY
In the present case, the Indemnity Agreement
was subject to the two limitations of the credit
accommodation: (1) that the obligation should
not exceed P8 million, and (2) that the
accommodation should expire not later than
November 30, 1981. Hence, it was a
continuing surety only in regard to loans
obtained on or before the aforementioned
expiry date and not exceeding the total of P8
million. Accordingly, the surety of Cuenca
secured only the first loan of P6.1 million
obtained on November 26, 1991. It did not
secure the subsequent loans, purportedly
under the 1980 credit accommodation, that
were obtained in 1986. Certainly, he could not
have guaranteed the 1989 Loan Agreement,
which was executed after November 30, 1981
and which exceeded the stipulated P8 million
ceiling.
Petitioner, however, cites the Dino ruling in
which the Court found the surety liable for the
loan obtained after the payment of the original
one, which was covered by a continuing surety
agreement. At the risk of being repetitious, we
hold that in Dino, the surety Agreement
specifically provided that each suretyship is a
continuing one which shall remain in full force
and effect until this bank is notified of its
revocation. Since the bank had not been
notified of such revocation, the surety was held
liable even for the subsequent obligations of
the principal borrower. No similar provision is
found in the present case. On the contrary,
respondents liability was confined to the 1980
credit accommodation, the amount and the
expiry date of which were set down in the
Credit Approval Memorandum.

CONSUELO P. PICZON, RUBEN O. PICZON

and AIDA P. ALCANTARA, , vs. ESTEBAN
PICZON and SOSING-LOBOS & CO., INC.,
(G.R. No. L-29139, November 15, 1974)
FACTS: This an appeal from the decision of
the Court of First Instance of Samar in its Civil
Case No. 5156, entitled Consuelo P. Piczon, et
al. vs. Esteban Piczon, et al., sentencing
defendants-appellees, Sosing Lobos and Co.,
Inc., as principal, and Esteban Piczon, as

guarantor, to pay CONSUELO P. PICZON,

RUBEN O. PICZON and AIDA
P.
ALCANTARA "the sum of P12,500.00 with
12% interest from August 6, 1964 until said
principal amount of P12,500.00 shall have
been duly paid, and the costs." Annex "A", the
actionable document of appellants reads thus:
AGREEMENT OF LOAN KNOW YE ALL MEN
BY THESE PRESENTS: That I, ESTEBAN
PICZON, of legal age, married, Filipino, and
resident of and with postal address in the
municipality of Catbalogan, Province of Samar,
Philippines, in my capacity as the President of
the corporation known as the "SOSINGLOBOS
and CO., INC.," as controlling stockholder, and
at the same time as guarantor for the same, do
by these presents contract a loan of Twelve
Thousand Five Hundred Pesos (P12,500.00),
Philippine Currency, the receipt of which is
hereby acknowledged, from the "Piczon and
Co., Inc." another corporation, the main offices
of the two corporations being in Catbalogan,
Samar, for which I undertake, bind and agree
to use the loan as surety cash deposit for
registration with the Securities and Exchange
Commission of the incorporation papers
relative to the "Sosing-Lobos and Co., Inc.,"
and to return or pay the same amount with
Twelve Per Cent (12%) interest per annum,
commencing from the date of execution hereof,
to the "Piczon and Co., Inc., as soon as the
said incorporation papers are duly registered
and the Certificate of Incorporation issued by
the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed
my name in Catbalogan, Samar, Philippines,
this 28th day of September, 1956.
(signed)Esteban Piczon.
ISSUES:
(a) SHOULD THE PAYMENT OF 12%
INTEREST ON THE PRINCIPAL OF
P12,500.00 FROM AUGUST 6, 1964, ONLY,
OR FROM SEPTEMBER 28, 1956, WHEN
ANNEX "A" WAS DULY EXECUTED?
SEPTEMBER 28, 1956
(b)

Is Esteban Piczon liable a guarantor or a

surety?
GUARANTOR
HELD: a. Instead of requiring appellees to pay
interest at 12% only from August 6, 1964, the

trial court should have adhered to the terms of

the agreement which plainly provides that
Esteban Piczon had obligated Sosing-Lobos
and Co., Inc. and himself to "return or pay (to
Piczon and Co., Inc.) the same amount
(P12,500.00) with Twelve Per Cent (12%)
interest per annum commencing from the date
of the execution hereof", Annex A, which was
on September 28, 1956. Under Article 2209 of
the Civil Code
"(i)f the obligation consists in the payment of a
sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no
stipulation to the contrary, shall be the
payment of the interest agreed upon, and in
the absence of stipulation, the legal interest,
which is six per cent per annum."
In the case at bar, the "interest agreed upon"
by the parties in Annex A was to commence
from the execution of said document.
b. Under the terms of the contract, Annex A,
Esteban Piczon expressly bound himself only
as guarantor, and there are no circumstances
in the record from which it can be deduced that
his liability could be that of a surety. A guaranty
must be express, (Article 2055, Civil Code) and
it would be violative of the law to consider a
party to be bound as a surety when the very
word used in the agreement is "guarantor."
Moreover, as well pointed out in appellees'
brief, under the terms of the pre-trial order,
appellants accepted the express assumption of
liability by Sosing-Lobos & Co., Inc. for the
payment of the obligation in question, thereby
modifying their original posture that inasmuch
as that corporation did not exist yet at the time
of the agreement, Piczon necessarily must
have bound himself as insurer.
As already explained earlier, appellants' prayer
for payment of legal interest upon interest due
from the filing of the complaint can no longer
be entertained, the same not having been
made an issue in the pleadings in the court
below. We do not believe that such a
substantial matter can be deemed included in
a general prayer for "any other relief just and
equitable in the premises", especially when, as
in this case, the pre-trial order does not
mention it in the enumeration of the issues to
be resolved by the court.

BA FINANCE vs. CA
FACTS: Renato Gaytano, doing business
under the name Gebbs International, applied
for and was granted a loan with respondent
Traders Royal Bank in the amount of
P60,000.00. As security for the payment of
said loan, the Gaytano spouses executed a
deed of suretyship whereby they agreed to pay
jointly and severally to Traders Royal Bank
bank the amount of the loan including
interests, penalty and other bank charges.
In a letter addressed toTraders Royal Bank,
Philip Wong as credit administrator of BA
Finance Corporation for and in behalf of the
latter, undertook to guarantee the loan of the
Gaytano spouses. Partial payments were
made on the loan leaving an unpaid balance in
the amount of P85,807.25. Since the Gaytano
spouses refused to pay their obligation,
Traders Royal Bank filed with the trial court
complaint for sum of money against the
Gaytano spouses and petitioner BA Finance
Corporation as alternative defendant. The
Gaytano spouses did not present evidence for
their defense. BA Finance Corporation
corporation, on the other hand, raised the
defense of lack of authority of its credit
administrator to bind the corporation.
The trial court rendered a decision in favor of
plaintiff and against defendants Gaytano
spouses, ordering the latter to jointly and
severally pay the plaintiff. Not satisfied with the
decision, Traders Royal Bank appealed with
the Court of Appeals. Respondent appellate
court rendered judgment modifying the
decision of the trial court. Hence, this petition.
ISSUE: WON the letter of guaranty is ultra
vires and thus invalid and/or unenforceable.
YES
HELD: It is a settled rule that persons dealing
with an assumed agent, whether the assumed
agency be a general or special one are bound
at their peril, if they would hold the principal
liable, to ascertain not only the fact of agency
but also the nature and extent of authority, and
in case either is controverted, the burden of
proof is upon them to establish it (Harry Keeler
v. Rodriguez, 4 Phil. 19).

Hence, the burden is on Traders Royal Bank to

satisfactorily prove that the credit administrator
with whom they transacted acted within the
authority given to him by his principal, BA
Finance Corporation.
The only evidence presented by Traders Royal
Bank was the testimony of Philip Wong, credit
administrator, w ho testifiedthat he had
authority to issue guarantees as can be
deducedfrom the wording of the memorandum
given to him by BA Finance Corporation on his
lending authority. The said memorandum
allegedly authorized Wong not only to approve
and grant loans but also to enter into contracts
of guaranty in behalf of the corporation.
Although Wong was clearly authorized to
approve loans even up to P350,000.00 without
any security requirement, which is far above
the amount subject of the guaranty in the
amount of P60,000.00, nothing in the said
memorandum expressly vests on the credit
administrator power to issue guarantees. We
cannot agree with respondent's contention that
the phrase "contingent commitment" set forth
in the memorandum means guarantees.
It has been held that a power of attorney or
authority of an agent should not be inferred
from the use of vague or general words.
Guaranty is not presumed, it must
be
expressed and cannot be extended beyond its
specified limits (Director v. Sing Juco, 53 Phil.
205). In one case, where it appears that a wife
gave her husband power of attorney to loan
money, this Court ruled that such fact did not
authorize him to make her liable as a surety for
the payment of the debt of a third person (Bank
of Philippine Islands v. Coster, 47Phil. 594).
The sole allegation of the credit
administrator in the absence of any other
proof that he is authorized to bind BA
Finance Corporation in a contract of
guaranty with third persons should not be
given weight. The representation of one who
acts as agent cannot by itself serve as proof of
his authority to act as agent or of the extent of
his authority as agent (Velasco v. La Urbana,
58Phil. 681). Wong's testimony that he had
entered into similar transactions of guaranty in
the past for and in behalf of the BA Finance
Corporation, lacks credence due to his failure

to show documents or records of the alleged

past transactions.
The actuation of Wong in claiming and
testifying that he has the authority is
understandable. He would naturally take steps
to save himself from personal liability for
damages to respondent bank considering that
he had exceeded his authority. The rule is clear
that an agent who exceeds his authority is
personally liable for damages.
Anent the conclusion of respondent appellate
court that BA Finance Corporation is estopped
from alleging lack of authority due to its failure
to cancel or disallow the guaranty, the Court
rules that said conclusion has no basis in fact.
Respondent bank had not shown any evidence
aside from the testimony of the credit
administrator that the disputed transaction of
guaranty was in fact entered into the official
records or files of petitioner corporation, which
will show notice or knowledge on the latter's
part and its consequent ratification of the said
transaction. In the absence of clear proof, it
would be unfair to hold BA Finance
Corporation guilty of estoppel in allowing its
credit administrator to act as though the latter
had power to guarantee.

TEXAS COMPANY vs ALONZO

FACTS: On November 5, 1935 Leonor S.
Bantug and Tomas Alonso were sued by the
Texas Company (P.I.), Inc. for the recovery of
the sum of P629, unpaid balance of the
account of Leonora S. Bantug in connection
with the agency contract with the Texas
Company for the faithful performance of which
Tomas Alonso signed the following:
For value received, we jointly and severally do
hereby bind ourselves and each of us, in
solidum, with Leonor S. Bantug the agent
named in the within and foregoing agreement,
for full and complete performance of same
hereby waiving notice of non-performance by
or demand upon said agent, and the consent
to any and all extensions of time for
performance. Liability under this undertaking,
however, shall not exceed the sum of P2,000,
Philippine currency.
Witness the hand and seal of the undersigned
affixed in the presence of two witness, this

12th day of August, 1929.

Leonor S. Bantug was declared in default as a
result of her failure to appear or answer, but
Tomas Alonso filed an answer setting up a
general denial and the special defenses that
Leonor S. Bantug made him believe that he
was merely a co-security of one Vicente
Palanca and he was never notified of the
acceptance of his bond by the Texas Company.
The CFI of Cebu sentenced Leonor S. Bantug
and Tomas Alonso to pay jointly and severally
to the Texas Company the sum of P629, with
interest at the rate of six per cent (6%) from the
date of filing of the complaint, and with
proportional costs. The CA modified the
judgment; Leonor S. Bantug was held solely
liable for the payment of the aforesaid sum of
P629 to the Texas Company, with the
consequent absolution of Tomas Alonso.
According to the petitioner, the CA erred in
holding that there was merely an offer of
guaranty on the part of the respondent, Tomas
Alonso, and that the latter cannot be held liable
thereunder because he was never notified by
the Texas Company of its acceptance.
ISSUE:
WON there was merely an offer
of guaranty on the part of Alonso? YES
HELD: The CA has placed reliance upon our
decision in National Bank vs. Garcia (47 Phil.,
662), while the petitioner invokes the case of
National Bank vs. Escueta, (50 Phil., 991). In
the first case, it was held that there was merely
an offer to give bond and, as there was no
acceptance of the offer, this court refused to
give effect to the bond. In the second case, the
sureties were held liable under their surety
agreement which was found to have been
accepted by the creditor, and it was therein
ruled that an acceptance need not always be
express or in writing.
The Court of Appeals found as a fact, and that
the bond in question was executed at the
request of the petitioner by virtue of the
following clause of the agency contract:
Additional Security. The Agent shall
whenever requested by the Company in
addition to the guaranty herewith provided,

furnish further guaranty or bond, conditioned

upon the Agent's faithful performance of this
contract, in such individuals of firms as joint
and several sureties as shall be satisfactory
to the Company.
In view of the foregoing clause which should
be the law between the parties, it is obvious
that, before a bond is accepted by the
petitioner, it has to be in such form and amount
and with such sureties as shall be satisfactory
hereto; in other words, the bond is subject to
petitioner's approval. The logical implication
arising from this requirement is that, if the
petitioner is satisfied with any such bond,
notice of its acceptance or approval should
necessarily be given to the proper party in
interest, namely, the surety or guarantor. There
is no evidence in this case tending to show that
the respondent, Tomas Alonso, ever had
knowledge of any act on the part of petitioner
amounting to an implied acceptance, so as to
justify the application of our decision in
National Bank vs. Escueta.
The decision appealed of CA is affirmed.
POLICY: Where there is merely an offer of, or
proposition for, a guaranty, or merely a
conditional guaranty in the sense that it
requires action by the creditor before the
obligation becomes fixed, it does not become a
binding obligation until it is accepted and,
unless there is a waiver of notice of such
acceptance is given to, or acquired by, the
guarantor, or until he has notice or knowledge
that the creditor has performed the conditions
and intends to act upon the guaranty. The
acceptance need not necessarily be express or
in writing, but may be indicated by acts
amounting to acceptance.
Where, upon the other hand, the transaction is
not merely an offer of guaranty but amounts to
direct or unconditional promise of guaranty,
unless notice of acceptance is made a
condition of the guaranty, all that is necessary
to make the promise binding is that the
promise should act upon it, and notice of
acceptance is not necessary, the reason being
that the contract of guaranty is unilateral.

VISAYAN SURETY vs CA

FACTS: On February 1993, the spouses

Danilo Ibajan and Mila Ambe Ibajan (plantiffs)
filed with the RTC a complaint against spouses
Jun and Susan Bartolome (defendants), for
replevin to recover from them the possession
of an Isuzu jeepney, with damages. Spouses
Ibajan alleged that they were the owners of an
Isuzu jeepney which was forcibly and
unlawfully taken by Spouses Bartolome on
December 1992, while parked at their
residence.
Spouses Ibajan filed a replevin bond through
petitioner Visayan Surety & Insurance
Corporation. The contract of surety provided
thus: "WHEREFORE, we, sps. Danilo Ibajan
and Mila Ibajan and the VISAYAN SURETY &
INSURANCE CORP., jointly and severally bind
ourselves in the sum of P300,000 for the return
of the property to the defendant, if the return
thereof be adjudged, and for the payment to
the defendant of such sum as he/she may
recover from the plaintiff in the action."
RTC granted issuance of a writ of replevin and
as such, the sheriff seized the subject vehicle
and turned over the same to spouses Ibajan.
However on May 1993, Dominador Ibajan,
father of Danilo Ibajan, filed a motion for leave
of court to intervene, stating that he has a
right superior to the spouses Ibajan over the
ownership and possession of the subject
vehicle.
RTC granted the motion to intervene. Then
later, RTC issued an order granting the motion
to quash the writ of replevin and ordered Mila
Ibajan to return the subject jeepney to the
intervenor Dominador Ibajan.
RTC thereafter ordered the issuance of a writ
of replevin in favor of the intervenor Dominador
who was the registered owner. This writ of
replevin in favor of intervenor Dominador was
however returned unsatisfied. Thus, in March
1994, intervenor Dominador filed with RTC a
motion/application for judgment against
spouses Ibajans bond.
RTC ruled in favor of Dominador and ordered
spouses Ibajan and Visayan Surety and
Insurance Corporation to pay the former jointly
and severally the value of the jeepney in the
amount of P150,000 and other damages. CA
affirmed RTC decision.

ISSUE: WON the surety is liable to an

intervenor on a replevin bond posted by
Visayan Surety in favor of defendants. NO
HELD: Who is an intervenor?
An intervenor is a person, not originally
impleaded in a proceeding, who has legal
interest in the matter in litigation, or in the
success of either of the parties, or an interest
against both, or is so situated as to be
adversely affected by a distribution or other
disposition of property in the custody of the
court or of an officer thereof.
An intervenor is not a party to a contract of
surety which he did not sign and which was
executed by plaintiffs and defendants. It is a
basic principle in law that contracts can bind
only the parties who had entered into it; it
cannot
favor
or
prejudice
a
third
person. Contracts take effect between the
parties, their assigns, and heirs, except in
cases where the rights and obligations arising
from the contract are not transmissible by their
nature, or by stipulation or by provision of law.
A contract of surety is an agreement where a
party called the surety guarantees the
performance by another party called the
principal or obligor of an obligation or
undertaking in favor of a third person called the
obligee. Specifically, suretyship is a contractual
relation resulting from an agreement whereby
one person, the surety, engages to be
answerable for the debt, default or miscarriage
of another, known as the principal.

RELATIONSHIP AND OBLIGATION OF THE

SURETY IS LIMITED TO THE DEFENDANTS
SPECIFIED IN THE CONTRACT OF
SURETY. Here, the defendants are the
spouses Bartolome.
SC ruled that Visayan Surety is not liable
under the replevin bond to the intervenor
Dominador.
POLICY: Recall in your OBLICON: Stipulations
in the contract govern. Thus, you cannot
extend the obligations of a party beyond what
is stipulated in the contract.

ESTATE OF HEMADY VS. LUZON SURETY

FACTS: The Luzon Surety Co. had filed a
claim against the Estate based on twenty
different indemnity agreements, or counter
bonds, each subscribed by a distinct principal
and by the deceased K. H. Hemady, a surety
solidary guarantor) in all of them, in
consideration of the Luzon Surety Co.s of
having guaranteed, the various principals in
favor of different creditors.
The Luzon Surety Co., prayed for allowance,
as a contingent claim, of the value of the
twenty bonds it had executed in consideration
of the counterbonds, and further asked for
judgment for the unpaid premiums and
documentary stamps affixed to the bonds, with
12 per cent interest thereon.

The obligation of a surety cannot be extended

by implication beyond its specified limits.
"When a surety executes a bond, it does not
guarantee that the plaintiffs cause of action is
meritorious, and that it will be responsible for
all the costs that may be adjudicated against
its principal in case the action fails. The extent
of a suretys liability is determined only by the
clause of the contract of suretyship." A contract
of surety is not presumed; it cannot extend to
more than what is stipulated.

Before answer was filed, and upon motion of

the administratrix of Hemadys estate, the
lower court, by order of September 23, 1953,
dismissed the claims of Luzon Surety Co., on
two grounds: (1) that the premiums due and
cost of documentary stamps were not
contemplated under the indemnity agreements
to be a part of the undertaking of the guarantor
(Hemady), since they were not liabilities
incurred after
the execution of the
counterbonds; and (2) that whatever losses
may occur after Hemadys death, are not
chargeable to his estate, because upon his
death he ceased to be guarantor.

Since the obligation of the

extended by implication, IT
THE SURETY CANNOT BE
THE
INTERVENOR

Lower Courts ruling: The administratrix further

contends that upon the death of Hemady, his
liability as a guarantor terminated, and
therefore, in the absence of a showing that a

surety cannot be
FOLLOWS THAT
HELD LIABLE TO
WHEN
THE

loss or damage was suffered, the claim cannot

be considered contingent. This Court believes
that there is merit in this contention and finds
support in Article 2046 of the new Civil Code. It
should be noted that a new requirement has
been added for a person to qualify as a
guarantor, that is: integrity. As correctly pointed
out by the Administratrix, integrity is something
purely personal and is not transmissible. Upon
the death of Hemady, his integrity was not
transmitted to his estate or successors.
Whatever loss therefore, may occur after
Hemadys death, are not chargeable to his
estate because upon his death he ceased to
be a guarantor. Another clear and strong
indication that the surety company has
exclusively relied on the personality, character,
honesty and integrity of the now deceased K.
H. Hemady, was the fact that in the printed
form of the indemnity agreement there is a
paragraph entitled Security by way of first
mortgage, which was expressly waived and
renounced by the security company. The
security company has not demanded from K.
H. Hemady to comply with this requirement of
giving security by way of first mortgage. In the
supporting papers of the claim presented by
Luzon Surety Company, no real property was
mentioned in the list of properties mortgaged
which appears at the back of the indemnity
agreement.
ISSUE: WON the liability of Hemady as
guarantor terminated upon his death. NO
HELD: We find this reasoning untenable.
Under the present Civil Code (Article 1311), as
well as under the Civil Code of 1889 (Article
1257), the rule is that
Contracts take effect only as between the
parties, their assigns and heirs, except in the
case where the rights and obligations arising
from the contract are not transmissible by their
nature, or by stipulation or by provision of law.
While in our successional system the
responsibility of the heirs for the debts of their
decedent cannot exceed the value of the
inheritance they receive from him, the principle
remains intact that these heirs succeed not
only to the rights of the deceased but also to
his obligations. Articles 774 and 776 of the
New Civil Code (and Articles 659 and 661 of
the preceding one) expressly so provide,
thereby confirming Article 1311 already

quoted. (See Art. 774 and 776)

In Mojica vs. Fernandez, 9 Phil. 403, this
Supreme Court ruled: Under the Civil Code
the heirs, by virtue of the rights of succession
are subrogated to all the rights and obligations
of the deceased (Article 661) and cannot be
regarded as third parties with respect to a
contract to which the deceased was a party,
touching the estate of the deceased (Barrios
vs. Dolor, 2 Phil. 44).
The binding effect of contracts upon the heirs
of the deceased party is not altered by the
provision in our Rules of Court that money
debts of a deceased must be liquidated and
paid from his estate before the residue is
distributed among said heirs (Rule 89). The
reason is that whatever payment is thus made
from the estate is ultimately a payment by the
heirs and distributees, since the amount of the
paid claim in fact diminishes or reduces the
shares that the heirs would have been entitled
to receive.
Under our law, therefore, the general rule is
that a partys contractual rights and obligations
are transmissible to the successors. The rule is
a
consequence
of
the
progressive
depersonalization of patrimonial rights and
duties that, as observed by Victorio Polacco,
has characterized the history of these
institutions.
Of the three exceptions fixed by Article 1311,
the nature of the obligation of the surety or
guarantor does not warrant the conclusion that
his
peculiar
individual
qualities
are
contemplated as a principal inducement for the
contract. What did the creditor Luzon Surety
Co. expect of K. H. Hemady when it accepted
the latter as surety in the counterbonds?
Nothing but the reimbursement of the moneys
that the Luzon Surety Co. might have to
disburse on account of the obligations of the
principal debtors. This reimbursement is a
payment of a sum of money, resulting from an
obligation to give; and to the Luzon Surety
Co., it was indifferent that the reimbursement
should be made by Hemady himself or by
someone else in his behalf, so long as the
money was paid to it.
The second exception of Article 1311, p. 1, is
intransmissibility by stipulation of the parties.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

Being exceptional and contrary to the general

rule, this intransmissibility should not be easily
implied, but must be expressly established, or
at the very least, clearly inferable from the
provisions of the contract itself, and the text of
the agreements sued upon nowhere indicate
that they are nontransferable.
Because under the law (Article 1311), a person
who enters into a contract is deemed to have
contracted for himself and his heirs and
assigns, it is unnecessary for him to expressly
stipulate to that effect; hence, his failure to do
so is no sign that he intended his bargain to
terminate upon his death.
Similarly, that the Luzon Surety Co., did not
require bondsman Hemady to execute a
mortgage indicates nothing more than the
companys faith and confidence in the financial
stability of the surety, but not that his obligation
was strictly personal.
The third exception to the transmissibility of
obligations under Article 1311 exists when they
are not transmissible by operation of law. The
provision makes reference to those cases
where the law expresses that the rights or
obligations are extinguished by death, as is the
case in legal support (Article 300), parental
authority (Article 327), usufruct (Article 603),
contracts for a piece of work (Article 1726),
partnership (Article 1830 and agency (Article
1919). By contract, the articles of the Civil
Code that regulate guaranty or suretyship
(Articles 2047 to 2084) contain no provision
that the guaranty is extinguished upon the
death of the guarantor or the surety. The lower
court sought to infer such a limitation from Art.
2056, to the effect that one who is obliged to
furnish a guarantor must present a person who
possesses integrity, capacity to bind himself,
and sufficient property to answer for the
obligation which he guarantees. It will be
noted, however, that the law requires these
qualities to be present only at the time of the
perfection of the contract of guaranty. It is selfevident that once the contract has become
perfected and binding, the supervening
incapacity of the guarantor would not operate
to exonerate him of the eventual liability he has
contracted; and if that be true of his capacity
to bind himself, it should also be true of his
integrity, which is a quality mentioned in the
article alongside the capacity.

90

The foregoing concept is confirmed by the next

Article 2057, that runs as follows: ART. 2057.
If the guarantor should be convicted in first
instance of a crime involving dishonesty or
should become insolvent, the creditor may
demand another who has all the qualifications
required in the preceding article. The case is
excepted where the creditor has required and
stipulated that a specified person should be
guarantor. From this article it should be
immediately apparent that the supervening
dishonesty of the guarantor (that is to say, the
disappearance of his integrity after he has
become bound) does not terminate the
contract but merely entitles the creditor to
demand a replacement of the guarantor. But
the step remains optional in the creditor: it is
his right, not his duty; he may waive it if he
chooses, and hold the guarantor to his bargain.
Hence Article 2057 of the present Civil Code is
incompatible with the trial courts stand that the
requirement of integrity in the guarantor or
surety makes the latters undertaking strictly
personal, so linked to his individuality that the
guaranty automatically terminates upon his
death.
The contracts of suretyship entered into by K.
H. Hemady in favor of Luzon Surety Co. not
being rendered intransmissible due to the
nature of the undertaking, nor by the
stipulations of the contracts themselves, nor by
provision of law, his eventual liability
thereunder necessarily passed upon his death
to his heirs. The contracts, therefore, give rise
to contingent claims provable against his
estate under section 5, Rule 87.
The most common example of the contigent
claim is that which arises when a person is
bound as surety or guarantor for a principal
who is insolvent or dead. Under the ordinary
contract of suretyship the surety has no claim
whatever against his principal until he himself
pays something by way of satisfaction upon
the obligation which is secured. When he does
this, there instantly arises in favor of the surety
the right to compel the principal to exonerate
the surety. But until the surety has contributed
something to the payment of the debt, or has
performed the secured obligation in whole or in
part, he has no right of action against anybody
no claim that could be reduced to judgment.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

For Defendant administratrix it is averred that

the above doctrine refers to a case where the
surety files claims against the estate of the
principal debtorand it is urged that the rule
does not apply to the case before us, where
the late Hemady was a surety, not a principal
debtor. The argument evinces a superficial
view of the relations between parties. If under
the Gaskell ruling, the Luzon Surety Co., as
guarantor, could file a contingent claim against
the estate of the principal debtors if the latter
should die, there is absolutely no reason why it
could not file such a claim against the estate of
Hemady, since Hemady is a solidary co-debtor
of his principals. What the Luzon Surety Co.
may claim from the estate of a principal debtor
it may equally claim from the estate
of
Hemady, since, in view of the existing
solidarity, the latter does not even enjoy the
benefit of exhaustion of the assets of the
principal debtor.
Our conclusion is that the solidary guarantors
liability is not extinguished by his death, and
that in such event, the Luzon Surety Co., had
the right to file against the estate a contingent
claim for reimbursement.
NOTE: The liability of the solidary
guarantor is not terminated by his death.

III.

Effects of Guaranty
WISE CO. VS. TANGLAO

FACTS: In the CFI of Manila, Wise & Co filed a

civil case against Cornelio C. David for the
was an agent of Wise & Co. and the amount
claimed from him was the result of a liquidation
of accounts showing that he was indebted in
said amount.
In said case Wise & Co. asked and obtained a
To avoid the execution of said attachment,
David succeeded in having the defendant Atty.
Tanglao sign a power of attorney in his favor,
with a clause (considered a special POA to
David) To sign as guarantor for himself in his
indebtedness to Wise & Company of Manila,
and to mortgage the Attorneys lot

91

Subsequently, David made a compromise

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

agreement with the petitioner Wise&Co. to

pay for the sum of P640, payable at the rate
of P80 per month and he pledged the lot
owned by the Atty. Dionisio Tanglao as a
guaranty for the balance.
David paid the sum of P343.47 to Wise &
Co., on account of the P640 which he bound
himself to pay leaving an unpaid balance of
P296.53.
Wise & Co. now institutes this case against
Tanglao for the recovery of said balance of
P296.53.
ISSUE: WON Atty. Dionisio Tanglao is liable
for the unpaid balance. NO.
HELD: NOTE: Exhibit A power of attorney;
Exhibit B- Compromise agreement.
There is no doubt that under Exhibit A,
Tanglao empowered David, in his name, to
enter into a contract of suretyship and a
contract of mortgage of the property
described in the document, with Wise & Co.
However, David used said power of attorney

92

only to mortgage the property and did not enter

into contract of suretyship. Nothing is stated in
Exhibit B to the effect that Tanglao became
David's surety for the payment of the sum in
question. Neither is this inferable from any of
the clauses thereof, and even if this inference
might be made, it would be insufficient to
create an obligation of suretyship which, under
the law, must be express and cannot be
presumed.
It appears from the foregoing that defendant,
Tanglao could not have contracted any
personal responsibility for the payment of the
sum of P640. The only obligation which Exhibit
B, in connection with Exhibit A, has created on
the part of Tanglao, is that resulting from the
mortgage of a property belonging to him to
secure the payment of said P640. However, a
foreclosure suit is not instituted in this case
against Tanglao, but a purely personal action
for the recovery of the amount still owed by
defendant Tanglao may be considered as a
surety under Exhibit B, the action does not yet
lie against him on the ground that all the legal
remedies against the debtor have not
previously been exhausted (art. 1830 of the

Civil Code, and decision of the Supreme Court

of Spain of March 2, 1891).
The plaintiff has in its favor a judgment against
debtor David for the payment of debt. It does
not appear that the execution of this judgment
has been asked for and Exhibit B, on the other
hand, shows that David has two pieces of
property the value of which is in excess of the
balance of the debt the payment of which is
sought of Tanglao in his alleged capacity as
surety.

PHILIPPINE BANK OF COMMUNICATIONS

VS. COURT OF APPEALS, JOSEPH L.G.
CHUA AND JALECO DEVT, INC.
FACTS: On April 14, 1976, Fortune Motors
(Phils.), Inc. executed a Surety Agreement in
favor of Philippine Bank of Communications
(PBCOM for short) with Joseph L.G. Chua, as
one of the sureties.
On March 6, 1981, Forte Merchant Finance,
Inc., executed a Surety Agreement in favor of
PBCOM with Joseph L.G. Chua as one of the
sureties
On October 24, 1983 Chua executed a Deed
of Exchange transferring a parcel of land with
improvements thereon covered by TCT No. S52808 (343721) to JALECO Development, Inc.
As a result, TCT No. 126573 of the Register of
Deeds of Rizal covering the aforementioned
parcel of land was issued in the name of
JALECO Development, Inc., on November 24,
1983.
On November 2, 1983, Chua sold 6,000
shares of JALECO Development, Inc., to Mr.
Chua Tiong King for P600,000.00 and another
6,000 shares of JALECO Development, Inc. to
Guillermo Jose, Jr. also for P600,000.00 and
Caw Le Ja Chua, wife of Chua sold the 6,000
share of JALECO Development, Inc., to Chua
Tiong King for P200,000.00
In the meanwhile, for failure of both Fortune
Motors (Phils.), Inc. and Forte Merchant
Finance, Inc. to meet their respective financial
obligations with PBCOM, the latter filed Civil
Case No. 84-25159 against Fortune Motors
(Phils.), Inc., Joseph L. G. Chua et. al. and
Civil Case No. 84-25160 against Forte

Merchant Finance, Inc., Joseph L. G. Chua et.

al. with the Regional Trial Court of Manila,
both for Sum of Money with Writ of Preliminary
Attachment where PBCOM was able to obtain
a notice of levy on the properties of Fortune
Motors (Phils.)
When plaintiff was able to locate Chua's former
property situated in Dasmarias, Makati, Metro
Manila, covered by TCT No. S-52808
containing an area of 1,541 square meters
which was already transferred to JALECO
Development, Inc., under TCT No. 126573 by
virtue of the Deed of Exchange dated October
24, 1983, PBCOM filed Civil Case No. 7889 for
annulment of Deed of Exchange with the
Regional Trial Court of Makati, Metro Manila.
Chua admitted the Deed of Exchange in favor
of JALECO and contended that it was done in
good faith and in accordance with law.
ISSUE: WON the Deed of Exchange should be
cancelled. YES
HELD: For failure of both Fortune Motors
(Phils), Inc. and Forte Merchant Finance, Inc.
to pay their obligations with the petitioner, the
latter filed the two civil cases against Fortune
Motors (Phils.), Inc. and Forte Merchant
Finance, Inc. and respondent Chua, among
others with the Regional Trial Court of Manila.
The petitioner was granted a writ of attachment
as a result of which properties belonging to
Fortune Motors (Phils.) were attached.
It
turned out, however, that the attached
properties of Fortune Motors (Phils.), Inc. were
already previously attached/mortgaged to prior
lien holders in the amount of about
P70,000,000.00. As regards Forte Merchant
Finance, Inc., it appears that it has no property
to satisfy the debts it incurred with PBCOM.
The record further shows that as regards
Chua, the property subject of the Deed of
Exchange between him and JALECO was his
only property. Under these circumstances, the
petitioner's petition for annulment of the deed
of exchange on the ground that the deed was
executed in fraud of creditors, despite the
pendency of the two (2) other civil cases is
well-taken.
As surety for the financial obligations of
Fortune Motors (Phils.), Inc. and the Forte
Merchant Finance, Inc., with the petitioner,

respondent Chua bound himself solidarily

liable with the two (2) principal debtors. (Article
2047, Civil Code) The petitioner may therefore
demand payment of the whole financial
obligations of Fortune Motors (Phils.), Inc. and
Forte Finance, Inc., from Chua, if the petitioner
chooses to go directly after him. Hence, since
the only property of Chua was sold to JALECO
after the debts became due, the petitioner has
the right to file an annulment of the deed of
exchange between Chua and JALECO
wherein Chua sold his only property to
JALECO to protect his interests and so as not
to make the judgments in the two (2) cases
illusory.
Parenthetically,
the
appellate
court's
observation that the petitioner's interests are
sufficiently protected by a writ of attachment on
the properties of Fortune Finance (Phils.), Inc.
has neither legal nor factual basis.

PRUDENTIAL BANK vs. INTERMEDIATE

APPELLATE COURT, PHILIPPINE RAYON
MILLS, INC. and ANACLETO R. CHI
FACTS: This case involves an action for the
recovery of sum of money representing the
amount paid by Prudential Bank to Nissho
Company Ltd. of Japan for textile machinery
imported by Philippine Rayon Mills Inc.
On August 8, 1962, Philippine Rayon Mills Inc.
entered into a contract with Nissho Co., Ltd. of
Japan for the importation of textile machineries
under a five-year deferred payment plan.
Philippine Rayon applied for a commercial
letter of credit with the Prudential Bank and
Trust Company in favor of Nissho in the
amount of $128,548,78. Nissho withdrew
twelve drafts against the letter of credit which
Prudential Bank paid to the Bank of Tokyo but
only two of these drafts were accepted by
Anacleto Chi, the president of Philippine
Rayon.
Upon the arrival of the machineries, the
Prudential Bank indorsed the shipping
documents to the defendant-appellant which
accepted delivery of the same. They executed,
by prior arrangenment, a trust receipt which
was signed by Anacleto Chi to enable
Philippine Rayon Mills to take delivery of the
machines.

At the back of the trust receipt is a printed

form to be accomplished by two sureties
who, by the very terms and conditions
thereof, were to be jointly and severally
liable to the Prudential Bank should the
defendant-appellant fail to pay the total
amount or any portion of the drafts issued by
Nissho and paid for by Prudential Bank. The
defendant-appellant was able to take
delivery of the textile machineries and
installed the same at its factory site at 69
Obudan Street, Quezon City.
Sometime in 1967, the defendant-appellant
ceased business operation. On December
29, 1969, defendant-appellant's factory was
leased by Yupangco Cotton Mills for an
annual rental of P200,000.00. The lease was
renewed on January 3, 1973. On January 5,
1974, all the textile machineries in the
defendant-appellant's factory were sold to
AIC
Development
Corporation
for
P300,000.00.
The obligation of the defendant-appellant
arising from the letter of credit and the trust
receipt remained unpaid and unliquidated.
Repeated formal demands for the payment

of the said trust receipt yielded no result

Hence, the present action for the collection of
the principal amount of P956,384.95 was filed
on October 3, 1974 against the defendantappellant and Anacleto R. Chi. In their
respective answers, the defendants interposed
identical special defenses, viz., the complaint
states no cause of action; if there is, the same
has prescribed; and the plaintiff is guilty of
laches.
The trial court rendered judgment holding
Philippine Rayon Mills Inc. liable for the sum of
P153,645.22 which represented the two drafts
accepted by Anacleto. The case against
Anacleto Chi was dismissed.
Petitioner appealed the decision to the then
Intermediate Appellate Court. In urging the
said court to reverse or modify the decision,
petitioner alleged in its Brief that the trial court
erred in (a) disregarding its right to
reimbursement from the private respondents
for the entire unpaid balance of the imported
machines, the total amount of which was paid
to the Nissho Company Ltd., thereby violating
the principle of the third party payor's right to
reimbursement provided for in the second

paragraph of Article 1236 of the Civil Code and

under the rule against unjust enrichment; (b)
refusing to hold Anacleto R. Chi, as the
responsible officer of defendant corporation,
liable under Section 13 of P.D No 115 for the
entire unpaid balance of the imported
machines covered by the bank's trust receipt
(c)finding that the solidary guaranty clause signed
by Anacleto R. Chi is not a guaranty at all; (d)
controverting the judicial admissions of
Anacleto R. Chi that he is at least a simple
guarantor of the said trust receipt obligation;
(e) contravening, based on the assumption that
Chi is a simple guarantor, Articles 2059, 2060
and 2062 of the Civil Code and the related
evidence and jurisprudence which provide that
such liability had already attached; (f)
contravening the judicial admissions of
Philippine Rayon with respect to its liability to
pay the petitioner the amounts involved in the
draft; and (g) interpreting "sight" drafts as
requiring acceptance by Philippine Rayon
before the latter could be held liable thereon.
ISSUES:(only the 3rd issue is related to the
topic)
1. Whether presentment for acceptance of the
drafts was indispensable to make Philippine
Rayon liable thereon; - NO
2. Whether Philippine Rayon is liable on the
basis of the trust receipt; - YES
3. Whether private respondent Chi is jointly
and severally liable with Philippine Rayon
for the obligation sought to be enforced NO and if not, whether he may be considered
a guarantor -YES; in the latter situation,
whether the case should have been dismissed
on the ground of lack of cause of action as
there was no prior exhaustion of Philippine
Rayon's properties. -NO
HELD:
ISSUE #1: 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). The said section
reads:
Sec. 143. When presentment for acceptance
must be made. Presentment for acceptance
must be made:
(a) Where the bill is payable after sight, or in any
other case, where presentment for acceptance
is necessary in order to fix the maturity of the
instrument; or
(b) Where the bill expressly stipulates that it shall
be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than
at the residence or place of business of the
drawee.
In no other case is presentment for acceptance
necessary in order to render any party to the
bill liable.
Obviously then, sight drafts do not require
presentment for acceptance.
The acceptance of a bill is the signification by
the drawee of his assent to the order of the
drawer; this may be done in writing by the
drawee in the bill itself, or in a separate
instrument.
ISSUE #2: The trial court and the public
respondent likewise erred in disregarding the
trust receipt and in not holding that Philippine
Rayon was liable thereon. In People vs. Yu
Chai Ho, this Court explains the nature of a
trust receipt by quoting In re Dunlap Carpet
Co., thus:
By this arrangement a banker advances
money to an intending importer, and thereby
lends the aid of capital, of credit, or of business
facilities and agencies abroad, to the
enterprise of foreign commerce. Much of this
trade could hardly be carried on by any other
means, and therefore it is of the first
importance that the fundamental factor in the
transaction, the banker's advance of money
and credit, should receive the amplest
protection. Accordingly, in order to secure that
the banker shall be repaid at the critical point

 that is, when the imported goods finally

reach the hands of the intended vendee the
banker takes the full title to the goods at the
very beginning; he takes it as soon as the
goods are bought and settled for by his
payments or acceptances in the foreign
country, and he continues to hold that title as
his indispensable security until the goods are
sold in the United States and the vendee is
called upon to pay for them. This security is not
an ordinary pledge by the importer to the
banker, for the importer has never owned the
goods, and moreover he is not able to deliver
the possession; but the security is the
complete title vested originally in the bankers,
and this characteristic of the transaction has
again and again been recognized
and
protected by the courts. Of course, the title is
at bottom a security title, as it has sometimes
been called, and the banker is always under
the obligation to reconvey; but only after his
advances have been fully repaid and after the
importer has fulfilled the other terms of the
contract.
As further stated in National Bank vs. Viuda e
Hijos de Angel Jose, trust receipts:
. . . [I]n a certain manner, . . . partake of the
nature of a conditional sale as provided by the
Chattel Mortgage Law, that is, the importer
becomes absolute owner of the imported
merchandise as soon an he has paid its price.
The ownership of the merchandise continues
to be vested in the owner thereof or in the
person who has advanced payment, until he
has been paid in full, or if the merchandise has
already been sold, the proceeds of the sale
should be turned over to him by the importer or
by his representative or successor in interest.
Under P.D. No. 115, otherwise known an the
Trust Receipts Law, which took effect on 29
January 1973, a trust receipt transaction is
defined as "any transaction by and between a
person referred to in this Decree as the
entruster, and another person referred to in
this Decree as the entrustee, whereby the
entruster, who owns or holds absolute title or
security interests' over certain specified goods,
documents or instruments, releases the same
to the possession of the entrustee upon the
latter's execution and delivery to the entruster
of a signed document called the "trust receipt"
wherein the entrustee binds himself to hold the

designated goods, documents or instruments

in trust for the entruster and to sell or otherwise
dispose of the goods, documents or
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 the goods,
instruments themselves if they are unsold or
not otherwise disposed of, in accordance with
the terms and conditions specified in the trusts
receipt, or for other purposes substantially
equivalent to any one of the following: . . ."
ISSUE #3: We also conclude, for the reason
hereinafter discussed, and not for that adduced
by the public respondent, that private
respondent Chi's signature in the dorsal portion
of the trust receipt did not bind him solidarily
with Philippine Rayon. The statement at the
dorsal portion of the said trust receipt, which
petitioner describes as a "solidary guaranty
clause", reads:
In consideration of the PRUDENTIAL BANK
AND TRUST COMPANY complying with the
foregoing, we jointly and severally agree and
undertake to pay on demand to the
PRUDENTIAL BANK AND TRUST COMPANY
all sums of money which the said
PRUDENTIAL BANK AND TRUST COMPANY
may call upon us to pay arising out of or
pertaining to, and/or in any event connected
with the default of and/or non-fulfillment in any
respect of the undertaking of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK
AND TRUST COMPANY does not have to take
any steps or exhaust its remedy against
aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI
Our own reading of the questioned solidary
guaranty clause yields no other conclusion
than that the obligation of Chi is only that of
a guarantor. This is further bolstered by the
last sentence which speaks of waiver of
exhaustion, which, nevertheless, is ineffective
in this case because the space therein for the
party whose property may not be exhausted

was not filled up. Under Article 2058 of the

Civil Code, the defense of exhaustion
(excussion) may be raised by a guarantor
before he may be held liable for the obligation.
Petitioner likewise admits that the questioned
provision is a solidary guaranty clause, thereby
clearly distinguishing it from a contract of
surety.
It, however, described the guaranty as solidary
between the guarantors; this would have been
correct if two (2) guarantors had signed it. The
clause "we jointly and severally agree and
undertake" refers to the undertaking of the two
(2) parties who are to sign it or to the liability
existing between themselves. It does not refer
to the undertaking between either one or both
of them on the one hand and the petitioner on
the other with respect to the liability described
under the trust receipt. Elsewise stated, their
liability is not divisible as between them, i.e., it
can be enforced to its full extent against any
one of them.
Furthermore, any doubt as to the import, or
true intent of the solidary guaranty clause
should be resolved against the petitioner. The
trust receipt, together with the questioned
solidary guaranty clause, is on a form drafted
and prepared solely by the petitioner; Chi's
participation therein is limited to the affixing of
his signature thereon. It is, therefore, a
contract of adhesion; as such, it must be
strictly construed against the party responsible
for its preparation.
Neither can We agree with the reasoning of the
public respondent that this solidary guaranty
clause was effectively disregarded simply
because it was not signed and witnessed by
two (2) persons and acknowledged before a
notary public. While indeed, the clause ought
to have been signed by two (2) guarantors, the
fact that it was only Chi who signed the same
did not make his act an idle ceremony or
render the clause totally meaningless. By his
signing, Chi became the sole guarantor.
The attestation by witnesses and the
acknowledgement before a notary public are
not required by law to make a party liable on
the instrument. The rule is that contracts shall
be obligatory in whatever form they may have
been entered into, provided all the essential
requisites for their validity are present;

however, when the law requires that a contract

be in some form in order that it may be valid or
enforceable, or that it be proved in a certain
way, that requirement is absolute and
indispensable. With respect to a guaranty,
which is a promise to answer for the debt or
default of another, the law merely requires that
it, or some note or memorandum thereof, be in
writing. Otherwise, it would be unenforceable
unless ratified. While the acknowledgement of
a surety before a notary public is required to
make the same a public document, under
Article 1358 of the Civil Code, a contract of
guaranty does not have to appear in a public
document.
The remaining issue to be resolved concerns
the propriety of the dismissal of the case
against private respondent Chi. The trial court
based the dismissal, and the respondent Court
its affirmance thereof, on the theory that Chi is
not liable on the trust receipt in any capacity
either as surety or as guarantor because his
signature at the dorsal portion thereof was
useless; and even if he could be bound by
such signature as a simple guarantor, he
cannot, pursuant to Article 2058 of the Civil
Code, be
compelled
to
pay
until
after petitioner has exhausted and resorted to
all legal remedies against the principal debtor,
Philippine Rayon. The records fail to show that
petitioner had done so. Reliance is thus placed
on Article 2058 of the Civil Code which
provides:
Art. 2058. The guarantor cannot be compelled
to pay the credit unless the latter has
exhausted all the property of the debtor, and
has resorted to all the legal remedies against
the debtor.
Simply stated, there is as yet no cause of
action against Chi.
Excussion is not a condition sine qua non for
the institution of an action against a guarantor.
In Southern Motors, Inc. vs. Barbosa, this
Court stated:
Although an ordinary personal guarantor
not a mortgagor or pledgor may demand the
aforementioned exhaustion, the creditor may,
prior thereto, secure a judgment against said
guarantor, who shall be entitled, however, to a
deferment of the execution of said judgment

against him until after the properties of the

principal debtor shall have been exhausted to
satisfy the obligation involved in the case.
However, Chi's liability is limited to the principal
obligation in the trust receipt plus all the
accessories thereof including judicial costs;
with respect to the latter, he shall only be liable
for those costs incurred after being judicially
required to pay. Interest and damages, being
accessories of the principal obligation, should
also be paid; these, however, shall run only
from the date of the filing of the complaint.
Attorney's fees may even be allowed in
appropriate cases.

FIDELIZA J. AGLIBOT vs. INGERSOL L.

SANTIA
G.R. No. 185945 (December 05, 2012)
FACTS: Engr. Ingersol L.Santia loaned
P2,500,000 to Pacific Lending and Capital
Corporation, through its manager Fideliza J.
Aglibot. The loan was evidence by
a
promisorry note date July 1, 2003 and payable
in one year subject to interest at 24% per
annum. Aglibot then issued and delivered to
Santia eleven post-dated personal checks
drawn from her own demand account as a
guaranty or security for the payment of the
note.
Upon presentation of the checks, they were
dishonored by the bank for having been drawn
against insufficient funds or closed account.
Santia then demanded payment from PLCC
and Aglibot of the face value of the checks, but
neither of them heeded his demand. As a
result, eleven Informations for violation of BP
22 were filed against Aglibot.
Aglibot, in her defense, admitted that she did
obtain the loan from Santia, but claimed that
she did so in behalf of PLCC; that before
granting the loan, Santia demanded and
obtained from her a security for the repayment
thereof, but with the understanding that upon
remittance in case of the face amount of the
checks, Santia would correspondingly return to
her each check so paid. Aglibot also mainted
that she was a mere guarantor of the PLCC's
debt and Santia failed to exhaust all means to
collect the debt from PLCC and therefore she
is not subsidiary liable.

ISSUE: Whether or not Aglibot is a guarantor

and thus, can invoke the benefit of
excussion
NO,
Aglibot
is
an
accommodation party
HELD: The RTC in its decision held that
Aglibot signed the promissory note on behalf
of PLCC as manager and nowhere does it
appear
that
she
signed
as
a
accommodation party. The RTC further
ruled that what Aglibot agreed to do by
issuing her personal checks was merely to
guarantee the indebtedness of PLCC, and
thus she must be accorded the benefit of
excussion- prior exhaustion of the property
of the debtor- as provided under Article 2058
of the Civil CodeArt. 2058. The guarantor cannot be
compelled to pay the creditor unless the
latter has exhausted all the property of the
debtor, and has resorted to all the legal
remedies against the debtor.
However, in the present case, Aglibot's claim
as a mere guarantor is bereft of merit for
want of proof as provided under Article

1403(2) of the Civil Code, embodying the

Statute of Frauds which providesArt. 1403. The following contracts
unenforceable, unless they are ratified:

are

(2) Those that do not comply with the Statute

of Frauds as set forth in this number. In the
following cases an agreement hereafter made
shall be unenforceable by action, unless the
same, or some note or memorandum thereof,
be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore,
of the agreement cannot be received without
the writing, or a secondary evidence of its
contents:
a) An agreement that by its terms is not to be
performed within a year from the making
thereof;
b) A special promise to answer for the debt,
default, or miscarriage of another;
c) An agreement made in consideration of
marriage, other than a mutual promise to
marry;
d) An agreement for the sale of goods, chattels or
things in action, at a price not less than five
hundred pesos, unless the buyer accept and
receive part of such goods and chattels, or the

evidences, or some of them, or such things in

action, or pay at the time some part of the
purchase money; but when a sale is made by
auction and entry is made by the auctioneer in
his sales book, at the time of the sale, of the
amount and kind of property sold, terms of
sale, price, names of purchasers and person
on whose account the sale is made, it is a
sufficient memorandum;
e) An agreement for the leasing of a longer
period than one year, or for the sale of real
property or of an interest therein;
f) A representation to the credit of a third person.
Under the above provision, concerning a
guaranty agreement, which is a promise to
answer for the debt or default of another, the
law clearly requires that it, or some note or
memorandum thereof, be in writing. Otherwise,
it would be unenforceable unless ratified,
although under Article 1358 of the Civil Code,
a contract of guaranty does not have to appear
in a public document.
Under Article 2055 of the Civil Code, it is
provided that a guaranty is not presumed, but
must be express and cannot extend to more
than what is stipulated therein. This is the
obvious rationale why a contract of guaranty is
unenforceable unless made in writing or
evidenced by some writing. For as pointed out
by Santia, Aglibot has not shown any proof,
such as a contract, a secretarys certificate or a
board resolution, nor even a note or
memorandum thereof, whereby it was agreed
that she would issue her personal checks in
behalf of the company to guarantee the
payment of its debt to Santia. Certainly, there
is nothing shown in the Promissory Note
signed by Aglibot herself remotely containing
an agreement between her and PLCC
resembling her guaranteeing its debt to Santia.
And neither is there a showing that PLCC
thereafter ratified her act of "guaranteeing" its
indebtedness by issuing her own checks to
Santia.
N.B.: Why Aglibot is an accommodation
party
The appellate court ruled that by issuing her
own post-dated checks, Aglibot thereby bound
herself personally and solidarily to pay Santia,
and dismissed her claim that she issued her
said checks in her official capacity as PLCCs

manager merely to guarantee the investment

of Santia. It noted that she could have issued
PLCCs checks, but instead she chose to
issue her own checks, drawn against her
personal account with Metrobank. It concluded
that Aglibot intended to personally assume the
repayment of the loan, pointing out that in her
Counter-Affidavit, she even admitted that she
was personally indebted to Santia, and only
raised payment as her defense, a clear
admission of her liability for the said loan.
The facts below present a clear situation where
Aglibot, as the manager of PLCC, agreed to
accommodate its loan to Santia by issuing her
own post-dated checks in payment thereof.
She is what the Negotiable Instruments Law
calls an accommodation party.

BENJAMIN BITANGA vs PYRAMID

CONSTRUCTION ENGINEERING
CORPORATION
G.R. No. 173526 (August 28, 2008)
FACTS: On March 26, 1997, Pyramid
Construction Engineering Corporation entered
into an agreement with Macrogen Realty, of
which Benjamin Bitanga is the president, to
construct in favor of the latter, the Shoppers
Gold Building. Pyramid commenced the
construction project on May 1997. However,
Macrogen Realty failed to settle Pyramid's
progress billings, which resulted to the
suspension of the work.
In August 1998, Pyramid once again
suspended the construction work because the
conditions that is imposed for its continuation,
including payment of the unsettled accounts
had not been complied with by Macrogen
Realty. Pyramid then instituted a case with the
Construction Industry Association Commission
against Macrogen Realty seeking payment
from the latter for the unpaid billings and
project costs.
On April 17, 2000, before the arbitration case
could be set for trial, both parties entered into a
compromise agreement whereby Macrogen
Realty agreed to pay the total amount of
P6,000,000 in six equal monthly installments.
Bitanga guaranteed the obligations of
Macrogen Realty under the compromise
agreement by executing a Contract of

Guaranty in favor of Pyramid, by virtue of

which he irrevocably and unconditionally
guaranteed the full and complete payment of
the principal liability of Macrogen Realty.
However, contrary to petitioners assurances,
Macrogen Realty failed and refused to pay all
the monthly installments agreed upon in the
Compromise Agreement. Hence, on 7
September 2000, respondent moved for the
8
issuance of a writ of execution against
Macrogen Realty, which CIAC granted.

is otherwise
excussion.

known

as

the

benefit

of

Article 2060 of the Civil Code reads:

Art. 2060. In order that the guarantor may
make use of the benefit of excussion, he must
set it up against the creditor upon the latters
demand for payment from him, and point out to
the creditor available property of the debtor
within Philippine territory, sufficient to cover the
amount of the debt.

On 29 November 2000, the sheriff filed a

return stating that he was unable to locate any
property of Macrogen Realty, except its bank
deposit of P20,242.33, with the Planters Bank,
Buendia Branch.
Respondent then made, on 3 January 2001, a
written demand on petitioner, as guarantor of
Macrogen Realty, to pay the P6,000,000.00, or
to point out available properties of the
Macrogen Realty within the Philippines
sufficient to cover the obligation guaranteed. It
also made verbal demands on petitioner. Yet,
respondents demands were left unheeded.
As a special and affirmative defense, petitioner
argued that the benefit of excussion was still
available to him as a guarantor since he had
set it up prior to any judgment against him.
According to petitioner, respondent failed to
exhaust all legal remedies to collect from
Macrogen Realty the amount due under the
Compromise Agreement, considering that
Macrogen Realty still had uncollected credits
which were more than enough to pay for the
same. Given these premise, petitioner could
not be held liable as guarantor.
ISSUE: Whether or not Benjamin Bitanga can
avail himself of the benefit of excussion - NO
HELD: Under a contract of guarantee, the
guarantor binds himself to the creditor to fulfill
the obligation of the principal debtor in case
the latter should fail to do so. The guarantor
who pays for a debtor, in turn, must be
indemnified by the latter. However, the
guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the
property of the debtor and resorted to all the
legal remedies against the debtor. This is what

The afore-quoted provision imposes a

condition for the invocation of the defense of
excussion. Article 2060 of the Civil Code
clearly requires that in order for the guarantor
to make use of the benefit of excussion, he
must set it up against the creditor upon the
latters demand for payment and point out to
the creditor available property of the debtor
within the Philippines sufficient to cover the
amount of the debt.
It must be stressed that despite having been
served a demand letter at his office, petitioner
still failed to point out to the respondent
properties of Macrogen Realty sufficient to
cover its debt as required under Article 2060 of
the Civil Code. Such failure on petitioners part
forecloses his right to set up the defense of
excussion.
Worthy of note as well is the Sheriffs return
stating that the only property of Macrogen
Realty which he found was its deposit
of P20,242.23 with the Planters Bank.
Article 2059(5) of the Civil Code thus finds
application and precludes petitioner from
interposing the defense of excussion. We
quote:
Art. 2059. This excussion shall not take place:
xxxx
(5) If it may be presumed that an
execution on the property of the
principal debtor would not result in the
satisfaction of the obligation.
Benjamin
Bitanga
had
not
genuinely
controverted the return made by Sheriff Joseph
F. Bisnar, who affirmed that, after exerting
diligent efforts, he was not able to locate any

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

property belonging to the Macrogen Realty,

except for a bank deposit with the Planters
Bank at Buendia, in the amount of P20,242.23.
It is axiomatic that the liability of the guarantor
arises when the insolvency or inability of the
debtor to pay the amount of debt is proven by
the return of the writ of execution that had not
been unsatisfied.

JN DEVELOPMENT CORPORATION, and

SPS. RODRIGO and LEONOR STA. ANA vs.
PHILIPPINE EXPORT AND FOREIGN LOAN
GUARANTEE CORPORATION
FACTS: Traders Royal Bank (TRB) extended
to JN Development Corporation (JN) an Export
Packing Credit Line for P2,000,000. The loan
was covered by a real estate mortgage and a
letter of guarantee from respondent Philippine
Export
and
Foreign
Loan
Guarantee
Corporation (PhilGuarantee).
Upon JNs failure to pay the loan when it
matured, PhilGuarantee, upon TRBs request
to make good its guarantee, paid the latter.
Subsequently, PhilGuarantee made several
demands on JN, but the latter proposed to
settle the obligation by way of development
and sale of the mortgaged property instead,
which PhilGuarantee rejected.
PhilGuarantee thus filed a complaint for
collection of money and damages against
herein petitioners. The RTC ruled that since
TRB was able to foreclose the real estate
mortgage executed by JN the obligation was
extinguished and thus the latter is not liable to
reimburse PhilGuarantee.
In addition, the RTC held that since the
guarantee was good for only one year, which
was not renewed after the expiry of said
period, PhilGuarantee had no more legal duty
to pay TRB.
On appeal, the CA reversed the RTCs
decision.

ISSUES:

100

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

1. Whether or not PhilGuarantees payment

to TRB amounts to a waiver of its right
under Article 2058 of the Civil Code
2. Whether or not PhilGuarantee had no
obligation to pay TRB because of the
alleged expiration of contract of
guarantee
RULING:
1. Under a contract of guarantee, the
guarantor binds himself to the creditor to
fulfil the obligation of the principal debtor
in case the latter should fail to do so. The
guarantor who pays for a debtor, in turn,
must be indemnified by the latter. Under
Article 2058, the guarantor cannot be
compelled to pay the creditor unless the
latter has exhausted all the property of
the debtor and resorted to all the legal
remedies against the debtor (benefit of
excussion). The creditor must first obtain
a judgment against the principal debtor
before assuming to run after the alleged
guarantor since the exhaustion of the
principals property cannot begin to take
place before judgment has been
obtained. In order that the guarantor may

100

make use of the benefit of excussion, he

must set it up against the creditor upon the
latters demand for payment and point out
to the creditor available property of the
debtor within the Philippines sufficient to
cover the amount of the debt. Excussion is
a right granted to the guarantor by law and
as such he may opt to make use of it or
waive it. PhilGuarantees waiver of the right
of excussion cannot prevent it from
demanding
reimbursement
from
petitioners. While a guarantor enjoys the
benefit of excussion, nothing prevents him
from paying the obligation once demand is
made on him. The law clearly requires the
debtor to indemnify the guarantor what the
latter has paid.
2. The guarantee was only up to December
17, 1980. JNs obligation with TRB fell due
on June 30, 1980, and demand on
PhilGuarantee was made by TRB on
October 8, 1980. That payment
was
actually made only on March 10, 1981
does not take it out of the terms of the
guarantee. What is controlling is
that
default and demand on PhilGuarantee had
taken place while the guarantee was still in

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

force. The benefit of excussion, as well as

the requirement of consent to extensions of
payment, is a protective device pertaining
to and conferred on the guarantor. These
may be invoked by the guarantor against
the creditor as defenses to bar the
unwarranted enforcement of the guarantee.
However, PhilGuarantee did not avail of
these defenses when it paid its obligation
once demand was made on it.

MIRA HERMANOS, INC. vs. MANILA

TOBACCONISTS, INC., ET AL.,;
PROVIDENT INSURANCE CO.
FACTS: By virtue of a written contract entered
into between Mira Hermanos, Inc., and
Manila Tobacconists, Inc., the former agreed
to deliver to the latter merchandise for sale on
consignment under certain specified terms and
the latter agreed to pay to the former on or
before the 20th day of each month the invoice
value of all the merchandise sold during the
preceding month.
Mira Hermanos, Inc., required of the Manila
Tobacconists, Inc., a bond of P3,000, which
was executed by the Provident Insurance Co.,
on September 2, 1939, to secure the fulfillment
of the obligation of the Tobacconists under the
contract up to the sum of P3,000.
In October, 1940, the volume of the business
of the Tobacconists having increased so that
the merchandise received by it on consignment
from Mira Hermanos exceeded P3,000 in
value, Mira Hermanos required of the
Tobacconist an additional bond of P2,000, and
in compliance with that requirement the
defendant Manila Compaia de Seguros, on
October 16, 1940, executed a bond of P2,000
with the same terms and conditions (except as
to the amount) as the bond of the Provident
Insurance Co.
On June 1, 1941, a final and complete
liquidation was made of the transactions
between
Mira
Hermanos
and
the
Tobacconists, as a result of which there was
found a balance due from the latter to the
former of P2,272.79, which indebtedness the
Tobacconists recognized but was unable to
pay. Thereupon Mira Hermanos made a
demand upon the two surety companies for

101

the payment of said sum.

The Provident Insurance Co., paid only the
sum of P1,363.67, which is 60% of the
amount owned by the Tobacconists to Mira
Hermanos, alleging that the remaining 40%
should be paid by the other surety, Manila
Compaia de Seguros, in accordance with
Article 8137 of the Civil Code.
The Manila Compaia de Seguros refused to
pay the balance, contending that so long as
the liability of the Tobacconists did not exceed
P3,000, it was not bound to pay anything
because its bond referred only to the obligation
of the Tobacconists in excess of P3,000 and
up to P5,000.
Hence Mira Hermanos, Inc., brought this to
recover from
them jointly and severally the sum of P909.12
with legal interest thereon from the date of the
complaint.
ISSUE: WON Provident Insurance Co. is
entitled to the
"benefit of division" provided in article 1837 of
the Civil Code
HELD: Article 1837 of the [Old] Civil Code
reads as follows:
Art. 1837. Should there be several sureties of
only one debtor for the same debt, the liability
therefor shall be divided among them all. The
creditor can claim from each surety only his
proportional part unless liability in solidum has
been expressly stipulated.
The right to the benefit of division against the
co-sureties for their respective shares ceases
in the same cases and for the same reason as
that to an exhaustion of property against the
principal debtor.
While on its face the bond given by the Manila
Compaia de Seguros contains the same
terms and conditions (except as to the amount)
as those of the bond given by the Provident
Insurance Co., nevertheless it was pleaded by
the Manila Compaia de Seguros and found
proven by the trial court.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

As the trial court observed, there would have

been no need for the additional bond of
P2,000

102

if its purpose were to cover the first P2,000

already covered by the P3,000 bond of the
Provident Insurance Co.
Indeed, if the purpose of the additional bond of
P2,000 were to cover not the excess over and
above P3,000 but the first P2,000 of the
obligation of the principal debtor like the bond
of P3,000 which covered only the first P3,000
of said obligation, then it would result that had
the obligation of the Tobacconists exceeded
P3,000, neither of the two bonds would have
responded for the excess, and that was
precisely the event against which Mira
Hermanos wanted to protect itself by
demanding the additional bond of P2,000.
For instance, suppose that the obligation of the
principal debtor, the Tobacconists, amounted
to P5,000; if both bonds were co-extensive up
to P2,000 as would logically follow if
appellant's contention were correct the
result would be that the first P2,000 of the
obligation would have to be divided between
and paid equally by the two surety companies,
which should pay P1,000 each, and of the
balance of P3,000 the Provident Insurance Co.
would have to pay only P1,000 more because
its liability is limited to the first P3,000, thus
leaving the plaintiff in the lurch as to the
excess of P2,000.
That was manifestly not the intention of the
parties. As a matter of fact, when the Provident
gave its bond and fixed the premiums thereon
it assumed an obligation of P3,000 in solidum
with the Tobacconists without any expectation
of any benefit of division with any other surety.
The additional bond of P2,000 was, more than
a year later, required by the creditor of the
principal debtor for the protection of said
creditor and certainly not for the benefit of the
original surety, which was not entitled to expect
any such benefit.
The foregoing considerations, which fortify the
trial court's conclusion as to the real intent and
agreement of the parties with regard to the
bond of P2,000 given by the Manila Compaia
de Seguros, destroys at the same time the
theory of the appellant regarding the
applicability of article 1837 of the Civil Code.
That article refers to several sureties of only

one debtor for the same debt. In the instant

case, altho the two bonds on their face appear
to guarantee the same debt coextensively up
to P2,000 that of the Provident Insurance
Co. alone extending beyond that sum up to
P3,000 it was pleaded and conclusively
proven that in reality said bonds, or the two
sureties, do not guarantee the same debt
because the Provident Insurance Co.
guarantees only the first P3,000 and the
Manila Compaia de Seguros, only the excess
over and above said amount up to P5,000.
Article 1837 does not apply to this factual
situation.

TUASON, TUASON, INC. vs. ANTONIO

MACHUCA
FACTS: "Manila Compaia de Seguros"
obtained from the Universal Trading Company
and Tuason, Tuason & Co., a solidary note for
the sum of P9,663 executed by
said
companies in its favor. Before signing said
note, Tuason, Tuason & Co., in turn, caused
the Universal Trading Company and its
president Antonio Machuca, personally, to sign
a document (Exhibit B), wherein they bound
themselves solidarily to pay, reimburse, and
refund to the company all such sums or
amounts of money as it, or its representative,
may pay or become bound to pay, upon its
obligation with "Manila Compaia de Seguros,"
whether or not it shall have actually paid such
sum or sums or any part thereof.
The Universal Trading Company having been
declared insolvent, "Manila Compaia de
Seguros" brought an action in the lower court
against Tuason, Tuason & Co. to recover the
value of the note for P9,663 and obtained final
judgment therein, which was affirmed by this
court on appeal, for the total sum of
P12,197.27, which includes the value of the
note with interest thereon.
Subsequently, all the rights of Tuason, Tuason
& Co. were transferred to the plaintiff Tuason,
Tuason, Inc.
Later on Tuason, Tuason, Inc., brought this
action to recover of Antonio Machuca the sum
of P12,197.27 which it was sentenced to pay in

the case filed against it by "Manila Compaia

de Seguros," plus P3,000 attorney's fees, and
P155.92 court's costs and sheriff's fees, that is,
a total of P15,353.19.
ISSUES:
a) WON Tuason, Tuason Inc. Is entitled to the
relief sought in view of the above facts?
b) WON Tuason, Tuason Inc. has the right to
recover from Machuca more than the value of
the note executed by Tuason, Tuason, Inc. in
favor of Manila Compania de Seguros?
HELD: The plaintiff company argues that, at all
events, it is entitled to bring this action under
article 1843 of the Civil Code, which provides
that the surety may, even before making
payment, bring action against the principal
debtor.
This contention of the plaintiff is untenable.
The present action, according to the terms of
the complaint, is clearly based on the fact of
payment. It is true that, under article 1843, an
action lies against the principal debtor even
before the surety pays the debt, but it clearly
appears in the complaint that this is not the
action brought by the plaintiff. Moreover this
article 1843 provided several cumulative
remedies in favor of the surety, at his election,
and the surety who brings an action under this
article must choose the remedy and apply for it
specifically. At any rate this article does not
provide for the reimbursement of any amount,
as is sought by the plaintiff.
But although the plaintiff has not as yet paid
"Manila Compaia de Seguros" the amount of
the judgment against it, and even considering
that this action cannot be held to come under
article 1843 of the Civil Code, yet the plaintiff is
entitled to the relief sought in view of the facts
established by the evidence. The plaintiff
became bound, by virtue of a final judgment, to
pay the value of the note executed by it in
favor of "Manila Compaia de Seguros."
According to the document executed solidarily
by the defendant and the Universal Trading
Company, the defendant bound himself to pay
the plaintiff as soon as the latter may have
become bound and liable, whether or not it
shall have actually paid. It is indisputable that
the plaintiff became bound and liable by a final
judgment to pay the value of the note to
"Manila Compaia de Seguros."

The defendant also contends that the

document executed by Albina Tuason in
favor of "Manila Compaia de Seguros"
assuming and making hers the obligation of
Tuason, Tuason & Co., was a novation of
the contract by substitution of the debtor,
and relieved Tuason, Tuason & Co. from all
obligation in favor of "Manila Compaia de
Seguros."
As to this, it is enough to say that if this was
what Albina Tuason contemplated in signing
the document, evidently it was not what
"Manila Compaia de Seguros" accepted.
As above stated, "Manila Compaia de
Seguros" accepted this document only as
additional security for its credit and not as a
novation of the contract.
Our conclusion is that the plaintiff has the
right to recover of the defendant the sum of
P9,663, the value of the note executed by
the plaintiff in favor of "Manila Compaia de
Seguros" which the plaintiff is under
obligation to pay by virtue of final judgment.
We do not believe, however, that the
defendant must pay the plaintiff the
expenses incurred by it in the litigation

between it and "Manila Compaia de Seguros."

That litigation was originated by the plaintiff
having failed to fulfill its obligation with "Manila
Compaia de Seguros," and it cannot charge
the defendant with expenses which it was
compelled to make by reason of its own fault. It
is entitled, however, to the expenses incurred
by it in this action brought against the
defendant, which are fixed at P1,653.65 as
attorney's fees.

KUENZLE & STREIFF VS. TAN SUNCO

FACTS: Kuenzle & Streiff instituted an action
against Chung Chu Sing for the recovery of
indebtedness. Before Kuenzle & Streiff could
secure judgment, Tan Sunco brought an action
against Chung Chu Sing for the payment of
another obligation for which Tan Sunco acted
as guarantor. Chung Chu Sing confessed
judgment in favor of Tan Sunco. Immediately
after obtaining judgment, Tan Sunco caused to
be levied upon under execution all the
properties of Chung Chu Sing. Kuenzle &
Streiff commenced an action to set aside the
judgment, claiming it was obtained by the fraud
and collusion, and that Tan Sunco had not paid

the debt for which as guarantor he obtained

the judgment.
ISSUE: WON a guarantor who sues his
principal debtor before paying the debt himself
entitled to recover judgment for the debt?
HELD: No, while the surety has the right to
obtain judgment against his principal debtor,
he will not be permitted to realize on said
judgment to the point of actual collection until
he has satisfied, or caused to be satisfied, the
obligation the payment of the obligation of
which he assures. A guarantor who obtains
judgment against his principal cannot execute
said judgment against the latters property until
he has paid the debt for which he stands as
guarantor.

MANILA SURETY v BATU CONSTRUCTION

FACTS:` On July 8, 1950, the defendant Batu
Construction & Company, as principal, and the
plaintiff Manila Surety & Fidelity Co. Inc., as
surety, executed a surety bond for the sum of
P8,812.00 to insure faithful performance of the
former's obligation as contractor for the
construction of the Bacarra Bridge, Project PR72 (No. 3) Ilocos Norte Province. On the same
date, July 8,1950, the Batu Construction &
Company and the defendants Carlos N.
Baquiran and Gonzales P. Amboy executed an
indemnity agreement to protect the Manila
Surety & Fidelity Co. Inc.., against damage,
loss or expenses which it may sustain as a
consequence of the surety bond executed by it
jointly with Batu Construction & Company.
On or about May 30, 1951, the plaintiff
received a notice from the Director of Public
Works (Exhibit B) annulling its contract with the
Government for the construction of the Bacarra
Bridge because of its failure to make
satisfactory progress in the execution of the
works, with the warning that ,any amount spent
by the Government in the continuation of the
work, in excess of the contract price, will be
charged against the surety bond furnished by
the plaintiff. It also appears that a complaint by
the laborers in said project of the Batu
Construction & Company was filed against it
and the Manila Surety and Fidelity Co., Inc., for
unpaid wages amounting to P5,960.10.

Trial Court dismissed the case holding that

provisions of article 2071 of the new Civil Code
may be availed of by a guarantor only and not
by a surety the complaint, with costs against
the plaintiff.
ISSUE: The main question to determine is
whether the last paragraph of article 2071 of
the new Civil Code taken from article 1843 of
the old Civil Code may be a
vailed of by a surety.
HELD: YES
Provision of law under guaranty available
to surety
In suretyship the surety becomes liable to the
creditor without the benefit of the principal
debtor's exclusion of his properties, for he (the
surety) maybe sued independently. So, he is
an insurer of the debt and as such he has
assumed or undertaken a responsibility or
obligation greater or more onerous than that of
guarantor. Such being the case, the provisions
of article 2071, under guaranty, are applicable
and available to a surety. Hence, a surety,
even before having paid, may proceed against
the principal debtor to obtain release from the
surety, or to demand a security that shall
protect him from any proceedings by the
creditor or from the danger of insolvency of the
debtor, when the surety is sued for payment.

PNB VS MANILA SURETY

FACTS: PNB had opened a letter of credit and
advanced thereon $120,000 to Edgington Oil
Refinery for 8,000 tons of hot asphalt. Of this
amount, 2,000 tons worth P279,000 were
released and delivered to ATACO under a trust
receipt guaranteed by Manila Surety and
Fidelity.
To pay for the asphalt, ATACO constituted
PNB its assignee and attorney-in-fact to
receive and collect for Bureau of Public Works
the amount out of the funds payable to the
assignor.
ATACO delivered to the Bureau of Public
Works and the latter accepted. Of this amount
the Bank regularly collected. Thereafter for
unexplained reasons, the Bank ceased to
collect from the bureau. It was later on
discovered that more money were payable to

ATACO from the Public Works office but the

bank allowed another creditor to collect the
funds due to ATACO.
Its demands on the principal debtor and the
Surety having been refused, the Bank sued
both in the Court of First Instance of Manila to
recover the balance of P158,563.18 as of
February 15, 1950, plus interests and costs.
The bank contends that the power of attorney
obtained from ATACO was merely in additional
security in its favor, and that it was the duty of
the surety, and not that of the creditor, owed
see to it that the obligor fulfills his obligation,
and that the creditor owed the surety no duty of
active diligence to collect any, sum from the
principal debtor.
ISSUE: W/N Manila Surety is released from
the obligation as surety.
HELD: Yes. Surety is released when
assigned funds permitted by the creditor to
be exhausted is made without notifying the
former.
By allowing the assigned funds to be
exhausted without notifying the surety, the
Bank deprived the former of any possibility of
recoursing against that security, therefore the
surety is released.

The appellant points out to its letter of

demand, Exhibit "K", addressed to the
Bureau of Public Works, on May 5, 1949,
and its letter to ATACO, Exhibit "G",
informing the debtor that as of its date,
October 31, 1949, its outstanding balance
was P156,374.83. Said Exhibit "G" has no
bearing on the issue whether the Bank has
exercised due diligence in collecting from the
Bureau of Public Works, since the letter was
addressed to ATACO, and the funds were to
come from elsewhere. As to the letter of
demand on the Public Works office, it does
not appear that any reply thereto was made;
nor that the demand was pressed, nor that
the debtor or the surety were ever apprised
that payment was not being made. The fact
remains that because of the Bank's inactivity
the other creditors were enabled to collect
P173,870.31, when the balance due to
appellant Bank was only P158,563.18. The
finding of negligence made by the Court of

Appeals is thus not only conclusive on us but

fully supported by the evidence.
Even if the Court of Appeals erred on the
second reason it advanced in support of the
decision now under appeal, because the
rules on application of payments, giving
preference to secured obligations are only
operative in cases where there are several
distinct debts, and not where there is only
one that is partially secured, the error is of no
importance, since the principal reason based
on the Bank's negligence furnishes adequate
support to the decision of the Court of
Appeals that the surety was thereby
released.

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STRONGHOLD VS. REPUBLIC

(492 SCRA 179, G.R. No. 147561, June
22, 2006)
FACTS: On May 24, 1989, [respondent]
Republic-Asahi
Glass
Corporation
(Republic-Asahi) entered into a contract
with Jose D. Santos, Jr., the proprietor of
JDS
Construction
(JDS),
for
the
construction of roadways and a drainage
system in Republic-Asahis compound. In
order to guarantee the faithful and
satisfactory
performance
of
its
undertakings
JDS,
shall
post
a
performance bond of seven hundred ninety
five thousand pesos
(P795,000.00).
Hence, JDS executed, jointly and severally
with [petitioner] Stronghold Insurance Co.,
Inc (SICI).
Republic-Asahis engineers called the
attention of JDS to the alleged alarmingly
slow pace of the construction. However,
said reminders went unheeded by JDS.
Dissatisfied with the progress of the work
undertaken
by,
Republic-Asahi
extrajudicially rescinded the contract
pursuant to Article XIII of said contract, and
wrote a letter to JDS informing the latter of
such
rescission.
Such
rescission,
according to Article XV of the contract shall
not be construed as a waiver of Asahis
right to recover damages from JDS and the
latters sureties.
Republic-Asahi alleged that, as a result of
JDSs failure to comply with the provisions
of the contract, which resulted in the said
contracts rescission, it had to hire another
contractor to finish the project, for which it
incurred
an
additional
expense.
Subsequently, Republic-Asahi sent a letter
to Stronghold SICI filing its claim under the
bond for not less than P795,000.00. On

111

January 6, 1990, Republic-Asahi again sent

another letter reiterating its demand for
payment under the aforementioned bond.
Both letters allegedly went unheeded.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

Republic-Asahi then filed [a] complaint

against JDS and SICI. It sought from
JDS
payment
of
P3,256,874.00
representing the additional expenses for
the completion of the project using
another contractor, and from JDS and
SICI, jointly and severally, payment of
P750,000.00 as damages in accordance
with the performance bond.
Summons were duly served on
defendant- appellee SICI. However, not
in the case Jose D. Santos, Jr. who
already died and JDS Construction was
no longer at its address and its
whereabouts were unknown. SICI filed
its answer, alleging that the RepublicAsahis money claims against SICI and
JDS have been extinguished by the
death of Jose D. Santos, Jr.
It further alleged that:
Republic-Asahi can no longer
prove its claim for damages in
view of the death of Santos.

112

SICI was not informed by RepublicAsahi of the death of Santos.

SICI was not informed by RepublicAsahi of the unilateral rescission of
its contract with JDS, thus SICI was
deprived of its right to protect its
interests as surety under the
performance bond, and therefore it
was released from all liability.

Lower court dismissed the complaint of

Republic- Asahi against JDS and SICI, on
the ground that the claim against JDS did
not survive the death of its sole proprietor,
Jose D. Santos, Jr. Upon Motion for
Reconsideration the dismissal of the case
against Stronghold Insurance Company,
Inc., is reconsidered. However, the case
against defendant Jose D. Santos, Jr.
(deceased) remains undisturbed.
The CA ruled that SICIs obligation under
the surety agreement was not extinguished
by the death of Jose D. Santos, Jr.
Consequently, Republic-Asahi could still go
after SICI for the bond.

ISSUE: WON petitioners liability under the

performance bond was automatically
extinguished by the death of Santos, the
principal. NO

HELD: As a general rule, the death of

either the creditor or the debtor does not
extinguish the obligation. Obligations are
transmissible to the heirs, except when the
transmission is prevented by the law, the
stipulations of the parties, or the nature of
the obligation. Only obligations that are
personal or are identified with the persons
themselves are extinguished by death.
Section 5 of Rule 86 of the Rules of Court
expressly allows the prosecution of money
claims arising from a contract against the
estate of a deceased debtor. Evidently,
those claims are not actually extinguished.
What is extinguished is only the obligees
action or suit filed before the court, which is
not then acting as a probate court.
In the present case, whatever monetary
liabilities or obligations Santos had under
his contracts with respondent were not
intransmissible by their nature, by
stipulation, or by provision of law. Hence,
his death did not result in the
extinguishment of those obligations or
liabilities, which merely passed on to his
estate. Death is not a defense that he or
his estate can set up to wipe out the
obligations under the performance bond.
Consequently, petitioner as surety cannot
use his death to escape its monetary
obligation under its performance bond.
As a surety, petitioner is solidarily liable
with Santos in accordance with the Civil
Code, which provides as follows:

"Art. 2047. By guaranty a person, called the

guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in
case the latter should fail to do so.

If a person binds himself solidarily with

the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book
shall be observed. In such case the
contract is called a suretyship."
xxxxxxxxx
"Art. 1216. The creditor may proceed
against any one of the solidary debtors
or some or all of them simultaneously.
The demand made against one of them
shall not be an obstacle to those which
may subsequently be directed against
the others, so long as the debt has not
been fully collected."
Thus, the suretys obligation is not an
original and direct one for the
performance of his own act, but merely
accessory or collateral to the obligation
contracted
by
the
principal.
Nevertheless, although the contract of a
surety is in essence secondary only to a
valid principal obligation, his liability to
the creditor or promisee of the principal

is said to be direct, primary and absolute;

in other words, he is directly and equally
bound with the principal.
Under the law and jurisprudence,
respondent may sue, separately or
together, the principal debtor and the
petitioner herein, in view of the solidary
nature of their liability. The death of the
principal debtor will not work to convert,
decrease or nullify the substantive right of
the solidary creditor. Evidently, despite the
death of the principal debtor, respondent
may still sue petitioner alone, in
accordance with the solidary nature of the
latters liability under the performance
bond.
POLICY: A surety companys liability under
the performance bond it issues is solidary.
The death of the principal obligor does not,
as a rule, extinguish the obligation and the
solidary nature of that liability.

SPOUSES TOH VS. SOLID BANK

(G.R. No. 154183, August 7, 2003)
FACTS: RESPONDENT SOLID BANK
extended an "omnibus line" credit facility
worth P10 million in favor of respondent
First Business Paper Corporation (FBPC).
A letter-advise dated May 16, 1993 was
sent to FBPC which stated the terms and
conditions of the agreement as well as the
checklist of documents among which is the
Continuing Guaranty for any and all
amounts signed by petitioner-spouses Luis
Toh and Vicky Tan Toh, and respondentspouses Kenneth and Ma. Victoria Ng Li.
The spouses Toh were then Chairman of
the Board and Vice-President while
respondent-spouses Li were President and
General Manager, respectively, of the
same corporation.
On 10 May 1993, spouses Toh and
spouses Li signed the required Continuing
Guaranty, which defined the contract
arising therefrom as a surety agreement
and provided for the solidary liability of the
signatories. The Continuing Guaranty set
forth
no
maximum limit on the
indebtedness that respondent FBPC may
incur and for which the sureties may be
liable.
The surety also contained a de facto
acceleration clause if "default be made in
the payment of any of the instruments,
indebtedness,
or
other
obligation"
guaranteed
by
petitioners
and
respondents. So as to strengthen this
security, the Continuing Guaranty waived
rights of the sureties against delay or
absence of notice or demand on the part of
respondent Bank, and gave future consent
to the Bank's action to "extend or change
the time payment, and/or the manner,

place or terms of payment," including

renewal, of the credit facility in such manner
and upon such terms as the Bank without
notice to or further assent from the sureties.

By November 17 1993, FBPC opened 13

letters of credit and obtained loans
totaling P15,227,510.00. As the letters of
credit were secured, FBPC through its
officers Kenneth Ng Li, Ma. Victoria Ng
Li and Redentor Padilla as signatories
executed a series of trust receipts over
the goods allegedly purchased from the
proceeds of the loans. But the Spouses
Li had fraudulently departed from their
conjugal home.
The Bank served a demand letter upon
FBPC and petitioner Luis Toh invoking
the acceleralation clause in the trust
receipts of FBPC and claimed payment
for P10,539,758.68 as unpaid overdue
accounts on the letters of credit plus
interests and penalties. On 17 January
1994 respondent Bank filed a complaint
for sum of money with ex parte
application for a writ of preliminary
attachment against FBPC, spouses Li,
and spouses Toh. Hence, properties of
FBPC were impounded but was later
released to third party claimants.

Spouses Toh alleged that they were made

to sign papers in blank and the Continuing
Guaranty could have been one of them , it
was impossible and absurd for them to
have freely and consciously executed the
surety on 10 May 1993, the date appearing
on its face since beginning March of that
year they had already divested their shares
in FBPC and assigned them in favor of
respondent Kenneth Ng Li although the
deeds of assignment were notarized only
on 14 June 1993.
They also contended that through FBPC
Board Resolution dated 12 May 1993
petitioner Luis Toh was removed as an
authorized signatory for FBPC and
replaced by spouses Li and Redentor
Padilla for all the transactions of FBPC with
respondent Bank. They even resigned from
their respective positions in FBPC as
reflected in the 12 June 1993 Secretary's
Certificate submitted to the Securities and

Exchange Commission as petitioner Luis

Toh was succeeded as Chairman by
respondent Ma. Victoria Ng Li, while one
Mylene C. Padilla took the place of
petitioner Vicky Tan Toh as Vice-President.
Finally, Toh averred that sometime in June
1993 they obtained from respondent
Kenneth Ng Li their exclusion from the
several surety agreements they had
entered into with different banks, i.e.,
Hongkong and Shanghai Bank, China
Banking Corporation, Far East Bank and
Trust Company, and herein respondent
Bank. As a matter of record, these other
banks executed written surety agreements
that showed respondent Kenneth Ng Li as
the only surety of FBPC's indebtedness.
TC-FBPC liable to pay Solid Bank
Corporation
the
principal
of
P10,539,758.68 plus twelve percent (12%)
interest per annum from finality of the
Decision until fully paid, but absolving
petitioner-spouses Toh of any liability.
CA-modified the Decision and held that by
signing
the
Continuing
Guaranty,
petitioner-spouses became solidarily liable
with FBPC citing that they failed to execute
any written revocation of the Continuing
Guaranty with notice to respondent Bank,
the instrument remained in full force and
effect when the letters of credit were
availed of by respondent FBPC.
Petitioner-spouses Luis Toh and Vicky Tan
Toh maintain that the Continuing Guaranty
is not legally valid and binding against
them for having been executed long after
they had withdrawn from FBPC. Lastly,
they claim that the surety agreement has
been extinguished by the material

alterations thereof and of the "letter-advise"

which were allegedly brought about by:
(ii) the provision of an acceleration
clause in the trust receipts;
(iii) the flight of their co-sureties, Li;
(iv) the grant of credit facility despite the
non- payment of marginal deposits

in an amount beyond the credit

limit of P10 million pesos;
(v) the inordinate delay of the Bank in
demanding the payment of the
indebtedness;
(vi) the presence of ghost deliveries
and fictitious purchases using the
Bank's letters of credit and trust
receipts;
(vii)
the extension of the due
dates of the letters of credit
without the required 25% partial
payment per extension;
(viii)
the approval of another
letter of credit, L/C 93-0042, even
after respondent- spouses Li had
defaulted on their previous
obligations; and,
(ix) the unmistakable pattern of fraud.
ISSUE: WON the spouses Toh are liable
as sureties to Solidbank. NO
HELD: The Continuing Guaranty is a
valid and binding contract of petitionerspouses as it is a public document that
enjoys the presumption of authenticity

and due execution. We are bound by the

consistent finding of the courts a quo that
petitioner- spouses Toh "voluntarily affixed
their signature[s]" on the surety agreement
and were thus "at some given point in time
willing to be liable under those forms." In
the absence of clear, convincing and more
than preponderant evidence to
the
contrary, our ruling cannot be otherwise.
Similarly, there is no basis for petitioners to
limit their responsibility so long as they
were corporate officers and stockholders of
FBPC. Nothing in the Continuing Guaranty
restricts their contractual undertaking to
such condition or eventuality. In fact the
obligations assumed by them therein
subsist "upon the undersigned, the heirs,
executors, administrators, successors and
assigns of the undersigned, and shall inure
to the benefit of, and be enforceable by
you, your successors, transferees and
assigns," and that their commitment "shall
remain in full force and effect until written

notice shall have been received by [the

Bank] that it has been revoked by the
undersigned."
Verily, if petitioners intended not to be
charged as sureties after their withdrawal
from FBPC, they could have simply
terminated the agreement by serving the
required notice of revocation upon the
Bank as expressly allowed therein.
In Garcia v. CA we ruled
Regarding the petitioner's claim that he is
liable only as a corporate officer of WMC,
the surety agreement shows that he signed
the same not in representation of WMC or
as its president but in his personal
capacity. He is therefore personally bound.
There is no law that prohibits a corporate
officer from binding himself personally to
answer for a corporate debt. While the
limited liability doctrine is intended to
protect the stockholder by immunizing him
from personal liability for the corporate
debts, he may nevertheless divest himself
of this protection by voluntarily binding
himself to the payment of the corporate
debts. The petitioner cannot therefore take
refuge in this doctrine that he has by his
own acts effectively waived. Insofar as
petitioners stipulate in the Continuing
Guaranty that respondent Bank "may at
any time, or from time to time, in [its]
discretion x x x extend or change the time
payment," this provision even if understood
as a waiver is confined per se to the grant
of an extension and does not surrender the
prerequisites therefor as mandated in the
"letter-advise."
In other words, the authority of the Bank to
defer
collection
contemplates
only
authorized extensions, that is, those that

meet the terms of the "letter-advise."

Certainly, while the Bank may extend the due
date at its discretion pursuant to the
Continuing Guaranty, it should nonetheless
comply with the requirements that domestic
letters of credit be supported by fifteen
percent (15%) marginal deposit

extendible three (3) times for a period of

thirty (30) days for each extension,
subject to twenty-five percent (25%)
partial payment per extension. Any doubt
on the terms and conditions of the surety
agreement should be resolved in favor of
the surety.
Stated otherwise, an extension of the
period for enforcing the indebtedness
does not by itself bring about the
discharge of the sureties unless the extra
time is not permitted within the terms of
the waiver, i.e., where there is no
payment or there is deficient settlement
of the marginal deposit and the twentyfive percent (25%) consideration, in
which case the illicit extension releases
the sureties.
Under Art. 2055 of the Civil Code, the
liability of a surety is measured by the
terms of his contract, and while he is
liable to the full extent thereof, his
accountability is strictly limited to that
assumed by its terms.

Respondent Bank extended several letters

of credit were for 90 days with alarmingly
flawed and inadequate consideration - the
indispensable marginal deposit of fifteen
percent (15%) and the twenty-five percent
(25%) prerequisite for each extension of
thirty (30) days. It bears stressing that the
requisite marginal deposit and security for
every thirty (30) - day extension specified
in the "letter-advise" were not set aside or
abrogated nor was there any prior notice of
such fact, if any was done.
The foregoing extensions of the letters of
credit made by respondent Bank without
observing the rigid restrictions
for
exercising the privilege are not covered by
the waiver stipulated in the Continuing
Guaranty. Evidently, they constitute illicit
extensions prohibited under Art. 2079 of
the Civil Code, "[a]n extension granted to
the debtor by the creditor without the
consent of the guarantor extinguishes the
guaranty."

This act of the Bank is not mere failure or

delay on its part to demand payment after
the debt has become due, as was the case
in unpaid five (5) letters of credit which the
Bank did not extend, defer or put off, but
comprises conscious, separate and binding
agreements to extend the due date. As a
result of these illicit extensions, petitionerspouses Luis Toh and Vicky Tan Toh are
relieved of their obligations as sureties of
respondent FBPC under Art. 2079 of the
Civil Code.
Further, we note several suspicious
circumstances that militate against the
enforcement of the Continuing Guaranty
against the accommodation sureties.
Firstly, the guaranty was executed more
than thirty (30) days from the original
acceptance period as required in the
"letter-advise." Thereafter, barely two (2)
days after the Continuing Guaranty was
signed, corporate agents of FBPC were
replaced on 12 May 1993 and other
adjustments in the corporate structure of
FBPC ensued in the month of June 1993,
which the Bank did not investigate
although such were made known to it. By
the same token, there is no explanation on
record for the utter worthlessness of the
trust receipts in favor of the Bank when
these documents ought to have added
more security to the indebtedness of
FBPC. The Bank has in fact no information
whether the trust receipts were indeed
used for the purpose for which they were
obtained.
The consequence of these omissions is to
discharge the surety, the spouses Toh,,
under Art. 2080 of the Civil Code, or at the
very least, mitigate the liability of the surety

up to the value of the property or lien

released If the creditor x x x has acquired a
lien upon the property of a principal, the
creditor at once becomes charged with the
duty of retaining such security, or maintaining
such lien in the interest of the surety, and
any release or impairment of

this security as a primary resource for

the payment of a debt, will discharge the
surety to the extent of the value of the
property or lien released x x x x [for]
there immediately arises a trust relation
between the parties, and the creditor as
trustee is bound to account to the surety
for the value of the security in his hands.
For the same reason, the grace period
granted by respondent Bank represents
unceremonious abandonment
and
forfeiture of the fifteen percent (15%)
marginal deposit and the twenty-five
percent (25%) partial payment as fixed in
the "letter-advise." These payments are
unmistakably
additional
securities
intended to protect both respondent
Bank and the sureties in the event that
the principal debtor FBPC becomes
insolvent during the extension period.
Compliance with these requisites was
not waived by petitioners in the
Continuing
Guaranty.
For
this
unwarranted exercise of discretion,
respondent Bank bears the loss; due to

its unauthorized extensions to pay granted

to FBPC, petitioner-spouses Luis Toh and
Vicky Tan Toh are discharged as sureties
under the Continuing Guaranty.
Finally, the foregoing omission or
negligence of respondent Bank in failing to
safe-keep the security provided by the
marginal deposit and the twenty-five
percent (25%) requirement results in the
material alteration of the principal contract,
i.e., the "letter-advise," and consequently
releases the surety. This inference was
admitted by the Bank through the
testimony of its lone witness that
"[w]henever this obligation becomes due
and demandable, except when you roll it
over, (so) there is novation there on the
original obligations."
As has been said, "if the suretyship
contract was made upon the condition that
the principal shall furnish the creditor
additional security, and the security being
furnished under these conditions is

afterwards released by the creditor, the

surety is wholly discharged, without regard
to the value of the securities released, for
such a transaction amounts to an alteration
of the main contract."
Petition granted. Decision of CA is
reversed and set aside. Spouses Toh are
absolved.

CALIBO VS. CA
(G.R. No. 120528, January 29, 2001)
FACTS: January 25, 1979, Dr. Pablo U.
Abella purchased an MF 210 agricultural
tractor which he used in his farm in
Dagohoy, Bohol. Sometime in October or
November 1985, Pablo Abellas son, Mike
Abella rented for residential purposes the
house of defendant-appellant Dionisio R.
Calibo, Jr., in Tagbilaran City.
In October 1986, Pablo Abella pulled out
his aforementioned tractor from his farm in
Dagohoy, Bohol, and left it in the
safekeeping of his son, Mike Abella, in
Tagbilaran City. Mike kept the tractor in the
garage of the house he was leasing from
Calibo.
Since he started renting Calibos house,
Mike had been religiously paying the
monthly rentals therefor, but beginning
November of 1986, he stopped doing so.
The following month, Calibo learned that
Mike had never paid the charges for
electric and water consumption in the
leased premises which the latter was dutybound to shoulder.
Thus, Calibo confronted Mike about his
rental arrears and the unpaid electric and
water bills. During this confrontation, Mike
informed Calibo that he (Mike) would be

staying in the leased property only until the

end of December 1986. Mike also assured
Calibo that he would be settling his account
with the latter, offering the tractor as security.
Mike even asked Calibo to help him find a
buyer for the tractor so he

could sooner
obligation.

pay

his

outstanding

In January 1987 when a new tenant

moved into the house formerly leased to
Mike, Calibo had the tractor moved to
the garage of his fathers house, also in
Tagbilaran City. After a long while, or on
November 22, 1988, Mikes father, Pablo
Abella, came to Tagbilaran City to claim
and take possession of the tractor.
Calibo, however, informed Pablo that
Mike left the tractor with him as security
for the payment of Mikes obligation to
him. Pablo offered to write Mike a check
for P2,000.00 in payment of Mikes
unpaid lease rentals, in addition to
issuing postdated checks to cover the
unpaid electric and water bills the
correctness of which Pablo said he still
had to verify with Mike.
Calibo told Pablo that he would accept
the P2,000.00-check only if the latter
would execute a promissory note in his
favor to cover the amount of the unpaid

electric and water bills. Pablo was not

amenable to this proposal. The two of them
having failed to come to an agreement,
Pablo left and went back to Cebu City,
unsuccessful in his attempt to take
possession of the tractor.
On November 25, 1988, Dr. Abella
instituted an action for replevin, claiming
ownership of the tractor and seeking to
recover possession thereof from petitioner.
RTC: ruled in favor of Dr. Abella.
CA: sustained the ruling of the trial court
that Mike Abella could not have validly
pledged the subject tractor to petitioner
since he was not the owner thereof, nor
was he authorized by its owner to pledge
the tractor.
ISSUE: WON the tractor in question was
validly pledged to Atty. Calibo. NO.
HELD: Atty. Calibo claims that the tractor
in question was validly pledged to him by

Dr. Abellas son Mike Abella to answer for

the latters monetary obligations to
petitioner. In the alternative, petitioner
asserts that the tractor was left with him, in
the concept of an innkeeper, on deposit
and that he may validly hold on thereto
until Mike Abella pays his obligations.
He maintains that even if Mike Abella were
not the owner of the tractor, a principalagent relationship may be implied between
Mike Abella and Dr. Abella. He contends
that the latter failed to repudiate the
alleged agency, knowing that his son is
acting on his behalf without authority when
he pledged the tractor to petitioner. Calibo
argues that, under Article 1911 of the Civil
Code, Dr. Abella is bound by the pledge,
even if it were beyond the authority of his
son to pledge the tractor, since he allowed
his son to act as though he had full
powers.
In a contract of pledge, the creditor is given
the right to retain his debtors movable
property in his possession, or in that of a
third person to whom it has been delivered,
until the debt is paid. For the contract to be
valid, it is necessary that:
the pledge is constituted to secure
the fulfillment of a principal
obligation;
the pledgor be the absolute owner
of the thing pledged; and
the person constituting the pledge
has the free disposal of his property,
and in the absence thereof, that he
be legally authorized for the
purpose.
As found by the trial court and affirmed by
respondent court, the pledgor in this case,
Mike Abella, was not the absolute owner of

the tractor that was allegedly pledged to

petitioner. The tractor was owned by his
father, Dr. Abella, who left the equipment with
him for safekeeping. Clearly, the second
requisite for a valid pledge, that the pledgor
be the absolute owner of the property, is
absent in this case. Hence,

there is no valid pledge.

He who is not the owner or proprietor of
the property pledged or mortgaged to
guarantee the fulfillment of a principal
obligation, cannot legally constitute such
a guaranty as may validly bind the
property in favor of his creditor, and the
pledgee or mortgagee in such a case
acquires no right whatsoever in the
property pledged or mortgaged.
(Discussion regarding Agency)
There also does not appear to be any
agency in this case. We agree with the
Court of Appeals that:
As indicated in Article 1869, for an
agency relationship to be deemed as
implied, the principal must know that
another person is acting on his behalf
without
authority.
Here,
appellee
categorically stated that the onlypurpose

for his leaving the subject tractor in the

care and custody of Mike Abella was for
safekeeping, and definitely not for him to
pledge or alienate the same. If it were true
that Mike pledged appellees tractor to
appellant, then Mike was acting not only
without appellees authority but without the
latters knowledge as well.
(Discussion regarding Deposit)
There is likewise no valid deposit in this
case. In a contract of deposit, a person
receives an object belonging to another
with the obligation of safely keeping it and
of returning the same. Petitioner himself
states that he received the tractor not to
safely keep it but as a form of security for
the payment of Mike Abellas obligations.
There is no deposit where the principal
purpose for receiving the object is not
safekeeping.

DEVELOPMENT BANK OF THE

PHILIPPINES V PRUDENTIAL BANK
Litex could not have subjected the goods
under the trust receipt to a chattel
mortgage. Thus, the inclusion in the
mortgage was void and had no legal effect.
There being no valid mortgage, there could
also be no valid foreclosure or valid auction
sale. Thus, DBP could not be considered
either as a mortgagee or as a purchaser in
good faith.
FACTS: Lirag Textile Mills, Inc. (Litex)
opened an irrevocable commercial letter of
credit with respondent Prudential Bank for
US$498,000. This was in connection with
its importation of 5,000 spindles for
spinning machinery with drawing frame,
simplex fly frame, ring spinning frame and
various accessories, spare parts and tool
gauge. These were released to Litex under
covering trust receipts it executed in favor
of Prudential Bank. Litex installed and used
the items in its textile mill located in
Montalban, Rizal. 9 years later, DBP
granted a foreign currency loan in the
amount of US$4,807,551 to Litex.
To secure the loan, Litex executed real
estate and chattel mortgages on its plant
site in Montalban, Rizal, including the
buildings
and
other
improvements,
machineries and equipments there. Among
the
machineries
and
equipments
mortgaged in favor of DBP were the
articles
covered
by
the
trust
receipts. Sometime in June 1982,
Prudential Bank learned about DBPs plan
for the overall rehabilitation of Litex. In a
July 14, 1982 letter, Prudential Bank
notified DBP of its claim over the various
items covered by the trust receipts which
had been installed and used by Litex in the

textile mill. Prudential Bank informed DBP

that it was the absolute and juridical owner of
the said items and they were thus not part of
the mortgaged assets that could be legally
ceded to DBP.

For the failure of Litex to pay its

obligation,
DBP
extra-judicially
foreclosed on the real estate and chattel
mortgages, including the articles claimed
by Prudential Bank. During the
foreclosure sale held on April 19, 1983,
DBP acquired the foreclosed properties
as the highest bidder. Learning of the
intended public auction, Prudential Bank
wrote a letter dated September 6, 1984
to DBP reasserting its claim over the
items covered by trust receipts in its
name and advising DBP not to include
them in the auction. It also demanded
the turn-over of the articles or
alternatively, the payment of their value.

mortgaged. Article 2085 (3) further

mandates that the person constituting the
pledge or mortgage must have the free
disposal of his property, and in the
absence thereof, that he be legally
authorized for the purpose. Litex had
neither absolute ownership, free disposal
nor the authority to freely dispose of the
articles. Litex could not have subjected
them to a chattel mortgage. Their inclusion
in the mortgage was void and had no legal
effect. There being no valid mortgage,
there could also be no valid foreclosure or
valid auction sale. Thus, DBP could not be
considered either as a mortgagee or as a
purchaser in good faith.

ISSUE: Whether or not the chattel

mortgage covers the goods under the
trust receipt

No one can transfer a right to another

greater than what he himself has. Nemo
dat quod non habet. Hence, Litex could not
transfer a right that it did not have over the
disputed items. Corollarily, DBP could not
acquire a right greater than what its
predecessor-in-interest had. The spring
cannot rise higher than its source. DBP
merely stepped into the shoes of Litex as

HELD: No. Article 2085 (2) of the Civil

Code requires that, in a contract of
pledge or mortgage, it is essential that
the pledgor or mortgagor should be the
absolute owner of the things pledged or

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

trustee of the imported articles with an

obligation to pay their value or to return
them on Prudential Banks demand. By its
failure to pay or return them despite
Prudential Banks repeated demands and
by selling them to Lyon without Prudential
Banks knowledge and conformity, DBP
became a trustee ex maleficio.
As a consequence of the release of the
goods and the execution of the trust
receipt, a two-fold obligation is imposed on
the entrustee, namely:
(1) to hold the designated goods, documents or
instruments in trust for the purpose of
selling or otherwise disposing of them and
(2) to turn over to the entruster either the
proceeds thereof to the extent of the
amount owing to the entruster or as
appears in the trust receipt, or the 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.
In the case of goods, they may also be
released for other purposes substantially
equivalent to (a) their sale or the
procurement of their sale; or (b) their
manufacture or processing with the
purpose of ultimate sale, in which case the
entruster retains his title over the said
goods whether in their original or
processed form until the entrustee has
complied fully with his obligation under the
trust receipt; or (c) the loading, unloading,
shipment or transshipment or otherwise
dealing with them in a manner preliminary
or necessary to their sale.
Thus, in a trust receipt transaction, the
release of the goods to the entrustee, on
his execution of a trust receipt, is
essentially for the purpose of their sale or

120

is necessarily connected with their ultimate or

subsequent sale.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

CAVITE DEVELOPMENT vs.

SPOUSES LIM
FACTS: One Rodolfo Guansing obtained
a loan in the amount of P90,000.00 from
Cavite Development Bank (CDB). As a
security, he mortgaged a parcel of land
situated La Loma, Quezon City and
covered by TCT No. 300809 registered
in his name. Guansing defaulted on the
payment of the loan, which led CDB to
foreclose the mortgage and later on
emerged as the highest bidder and
subsequently, the owner of the lot after
Guansing failed to redeem the same.
The Spouses Lim, through a broker,
offered to purchase the property from
CDB. The formal written offer stated a
payment of P30,000 (10% of P300,000)
as option money, provided that the land
be cleared of illegal occupants. For
payment of the option money, CDB

120

issued an official receipt. However, after

following up on the sale, Lim discovered
that the original owner of the land is
PERFECTO GUANSING, the father of
Rodolfo. In a civil case instituted by
Perfecto for the cancellation of Rodolfos
title, the Supreme Court adjudged Perfecto
as the real owner after proving that Rodolfo
fraudulently obtained it. Thus, Rodolfos
title was cancelled and a new one was
issued to Perfecto.
Aggrieved, the Spouses Lim instituted an
action for specific performance and
damages questioning the ability of CDB,
and its mother company Far East Bank
and Trust Company (FEBTC), to sell the
subject property.
The Regional Trial Court rendered a
decision in favor of the Spouses Lim, which
was affirmed by the Court of Appeals.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

ISSUES:
(1) What is the legal relation between the
parties?
(2) Whether or not Rodolfo Guansing/CDB
was the absolute owner of the subject
property as required under Art. 2085 to
effect a valid mortgage/sale?
(3) Whether or not CDB is a mortgagee in
good faith?
HELD:
(1) The parties entered into a CONTRACT
OF SALE.
The formal written offer of the
Spouses Lim was accepted by
CDB.
The Spouses Lim paid the option
money, which left only the
balance of the purchase price to
be paid.
In the Law on Sales, one does
not need to be the owner at the
perfection of the contract.
HOWEVER, NEMO DAT QUOD
NON HABET [One cannot give
what he does not have]. At the
consummation stage, it was
impossible for CDB to comply
with its legal obligation.
(2) NO. The sale by CDB to Lim of the
property mortgaged in 1983 by
Rodolfo Guansing must, therefore,
be deemed a nullity for CDB did not
have a valid title to the said property.
CDB never acquired a valid title
to the property because the
foreclosure sale, by virtue of
which the property had been
awarded to CDB as highest
bidder, is likewise void since the
mortgagor was not the owner of
the property foreclosed
A forced sale is still a sale
within the contemplation of the
law. Thus, the principle that the
seller must be the owner of the
thing sold also applies.

121

(3) NO. CDB cannot be considered as a

mortgagee in good faith.
CDB was remiss in its duty as
bank and failed to exercise the
due diligence required of it. In
short, CDB was negligent.
Citing
jurisprudence,
it
is
standard practice for banks,
before approving a loan, to send
representatives to the premises
of the land offered as collateral
and to investigate who are the
real owners thereof, noting that
banks are expected to exercise
more care and prudence than
private individuals in their
dealings, even those involving
registered lands, for their
business is affected with public
interest
No evidence to the contrary.
o Extrajudicial Settlement of
the Estate With Waiver, a
self-executed deed by
Rodolfo, should have
placed CDB on guard.
o Report of the purported
ocular inspection by its
representatives was never
admitted into evidence.

MAMERTA VDA. DE JAYME VS CA

FACTS: The spouses Graciano and
Mamerta Jayme are the registered owners
of Lot 2700, situated in the Municipality of
Mandaue On January 8, 1973, they
5
entered into a Contract of Lease with
George Neri, president of Airland Motors
Corporation (now Cebu Asiancars Inc.),
covering one-half of Lot 2700. The lease
was for twenty (20) years.
The terms and conditions of the lease
contract stipulated that Cebu Asiancars
Inc. (hereafter, Asiancars) may use the
leased premises as a collateral to secure
payment of a loan which Asiancars may
obtain from any bank, provided that the

proceeds of the loan shall be used solely

for the construction of a building which,
upon the termination of the lease or the
voluntary surrender of the leased premises
before the expiration of the contract, shall
automatically become the property of the
Jayme spouses (the lessors).
7
A Special Power of Attorney\ dated
January 26, 1974, was executed in favor of
respondent George Neri, who used the lot
to secure a loan of P300,000 from the
General Bank and Trust Company. The
loan was fully paid on August 14, 1977.
In October 1977, Asiancars obtained a
loan of P6,000,000 from the Metropolitan
Bank and Trust Company (MBTC). The
entire Lot 2700 was offered as one of
several properties given as collateral for
the loan. As mortgagors, the spouses
signed a Deed of Real
Estate
Mortgage dated November 21, 1977 in
favor of MBTC. It stated that the deed was
to secure the payment of a loan obtained
by Asiancars from the bank.
To assure the Jayme spouses, Neri and
the other officers of Asiancars, executed
an undertaking .In it they promised, in their
personal
capacities
and/or
in
representation of Cebu Asiancars, Inc., "to
compensate Mr. & Mrs. Graciano Jayme
for any and all or whatever damage they
may sustain or suffer by virtue and arising
out of the mortgage to MBTC. In addition,
Neri wrote a letter dated September 1,
1981 addressed to Mamerta Jayme
acknowledging her "confidence and help"
extended to him, his family and Asiancars.
He promised to pay their indebtedness to
MBTC before the loan was due.
Meeting financial difficulties and incurring
an outstanding balance on the loan,

Asiancars conveyed ownership of the

building on the leased premises to MBTC, by
way of "dacion en pago." Asiancars failed to
pay.

Eventually,
MBTC
extrajudicially
foreclosed the mortgage. A public
auction was held on February 4, 1981.
MBTC was the highest bidder for
P1,067,344.35. A certificate of sale was
issued and was registered with the
Register of Deeds.
Petitioners claim that Neri and Asiancars
did not tell them that the indebtedness
secured by the mortgage was for
P6,000,000 and that the security was the
whole of Lot 2700. Petitioners allege that
the deed presented to the Jayme
spouses
was
in
blank,
without
explanation on the stipulations contained
therein, except that its conditions were
identical to those of the stipulations when
they mortgaged half the lots area
previously with General Bank. Petitioners
also alleged that the Jayme spouses
were illiterate and only knew how to sign
their names. That because they did not
know how to read nor write, and had
given their full trust and confidence to

George Neri, the spouses were deceived

into signing the Deed of Real Estate
Mortgage. Their intention as well as
consent was only to be bound as
guarantors.
ISSUE: WON the dacion en pago by
Asiancars in favor of MBTC is valid and
binding despite the stipulation in the lease
contract that ownership of the building will
vest on the Jaymes at the termination of
the lease.
HELD: In the case at bar, when Asiancars
failed to pay its obligations with MBTC, the
properties given as security (one of them
being the land owned by the Jaymes)
became subject to foreclosure. When
several things are given to secure the
same debt in its entirety, all of them are
liable for the debt, and the creditor does
not have to divide his action by distributing
the debt among the various things pledged
or mortgaged. Even when only a part of the
debt remains unpaid, all the things are
liable for such balance.

The debtor cannot ask for the release of

one or some of the several properties
pledged or mortgaged (or any portion
thereof) or proportionate extinguishment of
the pledge or mortgage unless and until
the debt secured has been fully paid.
The alienation of the building by Asiancars
in favor of MBTC for the partial satisfaction
of its indebtedness is, in our view, also
valid. The ownership of the building had
been effectively in the name of the lesseemortgagor (Asiancars), though with the
provision
that
said
ownership
be
transferred to the Jaymes upon termination
of the lease or the voluntary surrender of
the premises. The lease was constituted
on January 8, 1973 and was to expire 20
years thereafter, or on January 8, 1993.
The alienation via dacion en pago was
made by Asiancars to MBTC on December
18, 1980, during the subsistence of the
lease. At this point, the mortgagor,
Asiancars, could validly exercise rights of
ownership, including the right to alienate it,
as it did to MBTC.

HECHANOVA vs ADIL
FACTS: Pio Servando sought to annul the
sale made by Jose Servando of three
parcels of land which according to him
were mortgaged in his favor. Alternatively,
if the sale is not annulled, to order the
defendant Jose Servando to pay the
amount of P20,000.00, plus interests, and
to order defendants to pay damages.
Attached to the complaint was a copy of
the private document evidencing the
alleged mortgage (Annex A), which is
quoted hereunder:

August 20, 1970

This is to certify that I, Jose Yusay Servando,
the sole owner of three parcel of land under
Tax Declaration No. 28905, 44123 and
31591 at Lot No. 1, 1863Portion of 1863 & 1860 situated at Sto. Nino
St., Arevalo, Compania St. &

Compania St., Interior Molo, respectively,

have this date mortgaged the said
property to my cousin Pio Servando, in
the amount of
TWENTY
THOUSAND
PESOS
(P20,000.00), redeemable for a period
not exceeding ten (10) years, the
mortgage amount bearing an interest of
10% per annum.
I further certify that in case I fail to
redeem the said properties within the
period stated above, my cousin Pio
Servando, shall become the sole owner
thereof.
ISSUE: WON the sale can be annulled
by reason that a mortgages has been
constituted on the subject properties. NO
HELD: Plaintiff has no standing to
question the validity of the deed of sale
executed by the deceased defendant
Jose Servando in favor of his codefendants Hechanova and Masa. No
valid mortgage has been constituted

plaintiff's favor, the

alleged deed of
mortgage being a mere private document
and not registered; moreover, it contains a
stipulation (pacto comisorio) which is null
and void under Article 2088 of the Civil
Code. Even assuming that the property
was validly mortgaged to the plaintiff, his
recourse was to foreclose the mortgage,
not to seek annulment of the sale.

MANILA BANKING vs TEODORO

FACTS: On April 25, 1966, Anastacio Jr. &
Grace Anna, together with Anastacio
Teodoro, Sr., jointly and severally, executed
in favor of Manila Banking Copr. (MB) a
Promissory Note (No. 11487) for the sum
of P10,420.00 payable in 120 days, or on
August 25, 1966, at 12% interest per
annum. Teodoros failed to pay the said
amount inspire of repeated demands and
the obligation as of September 30, 1969
stood at P 15,137.11 including accrued
interest and service charge.

On May 3, 1966 and June 20, 1966,

Anastacio Sr. (Father) and Anastacio, Jr.
(Son) executed in favor of MB two
Promissory Notes (Nos. 11515 and 11699)
for P8,000.00 an P1,000.00 respectively,
payable in 120 days at 12% interest per
annum. They made a partial payment on
the May 3, 1966 promissory Note but none
on the June 20, 1966 Promissory Note,
leaving still an unpaid balance of
P8,934.74 as of September 30, 1969
including accrued interest and service
charge.
The three Promissory Notes stipulated that
any interest due if not paid at the end of
every month shall be added to the total
amount then due, the whole amount to
bear interest at the rate of 12% per annum
until fully paid. It appears that on January
24, 1964, the Son executed in favor of
plaintiff a Deed of Assignment of
Receivables
from
the
Emergency
Employment Administration in the sum of
P44,635.00. The Deed of Assignment
provided that it was for and
in
consideration of certain credits, loans,
overdrafts
and
other
credit
accommodations extended to Teodoros as
security for the payment of said sum and
the interest thereon, and that they do
hereby remise, release and quitclaim all its
rights, title, and interest in and to the
accounts receivables.
In their stipulations of Fact, it is admitted by
the parties that MB extended loans to
Teodoros on the basis and by reason of
certain contracts entered into by the
defunct
Emergency
Employment
Administration (EEA) with Teodoros for the
fabrication of fishing boats, and that the
Philippine
Fisheries
Commission

succeeded the EEA after its abolition; that

non-payment of the notes was due to the
failure of the Commission to pay Teodoros
after the latter had complied with their
contractual obligations.
For failure of Teodoros to pay the sums

due on the Promissory Note, this action

was instituted on November 13, 1969,
originally against the Father, Son, and
the latter's wife. The Father died. The
action, then is against Son and his wife
for the collection of the sum of P
15,037.11 on Promissory Note No.
14487; and against Son for the recovery
of P 8,394.7.4 on Promissory Notes Nos.
11515 and 11699, plus interest on both
amounts at 12% per annum from
September 30, 1969 until fully paid, and
10% of the amounts due as attorney's
fees.
ISSUE 1: WON the assignment of
receivables has the effect of payment of
all the loans contracted by appellants
from appellee bank. NO
HELD 1: Assignment of credit is an
agreement by virtue of which the owner
of a credit, known as the assignor, by a
legal cause, such as sale, dation in
payment, exchange or donation, and
without the need of the consent of the

debtor, transfers his credit and

accessory rights to another, known as
assignee, who acquires the power
enforce it to the same extent as
assignor could have enforced it against
debtor. ...

its
the
to
the
the

It may be in the form of a sale, but at times

it may constitute a dation in payment, such
as when a debtor, in order to obtain a
release from his debt, assigns to his
creditor a credit he has against a third
person, or it may constitute a donation as
when it is by gratuitous title; or it may even
be merely by way of guaranty, as when the
creditor gives as a collateral, to secure his
own debt in favor of the assignee, without
transmitting ownership. The character that
it may assume determines its requisites
and effects. Its regulation, and the capacity
of the parties to execute it; and in every
case, the obligations between assignor and
assignee will depend upon the judicial
relation which is the basis of the
assignment.

It is evident that the assignment of

receivables executed by appellants on
January 24, 1964 did not transfer the
ownership of the receivables to appellee
bank and release appellants from their
loans with the bank incurred under
promissory notes Nos. 11487,11515 and
11699.
The Deed of Assignment provided that it
was for and in consideration of certain
credits, loans, overdrafts, and their credit
accommodations in the sum of P10,000.00
extended to appellants by appellee bank,
and as security for the payment of said
sum and the interest thereon; that
appellants as assignors, remise, release,
and quitclaim to assignee bank all their
rights, title and interest in and to the
accounts
receivable
assigned
(lst
paragraph). It was further stipulated that
the assignment will also stand as a
continuing guaranty for future loans of
appellants
to
appellee
bank
and
correspondingly the assignment shall also
extend to all the accounts receivable;
appellants shall also obtain in the future,
until the consideration on the loans
secured by appellants from appellee bank
shall have been fully paid by them (No. 9).
The position of Teodoros, however, is that
the deed of assignment is a quitclaim in
consideration of their indebtedness to
appellee bank, not mere guaranty, in view
of the provisions of the deed of
assignment.
The character of the transactions between
the parties is not, however, determined by
the language used in the document but by
their intention.

The characters of the transaction between

the parties is to be determined by their
intention, regardless of what language was
used or what the form of the transfer was. If
it was intended to secure the payment of
money, it must be construed as a pledge.
However, even though a transfer, if

regarded by itself, appellate to have

been absolute, its object and character
might still be qualified and explained by a
contemporaneous writing declaring it to
have been a deposit of the property as
collateral security. It has been Id that a
transfer of property by the debtor to a
creditor, even if sufficient on its farm to
make an absolute conveyance, should
be treated as a pledge if the debt
continues in existence and is not
discharged by the transfer, and that
accordingly, the use of the terms
ordinarily exporting conveyance, of
absolute ownership will not be given that
effect in such a transaction if they are
also commonly used in pledges and
mortgages and therefore do not
unqualifiedly indicate a transfer of
absolute ownership, in the absence of
clear and ambiguous language or other
circumstances excluding an intent to
pledge. (Lopez v. Court of Appeals, 114
SCRA 671 [1982]).
Definitely, the assignment of the
receivables did not result from a sale

transaction. It cannot be said to have been

constituted by virtue of a dation in payment
for appellants' loans with the bank
evidenced by promissory note Nos. 11487,
11515 and 11699 which are the subject of
the suit for collection in Civil Case No.
78178. At the time the deed of assignment
was executed, said loans were nonexistent yet. The deed of assignment was
executed on January 24, 1964 (Exh. "G"),
while promissory note No. 11487 is dated
April 25, 1966 (Exh. 'A), promissory note
11515, dated May 3, 1966 (Exh. 'B'),
promissory note 11699, on June 20, 1966
(Exh. "C"). At most, it was a dation in
payment for P10,000.00, the amount of
credit from appellee bank indicated in the
deed of assignment. At the time the
assignment was executed, there was no
obligation to be extinguished except the
amount of P10,000.00. Moreover, in order
that an obligation may be extinguished by
another which substitutes the same, it is
imperative that it be so declared in
unequivocal terms, or that the old and the

new obligations be on every point

incompatible with each other (Article 1292,
New Civil Code).
Obviously, the deed of assignment was
intended as collateral security for the bank
loans of appellants, as a continuing
guaranty for whatever sums would be
owing by defendants to plaintiff, as stated
in stipulation No. 9 of the deed.
In case of doubt as to whether a
transaction is a pledge or a dation in
payment, the presumption is in favor of
pledge, the latter being the lesser
transmission of rights and interests (Lopez
v. Court of Appeals, supra).
ISSUE 2: WON Manila Banking must first
exhaust all legal remedies against the
Philippine Fisheries Commission before it
can proceed against appellants for
collections of loan under the promissory
notes which are plaintiffs bases in the
action for collection in Civil Case No.
78178. NO.
HELD 2: The obligation of Teodoros under
the promissory notes not having been
released by the assignment of receivables,
appellants remain as the principal debtors
of MB rather than mere guarantors. The
deed of assignment merely guarantees
said obligations. That the guarantor cannot
be compelled to pay the creditor unless the
latter has exhausted all the property of the
debtor, and has resorted to all the legal
remedies against the debtor, under Article
2058 of the New Civil Code does not
therefore apply to them. It is of course of
the essence of a contract of pledge or
mortgage that when the principal obligation
becomes due, the things in which the

pledge or mortgage consists may be

alienated for the payment to the creditor
(Article 2087, New Civil Code). In the instant
case, Teodooros are both the principal
debtors and the pledgors or mortgagors.
Resort to one is, therefore, resort to the
other.

MB did try to collect on the pledged

receivables.
As
the
Emergency
Employment Agency (EEA) which issued
the receivables had been abolished, the
collection had to be coursed through the
Office
of
the
President
which
disapproved the same. The receivable
became virtually worthless leaving
Teodoros' loans from MB unsecured. It is
but proper that after their repeated
demands made on appellants for the
settlement of their obligations, appellee
bank should proceed against appellants.
It would be an exercise in futility to
proceed against a defunct office for the
collection of the receivables pledged.

ALCANTARA vs ALINEA et al
FACTS: Alcantara filed a complaint in
the Court of First Instance of La Laguna,
praying that judgment be rendered in his
behalf ordering the defendants to deliver
to him the house and lot claimed, and to

pay him in addition thereto as rent the sum

of 8 pesos per month from February of that
year, and to pay the costs of the action.
Alcantara alleged in effect that on the 29th
day of February, 1904, the defendants,
Ambrosio Alinea and Eudosia Belarmino,
borrowed from him the sum of 480 pesos,
payable in January of said year 1905 under
the agreement that if, at the expiration of
the said period, said amount should not be
paid it would be understood that the house
and lot, the house being constructed of
strong materials, owned by the said
defendants and located in the town of San
Pablo on the street of the same name,
Province of La Laguna, be considered as
absolutely sold to the plaintiff for the said
sum; that the superficial extent and
boundaries of said property are described
in the complaint; and that, notwithstanding
that the time for the payment of said sum
has expired and no payment has been
made, the defendants refuse to deliver to
plaintiff the said property, openly violating

that which they contracted to do and

depriving him to his loss of the rents which
plaintiff should receive, the same counting
from February, 1905.
After having taken the evidence of both
parties and attaching the documents
presented in evidence to the record, the
judge on November 27, 1905, rendered a
judgment ordering the defendants to
deliver to the plaintiff the house and lot, the
object of this litigation, and to pay the costs
of the action, not making any finding upon
the question of loss or damages by reason
of the absence of proof on these points.
The defendants duly took exception to this
decision, and asked for a new trial of the
case on the ground that the findings of the
court below in its decision were plainly
contrary to law, which motion
was
overruled and from which ruling defendants
also excepted.
ISSUE: WON the two contracts entered
into between the parties are void? NO
HELD: The fact that the parties have
agreed at the same time, in such a manner
that the fulfilment of the promise of sale
would depend upon the non-payment or
return of the amount loaned, has not
produced any charge in the nature and
legal conditions of either contract, or any
essential defect which would tend to nullify
the same.
If the promise of sale is not vitiated
because, according to the agreement
between the parties thereto, the price of
the same is to be the amount loaned and
not repaid, neither would the loan be null or
illegal, for the reason that the added
agreement provides that in the event of

failure of payment the sale of property as

agreed will take effect, the consideration
being the amount loaned and not paid.
The property, the sale of which was agreed to
by the debtors, does not appear mortgaged
in favor of the creditor, because

in order to constitute a valid mortgage it

is indispensable that the instrument be
registered in the Register of Property, in
accordance with article 1875 of the Civil
Code. In the case at bar, the transaction
does not constitute a mortgage, nor
could it possibly be a mortgage, for the
reason of said document is not vested
with the character and conditions of a
public instrument. Also, the said property
could not be pledged, not being personal
property, and notwithstanding the said
double contract the debtor continued in
possession thereof and the said property
has never been occupied by the creditor.
Neither was there ever any contract of
antichresis by reason of the said contract
of loan, inasmuch as the creditor plaintiff
has never been in possession thereof,
nor has he enjoyed the said property, nor
for one moment ever received its rents;
therefore, there are no proper terms in
law, taking into consideration the terms
of the conditions contained in the

aforesaid contract, whereby this court can

find that the contract was null, and under
no consideration whatever would it be just
to apply to the plaintiff articles 1859 and
1884 of the same code.
The contract (pactum commissorium),
indicates the existence of the contracts of
mortgage or of pledge or that
of
antichresis, none of which have coincided
in the loan indicated herein.
It is a principle in law, that the will of the
contracting parties is the law of contracts. It
was agreed between plaintiff and
defendants herein that if defendants should
not pay the loan of 480 pesos in
January1905, the property belonging to the
defendants and described in the contract
should remain sold for the aforesaid sum.
The document of contract has been
recognized by the defendant Alinea and by
the witnesses who signed same with him,
being therefore an authentic and
efficacious document, in accordance with

article 1225 of the Civil Code; and as the

amount loaned has not been paid and
continues in possession of the debtor, it is
only just that the promise of sale be carried
into effect, and the necessary instrument
be executed by the vendees.
Therefore, by virtue of the reasons given
above and accepting the findings given in
the judgment appealed from, we affirm the
said judgment herein, with the costs
against the appellants.
After expiration of twenty days from the
date of the notification of this decision let
judgment be entered in accordance
herewith and ten days thereafter let the
case be remanded to the court from
whence it came for proper action.

UY TONG VS. CA
G.R. No. 77465, May 21, 1988
FACTS: Uy Tong (also known as Henry
Uy) and Kho Po Giok (Spouses Uy) used
to be the owners of Apartment No. 307 of
the Ligaya Building, together with the
leasehold right for 99 years over the land
on which the building stands. The land is
registered in the name of Ligaya
Investments, Inc. It appears that Ligaya
Investments, Inc. owned the building which
houses the apartment units but sold
Apartment No. 307 and leased a portion of
the land in which the building stands to the
Spouses.
1969, the Spouses purchased from
Bayanihan Automotive, Inc. (Bayanihan) 7
units of motor vehicles for a total amount of
P47,700.00 payable in 3 installments. After
making a down payment of P7,700.00, the

Spouses failed to pay the balance of

P40,000.00. Due to these unpaid balances,
Bayanihan filed an action for specific
performance against the Spouses.
The trial court rendered a judgment in favor
of Bayanihan, ordering the Spouses, jointly

and severally, to pay them the sum of

P40,000.00, with interest at the legal rate
from July 1, 1970 until full payment. In
the event of their failure to do so within
30 days from notice of this judgment,
they are ordered to execute the
corresponding deed of absolute sale in
favor of the plaintiff and/or the
assignment of leasehold rights over the
defendant's apartment located at 307
Ligaya Building,
Pursuant to said judgment, an order for
execution pending appeal was issued by
the trial court and a deed of assignment
dated May 27, 1972, was executed by
the Spouses over Apartment of the
Ligaya Building together with the
leasehold right over the land on which
the building stands.
Notwithstanding the execution of the
deed of assignment, the Spouses
remained in possession of the premises.
This prompted BAYANHAN to file an
ejectment case against the spouses.

Spouses contend that the deed of

assignment is null and void because it is in
the nature of a pactum commissorium
and/or was borne out of the same.
ISSUE: WON the deed of assignment is
void because it is in the nature of pactum
commissorium? NO
HELD: The prohibition on pactum
commissorium stipulations is provided for
by Article 2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate
the things given by way of pledge or
mortgage, or dispose of the same. Any
stipulation to the contrary is null and void.
The aforequoted provision furnishes the
two elements for pactum commissorium to
exist:
(1) that there should be a pledge or
mortgage wherein a property is
pledged or mortgaged by way of
security for the payment of the
principal obligation; and

(2) that there should be a stipulation for

an automatic appropriation by the
creditor of the thing pledged or
mortgaged in the event of nonpayment of the principal obligation
within the stipulated period.
A perusal of the terms of the questioned
agreement evinces no basis for the
application of the pactum commissorium
provision. First, there is no indication of
any contract of mortgage entered into by
the parties. It is a fact that the parties
agreed on the sale and purchase of trucks.
Second, there is no case of automatic
appropriation of the property by Bayanihan.
When the Spouses defaulted in their
payments of the second and third
installments of the trucks they purchased,
Bayanihan filed an action in court for
specific performance. The trial court
rendered
favorable
judgment
for
Bayanihan and ordered the Spouses to
pay the balance of their obligation and in
case of failure to do so, to execute a deed
of assignment over the property involved in
this case. The Spouses elected to execute
the deed of assignment pursuant to said
judgment.
Clearly, there was no automatic vesting of
title on Bayanihan because it took the
intervention of the trial court to exact
fulfillment of the obligation, which, by its
very nature is "anathema to the concept of
pacto commissorio." And even granting
that the original agreement between the
parties had the badges of pactum
commissorium, the deed of assignment
does not suffer the same fate as this was
executed pursuant to a valid judgment in
Civil Case No. 80420 as can be gleaned
from its very terms and conditions. This

being the case, there is no reason to impugn

the validity of the said deed of assignment.

SPOUSES ONG VS. ROBAN

LENDING
557 SCRA 516 ; G.R. No. 172592, July 9,
2008
FACTS: Throughout 1999 and 2000,
spouses Ong borrowed through mutiple
loans a total of 4m from Roban Lending.
These loans were covered by a real
estate mortgage (REM) over the
spouses parcels of land in Tarlac.
In 2001, both parties consolidated their
loans, which now totaled 5.9m. They
then executed two documents: a Dacion
in Payment agreement, where the sps
assigned the properties covered by the
REM to Roban Lending; and a
Memorandun of Agreement, which stated
that if the sps fail to pay the restructured
loan, then Roban can validly enforce the
Dacion en Pago.
In 2002, the sps moved to declare the
dacion en pago agreement and

memorandum of agreement executed in

2001 were void for being pactum
commissorium.
Roban Lending claimed that dacion en
pago is recognized under Art 1245, as a
special form of payment whereby the
debtor-Plaintiffs alienates their property to
the creditor-Defendant in satisfaction of
their monetary obligation.
ISSUE: WON the memorandum of
agreement and dacion en pago agreement
amounted to pactum commissorium and
thus void? YES
HELD: Both documents in effect
automatically allow Roban
Lending to acquire ownership of the
properties should the sps fail to pay.
The SC found that both documents worked
as a way to circumvent the prohibition
found in Article 2088:
The creditor cannot appropriate the things
given by way of pledge or mortgage, or

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

130

dispose of them. Any stipulation to the

contrary is null and void."

P5,916,117.50 which they were to pay within

one year.

The elements of pactum commissorium,

which enables the mortgagee to acquire
ownership of the mortgaged property
without the need of any foreclosure
proceedings, are:
(1) there should be a property
mortgaged by way of security for the
payment of the principal obligation,
and
(2) there should be a stipulation for
automatic appropriation by the
creditor of the thing mortgaged in
case of nonpayment of the principal
obligation within the stipulated
period.

That the questioned contracts were freely

and voluntarily executed by petitioners and

In the case at bar, the Memorandum of

Agreement and the Dacion in Payment
contain no provisions for foreclosure
proceedings nor redemption. Under the
Memorandum of Agreement, the failure by
the petitioners to pay their debt within the
one-year period gives respondent the right
to enforce the Dacion in Payment
transferring to it ownership of the
properties covered by the REM.
Why there is no dacion in this case: the
dacion did not extinguish the sps
obligation
In a true dacion en pago, the assignment
of the property extinguishes the monetary
debt. In the case at bar, the alienation of
the properties was by way of security, and
not by way of satisfying the debt. The
Dacion in Payment did not extinguish
petitioners obligation to respondent. On
the contrary, under the Memorandum of
Agreement executed on the same day as
the Dacion in Payment, petitioners had to
execute
a
promissory
note
for

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

respondent is of no moment, pactum

commissorium being void for being
prohibited by law.
Side issue on interest rate:
The monthly interest rate of 3.5% per
month
(42%
annum)

found
unconscionable and reduced to 12%
Penalty interest of 5% per month (60%
annum) found iniquitous and reduced
to 12% per annum from date of demand.

MCMICKING VS. MARTINEZ

15 Phil. 204, G.R. No. L-5219, February
15, 1910
FACTS: Sometime during the year 1908,
Pedro Martinez, defendant, obtained
judgment in the CFI of the city of Manila
against
one
Maria
Aniversario.
Thereafter execution was issued upon
said judgment and the sheriff levied upon
a pailebot (pilots boat) alleged to be the
property of said Maria Aniversario.

130

Defendant Go Juna intervened and

claimed a lien upon said boat by virtue of
a pledge of the same to
him by the said Maria Aniversario made on
th
the 27 day of February, 1907, which said
pledge was evidenced by a public
instrument bearing that date.
This action was brought by the sheriff
against Go Juna and Pedro Martinez to
determine the rights of the parties to the
funds in his hands. Maria Aniversario was
not made a party. Pedro Martinez alleged
as a defense that the pledge which said
document was intended to constitute had
not been made effective by delivery of the
property pledged, as required by article
1863 of the Civil Code, and that, therefore,
there existed no preference in favor of said
Go Juna.
The court declared a preference in favor of
Pedro Martinez, and ordered the sheriff to
pay over the said funds in consonance
therewith. An appeal was taken from said

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

judgment.
ISSUE: WON there was a pledge. NO.
HELD: The court concluded that the
property was not delivered in accordance
with the provisions of article 1863 of the
Civil Code. The pledge was ineffective
against Martinez. It appears, however, that
the document of pledge is a public
document which contains an admission of
indebtedness. In other words, while it is
intended to be a pledge, it is also a credit
which appears in a public document.
Article 1924, paragraph 3, letter a, is
therefore applicable; and, said public
document antedating the judgment of
defendant Martinez, takes preference
thereover.
The validity of that document in so far as it
shows an indebtedness against Maria
Aniversario and its effectiveness against
her have not, however, been determined.
She is not a party to this action. No
judgment can be rendered affecting her
rights or liabilities under said instrument. If
said instrument is invalid or for any other
cause unenforceable against her, it would
be wholly unjust, by declaring its
preference over a debt acknowledged by
and conclusive against her, to require that
said funds be paid over to the holder of
said document. That would be to require
her to pay a debt which has not only been
shown to be enforceable against her but
which, as a witness for the defendant
Martinez on the trial of this cause, she
expressly and vehemently repudiated as a
valid claim against her.

131

Where a pledge in the form of a public

instrument, duly executed as such, contains
an admission of the indebtedness in a
specified amount to secure which debt said
pledge was made, and said pledge is void for
failure to deliver to the creditor, or to a third
person agreed upon, the property pledged,
said
indebtedness
is,

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

nevertheless, one appearing in a public

instrument under article 1924 of the Civil
Code, and such debt takes preference
over a judgment secured against the
pledgor subsequent to the date of said
public instrument.
The judgment is, therefore, reversed;
and it is ordered that the cause be
returned to the court below; that the
plaintiff bring in Maria Aniversario as a
party to this action, and that she be given
an opportunity to make her defense, if
she has any, to the document in question
under proper procedure.
POLICY: A pledge (not a chattel
mortgage) of personal property to secure
an indebtedness is without force or effect
unless the property pledged is delivered
to the pledgee or to some third person
agreed upon.

132

CALTEX vs PNB (1992)

FACTS: PNB issued 280 certificates of
time deposit (CTDs) in favor of Angel dela
Cruz who deposited with PNB the
aggregate amount of P1,120,000.00.
Angel delivered the CTD to Caltex in
connection with his purchased of fuel
products. Thereafter, Angel informed PNB
that she lost all the CTD. Ultimately 280
replacement CTDs were issued in favor of
Angel.
Angel negotiated and obtained a loan from
PNB amounting toP875,000.00. Angel
executed a notarized Deed of Assignment
of TD, surrendering to PNB "full control of
the indicated time deposits from and after
date" of the assignment and further
authorizes said bank to pre-terminate, setoff and "apply the said time deposits to the
payment of whatever amount or amounts
may be due" on the loan upon its maturity.
Credit Manager Caltex went to PNB and
presented for verification the CTDs

declared lost by Angel alleging that the

same were delivered to Caltex "as
security for purchases made with Caltex
Philippines, Inc." by said Angel.
When the loan of Angel with PNB matured
and fell due PNB set-off and applied the
time deposits in question to the payment of
the matured loan
ISSUE: Whether CALTEX can rightfully
recover on the CTDs. NO
HELD: Although the CTDs are bearer
instruments, a valid negotiation thereof for
the true purpose and agreement between it
and De la Cruz, as ultimately ascertained,
requires both delivery and indorsement.
However, the CTDs were delivered to
Caltex not as payment but as a security for
payment.
If it were true that the CTDs were delivered
as payment and not as
security,
petitioner's credit manager could have
easily said so, instead of using the words
"to guarantee" in the letter aforequoted.
Had Caltex produced the receipt prayed for
by PNB, it could have proved, if such truly
was the fact, that the CTDs were delivered
as payment and not as security.
The character of the transaction between
the parties is to be determined by their
intention, regardless of what language was
used or what the form of the transfer was.
If it was intended to secure the payment of
money, it must be construed as a pledge;
but if there was some other intention, it is
not a pledge. However, even though a
transfer, if regarded by itself, appears to
have been absolute, its object and
character might still be qualified and
explained by contemporaneous writing

declaring it to have been a deposit of the

property as collateral security. It has been
said that a transfer of property by the debtor
to a creditor, even if sufficient on its face to
make an absolute conveyance, should be
treated as a pledge if the debt

continues in inexistence and is not

discharged by the transfer, and that
accordingly the use of the terms
ordinarily importing conveyance of
absolute ownership will not be given that
effect in such a transaction if they are
also commonly used in pledges and
mortgages and therefore do not
unqualifiedly indicate a transfer of
absolute ownership, in the absence of
clear and unambiguous language or
other circumstances excluding an intent
to pledge.
Petitioner's insistence that the CTDs
were negotiated to it begs the question.
Under the Negotiable Instruments Law,
an instrument is negotiated when it is
transferred from one person to another in
such a manner as to constitute the
transferee the holder thereof, and a
holder may be the payee or indorsee of a
bill or note, who is in possession of it, or
the bearer thereof. In the present case,
however, there was no negotiation in the

sense of a transfer of the legal title to the

CTDs in favor of petitioner in which
situation, for obvious reasons, mere
delivery of the bearer CTDs would have
sufficed. Here, the delivery thereof only as
security for the purchases of Angel de la
Cruz (and we even disregard the fact that
the amount involved was not disclosed)
could at the most constitute petitioner only
as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose
cannot be effected by mere delivery of the
instrument since, necessarily, the terms
thereof and the subsequent disposition of
such security, in the event of non-payment
of the principal obligation, must be
contractually provided for.
Where the holder has a lien on the
instrument arising from contract, he is
deemed a holder for value to the extent of
his lien. As such holder of collateral
security, he would be a pledgee but the
requirements therefor and the effects
thereof, not being provided for by the
Negotiable Instruments Law, shall be

governed by the Civil Code provisions on

pledge of incorporeal rights, which
inceptively provide:
Art. 2095. Incorporeal rights, evidenced by
negotiable instruments, . . . may also be
pledged. The instrument proving the right
pledged shall be delivered to the creditor,
and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect
against third persons if a description of the
thing pledged and the date of the pledge
do not appear in a public instrument.
Aside from the fact that the CTDs were
only delivered but not indorsed, the factual
findings of respondent court quoted at the
start of this opinion show that petitioner
failed to produce any document evidencing
any contract of pledge or guarantee
agreement between it and Angel de la
Cruz. Consequently, the mere delivery of
the CTDs did not legally vest in petitioner
any right effective against and binding
upon respondent bank. The requirement
under Article 2096 aforementioned is not a
mere rule of adjective law prescribing the
mode whereby proof may be made of the
date of a pledge contract, but a rule of
substantive law prescribing a condition
without which the execution of a pledge
contract cannot affect third persons
adversely.

ESTATE OF LITTON V MENDOZA AND

CA | 1998
FACTS: In 1963, CMB Products, with
Mendoza as president, offered to sell
textile cotton materials to the Bernal
spouses,
who
were
engaged
in
manufacture of embroidery, garments and

cotton materials. For this purpose, Mendoza

introduced the spouses to Alfonso Tan.
The spouses purchased on credit from Tan
cotton materials amounting to 80,000.

Mendoza guaranteed the payment of

the debt.
Tan then delivered the cotton materials
to the spouses. In view of the
arrangement, CBM Products (thru
Mendoza) asked for and received a postdated check for the payment of the
spouses debt.
It was understood that Mendoza will
retain the check until the cotton materials
are finally manufactured into garments,
after which Mendoza will sell the finished
products for the spouses. Meanwhile, the
check matured without having been
cashed so Mendoza demanded for
another check without a date.
Feb. 28, 1964, Mendoza issued two
checks in favour of Tan. He told the
spouses of the same and told them they
are indebted to him and asked the
spouses to sign an instrument whereby
Mendoza assigned the said amount to
Insular Products, Inc..

Tan had the two checks discounted but

were later returned with words stop
payment. It appears it was ordered by
Mendoza for failure of the spouses to
deposit sufficient funds for the check
issued by the spouses in his favour.
Tan sued Mendoza while the spouses
brought an action for interpleader for not
knowing whom to pay. Pendente lite, Tan
assigned in favour of Littion, Sr his
litigatious credit (in action of spouses)
against Mendoza, duly submitted to the
court, with notice to the parties.
TC ordered Mendoza to pay Tan 76k,
which was affirmed by the CA.
Mendoza entered into Compromise
Agreement with Tan wherein the latter
recognized that his claims against
Mendoza had been settled and because of
that, both waives any claim against the
other; with a provision that it no way affects

Tans right to go against the spouses.

Mendoza filed MFR saying that there was
the compromise agreement
which
absolved him from liability.
Tan opposed this saying the Compromise
agreement was null and void because of
the deed of assignment executed in favour
of Litton, Sr.; he says that with such, he
has no more right to alienate said credit;
The compromise agreement was
approved:
a. It said that the assignment was by
way of securing only his obligation
to Litton, Sr.;
b. Thus, Tan retained possession and
dominion over the credit (2085);
c. Although considered as a litigatious
credit, such may be validly alienated
by Tan; such alienation is subject to
the remedies of Litton under 6 of CC
whereby, the assignment if proven
prejudicial to Litton, may entitle
Littion to pursue his remedies
against Tan;
d. The alienation of a litigatious credit
is further subject to the debtors
right of redemption under 1634;
ISSUE: Can a plaintiff in a case, who had
previously assigned in favor of his creditor
his litigated credit in said case, by a deed
of assignment which was duly submitted to
the court, validly enter into a compromise
agreement
thereafter
releasing
the
defendant therein from his claim without
notice to his assignee? NO
HELD: The purpose of compromise is to
replace and terminate controverted claims.
Once approved, it has the force of res
judicata (except for vices of consent or
forgery). Petitioner seeks to set aside the
compromise agreement since prior thereto,
Tan executed a deed of assignment in

favour of Littion, Sr. involving the same

litigated credit.
Fact that assignment was done by way

of

securing Tans obligation in favour of

Littion, Sr. does not affect the resolution
of the matter. Also, the validity of
pledge/guaranty in favour of Liiton has
not been questioned.
Deed
of
assignment
fulfils
the
requirements of a valid pledge or
mortgage.
Although it is true that Tan may validly
alienate the litigatious credit as ruled by
the appellate court, citing Article 1634 of
the Civil Code, said provision should not
be taken to mean as a grant of an
absolute right on the part of the assignor
Tan to indiscriminately dispose of the
thing or the right given as security. The
Court rules that the said provision should
be read in consonance with Article 2097
of the same code. Although the pledgee
or the assignee, Litton, Sr. did not

ipso facto become the creditor of private

respondent Mendoza, the pledge being
valid, the incorporeal right assigned by Tan
in favor of the former can only be alienated
by the latter with due notice to and consent
of Litton, Sr. or his duly authorized
representative. To allow the assignor to
dispose of or alienate the security without
notice and consent of the assignee will
render nugatory the very purpose of a
pledge or an assignment of credit.
Moreover, under Article 1634, the debtor
has a corresponding obligation
to
reimburse the assignee, Litton, Sr. for the
price he paid or for the value given as
consideration for the deed of assignment.
Failing in this, the alienation of the litigated
credit made by Tan in favor of private
respondent by way of a compromise
agreement does not bind the assignee,
petitioner herein.

DIOSDADO YULIONGSIU vs.

PHILIPPINE NATIONAL BANK
FACTS: Yuliongsiu was the owner of two
(2) vessels, namely: The M/S Surigao,
valued at P109,925.78 and the M/S Don
Dino, valued at P63,000.00, and operated
the FS-203, valued at P210,672.24, which
was purchased by him from the Philippine
Shipping Commission, by installment or on
account. As of January or February, 1943,
plaintiff had paid to the Philippine Shipping
Commission only the sum of P76,500 and
the balance of the purchase price was
payable at P50,000 a year, due on or
before the end of the current year.
Yuliongsiu obtained a loan of P50,000 from
PNB. To guarantee its payment, plaintiff
pledged the M/S Surigao, M/S Don Dino
and its equity in the FS-203, as evidenced
by the pledge contract , duly registered
with the office of the Collector of Customs
for the Port of Cebu. Yuliongsiu effected
partial payment of the loan in the sum of
P20,000. The remaining balance was
renewed by the execution of 2 promissory
notes in the bank's favor. These two notes
were never paid at all by Yuliongsiu on
their respective due dates.
PNB filed criminal charges against
Yuliongsiu and two other accused for
estafa thru falsification of commercial
documents, and they were convicted by
the trial court and sentenced to indemnify
PNB in the sum of P184,000. CA affirmed
conviction. The corresponding writ of
execution issued to implement the order for
indemnification was returned unsatisfied as
Yuliongsiu
was
totally
insolvent .Meanwhile, together with the
institution of the criminal action, PNB took
physical possession of three pledged

vessels while they were at the Port of Cebu,

and after the first note fell due and was not
paid, the Manager of PNB, acting as
attorney-in-fact of Yuliongsiu pursuant to the
terms of the pledge contract, executed a
document of sale, transferring

the two pledged vessels and Yuliongsiu's

equity in FS-203, to PNB for
P30,042.72.The
FS-203
was
subsequently surrendered by PNB to the
Philippine Shipping which rescinded the
sale to Yuliongsiu, for failure to pay the
remaining instalments on the purchase
price.
The other two boats were sold by PNB to
third parties. Yuliongsiu commenced
action in the CFI to recover the three
vessels or their value and damages from
PNB. The lower court rendered its
decision ruling: (a) that the bank's taking
of physical possession of the vessels
was justified by the pledge contract and
the law; (b) that the private sale of the
pledged vessels by PNB to itself without
notice to the plaintiff-pledgor as
stipulated in the pledge contract was
likewise valid; and (c) that the PNB
should pay the sums of P1,153.99 and
P8,000, as his remaining account
balance, or set-off these sums against

the indemnity which Yuliongsiu was

ordered to pay to it in the criminal cases.
ISSUE: W/N the contract was a chattel
mortgage so that PNB cannot take
possession of the chattels until after there
has been default. NO, PLEDGE
HELD: The parties stipulated as a fact that
Exhibit "A" & "1-Bank" is a pledge contract.
Necessarily, this judicial admission binds
Yuliongsiu. Without any showing that this
was made thru palpable mistake, no
amount of rationalization can offset it.
PNB as pledgee was therefore entitled to
the actual possession of the vessels. While
it is true that Yuliongsiu
continued
operating the vessels after the pledge
contract was entered into, his possession
was expressly made subject to the order
of the pledgee." The provision of Art. 2110
of the present Civil Code being new,
cannot apply to the pledge contract here
which was entered into on June 30, 1947.
On the other hand, there is an authority
supporting the proposition that the pledgee

can temporarily entrust the physical

possession of the chattels pledged to the
pledgor without invalidating the pledge. In
such a case, the pledgor is regarded as
holding the pledged property merely as
trustee for the pledgee.
Yuliongsiu also urge Us to rule that
constructive delivery is insufficient to make
pledge effective. The type of delivery will
depend upon the nature and the peculiar
circumstances of each case. The parties
here agreed that the vessels be delivered
by the "pledgor to the pledgor who shall
hold said property subject to the order of
the
pledgee."Considering
the
circumstances of this case and the nature
of the objects pledged, i.e., a vessel used
in maritime business, such delivery
is sufficient. Since PNB was, pursuant to
the terms of pledge contract, in full control
of the vessels thru Yuliongsiu, the
former could take actual possession at any
time during the life of the pledge to make
more effective its security. Its taking of the
vessels therefore was not unlawful. Nor
was it unjustified considering that
Yuliongsiu had just defrauded the PNB in
the huge sum of P184,000

LIM TAY vs. COURT OF APPEALS

FACTS:
On January 8, 1980,
Respondent-Appellee Sy Guiok and
Alfonso Sy Lim secured a loan from the
[p]etitioner in the amount of P40,000 each
payable within six (6) months. To secure
the payment of the aforesaid loan and
interest thereon, Respondent Guiok
executed a Contract of Pledge in favor of
the [p]etitioner whereby he pledged his
three hundred (300) shares of stock in the

Go Fay & Company Inc., Respondent

Corporation, for brevity's sake.
Under
said
"Contracts
of
Pledge,"
Respondent[s]
Guiok
and
Sy
Lim
covenanted, that:

3. In the event of the failure of the

PLEDGOR to pay the amount within
a period of six (6) months from the
date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge
upon the said shares of stock hereby
created by selling the same at public
or private sale
Respondent Guiok and Sy Lim endorsed
their respective shares of stock in blank
and delivered the same to the
[p]etitioner.
However, Respondent Guiok and Sy Lim
failed to pay their respective loans and
the accrued interests thereon to the
[p]etitioner. In October, 1990, the
[p]etitioner
filed
a
"Petition
for
Mandamus"
against
Respondent
Corporation, with the SEC e praying that
an order be issued directing the
corporate secretary of [R]espondent Go
Fay & Co., Inc. to register the stock
transfers and issue new certificates in
favor of Lim Tay.

The corporate secretary of Respondent

Corporation refused to record the transfer
of the shares of stock of Respondent Guiok
and Sy Lim in favor of and under the name
of the [p]etitioner and to issue new
certificates of stock to the [p]etitioner
stating that the pledge entered by the
parties did not automatically vest [i]n
complainant ownership of the pledged
shares.
ISSUE: Whether or not the pledgor in this
case became the owner of the pledged
share by virtue of the contract of pledge
entered by the parties. NO.
HELD: The contractual stipulation, which
was part of the Complaint, shows that
plaintiff was merely authorized to foreclose
the pledge upon maturity of the loans, not
to own them. Such foreclosure is not
automatic, for it must be done in a public or
private sale. Nowhere did the Complaint
mention that petitioner had in fact
foreclosed the pledge and purchased the

shares after such foreclosure. His status as

a mere pledgee does not, under civil law,
entitle him to ownership of the subject
shares. It is also noteworthy that
petitioner's Complaint did not aver that said
shares
were
acquired
through
extraordinary prescription, novation or
laches. Moreover, petitioner's claim,
subsequent to the filing of the Complaint,
that he acquired ownership of the said
shares through these three modes is not
indubitable and still has to be resolved. In
fact, as will be shown, such allegation-has
no merit. Manifestly, the Complaint by itself
did not contain any prima facie showing
that petitioner was the owner of the shares
of stocks. Quite the contrary, it
demonstrated that he was merely a
pledgee, not an owner.
Without Foreclosure and Purchase at
Auction, Pledgor Is Not the Owner of
Pledged Shares.
Petitioner initially argued that ownership of
the shares pledged had passed to him,
upon Respondents Sy Guiok and Sy Lim's
failure to pay their respective loans. But on
appeal, petitioner claimed that ownership
over the shares had passed to him, not via
the contracts of pledge, but by virtue of
prescription
and
by
respondents'
subsequent acts which amounted to a
novation of the contracts of pledge. We do
not agree.
At the outset, it must be underscored that
petitioner did not acquire ownership of the
shares by virtue of the contracts of pledge.
Article 2112 of the Civil Code states:
The creditor to whom the credit has
not been satisfied in due time, may
proceed before a Notary Public to
the sale of the thing pledged. This

sale shall be made at a public auction,

and with notification to the debtor and
the owner of the thing pledged in a
proper case, stating the amount for
which the public sale is to be held. If at
the first auction the

thing is not sold, a second one

with the same formalities shall be
held; and if at the second auction
there is no sale either, the creditor
may
appropriate
the
thing
pledged. In this case he shall be
obliged to give an acquittance for
his entire claim.
Furthermore, the contracts of pledge
contained a common proviso, which we
quote again for the sake of clarity:
3. In the event of the failure of the
PLEDGOR to pay the amount
within a period of six (6) months
from the date hereof, the
PLEDGEE is hereby authorized
to foreclose the pledge upon the
said shares of stock hereby
created by selling the same at
public or private sale with or
without notice to the PLEDGOR,
at which sale the PLEDGEE may
be the purchaser at his option;

and "the PLEDGEE is hereby

authorized and empowered at his
option to transfer the said shares of
stock on the books of the
corporation to his own name, and to
hold the certificate issued in lieu
thereof under the terms of this
pledge, and to sell the said shares
to issue to him and to apply the
proceeds of the sale to the payment
of the said sum and interest, in the
manner hereinabove provided;
There is no showing that petitioner made
any attempt to foreclose or sell the shares
through public or private auction, as
stipulated in the contracts of pledge and as
required by Article 2112 of the Civil Code.
Therefore, ownership of the shares could
not have passed to him. The pledgor
remains the owner during the pendency of
the pledge and prior to foreclosure and
sale, as explicitly provided by Article 2103
of the same Code:

Unless the thing pledged is

expropriated, the debtor continues
to be the owner thereof.

security for the payment of the

aforementioned sum and interest
thereon accruing.

Nevertheless, the creditor may bring

the actions which pertain to the
owner of the thing pledged in order
to recover it from, or defend it
against a third person.

This stipulation did not effect the transfer of

ownership to petitioner. It was merely in

No Novation in Favor of Petitioner.

Neither did petitioner acquire the shares by
virtue of a novation of the contract of
pledge. Novation is defined as "the
extinguishment of an obligation by a
subsequent one which terminates it, either
by changing its object or principal
conditions, by substituting a new debtor in
place of the old one, or by subrogating a
26
third person to the rights of the creditor."
Novation of a contract must not be
presumed. "In the absence of an express
agreement, novation takes place only
when the old and the new obligations are
incompatible on every point."
In the present case, novation cannot be
presumed by (a) respondents' indorsement
and delivery of the certificates of stock
covering the 600 shares, (b) petitioner's
receipt of dividends from 1980 to 1983,
and (c) the fact that respondents have not
instituted any action to recover the shares
since 1980.
Respondents' indorsement and delivery of
the certificates of stock were pursuant to
paragraph 2 of the contract of pledge
which reads:
2. The said certificates had been
delivered
by
the
PLEDGOR
endorsed in blank to be held by the
PLEDGEE under the pledge as

compliance with Article 2093 of the Civil

Code, which requires that the thing
pledged be placed in the possession of
the creditor or a third person of common
agreement; and Article 2095, which
states that if the thing pledged are
shares of stock, then the "instrument
proving the right pledged" must be
delivered to the creditor.
Moreover, the fact that respondents
allowed the petitioner to receive
dividends pertaining to the shares was
not meant to relinquish ownership
thereof. As stated by respondent
corporation, the same was done
pursuant to an agreement between the
petitioner and Respondents Sy Guiok
and Sy Lim, following Article 2102 of the
civil Code which provides:

It the pledge earns or produces

fruits,
income,
dividends,
or
interests,
the
creditor
shall
compensate what he receives with
those which are owing him; but if
none are owing him, or insofar as
the amount may exceed that which
is due, he shall apply it to the
principal. Unless there is
a
stipulation to the contrary, the
pledge shall extend to the interest
and the earnings of the right
pledged.
Novation cannot be inferred from the mere
fact that petitioner has not, since 1980,
instituted any action to recover the shares.
Such action is in fact premature, as the
loan is still outstanding. Besides, as
already pointed out, novation is never
presumed or inferred.

INSULAR LIFE vs. ROBERT YOUNG

FACTS: In December, 1987, respondent
Robert Young, together with his associates
and co-respondents, acquired by purchase
Home Bankers Savings and Trust Co., now
petitioner Insular Savings Bank ("the
Bank," for brevity), from the Licaros family
for P65,000,000.00.
On December, 1990, Benito Araneta, a
stockholder of the Bank, signified his
intention to purchase 99.82% of its
outstanding
capital
stock
for
P340,000,000.00, subject to the condition
that the ownership of all the shares will be
consolidated in Young's name. On
February 5, 1991, Araneta paid Young
P14,000,000.00
as
part
of
the
downpayment.
In order to carry out the intended sale to
Araneta, Young bought from Jorge Go and
his group their 45% equity in the Bank for
P153,000,000.00. In order to pay this
amount, Young obtained a short-term loan
of P170,000,000.00 from International
Corporate Bank ("Interbank") to finance the
purchase.
However, Araneta backed out from the
intended sale and demanded the return of
his downpayment.
Meanwhile, Young's loan from Interbank
became due, causing his serious financial
problem.
On August 27, 1991, Young and Insular
Life entered into a Credit Agreement.
Under its provisions, Insular Life extended
a loan to Young in the amount of
P200,000,000.00. To secure the loan,

Young, acting in his behalf and as attorneyin-fact of the other stockholders, executed on
the same day a Deed of Pledge over
1,324,864 shares which represented 99.82%
of the outstanding capital stock of the Bank.
The next day, he also executed a promissory
note in favor of

Insular Life in the same amount with an

interest rate of 26% per annum to
mature
120 days from execution. The Credit
Agreement further provides that Insular
Life shall have the prior right to purchase
the Schedule I Shares (owned by Young)
and the Schedule II Shares (owned by
the other stockholders of the Bank), as
well as the 250,000 shares which will be
issued after the additional capital of
P25,000,000.00 (payable from the
proceeds of the loan) shall have been
infused.

diligence audit on the Bank pursuant to the

MOA. The audit revealed several checkkiting operations which amounted to
P340,000,000.00, an anomaly in which
Young took responsibility.

On October 1, 1991, Insular Life and

Insular Life Pension Fund formally
informed Young of their intention to
acquire 30% and 12%, respectively, of
the Bank's outstanding shares, subject to
due diligence audit and proper
documentation.

On October 21, 1991, Young signed a

letter prepared by Atty. Jacinto Jimenez,
counsel of Insular Life, addressed to Mr.
Vicente R. Ayllon, Chairman of the Bank's
Board of Directors, stating that due to
business reverses, he shall not be able to
pay his obligations under the Credit
Agreement between him and Insular Life.
Consequently, Young "unconditionally and
irrevocably waive(s) the benefit of the
period" of the loan (up to December 26,
1991) and Insular "may consider (his)
obligations thereunder as defaulted." He
likewise interposes no objection to Insular
Life's exercise of its rights under the said
agreement.

On October 11, 1991, Insular Life,

through a team of auditors led by Mr.
Wilfrido Patawaran, conducted a due

Forthwith, Insular Life instructed its counsel

to foreclose the pledge constituted upon
the shares. The latter then sent Young a

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

notice informing him of the sale of the

shares in a public auction scheduled on
October 28, 1991, and in the event that the
shares are not sold, a second auction sale
shall be held the next day, October 29.
On October 28, 1991, only Insular Life
submitted a bid, hence, the shares were
not sold on that day. The next day, a
second auction was held. Again, Insular
Life was the sole bidder. Since the shares
were not sold at the two public auctions,
Insular Life appropriated to itself, not only
the original 1,324,864 shares, but also the
250,000 shares subsequently issued by
the Bank and delivered to Insular Life by
way of pledge. Thus, Insular Life gave
Young an acquittance of his entire claim.
Thereafter, title to the said shares was
consolidated in the name of Insular Life.
On November 12, 1991, the Bangko
Sentral ng Pilipinas' Supervision and
Examination Sector approved Insular Life's
request to maintain its present ownership
of 99.82% of the Bank.
On January 7, 1992, Young and his
associates filed a complaint against the
Bank, Insular Life and its counsel, Atty.
Jacinto Jimenez, petitioners, for annulment
of notarial sale. The complaint alleges, that
the notarial sale conducted by petitioner
Atty. Jacinto Jimenez is void as it does not
comply with the requirement of notice of
the second auction sale.
ISSUE: W/N the foreclosure of the pledge
is void. NO
HELD: It is as error to declare that the
auction sale is void since petitioners failed
to send a separate notice for the second
auction.

140

Article 2112 of the Civil Code provides: "The

creditor to whom the credit has not been
satisfied in due time, may proceed before a
Notary Public for the sale of the thing
pledged. The sale shall be made at a

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

140

public auction, and with notification to the

debtor and the owner of the thing
pledged in a proper case, stating the
amount for which the public sale is to be
held. If at the first auction the thing is not
sold, a second one with the same
formalities shall be held; and if at the
second auction there is no sale either,
the creditor may appropriate the thing
pledged. In this case he shall be obliged
to give an acquittance for his entire
claim."

of the public auction scheduled on October

28, 1991, and a second auction on the next
day, October 29, in the event that the
shares are not sold on the first auction, the
purpose of the law was achieved. We thus
reject respondents' argument that the term
"second one" refers to a separate notice
which requires the same formalities as the
first notice.

Clearly, there is no prohibition contained

in the law against the sending of one
notice for the first and second public
auction as was done here by petitioner
Insular Life. The purpose of the law in
requiring notice is to sufficiently apprise
the debtor and the pledgor that the thing
pledged to secure payment of the loan
will be sold in a public auction and the
proceeds thereof shall be applied to
satisfy the debt. When petitioner Insular
Life sent a notice to Young informing him

FACTS: In 1953, Manila Surety & Fidelity

Co., upon request of Rodolfo Velayo,
executed a bond for P2,800.00 for the
dissolution of a writ of attachment obtained
by one Jovita Granados in a suit against
Rodolfo Velayo in the Court of First
Instance of Manila. Velayo undertook to
pay the surety company an annual
premium of P112.00; to indemnify the
Company for any damage and loss of
whatsoever kind and nature that it shall or
may suffer, as well as reimburse the same
for all money it should pay or become

MANILA SURETY vs. VELAYO

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

liable to pay under the bond including costs

and attorneys' fees.
As "collateral security and by way of
pledge" Velayo also delivered four pieces
of jewelry to the Surety Company "for the
latter's further protection", with power to
sell the same in case the surety paid or
become obligated to pay any amount of
money in connection with said bond,
applying the proceeds to the payment of
any amounts it paid or will be liable to pay,
and turning the balance, if any, to the
persons entitled thereto, after deducting
legal expenses and costs.
Judgment having been rendered in favor of
Jovita Granados and against Rodolfo
Velayo, and execution having been
returned unsatisfied, the surety company
was forced to pay P2,800.00 that it later
sought to recoup from Velayo; and upon
the latter's failure to do so, the surety
caused the pledged jewelry to be sold,
realizing therefrom a net product of
P235.00 only. Thereafter and upon
Velayo's failure to pay the balance, the
surety company brought suit in Court.
Velayo countered with a claim that the sale
of the pledged jewelry extinguished any
further liability on his part under Article
2115 of the 1950 Civil Code, which recites:
Art. 2115. The sale of the thing pledged
shall
extinguish
the
principal obligation, whether or not
the proceeds of the sale are equal
to the amount of the principal
obligation, interest and expenses in
a proper case. If the price of the
sale is more than said amount, the
debtor shall not be entitled to the
excess, unless it is otherwise
agreed. If the price of the sale is

141

less, neither shall the creditor be

entitled to recover the deficiency,
notwithstanding any stipulation to the
contrary.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

ISSUE: Whether or not the sale of the

pledged jewelry extinguished Velayos
liability
HELD: The core of the appealed
decision is the following portion thereof:
It is thus crystal clear that the
main agreement between the
parties
is
the
Indemnity
Agreement and if the pieces of
jewelry
mentioned
by
the
defendant were delivered to the
plaintiff, it was merely as an
added protection to the latter.
There was no understanding that,
should the same be sold at public
auction and the value thereof
should
be
short
of
the
undertaking, the defendant would
have no further liability to the
plaintiff. On the contrary, the last
portion of the said agreement
specifies that in case the said
collateral should diminish in value,
the
plaintiff
may
demand
additional
securities.
This
stipulation is incompatible with the

142

idea of pledge as a principal

agreement. In this case, the status
of the pledge is nothing more nor
less than that of a mortgage given
as a collateral for the principal
obligation in which the creditor is
entitled to a deficiency judgment for
the balance should the collateral not
command the price equal to the
undertaking.
It appearing that the collateral given
by the defendant in favor of the
plaintiff to secure this obligation has
already been sold for only the
amount of P235.00, the liability of
the defendant should be limited to
the difference between the amounts
of P2,800.00 and P235.00 or
P2,565.00.
The above quoted reasoning of the
appealed decision is unsound. The
accessory character is of the essence of
pledge and mortgage. As stated in Article
2085 of the 1950 Civil Code, an essential

requisite of these contracts is that they be

constituted to secure the fulfillment of a
principal obligation, which in the present
case is Velayo's undertaking to indemnify
the surety company for any disbursements
made on account of its attachment
counterbond. Hence, the fact that the
pledge is not the principal agreement is of
no significance nor is it an obstacle to the
application of Article 2115 of the Civil
Code.
The reviewed decision further assumes
that the extinctive effect of the sale of the
pledged chattels must be derived from
stipulation. This is incorrect, because
Article 2115, in its last portion, clearly
establishes that the extinction of the
principal
obligation
supervenes
by
operation of imperative law that the parties
cannot override:
If the price of the sale is less,
neither shall the creditor be entitled
to
recover
the
deficiency
notwithstanding any stipulation to
the contrary.
The provision is clear and unmistakable,
and its effect cannot be evaded. By
electing to sell the articles pledged, instead
of suing on the principal obligation, the
creditor has waived any other remedy, and
must abide by the results of the sale. No
deficiency is recoverable.

DEVELOPMENT BANK OF THE

PHILIPPINES VS. COURT OF
APPEALS, CELEBRADA MANGUBAT
AND ABNER MANGUBAT
(G.R. No. 110053, October 16, 1995)
FACTS: On April 27, 1965, Pacifico Chica
mortgaged the land to DBP to secure a

loan of P6,000.00. However, he defaulted in

the payment of the loan, hence DBP caused
the extrajudicial foreclosure of the mortgage.
In the auction sale held on September 9,
1970, DBP acquired the property as the
highest bidder and was

issued a certificate of sale on September

17, 1970 by the sheriff. The certificate of
sale was entered in the Book of
Unregistered Property on September 23,
1970. Pacifico Chica failed to redeem the
property, and DBP consolidated its
ownership over the same.
On October 14, 1980, respondent
spouses offered to buy the property for
P18,599.99. DBP made a counter-offer
of P25,500.00 which was accepted by
respondent spouses. The parties further
agreed that payment was to be made
within six months thereafter for it to be
considered as cash payment. On July
20, 1981, the deed of absolute sale,
which is now being assailed herein, was
executed by DBP in favor of respondent
spouses. Said document contained a
waiver of the seller's warranty against
eviction.
Thereafter, respondent spouses applied
for an industrial tree planting loan with
DBP. The latter required the former to

submit a certification from the Bureau of

Forest Development that the land is
alienable and disposable. However, on
October 29, 1981, said office issued a
certificate attesting to the fact that the said
property was classified as timberland,
hence not subject to disposition. The loan
application of respondent spouses was
nevertheless eventually approved by DBP
in the sum of P140,000.00, despite the
aforesaid certification of the
bureau, on the understanding of the parties
that DBP woul work for the release of the
land by the former Ministry of Natural
Resources.
To secure payment of the loan, respondent
spouses executed a real estate mortgage
over the land on March 17, 1982, which
document was registered in the Registry of
Deeds pursuant to Act No. 3344. However,
DBP did not release the entire amount of
the loan ostensibly because the release of
the land from the then Ministry of Natural
Resources had not been obtained. On July

7, 1983, respondent spouses, as plaintiffs,

filed a complaint against DBP in the trial
court seeking the annulment of the subject
deed of absolute sale on the ground that it
belongs to the lands of the public domain.
DBP averred that the annulment of the sale
and the return of the purchase price to
respondent spouses would redound to their
benefit but would result in petitioner's
prejudice, since it had already released
P118,540.00 to the former while it would
be left without any security for
theP140,000.00 loan and that in the
remote possibility that the land is reverted
to the public domain, respondent spouses
should be made to immediately pay, jointly
and severally, the total amount of
P118,540.00 with interest. RTC rendered
judgment in favor of respondent spouses,
annulling the deed of absolute sale. CA
affirmed.
ISSUE: [Main issues in this case]
(1)WON private respondent spouses Celebrada
and Abner Mangubat should be ordered to
pay petitioner DBP their loan obligation
due under the mortgage contract executed
between them and DBP. YES.
(2) WON petitioner should reimburse
respondent spouses the purchase price of
the property and the amount of P11,980.00
for taxes and expenses for the relocation
Survey. (must be qualified) DBP should
reimburse the spouses for the purchase
price but not for taxes and expenses for
recolaction.
HELD 1:
Considering that neither party questioned
the legality and correctness of
the
judgment of the court a quo, as affirmed by
respondent court, ordering the annulment
of the deed of absolute sale, such decreed

nullification of the document has already

achieved finality.
Turning now to the issue of whether or not
private respondents should be made to pay

petitioner their loan obligation amounting

to P118,540.00, we answer in the
affirmative.
In its legal context, the contract of loan
executed between the parties is entirely
different and discrete from the deed of
sale they entered into. The annulment of
the sale will not have an effect on the
existence and demandability of the loan.
One who has received money as a loan
is bound to pay to the creditor an equal
amount of the same kind and quality.
The fact that the annulment of the
sale will also result in the invalidity of
the mortgage does not have an effect
on the validity and efficacy of the
principal obligation, for even an
obligation that is unsupported by any
security of the debtor may also be
enforced by means of an ordinary
action. Where a mortgage is not valid,
as where it is executed by one who is
not the owner of the property, or the

consideration of the contract is

simulated or false, the principal
obligation which it guarantees is not
thereby rendered null and void. That
obligation matures and becomes
demandable in accordance with the
stipulations pertaining to it.
Under the foregoing circumstances,
what is lost is only the right to foreclose
the mortgage as a special remedy for
satisfying or settling the indebtedness
which is the principal obligation. In case
of nullity, the mortgage deed remains as
evidence or proof of a personal
obligation of the debtor, and the amount
due to the creditor may be enforced in
an ordinary personal action.
HELD 2:
A contract which the law denounces as
void is necessarily no contract whatever,
and the acts of the parties in an effort to
create one can in no wise bring about a
change of their legal status. The parties
and the subject matter of the contract
remain in all particulars just as they did

before any act was performed in relation

thereto.

so proved with a reasonable degree of

certainty.

An action for money had and received lies

to recover back money paid on a contract,
the consideration of which has failed. As a
general rule, if one buys the land of
another, to which the latter is supposed to
have a good title, and, in consequence of
facts unknown alike to both parties, he has
no title at all, equity will cancel the
transaction and cause the purchase money
to be restored to the buyer, putting both
parties in status quo.

[Other Possible questions:]

(1) Was the deed of sale void? YES.
Considering that neither party questioned
the legality and correctness of the
judgment of the court a quo, as

Thus, on both local and foreign legal

principles, the return by DBP to respondent
spouses of the purchase price, plus
corresponding
interest
thereon,
is
ineluctably called for. However, despite
that admission of respondent spouses list
of damages as evidence, the Court agrees
with petitioner that the same cannot
constitute sufficient legal basis for an
award of P4,000.00 and P7,980.00 as
reimbursement for land taxes and
expenses for the relocation survey,
respectively. The list of damages was
prepared extrajudicially by respondent
spouses by themselves without any
supporting receipts as bases thereof or to
substantiate the same. That list, per se, is
necessarily self-serving and, on that
account, should have been declared
inadmissible in evidence as the factum
probans.
In order that damages may be recovered,
the best evidence obtainable by the injured
party must be presented. Actual or
compensatory
damages
cannot
be
presumed, but must be duly proved, and

affirmed
by
respondent
court,
ordering the annulment of the deed of
absolute
sale,
such
decreed
nullification of the document has
already achieved finality.
(2) Was there a contract of mortgage? NO,
the fact of
annulment of the sale resulted in the
invalidity of themortgage, the subject
property
being
classified
as
timberland. Hence, DBP had no title to
the property.
(3) Will the invalidity of the contract of
mortgage affect the principal loan
obligation? NO, since it is an
accessory contract.

MARCELO R. SORIANO vs.

SPOUSES RICARDO and
ROSALINA GALIT (G.R. No. 156295,
September 23, 2003)
FACTS: Respondent Ricardo Galit
contracted a loan from petitioner Marcelo
Soriano amounting to P480,000.00. This
loan was secured by a REM over a
parcel of land covered by OCT. No. 569.
When respondent defaulted in his

obligation, Soriano filed a complaint for

sum of money against him with the RTC of
Balanga City.
Upon failure of the respondent spouses
Galit to file their answer, the trial court
declared the spouses in default and it
thereafter rendered judgment in favor of
petitioner
Soriano
ordering
the
respondents to pay. The judgment became
final and executory. Accordingly, the trial
court issued a writ of execution in due
course, by virtue of which, Deputy Sheriff
Renato E. Robles levied on the following
real properties of the Galit spouses: (1) A
parcel of land covered by OCT No. T-569
(Homestead Patent No. 14692) situated in
the Bo. of Tapulac, Orani, Bataan;
(2)STORE/HOUSE CONSTRUCTED on
Lot No. 1103 made of strong materials G.I.
roofing situated at Centro I, Orani, Bataan;
and (3)BODEGA constructed on Lot
1103, made of strong materials, G.I.
roofing, situated in Centro I, Orani, Bataan.
On December 23, 1998, petitioner

emerged as the highest and only bidder

with a bid price of P483,000.00.
Thus, on February 4, 1999, Deputy Sheriff
Robles issued a Certificate of Sale of
Execution of Real Property. On April 23,
1999, petitioner caused the registration of
the Certificate of Sale on Execution of
Real Property with the Registry of Deeds.
Ten months from the time the Certificate of
Sale on Execution was registered with the
Registry of Deeds, petitioner moved for the
issuance of a writ of possession which was
granted by the RTC. This was, however,
subsequently nullified by the Court of
Appeals because it included a parcel of
land (OCT No. T-40785) which was not
among those explicitly enumerated in the
Certificate of Sale issued by the Deputy
Sheriff, but on which stand the immovables
(the BODEGA and STORE/HOUSE)
covered by the said Certificate. Petitioner
contends that the sale
of
these
immovables necessarily encompasses the
land on which they stand.
ISSUES:
(1) WON the land on which the buildings
levied upon in
execution is necessarily included. NO.
(2) WON the cert. of sale on execution of
real property and the writ of possession are
null and void despite the fact that they
enjoy the presumption of regularity being
public documents. YES.
HELD:
(1) Art. 4151 of the Civil Code enumerates
land and buildings separately. This can
only mean that a building is, by itself,
considered immovable. Thus, it has been
held that while it is true that a mortgage
of land necessarily includes, in the
absence
of
stipulation
of
the
improvements thereon, buildings, still a
building by itself may be mortgaged

apart from the land on which it has been

built. Such mortgage would be still a real
estate mortgage for the building would
still be considered immovable

property even if dealt with

separately and apart from the
land.
In this case, considering that what was
sold by virtue of the writ of execution
issued by the trial court was merely the
storehouse and bodega constructed on
the parcel of land covered by Transfer
Certificate of Title No. T-40785, which by
themselves are real properties of
respondents spouses, the same should
be regarded as separate and distinct
from the conveyance of the lot on which
they stand.

(3)

(4)

(5)
(2) True, public documents by themselves
may be adequate to establish the
presumption of their validity. However,
their probative weight must be evaluated
not in isolation but in conjunction with
other evidence adduced by the parties in
the controversy, much more so in this
case where the contents of a copy
thereof subsequently registered.

(6)

ART. 415. The following are immovable

property:
(1)
Land,
buildings,
roads
and
constructions of all kinds adhered to the
soil.
xxxxxx
Everything attached to an immovable in a
fixed manner, in such a way that it cannot
be separated therefrom without breaking
them material or deterioration of the object;
Statues, reliefs, paintings or other objects
for use or ornamentation, placed in
buildings or on lands by the owner of the
immovable in such a manner that it reveals
the intention to attach them permanently to
the tenements;
Machinery, receptacles, instruments or
implements intended by the owner of the
tenement for an industry or works which
may be carried on in a building or on a
piece of land, and which tend directly to
meet the needs of the said industry or
works;
Animal houses, pigeon houses, beehives,
fish ponds or breeding places of

similar nature, in case their owner has

placed them or preserves them with the
intention to have them permanently
attached to the land, and forming a
permanent part of it; the animals in these
places are also included;
xxxxxx
(9) Docks and structures which, though
floating, are intended by their nature and
object to remain at a fixed place on a river,
lake or for documentation purposes is
being contested. No reason has been
offered how and why the questioned entry
was subsequently intercalated in the copy
of the certificate of sale subsequently
registered with the Registry of Deeds.
Absent any satisfactory explanation as to
why said entry was belatedly inserted, the
surreptitiousness of its inclusion coupled
with the furtive manner of its intercalation
casts serious doubt on the authenticity of
petitioners copy of the Certificate of Sale.
Thus, it has been held that while a public
document like a notarized deed of sale is
vested with the presumption of regularity,
this is not a guarantee of the validity of its
contents.
It must be pointed out in this regard that
the issuance of a Certificate of Sale is
an end result of judicial foreclosure
where statutory requirements
are
strictly adhered to; where even the
slightest deviations therefrom will
invalidate the proceeding and the sale.
Among these requirements is an
explicit
enumeration
and
correct
description of what properties are to be
sold stated in the notice. The stringence
in the observance of these requirements is
such that an incorrect title number together
with a correct technical description of the
property to be sold and vice versa is
deemed a substantial and fatal error which
results in the invalidation of the sale.

The certificate of sale is an accurate record

of what properties were actually sold to
satisfy the debt. The strictness in the
observance of accuracy and correctness in

the description of the properties renders

the enumeration in the certificate
exclusive. Thus, subsequently including
properties which have not been explicitly
mentioned therein for registration
purposes
under
suspicious
circumstances smacks of fraud. The
explanation that the land on which the
properties sold is necessarily included
and, hence, was belatedly typed on the
dorsal portion of the copy of the
certificate subsequently registered is at
best a lame excuse unworthy of belief.
The appellate court correctly observed
that there was a marked difference in the
appearance of the typewritten words
appearing on the first page of the copy of
the Certificate of Sale registered with the
Registry of Deeds[38] and those
appearing at the dorsal portion thereof.
Underscoring the irregularity of the
intercalation is the clearly devious
attempt to let such an insertion pass

unnoticed by typing the same at the back

of the first page instead of on the second
page which was merely half-filled and
could accommodate the entry with room to
spare.
DANILO D. MENDOZA, also doing
business under the name and style of
ATLANTIC EXCHANGE PHILIPPINES,
vs. COURT OF APPEALS, PHILIPPINE
NATIONAL BANK, FERNANDO
MARAMAG, JR., RICARDO G.
DECEPIDA and BAYANI A. BAUTISTA
(G.R. No. 116710, June 25, 2001)
.
FACTS: Petitioner Danilo D. Mendoza is
engaged in the domestic and international
trading of raw materials and chemicals. He
operates under the business name Atlantic
Exchange Philippines (Atlantic). Sometime
in 1978 he was granted by respondent
Philippine National Bank (PNB) a
500,000.00 credit line and a 1,000,000.00
Letter of Credit/Trust Receipt (LC/TR) line.
As security for the credit accommodations
and for those which may thereinafter be

granted,
petitioner
mortgaged
to
respondent PNB the following: 1) three (3)
parcels of land with improvements 2) his
house and lot and 3) several pieces of
machinery and equipment in his Pasig
cocochemical plant.
Petitioner executed in favor of respondent
PNB three (3) promissory notes covering
the Five Hundred Thousand Pesos
(P500,000.00) credit line. Petitioner made
use of his LC/TR line to purchase raw
materials from foreign importers.
On March 9, 1981, he wrote a letter to
respondent PNB requesting for the
restructuring of his past due accounts into
a five-year term loan and for an additional
LC/TR line of Two Million Pesos
(P2,000,000.00). According to the letter,
because of the shut-down of his end-user
companies and the huge amount spent for
the expansion of his business, petitioner
failed to pay to respondent bank his LC/TR
accounts as they became due and
demandable. PNB Mandaluyong replied on
behalf of the respondent bank and required
petitioner to submit documents its:
1) Audited Financial Statements for 1979 and
1980;
2) Projected cash flow (cash in - cash out) for
five (5) years detailed yearly; and
3) List of additional machinery and
equipment and proof of ownership thereof.
On September 25, 1981, petitioner sent
another letter addressed to PNB VicePresident Jose Salvador, regarding his
request for restructuring of his loans. He
offered respondent PNB the following
proposals: 1) the disposal his house and
lot and a vacant lot in order to pay the
overdue trust receipts; 2) capitalization and
conversion of the balance into a 5-year

term loan payable semi-annually or on

annual installments; 3) a new Two Million
Pesos (P2,000,000.00) LC/TR line in order to
enable Atlantic Exchange Philippines to
operate at full capacity.

The petitioner testified that respondent

PNB Mandaluyong Branch found his
proposal favorable and recommended
the implementation of the agreement.
However, Fernando Maramag, PNB
Executive Vice-President, disapproved
the proposed release of the mortgaged
properties and reduced the proposed
new LC/TR line to One Million Pesos
(P1,000,000.00). Petitioner claimed he
was forced to agree to these changes
and that he was required to submit a
new formal proposal and to sign two (2)
blank promissory notes.
According to petitioner, respondent PNB
approved his proposal. He further
claimed that he and his wife were asked
to sign two
(2) blank promissory note forms.
According to petitioner, they were made
to believe that the blank promissory
notes were to be filled out by respondent
PNB to conform with the 5-year
restructuring plan allegedly agreed upon.

Petitioner testified that respondent PNB

allegedly
contravened
their
verbal
agreement by 1) affixing dates on the two
(2) subject promissory notes to make them
mature in two (2) years instead of five (5)
years as supposedly agreed upon.
Upon their failure to make good of the said
loans Respondent PNB extra-judicially
foreclosed the real and chattel mortgages,
and the mortgaged properties were sold at
public auction to respondent PNB, as
highest bidder, for a total of Three Million
Seven Hundred Ninety Eight Thousand
Seven Hundred Nineteen Pesos and Fifty
Centavos (P3,798,719.50).
ISSUE: WON the foreclosure sale was
proper.
HELD: (The court found out that PNB did
not categorically agree to petitioners
proposal to extend the credit line to five
years.)To the substantive issue of
mortgate. Petitioner prays for the
release

of some of his movables being withheld by

respondent PNB, alleging that they were
not included among the chattels he
mortgaged to respondent bank. However,
petitioner did not present any proof as to
when he acquired the subject movables
and hence it is not to be believe that the
same were "after acquired" chattels not
covered by the chattel and real estate
mortgages.
In asserting its rights over the subject
movables, respondent PNB relies on a
common provision in the two (2) subject
Promissory Notes Nos. 127/82 and 128/82
which
states:
In the event that this note is not paid
at maturity or when the same
becomes due under any of the
provisions hereof, we hereby
authorized the BANK at its option
and without notice, to apply to the
payment of this note, any and all
moneys, securities and things of
value which may be in its hands on
deposit or otherwise belonging to
me/us and for this purpose. We
hereby, jointly and severally,
irrevocably constitute and appoint
the BANK to be our true Attorney-inFact with full power and authority for
us in our name and behalf and
without prior notice to negotiate, sell
and transfer any moneys securities
and things of value which it may
hold, by public or private sale and
apply the proceeds thereof to the
payment of this note.
It is clear, however, from the above-quoted
provision of the said promissory notes that
respondent bank is authorized, in case of
default, to sell "things of value" belonging
to the mortgagor "which may be on its
hands for deposit or otherwise belonging to
me/us and for this purpose." Besides, the

petitioner executed not only a chattel

mortgage but also a real estate mortgage to
secure his loan obligations to

respondent bank.
SPOUSES VIOLA vs EQUITABLE (2008)
A stipulation in the mortgage, extending
its scope and effect to after-acquired
property is valid and binding where the
after- acquired property is in renewal of,
or in substitution for, goods on hand
when the mortgage was executed, or is
purchased with the proceeds of the sale
of such goods. More importantly,
respondent bank makes a valid
argument for the retention of the subject
movables. Respondent PNB asserts that
those
movables
were
in
fact
"immovables by destination" under Art.
415
(5) of the Civil Code. It is an established
rule that a mortgage constituted on an
immovable includes not only the land but
also the buildings, machinery and
accessories installed at the time the
mortgage was constituted as well as the
buildings, machinery and accessories
belonging to the mortgagor, installed
after the constitution thereof.

FACTS: March 31, 1997 Spouses

Leopoldo and Mercedita Viola of Leo-Mers
Commercial, Inc. obtained a loan through a
credit line facility in the maximum amount
of P 4,700,000.00 from the Philippine
Commercial International Bank (PCI Bank),
which was later merged with Equitable
Bank and became known as Equitable PCI
Bank, Inc.
The Credit Line Agreement stipulated that
the loan would bear interest at the
"prevailing PCI Bank lending rate" per
annum on the principal obligation and a
"penalty fee of three percent (3%) per
month on the outstanding amount."
To secure the payment of the loan, a
Real Estate Mortgage over their 2
parcels of land in favor of PCI Bank was
executed. Spouses Viola made partial
payments which totaled P 3,669,210.67;
PCI Bank contends however, that Spouses

Viola made no further payments since Nov.

24, 2000 despite demand they failed to pay
their outstanding obligation which as of
September
30,
2002,
totaled
P14,024,623.22, broken down as follows:
Principal obligation
Past due interest
from 11/24/00 to
09/30/02 at 15%
interest
Penalty at 3% per
month
from
03/31/98
to
02/23/02

P4,783,254.6
9
P1,345,290.3
8

P7,896,078.1
5
P14,024,623.
22

Thus, PCI Bank extrajudicially foreclosed

the mortgage before the Regional Trial
Court (RTC) and that the mortgaged
properties were sold at a public auction.
More than five months later or on October
8, 2003, petitioners filed a complaint for
annulment of foreclosure sale. Petitioners
alleged, inter alia, that
1. they had made substantial payments of
P3,669,210.67 receipts of which were
issued without respondent specifying
"whether the payment was for interest,
penalty or the principal obligation;" that
based on respondents statement of
account, not a single centavo of their
payments was applied to the principal
obligation;
2. that every time respondent sent them a
statement of account and demand
letters, they requested for a proper
accounting
for
the
purpose
of
determining their actual obligation, but
all their requests were unjustifiably
ignored on account of which they were
forced to discontinue payment;
3. that "the foreclosure proceedings and
auction sale were not only irregularly
and prematurely held but were null and

void because the mortgage debt is only

P2,224,073.31
on
the
principal

obligation and P1,455,137.36 on the

interest,
or
a
total
of
only
P3,679,210.67 as of April 15, 2003,
but the mortgaged properties were
sold to satisfy an
inflated and
erroneous principal obligation of
P4,783,254.69, plus 3% penalty fee
per month or 33% per year and 15%
interest per year, which amounted to
P14,024,623.22 as of September 30,
2002;"
4. that "the parties never agreed and
stipulated in the real estate mortgage
contract" that the 15% interest per
annum on the principal loan and the
3% penalty fee per month on the
outstanding amount would be covered
or secured by the mortgage;
5. that assuming respondent could
impose such interest and penalty fee,
the
same
are
"exorbitant,
unreasonable,
iniquitous
and
unconscionable, hence, must be
reduced;" and that respondent is only
allowed to impose the legal rate of
interest of 12% per annum on the
principal loan absent any stipulation
thereon.

Respondent denied petitioners assertions,

contending, inter alia, that the absence of
stipulation in the mortgage contract
securing the payment of 15% interest per
annum on the principal loan, as well as the
3% penalty fee per month on the
outstanding amount, is immaterial since
the mortgage contract is "a mere
accessory contract which must take its
bearings from the principal Credit Line
Agreement."
The RTC upheld the position of the PCI
Bank but reduced the interest on the
principal loan from 15% to 12% per annum
and the penalty fee per month on the
outstanding amount from 3% to 1.5% per
month. Accordingly, the court nullified the
foreclosure proceedings and the Certificate
of Sale subsequently issued, "without
prejudice" to the holding anew of
foreclosure proceedings based on the "recomputed amount" of the indebtedness, "if
the circumstances so warrant."

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

Spouses Viola filed a Motion for

Reconsideration but it was denied. On
appeal, the Court of Appeals (CA)
dismissed the petition for lack of merit.
ISSUE: WON the mortgage contract also
secured the penalty fee per month on the
outstanding amount as stipulated in the
Credit Line Agreement? NO
HELD: A mortgage must "sufficiently
describe the debt sought to be secured,
which description must not be such as to
mislead or deceive, and an obligation is not
secured by a mortgage unless it comes
fairly within the terms of the mortgage.
In the case at bar, the parties executed two
separate documents on March 31, 1997
the Credit Line Agreement granting the
Client a loan through a credit facility in the
maximum amount of P4,700,000.00, and
the Real Estate Mortgage contract
securing
the
payment
thereof.
Undisputedly,
both
contracts
were
prepared by respondent and written in fine
print, single space.
The Real Estate Mortgage contract states
its coverage, thus:
That for and in consideration of certain
loans, credit and other banking
facilities obtained x x x from the
Mortgagee, the principal amount of
which is PESOS FOUR MILLION
SEVEN HUNDERED THOUSAND
ONLY
(P4,700,000.00)
Philippine
Currency, and for the purpose of
securing
the
payment
thereof,
including the interest and bank
charges accruing thereon, xxx
The immediately-quoted provision of the
mortgage contract does not specifically

150

mention that, aside from the principal loan

obligation, it also secures the payment of "a
penalty fee of three percent (3%) per month
of the outstanding amount to be computed
from the day deficiency is

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

incurred up to the date of full payment

thereon," which penalty as the abovequoted portion of the Credit Line
Agreement expressly stipulates.
Since an action to foreclose "must be
limited to the amount mentioned in the
mortgage" and the penalty fee of 3% per
month of the outstanding obligation is not
mentioned in the mortgage, it must be
excluded from the computation of the
amount secured by the mortgage.
Regarding CA decision that the
phrase "including the interest and
bank charges" in the mortgage
contract "refers to the penalty
charges stipulated in the Credit Line
Agreement" is unavailing.
"Penalty fee" is entirely different from
"bank charges." The phrase "bank
charges" is normally understood to refer
to compensation for services. A "penalty
fee" is likened to a compensation for
damages in case of breach of the

150

obligation. Being penal in nature, such fee

must be specific and fixed by the
contracting parties, unlike in the present
case which slaps a 3% penalty fee per
month of the outstanding amount of the
obligation.
Moreover, the "penalty fee" does not
belong to the species of obligation
enumerated in the mortgage contract,
namely: "loans, credit and other banking
facilities obtained x x x from
the
Mortgagee, . . . including the interest and
bank charges, . . . the costs of collecting
the same and of taking possession of and
keeping the mortgaged properties, and all
other expenses to which the Mortgagee
may be put in connection with or as an
incident to this mortgage . . ."
In Philippine Bank of Communications v.
Court of Appeals which raised a similar
issue, this Court held:
The sole issue in this case is whether,
in the foreclosure of a real estate

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

mortgage, the penalties stipulated in

two promissory notes secured by the
mortgage may be charged against the
mortgagors as part of the sums
secured, although the mortgage
contract does not mention the said
penalties.
The court held, Indeed, a mortgage
must sufficiently describe the debt
sought to be secured, which
description must not be such as to
mislead or deceive, and an obligation
is not secured by a mortgage unless
it comes fairly within the terms of the
mortgage. Under the rule of ejusdem
generis, where a description of things of
a particular class or kind is
"accompanied by words of a generic
character, the generic words will usually
be limited to things of a kindred nature
with those particularly enumerated . . . "
A penalty charge does not belong to
the
species
of
obligations
enumerated in the mortgage, hence,
the said contract cannot be
understood to secure the penalty.
Regarding Respondents contention
that absence of stipulation for the
penalty fee in the mortgage contract is
of no consequence as the deed of
mortgage
is
merely
an
accessory
contract that "must take its bearings
from
the
principal
Credit
Line
Agreement,".
Such absence is significant as it creates an
ambiguity between the two contracts,
which ambiguity must be resolved in favor
of petitioners and against respondent who
drafted the contracts. Again, as stressed
by the Court in Philippine Bank of
Communications:
A mortgage and a note secured by it
are deemed parts of one transaction
and are construed together, thus, an

151

ambiguity is created when the notes

provide for the payment of a penalty
but the mortgage contract does not.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

Construing the ambiguity against the

petitioner, it follows that no penalty
was intended to be covered by the
mortgage. Plainly, the petitioner can
be as specific as it wants to be, yet it
simply did not specify nor even allude
to, that the penalty in the promissory
notes would be secured by the
mortgage. This can then only be
interpreted to mean that the petitioner
had no design of including the
penalty in the amount secured.
RTC
decision
AFFIRMED
with
MODIFICATION in that the "penalty fee"
per month of the outstanding obligation
is excluded in the computation of the
amount secured by the Real Estate
Mortgage executed by petitioners in
respondents favor.
POLICY: A mortgage must sufficiently
describe the debt sought to be secured,
which description must not be such as to
mislead or deceive. An obligation is not

152

secured by a mortgage unless it comes

fairly within the terms of the mortgage.

TAN vs VALDEHUEZA (1975)

FACTS: The parcel of land described in
the first cause of action was the subject
matter of the public auction sale held on
May 6, 1955 at the Capitol Building in
Oroquieta, Misamis Occidental, wherein
the plaintiff was the highest bidder and as
such a Certificate of Sale was executed by
MR. VICENTE D. ROA who was then the
Ex-Officio Provincial Sheriff in favor of
LUCIA TAN the herein plaintiff. Due to the
failure of defendant Arador Valdehueza to
redeem the said land within the period of
one year as being provided by law, MR.
VICENTE D. ROA who was then the ExOfficio Provincial Sheriff executed an
ABSOLUTE DEED OF SALE in favor of
the plaintiff LUCIA TAN.
Defendants ARADOR VALDEHUEZA and

REDICULO VALDEHUEZA have executed

two documents of DEED OF PACTO DE
RETRO SALE in favor of the plaintiff
herein, LUCIA TAN of two portions of a
parcel of land which is described in the
second cause of action with the total
amount of ONE THOUSAND FIVE
HUNDRED PESOS (P1,500.00).
That from the execution of the Deed of
Sale with right to repurchase mentioned in
the second cause of action, defendants
Arador
Valdehueza
and
Rediculo
Valdehueza remained in the possession of
the land; that land taxes to the said land
were paid by the same said defendants.
Tan filed a complaint forinjunction on July
24, 1957 against the Valdehuezas, to
enjoin them "from entering the abovedescribed parcel of land and gathering the
nuts therein ...." This complaint and the
counterclaim were subsequently dismissed
for failure of the parties "to seek for the
immediate trial thereof, thus evincing lack
of interest on their part to proceed with the
case.
The Deed of Pacto de Retro referred to in
stipulation of fact no. 5 as "Annex D"
(dated August 5, 1955) was not registered
in the Registry of Deeds, while the Deed of
Pacto de Retro referred to as "Annex E"
(dated March 15, 1955) was registered.
On the basis of the stipulation of facts and
the annexes, the trial court rendered
judgment, as follows:
Declaring Lucia Tan the absolute owner of
the property described in the first cause of
action of the amended complaint;

And as regards the land covered by deed of

pacto de retro annex 'D', the herein
defendants Arador Valdehueza and Rediculo
Valdehueza are hereby ordered to pay the
plaintiff the amount of P300 with legal
interest of 6% from August 15, 1966, the
said land serving as guaranty of the

said amount of payment;

ISSUE: Was there a valid mortgage?
(YES)
HELD: The trial court treated the
registered deed of pacto de retro as an
equitable mortgage but considered the
unregistered deed of pacto de retro "as a
mere case of simple loan, secured by
the property thus sold under pacto de
retro," on the ground that no suit lies to
foreclose an unregistered mortgage. It
would appear that the trial judge had not
updated
himself
on
law
and
jurisprudence; he cited, in support of his
ruling, article 1875 of the old Civil Code
and decisions of this Court circa 1910
and 1912.
Under article 1875 of the Civil Code of
1889, registration was a necessary
requisite for the validity of a mortgage
even as between the parties, but under
article 2125 of the new Civil Code (in
effect since August 30,1950), this is no
longer so.

If the instrument is not recorded, the

mortgage is nonetheless binding between
the parties. (Article 2125, 2nd sentence).
The Valdehuezas having remained in
possession of the land and the realty taxes
having been paid by them, the contracts
which purported to be pacto de retro
transactions are presumed to be equitable
mortgages, 5 whether registered or not,
there being no third parties involved.
ISSUE ON THE PROCEEDS OF THE
HARVEST
The Valdehuezas claim that their answer to
the complaint of the plaintiff affirmed that
they remained in possession of the land
and gave the proceeds of the harvest to
the plaintiff; it is thus argued that they
would suffer double prejudice if they are to
pay legal interest on the amounts stated in
the pacto de retro contracts, as the lower
court has directed, and that therefore the
court should have ordered evidence to be

adduced on the harvest.

The record does not support this claim.
Nowhere in the original and the amended
complaints is an allegation of delivery to
the plaintiff of the harvest from the land
involved in the second cause of action.
Hence, the defendants' answer had none
to affirm.
In submitting their stipulation of facts, the
parties prayed "for its approval and maybe
made the basis of the decision of this
Honorable Court. " (emphasis supplied)
This, the court did. It cannot therefore be
faulted for not receiving evidence on who
profited from the harvest.
ISSUE ON LEGAL INTEREST
The imposition of legal interest on the
amounts subject of the equitable
mortgages, P1,200 and P300, respectively,
is without legal basis, for, "No interest shall
be due unless it has been expressly
stipulated in writing." (Article 1956, new
Civil Code) Furthermore, the plaintiff did
not pray for such interest; her thesis was a
consolidation of ownership, which was
properly rejected, the contracts being
equitable mortgages.
With the definitive resolution of the rights of
the parties as discussed above, we find it
needless to pass upon the plaintiffs petition
for receivership. Should the circumstances
so warrant, she may address the said
petition to the court a quo.
ACCORDINGLY, the judgment a quo is
hereby modified, as follows: (a) the
amounts of P1,200 and P300 mentioned in
Annexes E and D shall bear interest at six
percent per annum from the finality of this

decision; and (b) the parcel of land covered

by Annex D shall be treated in the same
manner as that covered by Annex E, should
the defendants fail to pay to the plaintiff the
sum of P300 within 90 days from the finality
of this decision. In all other respects
the
judgment is affirmed. No

costs.

STATE INVESTMENT vs CA (1996)

FACTS: On October 15, 1969, a contract
to sell was executed by Spouses Canuto
and Ma. Aranzazu Oreta, and the Solid
Homes, Inc. (SOLID), involving a parcel
of land in Capitol Park Homes Subd., in
Quezon City for a consideration of P
39,347.00.
Upon signing of the contract, the
spouses made payment amounting to P
7,869.40, with the agreement that the
balance shall be payable in monthly
installments of P 451.70, at 12% interest
p.a.
On November 4, 1976. SOLID executed
several real estate mortgage contracts in
favor of State Investment Homes, Inc.
(STATE) over its subdivided parcels of
land, one of which is the subject lot. For
failure of SOLID to comply with its

mortgage obligations contract, STATE

extrajudicially foreclosed the mortgaged
properties including the subject lot on April
6, 1983, with the corresponding certificate
of sale issued therefore to STATE.
On June 23, 1984; SOLID thru a MOA
negotiated
for
the
deferment
of
consolidation of ownership over the
foreclosed properties by committing to
redeem
the
properties
from
STATE.Thereafter, the spouses filed a
complaint before the HLURB, against
SOLID and STATE for failure on the part of
SOLID to execute the necessary absolute
deed of sale as well as to deliver the title to
said property despite full payment of
purchase price.
In defense, SOLID alleged that the
obligation under the contract to sell has
become so difficult that they be released
from the said obligation by substituting
subject lot with another suitable residential
lot from another subdivision, which they

operate. STATE averred that

unless
SOLID pays the redemption price of P
125,195.00, it has a right to hold on and
not release the foreclosed properties. The
OAALA rendered a decision ordering
STATE to execute a deed of conveyance
in favor of the spouses, and SOLID to pay
STATE the portion of its loan, which
corresponds to the value of the lot as
collateral.
ISSUE: Who between the Spouses Oreta
and STATE have better right over the
subject lot? (SPOUSES ORETA)
HELD: STATE's registered mortgage right
over the property is inferior to that of
respondents-spouses' unregistered right.
The
unrecorded
sale
between
respondents-spouses and SOLID is
preferred for the reason that if the original
owner (SOLID, in this case) had parted
with his ownership of the thing sold then he
no longer had ownership and free disposal
of that thing so as to be able to mortgage it
again. Registration of the mortgage is of no
moment since it is understood to be
without prejudice to the better right of third
parties.
Petitioner asserts that a purchaser or
mortgagee of land/s covered under the
Torrens System "is not required to do more
than rely upon the certificate of title for it is
enough that the purchaser or mortgagee
examines the pertinent certificate of title
without need of looking beyond such title."
As a general rule, where there is nothing in
the certificate of title to indicate any cloud
or vice in the ownership of the property, or
any encumbrance thereon, the purchaser
is not required to explore further than what
the Torrens Title upon its face indicates in

quest for any hidden defect or inchoate right

that may subsequently defeat his right
thereto. This rule, however, admits of an
exception as where the purchaser or
mortgagee, has knowledge of a defect or
lack of title in his vendor, or that he was

aware of sufficient facts to induce a

reasonably prudent man to inquire into
the status of the title of the property in
litigation.
In this case, petitioner was well aware
that it was dealing with SOLID, a
business entity engaged in the business
of selling subdivision lots. In fact, the
OAALA found that at the time the lot was
mortgaged, respondent State Investment
House Inc., [now petitioner] had been
aware of the lot's location and that the
said lot formed part of Capital
Park/Homes
Subdivision. In Sunshine Finance and
Investment Corp. v. Intermediate
Appellate Court, the Court noting
petitioner therein to be a financing
corporation, deviated from the general
rule that a purchaser or mortgagee of a
land is not required to look further that
what appears on the face of the Torrens
Title. Thus:
Nevertheless, we have to deviate from
the general rule because of the failure of

the petitioner in this case to take the

necessary precautions to ascertain if there
was any flaw in the title of the mortgage.
The petitioner is an investment and
financing corporation. We presume it is
experienced in its business. Ascertainment
of the status and condition of properties
offerred to it as security for the loans it
extends must be a standard and
indispensable part of its operations. Surely,
it cannot simply rely on an examination of a
Torrens certificate to determine what the
subject property looks like as its condition
is not apparent in the document. The land
might be in a depressed area. There might
be squatters on it. It might be easily
inundated. It might be an interior lot,
without convenient access. These and
other similar factors determine the value of
the property and so should be of practical
concern to the petitioner.
xxx xxx xxx
Our conclusion might have been different if
the mortgagee were an ordinary individual

or company without the expertise of the

petitioner in the mortgage and sale of
registered land or if the land mortgaged
were some distance from the mortgagee
and could not be conveniently inspected.
But there were no such impediments in this
case. The facilities of the petitioner were
not so limited as to prevent it from making
a more careful examination of the land to
assure itself that there were no
unauthorized persons in possession.
The above-enunciated rule should apply in
this case as petitioner admits of being a
11
financing institution. We take judicial
notice of the uniform practice of
financing institutions to investigate,
examine and assess the real property
offered as security for any loan
application especially where, as in this
case, the subject property is a
subdivision lot located at Quezon City,
M.M. It is a settled rule that a purchaser
or mortgagee cannot close its eyes to
facts which should put a reasonable
man upon his guard, and then claim
that he acted in good faith under the
belief that there was no defect in the
title
of
the
vendor
or
mortgagor. Petitioner's constructive
knowledge of the defect in the title of
the subject property, or lack of such
knowledge due to its negligence, takes
the place of registration of the rights of
respondents-spouses.
Respondent
Court thus correctly ruled that
petitioner was not a purchaser or
mortgagee in good faith; hence
petitioner can not solely rely on what
merely appears on the face of the
Torrens Title.

PHILIPPINE NATIONAL BANK, AS THE

ATTORNEY-IN-FACT OF OPAL
PORTFOLIO INVESTMENTS (SPV-AMC),
INC. vs. MERCEDES CORPUZ,
REPRESENTED BY HER ATTORNEY-INFACT VALENTINA CORPUZ
FACTS: On October 4, 1974 respondent
Mercedes Corpuz delivered her owners
duplicate copy of Transfer Certificate of
Title (TCT) 32815 to Dagupan City Rural
Bank as security against any liability she
might incur as its cashier. She later left her
job and went to the United States.
On October 24, 1994 the rural bank where
she worked cancelled its lien on Corpuzs
title, she having incurred no liability to her
employer. Without Corpuzs knowledge
and consent, however, Natividad Alano,
the rural banks manager, turned over
Corpuzs title to Julita Camacho and
Amparo Callejo.
Conniving with someone from the
assessors office, Alano, Camacho, and
Callejo prepared a falsified deed of sale,
making it appear that on February 23, 1995
Corpuz sold her land to one "Mary Bondoc"
for P50,000.00. They caused the
registration of the deed of sale, resulting in
the cancellation of TCT 32815 and the
issuance of TCT 63262 in Bondocs name.
About a month later or on March 27, 1995
the trio executed another fictitious deed of
sale with "Mary Bondoc" selling the
property to the spouses Rufo and Teresa
Palaganas for only P15,000.00. This sale
resulted in the issuance of TCT 63466 in
favor of the Palaganases.
Nine days later or on April 5, 1995 the
Palaganases executed a deed of sale in
favor of spouses Virgilio and Elena

Songcuan for P50,000.00, resulting in

the issuance of TCT 63528. Finally, four
months later or on August 10, 1995 the
Songcuans took out a loan of P1.1

million from petitioner Philippine National

Bank (PNB) and, to secure payment,
they

executed a real estate mortgage on their

title. Before granting the loan, the PNB had
the title verified and the property inspected.
On November 20, 1995 respondent Corpuz
filed, through an attorney-in-fact, a
complaint before the Dagupan Regional
Trial Court (RTC) against Mary Bondoc,
the Palaganases, the Songcuans, and
petitioner PNB, asking for the annulment of
the layers of deeds of sale covering the
land, the cancellation of TCTs 63262,
63466, and 63528, and the reinstatement
of TCT 32815 in her name.
On June 29, 1998 the RTC rendered a
decision granting respondent Corpuzs
prayers. This prompted petitioner PNB to
appeal to the Court of Appeals (CA). On
July 31, 2007 the CA affirmed the decision
of the RTC and denied the motion for its
reconsideration, prompting PNB to take
recourse to this Court.
ISSUE: The sole issue presented in this
case is whether or not petitioner PNB is a
mortgagee in good faith, entitling it to its
lien on the title to the property in dispute.
RULING: Petitioner PNB points out that,
since it did a credit investigation, inspected
the property, and verified the clean status
of the title before giving out the loan to the
Songcuans, it should be regarded as a
mortgagee in good faith. PNB claims that
the precautions it took constitute sufficient
compliance with the due diligence required
of banks when dealing with registered
lands.
As a rule, the Court would not expect a
mortgagee to conduct an exhaustive
investigation of the history of the
mortgagors title before he extends a

loan. But petitioner PNB is not an ordinary

2
mortgagee; it is a bank. Banks are expected
to be more cautious than ordinary individuals
in dealing with lands, even registered ones,
since the business of banks is imbued with
public interest. It is

of judicial notice that the standard

practice for banks before approving a
loan is to send a staff to the property
offered as collateral and verify the
genuineness of the title to determine the
real owner or owners.
One of the CAs findings in this case is
that in the course of its verification,
petitioner PNB was informed of the
previous TCTs covering the subject
property. And the PNB has not
categorically contested this finding. It is
evident from the faces of those titles that
the ownership of the land changed from
Corpuz to Bondoc, from Bondoc to the
Palaganases, and from the Palaganases
to the Songcuans in less than three

months and mortgaged to PNB within four

months of the last transfer.
The above information in turn should have
driven the PNB to look at the deeds of sale
involved. It would have then discovered
that the property was sold for ridiculously
low prices: Corpuz supposedly sold it to
Bondoc for justP50,000.00; Bondoc to the
Palaganases for just P15,000.00; and the
Palaganases to the Songcuans also for
justP50,000.00. Yet the PNB gave the
property
an
appraised
value
of P781,760.00. Anyone who deliberately
ignores a significant fact that would create
suspicion in an otherwise reasonable
person cannot be considered as an
innocent mortgagee for value. The Court
finds no reason to reverse the CA decision.

CANLAS VS. CA
FACTS: The private respondent own
several parcels of land located in Quezon
City for which he is the registered owner.
He secured loans from L and R
corporations and executed deeds of
mortgage over the parcels of land for the
security of the same. Upon the maturity of
said loans, the firm initiated an extrajudicial
foreclosure of the properties in question
after private respondent failed to pay until
maturity. The private respondent filed a
complaint for injunction over the said
foreclosure and for redemption of the
parcels of land. Two years after the filing of
the petition, private respondent and L and
R corporation entered into a compromise
agreement that renders the former to be
insured another year for the said
properties. Included in the stipulations
were the attorneys fees amounting to Php
100,000.00. The private respondent
however, remained to be in turmoil when it
came to finances and was apparently
unable to pay and secure the attorneys
fees, more so the redemption liability.
Relief was discussed by petitioner and
private respondent executed a document
to redeem the parcels of land and to
register the same to his name.
Allegations were made by the private
respondent claiming the parcels of land to
his name but without prior notice, the
properties were already registered under
the petitioners name. The private
respondent calls for a review and for the
court to act on the said adverse claim by
petitioner on said certificates for the
properties consolidated by the redemption
price he paid for said properties. The

private respondent filed a suit for the

annulment of judgment in the Court of
appeals which ruled over the same.
ISSUE: whether the petitioner is on solid
ground on the reacquisition over the said
properties.

RULING: By Atty. Canlas' own account,

"due to lack of paying capacity of
respondent Herrera, no financing entity
was willing to extend him any loan with
which to pay the redemption price of his
mortgaged properties and petitioner's
P100,000.00 attorney's fees awarded in
the
Compromise
Judgment,"
a
development that should have tempered
his demand for his fees. For obvious
reasons, he placed his interests over and
above those of his client, in opposition to
his oath to "conduct himself as a
lawyer ... with all good fidelity ... to [his]
clients." The Court finds the occasion fit
to stress that lawyering is not a
moneymaking venture and lawyers are
not merchants, a fundamental standard
that has, as a matter of judicial notice,
eluded not a few law advocates. The
petitioner's
efforts partaking of a
shakedown" of his own client are not
becoming of a lawyer and certainly, do
not speak well of his fealty to his oath to
"delay no man for money."

We are not, however, condoning the

private respondent's own shortcomings. In
condemning Atty. Canlas monetarily, we
cannot overlook the fact that the private
respondent has not settled his liability for
payment of the properties. To hold Atty.
Canlas alone liable for damages is to
enrich said respondent at the expense of
his lawyer. The parties must then set off
their obligations against the other.

AGRICULTURAL CREDIT
COOPERATIVE ASSOCIATION OF
HINIGARAN vs. ESTANISLAO YULO
YUSAY, ET AL.
FACTS: July 20, 1952, Rafaela Yulo
executed in favor of the movant
a
mortgage for P33,626.29, due from her,
her mother, sisters, brothers, and others,
which amount she assumed to pay to the
movant. A motion was presented to the
court by the movant demanding the
surrender of the owner's duplicate

certificate of title that he may annotate said

mortgage at the back of the certificate.
Estanislao Yusay, a part owner of the lot,
opposed the petition on the ground that he
is owner of a part of the property in
question; that the granting of the motion
would operate to his prejudice, as he has
not participated in the mortgage cited in the
motion; that Rafaela Yulo is dead; that the
motion is not verified and movant's rights
have lapsed by prescription. Finally it is
argued that his opposition raises a
controversial matter which the court has no
jurisdiction to pass upon. Margarita, Maria,
Elena and Pilar, all surnamed Yulo, joined
the oppositor Estanislao Yusay, raising the
same objections interposed by Yusay.
The existence of the mortgage is not
disputed, and neither is the fact that the
mortgagor Rafaela Yulo is part owner of
Lot No. 855 of the Cadastral Survey of
Pontevedra. The oppositors do not dispute
that she is such a part owner, and their
main objection to the petition is that as part
owners of the property, the annotation of
the mortgage on the common title will
affect their rights.
ISSUE: WON as part owners of the
property, the annotation of the mortgage
on the common title will affect their (Yusay)
rights.
RULING: The court held that even if the
ownership of the deceased Rafaela Yulo
over the portion of the lot in question and
the validity of the mortgage are disputed,
such invalidity of the mortgage is no proof
of the non-existence of the mortgage nor a
ground for objecting to its registration,
citing the case of Register of Deeds of
Manila vs. Maxima Tinoco Vda. de Cruz,
et, al., 95 Phil., 818; 53 Off. Gaz., 2804.

In his Brief before this Court, counsel for

appellants argue that the mortgage sought to
be registered was not recorded before the
closing of the intestate proceedings of the
deceased mortgagor, but was so

recorded only four months after the

termination of said proceedings, so that
the claim of movant has been reduced to
the character of a mere money claim, not
a mortgage, hence the mortgage may
not be registered. In the first place, as
the judge below correctly ruled, the
proceeding to register the mortgage
does not purport to determine the
supposed invalidity of the mortgage or its
effect. Registration is a mere ministerial
act by which a deed, contract or
instrument is sought to be inscribed in
the records of the Office of the Register
of Deeds and annotated at the back of
the certificate of title covering the land
subject of the deed, contract or
instrument.
The registration of a lease or mortgage,
or the entry of a memorial of a lease or
mortgage on the register, is not a
declaration by the state that such an
instrument is a valid and subsisting
interest in land; it is merely a declaration
that the record of the title appears to be

burdened with the lease or mortgage

described, according to the priority set forth
in the certificate.
The mere fact that a lease or mortgage
was registered does not stop any party to it
from setting up that it now has no force or
effect. (Niblack, pp. 134-135, quoted in
Francisco Land Registration Act, l950 ed.,
p. 348.)
The court below, in ordering the
registration and annotation of
the
mortgage, did not pass on its invalidity or
effect. As the mortgage is admittedly an act
of the registered owner, all that the judge
below did and could do, as a registration
court, is to order its registration and
annotation on the certificate of title
covering the land mortgaged. By said order
the court did not pass upon the effect or
validity of the mortgage these can only
be determined in an ordinary case before
the courts, not before a court acting merely
as a registration court, which did not have

the jurisdiction to pass upon the alleged

effect or validity.
Wherefore, the order appealed from is
hereby affirmed, with costs against
oppositors-appellants. So ordered.

JOE A. ROS and ESTRELLA AGUETE

vs. PHILIPPINE NATIONAL BANK LAOAG BRANCH
G.R. No. 170166 (April 6, 2011)
FACTS: On January 13, 1983, spouses
Jose A. Ros and Estrella Aguete filed a
complaint for the annulment of the Real
Estate Mortgage and all legal proceedings
taken thereunder against PNB, Laoag
Branch before the Court of First Instance,
Ilocos Norte.
The averments in the complaint disclosed
that plaintiff-appellee Joe A. Ros obtained
a loan of P115,000.00 from PNB Laoag
Branch on October 14, 1974 and as
security for the loan, plaintiff-appellee Ros
executed a real estate mortgage involving
a parcel of land Lot No. 9161 of the
Cadastral Survey of Laoag, with all the
improvements thereon described under
Transfer Certificate of Title No. T-9646.
Upon maturity, the loan remained
outstanding. As a result, PNB instituted
extrajudicial foreclosure proceedings on
the mortgaged property. After the lapse of
one (1) year without the property being
redeemed, the property was consolidated
and registered in the name of PNB, Laoag
Branch on August 10, 1978.
Claiming that she has no knowledge of the
loan obtained by her husband nor she
consented to the mortgage instituted on

the conjugal property a complaint was filed

by Estrella Aguete to annul the proceedings
pertaining to the mortgage, sale and
consolidation of the property interposing
the defense that her signatures affixed on the
documents were forged and

that the loan did not redound to the

benefit of the family.
In its answer, PNB prays for the
dismissal of the complaint for lack of
cause of action, and insists that it was
plaintiffs-appellees
own
acts
of
omission/connivance that bar them from
recovering the subject property on the
ground
of
estoppel,
laches,
abandonment and prescription.
On 29 June 2001, the trial court
rendered its Decision in favor of
petitioners. The trial court declared
that Aguete did not sign the loan
documents, did not appear before the
Notary Public to acknowledge the
execution of the loan documents, did
not receive the loan proceeds from
PNB, and was not aware of the loan
until PNB notified her in 14 August 1978
that she and her family should vacate
the mortgaged property because of the

expiration of the redemption period. Under

the Civil Code, the effective law at the time
of the transaction, Ros could not
encumber any real property of the
conjugal partnership without Aguetes
consent. Aguete may, during their
marriage and within ten years from the
transaction questioned, ask the courts
for the annulment of the contract her
husband entered into without her
consent, especially in the present case
where her consent is required.
On 17 October 2005, the appellate court
rendered its Decision and granted PNBs
appeal. The appellate court reversed the
trial courts decision, and dismissed
petitioners complaint.
The appellate court stated that the trial
court
concluded
forgery
without
adequate proof. The appellate court
declared that Aguete affixed her signatures
on the documents knowingly and with her
full consent.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

Assuming arguendo that Aguete did not

give her consent to Ros loan, the
appellate court ruled that the conjugal
partnership is still liable because the
loan proceeds redounded to the benefit
of the family. The records of the case
reveal that the loan was used for the
expansion of the familys business.
Therefore, the debt obtained is chargeable
against the conjugal partnership.
ISSUE: Whether or not the real estate
mortgage was valid? YES
HELD: The Civil Code was the applicable
law at the time of the mortgage. The
subject property is thus considered part of
the conjugal partnership of gains, as
provided under Articles 153, 160, 161, 166
and 173 of the Civil Code.
There is no doubt that the subject property
was acquired during Ros and Aguetes
marriage. There is also no doubt that Ros
encumbered the subject property when he
mortgaged it for P115,000.00. PNB Laoag
does not doubt that Aguete, as evidenced
by her signature, consented to Ros
mortgage to PNB of the subject property.
On the other hand, Aguete denies ever
having consented to the loan and also
denies affixing her signature to the
mortgage and loan documents.
The husband cannot alienate or
encumber any conjugal real property
without the consent, express or implied,
of the wife. Should the husband do so,
then the contract is voidable. Article 173
of the Civil Code allows Aguete to
question Ros encumbrance of the
subject property. Annulment will be
declared only upon a finding that the
wife did not give her consent. In the
present case, we follow the conclusion of
the appellate court and rule that Aguete

160

gave her consent to Ros encumbrance of the

subject property.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

The documents disavowed by Aguete

are acknowledged before a notary
public,
hence
they
are
public
documents. Every instrument duly
acknowledged
and
certified
as
provided by law may be presented in
evidence without further proof,
the
certificate
of acknowledgment
being
prima
facie
evidence of the execution of the
instrument or document involved. The
execution of a document that has been
ratified before a notary public cannot be
disproved by the mere denial of the
alleged signer. PNB was correct when it
stated that petitioners omission to
present other positive evidence to
substantiate their claim of forgery was
fatal to petitioners cause. Petitioners did
not present any corroborating witness,
such as a handwriting expert, who could
authoritatively declare that Aguetes
signatures were really forged.
A notarized document carries the
evidentiary weight conferred upon it

160

with respect to its due execution, and it

has in its favor the presumption of
regularity which may only be rebutted
by evidence so clear, strong and
convincing
as
to
exclude
all
controversy as to the falsity of the
certificate.
Absent
such,
the
presumption must be upheld.
Ros himself cannot bring action against
PNB, for no one can come before the
courts with unclean hands. In their
memorandum before the trial court,
petitioners themselves admitted that Ros
forged Aguetes signatures.
The application for loan shows that the
loan would be used exclusively "for
additional working [capital] of buy & sell of
garlic & virginia tobacco." In her testimony,
Aguete confirmed that Ros engaged in
such business, but claimed to be unaware
whether it prospered. Aguete was also
aware of loans contracted by Ros, but did
not know where he "wasted the money."

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

Debts contracted by the husband for

and in the exercise of the industry or
profession by which he contributes to
the support of the family cannot be
deemed to be his exclusive and private
debts.
If the husband himself is the principal
obligor in the contract, i.e., he directly
received the money and services to be
used in or for his own business or his own
profession, that contract falls within the
term "x x x x obligations for the benefit of
the conjugal partnership." Here, no actual
benefit may be proved. It is enough that
the benefit to the family is apparent at the
signing of the contract. From the very
nature of the contract of loan or services,
the family stands to benefit from the loan
facility or services to be rendered to the
business or profession of the husband. It is
immaterial, if in the end, his business or
profession fails or does not succeed.
Simply stated, where the husband
contracts obligations on behalf of the
family business, the law presumes, and
rightly so, that such obligation will
redound to the benefit of the conjugal
partnership.
Thus, Ros' loan redounded to the benefit of
the family and thus, the debt is chargeable
to the conjugal partnership.

PRODUCERS BANK OF THE

PHILIPPINES vs. EXCELSA
INDUSTRIES, INC.
G.R. No. 152071 (May 8, 2009)
FACTS: Respondent Excelsa Industries,
Inc. is a manufacturer and exporter of fuel
products, particularly charcoal briquettes,
as an alternative fuel source. Sometime in
January 1987, respondent applied for a
packing credit line or a credit export
advance with petitioner Producers Bank of
the Philippines, a banking institution duly

161

organized and existing under Philippines

laws. The application was supported by

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

Letter of Credit No. M3411610NS2970

dated 14 October 1986. Kwang Ju Bank,
Ltd. of Seoul, Korea issued the letter of
credit through its correspondent bank,
the Bank of the Philippine Islands, in the
amount of US$23,000.00. T.L. World
Development Corporation, who was the
original beneficiary of the letter of
credit, transferred to respondent all its
rights and obligations under the said
letter of credit.
Petitioner
approved
respondents
application for a packing credit line in the
amount of P300,000.00, of
which
about P96,000.00 in principal remained
outstanding. Respondent executed the
corresponding
promissory
notes
evidencing the indebtedness.
Prior to the application for the packing
credit line, respondent had obtained a
loan from petitioner in the form of a bill
discounted
and
secured
credit
accommodation
in
the
amount
of P200,000.00, of which P110,000.00

162

was outstanding at the time of the approval

of the packing credit line. The loan was
secured by a real estate mortgage dated
05 December 1986 over respondents
properties.
The real estate mortgage contained the
following clause:
For and in consideration of those certain
loans, overdraft and/or other credit
accommodations on this date obtained
from the MORTGAGEE, and to secure the
payment of the same, the principal of all of
which is hereby fixed at P500,000,
Philippine Currency, as well as those that
the MORTGAGEE may hereafter extend to
the MORTGAGOR, including interest and
expenses or any other obligation owing to
the MORTGAGEE, the MORTGAGOR
does hereby transfer and convey by way of
mortgage unto the MORTGAGEE, its
successors or assigns, the parcels of land
which are described in the list inserted on
the back of this document, and/or
appended hereto, together with all the

buildings and improvements now existing

or which may hereafter be erected or
constructed thereon, of which the
MORTGAGOR declares that he/it is the
absolute owner, free from all liens and
encumbrances.
On 17 March 1987, respondent presented
for negotiation to petitioner drafts drawn
under the letter of credit and the
corresponding export documents in
consideration for its drawings in the
amounts
of
US$5,739.76
and
US$4,585.79. Petitioner purchased the
drafts and export documents by paying
respondent the peso equivalent of the
drawings. The purchase was subject to the
conditions laid down in two separate
undertakings by respondent dated 17
March 1987 and 10 April 1987.
On 24 April 1987, Kwang Ju Bank, Ltd.
notified petitioner through cable that the
Korean buyer refused to pay respondents
export
documents
on
account
of
typographical discrepancies. Kwang Ju
Bank, Ltd. returned to petitioner the export
documents.
Upon learning about the Korean importers
non-payment, respondent sent petitioner a
letter dated 27 July 1987, informing the
latter that respondent had brought the
matter before the Korea Trade Court and
that it was ready to liquidate its past due
account with petitioner. Respondent sent
another letter dated 08 September 1987,
reiterating the same assurance. In a letter
05 October 1987, Kwang Ju Bank, Ltd.
informed petitioner that it would be
returning the export documents on account
of the non-acceptance by the importer.

Petitioner demanded from respondent the

payment of the peso equivalent of the export
documents, plus interest and other charges,
and also of the other due and unpaid loans.
Due to respondents failure to heed the
demand,
petitioner
moved
for
the
extrajudicial foreclosure on the real

estate mortgage
properties.

over

respondents

Antipolo, Rizal. The complaint prayed,

among others, that the defendants be
enjoined from causing the transfer of
ownership over the foreclosed properties
from respondent to petitioner.

At the public auction held on 05 January

1988, the Sheriff of Antipolo, Rizal issued
a Certificate of Sale in favor of petitioner
as the highest bidder. The certificate of
sale was
registered
on
24
March 1988. Subsequently, petitioner
executed an affidavit of consolidation
over the foreclosed properties after
respondent failed to redeem the same.
As a result, the Register of Deeds of
Marikina issued new certificates of title in
the name of petitioner.

On 18 December 1997, the RTC rendered

a decision upholding the validity of the
extrajudicial foreclosure and ordering the
issuance of a writ of possession in favor of
petitioner. The Court of Appeals then
rendered the assailed decision reversing
the decision of the RTC.

1)
On 17 November 1989, respondent
instituted an action for the annulment of
the extrajudicial foreclosure with prayer
for preliminary injunction and damages
against petitioner and the Register of
Deeds of Marikina. Docketed as Civil
Case No. 1587-A, the complaint was
raffled to Branch 73 of the RTC of

2)

3)
4)

ISSUE:
Whether or not Excelsa is liable for the
dishonor of the draft and export - YES
Whether or not the real estate mortgage
also served as security for respondent's
drafts that were not accepted and paid by
Kwang Ju Bank, Ltd. - YES
Whether or not extrajudicial foreclosure of
the mortgage may be invalidated for lack of
notice to respondent - NO
Whether or not respondent may still
question the foreclosure sale - NO

HELD:
1) Excelsa is liable.
Much of the discussion has revolved
around who should be liable for the
dishonor of the draft and export
documents. In the two undertakings
executed by respondent as a condition for
the negotiation of the drafts, respondent
held itself liable if the drafts were not
accepted. The two undertakings signed by
respondent are similarly-worded and
contained
respondents
express
warranties, to wit:
In consideration of your negotiating the
above described draft(s), we hereby
warrant that the said draft(s) and
accompanying documents thereon are
valid, genuine and accurately represent
the facts stated therein, and that such
draft(s) will be accepted and paid in
accordance with its/their tenor. We
further undertake and agree, jointly and
severally, to defend and hold you free and
harmless from any and all actions, claims
and demands whatsoever, and to pay on
demand
all
damages
actual
or
compensatory including attorneys fees,
costs and other awards or be adjudged to
pay, in case of suit, which you may suffer
arising from, by reason, or on account of
your negotiating the above draft(s)
because of the following discrepancies or
reasons or any other discrepancy or
reason whatever.
We hereby undertake to pay on demand
the full amount of the above draft(s) or
any unpaid balance thereof, the
Philippine perso equivalent converted at
the prevailing selling rate (or selling rate
prevailing at the date you negotiate our
draft, whichever is higher) allowed by the
Central Bank with interest at the rate
prevailing today from the date of
negotiation, plus all charges and expenses
whatsoever
incurred
in
connection

therewith. You shall neither be obliged to

contest or dispute any refusal to accept or to
pay the whole or any part of the above

draft(s), nor proceed in any way against

the drawee, the issuing bank or any
endorser thereof, before making a
demand on us for the payment of the
whole or any unpaid balance of the
draft(s).
In
Velasquez
v.
Solidbank
Corporation, where the drawer therein
also executed a separate letter of
undertaking in consideration for the
banks negotiation of its sight drafts, the
Court held that the drawer can still be
made liable under the letter of
undertaking even if he is discharged due
to the banks failure to protest the nonacceptance of the drafts. The Court
explained, thus:
Petitioner, however, can still be made
liable under the letter of undertaking. It
bears stressing that it is a separate
contract from the sight draft. The
liability of petitioner under the letter of

undertaking is direct and primary. It is

independent from his liability under the
sight draft. Liability subsists on it even
if the sight draft was dishonored for
non-acceptance or non-payment.
2) The real estate mortgage served as
security
for
respondent's
drafts.
Respondent executed a real estate
mortgage containing a "blanket mortgage
clause," also known as a "dragnet
clause." It has been settled in a long line
of decisions that mortgages given to
secure future advancements are valid and
legal contracts, and the amounts named as
consideration in said contracts do not limit
the amount for which the mortgage may
stand as security if from the four corners of
the instrument the intent to secure future
and other indebtedness can be gathered.
In Union Bank of the Philippines v.
Court of Appeals, the nature of a dragnet
clause was explained, thus:
Is one which is specifically
phrased to subsume all debts of past
and future origins. Such clauses are
"carefully scrutinized and strictly

construed." Mortgages of this character

enable the parties to provide continuous
dealings, the nature or extent of which may
not be known or anticipated at the time,
and they avoid the expense and
inconvenience of executing a new security
on each new transaction. A "dragnet
clause" operates as a convenience and
accommodation to the borrowers as it
makes available additional funds
without their having to execute
additional security documents, thereby
saving time, travel, loan closing costs,
costs of extra legal services, recording
fees, et cetera.
Petitioner, therefore, was not precluded
from seeking the foreclosure of the real
estate mortgage based on the unpaid
drafts drawn by respondent.
3) Extrajudicial foreclosure was valid.
Under paragraph 12 of the real estate
mortgage, personal notice of the
foreclosure sale is not a requirement to
the validity of the foreclosure sale.
A perusal of the records of the case shows
that a notice of sheriffs sale was sent by
registered mail to respondent and received
in due course. Yet, respondent claims that
it did not receive the notice but only
learned about it from petitioner. In any
event, paragraph 12 of the real estate
mortgage requires petitioner merely to
furnish respondent with the notice and
does not oblige petitioner to ensure that
respondent actually receives the notice.
On this score, the Court holds that
petitioner has performed its obligation
under paragraph 12 of the real estate
mortgage.
4) Respondent cannot question the
foreclosure sale.
Plaintiff is estopped from questioning the
foreclosure. The plaintiff is guilty of
laches and cannot at this point in time
question the foreclosure of the subject
properties.
Defendant
bank made

demands against the plaintiff for the

payment of plaintiffs outstanding loans and
advances with the defendant as early as
July 1997.
Plaintiff acknowledged such outstanding
loans and advances to the defendant bank
and committed to liquidate the same. For
failure of the plaintiff to pay its obligations
on maturity, defendant bank foreclosed the
mortgage on subject properties on January
5, 1988 the certificate of sale was
annotated on March 24, 1988 and there
being no redemption made by the plaintiff,
title to said properties were consolidated in
the name of defendant in July 1989.
Undeniably, subject foreclosure was
done in accordance with the prescribed
rule.
PRUDENTIAL BANK vs. DON A. ALVIAR
& GEORGIA B. ALVIAR
G.R. No. 150197 (July 28, 2005)
FACTS: Don A. Alviar and Georgia B.
Alviar, are the registered owners of a
parcel of land in San Juan, Metro Manila.
On 10 July 1975, they executed a deed of
real estate mortgage in favor of petitioner
Prudential Bank to secure the payment of a
loan worth P250,000.00. On 4 August
1975,
respondents
executed
the
corresponding promissory note, PN
BD#75/C-252, covering the said loan,
which provides that the loan matured on 4
August 1976 at an interest rate of 12% per
annum with a 2% service charge, and that
the note is secured by a real estate
mortgage as aforementioned.
The real estate mortgage contained the
following clause:
That for and in consideration of certain
loans,
overdraft
and
other
credit

accommodations obtained from the

Mortgagee by the Mortgagor and/or
hereinafter referred to, irrespective of
number, as DEBTOR, and to secure the

payment of the same and those that may

hereafter be obtained, the principal or all of
which is hereby fixed at Two Hundred Fifty

Thousand (P250,000.00) Pesos, Philippine

Currency, as well as those that the
Mortgagee may extend to the Mortgagor
and/or DEBTOR, including interest and
expenses or any other obligation owing to
the Mortgagee, whether direct or indirect,
principal or secondary as appears in the
accounts, books and records of the
Mortgagee, the Mortgagor does hereby
transfer and convey by way of mortgage
unto the Mortgagee, its successors or
assigns, the parcels of land which are
described in the list inserted on the back of
this document, and/or appended hereto,
together with all the buildings and
improvements now existing or which may
hereafter be erected or constructed
thereon, of which the Mortgagor declares
that he/it is the absolute owner free from all
liens and encumbrances. (this is a
blanket mortgage clause or dragnet
clause)
On 22 October 1976, Don Alviar executed
another promissory note, PN BD#76/C-345
for P2,640,000.00, secured by D/A SFDX
#129, signifying that the loan was secured
by a "hold-out" on the mortgagors foreign
currency savings account with the bank
under Account No. 129, and that the
mortgagors passbook is to be surrendered
to the bank until the amount secured by the
"hold-out" is settled.
On 27 December 1976, respondent
spouses executed for Donalco Trading,
Inc., of which the husband and wife were
President and Chairman of the Board and
Vice President, respectively, PN BD#76/C430 covering P545,000.000. As provided in
the note, the loan is secured by "CleanPhase out TOD CA 3923," which means
that the temporary overdraft incurred by

Donalco Trading, Inc. with petitioner is to be

converted into an ordinary loan.
On 16 March 1977, petitioner wrote Donalco
Trading, Inc., informing the latter of its
approval of a straight loan of P545,000.00,
the proceeds of which shall

be used to liquidate the outstanding loan

of P545,000.00 TOD. The letter likewise
mentioned that the securities for the loan
were the deed of assignment on two
promissory notes executed by Bancom
Realty Corporation with Deed of
Guarantee in favor of A.U. Valencia and
Co. and the chattel mortgage on various
heavy and transportation equipment.
On 06 March 1979, respondents paid
petitioner P2,000,000.00, to be applied
to the obligations of G.B. Alviar Realty
and Development, Inc. and for the
release of the
real
estate
mortgage
for the P450,000.00 loan
covering the two lots located at Vam
Buren and Madison Streets, North
Greenhills, San Juan, Metro Manila. The
payment was
acknowledged by
petitioner who accordingly released the
mortgage over the two properties.
On 15 January 1980, petitioner moved
for the extrajudicial foreclosure of the

mortgage on the property covered by TCT

No. 438157. Per petitioners computation,
respondents had the total obligation
of P1,608,256.68, covering the three
promissory notes plus assessed past due
interests and penalty charges. The public
auction sale of the mortgaged property was
set on 15 January 1980.
Respondents filed a complaint for
damages with a prayer for the issuance of
a writ of preliminary injunction with the
RTC of Pasig, claiming that they have paid
their principal loan secured by the
mortgaged property, and thus the
mortgage should not be foreclosed. For its
part, petitioner averred that the payment
of P2,000,000.00 made on 6 March 1979
was not a payment made by respondents,
but by G.B. Alviar Realty and Development
Inc., which has a separate loan with the
bank secured by a separate mortgage.
ISSUES:
1) Whether or not the blanket mortgage
clause or dragnet clause is valid - VALID

2) Whether or not the blanket mortgage

clause applies even to subsequent
advancements for which other securities
were intended - NO
3) Whether or not the foreclosure of the
property was proper - NO
HELD: A "blanket mortgage clause," also
known as a "dragnet clause" in American
jurisprudence, is one which is specifically
phrased to subsume all debts of past or
future origins. Such clauses
are
"carefully scrutinized and strictly
construed." Mortgages of this character
enable the parties to
provide
continuous dealings, the nature or
extent of which may not be known or
anticipated at the time, and they avoid
the expense and inconvenience of
executing a new security on each new
transaction.
A "dragnet clause" operates as a
convenience and accommodation to the
borrowers as it makes available additional
funds without their having to execute
additional security documents, thereby
saving time, travel, loan closing costs,
costs of extra legal services, recording
fees, et cetera. Indeed, it has been settled
in a long line of decisions that mortgages
given to secure future advancements
are valid and legal contracts, and the
amounts named as consideration in
said contracts do not limit the amount
for which the mortgage may stand as
security if from the four corners of the
instrument the intent to secure future
and other indebtedness can
be
gathered.
On the basis of the blanket mortgage
clause contained in the real estate
mortgage, petitioner and respondents
intended the real estate mortgage to
secure not only the P250,000.00 loan from
the petitioner, but also future credit
facilities and advancements that may be
obtained by the respondents.

Under American jurisprudence,

two
schools of thought have emerged on this
question. One school advocates that a
"dragnet clause" so worded as to be
broad enough to cover all other debts in
addition to the one specifically secured
will be construed to cover a different
debt, although such other debt is
secured by another mortgage. The
contrary thinking maintains that a
mortgage with such a clause will not
secure a note that expresses on its face
that it is otherwise secured as to its
entirety, at least to anything other than
a deficiency after exhausting the
security
specified
therein,
such
deficiency being an indebtedness within
the meaning of the mortgage, in the
absence of a special contract excluding
it from the arrangement.
The latter school represents the better
position. The parties having conformed to
the "blanket mortgage clause" or "dragnet
clause," it is reasonable to conclude that
they also agreed to an implied
understanding that subsequent loans
need not be secured by other securities,
as the subsequent loans will be secured
by the first mortgage. In other words, the
sufficiency of the first security is a
corollary component of the "dragnet
clause." But of course, there is no
prohibition, as in the mortgage contract in
issue, against contractually requiring other
securities for the subsequent loans. Thus,
when the mortgagor takes another loan
for which another security was given it
could not be inferred that such loan was
made in reliance solely on the original
security with the "dragnet clause," but
rather, on the new security given. This
is the "reliance on the security test."
It was therefore improper for petitioner
in this case to seek foreclosure of the
mortgaged property because of nonpayment of all the three promissory
notes. While the existence and validity of
the "dragnet clause" cannot be denied,

there is a need to respect the existence of

the
other
security given
for
PN
BD#76/C345. The foreclosure of the mortgaged
property
should
only
be
for
the P250,000.00 loan covered by PN
BD#75/C-252, and for any amount not
covered by the security for the second
promissory note. While the "dragnet
clause"
subsists,
the
security
specifically executed for subsequent
loans must first be exhausted before
the mortgaged property can be resorted
to.
It is important to note that the mortgage
contract, as well as the promissory
notes subject of this case, is a contract
of adhesion, to which respondents only
participation was the affixing of their
signatures or "adhesion" thereto. A
contract of adhesion is one in which a
party imposes a ready-made form of
contract which the other party may
accept or reject, but which the latter
cannot modify.
The real estate mortgage in issue appears
in a standard form, drafted and prepared
solely by petitioner, and which, according
to jurisprudence must be strictly construed
against the party responsible for its
preparation. If the parties intended that
the "blanket mortgage clause" shall
cover
subsequent
advancement
secured by separate securities, then the
same should have been indicated in the
mortgage contract. Consequently, any
ambiguity is to be taken contra
proferentum, that is, construed against the
party who caused the ambiguity which
could have avoided it by the exercise of a
little more care. To be more emphatic, any
ambiguity in a contract whose terms are
susceptible of different interpretations must
be read against the party who drafted
it, which is the petitioner in this case.

Even the promissory notes in issue were

made on standard forms prepared by
petitioner, and as such are likewise

contracts of adhesion. Being of such

nature, the same should be interpreted
strictly against petitioner and with even
more reason since having been
accomplished by respondents in the
presence of petitioners personnel and
approved by its manager, they could not
have been unaware of the import and
extent of such contracts.
Petitioner, however, is not without
recourse. Both the Court of Appeals and
the trial court found that respondents
have not yet paid the P250,000.00, and
gave no credence to their claim that they
paid the said amount when
they
paid petitioner P2,000,000.00. Thus, the
mortgaged property could still be
properly
subjected
to
foreclosure
proceedings for the unpaid P250,000.00
loan, and as mentioned earlier, for any
deficiency after D/A SFDX#129, security
for PN BD#76/C- 345, has been
exhausted, subject of
course to

defenses
which
respondents.

are

available

to

N.B. In the absence of clear, supportive

evidence of a contrary intention, a
mortgage containing a "dragnet clause"
will not be extended to cover future
advances
unless
the
document
evidencing the subsequent advance
refers to the mortgage as providing
security therefor.

PHILIPPINE CHARITY SWEEPSTAKES

OFFICE (PCSO) vs. NEW DAGUPAN
METRO GAS CORPORATION, PURITA
E. PERALTA and PATRICIA P. GALANG
FACTS: Purita E. Peralta is the registered
owner of a parcel of land located at
Bonuan Blue Beach Subdivision, Dagupan
City. In 1989, a real estate mortgage was
constituted over such property in favor of
PCSO to secure the payment of the
sweepstakes tickets purchased Patricia P.
Galang (provincial distributor).

However on July 31, 1990, Peralta sold,

under a conditional sale, the subject
property to New Dagupan.
The conveyance to be absolute (full
payment of the price of P800,000.00), New
Dagupan paid Peralta P200,000.00 upon
the execution of the corresponding deed
and the balance of P600,000.00 by
monthly instalments of P70,000.00.
Peralta showed to New Dagupan a
photocopy of TCT, which bore no liens and
encumbrances, and undertook to deliver
the owners duplicate within three (3)
months from the execution of the contract.
In view of Peraltas failure to deliver the
owners duplicate of TCT and to execute a
deed of absolute sale in its favor, New
Dagupan withheld payment of the last
instalment and through its President, Julian
Ong Cua, executed an affidavit of
adverse claim, which was annotated on
October 1, 1991.
Due to Peraltas continued failure to deliver
a deed of absolute sale and the owners
duplicate of the title, New Dagupan filed a
complaint for specific performance her.
On the other hand, on May 20, 1992,
during the pendency of New Dagupans
complaint against Peralta, PCSO caused
the registration of the mortgage. PCSO
filed an application for the extrajudicial
foreclosure sale of the subject property in
view of Galangs failure to fully pay the
sweepstakes she purchased in 1992. A
public auction took place on June 15, 1993
where PCSO was the highest bidder. A
certificate of sale was correspondingly
issued to PCSO.

New Dagupan obtained from the ROD of

Dagupan City for its use in Civil Case a
certified true copy of TCT that reflected
PCSOs mortgage lien, claiming that it is only
then that it was informed of the subject
mortgage, sent a letter to PCSO on

October 28, 1993, notifying the latter of

its complaint against Peralta and its
claim over the subject property and
suggesting that PCSO intervene and
participate in the case.
The RTC rendered a Decision (for the
specific performance case), approving
the compromise agreement between
Peralta and New Dagupan. When the
decision became final and executory,
New Dagupan once again demanded
Peraltas delivery of the owners
duplicate of TCT.
In a letter dated March 29, 1994, New
Dagupan made a similar demand from
PCSO, who in response, stated that it
had already foreclosed the mortgage on
the subject property and it has in its
name a certificate of sale for being the
highest bidder in the public auction that
took place on June 15, 1993.
Thus, New Dagupan filed with the RTC a
petition against PCSO for the annulment

of TCT or surrender of the owners

duplicate thereof.
The RTC Branch 42 rendered a Decision in
New Dagupans favor and ordered PCSO
to deliver the owners duplicate copy of
TCT in its possession to the Registry of
Deeds of Dagupan City for the purpose of
having the decision to be annotated at the
back thereof.
PCSOs appeal from the foregoing adverse
decision was dismissed. By way of its
assailed decision, the CA did not agree
with PCSOs claim that the subject
mortgage is in the nature of a continuing
guaranty,
holding
that
Peraltas
undertaking to secure Galangs liability to
PCSO is only for a period of one year and
was extinguished when Peralta completed
payment on the sweepstakes tickets she
purchased in 1989.
ISSUE: Who between New Dagupan and
PCSO has a better right to the property in

question NEW DAGUPAN

RULING: As a general rule, a mortgage
liability is usually limited to the amount
mentioned in the contract. However, the
amounts named as consideration in a
contract of mortgage do not limit the
amount for which the mortgage may stand
as security if from the four corners of the
instrument the intent to secure future and
other indebtedness can be gathered.
Alternatively, while a real estate mortgage
may exceptionally secure future loans or
advancements, these future debts must be
specifically described in the mortgage
contract. An obligation is not secured by a
mortgage unless it comes fairly within the
terms of the mortgage contract.
The stipulation extending the coverage of a
mortgage to advances or loans other than
those already obtained or specified in the
contract is valid and has been commonly
referred to as a "blanket mortgage" or
"dragnet" clause.
In Prudential Bank v. Alviar,28 this Court
elucidated on the nature and purpose of
such a clause as follows:
A "blanket mortgage clause," also known
as a "dragnet clause" in American
jurisprudence, is one which is specifically
phrased to subsume all debts of past or
future origins. Such clauses are "carefully
scrutinized
and
strictly
construed."
Mortgages of this character enable the
parties to provide continuous dealings, the
nature or extent of which may not be
known or anticipated at the time, and they
avoid the expense and inconvenience of
executing a new security on each new
transaction. A "dragnet clause" operates as
a convenience and accommodation to the
borrowers as it makes available additional

funds without their having to execute

additional security documents, thereby
saving time, travel, loan closing costs, costs
of extra legal services, recording

fees, et cetera. x x x.29 (Citations omitted)

A mortgage that provides for a dragnet
clause is in the nature of a continuing
guaranty and constitutes an exception to
the rule than an action to foreclose a
mortgage must be limited to the amount
mentioned in the mortgage contract. Its
validity is anchored on Article 2053 of the
Civil Code and is not limited to a single
transaction, but contemplates a future
course of dealing, covering a series of
transactions, generally for an indefinite
time or until revoked. It is prospective in
its operation and is generally intended to
provide security with respect to future
transactions within certain limits, and
contemplates a succession of liabilities,
for which, as they accrue, the guarantor
becomes liable. In other words, a
continuing guaranty is one that covers all
transactions, including those arising in
the future, which are within the
description or contemplation of the
contract of guaranty, until the expiration
or termination thereof.30

In this case, PCSO claims the subject

mortgage is a continuing guaranty.
According to PCSO, the intent was to
secure Galangs ticket purchases other
than those outstanding at the time of the
execution of the Deed of Undertaking with
First Real Estate Mortgage on March 8,
1989 such that it can foreclose the subject
mortgage for Galangs non-payment of her
ticket purchases in 1992. PCSO does not
deny and even admits that Galang had
already settled the amount of P450,000.00.
However, PCSO refuses to concede that
the subject mortgage had already been
discharged, claiming that Galang had
unpaid ticket purchases in 1992 and these
are likewise secured as evidenced by the
following clause in the Deed
of
Undertaking with First Real Estate
Mortgage.
As the CA correctly observed, the use

of

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

the terms "outstanding" and "unpaid"

militates against PCSOs claim that future
ticket purchases are likewise secured. That
there is a seeming ambiguity between the
provision relied upon by PCSO containing
the phrase "after each draw" and the other
provisions, which mention with particularity
the amount of P450,000.00 as Galangs
unpaid and outstanding account and
secured by the subject mortgage, should
be construed against PCSO. The subject
mortgage is a contract of adhesion as it
was prepared solely by PCSO and the only
participation of Galang and Peralta was the
act of affixing their signatures thereto.
Considering that the debt secured had
already been fully paid, the subject
mortgage had already been discharged
and there is no necessity for any act or
document to be executed for the purpose.
As provided in the Deed of Undertaking
with First Real Estate Mortgage:
15. Upon payment of the principal amount
together with interest and other expenses
legally incurred by the MORTGAGEE, the
above-undertaking
is
considered
terminated.
Section 6234 of Presidential Decree (P.D.)
No. 1529 appears to require the execution
of an instrument in order for a mortgage to
be cancelled or discharged. However, this
rule presupposes that there has been a
prior registration of the mortgage lien prior
to its discharge.
In this case, the subject mortgage had
already been cancelled or terminated upon
Galangs full payment before
PCSO
availed of registration in 1992.

170

As the subject mortgage was not annotated

on TCT No. 52135 at the time it was
terminated, there was no need for Peralta to
secure a deed of cancellation in order for
such discharge to be fully effective and duly
reflected on the face of her title.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

Therefore, since the subject mortgage is

not in the nature of a continuing guaranty
and given the automatic termination
thereof, PCSO cannot claim that
Galangs ticket purchases in 1992 are
also secured. From the time the amount
of P450,000.00 was fully settled, the
subject mortgage had already been
cancelled such that Galangs subsequent
ticket purchases are unsecured. Simply
put, PCSO had nothing to register, much
less, foreclose.
Consequently, PCSOs registration of its
non-existent
mortgage
lien
and
subsequent foreclosure of a mortgage
that was no longer extant cannot defeat
New Dagupans title over the subject
property.

ASIA TRUST DEVELOPMENT BANK vs.

CARMELO H. TUBLE
FACTS: Carmelo H. Tuble, who served
as the vice-president of petitioner Asia

170

trust Development Bank availed himself of

the car incentive plan and loan privileges
offered by the bank. He was also entitled to
the Senior Managers Deferred Incentive
Plan (DIP)
Tuble acquired a Nissan Vanette through
the companys car incentive plan. The
arrangement was made to appear as a
lease agreement requiring only the
payment of monthly rentals. Accordingly,
the lease would be terminated in case of
the employees resignation or retirement
prior to full payment of the price.
As regards the loan privileges, Tuble
obtained three separate loans.
a.) First, a real estate loan evidenced by
the January 18 1993 Promissory note with
maturity date of January 1, 1999 was
secured by a mortgage over his property
covered by transfer certificate.
b.) Second was a consumption loan,
evidenced by the January 10, 1994
c.) Third, a salary loan.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

He resigned on March 30, 1995 and was

subsequently given the option to either
return the vehicle without any further
obligation or retain the unit or pay its
remaining book value.
Tuble had the following obligations to the
bank after his retirement
a.) The purchase or return of the
Nissan
b.) 100,000 as consumption loan
c.) 421,800 as real estate loan
d.) 16,250 as salary loan
Moreover, the bank also owed Tuble his
pro-rata share in the DIP which was to be
issued after the bank had given the
resigned employees clearance and 25,797
representing
his
final
salary
and
corresponding 13th month pay.
He claimed that since he and the bank
were debtors and creditors of each other,
the offsetting of loans could legally take
place. He then asked the bank to simply
compute his DIP and apply his receivables
to his loans. The bank refused and sent
him a demand letter and required him to
return the Nissan Vanette.
On August 14, 1995, Tuble wrote the bank
again to follow up his request to offset the
loans. This was not immediately acted
upon, and it was only on October 13, 1995
that the bank finally allowed the offsetting
of his various claims and liabilities. As a
result, his liabilities were reduced to 970
thousand plus the unreturned value of the
vehicle.
The bank then filed a complaint for replevin
against tuble. The judgement was

171

favorable for the bank. To collect the liabilities

of Tuble, it also filed a petition for extrajudicial foreclosure of real estate mortgage
over his property. It was based on his real
estate loan.
He redeemed the property. With

this

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

payment, he was released from his

accountabilities and had his clearance.
The bank then issued the clearance
necessary for the release of his DIP
share. Tuble received a managers check
in the amount of 166,049 representing
his share in the DIP funds.
Tuble paid the redemption price but
disputed its costing. He filed a complaint
for recovery of a sum of money and
damages before the RTC. The RTC
ruled in favor of Tuble. They held that the
value of the car should not have been
included given that it was already
returned. The CA affirmed the RTC.
ISSUES:
ISSUE 1: Whether or not the bank is
entitled to include these items in the
redemption price: the 18% annual
interest on the bid price of P421,800.
RULING: The 18% Annual Interest on
the Bid Price of P421,800

172

The Applicable Law

The bank argues that instead of referring to
the Rules of Court to compute the
redemption price, the courts a quo should
have applied the General Banking Law,
considering that petitioner is a banking
institution.
The statute referred to requires that in the
event of judicial or extrajudicial foreclosure
of any mortgage on real estate that is used
as security for an obligation to any bank,
banking institution, or credit institution, the
mortgagor can redeem the property by
paying the amount fixed by the court in the
order of execution, with interest thereon at
the rate specified in the mortgage.18
Petitioner is correct.
From the plethora of cases, the SC held
that the General Banking Act being a
special and subsequent legislation has
the effect of amending Section 6 of Act No.

3135, insofar as the redemption price is

concerned, when the mortgagee is a bank.
Thus, the amount to be paid in redeeming
the property is determined by the General
Banking Act, and not by the Rules of Court
in Relation to Act 3135.
The Remedy of Foreclosure
Firstly, at the time respondent resigned,
which was chronologically before the
foreclosure proceedings, he had several
liabilities to the bank. Secondly, when the
bank later on instituted the foreclosure
proceedings, it foreclosed only the
mortgage secured by the real estate loan
of P421,800.22 It did not seek to include, in
the foreclosure, the consumption loan
under Promissory Note No. 0143 or the
other alleged obligations of respondent.
Thirdly, on 28 February 1996, the bank
availed itself of the remedy of foreclosure
and, in doing so, effectively gained the
property.
As a result of these established facts, one
evident conclusion surfaces: the Real
Estate Mortgage Contract on the
secured
property
is
already
extinguished.
In foreclosures, the mortgaged property is
subjected to the proceedings for the
satisfaction of the obligation. As a result,
payment is effected by abnormal means
whereby the debtor is forced by a judicial
proceeding to comply with the presentation
or to pay indemnity.
Once the proceeds from the sale of the
property are applied to the payment of the
obligation, the obligation is already
extinguished.
Thus, in Spouses Romero v. Court of
Appeals, the SC held that the mortgage

indebtedness was extinguished with the

foreclosure and sale of the mortgaged
property, and that what remained was the
right of redemption granted by law.

Consequently, since the Real Estate

Mortgage
Contract
is
already
extinguished, petitioner can no longer
rely on it or invoke its provisions,
including the dragnet clause stipulated
therein. It follows that the bank cannot
refer to the 18% annual interest charged
in Promissory Note No. 0143, an
obligation allegedly covered by the
terms of the Contract.
Neither can the bank use the
consummated contract to collect on the
rest of the obligations, which were not
included when it earlier instituted the
foreclosure proceedings. It cannot be
allowed to use the same security to
collect on the other loans. To do so
would be akin to foreclosing an already
foreclosed property.
Rather than relying on an expired
contract, the bank should
have
collected on the excluded loans by
instituting the proper actions for

recovery of sums of money. Simply put,

petitioner should have run after Tuble
separately, instead of hostaging the
same property to cover all of his
liabilities.
The Dragnet Clause
In any event, assuming that the Real
Estate Mortgage Contract subsists, the SC
ruled that the dragnet clause therein does
not justify the imposition of an 18% annual
interest on the redemption price.
The Court has recognized that, through
a dragnet clause, a real estate mortgage
contract may exceptionally secure
future loans or advancements. But an
obligation is not secured by a
mortgage, unless, that mortgage comes
fairly within the terms of the mortgage
contract.
Moreover, the mortgage agreement, being
a contract of adhesion, is to be carefully
scrutinized and strictly construed against
the bank, the party that prepared the

agreement.
The Court finds that there is no specific
mention of interest to be added in case of
either default or redemption. The Real
Estate Mortgage Contract itself is silent on
the computation of the redemption price.
Although it refers to the Promissory Notes
as constitutive of Tubles secured
obligations, the said contract does not
state that the interest to be charged in case
of redemption should be what is specified
in the Promissory Notes.
Thus, an ambiguity results as to which
interest shall be applied, for to apply an
18% interest per annum based on
Promissory Note No. 0143 will negate the
existence of the 0% interest charged by
Promissory Note No. 0142. Notably, it is
this latter Promissory Note that refers to
the principal agreement to which the
security attaches.
In resolving this ambiguity, the SC refer to
a basic principle in the law of contracts:
"Any ambiguity is to be taken contra
proferentem, that is, construed against
the party who caused the ambiguity
which could have avoided it by the
exercise of a little more care."
Therefore, the ambiguity in the mortgage
deed whose terms are susceptible of
different interpretations must be read
against the bank that drafted it.
Furthermore, the Court refuses to be
blindsided by the dragnet clause in the
Real Estate Mortgage Contract to
automatically include the consumption
loan, and its corresponding interest, in
computing the redemption price.

In the absence of clear and supportive

evidence of a contrary intention, a
mortgage containing a dragnet clause will
not be extended to cover future advances,
unless the document evidencing
the
subsequent advance

refers to the mortgage as providing

security therefor.
In this regard, the Court adopted the
"reliance on the security test", the test as
follows:
A mortgage with a "dragnet clause" is
an "offer" by the mortgagor to the
bank to provide the security of the
mortgage for advances of and when
they were made. Thus, it was
concluded that the "offer" was not
accepted by the bank when a
subsequent advance was made
because (1) the second note was
secured by a chattel mortgage on
certain vehicles, and the clause
therein stated that the note was
secured by such chattel mortgage; (2)
there was no reference in the second
note or chattel mortgage indicating a
connection between the real estate
mortgage and the advance; (3) the
mortgagor signed the real estate
mortgage by her name alone, whereas
the second note and chattel mortgage

were signed by the mortgagor doing

business under an assumed name; and
(4) there was no allegation by the bank,
and apparently no proof, that it relied on
the security of the real estate mortgage
in making the advance.
(Emphasis
supplied)
The second loan agreement, or Promissory
Note No. 0143, referring to the
consumption loan makes no reference to
the earlier loan with a real estate
mortgage. Neither does the bank make any
allegation that it relied on the security of
the real estate mortgage in issuing the
consumption loan to Tuble.
Tuble was Asia Trusts previous vicepresident, as one of the senior officers, the
consumption loan was given to him not as
an ordinary loan, but as a form of
accommodation or privilege. The banks
grant of the salary loan to Tuble was
apparently not motivated by the creation of
a security in favor of the bank, but by the

fact the he was a top executive of

petitioner.

obligor is proven to have defaulted

in paying the loan.

Thus, the bank cannot claim that it relied

on the previous security in granting the
consumption loan to Tuble. For this
reason, the dragnet clause will not be
extended to cover the consumption loan. It
follows, therefore, that its corresponding
interest 18% per annum is inapplicable.

A default must exist before the bank can

collect the compensatory legal interest of
12% per annum. Tuble denies being in

ISSUE 2: Whether or not the bank is

entitled to interest charges on Promissory
Note 0142
RULING: In addition to the 18% annual
interest, the bank also claims a 12% per
annum on the consumption loan.
Notwithstanding that promissory note
contains no stipulation on interest
payments, the bank still claims that Tuble
is liable to pay the legal interest pursuant
to article 2209 of the family code:
Article 2209 If the obligation consists in
the payment of a sum of money and the
debtor incurs in delay, the indemnity for
damages, there being no stipulation shall
be the payment of the interest agreed upon
and in the absence of stipulation, the legal
interest, which is six per cent per annum.
While Article 2209 allows the recovery of
interest sans stipulation, this charge is
provided not as a form of monetary interest
but as one of compensatory interest.
a.) Monetary interest refers to the
compensation set by the parties
for the use or forbearance of
money.
b.) Compensatory interest refers to
the penalty or indemnity for
damages imposed by law or
courts. This is due only if the

default since by way of legal

compensation, he effectively paid his
liabilities on time.

controversy,

The court held that there was no legal

compensation. In order for legal
compensation to take effect, article 1279
requires that the debts be liquidated and
demandable.

Liquidated debts are those who exact

amount has already been determined. In
this case, the receivable of Tuble, including
his DIP share was not yet determined. It
was the banks policy to compute and
issue the computation only after the retired
employee had been cleared by the bank.
Thus, Tuble incorrectly invoked legal
compensation.

a. Requisites for legal compensation:

i.) That each one of the obligors
be bound
physically, and that he be
at the same time a principal creditor of
the other.
ii.) That both debts consist in a
sum of money, or if
the
things
due are consumable,
they be of the
same kind, and
also of the same quality if the
latter has been stated.
iii.) That the two debts be due
iv.) That they be liquidated and
demandable
v.) That over neither of them there
be any
retention,
or

commenced
by
third
persons
and
communicated n due time to the debtor.

SPOUSES ANTONIO & LETICIA VEGA

VS SSS & PILAR DEVELOPMENT
CORPORATION
FACTS: Magdalena Reyes owned a piece
of titled land in Pilar Village, Las Pias
CIty. On August 17, 1979, she got a
housing Loan from SSS for which she
mortgaged her land.
Late 1979, Reyes asked the Sps Vega to

assume the loan and buy her house and

lot since she was to emigrate.
An employee at SSS said, however, that
SSS did not approve of members
transferring their mortgaged homes.
But the Spouses Vega (Vegas) could make
a private arrangement with Reyes provided
that they pay the monthly amortizations on
time. Vegas agreed for Reyes to execute in
their favor a deed of assignment of real
property with assumption of mortgage and
paid Reyes P20,000 after she undertook to
update the amortizations before leaving the
country. The Vegas took possession of the
house in January 1981. Reyes did not
execute the deed of assignment. She left
the country and left her sister (Julieta
Ofilada) a special power of attorney to
convey ownership of property.
Sometime between 1983 and
1984,
Ofilada executed the deed of assignment
in favor of the Vegas, kept the original and
gave the Vegas two copies, one to be
given to the Home Development Mortgage
Fund and kept the other. A storm in 1984
resulted in flood and destroyed their
personal copy.
In 1992, the Vegas learned that Reyes did
not update the amortizations because they
received a notice to Reyes from the SSS.
They told the SSS that they already gave
the payment to Reyes but, since it
appeared indifferent, on January 6, 1992,
the Vegas updated the amortization and
paid P115,738.48 to the SSS. They
negotiated seven additional remittances
and the SSS accepted P8,681 more from
the Vegas.

On April 16, 1993, PDC filed an action for

sum of money against Reyes before the RTC
of Manila, claiming that Reyes borrowed from
Apex Mortgage and Loans Corporation
(Apex) P46,500 to buy the lot and construct a
house on it.

Apex assigned Reyes' credit to PDC on

December 29, 1992.
RTC: Reyes must pay the PDC the loan
of P46,398 plus interest and penalties
beginning April 11, 1979 as well as
attorney's fees and costs. Unable to pay,
RTC issued a writ of execution against
Reyes and its Sheriff levied on the
property in Pilar Village.
On Feb 16, 1994, the Vegas requested
the SSS to acknowledge their status as
subrogees and to give them an update of
the account so they could settle it in full.
SSS did not reply. RTC sheriff published
a notice for the auction sale of the
property on Feb 24, March 3 and 10,
1994. He also gave notice to the Vegas
on March 20. The Vegas filed an affidavit
of third party claimant and a motion to
quash the levy on the property. However,
RTC directed the sheriff to proceed with
the execution.

The Vegas got a telegram informing them

that the SSS intended to foreclose on the
property to satisfy the unpaid debt of
P38,789.58. The Vegas requested from the
SSS in writing for the exact amount of the
indebtedness and for assurance that they
would be entitled to the discharge of the
mortgage and delivery of the proper
subrogation documents upon payment.
They also sent a P37,521.95 manager's
check that SSS refused to accept.
The Vegas filed an action for consignation,
damages, and injunction with application
for preliminary injunction and TRO against
SSS, PDC, the RTC sheriff and the
Register of Deeds before the RTC in Las
Pias. While the case was pending, SSS
released the mortgage to PDC. A writ of
possession evicted the Vegas from the
property. RTC decided in favor of the
Vegas. CA reversed.
ISSUE :WON Reyes validly sold her SSSmortgaged property to the Vegas

HELD: Reyes acquired the property in this

case through a loan from the SSS in
whose favor she executed a mortgage as
collateral for the loan. Although the loan
was still unpaid, she assigned the property
to the Vegas without notice to or the
consent of the SSS. The Vegas continued
to pay the amortizations apparently in
Reyes name. Meantime, Reyes apparently
got a cash loan from Apex, which assigned
the credit to PDC. This loan was not
secured by a mortgage on the property but
PDC succeeded in getting a money
judgment against Reyes and had it
executed on the property. Such property
was still in Reyes name but, as pointed out
above, the latter had disposed of it in favor
of the Vegas more than 10 years before
PDC executed on it.
The question is: was Reyes disposal of the
property in favor of the Vegas valid given a
provision in the mortgage agreement that
she could not do so without the written
consent of the SSS?
The CA ruled that, under Article 1237 of
the Civil Code, the Vegas who paid the
SSS amortizations except the last on
behalf of Reyes, without the latters
knowledge or against her consent, cannot
compel the SSS to subrogate them in her
rights arising from the mortgage. Further,
said the CA, the Vegas claim of
subrogation was invalid because it was
done without the knowledge and consent
of the SSS as required under the mortgage
agreement.
But Article 1237 cannot apply in this case
since Reyes consented to the transfer of
ownership of the mortgaged property to the
Vegas. Reyes also agreed for the Vegas to

assume the mortgage and pay the balance of

her obligation to SSS. Of course, paragraph
4 of the mortgage contract covering the
property required Reyes to secure SSS
consent before selling the property. But,
although such a stipulation is valid and
binding, in the sense that the

SSS cannot be compelled while the loan

was unpaid to recognize the sale, it
cannot be interpreted as absolutely
forbidding her, as owner of the
mortgaged property, from selling the
same while her loan remained unpaid.
Such stipulation contravenes public
policy, being an undue impediment or
interference on the transmission of
property.
Besides, when a mortgagor sells the
mortgaged property to a third person, the
creditor may demand from such third
person the payment of the principal
obligation. The reason for this is that the
mortgage credit is a real right, which
follows the property wherever it goes,
even if its ownership changes. Article
2129 of
the Civil Code gives the
mortgagee, here the SSS, the option of
collecting from the third person in

possession of the mortgaged property in

the concept of owner. More, the mortgagorowners sale of the property does not
affect the right of the registered mortgagee
to foreclose on the same even if its
ownership had been transferred to another
person. The latter is bound by the
registered mortgage on the title he
acquired.
After the mortgage debt to SSS had been
paid, however, the latter had no further
justification for withholding the release of
the collateral and the registered title to the
party to whom Reyes had transferred her
right as owner.
Under the circumstance, the Vegas had
the right to sue for the conveyance to them
of that title, having been validly subrogated
to Reyes rights.

PINEDA VS. CA
FACTS: Spouses Benitez mortgaged a
house and lot in favor of Juanita P. Pineda
(Pineda) and Leila P. Sayoc (Sayoc)
which was not registered . With the
consent of Pineda, spouses Benitez sold
the house, which was part of the Property,
to Olivia G. Mojica (Mojica). On the same
date, Mojica filed a petition for the issuance
of a second owners duplicate alleging that
she purchased a parcel of land and the
owners duplicate copy was lost. The
same was granted.
The lot was also subsequently sold to
Mojica. Mojica executed a deed of
mortgage over the same property in favor
of Gonzales which deed was registered.
Pineda and Sayoc filed a complaint against
the Spouses Benitez and Mojica. The
complaint prayed for the cancellation of the
second owners duplicate. During the
pendency of the case, Pineda caused the
annotation of a notice of lis pendens. The
Court ruled that the second owners
duplicate was void.
Meanwhile, Mojica defaulted in paying the
obligation to Gonzales so the latter
foreclosed the mortgaged and purchased it
at the auction sale. A new TCT was issued
in the name of Gonzales.
Pineda and Sayoc filed a motion with the
trial court for the issuance of an order
requiring Gonzales to surrender the
owners duplicate of TCT to the ROD.
The Trial Court declared the title of
Gonzales as void and ordered the
reinstatement of the TC in the name of

Spouses Benitez. The CA ruled in favor of

Gonzales
ISSUES:
1. WON the mortgage to Gonzales is
valid.
YES
2.WON Gonzales is an innocent purchaser/
mortgagee for value. YES

HELD:
Mojicas Title is Void Since the TCT of
the property was not actually lost but
was in the possession of Pineda, the
reconstitution proceeding and the
second TCT issue in favor of Mojica by
virtue of the sale were void.
However, the prior mortgage of the
Property by the Spouses Benitez to
Pineda and Sayoc did not prevent the
Spouses Benitez, as owners of the
Property, from selling the Property to
Mojica. A mortgage is merely an
encumbrance on the property and does
not extinguish the title of the debtor who
does not lose his principal attribute as
owner to dispose of the property. The law
even considers void a stipulation
forbidding the owner of the property from
alienating the mortgaged immovable.
Since the Spouses Benitez were the
undisputed owners of the Property, they
could validly sell and deliver the Property

to Mojica. The execution of the notarized

deed of sale between the Spouses Benitez
and Mojica had the legal effect of actual or
physical delivery. Ownership of the
Property passed from the Spouses Benitez
to Mojica. The nullity of the second owners
duplicate of TCT did not affect the validity
of the sale as between the Spouses
Benitez and Mojica.
Gonzales is an Innocent Purchaser for
Value The nullity of MOjicas title does not
automatically carry with it the nullity of the
annotation of Gonzales mortgage. The
rule is that a mortgage annotated on a void
title is valid if the mortgagee registered the
mortgage in good faith.
Gonzales registered her mortgage in good
faith. Gonzales had no actual notice of the
prior unregistered mortgage in favor of
Pineda and Sayoc. To bind third parties to
an unregistered encumbrance, the law
requires actual notice. The fact that Mojica,

who sold the Property to Gonzales, had

SPOUSES ROSALES VS. SPOUSES
SUBA
actual notice of the unregistered mortgage
did not constitute actual notice to
FACTS: On June 13, 1997, RTC rendered a
Gonzales, absent proof that Gonzales
decision in two Civil Cases, the dispositive
herself had actual notice of the prior
portion of which reads:
mortgage. Thus, Gonzales acquired her (1) Declaring the Deed of Sale of Exhibit D, G
rights as a mortgagee in good faith.
and I, affecting the property in
When Mojica defaulted in paying her debt,
Gonzales
caused
the
extrajudicial
foreclosure of the mortgaged Property.
Gonzales purchased the mortgaged
Property as the sole bidder at the public
auction sale. For Mojicas failure to
redeem the foreclosed Property within the
prescribed period, Gonzales consolidated
her title to the Property. Absent
anyevidence to the contrary, the sale at
public auction of the Property to Gonzales
was valid. Thus, the title or ownership of
the Property passed from Mojica to
Gonzales. At this point,
therefore,
Gonzales became the owner of the
Property. When Gonzales purchased the
Property at the auction sale, Pineda and
Sayoc had already annotated the lis
pendens on the original of TCT 8361,
which remained valid. However, the
mortgage of Gonzales was validly
registered prior to the notation of the lis
pendens. The subsequent annotation of
the lis pendens could not defeat the rights
of the mortgagee or the purchaser at the
auction sale who derived their rights under
a prior mortgage validly registered. The
settled rule is that the auction sale
retroacts to the date of the registration of
the mortgage, putting the auction sale
beyond the reach of any intervening lis
pendens, sale or attachment.

question, as an equitable mortgage;

(2) Declaring the parties Erlinda Sibug and
Ricardo Rosales, within 90 days from
finality of this Decision, to deposit with
the Clerk of Court, for payment to the
parties Felicisimo Macaspac and Elena
Jiao, the sum of P65,000.00, with
interest at nine (9) percent per annum
from September 30, 1982 until payment
is made, plus the sum of P219.76 as
reimbursement for real estate taxes;
(3) Directing the parties Felicisimo Macaspac
and Elena Jiao, upon the deposit on their
behalf of the amounts specified in the
foregoing paragraph, to execute a deed
of reconveyance of the property in
question to Erlinda Sibug, married to
Ricardo Rosales, and the Register of
Deeds of Manila shall cancel Transfer
Certificate of Title No. 150540 in the
name of the Macaspacs (Exh. E) and
issue new title in the name of Sibug;
(4) For non-compliance by Sibug and Rosales
of the directive in paragraph (2) of this
dispositive portion, let the property be
sold in accordance with the Rules of
Court for the release of the mortgage

debt and the issuance of title to the

purchaser.
The decision became final and executor.
Spouses Rosales, judgment debtors and
petitioners failed to comply with par 2
(deposit with Clerk of Court 65k). This
prompted Macaspac, as judgment creditor,
to file a motion for execution. On May 15,
1998, an auction sale of the property was
held, wherein petitioners participated. The
property was sold for 285k to spouses
Suba (respondents), being the highest
bidders.
Respondents thereafter filed with the court
a motion for writ of possession, contending
that the confirmation of the sale effectively
cut of petitioners equity of redemption.
RTC ruled that petitioners have no right to
redeem since the case is for judicial
foreclosure
of
mortgage.
Hence,
respondents as purchasers are entitled to
possession. CA affirmed: no right of

redemption
mortgage.

in

judicial

foreclosure

of

ISSUE: WON petitioners have the right to

redeem the subject property. NO
HELD: The decision of the trial court,
which is final and executory, declared the
transaction between petitioners and
Macaspac an equitable mortgage. The
Court defined an equitable mortgage as
one which although lacking in some
formality, or form or words, or other
requisites demanded by a statute,
nevertheless reveals the intention of the
parties to charge real property as security
for a debt, and contains nothing impossible
or contrary to law. An equitable mortgage
is not different from a real estate mortgage,
and the lien created thereby ought not to
be defeated by requiring compliance with
the formalities necessary to the validity of a
voluntary real estate mortgage.[6] Since
the parties transaction is an equitable
mortgage and that the trial court ordered its
foreclosure, execution of judgment is
governed by Sections 2 and 3, Rule 68 of
the 1997 Rules of Civil Procedure, as
amended.
In Huerta Alba Resort, Inc. vs. Court of
Appeals,[7] we held that the right of
redemption is not recognized in a judicial
foreclosure, thus:
The right of redemption in relation to a
mortgage understood in the sense of a
prerogative to re-acquire mortgaged
property after registration of the foreclosure
sale exists only in the case of the
extrajudicial foreclosure of the mortgage.
No such right is recognized in a judicial
foreclosure except only where the

Where the foreclosure is judicially

effected, however, no equivalent right of
redemption exists. The law declares that a
judicial foreclosure sale, when confirmed
by an order of the court, x x x shall operate
to divest the rights of all the parties to the
action and to vest their rights in the
purchaser, subject to such rights of
redemption as may be allowed by law.
Such rights exceptionally allowed by law
(i.e., even after the confirmation by an
order of the court) are those granted by the
charter of the Philippine National Bank (Act
Nos. 2747 and 2938), and the General
Banking Act (R.A.337). These laws confer
on the mortgagor, his successors in
interest or any judgment creditor of the
mortgagor, the right to redeem the property
sold on foreclosureafter confirmation by
the court of the foreclosure salewhich
right may be exercised within a period of
one (1) year, counted from the date of
registration of the certificate of sale in the
Registry of Property.
But, to repeat, no such right of redemption
exists in case of judicial foreclosure of a
mortgage if the mortgagee is not the PNB
or a bank or banking institution. In such a
case, the foreclosure sale,
when
confirmed by an order of the court, x x x
shall operate to divest the rights of all the
parties to the action and to vest their rights
in the purchaser. There then exists only
what is known as the equity of redemption.
This is simply the right of the defendant
mortgagor to extinguish the mortgage and
retain ownership of the property by paying
the secured debt within the 90-day period
after the judgment becomes final, in
accordance with Rule 68, or even after the

mortgagee is the Philippine National bank

or a bank or a banking institution.

foreclosure sale
confirmation.

but

prior

to

its

Where a mortgage is foreclosed

extrajudicially, Act 3135 grants to the
mortgagor the right of redemption within
one (1) year from the registration of the
sheriffs certificate of foreclosure sale.

This is the mortgagors equity (not right) of

redemption which, as above stated, may
be exercised by him even beyond the 90day period from the date of service of the
order, and even after the foreclosure sale

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

itself, provided it be before the order of

confirmation of the sale. After such order
of confirmation, no redemption can be
effected any longer.
Clearly, as a general rule, there is no right
of redemption in a judicial foreclosure of
mortgage. The only exemption is when the
mortgagee is the Philippine National Bank
or a bank or a banking institution. Since
the mortgagee in this case is not one of
those mentioned, no right of redemption
exists in favor of petitioners. They merely
have an equity of redemption, which, to
reiterate, is simply their right, as
mortgagor, to extinguish the mortgage and
retain ownership of the property by paying
the secured debt prior to the confirmation
of the foreclosure sale. However, instead
of exercising this equity of redemption,
petitioners chose to delay the proceedings
by filing several manifestations with the
trial court. Thus, they
only
have
themselves to blame for the consequent
loss of their property.

SPOUSES LANDRITO VS. CA

FACTS : In July 1990, spouses Landrito
obtained a loan of P350,000.00 from
respondent Carmencita San Diego. To
secure payment thereof, petitioners
executed on 02 August 1990 a deed of
real estate mortgage over their parcel of
land located at Bayanan, Muntinlupa,
Rizal.
After making substantial payments,
petitioners again obtained and
were
granted by Carmencita San Diego an
additional loan of One Million Pesos. To
secure this additional loan, the parties

180

executed on 13 September 1991 an

"Amendment of Real Estate Mortgage",
whereunder they stipulated that the loan shall
be paid within six (6) months from 16
September 1991, and if not paid within said
period, the mortgagee shall have the right to
declare the mortgage due and may

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

immediately foreclose the same judicially

or extrajudicially, in accordance with law.
On 30 June 1993, after her efforts to
collect
proved
futile,
respondent
Carmencita San Diego filed a petition for
the extrajudicial foreclosure of the
mortgage. Property was sold in a public
auction with Carmencita San Diego as
the highest bidder for P2,000,000.00.
With the petitioners having failed to
redeem their property within the 1-year
redemption period from the date of
inscription of the sheriffs certificate of
sale, as provided for in Act No. 3135, as
amended, the San Diegos caused the
consolidation of title over the foreclosed
property in their names.
Then, on 09 November 1994, petitioners
filed their complaint for annulment of the
extrajudicial foreclosure and auction
sale, with damages. Petitioners alleged
that (1) said foreclosure and auction sale

180

were null and void for failure to comply with

the requirements of notice and publication,
as mandated by Act 3135, as amended; (2)
the mortgaged property was illegally
foreclosed in the light of the settled rule
that an action to foreclose a mortgage
must be limited to the amount mentioned in
the mortgage document, in this case,
P1,000,000.00,
which
amount
was
allegedly
bloated
by
respondent
Carmencita San Diego to P1,950,000.00;
and (3) the San Diegos application for
consolidation of title was premature
because the husband, Benjamin San
Diego, allegedly granted them
an
extension of the period of redemption up to
11 November 1994.
TC- the latters cause of action is already
barred by laches on account of their failure
or neglect for an unreasonable length of
time to do that which, by exercising due
diligence, could or should have been done
earlier. Also that petitioners inaction
constituted a waiver on their part.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

ISSUE: WON the extra-judicial foreclosure

and public auction sale of the subject
parcel of land are valid and lawful when the
amount stated in letter-request or the
petition for extrajudicial foreclosure and in
the notice of sheriff sale doubled the
amount stipulated in the Amendment of
Real Estate Mortgage. NO
HELD: At the time of the foreclosure sale
on 11 August 1993, petitioners were
already in default in their loan obligation.
Much earlier, or on 27 April 1993, a final
notice of demand for payment had been
sent to them, despite which they still failed
to pay. Hence, respondent Carmencita San
Diegos resort to extrajudicial foreclosure,
provided no less in the parties
"Amendment of Real Estate Mortgage".
The rule has been, and still is, that in real
estate mortgage, when the principal
obligation is not paid when due, the
mortgagee has the right to foreclose on the
mortgage and to have the mortgaged
property seized and sold with the view of
applying the proceeds thereof to the
payment of the obligation.
Here, the validity of the extrajudicial
foreclosure on 11 August 1993
was
virtually confirmed by the trial court when it
dismissed petitioners complaint, and
rightly so, what with the fact that petitioners
failed to exercise their right of redemption
within the 1-year period therefore counted
from the registration of the sheriffs
certificate of sale.
We do not take issue with petitioners
submission that a mortgage may be
foreclosed only for the amount appearing

181

in the mortgage document, more so where,

as here, the mortgage contract entered into
by the parties is evidently silent on the
payment of interest.
It appears from the evidence on record that

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

despite due notice and publication of the

same in a newspaper of general
circulation, petitioners did not bother to
attend the foreclosure sale nor raise any
question regarding the propriety of the
sale. It was only on November 9, 1994,
or more than one year from the
registration of the Sheriffs Certificate of
Sale, that [petitioners] filed the instant
complaint. Clearly, [petitioners] had slept
on their rights and are therefore guilty of
laches, which is defined as the failure or
neglect
for an unreasonable or
explained length of time to do that which,
by exercising due diligence, could or
should have been done earlier, failure of
which gives rise to the presumption that
the person possessed of the right or
privilege has abandoned or has declined
to assert the same.
The law on redemption of mortgaged
property is clear. Republic Act No. 3135
(An Act to Regulate the Sale of Property
Under Special Powers Inserted In Or
Annexed to Real Estate Mortgages), as

182

amended by Republic Act No. 4118,

provides in Section 6 thereof, thus:
"Sec. 6. In all cases in which an
extrajudicial sale is made under the special
power hereinbefore referred to, the debtor,
his successors in interest or any judicial
creditor or judgment creditor of said debtor,
or any person having a lien on the property
subsequent to the mortgage or deed of
trust under which the property is sold, may
redeem the same at any time within the
term of one year from and after the date of
the sale; xxx"
In a long line of cases, this Court has
consistently ruled that the one-year
redemption period should be counted not
from the date of foreclosure sale, but from
the time the certificate of sale is registered
with the Register of Deeds. Here, it is not
disputed that the sheriffs certificate of sale
was registered on 29 October 1993.
From the foregoing, it is clear as day that

even the complaint filed by the petitioners

with the trial court on 09 November 1994
was instituted beyond the 1-year
redemption period. In fact, petitioners no
less acknowledged that their complaint for
annulment of extrajudicial foreclosure and
auction sale was filed about eleven (11)
days after the redemption period had
already expired on 29 October 19947.
They merely harp on the alleged increase
in the redemption price of the mortgaged
property as the reason for their failure to
redeem the same. However, and as
already pointed out herein, they chose not,
despite notice, to appear during the
foreclosure proceedings. Of course,
petitioners presently insist that they
requested for and were granted an
extension of time within which to redeem
their property, relying on a handwritten
note allegedly written by Mrs. San Diegos
husband on petitioners statement of
account, indicating therein the date 11
November 1994 as the last day to pay their
outstanding account in full. Even
assuming, in gratia argumenti, that they
were indeed granted such an extension,
the hard reality, however, is that at no time
at all did petitioners make a valid offer to
redeem coupled with a tender of the
redemption price.
For, in Lazo v. Republic Surety &
Insurance Co., Inc., this Court has made it
clear that it is only where, by voluntary
agreement of the parties, consisting of
extensions of the redemption period,
followed by commitment by the debtor to
pay the redemption price at a fixed date,
will the concept of legal redemption be
converted into one of conventional
redemption.

POLICY: Period of redemption is not a

prescriptive period but a condition precedent
provided by law to restrict the right of the
person
exercising
redemption.
Correspondingly, if a person exercising the
right of redemption has offered to redeem the
property within the period fixed, he is
considered to have complied with the

condition precedent prescribed by law

and may thereafter bring an action to
enforce redemption. If the period is
allowed to lapse before the right of
redemption is exercised, then the action
to enforce redemption will not prosper,
even if the action is brought within the
ordinary prescriptive period. Moreover,
the period within which to redeem the
property sold at a sheriffs sale is not
suspended by the institution of an action
to annul the foreclosure sale.

GOLDENWAY MERCHANDISING
CORPORATION vs. EQUITABLE
PCI BANK

FACTS:
Goldenway
Merchandising
Corporation (petitioner) executed a Real
Estate Mortgage in favor of Equitable
PCI Bank (respondent) over its real
properties situated in Valenzuela,
Bulacan (now Valenzuela City). The

mortgage secured the P2,000,000.00 loan

granted by respondent to petitioner and
was duly registered.
As Goldenway failed to settle its loan
obligation,
Equitable
extrajudicially
foreclosed the mortgage. During the public
auction, the mortgaged properties were
sold for P3,500,000.00 to Equitable and a
Certificate of Sale was issued.
Goldenways counsel offered to redeem
the foreclosed properties by tendering a
check in the amount of P3,500,000.00. Its
counsel met with Equitables counsel
reiterating their intention to exercise the
right of redemption. However, Goldenway
was told that such redemption is no longer
possible because the certificate of sale had
already been registered.
Goldenway filed a complaint for specific
performance
and
damages
against
Equitable, asserting that it is the one-year
period of redemption under Act No. 3135

which should apply and not the shorter

redemption period provided in R.A. No.
8791. Goldenway argued that applying
Section 47 of R.A. 8791 to the real estate
mortgage executed in 1985 would result in
the impairment of obligation of contracts
and violation of the equal protection clause
under the Constitution.
Additionally, Goldenway faulted Equitable
for allegedly failing to furnish it and the
Office of the Clerk of Court with a
Statement of Account as directed in the
Certificate of Sale, due to which
Goldenway was not apprised of the
assessment and fees incurred
by
Equitable, thus depriving Goldenway of the
opportunity to exercise its right of
redemption.
Equitable pointed out that Goldenway
cannot claim that it was unaware of the
redemption price which is clearly provided
in Section 47 of R.A. No. 8791, and that
Goldenway had all the opportune time to
redeem the foreclosed properties. As to the
check payment tendered by Goldenway,
Equitable said that even assuming
arguendo such redemption was timely
made, it was not for the amount as
required by law.
RTC rendered its decision dismissing the
complaint. CA which affirmed RTCs
decision.
In the present petition, Goldenway
contended that Section 47 of R.A. No.
8791 is inapplicable considering that the
contracting
parties
expressly
and
categorically agreed that the foreclosure of
the real estate mortgage shall be in
accordance with Act No. 3135. It

contended that the right of redemption is part

and parcel of the Deed of Real Estate
Mortgage itself and attaches thereto upon its
execution.
It also argues that applying Section 47 of
R.A. No. 8791 to the present case would

be a substantial impairment of its vested

right of redemption under the real estate
mortgage contract. Such impairment
would be violative of the constitutional
proscription against impairment of
obligations of contract.
ISSUES:
Whether
or
not
the
redemption period should be the 1year period provided under Act 3135,
and not the shorter period under RA
8791 as the parties expressly agreed
that
foreclosure
would
be
in
accordance
with Act 3135. (The
shorter period under RA 8791 should
apply.)
May the foregoing amendment be
validly applied in this case when the
real estate mortgage contract was
executed in 1985 and the mortgage
foreclosed when R.A. No. 8791 was
already in effect? Yes

HELD: The law governing cases of

extrajudicial foreclosure of mortgage is Act
No. 3135,14 as amended by Act No. 4118.
Section 6 thereof provides:
SEC. 6. In all cases in which an
extrajudicial sale is made under the special
power hereinbefore referred to, the debtor,
his successors-in-interest or any judicial
creditor or judgment creditor of said debtor,
or any person having a lien on the property
subsequent to the mortgage or deed of
trust under which the property is sold, may
redeem the same at any time within the
term of one year from and after the date of
the sale; and such redemption shall be
governed by the provisions of sections four
hundred and sixty-four to four hundred and
sixty-six, inclusive, of the Code of Civil
Procedure, in so far as these are not
inconsistent with the provisions of this Act.
The one-year period of redemption is
counted from the date of the registration of
the certificate of sale. In this case, the
parties provided in their real estate

mortgage contract that upon petitioners

default and the latters entire loan
obligation becoming due, respondent may
immediately foreclose the mortgage
judicially in accordance with the Rules of
Court, or extrajudicially in accordance with
Act No. 3135, as amended.
However, Section 47 of R.A. No. 8791
otherwise known as "The General
Banking Law of 2000" which took effect
on June 13, 2000, amended Act No.
3135. Said provision reads:
SECTION 47. Foreclosure of Real Estate
Mortgage. In the event of foreclosure,
whether judicially or extrajudicially, of any
mortgage on real estate which is security
for any loan or other credit accommodation
granted, the mortgagor or debtor whose
real property has been sold for the full or
partial payment of his obligation shall have
the right within one year after the sale of
the real estate, to redeem the property by
paying the amount due under the
mortgage deed, with interest thereon at the
rate specified in the mortgage, and all the
costs and expenses incurred by the bank
or institution from the sale and custody of
said property less the income derived
therefrom. However, the purchaser at the
auction sale concerned whether in a
judicial or extrajudicial foreclosure shall
have the right to enter upon and take
possession of such property immediately
after the date of the confirmation of the
auction sale and administer the same in
accordance with law. Any petition in court
to enjoin or restrain the conduct of
foreclosure
proceedings
instituted
pursuant to this provision shall be given
due course only upon the filing by the
petitioner of a bond in an amount fixed by
the court conditioned that he will pay all
the damages which the bank may suffer
by the enjoining or the restraint of the
foreclosure proceeding.
Notwithstanding Act 3135, juridical
persons whose property is being sold

pursuant to an extrajudicial foreclosure,

shall have the right to redeem the property
in accordance with this provision until, but
not after, the registration of the
certificate of foreclosure sale with the
applicable Register of Deeds which in no
case shall be more than three (3)
months after foreclosure, whichever is
earlier. Owners of property that has been
sold in a foreclosure sale prior to the
effectivity of this Act shall retain their
redemption rights until their expiration.
Under the new law, an exception is thus
made in the case of juridical persons which
are allowed to exercise the right of
redemption only "until, but not after, the
registration of the certificate of foreclosure
sale" and in no case more than 3 months
after foreclosure, whichever comes first.
Petitioners contention that Section 47 of
R.A. 8791 violates the constitutional
proscription against impairment of the
obligation of contract has no basis. The
purpose of the non-impairment clause of
the Constitution is to safeguard the
integrity of contracts against unwarranted
interference by the State. There is an
impairment if a subsequent law changes
the terms of a contract between the
parties, imposes
new
conditions,
dispenses with those agreed upon or
withdraws remedies for the enforcement of
the rights of the parties.
Section 47 did not divest juridical persons
of the right to redeem their foreclosed
properties but only modified the time for
the exercise of such right by reducing the
one-year period originally provided in Act
No. 3135. The new redemption period
commences from the date of foreclosure
sale, and expires upon registration of the
certificate of sale or three months after

foreclosure, whichever is earlier. There is

likewise no retroactive application of the
new
redemption
period
because
Section

47 exempts from its operation those

properties foreclosed prior to its effectivity

and whose owners shall retain their

redemption rights under Act No. 3135.
We agree with the CA that the legislature
clearly intended to shorten the period of
redemption for juridical persons whose
properties were foreclosed and sold in
accordance with the provisions of Act No.
3135.
The difference in the treatment of juridical
persons and natural persons was based on
the nature of the properties foreclosed
whether these are used as residence, for
which
the
more
liberal
one-year
redemption period is retained, or used for
industrial or commercial purposes, in which
case a shorter term is deemed necessary
to reduce the period of uncertainty in the
ownership of property and enable
mortgagee-banks to dispose sooner of
these acquired assets.
It must be underscored that the General
Banking Law of 2000 sought to reform the
General Banking Act of 1949 to maintain a
safe and sound banking system. The
amendment introduced by Section 47
embodied one of such safe and sound
practices aimed at ensuring the solvency
and liquidity of our banks.
The right of redemption must be exercised
in the manner prescribed by the statute,
and within the prescribed time limit, to
make it effective. Furthermore, as with
other individual rights to contract and to
property, it has to give way to police power
exercised for public welfare.
Having ruled that the assailed Section 47
of R.A. No. 8791 is constitutional, we find
no reversible error committed by the CA in

holding that petitioner can no longer exercise

the right of redemption over its foreclosed
properties after the certificate of sale in favor
of respondent had been registered.

UNIONBANK OF THE PHILIPPINES

VS. THE COURT OF APPEALS and
FERMINA S. DARIO and REYNALDO
S. DARIO
FACTS: This case stemmed from a real
estate mortgage executed by spouses
Leopoldo and Jessica Dario (hereafter
mortgagors) in favor of UNIONBANK to
secure a P3 million loan, including
interest and other charges. The
mortgage covered a Quezon City
property in Leopoldo Darios name and
was annotated on the title on 18
December 1991. For non-payment of the
principal
obligation,
UNIONBANK
extrajudicially foreclosed the property
mortgaged on 12 August 1993 and sold
the same at public auction, with itself
posting the highest bid.
On 4 October 1994, one week before the
one-year redemption period expired, the
DARIOs filed a complaint with the RTC
of Quezon City against the mortgagors,
UNIONBANK, the Register of Deeds and

the City Sheriff of Quezon City. The

complaint was for annulment of sale and
real estate mortgage with reconveyance
and prayer for restraining order and
prohibitory injunction. A notice of lis
pendens was annotated on the title.
On 10 October 1994, RTC issued a
temporary
restraining
order
(TRO)
enjoining the redemption of property within
the statutory period and its consolidation
under UNIONBANKs name.
In the meantime, without notifying the
DARIOs, UNIONBANK consolidated its title
over the foreclosed property on 24 October
1994. TCT No. 41828 was cancelled and
TCT No. 120929 in UNIONBANKs name
was issued in its stead.
The DARIOs filed an amended complaint
on 9 December 1994, alleging that they,
not the mortgagors, are the true owners of
the property mortgaged and insisting on
the invalidity of both the mortgage and its

subsequent extrajudicial foreclosure. They

claimed that the original title, TCT No.
61571, was entrusted to a certain Atty.
Reynaldo Singson preparatory to its
administrative reconstitution after a fire
gutted the Quezon City Hall building.
Mortgagor Leopoldo, private respondent
Ferminas son, obtained the property from
Atty. Singson, had the title reconstituted
under his name without the DARIOs
knowledge, executed an ante-dated deed
of sale in his favor and mortgaged the
property to UNIONBANK.
The CA upheld Judge Capulongs order
admitting the amended complaint on 24
April 1995, UNIONBANK thereafter
elevated its cause to this Court.
Meanwhile,
on
9
February
1995
UNIONBANK filed its answer ad cautelam
asserting its status as an innocent
mortgagee for value whose right or lien
upon the property mortgaged must be
respected even if the mortgagor obtained
his title through fraud. It also averred that
the action had become moot and
academic by the consolidation of the
foreclosed property on 24 October 1994 in
its name, resulting to the issuance of TCT
No. 120929 by the Register of Deeds of
Quezon City.
In its 19 August 1995 Order, the RTC held
the mortgagors and the City Sheriff of
Quezon City in default and sustained
UNIONBANKs contention that the act
sought to be enjoined had been enforced,
negating the need of hearing the
application for preliminary injunction.
After considering the arguments presented
by the parties, the CA ruled that despite its
knowledge that the ownership of the

property was being questioned, UNIONBANK

took advantage of the DARIOs procedural
error by consolidating title to the property,
which smacked of bad faith and evinced a
reprobate disposition of the part of its
counsel to advance his clients cause by fair
means or foul. As a

result thereof the transfer of title was

vitiated by non-adherence to procedural
due process.
On 26 June 1997, CA nullified the
consolidation of ownership, ordered the
Register of Deeds to cancel the
certificate of title in UNIONBANKs name
and to reinstate TCT No. 41828 with the
notice of lis penden sannotated at the
back. The CA also set aside the portion
of the assailed RTC Orders that declared
the DARIOs prayer for writ of preliminary
injunction as moot and academic.
UNIONBANKs
motion
for
reconsideration of the above- mentioned
decision was likewise rejected for lack of
merit on 7 April 1998.
UNIONBANKs contention: came to this
Court claiming to be a mortgagee in
good faith and for value with a right to
consolidate
ownership
over
the
foreclosed property with the redemption
period having expired and there having

been no redemptioners. UNIONBANK

contends that the TRO which provisionally
enjoined the tolling of the redemption
period was automatically dissolved upon
dismissal of the complaint on 17 October
1994. Conformably, consolidation of title in
its name and the issuance of TCT No.
120929 rendered further proceedings on
the application for injunction academic.
Moreover, the alleged fraudulent mortgage
was facilitated through the DARIOs
negligence so they must bear the loss. It
also contends that since the DARIOs had
filed several pleadings, due process, being
an opportunity to be heard either through
pleadings or oral arguments,
was
observed.
Darios contention: that UNIONBANKs
consolidation of the title in its name was in
bad faith, vitiated a standing court order, is
against the law, thus void ab initio. The
application for preliminary injunction was
not rendered moot and academic by
consolidation, which took place during the
lifetime of the TRO, and did not follow the

proper legal procedure due to the

surreptitious manner it was accomplished.
By treating the application for preliminary
injunction as moot and academic and
denying the motion for indirect contempt
without hearing, the RTC order ran afoul
with the requirements of due process.
ISSUE:
Whether
or
not
the
consolidation of title in UNIONBANKs
name proper. YES
HELD: UNIONBANKs consolidation of title
over the property on 24 October 1994 was
proper, though precipitate. Contrary to the
DARIOs allegation UNIONBANK violated
no standing court order. The only bar to
consolidation
was
the
temporary
restraining order issued by Justice LipanaReyes on 10 October 1994 which
effectively halted the tolling of the
redemption period 7 days short of its
expiration. When the DARIOs original
complaint was dismissed on 17 October
1994 for failure to append a certification of
non-forum shopping, the TRO, as an
ancillary
order
that
cannot
stand
independent of the main proceeding,
became functus officio. Thus the tolling of
the
12-month
redemption
period,
interrupted by the filing of the complaint
and the TRO, recommenced
and
eventually expired 7 days thereafter or on
24 October 1994, the date of the disputed
consolidation.
The motion for reconsideration and to
amend
complaint filed by private
respondent on 20 October 1994 was of no
moment, this Court recognizing that a
dismissal, discontinuance or non-suit of an
action in which a restraining order or
temporary injunction has been granted
operates as a dissolution of the restraining

order or temporary injunction, regardless of

whether the period for filing a motion for
reconsideration of the order dismissing the
case or appeal therefrom has expired. The
rationale therefor is that even in cases where
an appeal is taken from a judgment

dismissing an action on the merits, the

appeal does not suspend the judgment,
hence the general rule applies that a
temporary
injunction
terminates
automatically on the dismissal of the
action.

property sold becomes consolidated in the

purchaser. Notice to the mortgagors and
with more reason, to the DARIOs who are
not even parties to the mortgage contract
nor to the extrajudicial sale is not
necessary.

We disagree with the appellate courts

observation that consolidation deprived
the DARIOs of their property without due
process. It is settled that the buyer in a
foreclosure sale becomes the absolute
owner of the property purchased if it is
not redeemed during the period of one
year after the registration of the sale.
Consolidation took place as a matter of
right since there was no redemption of
the foreclosed property and the TRO
expired upon dismissal of the complaint.
UNIONBANK need not have informed
private
respondent
that
it
was
consolidating its title over the property,
upon the expiration of the redemption
period, without the judgment debtor
having made use of his right of
redemption, the ownership of the

In real estate mortgage, when the principal

obligation is not paid when due, the
mortgage has the right to foreclose the
mortgage and to have the property seized
and sold with a view to applying the
proceeds to the payment of the principal
obligation. Foreclosure may be effected
either judicially or extrajudicially.
In a public bidding during extra-judicial
foreclosure,
the
creditor-mortgagee,
trustee, or other person authorized to act
for the creditor may participate and
purchase the mortgaged property as any
other bidder. Thereafter the mortgagor has
one year within which to redeem the
property from and after registration of sale
with the Register of Deeds. In case of non-

redemption, the purchaser at foreclosure

sale shall file with the Register of Deeds,
either a final deed of sale executed by the
person authorized by virtue of the power of
attorney embodied in the deed or
mortgage, or his sworn statement attesting
to the fact of non-redemption; whereupon,
the Register of Deeds shall issue a new
certificate of title in favor of the purchaser
after the owners duplicate of the certificate
has been previously delivered and
cancelled. Thus, upon failure to redeem
foreclosed realty, consolidation of title
becomes a matter of right on the part of the
auction buyer, and the issuance of a
certificate of title in favor of the purchaser
becomes ministerial upon the Register of
Deeds.
DOCTRINE: In real estate mortgage, when
the principal obligation is not paid when
due, the mortgages has the right to
foreclose the mortgage and to have the
property seized and sold with a view to
applying the proceeds to the payment of
the principal obligation. Foreclosure may
be
effected
either
judicially
or
extrajudicially. In a public bidding during
extra-judicial foreclosure, the creditormortgagee, trustee, or other person
authorized to act for the creditor may
participate and purchase the mortgaged
property as any other bidder. Thereafter
the mortgagor has one year within which to
redeem the property from and after
registration of sale with the Register of
Deeds. In case of non-redemption, the
purchaser at foreclosure sale shall file with
the Register of Deeds, either a final deed
of sale executed by the person authorized
by virtue of the power of attorney
embodied in the deed or mortgage, or his
sworn statement attesting to the fact of

non-redemption; whereupon, the Register of

Deeds shall issue a new certificate of title in
favor of the purchaser after the owners
duplicate of the certificate has been
previously delivered and cancelled. Thus,
upon failure to redeem foreclosed realty,
consolidation of title becomes a

matter of right on the part of the auction

buyer, and the issuance of a certificate of
title in favor of the purchaser becomes
ministerial upon the Register of Deeds.

PHILBANCOR FINANCE, INC.

AND VICENTE HIZON, JR. VS.
COURT OF APPEALS
FACTS: On July 14, 1992, private
respondents Alfredo Pare, Pablo Galang
and Amado Vie, filed with the Provincial
Agrarian Reform Adjudication Board
(PARAB) a complaint for maintenance of
possession with redemption and tenancy
right of pre-emption against petitioners
Philbancor Finance, Inc. and Vicente
Hizon, Jr.
Hizon is the owner of the disputed
agricultural lands located in San
Fernando, Pampanga and that private
respondents are the legitimate and bona
fide tenants on the lots for more than fifty
(50) years.

In October 1983, Hizon, without their

knowledge, mortgaged the disputed lots to
Philbancor Finance, Inc. Hizon failed to
pay his obligations to Philbancor, which
eventually led to the sale of the mortgaged
lots to the latter. The certificate of sale of
the subject property, which was sold at
public auction, was registered with the
ROD of Pampanga on July 31, 1985.
Private respondents came to know of the
transaction only when they were notified by
Philbancor to vacate the lots, and
Philbancor threatened to take from them
the actual or physical possession of the
agricultural lots.
Philbancor alleged, among others, that it
has no tenancy or agricultural relationship
with private respondents considering that it
acquired ownership over the disputed lots
by virtue of an extra-judicial foreclosure
sale pursuant to Act 3135, as amended;
that it is not an agricultural lessor
as

contemplated in Section 10 of R.A. No.

3844, as amended; that assuming private
respondents have the right to redeem the
lots in question, such right has already
expired in accordance with Section 12 of
R.A. 3844, which states that the right of
redemption may be exercised within two
(2) years from the registration of the sale.
Decision was rendered in favor of private
respondents.
ISSUE: Whether or not the private
respondents could still exercise their
right of redemption of the parcels of
land sold at public auction due to
foreclosure of the mortgages thereon
considering that they invoked their right
to redeem only on July 14, 1992, seven
years after the date of registration of the
certificate of sale with the Register of
Deeds. NO
HELD: Redemption period already elapsed
R.A. No. 3844, Section 12, provides as
follows:
In case the landholding is sold to a third
person without the knowledge of the
agricultural lessee, the latter shall have the
right to redeem the same at a reasonable
price and consideration. Provided, that the
entire landholding sold must be redeemed.
Provided further, that where there are two
or more agricultural lessees, each shall be
entitled to said right of redemption only to
the extent of the area actually cultivated by
him. The right of redemption under this
section may be exercised within two (2)
years from the registration of the sale and
shall have priority over any other right of
legal redemption.
In this case, the certificate of sale of the
subject property, which was sold at public
auction, was registered with the ROD of
Pampanga on July 31, 1985. The 2-year

redemption period thus expired on July 31,

1987. The complaint for redemption was filed
by respondents only on July 14, 1992,

five (5) years after expiration of the

redemption period prescribed by law.
Private respondents may still continue
possession of the lots Nonetheless,
private respondents may continue in
possession and enjoyment of the land in
question as legitimate tenants because
the right of tenancy attaches to the
landholding by operation of law. The
leasehold relation is not extinguished by
the alienation or transfer of the legal
possession of the landholding. SC
GRANTED petition.

CITY MAYOR, CITY TREASURER,

CITY ASSESSOR, ALL OF QUEZON
CITY, and ALVIN EMERSON S. YU vs
RIZAL COMMERCIAL BANKING
CORPORATION
FACTS: The spouses Roberto and
Monette Naval obtained a loan from
respondent Rizal Commercial Banking
Corporation, secured by a real estate
mortgage of properties. In 1998, the real

estate mortgage was later foreclosed and

the properties were sold at public auction
with respondent as the highest bidder. The
corresponding Certificates of Sale were
issued in favor of respondent on August 4,
1998. However, the certificates of sale
were allegedly registered only on February
10, 2004.
On May 30, 2003, an auction sale of tax
delinquent properties was conducted by
the City Treasurer of Quezon
City.
Included in the properties that were
auctioned were two (2) townhouse units
and the parcel of land. For these
delinquent properties, Alvin Emerson S. Yu
was adjudged as the highest bidder. Upon
payment of the tax delinquencies, he was
issued the corresponding Certificate of
Sale of Delinquent Property.
On February 10, 2004, the Certificate of
Sale of Delinquent Property was registered
with the Office of the Register of Deeds of
Quezon City.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

On June 10, 2004, respondent tendered

payment for all of the assessed tax
delinquencies, interest, and other costs of
the subject properties with the Office of the
City Treasurer, Quezon City. However, the
Office of the City Treasurer refused to
accept said tender of payment.
Undeterred, on June 15, 2004, respondent
filed before the Office of the City Treasurer
a Petition for the acceptance of its tender
of payment and for the subsequent
issuance of the certificate of redemption in
its favor. Nevertheless, respondents
subsequent tender of payment was also
denied.
Petitioners argue:
that the RTC erred when it ruled that P.D.
No. 464 was not repealed by R.A. No.
7160 and when it concluded that the
phrase from the date of sale as appearing
in Section 261 of R.A. No. 7160 means
that the counting of the one (1) year
redemption period of tax delinquent
properties sold at public action shall
commence from the date of registration of
the certificate of sale.
Respondent argues:
the RTC did not rule that P.D. No. 464 was
not repealed by R.A. No. 7160, it merely
made reference to Section 78 of P.D. No.
464.
ISSUES:
W/N section 78 of p.d. 464 was
repealed by republic act no. 7160
known as the local government code
of 1991.
Whether the period of redemption in a
realty tax sale in Quezon City [h]as to
be reckoned from the date of

190

annotation of the certificate of sale

pursuant to paragraph 7, section 14 of
Quezon City tax ordinance no. Sp-91- 93
or from the date of sale pursuant to
section 261 of r.a. 7160.
Whether or not the respondent is
entitled to the protection of all the

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

provisions of Quezon City tax

ordinance
number
sp-91-93,
otherwise known as Quezon City
revenue code of 1993, including
section 14 thereof, promulgated
pursuant to r.a. 7160;
HELD:
1. The issue of whether or not R.A No.
7160 or the Local Government Code,
repealed P.D. No. 464 or the Real
Property Tax Code has long been laid to
rest by this Court. Jurisdiction thrives to
the effect that
R.A. No. 7160 repealed P.D. No. 464.
From January 1, 1992 onwards, the
proper basis for the computation of the
real property tax payable, including
penalties or interests, if applicable, must
be R. A. No. 7160.
As such, it is apparent that in case of
sale of tax delinquent properties, R.A.
No. 7160 is the general law applicable.
Consequently, as regards redemption of
tax delinquent properties sold at public

190

auction, the pertinent provision is Section

261 of R.A. No. 7160, which provides:
Section 261. Redemption of Property
Sold. Within one (1) year from the date
of sale, the owner of the delinquent real
property or person having legal interest
therein, or his representative, shall have
the right to redeem the property upon
payment to the local treasurer of the
amount of delinquent tax, including the
interest due thereon, and the expenses
of sale from the date of delinquency to
the date of sale, plus interest of not
more than two percent (2%) per month
on the purchase price from the date of
sale to the date of redemption. Such
payment shall invalidate the certificate of
sale issued to the purchaser and the
owner of the delinquent real property or
person having legal interest therein shall
be entitled to a certificate of redemption
which shall be issued by the local
treasurer or his deputy.
From the date of sale until the expiration

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

of the period of redemption, the

delinquent real property shall remain in
the possession of the owner or person
having legal interest therein who shall
remain in the possession of the owner or
person having legal interest therein who
shall be entitled to the income and other
fruits thereof.
The local treasurer or his deputy, upon
receipt from the purchaser of the
certificate of sale, shall forthwith return
to the latter the entire amount paid by
him plus interest of not more than two
percent (2%) per month. Thereafter, the
property shall be free from all lien of
such delinquent tax, interest
due
thereon and expenses of sale.
2. From the foregoing, the owner of the
delinquent real property or person having
legal interest therein, or his representative,
has the right to redeem the property within
one (1) year from the date of sale upon
payment of the delinquent tax and other
fees. Verily, the period of redemption of tax
delinquent properties should be counted
not from the date of registration of the
certificate of sale, as previously provided
by Section 78 of P.D. No. 464, but rather
on the date of sale of the tax delinquent
property, as explicitly provided by Section
261 of R.A. No. 7160.
Nonetheless
the government of Quezon City, pursuant
to the taxing power vested on local
government units by Section 5, Article X of
the 1987 Constitutions and R.A. No.
7160, enacted City Ordinance No. SP-91,
S-93, otherwise known as the Quezon City
Revenue Code of 1993, providing, among
other things, the procedure in the collection
of delinquent taxes on real properties
within the territorial jurisdiction of Quezon

191

City. Section 14 (a), Paragraph 7, the Code

provides:
Within one (1) year from the date of
the annotation of the sale of the property

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

at the proper registry, the owner of the

delinquent real property or person having
legal
interest
therein,
or
his
representative, shall have the right to
redeem the property by paying to the
City Treasurer the amount of the
delinquent tax, including interest due
thereon, and the expenses of sale plus
interest of two percent (2) per month on
the purchase price from the date of sale
to the date of redemption. Such payment
shall invalidate the certificate of sale
issued to the purchaser and the owner of
the delinquent real property or person
having legal interest therein shall be
entitled to a certificate of redemption
which shall be issued by the City
Treasurer.
xxxx
Verily, the ordinance is explicit that the
one-year redemption period should be
counted from the date of the annotation
of the sale of the property at the proper
registry. At first glance, this provision
runs counter to that of Section 261 of

192

R.A. No. 7160 which provides that the one

year redemption period shall be counted
from the date of sale of the tax delinquent
property. There is, therefore, a need to
reconcile these seemingly conflicting
provisions of a general law and a special
law.
To harmonize the provisions of the two
laws and to maintain the policy of the law
to aid rather than to defeat the owners right
to redeem his property, Section 14 (a),
Paragraph 7 of City Ordinance No. SP-91,
S-93 should be construed as to define the
phrase one (1) year from the date of sale
as appearing in Section 261 of R.A. No.
7160, to mean one (1) year from the date
of the annotation of the sale of the property
at the proper registry.
3. Consequently, the counting of the one
(1) year redemption period of property sold
at public auction for its tax delinquency
should be counted from the date of
annotation of the certificate of sale in the
proper Register of Deeds. Applying the
foregoing to the case at bar, from the date

of registration of the Certificate of Sale of

Delinquent Property on February 10, 2004,
respondent had until February 10, 2005 to
redeem the subject properties. Hence, its
tender of payment of the subject properties
tax delinquencies and other fees on June
10, 2004, was well within the redemption
period, and it was manifest error on the
part of petitioners to have refused such
tender of payment.

CUA LAI CHU, CLARO G. CASTRO, and

JUANITA CASTRO vs. HON. HILARIO L.
LAQUI
The right to possession of a purchaser at
an extrajudicial foreclosure sale is not
affected by a pending case questioning the
validity of the foreclosure proceeding. The
latter is not a bar to the former.
FACTS: November 1994: Philippine Bank
of Communication (respondent) loaned
P3,200,000 to the petitioners. To secure
the loan, petitioners executed in favor of
private respondent a Deed of Real Estate
Mortgage.
August 1997: the mortgage was amended,
and the loan was increased by P1,800,000,
making the amount P5,000,000. For failure
of petitioners to pay the full amount of the
outstanding loan upon demand, private
respondent applied for the extrajudicial
foreclosure of the real estate mortgage.
TRIAL COURT: Granted respondents
motion for a declaration of general default
and allowed them to present evidence ex
parte.
COURT
OF
APPEALS:
Petitioners
appealed. However, it was
dismissed
since the counsel for petitioners failed to

indicate the updated PTR Number in the said

petition, which is a ground for outright
dismissal under B.M 1132. The court held
that a proceeding for the issuance of a writ of
possession is ex parte in nature.

ISSUE: Whether the writ of possession

was properly issued despite the
pendency of a case questioning the
validity of the extrajudicial foreclosure
sale even when petitioners were
declared in default.
HELD: The Supreme Court held
since the private respondent
purchased
the
property
at
foreclosure sale, their right over the
property became absolute, vesting
the corollary right of possession.

that
had
the
said
in it

Petitioners cannot oppose or appeal the

courts order granting the writ of
possession in an ex parte proceeding.
The remedy of petitioners is to have the
sale set aside and the writ of possession
cancelled in accordance with Section 8
of Act No. 3135, as amended:
SEC. 8. The debtor may, in the
proceedings in which possession was

requested, but not later than thirty days

after the purchaser was given possession,
petition that the sale be set aside and the
writ of possession cancelled, specifying the
damages suffered by him, because the
mortgage was not violated or the sale was
not made in accordance with the
provisions hereof.

MALLARI vs. GOVERNMENT SERVICE

INSURANCE SYSTEM
FACTS: In 1968, the petitioner obtained
two loans totaling P34,000.00 from
respondent
GSIS.
To secure
the
performance, he mortgaged two parcels of
land registered under his and his wife
Marcelina Mallaris names. However, he
paid GSIS about ten years after contracting
the
obligations
only P10,000.00
and P20,000.00.
Nearly three years later (1984), GSIS
applied for the extrajudicial foreclosure
of the mortgage by reason of his failure

to settle his account. He requested an

updated computation of his outstanding
account. He persuaded the sheriff to hold
the publication of the foreclosure to await
action on his pending request for final
accounting (that is, taking his payments
of P30,000.00 made in 1978 into
account). GSIS responded to his request.
It
finally
commenced
extrajudicial
foreclosure proceedings against him
because he had meanwhile made no
further payments.
The petitioner sued GSIS (prelim
injunction). The RTC decided in his favor,
nullifying the extrajudicial foreclosure and
auction sale. GSIS appealed to the CA,
which reversed the RTC. Petitioner
elevated the CA decision to this Court via
petition for review on certiorari.
This Court denied his petition for review
and motion for reconsideration. As a result,
the CA decision became final and
executory, rendering unassailable both
the
extrajudicial
foreclosure
and
auction sale.
Because of the petitioners request for an
extension of time to vacate the properties,
GSIS acceded to the request. Yet, the
petitioner did not voluntarily vacate the
properties, but instead filed a MR and/or to
quash the writ of execution and motion to
hold GSIS in contempt of court for painting
the fence of the properties during the
pendency of his said motion.
ISSUE: W/N the petitioner, as defaulting
mortgagor, was not entitled under Act
3135, as amended, and its pertinent
jurisprudence to any prior notice of the
application for the issuance of the writ of
possession.

HELD: No. The petitioner, as defaulting

mortgagor, was not entitled under Act 3135,
as amended, and its pertinent jurisprudence
to any prior notice of the application for the
issuance of the writ
of

possession.
A writ of possession, which commands
the sheriff to place a person in
possession of real property, may be
issued in:
(1) Land registration proceedings under
Section 17 of Act No. 496;
(2) Judicial foreclosure, provided the debtor
is in possession of the mortgaged
property, and no third person, not a party
to the foreclosure suit, had intervened;
(3) Extrajudicial foreclosure of a real estate
mortgage, pending redemption under
Section 7 of Act No. 3135, as amended
by Act No. 4118; and
(4) Execution sales, pursuant to the last
paragraph of Section 33, Rule 39 of the
31
Rules of Court.
Anent the redemption of property sold in
an extrajudicial foreclosure sale made
pursuant to the special power referred to
32
33
in Section 1 of Act No. 3135, as
amended,
the debtor, his successor-in-interest, or
any judicial creditor or judgment creditor

of said debtor, or any person having a lien

on the property subsequent to the
mortgage or deed of trust under which the
property is sold has the right to redeem the
property at anytime within the term of one
year from and after the date of the sale,
such redemption to be governed by the
provisions of Section 464 to Section 466 of
the Code of Civil Procedure, to the extent
that said provisions were not inconsistent
34
with the provisions of Act 3135.
In this regard, we clarify that
the
redemption period envisioned under Act
3135 is reckoned from the date of the
registration of the sale, not from and after
the date of the sale, as the text of Act 3135
shows. Although the original Rules of Court
(effective on July 1, 1940) incorporated
Section 464 to Section 466 of the Code of
Civil Procedure as its Section 25 (Section
464); Section 26 (Section 465); and
Section 27 (Section 466) of Rule 39, with
Section 27 still expressly reckoning the

redemption period to be "at any time within

twelve months after the sale;" and although
the Revised Rules of Court (effective on
January 1, 1964) continued to provide in
Section 30 of Rule 39 that the redemption
be made from the purchaser "at any time
35
within twelve (12) months after the sale,"
the 12-month period of redemption came to
be held as beginning "to run not from the
date of the sale but from the time of
registration of the sale in the Office of the
36
Register of Deeds." This construction
was due to the fact that the sheriffs sale of
registered (and unregistered) lands did not
take effect as a conveyance, or did not
bind the land, until the sale was registered
37
in the Register of Deeds.
Desiring to avoid any confusion arising
from the conflict between the texts of the
Rules of Court (1940 and 1964) and Act
No. 3135, on one hand, and the
jurisprudence clarifying the reckoning of
the redemption period in judicial sales of
real property, on the other hand, the Court
has incorporated in Section 28 of Rule 39
of the current Rules of Court (effective on
July 1, 1997) the foregoing judicial
construction of reckoning the redemption
period from the date of the registration of
the certificate of sale, to wit:
Sec. 28. Time and manner of, and
amounts payable on, successive
redemptions; notice to be given and
filed. The judgment obligor, or
redemptioner, may redeem the property
from the purchaser, at any time within
one (1) year from the date of the
registration of the certificate of sale, by
paying the purchaser the amount of his
purchase, with one per centum per
month interest thereon in addition, up to
the time of redemption, together with the
amount of any assessments or taxes

which the purchaser may have paid

thereon after purchase, and interest on
such last named amount at the same rate;
and if the purchaser be also a creditor
having a prior lien to that of the

redemptioner, other than the judgment

under which such purchase was
made, the amount of such other lien,
with interest.
Property so redeemed may again be
redeemed within sixty (60) days after
the last redemption upon payment of
the sum paid on the last redemption,
with two per centum thereon in
addition, and the amount of any
assessments or taxes which the last
redemptioner may have paid thereon
after redemption by him, with interest
on such last-named amount, and in
addition, the amount of any liens held
by said last redemptioner prior to his
own, with interest. The property may
be again, and as often as
a
redemptioner
is
so
disposed,
redeemed
from
any
previous
redemptioner within sixty (60) days
after the last redemption, on paying
the sum paid on the last previous
redemption, with two per centum

thereon in addition, and the amounts of

any assessments or taxes which the last
previous redemptioner paid after the
redemption thereon, with interest
thereon, and the amount of any liens
held by the last redemptioner prior to his
own, with interest.
Written notice of any redemption must
be given to the officer who made the
sale and a duplicate filed with the
registry of deeds of the place, and if any
assessments or taxes are paid by the
redemptioner or if he has or acquires
any lien other than that upon which the
redemption was made, notice thereof
must in like manner be given to the
officer and filed with the registry of
deeds; if such notice be not filed, the
property may be redeemed without
paying such assessments, taxes, or
liens. (30a) (Emphasis supplied).
Accordingly, the mortgagor or his
successor-in-interest must redeem the
foreclosed property within one year from

the registration of the sale with the

Register of Deeds in order to avoid the title
from consolidating in the purchaser. By
failing to redeem thuswise, the mortgagor
loses all interest over the foreclosed
38
property. The purchaser, who has a right
to possession that extends beyond the
expiration of the redemption period,
becomes the absolute owner of the
39
property when no redemption is made,
that it is no longer necessary for the
purchaser to file the bond required under
Section 7 of Act No. 3135, as amended,
considering that the possession of the land
becomes his absolute right as the lands
40
confirmed owner. The consolidation of
ownership in the purchasers name and the
issuance to him of a new TCT then entitles
him to demand possession of the property
at any time, and the issuance of a writ of
possession to him becomes a matter of
right upon the consolidation of title in his
name.
The court can neither halt nor hesitate to
issue the writ of possession. It cannot
exercise any discretion to determine
whether or not to issue the writ, for the
issuance of the writ to the purchaser in an
extrajudicial foreclosure sale becomes a
41
ministerial function.
Verily, a marked
distinction exists between a discretionary
act and a ministerial one. A purely
ministerial act or duty is one that an officer
or tribunal performs in a given state of
facts, in a prescribed manner, in obedience
to the mandate of a legal authority, without
regard to or the exercise of his own
judgment upon the propriety or impropriety
of the act done. If the law imposes a duty
upon a public officer and gives him the
right to decide how or when the duty shall
be performed, such duty is discretionary,
not ministerial. The duty is ministerial only
when its discharge requires neither the
exercise of official discretion nor the

exercise of judgment.

42

The proceeding upon an application for a writ

of possession is ex parte and summary

in nature, brought for the benefit of one

party only and without notice being sent
by the court to any person adverse in
interest. The relief is granted even
without giving an opportunity to
be
heard to the person
43
against whom the relief is sought. Its
nature as an ex parte petition under
Act
No. 3135, as amended, renders the
application for the issuance of a writ of
44
possession a non-litigious proceeding.

execution cum writ of possession were

tainted by bad faith, for he was only too
aware, being his own lawyer, of the dire
consequences of his
non-redemption
within the period provided by law for that
purpose.

It is clear from the foregoing that a nonredeeming mortgagor like the petitioner
had no more right to challenge the
issuance of the writ of execution cum writ
of possession upon the ex parte
application of GSIS. He could not also
impugn anymore the extrajudicial
foreclosure, and could not undo the
consolidation in GSIS of the ownership
of the properties covered by TCT No.
284272-R and TCT
No. 284273-R,
which
consolidation was already irreversible.
Hence, his moves against the writ of

FACTS: Emerald Resort Hotel Corporation

("ERHC") obtained a loan from petitioner
Development Bank of the Philippines
("DBP"). To secure the loan, ERHC
mortgaged its personal and real properties
to DBP. On 18 March 1981, DBP approved
a restructuring of ERHCs loan subject to
certain conditions.

DEVELOPMENT BANK OF THE

PHILIPPINES VS CA and EMERAL
RESORT HOTEL CORP. (G.R. No.
125838, June 10, 2003)

On 5 June 1986, alleging that ERHC failed

to pay its loan, DBP filed with the Office of
the Sheriff, Regional Trial Court of Iriga
City, an Application for Extra-judicial

Foreclosure of Real Estate and Chattel

Mortgages.
Deputy Provincial Sheriffs Abel Ramos and
Ruperto Galeon issued the
required
notices of public auction sale of the
personal and real properties. However,
Sheriffs Ramos and Galeon failed to
execute the corresponding certificates of
posting of the notices. On 10 July 1986,
the auction sale of the personal properties
proceeded.
The Office of the Sheriff scheduled on 12
August 1986 the public auction sale of the
real properties. The Bicol Tribune
published on 18 July 1986, 25 July 1986
and 1 August 1986 the notice of auction
sale of the real properties. However, the
Office of the Sheriff postponed the auction
sale on 12 August 1986 to 11 September
1986 at the request of ERHC. DBP did not
republish the notice of the rescheduled
auction sale because DBP and ERHC
signed an agreement to postpone the 12
August 1986 auction sale. ERHC, however,
disputes the authority of Jaime Nuevas
who signed the agreement for ERHC.
On 22 December 1986, ERHC filed with
the Regional Trial Court of Iriga City a
complaint for annulment of the foreclosure
sale of the personal and real properties.
ERHC alleged that the foreclosure was
void mainly because (1) DBP failed to
comply with the procedural requirements
prescribed by law; and (2) the foreclosure
was premature.
DBPs CONTENTION: DBP maintains that
it complied with the mandatory posting
requirement under applicable laws. DBP

insists that the non-execution of the

certificate of posting of the auction sale
notices did not invalidate the foreclosure.
DBP also maintains that when upon their
(DBP and ERHC) agreement to postpone the
auction sale, there was no more need to
publish the notice for the September 11,

1986 auction sale.

ISSUE: W/N DBP complied with the
posting and publication requirements
under applicable laws for a valid
foreclosure.
HELD:
POSTING
REQUIREMENT:
COMPLIED WITH
This Court ruled in Cristobal v. Court of
Appeals that a certificate of posting is
not required, much less considered
indispensable for the validity of an
extrajudicial foreclosure sale of real
property under Act No. 3135. In the
present case, the foreclosing sheriffs
failed to execute the certificate of posting
of the auction sale notices. However, this
fact alone does not prove that the
sheriffs failed to post the required
notices. As held before, "the fact alone
that there is no certificate of posting
attached to the sheriff's records is not
sufficient to prove the lack of posting."
Based on the records, DBP presented
sufficient evidence to prove that the

sheriffs posted the notices of the

extrajudicial sale. A careful examination of
these two documents clearly shows that
the foreclosing sheriffs posted the required
notices of sale.
Deputy Sheriff Galeon also testified that
he, together with Sheriff Ramos, actually
posted the notices of sale. Indisputably,
there is clear and convincing evidence of
the posting of the notices of sale. What the
law requires is the posting of the notice of
sale, which is present in this case, and not
the execution of the certificate of posting.
Moreover, ERHC bore the burden of
presenting evidence that the sheriffs failed
to post the notices of sale. In the absence
of contrary evidence, as in this case, the
presumption prevails that the sheriffs
performed their official duty of posting the
notices of sale. Consequently, we hold that
the non-execution of the certificate of
posting cannot nullify the foreclosure of the

chattel and real estate mortgages in the

instant case.
PUBLICATION REQUIREMENT: NOT
COMPLIED
The Court held recently in Ouano v. Court
of Appeals that republication in the
manner prescribed by Act No. 3135 is
necessary for the validity of a postponed
extrajudicial foreclosure sale. Another
publication is required in case the auction
sale is rescheduled, and the absence of
such
republication
invalidates
the
foreclosure sale. The Court also ruled in
Ouano that the parties have no right to
waive the publication requirement in Act
No. 3135.
Publication, therefore, is required to
give the foreclosure sale a
reasonably wide publicity such that
those interested might attend the
public sale. To allow the parties to
waive this jurisdictional requirement
would result in converting into a
private sale what ought to be a
public auction.
The Court also ruled on DBPs argument
that Sec. 24, Rule 39 of the Rules of Court
does not apply in the present case. Act No.
3135, as amended by Act No. 4118
otherwise known as "An Act to Regulate
the Sale of Property under Special Powers
Inserted in or Annexed to Real Estate
Mortgages" applies in cases of extrajudicial
foreclosure sale. A different set of law
applies to each class of sale mentioned.
The cited provision in the Rules of
Court hence does not apply to an
extrajudicial foreclosure sale.
As to DBPs contention that ERHCs act of
requesting postponement of the 12 August

1986 auction sale estops ERHC from

challenging the absence of publication of the
notice of the rescheduled auction sale, the
records are bereft of any evidence that
ERHC requested the postponement without
need of republication of the notice

of sale.
The form of the notice of extrajudicial
sale is now prescribed in Circular No. 726
2002 issued by the Office of the Court
Administrator on 22 January 2002.
Section 4(a) of Circular No. 7-2002
provides that:
XXX
"In the event the public auction
should not take place on the said
date, it shall be held on ,_
without further notice."
The last paragraph of the prescribed
notice of sale allows the holding of a
rescheduled
auction
sale
without
reposting or republication of the notice.
However, the rescheduled auction sale
will only be valid if the rescheduled date
of auction is clearly specified in the prior
notice of sale. The absence of this
information in the prior notice of sale will
render the rescheduled auction sale void
for lack of reposting or republication. If
the notice of auction sale contains this

particular information, whether or not the

parties agreed to such rescheduled date,
there is no more need for the reposting or
republication of the notice of the
rescheduled auction sale.
In the instant case, there is no information
in the notice of auction sale of any date of
a rescheduled auction sale. Even if such
information were stated in the notice of
sale, the reposting and republication of the
notice of sale would still be necessary
because Circular No. 7-2002 took effect
only on 22 April 2002. There were no such
guidelines in effect during the questioned
foreclosure.
Clearly, DBP failed to comply with the
publication requirement under Act No.
3135. There was no publication of the
notice of the rescheduled auction sale of
the real properties. Therefore, the
extrajudicial foreclosure of the real estate
mortgage is void.

JOSE RAMIREZ vs THE MANILA

BANKING CORP. (G.R. No. 198800,
December 11, 2013)
FACTS: Jose T. Ramirez mortgaged two
parcels of land located at Bayanbayanan,
Marikina City in favor of The Manila
Banking Corporation to secure his
P265,000 loan. The real estate mortgage
provides that all correspondence relative to
the mortgage including notifications of
extrajudicial actions shall be sent to
petitioner Ramirez at his given address, to
wit:
N) All correspondence relative to this
MORTGAGE,
including
demand
letters, summons, subpoenas or
notifications of any judicial or
extrajudicial actions shall be sent to the
MORTGAGOR at the address given
above or at the address that may
hereafter be given in writing by the
MORTGAGOR to the MORTGAGEE,
and the mere act of sending any
correspondence by mail or by personal
delivery to the said address shall be
valid and effective notice to the
MORTGAGOR for all legal purposes
and the fact that any communication is
not
actually
received
by
the
MORTGAGOR, or that it has been
returned
unclaimed
to
the
MORTGAGEE, or that no person was
found at the address given, or that the
address is fictitious or cannot be
located, shall not excuse or relieve the
MORTGAGOR from the effects of such
notice.
Manila Bank filed a request for extrajudicial
foreclosure of real estate mortgage on the
ground that Ramirez failed to pay his loan
despite demands. During the auction sale

on September 8, 1994, respondent was the

only bidder for the mortgaged properties.
Ramirez sued respondent for annulment of
sale and prayed that the certificate of sale be
annulled on the ground, among others, that
paragraph N of the real estate

mortgage was violated for he was not

notified of the foreclosure and auction
sale.

The Court ruled that when respondent

failed to send the notice of extrajudicial
foreclosure sale to Ramirez, it committed
a contractual breach of said paragraph N
sufficient to render the extrajudicial
foreclosure sale on September 8, 1994
null and void.

foreclosure proceedings is not necessary

because Section 3 of Act No. 3135 only
requires the posting of the notice of sale in
three public places and the publication of
that notice in a newspaper of general
circulation. In this case, the parties
stipulated in paragraph N of the real estate
mortgage that all correspondence relative
to the mortgage including notifications of
extrajudicial actions shall be sent to
mortgagor Ramirez at his given address.
Respondent had no choice but to comply
with this contractual provision it has
entered into with Ramirez. The contract is
the law between them. Hence, we cannot
agree with the bank that paragraph N of
the real estate mortgage does not impose
an additional obligation upon it to provide
personal notice of the extrajudicial
foreclosure sale to the mortgagor Ramirez.

In Carlos Lim, et al. v. Development

Bank of the Philippines, we held that
unless the parties stipulate, personal
notice to the mortgagor in extrajudicial

As we explained in Metropolitan Bank v.

Wong, the banks violation of paragraph N
of the real estate mortgage is sufficient to
invalidate the extrajudicial foreclosure sale.

In its answer, respondent claimed that

the foreclosure proceedings were valid.
ISSUE: W/N Paragraph N of the Real
Estate Mortgage was violated by Manila
Bank and What is its effect?
HELD: YES. Paragraph N was violated
by Manila Bank.

ALFREDO OUANO vs CA and HEIRS OF

JULIETA OUANO (G.R. No. 129729,
March 4, 2003)
FACTS: On June 8, 1977, Julieta M.
Ouano (Julieta), now deceased, obtained a
loan from the PNB in the amount of
P104,280.00. As security for said loan, she
executed a real estate mortgage over two
parcels of land located at Opao, Mandaue
City. She defaulted on her obligation. On
September 29, 1980, PNB filed a petition
for extrajudicial foreclosure with the City
Sheriff of Mandaue City.
On November 4, 1980, the sheriff prepared
a notice of sale setting the date of public
auction of the two parcels of land on
December 5, 1980 at 9:00 a.m. to 4:00
p.m. He caused the notice to be published
in the Cebu Daily Times, a newspaper of
general circulation in Mandaue City, in its
issues of November 13, 20 and 27, 1980.
He likewise posted copies thereof in public
places in Mandaue City and in the place
where the properties are located.
However, the sale as scheduled and
published did not take place as the parties,
on four separate dates, executed
Agreements
to
Postpone
Sale
(Agreements). These Agreements were
addressed to the sheriff, requesting the
latter to defer the auction sale to another
date at the same time and place, "without
any further republication of the Notice."
There was however no sale that took place
and was repeatedly postponed and in all
these postponements, no new notice of
sale was issued, nor was there any
republication or reposting of notice for the
rescheduled dates.

Finally, on May 29, 1981, the sheriff

conducted the auction sale, awarding the two
parcels of land to PNB, the only bidder. He
executed a Certificate of Sale certifying the
sale for and in consideration of P195,

510.50.
Julieta failed to redeem the properties
within the one year period from
registration of sale. PNB later conveyed
the properties to Alfredo Ouano, the
brother of Julieta.
On March 28, 1983, Julieta sent demand
letters to PNB and petitioner, pointing out
irregularities in the foreclosure sale.On
April 18, 1983, Julieta filed a complaint
with the Regional Trial Court (RTC) of
Cebu for the nullification of the May 29,
1981 foreclosure sale.
ISSUE: W/N the requirements of Act No.
3135 were complied with in the May 29,
1981 foreclosure sale.
HELD:
The
governing
law
for
extrajudicial foreclosures is Act No. 3135
as amended by Act No. 4118. The
provision relevant to this case is Section
3, which provides:
SEC. 3. Notice shall be given by
posting notices of the sale for not

less than twenty (20) days in at least

three
public
places
of
the
municipality or city where the
property is situated, and if such
property is worth more than four
hundred pesos, such notice shall
also be published once a week for
at least three consecutive weeks in
a newspaper of general circulation
in the municipality of city.
In a number of cases, we have consistently
held that failure to advertise a mortgage
foreclosure sale in compliance with
statutory requirements constitutes a
jurisdictional defect invalidating the sale.
Consequently, such defect renders the
sale absolutely void and no title passes.
Petitioner, however, insists that there was
substantial compliance with the publication
requirement,
considering
that
prior
publication and posting of the notice of the
first date were made.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

In Tambunting v. Court of Appeals, we held

that republication in the manner prescribed
by Act No. 3135 is necessary for the
validity of a postponed extrajudicial
foreclosure sale.
Publication, therefore, is required to give
the foreclosure sale a reasonably wide
publicity such that those interested might
attend the public sale. To allow the parties
to waive this jurisdictional requirement
would result in converting into a private
sale what ought to be a public auction.
Moreover, assuming arguendo that the
written waivers are valid, we find
noticeable flaws that would nevertheless
invalidate the foreclosure proceedings. The
Agreements are clearly defective
for
having been belatedly executed and filed
with the sheriff. The party who may be said
to be at fault for this failure, and who
should bear the consequences, is no other
than PNB, the mortgagee in the case at
bar. It is the mortgagee who causes the
mortgaged property to be sold, and the
date of sale is fixed upon his instruction.
We have held that the mortgagee's right to
foreclose a mortgage must be exercised
according to the clear mandate of the law.
Every requirement of the law must be
complied with, lest the valid exercise of the
right would end. PNB's inaction on the
scheduled date of sale and belated filing of
requests to postpone may be deemed as
an abandonment of the petition
to
foreclose it filed with the sheriff.
Consequently, its right to foreclose the
mortgage based on said petition lapsed.
In a vain attempt to uphold the validity of
the aforesaid waiver, petitioner asserts that
the Court of Appeals should have applied

200

Rule 39, Section 24 of the Rules of Court,

which allows adjournment of execution sales
by agreement of the parties. The cited
provision in the Rules of Court hence does
not apply to an extrajudicial foreclosure sale.
Act No. 3135, as amended by Act No.
4118 otherwise

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

known as "An Act to Regulate the Sale of

Property under Special Powers Inserted
in or Annexed to Real Estate Mortgages"
applies in cases of extrajudicial
foreclosure sale. A different set of law
applies to each class of sale mentioned.
Next, petitioner maintains that Julieta's
act of requesting the postponement and
repeatedly signing the Agreements had
placed her under estoppel, barring her
from challenging the lack of publication
of the auction sale.
We rule otherwise. Julieta did request for
the postponement of the foreclosure
sale to extend the period to settle her
obligation. However, the records do not
show
that
she
requested
the
postponement
without
need
of
republication and reporting of notice of
sale.
In addition, we observe herein that the
Agreements prepared by the counsel of

200

PNB were in standard forms of the bank,

labeled as "Legal Form No. We therefore
held that said agreement partakes of the
nature of a contract of adhesion, i.e., one
in which one of the contracting parties
imposes a ready-made form of contract
which the other party may accept or reject,
but cannot modify. One party prepares the
stipulation in the contract, while the other
party merely affixes his signature or his
"adhesion" thereto, giving no room for
negotiation, and depriving the latter of the
opportunity to bargain on equal footing. As
such, their terms are construed strictly
against the party who drafted it.
More importantly, the waiver being void for
being contrary to the express mandate of
Act No. 3135, such cannot be ratified by
estoppel. Estoppel cannot give validity to
an act that is prohibited by law or one that
is against public policy. Neither can the
defense of illegality be waived.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

DARCEN V. V.R. GONZALES CREDIT

ENTERPRISES, INC.
G.R. No. 199747; April 03, 2013
FACTS: Spouses MamertoDarcen and
Flora De Guzman begot 7 children,
namely: Teodoro, Mamerto, Jr., Nestor,
Benilda, and Elenita (petitioners), and their
brothers Arturo and Manuel.
Mamerto died in 1986, leaving behind 3
titled parcels of land located in Bulacan, all
under the name Mamerto Darcen married
to Flora de Guzman.
According to the petitioners, sometime in
1990, their brother Manuel borrowed
money
from
Veronica
Gonzales
(Gonzales), president of V.R. Gonzales
Credit Enterprises. Manuel sought their
consent in constituting a mortgage over the
above properties of their father, but the
petitioners refused. Manuel then caused
the execution of an Extra-Judicial
Settlement of Estate with Waiver (ESEW)
by forging the signatures of the petitioners
and their mother Flora.
In the said instrument, the petitioners were
said to have waived their shares in their
fathers estate in favor of their mother, thus
making Flora the sole owner of the 3 lots.
Meanwhile, fire had razed part of the ROD
of Bulacan and destroyed the titles to the
lots. After reconstitution of the titles, new
titles were issued in the name of Flora de
Guzman, Filipino, of legal age, widow.
Petitioners further claim that on the day
that the new titles were issued, they
caused the annotation thereon of their

201

hereditary claim in their fathers estate. In

2000, Flora died.
In 2007, Gonzales demanded payment from
the petitioners of several loans allegedly
taken out by Flora, claiming that the latter
had mortgaged the properties to

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

VR Enterprise.
Petitioners say that they immediately
noted that the purported signatures of
their mother on the 3 mortgage contracts
were actually forgeries, and that the
mortgage contracts did not state when
the supposed loan obligations would
become due and demandable.
They maintain that their mother did not
contract the loans, and they point to their
brothers Manuel and Arturo, whose
signatures appear as witnesses on the
mortgage documents, as guilty of forging
her signatures and of receiving the
proceeds of the loans. The petitioners
also disclaim any knowledge of the
loans, or of their consent thereto, either
before or after.
VR Enterprise extrajudicially foreclosed
the mortgage over the lots, but
meanwhile,
petitioners
filed
for
Annulment of Mortgage, Extra-Judicial
Foreclosure, Auction Sale, Certificate of

202

Sale, and Damages, seeking to void the

real estate mortgages, the extrajudicial
foreclosure and the auction sale of the lots.
The three properties were sold, with the
VR Enterprise as the highest bidder. The
one-year period to redeem lapsed. VR
Enterprise executed an affidavit of
consolidation of ownership, and a writ of
possession was issued against petitioners.
Contention of Petitioners:
They are adverse claimants who are third
parties and strangers to the real estate
mortgages executed by their mother. The
issuance of a writ of possession in favor of
the purchaser in an
extrajudicial
foreclosure sale ceases to be ministerial
where the property is in the possession of
a third party who holds the property under
a claim adverse to that of the
debtor/mortgagor.
The petitioners maintain that they knew
nothing about the mortgage contracts,

whose validity is now the subject of their

appeal. They further claim that their
signatures in the ESEW were forged. As
co-heirs and co-owners with their mother of
the subject lots, they have a claim directly
adverse to hers, and therefore, also
directly adverse to her successor-ininterest, VR Enterprise. Thus they should
be entitled to retain possession of the
properties until the claim for ownership is
resolved.
ISSUE: WON the petitioners are adverse
claimants entitled to retain possession of
the properties. NO
HELD: The long-settled rule in extrajudicial
foreclosure of real estate mortgage is that
after consolidation of ownership of the
foreclosed property, it is the ministerial
duty of the court to issue, as a matter of
right, an ex parte writ of possession to
the buyer.
The established rule is that the purchaser
in an extrajudicial foreclosure sale
becomes the absolute owner of the
property if no redemption is made within 1
year from the registration of the certificate
of sale.
Possession, being a recognized essential
attribute of ownership after consolidation of
title,
the
purchaser may demand
possession as a matter of right.
The possession may be granted to the
buyer either
(a) within the one-year redemption
period, upon the filing by the
purchaser of a bond, or
(b) after the lapse of the redemption
period, without need of a bond.

It is a time-honored legal precept that after

the consolidation of titles in the buyers
name, for failure of the mortgagor to redeem,
entitlement to a writ of possession becomes
a matter of right. As the confirmed owner,
the purchasers right to

possession becomes absolute.

The
basis of this right to possession is the
purchasers
ownership
of
the
property.There is even no need for him
to post a bond, and it is the ministerial
duty of the courts to issue the same
upon proper application and proof of title.
The nature of an ex parte petition for
issuance of the possessory writ is a nonlitigious proceeding and summary in
nature. As an ex parte proceeding, it is
brought for the benefit of one party only,
and without notice to or consent by any
person adversely interested.
Furthermore, it is settled that a pending
action for annulment of mortgage or
foreclosure sale does not stay the
issuance of the writ of possession.
Nonetheless, the ministerial duty of
the court to issue an ex parte writ of
possession ceases once it appears

that there is a third party in possession

of the property, who is a stranger to the
mortgage and who claims a right
adverse to that of the debtor/
mortgagor.
Section 33, Rule 39 of the Rules of Court
provides that in an execution sale, the
possession of the property shall be given
to
the
purchaser
or
last
redemptioner, unless a third party is
actually holding the property adversely
to the judgment obligor. The application
of the above Section has been extended to
extrajudicial foreclosure sales pursuant to
Section 6 of Act No. 3135.
The petitioners have persisted in making
the point that they are strangers to the
mortgage contracts executed by their
mother over their fathers lots, which they
claim to co-own with her, an interest
adverse to that of the VR Enterprise.
Thus, as an exception, the possession of
the mortgaged property may be awarded to

a purchaser in the extrajudicial foreclosure

unless a third party is actually holding the
property adversely to the judgment debtor.
The purchasers right of possession is
recognized only as against the judgment
debtor and his successor-in-interest but not
against persons whose right of possession
is adverse to the latter.
However, the SC finds no proof that the
petitioners are adverse third-party
claimants entitled to be retained in
possession.
The chief consideration for granting to VR
Enterprise a writ of possession was that
the assailed mortgages executed by Flora
in 1995 were constituted on properties
covered by titles issued solely in her
name.
It will be noted that it was only in June
2007, after VR Enterprise had threatened
them with extrajudicial foreclosure and
eviction, or after 12 years had passed, that
the petitioners brought an action to annul
the real estate mortgages, and meanwhile,
Flora had obtained several loans totaling
P7.5 million fromVR Enterprise. It took
petitioners even longer, 15 years, to assail
the validity of the ESEW, which gave Flora
sole title to the subject lots under the new
reconstituted titles issued to her.
Realizing that their claim of forgery of their
mothers signature in the mortgage
contracts was tenuous, the petitioners now
claim that an earlier instrument, the ESEW,
was falsified by their brothers Manuel and
Arturo who forged their signatures. Yet the
petitioners did not explain why the said
instrument named neither Manuel nor

Arturo but their mother Flora as the sole

beneficiary of the heirs waiver.
Considering that the petitioners are now
asserting that their signatures in the ESEW
had been forged, it is inexplicable why they
failed to attach a copy thereof to

their Opposition to the ex parte petition

for writ of possession. All that they could
say about this oversight is that they
were never able to insist on the
presentation of the said document
because they were never parties in the
case for writ of possession. Besides, the
case for writ of possession is summary
and non- adversarial.
But this is a lie and an obvious
subterfuge, for the fact is that they
appeared with their lawyer, and had an
opportunity to lay out the complete facts
and
present
whatever
pertinent
documents were in their possession.
They did no such thing.
Not only did petitioners not sue to annul
the extrajudicial settlement, but on the
very day that the new titles were issued
to Flora, an inscription appears in the
said titles announcing that one-half ()
of the lots would be bound for the next
two years to possible claims by other

heirs or unknown creditors against the

estate of Mamerto. All three titles bear this
same inscription, which the petitioners
admit that they themselves had caused to
be annotated on their mothers titles.
All the above leave little doubt that the
petitioners had always known about, and
had consented to, the extrajudicial
settlement of the estate of their father
Mamerto, as well as waiver by them of
their shares therein in favor of their mother
Flora. For this very reason, they cannot
now be permitted to interpose an adverse
claim in the subject mortgaged lots and
defeat the writ of possession issued to VR
Enterprise.
Note: Any question regarding the validity of
the mortgage or its foreclosure cannot be a
legal ground for the refusal to issue a writ
of possession. Regardless of whether or
not there is a pending suit for the
annulment of the mortgage or the
foreclosure itself, the purchaser is entitled
to a writ of possession without prejudice, of

course, to the eventual outcome of the

pending annulment case.

BARRETTO VS. BARRETTO

G.R. No. L-11933; December 1, 1917
FACTS: Juan Antonio Barretto, Sr.
succeeded by his children Juan Antonio,
Jr. (debtor), Leonardo (Atty. of debtor) and
other heirs Juan Antonio Jr. borrowed
money from Antonio Vicente Barretto
(creditor) mortgaged the hacienda
failed to pay Antonio took possession of
the hacienda Antonio succeeded by
Alberto (son, plaintiff) Alberto in present
possession Leonardo usurped the
hacienda
Albertos case
Alberto Barretto alleges that he is the
owner of the whole hacienda called
Balintagac.
He was in possession of the said
hacienda quietly, peacefully, and
continuously, as were his predecessors
since the year 1884 until 1912.
Leonardo Barretto, alleging himself to
be the owner of a certain part of said
hacienda, illegally and unduly usurped
a portion thereof.
Leonardo refused to return that portion
of land usurped together with the fruits
received, or their value, in spite of the
fact that he has been required to do so
in writing by the Alberto.
Leonardos case
The hacienda of Balintagac was owned
and possessed by Juan Antonio
Barretto, Sr., who died in 1881 and left
7 children: Juan Antonio, Angelica
Maria, Leonardo, Francisca, Bartolome,
Jose and Leopoldo.
The 7 children of Juan Antonio, Sr.
succeeded him in all his rights and
actions and became owners with the
right of possession of hacienda
Balintagac.

Juan Antonio Jr., then executor of his

deceased father Juan Antonio Sr.,
declaring himself to be the absolute
owner of all the hacienda of Balintagac,
borrowed money in the sum of P11,000
from Antonio Vicente Barretto for the
expenses of the hacienda with the
obligation
to
pay
P1,000
for
delinquency, and interests at 8% per
annum, payable quarterly in advance
As guaranty for said loan, he
mortgaged the cultivated half of the
hacienda and other properties.
For the failure of the debtor to pay his
debt, the creditor Antonio Vicente
brought an action to foreclose the
mortgage in order to recover the money
loaned, against Juan Antonio Jr. in his
own behalf and as executor of his
father.
Half of the mortgaged hacienda was
levied upon and a judgment to sell the
property was rendered, but it could not
be sold in spite of the fact that it was
placed at auction three times.
Antonio Vicente prayed for the
adjudication of all the property attached
to the payment of his credit of P7,648,
to which Leonardo voluntarily agreed
and consented as attorney in fact of
Juan Antonio Jr.
Juan Antonio Jr. and his brothers, not
being able to pay the debt, interests,
and costs, delivered and conveyed all
the hacienda of Balintagac to the
creditor.
From then, the brothers of Juan Antonio
Jr. administered, by the appointment
and exclusive account of Antonio
Vicente,
the
entire
hacienda,
acknowledging him as the owner of all
of it and delivering to him all its
products till April 1896.

ISSUES:
1. WON there was a contract of
antichresis. YES
2. WON the creditor acquires through
possession the ownership of the real
property in antichresis when debtor fails

to pay debt within the stipulated

NO.

time.

HELD: Antonio Vicente Barretto as creditor

not being able to collect his credit of
P11,000 and interest at 8%, nor obtain the
adjudication in his favor of half of hacienda
of Balintagac which was mortgaged for the
security of the debt, and there having been
no bidders on the three occasions in which
it was offered for public auction took
possession of all the hacienda, and from
that time on received through his
administrators the products of the same for
the purpose of collecting his credit
interests.
It may be established that he took
possession of said hacienda by virtue of
voluntary assignment with the express
consent of heirs of Juan Antonio Sr., owner
of one-half of the hacienda and of Juan
Antonio Jr., owner of the other half.
It does not fully appear which contract has
been entered into between the creditor and
the heirs of Juan Antonio, Sr., and his son
Juan Antonio Jr; but from the facts that
have been fully established it is inferred
that once the foreclosure proceedings were
suspended, because the creditor had not
been able to obtain the adjudication of the
hacienda in his favor, the creditor took
possession
of the
hacienda
of
Balintagac, and held it in usufruct with
the knowledge and express consent of
its legitimate owners; there has not been
any opposition or protest against the
possession, which by usufruct the creditor
and his successors enjoyed.
Considering that from the facts proved,
which refer to the possession and usufruct
enjoyed by Antonio Vicente and then his
successors, one of whom is Alberto
Barretto, it is logically deduced that such

facts were accomplished by virtue of a

verbal contract, and not by written one,
entered into between the owners of the
hacienda and the creditor Antonio Vicente.

Since it is not shown that the debtors

have delivered the whole hacienda to the
creditor by assignment of the property, it
is to be presumed that the debtors
delivered not only one half, but the whole
hacienda with a view that the creditor
might collect by usufruct his credit with
the accrued interests.
In spite of the fact that the agreement
between the creditor and the debtors
was not set down in any document, due
to the relationship which exists between
them, it may safely be asserted that the
debtors have limited themselves to give
to the creditor the right to collect his
credit from the fruits of the hacienda of
Balintagac, conferring upon him the
possession of the property, but not
transferring to him the dominion of
the same, since such transfer was not
proved in the present action.
The agreement or verbal stipulation is an
antichresis as defined by Article 1881 of
the Civil Code, which says:

By the antichresis a creditor

acquires a right to receive the fruits
of real property of his debtor, with
the obligation to apply them to the
payment of the interest, if due, and
afterwards to the principal of his
credit.
The perusal of articles 1882-1886 shows
that the possession of the hacienda
enjoyed by the creditor Antonio Vicente
and his successors up to the present time
was conferred to them by virtue of the
stated contract or agreement in antichresis.
One of the administrators of the hacienda
presented the sworn declaration of
ownership for the purposes of tax
assessment and paid the land tax in the
name of the creditor who possessed and
held the hacienda in usufruct.
Although article 1884 states that

the

creditor does not acquire through

possession the ownership of the real
property delivered by virtue of an
antichresis for failure to pay the debt within
the stipulated time, nevertheless, the
debtor cannot recover the use of the real
property given in antichresis to the creditor,
without previously fully paying the creditor.
In case of insolvency, the creditor may ask
for the sale of the real property which he
possesses in antichresis, unless the
pending debt is paid.
It appears that defendant Leonardo,
without the consent of Alberto, took over
and usurped a portion of land of the
hacienda, withholding and refusing to
deliver them to the creditor in antichresis
on the pretext that he is the owner of the
whole hacienda. Although it appears that
the debt has been paid, Leonardo still
acted without just reason and in
contravention of article 1883 when he
effected the usurpation.
It is known that the action to recover a
thing, where a legitimate possessor has
been deprived of his possession, takes
place in accordance with the law even
against the owner himself, who can never
be protected by the law even on his right of
ownership, without first restoring what
he acquired through an illegal act of
dispossession.
Though Alberto Barretto has no title of
ownership over the hacienda of Balintagac,
and therefore, he cannot be declared
owner of the same, nevertheless, his claim
that a judgment be rendered ordering the
return to him of the portion usurped by
Leonardo is in conformity with the law.
Alberto being in the legitimate possession
and use of all the hacienda of Balintagac

which was voluntarily delivered to him by

Juan Antonio, Jr. and his co-heirs, with the
object that the creditor Antonio Vicente might
collect the capital and interests which they
owed and still owe him a

lawful contractual act called by law a

covenant in antichresis the debtors
cannot, while the debt exists and is not
fully paid, recover or reacquire the
possession and use of the real property
delivered to the creditor, without the
latter giving his consent;
Consequently, Leonardo, without the
knowledge or consent Alberto Barretto,
who succeeded in the possession and
use of the hacienda, could not have
recovered,
by
usurpation,
the
possession and use of a portion of
the hacienda.

MACAPINLAC VS. REPIDE

G.R. No. 18574; September 20, 1922
FACTS: On and prior to August 22,
1916, Jose Macapinlac was the owner of
the Hacienda Dolores, a property located
in Pampanga. This property had been
registered and a Torrens certificate of
title had been issued.

On the date above stated, Macapinlac was

indebted to Bachrach Motor Company for
the price of an automobile and its
accessories, purchased upon credit; and
as evidence of this indebtedness he
executed 14 promissory notes (PNs)
payable to Bachrach amounting to the sum
of P12,960.
Contemporaneously with the delivery of the
PNs, Macapinlac executed what purports
to be a deed of sale, with privilege of
repurchase, to be exercised on or before
October 2, 1917 (due date of the debt).
This transfer covered the Hacienda
Dolores. In this conveyance E.
M.
Bachrach is named as transferee.
On November 8, 1917, Francisco Repide
acquired, for the sum of P5,000, all the
rights of E. M. Bachrach in the property
which had been conveyed to the latter.
Repide was well aware that the transfer of
the property to Bachrach had been made

by the Macapinlac for the purpose of

securing a debt owing to Bachrach
Company, and he was furthermore aware
that part of the debt has been paid and
there was only balance of less than onehalf of the sum of P12,960. After Repide
had acquired the interest in the hacienda in
question, he processed the certificate of
title to be transferred to his own name.
To accomplish this, it was necessary to
make it appear that the contract of sale
with pacto de retro noted in the original
Torrens certificate was really and truly
what it appeared to be, that is, a contract of
sale, not a mere mortgage, and that the
ownership had consolidated in the
purchaser by reason of the failure of the
seller to repurchase the property before the
expiration of the time allowed for
redemption. Inasmuch as it appeared that
the ownership had then consolidated in the
purchaser, he directed the ROD of
Pampanga to register the property in the
name of Francisco Gutierrez Repide and to
issue to him a new certificate of transfer,
which was accordingly done.
At the time of the filing of this complaint,
Repide was in actual possession of the
property in question, and that he had in
effect been enjoying possession since
August 1917.
ISSUES:
1. WON the contract executed between
Macapinlac and Bachrach Motor, the
sale with pacto de retro, was a deed of
sale or an equitable mortgage.
Equitable Mortgage(EM)
2. What
contract
govern
between
Macapinlac and Repide (as successor
in interest of Bachrach) if the original
contract executed by plaintiff with

Bachrach was an EM. Contract of

Antichresis.
HELD:
1.
In taking up these problems we begin
with the situation created by the

execution of the contract of sale with

pacto de retro between Macapinlac and
Bachrach Company. In this connection
the first and most obvious proposition to
be laid down is that since the
conveyance is alleged to have been
executed as security for a debt owing by
Macapinlac to Bachrach, it follows that in
equity, said conveyance must be treated
as a mere security or substantially as a
mortgage, as creating a mere equitable
charge in favor of the creditor or person
named as the purchaser therein.
In this connection the cardinal rule is that
a party who acquires any interest in
property with notice of an existing equity
takes subject to that equity. In other
words, having acquired the interest of
Bachrach in the Hacienda Dolores, with
knowledge that the contract has been
executed as security for a debt,
Francisco Repide must be understood to
stand in exactly the same position
occupied by Bachrach, if the transfer to
Repide had never been effected.

Repides contention:
Repide insisted that his title has become
indefeasible and the action of Macapinlac
already prescribed, owing to the fact that
the conveyance of the land to him has
been followed by the issuance of a TCT in
his name, and the original certificate in the
name of Macapinlac has been cancelled
all of which had been accomplished more
than one year before the present action
was begun.
In the first place, it must be borne in mind
that the equitable doctrine, to the effect
that any conveyance intended as security
for a debt will be held in effect to be
amortgage, whether so actually expressed
in the instrument or not, operates
regardless of the form of the agreement
chosen by the contracting parties as the
repository of their will.
Equity looks through the form and
considers the substance; and no kind of

engagement can be adopted which will

enable the parties to escape from the
equitable doctrine to which reference is
made. In other words, a conveyance of
land, accompanied by registration in the
name of the transferee and the issuance of
a new certificate, is no more secured from
the operation of this equitable doctrine than
the most informal conveyance that could
be devised.
In the second place, the circumstance that
the land has been registered under the
Torrens system does not change or affect
civil rights and liabilities with respect
thereto. An ordinary transfer of land,
effected in any of the ways allowed by law,
even when followed by registration and
that issuance of a new certificate of the
Land Registration Act, has a different
character.
Applying said provision to the facts of the
present case, it must follow that the cause
of action of the plaintiff to annul the
registration of this property in the name of
Francisco Repide did not prescribe at one
year, and the plaintiff's cause of action
upon this branch of the case had not in fact
been barred at all when the present action
was begun.
2.
Discussion on antichresis:
The preceding discussion conducts us to
the conclusion that the estate of Francisco
Repide occupies substantially the position
of a mortgagee in possession. The
question then arises as to what are the
legal rights of the plaintiff as against the
Repide estate.
The solution of this problem is to be found
in the application of the doctrine formulated
in Barretto vs. Barretto. In that case the

heirs of a mortgagee of an estate were found

in possession of mortgaged property more
than thirty years after the mortgage had been
executed; and it was shown that the
mortgage had never been foreclosed. Upon
this state of facts it was in effect held that the
rights of the parties, heirs of the

mortgagor and mortgagee,

were
essentially the same as under the
contract of antichresis.
By reference to the appropriate
provisions of theCivil Code (arts. 18811884), in the chapter dealing with
antichresis, it will be at once seen that
while non-payment of the debt does
not vest the ownership of the property
in the creditor, nevertheless the
debtor cannot recover the enjoyment
of the property without first paying in
full what he owes to his creditor. At
the same time, however, the creditor is
under obligation to apply the fruits
derived from the estate in satisfaction,
first, of the interest on the debt, and
secondly, to the payment of the principal.
From this is necessarily deduced the
obligation of the creditor to account to
the debtor for said fruits and the
corresponding right of the debtor to have
the same applied in satisfaction of the
mortgage debt.

The respective rights and obligations of the

parties to a contract of antichresis may be
taken to be established, namely:
that if the mortgagee acquires
possession in any lawful manner, he
is entitled to retain such possession
until the indebtedness is satisfied
and the property redeemed;
that the non-payment of the debt within
the term agreed does not vest the
ownership of the property in the
creditor;
that the general duty of the mortgagee
in possession towards the premises is
that of the ordinary prudent owner;
that the mortgagee must account for the
rents and profits of the land, or its value
for purposes of use and occupation,
any amount thus realized going towards
the discharge of the mortgage debt;
that if the mortgagee remains in
possession after the mortgage debt
has been satisfied, he becomes a
trustee for the mortgagor as to the

excess of the rents and profits over

such debt; and
that the mortgagor can only enforce his
rights to the land by an equitable action
for an account and to redeem.

ALOJADO VS SIONCO
FACTS: Juana Mabaquiao sold the landin-dispute described in the complaint to
Nicolas Alegata . Alegata died. Settlement
proceedings of his estate was instituted,
his property, which included the land-indispute was adjudicated to Lim Kang Sang
and Lim Eng Teeng, his only heirs. Lim
Kang and Lim Eng sold the land to Lim
Ponso & Co., with the right to repurchase
for the period of one year Period expired
without this right having exercised.
Lim Ponso & Co. transferred this land
unconditionally to Lim Siongco and Lim
Kingko.
Juana
Mabaquiao
dies.
Intestate
proceedings took place and Ambrosio T.
Alojado was appointed administrator.
Ambrosio, as administration, brought this
action against Lim Sionco, Lim Kingko and
Lim Ponso & Co. prays that he be declared
the absolute owner of this land with the
improvements thereon, and that the
defendants be ordered to restore and
respect his right of ownership, possession
and usufruct of the property;
RTC: in favor of Lim Sionco, Lim Kingko,
Lim Ponso &Co.
Ambrosio contends that the contract
executed by Juana Mabaquiao
with
Nicolas Alegata was not a contract of sale

with the right to repurchase, but a contract or

antichrises
ISSUE: WON the contract was a contract of
antichresis or contract of sale with right to
redemption? Contract of sale with right to
remdemption

HELD: The terms of the contract it is

clearly a sale with the right to
repurchase. It speaks in unequivocal
terms of a sale and the conveyance of
land with the right to repurchase, and
the character of the contract is that of a
sale with the right to repurchase. The
contract is very defective in its wording,
especially so where it refers to the period
within which to exercise the right to
repurchase. But examining it as a whole,
it clearly appears that it was the parties'
intention
that
the
vendor
could
repurchase the land without delay when
he had the means to pay the purchase
price.
What characterizes a contract or
antichresis is that the creditor
acquires the right to receive the fruits
of the property of his debtor with the
obligation to apply them to the
payment of interests, if any is due,
and then to the principal of his credit.
Nowhere in the contract in question does

this character of a contract of antichresis

appear. The only substantial thing agreed
upon between the parties was that Juana
Mabaquiao could repurchase the land
when she had the means.
ISSUE: Whether or not the title to the land
conveyed by Juana Mabaquiao has been
consolidated.? YES
HELD: This action was brought in January,
1922, fifteen years after the contract was
entered into. The contract, as been noted,
fixes the period for the exercise of the right
of redemption until Juana Mabaquiao, or
her heirs has the means.
Whether or not this is considered a period,
it is clear that the title transmitted to
Nicolas Alegata has been consolidated.
According to article 1508 of the Civil Code,
when no period of redemption is fixed it
shall last four years, and it is fixed, it shall
not exceed ten years. The right of
redemption not having been exercised the

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

period of ten years, the title of Nicolas

Alegata, or his heirs, has by this fact alone
been consolidated any events.

RAMIREZ v. CA
G.R. No. L-38185. September 24, 1986
FACTS: On September 15, 1959,
petitioners-spouses Hilario Ramirez and
Valentina Bonifacio filed an application for
registration of a parcel of riceland in
Pamplona, Las Pinas, Rizal. After notice
and publication, nobody appeared to
oppose the application. An order of general
default was issued and the court allowed
the petitioners to present evidence in
support of their claim. Thereafter, the
petitioners presented parole evidence that
they acquired the land in question by
purchase from Gregoria Pascual during the
early part of the American regime but the
corresponding contract of sale was lost
and no copy or record of the same was
available. On January 30, 1960, the court
ordered the issuance of the decree of
registration and consequently, Original
Certificate of Title No. 2273 of the Registry
of Deeds of Rizal was issued in the
petitioners names. On March 30, 1960,
private respondents filed a petition to
review the decree of registration on the
ground of fraud. The respondents alleged
among others that they obtained a loan of
P400.00 from the petitioners in which they
secured with a mortgage on the land in
question by way of antichresis and that
there were several attempts to redeem the
land but were refused by the petitioners.
The trial court ordered the cancellation of
the original certificate of title. The Court of
Appeals affirmed the decision.

210

ISSUE: Can an antichretic creditor acquire

land of debtor by prescription? NO.
HELD: An antichretic creditor cannot acquire
the land of a debtor by prescription. An
antichretic creditor is not a

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

possessor in the concept of owner but a

mere holder placed in possession of the
land by its owners. Thus, possession of
an antichretic creditor cannot serve as a
title for acquiring dominion. The court,
from other cases like Trillana v.
Manansala, Valencia v. Acala and
Barretto v. Barretto, held that the
antichretic creditor cannot ordinarily
acquire by prescription the land
surrendered to him by the debtor.
Holding: The decision appealed from is
affirmed with a modification that the
respondents are ordered to pay the
petitioners the amount of P400.00 as
principal for the contract of antichresis,
the fruits obtained from the possession
of the land having been applied to the
interests on the loan.

ANCIETO BANGIS V HEIRS

OF SERAFIN AND SALUD
ADOLFO GR 190875 June 13
2012

210

FACTS: Spouses Serafin, Sr. and

Saludada Adolfo were the original
registered owners of a lot which was
mortgaged to the DBP. Upon default in the
payment of the loan obligation, it was
foreclosed
and
ownership
was
consolidated in DBPs name under a TCT.
Serafin Adolfo, Sr. repurchased the same
and was issued a TCT a year after his wife
died. He allegedly mortgaged the subject
property to Ancieto Bangis who took
possession of the land but their transaction
was not reduced into writing. When Adolfo
died, his heirs executed a deed of
extrajudicial partition covering the subject
property and TCT issued to them. The
said property was subdivided and separate
titles were issued in names of the heirs of
Adolfo. The heirs of Adolfo filed a complaint
for annulment of the deed of sale and
declaration of the purported contract of
sale as antichresis, accounting and
redemption of property and damages
against Bangis. The RTC rendered a
decision in favor of the heirs of Adolfo
declaring that the contract as an
antichresis, ordering the defendant to

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

deliver the possession of the property in

question to the plaintiffs and the TCT under
Bangis as null and void. Thus, the heirs of
Bangis appealed before the CA.
CA affirmed the RTC finding that the
contract between the parties was a
mortgage, not a sale. It noted that while
Bangis was given possession of the
subject property, the certificate of title
remained in the custody of Adolfo and was
never cancelled.
ISSUE: WON the transaction between the
parties was one of sale and not a mortgage
or antichresis. NEITHER
HELD: There was neither an antichresis
nor sale. For the contract of antichresis to
be valid, Article 2134 of the Civil Code
requires that the amount of the principal
and of the interest shall be specified in
writing; otherwise
the
contract of
antichresis shall be void. In this case, the
Heirs of Adolfo were indisputably unable to
produce any document in support of their
claim that the contract between Adolfo and
Bangis was an antichresis, hence, the CA
properly held that no such relationship
existed between the parties.
The bare testimony of one of the Heirs of
Bangis, Rodolfo Bangis, that the subject
document was only handed to him by his
father, Aniceto, with the information that
the original thereof could not be found
was
insufficient
to
justify
its
admissibility. The identification made by
Notary Public Atty. Valentin Murillo that he
notarized such document cannot be given
credence as his conclusion was not
verified against his own notarial records.

211

In sum, the Heirs of Bangis failed to establish

the existence and due execution of the
subject deed on which their claim of
ownership was founded.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

OLAF N. BORLOUGH vs.

FORTUNE
ENTERPRISES, INC.
FACTS: Fortune Enterprises, Inc. sold to
Salvador Aguinaldo a Chevrolet sedan,
which it from United Car Exchange, and
for not having paid it in full, the latter
executed on the same date a promissory
note in the amount of P2,400 payable in
20 installments.
To secure the payment of this note,
Aguinaldo executed a deed of chattel
mortgage over said car. The deed was
duly registered in the office of the
Register of Deeds of Manila.
As the buyer-mortgagor defaulted in the
payment of the installments due, counsel
for Fortune Enterprises Inc. addressed a
letter on May 16, 1952, requesting him to
make the necessary payment and to
keep his account up to date, so that no
court action would be resorted to.

212

The above-described car found its way

again into the United Car Exchange which
sold the same in cash for P4,000 to one O.
N. Borlough. Accordingly, he registered it
on the following day with the Motor
Vehicles Office.
1. N. Borlough took possession of the vehicle
from the time he purchased it, On July 10,
1952, Fortune Enterprises, Inc. brought
action against Salvador Aguinaldo to
recover the balance of the purchase price.
Borlough filed a third-party complaint,
claiming the vehicle. Thereupon, Fortune
Enterprises, Inc. amended its complaint,
including Borlough as a defendant and
alleging that he was in connivance with
Salvador Aguinaldo and was unlawfully
hiding and concealing the vehicle in order
to evade seizure by judicial process.
Borlough answered alleging that he was in
legal
possession
thereof,
having
purchased it in good faith and for the full

price of P4,000, and that he had a

certificate of registration of the vehicle
issued by the Motor Vehicles Office, and
he prayed for the dismissal of the
complaint, the return of the vehicle and for
damages against the plaintiff.
ISSUE: Whether or not the mortgage binds
Borlough who is a purchaser in good faith.
NO.
HELD: Two recording laws are here being
invoked, one by each contending party
the Chattel Mortgage Law (Act No. 1508),
by the mortgagor and the Revised Motor
Vehicles Law (Act No. 3992), by a
purchaser in possession.
The Revised Motor Vehicles Law is a
special legislation enacted to "amend and
compile the laws relative to
motor
vehicles," whereas the Chattel Mortgage
Law is a general law covering mortgages
of all kinds of personal property. The
former is the latest attempt to assemble
and compile the motor vehicle laws of the
Philippines, all the earlier laws on the
subject having been found to be very
deficient in form as well as in substance; it
had been designed primarily to control the
registration and operation of motor
vehicles.
Counsel for petitioner contends that the
passage of the Revised Motor Vehicles
Law had the effect of repealing the Chattel
Mortgage Law, as regards registration of
motor vehicles and of the recording of
transaction affecting the same. We do not
believe that it could have been the
intention of the legislature to bring about
such a repeal. In the first place, the
provisions of the Revised Motor Vehicles
Law on registration are not inconsistent
with does of the Chattel Mortgage Law. In

the second place, implied repeals are not

favored; implied repeals are permitted only in
cases of clear and positive inconsistency.
The first paragraph of section 5 indicates that
the provisions of the Revised Motor Vehicles
Law regarding

registration and recording of mortgage

are not incompatible with a mortgage
under the Chattel Mortgage Law. The
section merely requires report to the
Motor Vehicles Office of a mortgage; it
does not state that the registration of the
mortgage under the Chattel Mortgage
Law is to be dispensed with. We have,
therefore, an additional requirements in
the Revised Motor Vehicles Law, aside
from the registration of a chattel
mortgage, which is to report a mortgage
to the Motor Vehicles Office, if the
subject of the mortgage is a motor
vehicle; the report merely supplements
or complements the registration.
The recording provisions of the Revised
Motor Vehicles Law, therefore, are
merely complementary to those of the
Chattel Mortgage Law. A mortgage in
order to affect third persons should not
only be registered in the Chattel
Mortgage Registry, but the same should
also be recorded in the motor Vehicles
Office as required by section 5 (e) of the

Revised Motor Vehicles Law [Whenever

any owner hypothecates or mortgage any
motor vehicle as surety for a debt or other
obligation, the creditor or person in whose
favor the mortgage is made shall, within
seven days, notify the Chief of the Motor
Vehicles Office in writing]. And the failure
of the respondent mortgage to report the
mortgage executed in its favor had the
effect of making said mortgage ineffective
against Borlough, who had his purchase
registered in the said Motor Vehicles
Office.
One holding a lien on a motor vehicle, in so
far as he can reasonably do so, must
protect himself and others thereafter
dealing in good faith by complying and
requiring compliance with the provisions of
the laws concerning certificates of title to
motor vehicles, such as statutes providing
for the notation of liens or claims against
the motor vehicle certificate of title or
manufacturer's certificate, or for the
issuance to the mortgagee of a new

certificate of ownership.
The holder of a lien who is derelict in his
duty to comply and require compliance with
the statutory provisions acts at his own
peril, and must suffer the consequence of
his own negligence; and accordingly, he is
not entitled to the lien as against a
subsequent innocent purchaser filed as
provided by other chattel mortgage
statutes.
The above authorities leave no room for
doubt that purchaser O. N. Borlough's right
to the vehicle should be upheld as against
the previous and prior mortgage Fortune
Enterprises, Inc., which failed to record its
lien in accordance with the Revised Motor
Vehicles Law.

STANDARD OIL COMPANY vs.

JARAMILLO
FACTS: Gervasia de la Rosa, Vda. de
Vera, was the lessee of a parcel of land
situated in the City of Manila and owner of
the house of strong materials built thereon,
upon which date she executed a document
in the form of a chattel mortgage,
purporting to convey to the petitioner by
way of mortgage both the leasehold
interest in said lot and the building which
stands thereon.
The clauses in said document describing
the property intended to be thus mortgage
are expressed in the following words:
Now, therefore, the mortgagor
hereby conveys and transfer to the
mortgage, by way of mortgage, the
following
described
personal
property, situated in the City of

Manila, and now in possession of the

mortgagor, to wit:
(1)
All of the right, title, and interest of
the mortgagor in and to the contract of lease
hereinabove referred to, and in and to
the

premises the subject of the said

lease;
(2) The building, property of the
mortgagor, situated on the
aforesaid leased premises.
After said document had been duly
acknowledge
and
delivered,
the
petitioner caused the same to be
presented to the respondent, Joaquin
Jaramillo, as register of deeds of the City
of Manila, for the purpose of having the
same recorded in the book of record of
chattel mortgages. Upon examination of
the instrument, the respondent was of
the opinion that it was not a chattel
mortgage, for the reason that the interest
therein mortgaged did not appear to be
personal property, within the meaning of
the Chattel Mortgage Law, and
registration was refused on this ground
only.
ISSUE: Whether or not the RoD may
refuse registration of the mortgage. NO

HELD:
The duties of a register of
deeds in respect to the registration of
chattel mortgage are of a purely ministerial
character; and no provision of law can be
cited which confers upon him any judicial
or quasi-judicial power to determine the
nature of any document of which
registration is sought as a chattel
mortgage.
His duties in respect to such instruments
are ministerial only. The efficacy of the act
of recording a chattel mortgage consists in
the fact that it operates as constructive
notice of the existence of the contract, and
the legal effects of the contract must be
discovered in the instrument itself in
relation with the fact of notice. Registration
adds nothing to the instrument, considered
as a source of title, and affects nobody's
rights except as a specifies of notice.
Articles 334 and 335 of the Civil Code
supply
no
absolute
criterion
for
discriminating between real property and

personal property for purpose of the

application of the Chattel Mortgage Law.
Those
articles
state
rules
which,
considered as a general doctrine, are law
in this jurisdiction; but it must not be
forgotten that under given conditions
property may have character different from
that imputed to it in said articles. It is
undeniable that the parties to a contract
may by agreement treat as personal
property that which by nature would be real
property; and it is a familiar phenomenon
to see things classed as real property for
purposes of taxation which on general
principle might be considered personal
property. Other situations are constantly
arising, and from time to time are
presented to this court, in which the proper
classification of one thing or another as
real or personal property may be said to be
doubtful.

SALDANA vs. PHILIPPINE GUARANTY

FACTS:
in
order
to
secure
an
indebtedness of P15,000.00, Josefina Vda.
de Aleazar executed in favor of the plaintiffappellant Buenaventura Saldana a chattel
mortgage covering properties described as
follows:
A building of strong materials, used for
restaurant business, located in front of
the San Juan de Dios Hospital at Dewey
Boulevard, Pasay City, and the following
personal properties therein contained:
1 Radio, Zenith, cabinet type.
1 Cooler.
1 Electric range, stateside, 4 burners.
1 Frigidaire, 8 cubic feet.
1 G.E. Deepfreezer.
8 Tables, stateside.
32 Chromium chairs, stateside.
1 Sala set upholstered, 6
pieces.
1 Bedroom set, 6 pieces.

And all other furniture's, fixtures or

equipment found in the said premises.
Subsequent to the execution of the
mortgage, a writ of execution was duly

issued as a result of a civil case

instituted by Hospital de San Juan de
Dios
against
Josefina
Eleazar;
whereupon the following properties of
Josefina Eleazar were levied upon:
8 Tables with 4 (upholstered) chairs
each.
1 Table with 4 (wooden) chairs.
1 Table (large) with 5 chairs.
1 Radio-phono (Zenith, 8
tubes). 2 Showcases (big, with
mirrors).
1 Rattan sala set with 4 chairs, 1 table
and 3 sidetables .
1 Wooden drawer.
1 Tocador
(brown
with
mirror). 1 Aparador .
2 Beds (single type).
1 Freezer (deep freeze).
1 Gas range (magic chef, with
4 burners).
1 Freezer (G.E.).
On January 31, 1957, the plaintiffappellant Saldana filed a third-party
claim asserting that the above-described

properties levied are subject to his chattel

mortgage of May 8, 1953. In virtue thereof,
the sheriff released only some of the
property originally included in the levy of
January 28, 1957, to wit:
1 Radio, Zenith, cabinet type.
8 Tables, stateside.
32 Chromiun chairs, stateside.
1 G.E. Deep freezer.
Appellants claims that the phrase in the
chattel mortgage contract "and all other
furnitures, fixtures and equipment found in
the said premises", validly and sufficiently
covered within its terms the personal
properties disposed of in the auction sale,
ISSUE: Whether or not the properties
levied are covered by the mortgage. YES.
HELD: Section 7 of Act No. 1508,
commonly and better known as the Chattel
Mortgage Law, does not demand a minute
and specific description of every chattel
mortgaged in the deal of mortgage but only

requires that the description of the

properties be such "as to enable the
parties in the mortgage, or any other
person, after reasonable inquiry and
investigation to identify the same". Gauged
by this standard, general description have
been held by this Court.
the description in the mortgage must point
out its subject matter so that such person
may identify the chattels observed, but it is
not essential that the description be so
specific that the property may be identified
by it alone, if such description or means of
identification which, if pursued will disclose
the property conveyed.
The specifications in the chattel mortgage
contract in the instant case, we believe, in
substantial
compliance
with
the
"reasonable description rule" fixed by the
chattel Mortgage Act. We may notice in the
agreement, moreover, that the phrase in
question is found after an enumeration of
other specific articles. It can thus be
reasonably inferred therefrom that the
"furnitures, fixture and equipment" referred
to are properties of like nature, similarly
situated or similarly used in the restaurant
of the mortgagor located in front of the San
Juan de Dos Hospital at Dewey Boulevard,
Pasay City, which articles can be definitely
pointed out or ascertain by simple inquiry
at or about the premises. A contrary view
would unduly impose a more rigid condition
than what the law prescribes, which is that
the description be only such as to enable
identification after a reasonable inquiry and
investigation.

ALEKO E. LILIUS vs. MANILA

RAILROAD COMPANY
(G.R. No. 42551, September 4, 1935)

FACTS: In G.R. No. L-39587, Aleko E.

Lilius, and his wife Sonja Maria Lilius, and
Brita Marianne Lilius, met an accident,
wherein their Studebaker car, collided with
locomotive No. 713, Manila Railroad

Companys
train.
They sustained
lifethreatening wounds, fractures and
other
injuries,
which
left
them
permanently disfigured. The Supreme
Court ruled in favor of Aleko Lilius, et al,
awarding them
in the amount of
P33,525.03 as damages, including
interest and costs.
In G.R. No. 42551, herein case, Laura
Lindley Shuman, the Manila Wine
Merchants, Ltd., the Bank of the
Philippine Islands and the Manila Motor
Co., Inc(creditors of the spouses Lilius).,
have appealed from an order of the
Court of First Instance of Manila fixing
the degree of preference of the claimants
and distributing the proceeds of the
judgment of this court in the case of
Lilius vs. Manila Railroad Co.
APPEAL OF LAURA LINDLEY SHUMAN
:The lower court erred in holding that Dr.
W.H. Waterous and Dr. M. Marfori had a
claim against the plaintiff, Aleko E. Lilius

superior to the claim of the appellant,

Laura Lindley Shuman, against him."
One of the contentions of this appellant
under this assignment of error is that her
claim, having been made the basis of the
plaintiffs' action and of the award for
damages, as shown in the original decision
herein, should constitute, and does
constitute a superior lien against the funds
awarded said plaintiffs, to those of any
other claimants, except the two doctors,
the hospital and the other nurse, and that
as to the claims of the two doctors, the
hospital and the other nurse the claim of
this appellant has equal preference with
their claims.
APPEAL OF THE MANILA WINE
MERCHANTS, LTD., AND THE BANK OF
THE
PHILIPPINE
ISLANDS.
:The
appellants, the Manila Wine Merchants.
Ltd., and the Bank of the Philippine islands
also contend that the sum separately
awarded Sonja Maria Lilius is conjugal
property and therefore liable for the
payment of the private debts of her

husband, Aleko E. Lilius, contracted during

her marriage.
APPEAL OF THE THE MANILA MOTOR
CO., INC.: For its part, Manila Motor Co.,
Inc. claims that the lower court erred in not
holding their claims, evidenced by public
instruments and final judgment, as
preferred over all other claims against
Aleko E. Lilius. In support of its claim of
preference against the fund of Aleko E.
Lilius was a certified copy of its judgment
against him in civil case No. 41159 of the
Court of First Instance of Manila, together
with a certified copy of the writ of execution
and the garnishment issued by virtue of
said judgment. The alleged public
document evidencing its claim was not
offered in evidence but, in their brief in this
court, counsel for the Motor Co., Inc.,
merely assume that its credit is evidenced
by a public document dated may 10, 1931,
because the court, in its judgment in said
civil case No. 41159, refers to a mortgage
appearing in the evidence as Exhibit A, as
the basis of its judgment, without
mentioning the date of the execution of the
exhibit.
ISSUE: WON the reference to a mortgage
appearing in a public document in a
judgment, entitled to preference under
article 1924 of the Civil Code. NO
HELD: This reference in said judgment to
a mortgage is not competent or satisfactory
evidence as against third persons upon
which to base a finding that the Manila
Motor Company's credit evidenced by a
public document within the meaning of
article 1924 of the Civil Code. If the Manila
motor Co., Inc., desired to rely upon a
public document in the form of a mortgage
as establishing its preference in this case,

it should have offered that document in

evidence, so that the court might satisfy itself
as to its nature and unquestionably fix the
date of its execution.
Under section 5 of Act No. 1507 as amended
by Act No. 2496, a chattel does

not have to be acknowledged before a

notary public. As against creditors
and subsequent encumbrances, the
law does require an affidavit of good
faith appended to the mortgage and
recorded with it. A chattel mortgage
may, however, be valid as between the
parties without such an affidavit of good
faith. In 11 Corpus Juris, 482, the rule is
expressly stated that as between the
parties and as to third persons who have
no rights against the mortgagor, no
affidavit of good faith is necessary. It will
thus be seen that under the law, a valid
mortgage may exist between the
parties without its being evidenced by
a public document.
This court would not be justified, merely
from the reference by the lower court in
that case to a mortgage, in assuming
that its date appears in a public
document. if the Manila motor Co., Inc.,
desired to rely upon a public document in
the form of a mortgagor as establishing
its preference in this case, it should have
offered that document in evidence, so

that the court might satisfy itself as to its

nature and unquestionably fix the date of
its execution. There is nothing either in the
judgment relied upon or in the evidence to
show the date of said mortgage. The
burden was upon the claimant to prove that
it actually had a public Code.
It is essential that the nature and the date
of the document be established by
competent evidence before the court can
allow a preference as against the other
parties to this proceeding. Inasmuch as the
claimant failed to establish its preference,
based on a public document, the lower
court properly held that its claim against
the said Aleko E. Lilius was based on the
final judgment in civil case No. 41159 of
the Court of First Instance of Manila of May
3, 1932. The court, therefore, committed
no error in holding that the claim of the
Manila Motor Co., Inc., was inferior in
preference to those of the appellees in this
case.

CEBU INTERNATIONAL FINANCE

CORPORATION, petitioner,vs. COURT
OF APPEALS, ROBERTO ONG AND
ANGTAY, respondents
(268 SCRA 178, G.R. No. 107554,
February 13, 1997)
FACTS: On 4 March 1987, Jacinto Dy
executed a Special Power of Attorney in
favor of private respondent Ang Tay,
authorizing the latter to sell the cargo
vessel Owned by Dy and christened LCT
Asiatic.
On 28 April 1987, through a Deed of
Absolute Sale, Ang Tay sold the subject
vessel to private respondent Robert Ong
(Ong) for P900,000.00. Ong paid the
purchase price by issuing three (3) checks
in the following amounts: P150,000.000,
P600,000.00 and P150,000.00. However,
since the payment was not made in cash, it
was specifically stipulated in the deed of
sale that the LCT Asiatic shall not be
registered or transferred to Robert Ong
until complete payment.
Thereafter, Ong obtained possession of
the subject vessel so he could begin
deriving economic benefits therefrom. He,
likewise,
obtained
copies
of
the
unnotarized deed of sale allegedly to be
shown to the banks to enable him to
acquire a loan to replenish his (Ongs)
capital.
The
aforequoted
condition,
however, which was handwritten on the
original deed of sale, does not appear on
Ongs copies.
Contrary
to
the
aforementioned
agreements and without the knowledge of
Ang Tay, Ong had his copies of the deed

of sale (on which the aforementioned

prohibition does not appear) notarized on 18
May 1987. Ong presented the notarized deed
to the Philippine Coast Guard which
subsequently issued him a Certificate of
Ownership and a Certificate of Philippine

Register over the subject vessel on 27

May 1987. Ong also succeeded in
having the name of the vessel changed
to LCT Orient Hope.

As security for the loan, Ong

executed a chattel mortgage over the
subject vessel, which mortgage was
registered with the Philippine Coast
Guard and annotated on the Certificate
of Ownership.

case the rights and interests of the

MORTGAGEE in the foregoing mortgage
are assigned to a third person, under the
terms of said promissory note, as follows:
(a)(P20,667.00 on or before...and (b) the
balance in Twenty Four (24) equal
successive monthly instalments on the . . .
. . . day of each and every succeeding
month thereafter until the amount is fully
paid. The interest on the foregoing
instalments shall be paid on the same date
that the instalments become payable and
additional interest at the rate of fourteen
(14%) per cent per annum will be charged
on all amounts, principal and interest, not
paid on due date.

In paragraph 3 of the Deed of Chattel

Mortgage, it was stated that:
3. The said sum of 496,008.00
represents the balance due on of
MORTGAGOR(S)
from
the
MORTGAGEE and is payable in the
office of the MORTGAGEE at Cebu City
or in the office of the latters assignee, in

Ong defaulted in the payment of the

monthly instalments. Consequently, on 11
May 1988, petitioner sent him a letter
demanding delivery of the mortgaged
vessel for foreclosure or in the alternative
to pay the balance of P437,802.00
pursuant to paragraph 11 of the deed of
chattel mortgage.

On 29 October 1987, Ong acquired a

loan from petitioner in the amount of
P496,008.00 to be paid in instalments as
evidenced by a promissory note of even
date.

Meanwhile, the two checks (worth

P600,000.00 and P150,000.00) paid by
Ong to Ang Tay for the purchase of the
subject vessel bounced. Ang Tays search
for the elusive Ong and all attempts to
confer with him proved to be futile.
A subsequent investigation and inquiry with
the Office of the Coast Guard revealed that
the subject vessel was already in the name
of Ong, in violation of the express
undertaking contained in the original deed
of sale.
As a result thereof, on 13 January 1988,
Ang Tay and Jacinto Dy filed a civil case
for rescission and replevin with damages
against Ong and his wife.
ISSUES:
1. WON the chattel mortgage contract
between petitioner and Ong is valid.
2. WON petitioner is a mortgagee in good
faith whose lien over the mortgaged vessel
should be respected.
HELD:
1. As to validity of the mortgage
contract between Cebu International
and Ong:
The key lies in the certificate of ownership
issued in Ong's name (which, along with
the deed of sale, he submitted to petitioner
as proof that he is the owner of the ship he
gave as security for his loan). It was plainly
stated therein that the ship LCT "Orient
Hope" ex "Asiatic," by means of a Deed of
Absolute Sale dated 28 April 1987, was
"sold and transferred by Jacinto Dy to
Robert Ong."
There can be no dispute then that it was
Dy who was the seller and Ong the buyer
of the subject vessel. Coupled with the fact

that there is no evidence euphony

transaction between Jacinto Dy or Ang Tay
and petitioner, it follows, therefore, that
petitioner's role in the picture is properly and
logically that of a creditor-mortgagee

and not owner-seller.

petitioner and Ong is valid and subsisting.

It is paragraph 2 of the mortgage

contract which accurately expresses the
true nature of the transaction between
petitioner and Ong--that it is a simple
loan with chattel mortgage. The amount
petitioner loaned to Ong does not
represent the balance of any purchase
price
since
the
aforementioned
documents state that Ong is already the
absolute owner of the subject vessel.
Obviously, therefore, paragraph 3 of the
said contract was filled up by mistake.
Considering that petitioner used a form
contract, it is not improbable that such an
oversight may have been committed-negligently but unintentionally and
without malice.
Accordingly, the
contract between

chattel

mortgage

2.As to the good faith of Cebu International

as mortgagee whose lien over the
mortgaged vessel should be respected:
The prevailing jurisprudence is that a
mortgagee has a right to rely in good faith
on the certificate of title of the mortgagor to
the property given as security and in the
absence of any sign that might arouse
suspicion, has no obligation to undertake
further investigation. Hence, even if the
mortgagor is not the rightful owner of or
does not have a valid title to the mortgaged
property, the mortgagee or transferee in
good faith is nonetheless entitled to
protection. Although this rule generally
pertains to real property, particularly
registered land, it may also be applied
by analogy to personal property, in this
case specifically, since ship owners are,
likewise, required by law to register
their vessels with the Philippine Coast
Guard.
ANG TAYS CONTENTIONS:

That the above rule is not applicable in the

case at bar in the face of the numerous
"badges of bad faith" on the part of
petitioner.
Ang Tay's contentions are unmeritorious.
As previously discussed, paragraph 3 of
the chattel mortgage contract was
erroneously but unintentionally filled up.
The failure of petitioner to exercise due
care in filling up the necessary provisions
in the chattel mortgage contract does not,
however, amount to bad faith. It was a
mere oversight and not a deliberate and
malicious act.
ISSUE ON AFFIDAVIT OF GOOD FAITH
That petitioner's bad faith is further
demonstrated by its failure to comply with
the special affidavit of good faith as
required in Sec. 4 of P.D. No. 1521.
The special affidavit of good faith, on
the other hand, is required only for the
purpose of transforming an already
valid mortgage into a "preferred
mortgage." Thus, the abovementioned
affidavit is not necessary for the validity
of the chattel mortgage itself but only to
give it a preferred status.
***
Petitioner had every right to rely on the
Certificate of Ownership and Certificate of
Philippine Register duly issued by the
Philippine Coast Guard in Ong's name.
Petitioner had no reason to doubt Ong's
ownership over the subject vessel. The
documents presented by Ong, upon
petitioner's insistence before accepting the
said vessel as loan security, were all in
order and properly issued by the duly
constituted authorities. There was no
circumstance that might have aroused
petitioner's suspicion or alerted it to any

infirmity committed by Ong. It had no

participation in and was not privy to the sale
transaction between Jacinto Dy (through Ang
Tay) and Ong. Petitioner, thus, had no
obligation to undertake further

investigation since it had the necessary

documents to prove Ong's ownership. In
addition petitioner even took pains to
inspect the subject vessel which was in
Ong's possession.
Although Ang Tay may also be an
innocent person, a similar victim of Ong's
fraudulent machinations, it was his act of
confidence which led to the present
fiasco. Ang Tay readily agreed to execute
a deed of absolute sale in Ong's favor
even though Ong had yet to make a
complete payment of the purchase price.
It is true that in the copy of the said deed
submitted by Ang Tay there was an
undertaking that ownership will not vest
in Ong until full payment.
However, Ong was able to obtain several
copies of the deed with Ang Tay's
signature and had these notarized
without the aforementioned undertaking
as evidenced by the copy of the deed of

sale presented by petitioner. The Deed of

Absolute Sale consisted of two (2) pages.
The signatures of Ang Tay and Ong
appeared only on the first page of the
deed. The Second page contained the
continuation of the acknowledgment and
the undertaking. Ong could have easily
reproduced the second page without the
undertaking since this page was not signed
by the contracting parties. To complete the
deception, Ang Tay unwittingly allowed Ong
to have possession of the ship. Hence, in
consonance with our ruling that:
... as between two innocent persons, the
mortgagee and the owner of the
mortgaged property, one of whom must
suffer the consequence of a breach of
trust, the one who made it possible by his
act of confidence must bear the loss, it is
Ang Tay and his principal Jacinto Dy who
must,
unfortunately,
suffer
the
consequences
thereof.
They
are
considered bound by the chattel mortgage
on the subject vessel.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

PAMECA WOOD TREATMENT PLANT,

INC., HERMINIO G. TEVES, VICTORIA V.
TEVES and HIRAM DIDAY R. PULIDO vs
HON. COURT OF APPEALS and
DEVELOPMENT BANK OF THE
PHILIPPINES
(310 SCRA 281, G.R. No. 106435, July
14, 1999)
FACTS: On April 17, 1980, petitioner
PAMECA obtained 2Mworth loan from
respondent Bank. By virtue of this loan,
petitioner PAMECA, through its President,
petitioner Teves, executed a promissory
note for the said amount, promising to pay
the loan by installment. As security for the
said loan, a chattel mortgage was also
executed over PAMECA's properties in
Dumaguete City, consisting of inventories,
furniture and equipment, to cover the
whole value of the loan.
On January 18, 1984, and upon petitioner
PAMECA's failure to pay, respondent bank
extrajudicially foreclosed the chattel
mortgage, and, as sole bidder in the public
auction,
purchased
the
foreclosed
properties.
On June 29, 1984, respondent bank filed a
complaint for the collection of the balance
against petitioner PAMECA and private
petitioners herein, as solidary debtors with
PAMECA under the promissory note.
RTC ruled in favor of respondent Bank. CA
affirmed RTCs decision.
Petitioners now claim that respondent
appellate court gravely erred in not holding
that the public auction sale of petitioner
PAMECA's chattels were tainted with
fraud, as the chattels of the said petitioner
were bought by private respondent as sole
bidder in only 1/6 of the market value of the

220

property,
hence
unconscionable
and
inequitable (P322,350.00 from 2M), and
therefore null and void.
Petitioners contend that the amount of

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

P322,350.00 at which respondent bank

bid for and purchased the mortgaged
properties was unconscionable and
inequitable considering that, at the time
of the public sale, the mortgaged
properties had a total value of more than
P2,000,000.00.
According to petitioners, this is evident
from an inventory which valued the
properties
at
P2,518,621.00,
in
accordance with the terms of the chattel
mortgage contract between the parties
that required that the inventories "be
maintained at a level no less than P2
million".
Petitioners argue that respondent bank's
act of bidding and purchasing the
mortgaged properties for P322,350.00 or
only about 1/6 of their actual value in a
public sale in which it was the sole
bidder was fraudulent, unconscionable
and inequitable, and constitutes sufficient
ground for the annulment of the auction
sale.

220

ISSUE: WON the auction sale is null and

void on grounds of fraud and inadequacy
of price. NO
HELD: There is no merit in petitioners'
submission that the public auction sale is
void on grounds of fraud and inadequacy
of price.
Petitioners never assailed the validity of
the sale in the RTC, and only in the Court
of Appeals did they attempt to prove
inadequacy of price.
Having
nonetheless
examined
the
inventory and chattel mortgage document
as part of the records, We are not
convinced that they effectively prove that
the mortgaged properties had a market
value of at least P2,000,000.00 on January
18, 1984, the date of the foreclosure sale.
At best, the chattel mortgage contract only
indicates the obligation of the mortgagor to

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

maintain the inventory at a value of at least

P2,000,000.00, but does not evidence
compliance therewith.
Furthermore, the mere fact that respondent
bank was the sole bidder
for
the
mortgaged properties in the public sale
does not warrant the conclusion that the
transaction was attended with fraud. Fraud
is a serious allegation that requires full and
convincing evidence, and may not be
inferred from the lone circumstance that it
was only respondent bank that bid in the
sale of the foreclosed properties.
NOTE: The mere fact that the mortgagee
was the sole bidder for the mortgaged
property in the public sale does not warrant
the conclusion that the transaction was
attended with fraud.

CABRAL vs EVANGELISTA
FACTS: On 12 Dec 1959, George had
executed in favor of Cabral Spouses a
chattel mortgage covering a Morrison
English piano and a Frigidaire GM Electric
Stove as security for payment to the latter
of a promissory note in the sum of P1k
executed on the same date in the Chattel
Mortgage Register of Rizal on 14 Dec
1959. Meanwhile, the Evangelista spouses
obtained a final money judgment against
Tanuya in a Civil Case. They caused the
levy in execution on Tanuyas personal
properties, including the piano and the
stove mortgaged to Cabral spouses.
The said mortgage chattels, together with
other personal properties of the judgment
debtor, were sold at public auction to
Evangelista spouses as the highest

221

bidders. The judgment credit of Evangelista

spouses, as creditors in the said Civil Case,
was considered paid up and the Sheriff
issued the corresponding certificate of sale in
their favor.
Subsequently, 8 months after the maturity

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

of Tanuyas promissory note and his

having defaulted in the payment thereof,
Cabral spouses filed their complaint
against Tanuya and the Evangelista
spouses, alleging that the Evangelista
spouses had refused their demands to
pay the amount due to Tanuyas
promissory note or to exercises their
right of redemption and praying for
judgment,
ordering
Tanuya
and
Evangelista
spouses,
jointly
and
solidarily, to pay them the amounts
stipulated on the note, and in case of the
failure to make such payment, to order
them to deliver to the Sheriff the
mortgaged chattels for sale at public
auction to satisfy their mortgage credit.

222

Evangelista spouses now claim that their

right over the mortgaged chattels as
purchasers at the public sale in execution
of their judgment against their debtor,
defendant Tunaya, should not be held
subordinate to the mortgage lien of
plaintiffs-appellees as mortgagees, by
virtue of prescription and laches on the part
of said mortgagees as well as of their
having purchased the chattels at a public
sheriffs sale.
ISSUES:
(1) Has the right of the Cabral spouses to
recover the properties prescribed?
NO.
(2) Did the certificate of sale give the
Evangelista spouses superior right
against the Cabral spouses? NO.
(3) Are the Evangelista spouses jointly
and severally liable with Tunaya to
the Cabral spouses? YES

The trial court rendered a decision in

favor of the Cabral spouses. Upon
appeal, the CA ordered Tanuya and the
Evengelista spouses to pay the Cabral
spouses jointly and severally the amount
HELD:
(1)
This
thirty-day period is the minimum period
plus interest as provided in the
after violation of the
promissory note.

mortgage condition for the mortgage

creditor to cause the sale at public auction
of the mortgaged chattels, with at least ten
days notice to the mortgagor and posting
of public notice of the time, place and
purpose of such sale, and is a period of
grace for the mortgagor, who has no right
of redemption after the sale is held,
to
5
discharge the mortgage obligation.
The prescription period for recovery of
movables for foreclosure purposes such as
in the present case is eight years as
provided in Article 1140 of the Civil
6
Code,
and here plaintiffs had timely
filed
their action within 8 months from the
mortgage debtor's default.
By the same token, neither could laches
properly be imputed against plaintiffs, who
filed their action promptly after they had
been advised by their debtor, defendant
Tunaya, of the public auction sale on June
24, 1960 of the chattels at the instance of
defendants-appellants as his judgment
creditors.
(2)
Defendants-appellants' purchase of
the mortgaged chattels at the public
sheriff's sale and the delivery of the
chattels to them with a certificate of sale
did not give them a superior right to the
chattels as against plaintiffs-mortgagees.
Rule 39, section 22 of the old Rules of
Court (now Rule 39, section 25 of the
Revised Rules), cited by appellants
precisely provides that "the sale conveys
to the purchaser all the right which the
debtor had in such property on the day the
execution or attachment was levied."
It has long been settled by this Court that
"The right of those who so acquire said
properties should not and cannot be
superior to that of the creditor who has in
his favor an instrument of mortgage
executed with the formalities of the law, in

good faith, and without the least indication of

fraud.

This is all the more true in the present

case, because, when the plaintiff
purchased the automobile in question on
August 22, 1933, he knew, or at least, it
is presumed that he knew, by the mere
fact that the instrument of mortgage,
Exhibit 2, was registered in the office of
the register of deeds of Manila, that said
automobile was subject to a mortgage
lien. In purchasing it, with full knowledge
that such circumstances existed, it
should be presumed that he did so, very
much willing to respect the lien existing
thereon, since he should not have
expected that with the purchase, he
would acquire a better right than that
which the vendor then had."
In
another
case
between
two
mortgagees, we held that "As between
the first and second mortgagees,
therefore, the second mortgagee has at
most only he right to redeem, and even
when the second mortgagee goes

through the formality of an extrajudicial

foreclosure, the purchaser
acquires no more than the right of
9
redemption from the first mortgagee."
The superiority of the mortgagee's lien
over that of a subsequent judgment
creditor is now expressly provided in Rule
39, section 16 of the Revised Rules of
Court, which states with regard to the
effect of levy on execution as to third
persons that "The levy on execution shall
create a lien in favor of the judgment
creditor over the right, title and interest of
the judgment debtor in such property at the
time of the levy, subject to liens or
incumbrances then existing."
(3) Article 559 of the Civil Code providing that "If
the possessor of a movable lost or of
which the owner has been unlawfully
deprived, has acquired it in good faith at a
public sale, the owner cannot obtain its
return without reimbursing the price paid
therefor..." cited by appellants has no
application in the present case, for as
pointed above, they

acquired the chattels subject to the

existing mortgage lien of plaintiffs thereon.
Appellants state in their brief that they paid
for the
chattels
the
amount
of
10
P2,373.00.
As pointed out by appellees, the record
shows that defendants-appellants had
disposed of the mortgaged chattels "to
11
other persons at a discounted rate" and
had, therefore, appropriated the same as if
the chattels were of their absolute
ownership, in complete derogation of
plaintiffs' superior mortgage lien and in
disregard of plaintiffs' demands to them
prior to the filing of their complaint on
October 11, 1960, to pay or exercise their
right of redemption.
Appellants by their act of disposition of the
mortgaged chattels, whose value were
admittedly more than adequate to secure
Tunaya's mortgage obligation, have thus
practically nullified plaintiffs' superior right
to foreclose the mortgage and collect the
amount due them. Considering the long
period that has elapsed since October 11,
1960 when plaintiffs tried to enforce their
claim and defendants-appellants' adamant
resistance thereof and unjust refusal to
recognize plaintiffs' clearly superior right to
the chattels, which appellants admittedly
disposed of without lawful right to other
unknown persons obviously to defeat
plaintiffs' right over the same, we are
satisfied that justice and equity justify the
lower court's judgment holding the
defendants-appellants solidarily liable for
the amount due plaintiffs-appellees

NORTHERN MOTORS vs COQUIA

FACTS:
***Manila
Yellow
Taxicab,
executed a chattel mortgage over several
taxicabs in favor of Northern Motors.

TROPICAL is a judgment creditor of Yellow

Taxicab which assigned the credit to ONG.

MYT failed to pay its loan so On December

12 1974, Sheriff then levied upon 20
taxicabs in favor of Tropical, 8 of which
are security for the chattel mortgage.
Northern Motors filed an intervention on
December 18, 1974; however, the levied
taxicabs were sold the same day at 2pm
although agreement shows that it should
have happened at 4pm. Indemnity bond
was posted by TROPICAL, but the bond
was cancelled after the sale without
notice to Northern Motors.
A second levy was made upon 35
taxicabs, 7 of which are mortgaged to
Northern Motors. The taxies were levied
and sold at an auction sale. The auction
sale proceeded and the purchasers were
of unknown addresses, hence the 8
taxicabs cannot be recovered. The
proceeds of the auction were contested
by Northern Motors. Moreover the sheriff
deducted the expenses of the execution
sale from the proceeds.***

Honesto Ong and City Sheriff of Manila

filed a motion for the reconsideration of this
Court's resolution which held that the lien
of Northern Motors, Inc., as chattel
mortgagee, over certain taxicabs is
superior to the levy made on the said cabs
by Honesto Ong, the assignee of the
unsecured judgment creditor of the chattel
mortgagor, MYT.
On the other hand, Northern Motors, Inc. in
its motion for the partial reconsideration
prayed for the reversal of the lower court's
orders cancelling the bond filed by
Filwriters Guaranty Assurance Corporation.
It further prayed that the sheriff should be
required to deliver to it the proceeds of the
execution sale of the mortgaged taxicabs
without deducting the expenses of
execution.
ISSUES:
1. WON the expenses for the execution
sale should be deducted from the
proceeds thereof. NO

2. WON the purchaser has a better right

than the creditor/mortgagee. NO
HELD:
The motion for reconsideration of Ong and
the sheriff should be denied. Those cabs
cannot be sold at an execution sale
because the levy thereon was wrongful.
Ong had no right to levy upon the
mortgaged taxicabs and that he could have
levied only upon the mortgagor's equity of
redemption. The essence of the chattel
mortgage is that the mortgaged chattels
should answer for the mortgage credit and
not for the judgment credit of the
mortgagor's unsecured creditor. The
mortgagee is not obligated to file an
"independent action" for the enforcement
of his credit. To require him to do so would
be a nullification of his lien and would
defeat the purpose of the chattel mortgage
which is to give him preference over the
mortgaged chattels for the satisfaction of
his credit. (See art. 2087, Civil Code).
Intervenor Filinvest Credit Corporation, the
assignee of a portion of the chattel
mortgage credit, realized that to vindicate
its claim by independent action would be
illusory. Thus, it was constrained to enter
into a compromise with Honesto Ong by
agreeing to pay him P145,000. That
amount was characterized by Northern
Motors, Inc. as the "ransom" for the
taxicabs levied upon by the sheriff at the
behest of Honesto Ong.
Ong's theory that Manila Yellow Taxicab's
breach of the chattel mortgage should not
affect him because he is not privy of such
contract is untenable. The registration of
the chattel mortgage is an effective and
binding notice to him of its existence or a

lien which, being recorded, follows the chattel

wherever it goes.
His contention that Northern Motors, Inc.,
was negligent because it did not sue the
sheriff within the 120-day period provided

for in section 17, Rule 39 of the Rules of

Court is not correct. Such action was
filed on April 14, 1975 in the Court of
First Instance of Rizal, Pasig Branch XIII,
in Civil Case No. 21065 entitled
"Northern Motors, Inc. vs. Filwriters
Guaranty Assurance Corporation, et al.".
However, instead of Honesto Ong, his
assignor,
Tropical
Commercial
Corporation, was impleaded as a
defendant therein. That might explain his
unawareness of the pendency of such
action.
Ong admits "that the mortgagee's right to
the mortgaged property is superior to
that of the judgment creditor". But he
contends that the rights of the
purchasers of the cars at the execution
sale should be respected. He reasons
out they were not parties to the mortgage
and that they acquired the cars prior to
the mortgagee's assertion of its rights
thereto.

The third-party claim filed by Northern

Motors, Inc. should have alerted the
purchasers to the risk which they were
taking when they took part in the auction
sale. Moreover, at an execution sale the
buyers acquire only the right of the
judgment debtor which in this case was a
mere right or equity of redemption. The
sale did not extinguish the pre-existing
mortgage lien.
As to Petitioners motion for partial
reconsideration. The lower court in its
order of January 3, 1975 cancelled the
indemnity bonds for P480,000 filed by
Filwriters Guaranty Assurance Corporation
for Tropical Commercial Co., Inc. The
bonds were cancelled without notice to
Northern Motors, Inc. as third-party
claimant. Bond should be reinstated.
Purpose of surety-that the surety be
ordered to pay damages in the event that
the eight taxicabs could not be surrendered
to the mortgagee.
We already held that the execution was
not justified and that Northern Motors,

Inc., as mortgagee, was entitled to the

possession of the eight taxicabs. Those
cabs should not have been levied upon
and sold at public auction to satisfy the
judgment credit which was inferior to
the chattel mortgage. Since the cabs
could no longer be recovered because
they had been transferred to persons
whose addresses are unknown, the
proceeds of the execution sale may be
regarded as a partial substitute for the
unrecoverable cabs . Northern Motors,
Inc. is entitled to the entire proceeds
without deduction of the expenses of
execution.
POLICY: The mortgagee has a better right
over the thing mortgaged than
the
judgment creditors of the mortgagor. It is
improper to deduct the expenses of an
illegal auction from the proceeds of thereof.
Proceeds of the must be delivered to the
mortgagee in full.

CORDOVA vs REYES
FACTS: Sometime in 1977 and 1978,
petitioner Jose Cordova bought from
Philfinance certificates of stock of Celebrity
Sports Plaza Inc (CSPI) and shares of
stock of other corporations. He was issued
a confirmation of sale. CSPI shares were
delivered to former Filmanbank and
Philtrust Banks (as custodian banks to hold
the shares in behalf of Cordova).
In 1981, Philfinance was placed under
receivership by SEC. Thereafter, private
respondents Reyes and Atty Wendell
Coronel were appointed as liquidators. In
1991, without the knowledge and consent
of Cordova and without authority from
SEC, private respondents withdrew the
CSPI shares from the custodian banks.
They subsequently sold the shares to

Northeast Corporation and included the

proceeds thereof in the funds of Philfinance.
Cordova learned about the sale only in
1996. He filed a complaint

against private respondents in the

receivership proceedings with the SEC
for the return of the shares.
In 1998, SEC dismissed the petition, but
granted it upon reconsideration. It held
that Cordova was the owner of the CSPI
shares by virtue of a confirmation sale
(which was considered as a deed of
assignment)
issued
to
him
by
Philfinance. But since the shares had
already been sold and proceeds
commingled with other assets of
Philfinance, Cordovas status was
converted into that of an ordinary creditor
for the value of such shares.
Therefore, it ordered private respondents
to pay Cordova the amount of
P5,062,500, representing the 15% of
monetary value of his CSPI shares plus
interest at the legal rate from the time of
their unauthorized sale.
ISSUES:

1. WON petitioner should be considered

as preferred (and secured) creditor of
Philfinance NO
2. WON petitioner can recover the full
value of his CSPI shares or merely 15%
thereof like all other ordinary creditors
of Philfinance only 15%
3. WON petitioner is entitled to legal
interest NO
HELD:
To resolve the issues, we have to
determine if petitioner was indeed a
creditor of Philfinance. SC held that
petitioner had become an ORDINARY
creditor of Philfinance. Certainly, petitioner
had the right to demand the return of the
shares. He filed a complaint in the
liquidation proceedings. He sought instead
to recover their monetary value.
The CSPI shares were specific or
determinate movable properties. But after
they were sold, the money raised from the
sale became generic and
were
commingled with other assets
of

Philfinance. Unlike shares of stock, money

is generic. This means that once a certain
amount is added to the cash balance, one
can no longer pinpoint the specific amount
included which then becomes part of a
whole mass of money.
It thus became impossible to identify the
exact proceeds of the sale of the CSPI
shares. Petitioners only remedy was to file
a claim on the whole mass of these assets,
to which unfortunately all other creditors of
Philfinance also had a claim.
Petitioners right of action against
Philfinance was a claim properly to be
litigated in the liquidation proceedings. He
had a right to the payment of the value of
his shares. His demand was of a pecuniary
nature since he was claiming the monetary
value of his shares. It was in this sense
that he was a creditor of Philfinance.
Petitioner argues that he was a preferred
creditor because private respondents
illegally withdrew his CSPI shares from the
custodian banks and sold them without his
knowledge and consent and without
authority from the SEC. He quotes Article
2241 (2) of the Civil Code:
With reference to specific movable
property of the debtor, the following
claims or liens shall be preferred:
(2) Claims
arising
from
misappropriation, breach of trust, or
malfeasance by public officials
committed in the performance of
their duties, on the movables,
money or securities obtained by
them;

He asserts that, as a preferred creditor, he

was entitled to the entire monetary value of
his shares. Petitioners argument is incorrect.
Article 2241 refers only to specific movable
property. His claim was for the payment of
money, which, as already discussed, is
generic property and

not specific or determinate. Considering

that petitioner did not fall under any of
the provisions applicable to preferred
creditors, he was deemed an ordinary
creditor under Article 2245:
Credits of any other kind or class,
or by any other right or title not
comprised in the four preceding
articles, shall enjoy no preference.
This being so, Article 2251 (2)
states that:
Common credits referred to in Article
2245 shall be paid pro rata regardless of
dates.
Like all the other ordinary creditors or
claimants against Philfinance, he was
entitled to a rate of recovery of only 15%
of his money claim.
Was petitioner entitled to interest?
Petitioner is not entitled to legal interest
of 12% per annum because the amount

owing to him was not a loan or forbearance

of money. Neither was he entitled to legal
interest of 6% per annum under Art 2209 of
the Civil Code since it applies only when
there is a delay in the payment of a sum of
money.

DE BARRETO vs VILLANUEVA
FACTS: Rosario Cruzado sold all her right,
title, and interest and that of her children in
the house and lot herein involved to
Villanueva for P19K. The purchaser paid
P1,500 in advance, and executed a
promissory note for the balance. However,
the buyer could only pay P5,500 On
account of the note, for which reason the
vendor obtained judgment for the unpaid
balance. In the meantime, the buyer
Villanueva was able to secure a clean
certificate of title and mortgaged the
property to appellant Barretto to secure a
loan of P30K, said mortgage having been
duly recorded.

Villanueva defaulted on the mortgage loan

in favor of Barretto. The latter foreclosed
the mortgage in her favor, obtained
judgment, and upon its becoming final
asked for execution. Cruzado filed a
motion for recognition for her "vendor's
lien" invoking Articles 2242, 2243, and
2249 of the new Civil Code. After hearing,
the court below ordered the "lien"
annotated on the back of the title, with the
proviso that in case of sale under the
foreclosure decree the vendor's lien and
the mortgage credit of appellant Barretto
should be paid pro rata from the proceeds.

1.

2.

Appellants insist that:

The vendor's lien, under Articles 2242 and
2243 of the new, Civil Code of the
Philippines, can only become effective in
the event of insolvency of the vendee,
which has not been proved to exist in the
instant case; and .
That the Cruzado is not a true vendor of the
foreclosed property.
Article 2242 of the new Civil Code
enumerates the claims, mortgage and liens
that constitute an encumbrance on specific
immovable property, and among them are:
.
(2) For the unpaid price of real property
sold, upon the immovable sold; and
(5) Mortgage credits recorded in the Registry
of Property."
Article 2249 of the same Code provides
that "if there are two or more credits with
respect to the same specific real property
or real rights, they shall be satisfied prorata after the payment of the taxes and
assessment upon the immovable property
or real rights.

HELD: Application of the above-quoted

provisions to the case at bar would mean that
the herein appellee Rosario Cruzado as an
unpaid vendor of the property in question has
the right to share pro-rata with
the
appellants the proceeds of the

foreclosure sale.
ISSUE: Appellants argument: inasmuch
as the unpaid vendor's lien in this case
was not registered, it should not
prejudice the said appellants' registered
rights over the property.
HELD: There is nothing to this argument.
Note must be taken of the fact that article
2242 of the new Civil Code enumerating
the preferred claims, mortgages and
liens
on
immovables,
specifically
requires that. Unlike the unpaid price of
real property sold. mortgage credits, in
order to be given preference, should be
recorded in the Registry of Property. If
the legislative intent was to impose the
same requirement in the case of the
vendor's lien, or the unpaid price of real
property sold, the lawmakers could have
easily inserted the same qualification
which now modifies the mortgage
credits. The law, however, does not
make any distinction between registered

and unregistered vendor's lien, which only

goes to show that any lien of that kind
enjoys the preferred credit status.
As to the point made that the articles of the
Civil Code on concurrence and preference
of credits are applicable only to the
insolvent debtor, suffice it to say that
nothing in the law shows any such
limitation. If we are to interpret this portion
of the Code as intended only for insolvency
cases,
then
other
creditor-debtor
relationships where there are concurrence
of credits would be left without any rules to
govern them, and it would render
purposeless the special laws
on
insolvency.
Resolution on Motion to Consider
(1962)
Appellants, spouses Barretto, have filed a
motion vigorously urging that our decision
be reconsidered and set aside, and a new
one entered declaring that their right as
mortgagees remain superior to the
unrecorded claim of herein appellee for the

balance of the purchase price of her rights,

title, and interests in the mortgaged
property.
We have reached the conclusion that our
original decision must be reconsidered and
set aside:
Under the system of the Civil Code of the
Philippines, only taxes enjoy a similar
absolute preference. All the remaining
thirteen classes of preferred creditors
under Article 2242 enjoy no priority among
themselves, but must be paid pro-rata i.e.,
in proportion to the amount of the
respective
credits.
Thus, Article
2249 provides:
If there are two or more credits with
respect to the same specific real property
or real rights, they, shall be satisfied prorata after the payment of the taxes and
assessments upon the immovable property
or real rights."
The full application of Articles 2249 and
2242 demands that there must be first
some proceedings where the claims of all
the preferred creditors may be bindingly
adjudicated, such as:
1.
insolvency,
2.
the settlement of decedents
estate under Rule 87 of the Rules
of Court, or
3.
other liquidation proceedings of
similar import.
This explains the rule of Article 2243 of
the new Civil Code that
The claims or credits enumerated in the
two preceding articles" shall be considered
as mortgages or pledges of real or
personal property, or liens within the
purview of legal provisions governing
insolvency.

And the rule is further clarified in the Report

of the Code Commission, as follows:
The question as to whether the Civil Code
and the insolvency Law can be harmonized

is settled by Article 2243. The

preferences named in Articles 2261 and
2262 (now 2241 and 2242) are to be
enforced in accordance with the
Insolvency Law."
RULE:
Thus, it becomes evident that
one
preferred creditor's third-party claim to
the proceeds of a foreclosure sale (as in
the case now before us) is not the
proceeding contemplated by law for the
enforcement of preferences under Article
2242, unless the claimant were enforcing
a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes,
a dispute between two creditors will not
enable the Court to ascertain the prorata dividend corresponding to each,
because the rights of the other creditors
likewise" enjoying preference under
Article 2242 can not be ascertained.
HELD: There being no insolvency or
liquidation, the claim of the appellee, as
unpaid vendor, did not require
the

character and rank of a statutory lien coequal to the mortgagee's recorded

encumbrance,
and
must
remain
subordinate to the latter.

PHILIPPINE SAVINGS vs LANTIN

FACTS: Involved in this case is a duplexapartment house on a lot covered by TCT
No. 86195 situated at San Diego Street,
Sampaloc, Manila, and owned by the
spouses Filomeno and Socorro Tabligan.
The duplex-apartment house was built for
the spouses by private respondent
Candido Ramos, a duly licensed architect
and building contractor, at a total cost of
P32,927.00. The spouses paid private
respondent the sum of P7,139.00 only.
Hence, the latter used his own money,
P25,788.50 in all, to finish the construction
of the duplex-apartment.
Meanwhile,

on

December

16,

1966,

February 1, 1967, and February 28, 1967,

the spouses Tabligan obtained from
petitioner Philippine Savings Bank three (3)
loans in the total amount of P35,000.00,
the purpose of which was to complete the
construction of the duplex-apartment. To
secure payment of the l2oans, the spouses
executed in favor of the petitioner three (3)
promissory notes and three (3) deeds of
real estate mortgages over the property
subject matter of this litigation.
On December 19, 1966, the petitioner
registered the December 16, 1966 deed of
real estate mortgage with the Register of
Deeds of Manila. The subsequent
mortgages of February 1, 1967, and
February 28, 1967, were registered with
the Register of Deeds of Manila on
February 2, 1967 and March 1, 1967,
respectively. At the time of the registration
of these mortgages, Transfer Certificate of
Title No. 86195 was free from all liens and
encumbrances.
The spouses failed to pay their monthly
amortizations. As a result thereof, the
petitioner bank foreclosed the mortgages,
and at the public auction held on July 23,
1969, was the highest bidder.
On August 5, 1969, the petitioner bank
registered the certificate of sale issued in
its favor. On August 9, 1970, the bank
consolidated its ownership over the
property in question, and Transfer
Certificate of Title No. 101864 was issued
by the Register of Deeds of Manila in the
name of the petitioner bank.
Upon the other hand, the private
respondent filed an action against the
spouses to collect the unpaid cost of the

construction of the duplex-apartment before

the Court of First Instance of Manila, Branch
I, which case was docketed therein as Civil
Case No. 69228. During its pendency, the
private respondent succeeded in obtaining
the issuance of a writ
of
preliminary
attachment,
and

pursuant thereto, had the property in

question attached. Consequently, a
notice of adverse claim was annotated at
the back of Transfer Certificate of Title
No. 86195.
On August 26, 1968, a decision was
rendered in Civil Case No. 69228 in
favor of the private respondent and
against the spouses. A writ of execution
was accordingly issued but was returned
unsatisfied.
As the spouses did not have any
properties to satisfy the judgment in Civil
Case No. 69228, the private respondent
addressed a letter to the petitioner for
the delivery to him (private respondent)
of his pro-rata share in the value of the
duplex-apartment in accordance with
Article 2242 of the Civil Code. The
petitioner refused to pay the pro-rata
value prompting the private respondent
to file the instant action. A decision was
rendered in favor of the private
Respondent.

ISSUE: whether or not the private

respondent is entitled to claim a pro-rata
share in the value of the property in
question.
RULING: NO. The conclusions of the lower
court are not supported by the law and the
facts.
Concurrence of credits occurs when the
same specific property of the debtor or all
of his property is subjected to the claims of
several creditors. The concurrence of
credits raises no questions of consequence
were the value of the property or the value
of all assets of the debtor is sufficient to
pay in fall all the creditors. However, it
becomes material when said assets are
insufficient for then some creditors of
necessity will not be paid or some creditors
will not obtain the full satisfaction of their
claims. In this situation, the question of
preference will then arise, that is to say
who of the creditors will be paid the all of

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

230

the others.
J.L. BERNARDO VS CA
The proceedings in the court below do not
partake of the nature of the insolvency
proceedings or settlement of a decedents
estate. The action filed by Ramos was only
to collect the unpaid cost of the
construction of the duplex apartment. It is
far from being a general liquidation of the
estate of the Tabligan spouses.
Insolvency proceedings and settlement of
a decedents estate are both proceedings
in rem which are binding against the whole
world. All persons having interest in the
subject matter involved, whether they were
notified or not, are equally bound.
Consequently, a liquidation of similar
import or "other equivalent general
liquidation must also necessarily be a
proceeding in rem so that all interested
persons whether known to the parties or
not may be bound by such proceeding.
In the case at bar, although the lower court
found that "there were no known creditors
other than the plaintiff and the defendant
herein", this can not be conclusive. It will
not bar other creditors in the event they
show up and present their claims against
the petitioner bank, claiming that they also
have preferred liens against the property
involved.
Consequently,
Transfer
Certificate of Title No. 101864 issued in
favor of the bank which is supposed to be
indefeasible would remain constantly
unstable and questionable. Such could not
have been the intention of Article 2243 of
the Civil Code although it considers claims
and credits under Article 2242 as statutory
liens. Neither does the De Barretto case
sanction such instability.

FACTS: Sometime in 1990, the municipal

government of San Antonio, Nueva Ecija
approved the construction of the San Antonio
Public Market. The construction of

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

the market was to be funded by the

Economic Support Fund Secretariat
(ESFS), a government agency working
with the USAID. Under ESFS "grantloan- equity" financing program, the
funding for the market would be
composed of a (a) grant from ESFS, (b)
loan extended by ESFS to the
Municipality of San Antonio, and (c)
equity or counterpart funds from the
Municipality.
It is claimed by petitioners Santiago R.
Sugay, Edwin A. Sugay, Fernando S.A.
Erana and J.L. Bernardo Construction, a
single proprietorship owned by Juanito L.
Bernardo, that they entered into a
business venture for the purpose of
participating in the bidding for the public
market. It was agreed by petitioners that
Santiago Sugay would take the lead role
and be responsible for the preparation
and submission of the bid documents,
financing the entire project, providing
and utilizing his own equipment,

230

providing the necessary labor, supplies and

materials and making the necessary
representations and doing the liaison work
with the concerned government agencies.
On April 20, 1990, J.L. Bernardo
Construction, thru petitioner Santiago
Sugay, submitted its bid together with other
qualified bidders. After evaluating the bids,
the municipal pre-qualification bids and
awards committee, headed by respondent
Jose L. Salonga (then incumbent municipal
mayor of San Antonio) as Chairman,
awarded the contract to petitioners. On
June 8, 1990, a Construction Agreement
was entered into by the Municipality of San
Antonio thru respondent Salonga and
petitioner J.L. Bernardo Construction.
It is claimed by petitioners that under this
Construction Agreement, the Municipality
agreed to assume the expenses for the
demolition, clearing and site filling of the
construction site in the amount of
P1,150,000 and, in addition, to provide
cash equity of P767,305.99 to be remitted

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

231

directly to petitioners.
Petitioners allege that, although the whole
amount of the cash equity became due, the
Municipality refused to pay the same,
despite
repeated
demands
and
notwithstanding that the public market was
more than ninety-eight percent (98%)
complete as of July 20, 1991.
Furthermore, petitioners maintain that
Salonga induced them to advance the
expenses for the demolition, clearing and
site filling work by making representations
that the Municipality had the financial
capability to reimburse them later on.
However, petitioners claim that they have
not been reimbursed for their expenses.
On July 31, 1991, J.L. Bernardo
Construction, Santiago Sugay, Edwin
Sugay and Fernando Erana, with the latter
three bringing the case in their own
personal
capacities
and
also
in
representation
of
J.L.
Bernardo
Construction, filed a complaint for breach
of contract, specific performance, and
collection of a sum of money, with prayer
for
preliminary
attachment
and
enforcement of contractors lien against the
Municipality of San Antonio, Nueva Ecija
and Salonga, in his personal and official
capacity as municipal mayor. After
defendants filed their answer, the Regional
Trial Court held hearings on the ancillary
remedies prayed for by plaintiffs.
On September 5, 1991, the Regional Trial
Court issued the writ of preliminary
attachment prayed for by plaintiffs. It also
granted J.L. Bernardo Construction the
right to maintain possession of the public
market and to operate the same.

ISSUE: Whether or not the grant of writ of

attachment and the contractors lien proper?
HELD: There is no contractors lien in favor
of petitioners.

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

Articles 2241 and 2242 of the Civil Code

enumerates certain credits which enjoy
preference with respect to specific
personal or real property of the debtor.
Specifically, the contractors lien claimed
by petitioners is granted under the third
paragraph of Article 2242 which provides
that the claims of contractors engaged in
the construction, reconstruction or repair
of buildings or other works shall be
preferred with respect to the specific
building or other immovable property
constructed.
However, Article 2242 only finds
application when there is a concurrence
of credits, i.e. when the same specific
property of the debtor is subjected to the
claims of several creditors and the value
of such property of the debtor is
insufficient to pay in full all the creditors.
In such a situation, the question of
preference will arise, that is, there will be
a need to determine which of the
creditors will be paid ahead of the others.
Fundamental tenets of due process will

232

dictate that this statutory lien should then

only be enforced in the context of some
kind of a proceeding where the claims of all
the preferred creditors may be bindingly
adjudicated,
such
as
insolvency
proceedings.
This is made explicit by Article 2243 which
states that the claims and
liens
enumerated in articles 2241 and 2242 shall
be considered as mortgages or pledges of
real or personal property, or liens within the
purview of legal provisions governing
insolvency.
The action filed by petitioners in the trial
court does not partake of the nature of an
insolvency proceeding. It is basically for
specific performance and damages. Thus,
even if it is finally adjudicated that
petitioners herein actually stand in the
position of unpaid contractors and are
entitled to invoke the contractors lien
granted under Article 2242, such lien
cannot be enforced in the present action

for there is no way of determining whether

or not there exist other preferred creditors
with claims over the San Antonio Public
Market. The records do not contain any
allegation that petitioners are the only
creditors with respect to such property. The
fact that no third party claims have been
filed in the trial court will not bar other
creditors from subsequently bringing
actions and claiming that they also have
preferred liens against the property
involved.

ATLANTIC ERECTORS, INC. vs.

HERBAL COVE REALTY
CORPORATION
G.R. No. 148568 (March 20, 2003)
FACTS: On June 20, 1996, Herbal Cove
Realty Corporation and Atlantic Erectors,
Inc. entered into a Construction Contract
whereby the former agreed to construct
four (4) units of townhouses designated
and one (1) single detached unit for an
original contract price of P15,726,745.19
which
was
later
adjusted
to
P16,726,745.19 as a result of additional
works. Respondent was not able to finish
the construction in time and as a
consequence petitioner filed a complaint
for sum of money with damages. Petitioner
won the suit and the RTC ordered
respondent to pay around 24 million in
damages and fees. (The cause of action in
this case is a money claim by one creditor)
On November 21, 1997, petitioner filed a
notice of lis pendens for annotation of the
pendency of Civil Case No. 97-707 on titles
TCTs nos. T-30228, 30229, 30230, 30231
and 30232. When the lots covered by said
titles were subsequently subdivided into 50
lots, the notices of lis pendens were carried

over to the titles of the subdivided lots, i.e.,

Transfer Certificate of Title Nos. T-36179 to
T-36226 and T-36245 to T-36246 of the
Register of Deeds of Tagaytay City. (The
case does not explain the existence of these
TCT's. It was not mentioned if these

were securities or properties under

execution.)
On January 30, 1998, respondent and a
certain Ernest L. Escaler, filed a Motion
to Dismiss petitioner's Complaint for lack
of jurisdiction and for failure to state a
cause of action. They claimed that the
Makati RTC has no jurisdiction over the
subject matter of the case because the
parties' Construction Contract contained
a clause requiring them to submit their
dispute to arbitration. The case against
respondent was dismissed because of
failure to comply with the arbitration
clause. Under the law, a prior resort to
arbitration is a condition precedent for
filing a court action. Thus, in effect, the
court admitted it had no jurisdiction to
hear and decide the case.
On April 24, 1998, respondent filed a
Motion to Cancel Notice of Lis Pendens.
It argued that the notices of lis pendens
are without basis because petitioner's
action is a purely personal action to

collect a sum of money and recover

damages and does not directly affect title
to, use or possession of real property. This
motion was granted.
However, the notices of lis pendens were
subsequently reinstated after judge
Ranada claimed that a notice of lis
pendens serves only as a precautionary
measure or warning to prospective buyers
of a property that there is a pending
litigation involving the case. Respondent
then made an appeal to the CA which
rendered a decision in favor of the former.
Claims of each party:
petitioner- the money claim constitutes a
lien that can be enforced to secure
payment for the said obligations. The lien
on respondent's property was necessary to
preserve the alleged improvement it had
made on the subject land.
respondent- the annotation is bereft of any
factual or legal basis because the action
does not directly affect the title to the

property, or the use or possession thereof.

The annotation is baseless and cannot be
made through the enforcement of a
contractor's lien under Art. 2242 as said
provision applies only to cases in which
there are several creditors carrying on a
legal action against an insolvent debtor.
ISSUE:
1. Whether or not money claims representing
cost of materials and labor on the houses
constructed on a property are a proper lien
for annotation of lis pendens on the
property title
2. Whether or not the trial court, after
having declared itself without jurisdiction to
try the case, may still decide on
thesubstantial issue of the case\

HELD:
1. NO, the lis pendens annotations were
improper.
As a general rule, the only instances in
which a notice of lis pendens may be
availed of are as follows: (a) an action to
recover possession of real estate; (b) an
action for partition; and (c) any other court
proceedings that directly affect the title to
the land or the building thereon or the use
or the occupation thereof. Additionally, this
Court has held that resorting to lis
pendens is not necessarily confined to
cases that involve title to or possession of
real property. This annotation also applies
to suits seeking to establish a right to, or
an equitable estate or interest in, a specific
real property; or to enforce a lien, a charge
or an encumbrance against it.
Petitioner's money claim is not a
contractor's lien
Apparently, petitioner proceeds on the
premise that its money claim involves the
enforcement of a lien. Since the money

claim is for the nonpayment of materials and

labor used in the construction of townhouses,
the lien referred to would have to be that
provided under Article

2242 of the Civil Code. This provision

describes a contractor's lien over an
immovable property as follows:
Art. 2242. With reference to specific
immovable property and real rights
of the debtor, the following claims,
mortgages and liens shall be
preferred, and shall constitute an
encumbrance on the immovable or
real right:
xxx
xxx
xxx
(3) Claims of laborers, masons,
mechanics and other workmen, as
well as of architects, engineers
and contractors, engaged in the
construction, reconstruction or
repair of buildings, canals or other
works, upon said buildings, canals
or other works;
(4) Claims of furnishers of materials
used
in
the
construction,
reconstruction, or repair of
buildings, canals or other works,
upon said buildings, canals or
other works.
However, a careful examination of
petitioner's Complaint, as well as the

reliefs it seeks, reveals that no such lien or

interest over the property was ever alleged.
The Complaint merely asked for the
payment of construction services and
materials
plus
damages,
without
mentioning -- much less asserting -- a lien
or an encumbrance over the property.
Verily, it was a purely personal action and
a simple collection case. It did not contain
any material averment of any enforceable
right, interest or lien in connection with the
subject property. Even if a party initially
avails itself of a notice of lis pendens upon
the filing of a case in court, such notice is
rendered nugatory if the case turns out to
be a purely personal action.
As it is, petitioner's money claim cannot be
characterized as an action that involves the
enforcement of a lien or an encumbrance,
one that would thus warrant the annotation
of the Notice of Lis Pendens. Indeed, the
nature of an action is determined by the
allegations of the complaint.

Even assuming that petitioner had

sufficiently
alleged
such
lien
or
encumbrance in its Complaint, the
annotation of
the
Notice
of Lis
Pendens would still
be
unjustified,
because a complaint for collection and
damages is not the proper mode for the
enforcement of a contractor's lien.
Contractor's lien and the proper
methods of enforcing it
In J.L. Bernardo Construction v. Court of
Appeals, the Court explained the concept
of a contractor's lien under Article 2242 of
the Civil Code and the proper mode for its
enforcement as follows:
Articles 2241 and 2242 of the Civil
Code enumerates certain credits which
enjoy preference with respect to
specific personal or real property of the
debtor. Specifically, the contractor's
lien claimed by the petitioners is
granted under the third paragraph of
Article 2242 which provides that the
claims of contractors engaged in the
construction, reconstruction or repair of
buildings or other works shall be
preferred with respect to the specific
building or other immovable property
constructed.
However, Article 2242
finds
application when there is
a
concurrence of credits, i.e., when the
same specific property of the debtor is
subjected to the claims of several
creditors and the value of such
property of the debtor is insufficient to
pay in full all the creditors. In such a
situation, the question of preference
will arise, that is, there will be a need to
determine which of the creditors will be
paid ahead of the others. Fundamental
tenets of due process will dictate that

this statutory lien should then only be

enforced in the context of some kind of a
proceeding where the claims of all the
preferred creditors may be bindingly
adjudicated,
such
as
insolvency
proceedings.

Clearly then, neither Article 2242 of the

Civil Code nor the enforcement of the
lien thereunder is applicable here,
because petitioner's Complaint failed to
satisfy the foregoing requirements.
Nowhere does it show that respondent's
property was subject to the claims of
other creditors or was insufficient to pay
for all concurring debts. Moreover, the
Complaint did not pertain to insolvency
proceedings or to any other action in
which the adjudication of claims of
preferred creditors could be ascertained.
2.The trial court still had jurisdiction to
decide on the substantial issue of the
case
The trial court lost jurisdiction over the
case only on August 31, 1998, when
petitioner filed its Notice of Appeal. Thus,
any order issued by the RTC prior to that
date should be considered valid,
because the court still had jurisdiction
over the case. Accordingly, it still had the
authority or jurisdiction to issue the July

30, 1998 Order canceling the Notice of Lis

Pendens.
On the other hand, the
November 4, 1998Order that set aside the
July 30, 1998 Order and reinstated that
Notice should be considered without force
and effect, because it was issued by the
trial
court after it had already lost
jurisdiction.
Finally, petitioner vehemently insists that
the trial court had no jurisdiction to cancel
the Notice. Yet, the former filed before the
CA an appeal, docketed as CA-GR CV No.
65647, questioning the RTC's dismissal of
the Complaint for lack of jurisdiction.
Moreover, it must be remembered that it
was petitioner which had initially invoked
the jurisdiction of the trial court when the
former sought a judgment for the recovery
of
money
and
damages
against
respondent. Yet again, it was
also
petitioner which assailed that same
jurisdiction for issuing an order unfavorable
to the former's cause. Indeed, parties
cannot invoke the jurisdiction of a court to

secure affirmative relief, then repudiate or

question that same jurisdiction after
obtaining or failing to obtain such relief.

DEVELOPMENT BANK OF THE

PHILIPPINES vs. HONORABLE COURT
OF APPEALS & REMINGTON
INDUSTRIAL SALES CORPORATION
G.R. No. 126200 (August 16, 2001)
FACTS: Marinduque Mining-Industrial
Corporation (MMIC) obtained from the
Philippine National Bank (PNB) various
loan accommodations. To secure the
loans, Marinduque Mining executed on
October 9, 1978 a Deed of Real Estate
Mortgage and Chattel Mortgage in favor of
PNB. The mortgage covered all of
Marinduque Mining's real properties,
located at Surigao del Norte, Sipalay,
Negros Occidental, and at Antipolo, Rizal,
including the improvements thereon. As of
November 20, 1980, the loans extended by
PNB amounted to P4 Billion, exclusive of
interest and charges.
On July 13, 1981, Marinduque Mining
executed in favor of PNB and the
Development Bank of the Philippines
(DBP)
a
second
Mortgage
Trust
Agreement.
In
said
agreement,
Marinduque Mining mortgaged to PNB and
DBP all its real properties located at
Surigao del Norte, Sipalay, Negros
Occidental, and Antipolo, Rizal, including
the improvements thereon. The mortgage
also covered all of Marinduque Mining's
chattels, as well as assets of whatever
kind, nature and description which
Marinduque Mining may subsequently
acquire in substitution or replenishment or
in addition to the properties covered by the

previous Deed of Real and Chattel Mortgage

dated October 7, 1978. Apparently,
Marinduque Mining had also obtained loans
totaling P2 Billion from DBP, exclusive of
interest and charges.

On April 27, 1984, Marinduque Mining

executed in favor of PNB and DBP an
Amendment
to
Mortgage
Trust
Agreement
by
virtue
of
which
Marinduque Mining mortgaged in favor of
PNB and DBP all other real and personal
properties and other real rights
subsequently acquired by Marinduque
Mining.
For failure of Marinduque Mining to settle
its loan obligations, PNB and DBP
instituted sometime on July and August
1984
extrajudicial
foreclosure
proceedings
over
the
mortgaged
properties.
In the ensuing public auction sale
conducted on August 31, 1984, PNB and
DBP emerged and were declared the
highest bidders over the foreclosed real
properties, buildings, mining claims,
leasehold rights together with the
improvements thereon as well as
machineries and equipments of MMIC.

PNB and DBP thereafter thru a Deed of

Transfer dated August 31, 1984 and June
6 1994, purposely, in order to ensure the
continued operation of the Nickel refinery
plant and to prevent the deterioration of the
assets
foreclosed,
assigned
and
transferred to Nonoc Mining and Industrial
Corporation amd Maricalum Mining Corp.
respectively, all their rights, interest and
participation over the foreclosed properties
of MMIC.
On February 27, 1987, PNB and DBP,
pursuant to Proclamation No. 50 as
amended, again assigned, transferred and
conveyed to the National Government thru
the Asset Privatization Trust (APT) all its
existing rights and interest over the assets
of MMIC, earlier assigned to Nonoc Mining
and Industrial Corporation, Maricalum
Mining Corporation and Island Cement
Corporation.
In the meantime, between July 16, 1982 to
October 4, 1983, Marinduque Mining
purchased and caused to be delivered

construction
materials
and
other
merchandise from Remington Industrial
Sales Corporation (Remington) worth
P921,755.95. The purchases remained
unpaid as of August 1, 1984 when
Remington filed a complaint for a sum of
money and damages against Marinduque
Mining for the value of the unpaid
construction
materials
and
other
merchandise purchased by Marinduque
Mining, as well as interest, attorney's fees
and the costs of suit.
Remington's original complaint was later
amended to implead additional defendants
and in the end, the co-defendants were
MMIC, PNB, DBP, Nonoc Mining,
Maricalum Mining, Island Cement and
Asset Privatization Trust.
The RTC ruled in favor of Remington,
whose decision was later affirmed by the
CA. The CA held that there exists in
Remington's favor a lien on the unpaid
purchases of MMIC and as transferee,
DBP must be held liable for the value
thereof.
ISSUE: Whether or not Remington can
enforce its claim for unpaid purchases
made by MMIC against DBP
HELD: No, in the absence of liquidation
proceedings, Remington's claim cannot
be enforced against DBP.
ARTICLE 2241. With reference to specific
movable property of the debtor, the
following claims or liens shall be preferred:
xxx
xxx
xxx
(3) Claims for the unpaid price of movables
sold, on said movables, so long as they are
in the possession of the debtor, up to the
value of the same; and if the movable has
been resold by the debtor and the price is
still unpaid, the lien may be enforced on

the price; this right is not lost by the

immobilization of the thing by destination,
provided it has not lost its form, substance
and identity, neither is the right lost by the

sale of the thing together with other

property for a lump sum, when the price
thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long
as the things pledged are in the hands of
the creditor, or those guaranteed by a
chattel mortgage, upon the things
pledged or mortgaged, up to the value
thereof;
In Barretto vs. Villanueva, the Court had
occasion to construe Article 2242,
governing claims or liens over specific
immovable property.
In its decision upholding the order of the
lower court, the Court ratiocinated thus:
Article 2242 of the new Civil
Code enumerates the claims,
mortgages and liens that constitute an
encumbrance on specific immovable
property, and among them are:
"(2) For the unpaid price of real property
sold, upon the immovable sold"; and

"(5) Mortgage credits recorded in the

Registry of Property."
Article 2249 of the same Code provides
that "if there are two or more credits with
respect to the same specific real property
or real rights, they shall be satisfied prorata, after the payment of the taxes and
assessments upon the immovable property
or real rights."
Application of the above-quoted provisions
to the case at bar would mean that the
herein appellee Rosario Cruzado as an
unpaid vendor of the property in question
has the right to share pro-rata with the
appellants the proceeds of the foreclosure
sale.
xxx
xxx
xxx
As to the point made that the articles of the
Civil Code on concurrence and preference
of credits are applicable only to the
insolvent debtor, suffice it to say that
nothing in the law shows any such
limitation. If we are to interpret this portion
of the Code as intended only for insolvency

cases,
then
other
creditor-debtor
relationships where there are concurrence
of credits would be left without any rules to
govern them, and it would render
purposeless the special laws
on
insolvency.
Upon motion by appellants, however, the
Court reconsidered its decision. Justice
J.B.L. Reyes, speaking for the Court,
explained the reasons for the reversal:
The previous decision failed to take fully
into account the radical changes
introduced by the Civil Code of the
Philippines into the system of priorities
among creditors ordained by the Civil Code
of 1889.
Pursuant to the former Code, conflicts
among creditors entitled to preference as
to specific real property under Article 1923
were to be resolved according to an order
of priorities established by Article 1927,
whereby one class of creditors could
exclude the creditors of lower order until
the claims of the former were fully satisfied
out of the proceeds of the sale of the real
property subject of the preference, and
could even exhaust proceeds if necessary.
Under the system of the Civil Code of the
Philippines, however, only taxes enjoy a
similar absolute preference. All the
remaining thirteen classes of preferred
creditors under Article 2242 enjoy no
priority among themselves, but must be
paid pro rata, i.e., in proportion to the
amount of the respective credits. Thus,
Article 2249 provides:
"If there are two or more credits with
respect to the same specific real property
or real rights, they shall be satisfied pro

rata, after the payment of the taxes and

assessments upon the immovable property
or real rights."
But in order to make this prorating fully
effective, the preferred creditors enumerated
in Nos. 2 to 14 of Article 2242

(or such of them as have credits

outstanding) must necessarily be
convened, and the import of their claims
ascertained. It is thus apparent that the
full application of Articles 2249 and
2242 demands that there must be first
some proceeding where the claims of all
the preferred creditors may be bindingly
adjudicated, such as insolvency, the
settlement of decedent's estate under
Rule 87 of the Rules of Court, or other
liquidation proceedings of similar import.
This explains the rule of Article 2243 of
the new Civil Code that
"The claims or credits enumerated
in the two preceding articles shall be
considered as mortgages or pledges of
real or personal property, or liens within
the purview of legal provisions governing
insolvency.
And the rule is further clarified in the
Report of the Code Commission, as
follows "The question as to whether
the

Civil Code and the Insolvency Law can be

harmonized is settled by this Article (2243).
The preferences named in Articles 2261
and 2262 (now 2241 and 2242) are to be
enforced in accordance with the Insolvency
Law."
Thus, it becomes evident
that one
preferred creditor's third-party claim to the
proceeds of a foreclosure sale (as in the
case now before us) is not the proceeding
contemplated by law for the enforcement of
preferences under Article 2242, unless the
claimant were enforcing a credit for taxes
that enjoy absolute priority. If none of the
claims is for taxes, a dispute between two
creditors will not enable the Court to
ascertain
the
pro
rata
dividend
corresponding to each, because the rights
of the other creditors likewise enjoying
preference under Article 2242 cannot be
ascertained.
Although Barretto involved
specific
immovable property, the ruling therein
should apply equally in this case where

specific movable property is involved. As

the extrajudicial foreclosure instituted by
PNB and DBP is not the liquidation
proceeding contemplated by the Civil
Code, Remington cannot claim its pro rata
share from DBP.
Thus, Remington cannot enforce its lien
against DBP because there was no
liquidation proceeding. The liquidation
proceeding contemplated by the Civil Code
is not the extrajudicial foreclosure done by
DBP. The proceeding contemplated is
where the claims of all the preferred
creditors may be bindingly adjudicated
such as insolvency, settlement of
decedent's estate or other similar
proceedings.

REPUBLIC VS. PERALTA

[150 SCRA 37(1987)]
FACTS: The Republic of the Philippines
seeks the review on certiorari of the Order
of the CFI of Manila in its Civil Case No.
108395 entitled "In the Matter of Voluntary
Insolvency of Quality Tobacco Corporation,
Quality Tobacco.
In its questioned Order, the trial court held
that the above enumerated claims of USTC
and FOITAF (hereafter collectively referred
to as the "Unions") for separation pay of
their respective members embodied in final
awards of the NLRC were to be preferred
over the claims of the Bureau of Customs
and the BIR. The trial court, in so ruling,
relied primarily upon Article 110 of the
Labor Code.
The Solicitor General, in seeking the
reversal of the questioned Orders, argues
that Article 110 of the Labor Code is not

applicable as it speaks of "wages," a term

which he asserts does not include the
separation pay claimed by the Unions.
"Separation pay," the Solicitor General
contends: is given to a laborer for a

separation from employment computed

on the basis of the number of years the
laborer was employed by the SEC.
1. Requirements for Issuance of License.
Every applicant for license to operate a
private employment agency or manning
agency shall submit a written application
together with the following requirements:
xxx xxx
f. A verified undertaking stating that the
applicant:
xxx xxx xxx(3) Shall assume joint and
solidary liability with the employer for all
claims and liabilities which may arise in
connection with the implementation of
the contract; including but not limited to
payment of wages, health and disability
compensation and reparation.
employer; it is a form of penalty or
damage against the employer in favor of
the employee for the latter's dismissal or
separation from service

ISSUE: WON separation pay of their

respective members embodied in final
awards of the NLRC were to be preferred
over the claims of the Bureau of Customs
and the BIR (WON separation pay is
included in the term wages)
HELD: YES. For the specific purposes of
Article 1109 and in the context of
insolvency termination or separation pay is
reasonably regarded as forming part of the
remuneration or other money benefits
accruing to employees or workers by
reason of their having previously rendered
services to their employer; as such, they
fall within the scope of "remuneration or
earnings for services rendered or to be
rendered ."
Liability for separation pay might indeed
have the effect of a penalty, so far as the
employer is concerned. So far as concerns
the employees, however, separation pay is

additional remuneration to which they

become
entitled
because,
having
previously rendered services, they are
separated from the employer's service.
Reasoning
We note, in this connection, that in
Philippine Commercial and Industrial Bank
(PCIB) us. National Mines and Allied
Workers Union, the Solicitor General took
a different view and there urged that the
term "wages" under Article 110 of the
Labor Code may be regarded as
embracing within its scope severance pay
or termination or separation pay. In PCIB,
this Court agreed with the position
advanced by the Solicitor General. We see
no reason for overturning this particular
position.
The resolution of the issue of priority
among the several claims filed in the
insolvency proceedings instituted by the
Insolvent cannot, however, rest on a
reading of Article 110 of the labor Code
alone.
Article 110 of the Labor Code, in
determining the reach of its terms, cannot
be viewed in isolation. Rather, Article 110
must be read in relation to the provisions of
the
Civil
Code
concerning
the
classification, concurrence and preference
of credits, which provisions find particular
application in insolvency proceedings
where the claims of all creditors, preferred
or non-preferred, may be adjudicated in a
binding manner.
Disposition
MODIFIED and REMANDED to the trial
court for further proceedings in insolvency.

Article 97 (f) of the Labor Code defines

"wages" in the following terms:
Wage' paid to any employee shall mean the
remuneration
or
earnings,
however
designated, capable of being expressed in
terms of money, whether fixed or ascertained
on a time, task, piece, or

commission basis, or other method of

calculating the same, which is payable
by an employer to an employee under a
written or unwritten contract of
employment for work done or to be
done, or for services rendered or to be
rendered, and includes the fair and
reasonable value, as determined by the
Secretary of Labor, of board, lodging, or
other facilities customarily furnished by
the employer to the employee. 'Fair and
reasonable value' shall not include any
profit to the employer or to any person
affiliated with the employer.(emphasis
supplied)
Article 110. Worker preference in case
of bankruptcy In the event of
bankruptcy or liquidation of an
employer's business, his workers
shall enjoy first preference as regards
wages due them for services
rendered during the period prior to
the bankruptcy or liquidation, any
provision of law to the contrary
notwithstanding. Union paid wages

shall be paid in full before other

creditors may establish any claim to a
share in the assets of the employer.
(emphasis supplied).

DEVELOPMENT BANK OF THE

PHILIPPINES VS. NLRC
[242 SCRA 59 (1995)]
FACTS: PSC obtained a loan in 1983 from
the DBP to finance its iron smelting and
steel manufacturing business. To secure
said loan, PSC mortgaged to DBP real
properties with all the buildings and
improvements thereon and chattels. By
virtue of the said loan agreement, DBP
became the majority stockholder of PSC,
with stockholdings. Subsequently, it took
over the management of PSC. When PSC
failed to pay its obligation with DBP, DBP
foreclosed and acquired the mortgaged
real estate and chattels of PSC in the
auction sales in 1987. Petitioners filed a
Petition for Involuntary Insolvency in the
RTC against PSC and DBP, impleading as

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

co-respondents therein Olecram Mining

Corporation and Jose Panganiban Ice
Plant and Cold Storage, with said
petitioners representing themselves as
unpaid employees of said private
respondents. Herein private respondents
filed a complaint with the Department of
Labor against PSC, including later on DBP,
for non-payment of salaries, 13th month
pay, incentive leave pay and separation
pay. DBP submits that when it foreclosed
the assets of PSC, it did so as a
foreclosing creditor.
ISSUE: Whether DBP, as foreclosing
creditor, could be held liable for the unpaid
wages, 13th month pay, incentive leave
pay and separation pay of the employees
of PSC
The terms 'declaration' of bankruptcy or
'judicial' liquidation in Article 110 of the
Labor Code have been eliminated by RA
6715, which took effect on March 21,
1989. Does this mean then that liquidation
proceedings have been done away with?
RULING: We opine in the negative.
Because of its impact on the entire system
of credit, Article 110 of the Labor Code
cannot be viewed in isolation but must be
read in relation to the Civil Code scheme
on classification and preference of credits.
In the event of insolvency, a principal
objective should be to effect an equitable
distribution of the insolvent's property
among his creditors. To accomplish this
there must first be some proceeding where
notice to all of the insolvent's creditors may
be given and where the claims of preferred
creditors may be bindingly adjudicated.

240

The right of first preference as regards

unpaid wages recognized by Article 110 does
not constitute a lien on the property of the
insolvent debtor in favor or workers. It is but
a preference of credit in their favor, a
preference in application. It is a method
adopted to determine and specify the order

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

in which credits should be paid in the

final distribution of the proceeds of the
insolvent's assets. The DBP anchors its
claim on a mortgage credit, which
directly and immediately subjects the
property upon which it is imposed,
whoever the possessor may be, to the
fulfillment of the obligation for whose
security it was constituted (Art. 2176,
CC). It creates a real right which is
enforceable against the whole world. It is
a lien on an identified immovable
property, which a preference is not.
Even if Article 110 and its Implementing
Rule, as amended, should be interpreted
to mean `absolute preference,' the same
should be given only prospective effect
in line with the cardinal rule that laws
shall have no retroactive effect, unless
the contrary is provided (Art. 4, CC).
Thereby, any infringement on the
constitutional
guarantee
on
nonimpairment of obligation of contracts

240

(Sec. 10, Art. III, 1987 Consti.) is also

avoided. In point of fact, DBP's mortgage
credit antedated by several years the
amendatory law, RA 6715. To give Article
110 retroactive effect would be to wipe out
the mortgage in DBP's favor and expose it
to a risk which it sought to protect itself
against by requiring a collateral in the form
of real property.
In fine, the right to preference given to
workers under Article 110 of the Labor
Code cannot exist in any effective way
prior to the time of its presentation in
distribution proceedings. It will find
application when, in proceedings such as
insolvency, such unpaid wages shall be
paid in full before the `claims of the
Government and other creditors' may be
paid. But, for an orderly settlement of a
debtor's assets, all creditors must be
convened, their claims ascertained and
inventoried, and thereafter the preference
determined in the course of judicial
proceedings which have for their object the
subjection of the property of the debtor to
the payment of his debts or other lawful

CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016

obligations.
Thereby,
an
orderly
determination of preference of creditors'
claims is assured; the adjudication made
will be binding on all parties-in-interest,
since those proceedings are proceedings
in rem; and the legal scheme of
classification, concurrence and preference
of credits in the Civil Code, the Insolvency
Law, and the Labor Code is preserved in
harmony.

Isaiah 41:10
So do not fear, for I am with you; do not
be dismayed, for I am your God. I will
strengthen you and help you; I will uphold
you with my righteous right hand.

241