1

FORT BONIFACIO DEVELOPMENT CORPORATION

LENDING CORPORATION GR NO. 158977

VS

YLAS

DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari[1] of the Orders issued
on 7 March 2003[2] and 3 July 2003[3] by Branch 59 of the Regional
Trial Court of Makati City (trial court) in Civil Case No. 01-1452. The trial
courts orders dismissed Fort Bonifacio Development Corporations
(FBDC) third party claim and denied FBDCs Motion to Intervene and
Admit Complaint in Intervention.
The Facts
On 24 April 1998, FBDC executed a lease contract in favor of
Tirreno, Inc. (Tirreno) over a unit at the Entertainment Center Phase 1
of the Bonifacio Global City in Taguig, Metro Manila. The parties had the
lease contract notarized on the day of its execution. Tirreno used the
leased premises for Savoia Ristorante and La Strega Bar.
Two provisions in the lease contract are pertinent to the present
case: Section 20, which is about the consequences in case of default of
the lessee, and Section 22, which is about the lien on the properties of
the lease. The pertinent portion of Section 20 reads:
Section 20. Default of the Lessee
20.1 The LESSEE shall be deemed to be in default within the
meaning of this Contract in case:
(i)
The LESSEE fails to fully pay on time any rental, utility and
service charge or other financial obligation of the LESSEE under this
Contract;
xxx

20.2 Without prejudice to any of the rights of the LESSOR under

this Contract, in case of default of the LESSEE, the lessor shall have the
right to:
(i)
Terminate this Contract immediately upon written notice to
the LESSEE, without need of any judicial action or declaration;
xxx
Section 22, on the other hand, reads:
Section 22. Lien on the Properties of the Lessee
Upon the termination of this Contract or the expiration of the
Lease Period without the rentals, charges and/or damages, if any, being
fully paid or settled, the LESSOR shall have the right to retain
possession of the properties of the LESSEE used or situated in the
Leased Premises and the LESSEE hereby authorizes the LESSOR to
offset the prevailing value thereof as appraised by the LESSOR against
any unpaid rentals, charges and/or damages. If the LESSOR does not
want to use said properties, it may instead sell the same to third parties
and apply the proceeds thereof against any unpaid rentals, charges
and/or damages.
Tirreno began to default in its lease payments in 1999. By July
2000, Tirreno was already in arrears by P5,027,337.91. FBDC and
Tirreno entered into a settlement agreement on 8 August 2000. Despite
the execution of the settlement agreement, FBDC found need to send
Tirreno a written notice of termination dated 19 September 2000 due to
Tirrenos alleged failure to settle its outstanding obligations. On 29
September 2000, FBDC entered and occupied the leased premises.
FBDC also appropriated the equipment and properties left by Tirreno
pursuant to Section 22 of their Contract of Lease as partial payment for
Tirrenos outstanding obligations. Tirreno filed an action for forcible
entry against FBDC before the Municipal Trial Court of Taguig. Tirreno
also filed a complaint for specific performance with a prayer for the
issuance of a temporary restraining order and/or a writ of preliminary
injunction against FBDC before the Regional Trial Court (RTC) of Pasig
City. The RTC of Pasig City dismissed Tirrenos complaint for forumshopping.

2
On 4 March 2002, Yllas Lending Corporation and Jose S. Lauraya,
in his official capacity as President, (respondents) caused the sheriff of
Branch 59 of the trial court to serve an alias writ of seizure against
FBDC. On the same day, FBDC served on the sheriff an affidavit of title
and third party claim. FBDC found out that on 27 September 2001,
respondents filed a complaint for Foreclosure of Chattel Mortgage with
Replevin, docketed as Civil Case No. 01-1452, against Tirreno, Eloisa
Poblete Todaro (Eloisa), and Antonio D. Todaro (Antonio), in their
personal and individual capacities, and in Eloisas official capacity as
President. In their complaint, respondents alleged that they lent a total
of P1.5 million to Tirreno, Eloisa, and Antonio. On 9 November 2000,
Tirreno, Eloisa and Antonio executed a Deed of Chattel Mortgage in
favor of respondents as security for the loan. The following properties
are covered by the Chattel Mortgage:
a. Furniture, Fixtures and Equipment of Savoia Ristorante and La Strega
Bar, a restaurant owned and managed by [Tirreno], inclusive of the
leasehold right of [Tirreno] over its rented building where [the] same is
presently located.
b. Goodwill over the aforesaid restaurant, including its business name,
business sign, logo, and any and all interest therein.
c. Eighteen (18) items of paintings made by Florentine Master, Gino Tili,
which are fixtures in the above-named restaurant.
The details and descriptions of the above items are specified in
Annex A which is hereto attached and forms as an integral part of this
Chattel Mortgage instrument.[4]

In the Deed of Chattel Mortgage, Tirreno, Eloisa, and Antonio

made the following warranties to respondents:
1.
that:

WARRANTIES: The MORTGAGOR hereby declares and warrants

a.
The MORTGAGOR is the absolute owner of the above named
properties subject of this mortgage, free from all liens and
encumbrances.

b.
There exist no transaction or documents affecting the same
previously presented for, and/or pending transaction.[5]
Despite FBDCs service upon him of an affidavit of title and third
party claim, the sheriff proceeded with the seizure of certain items from
FBDCs premises. The sheriffs partial return indicated the seizure of
the following items from FBDC:
A. FIXTURES
(2) Smaller Murano Chandeliers
(1) Main Murano Chandelier
B. EQUIPMENT
(13) Uni-Air Split Type 2HP Air Cond.
(2) Uni-Air Split Type 1HP Air Cond.
(3) Uni-Air Window Type 2HP Air Cond.
(56) Chairs
(1) Table
(2) boxes Kitchen equipments [sic][6]
The sheriff delivered the seized properties to respondents. FBDC
questioned the propriety of the seizure and delivery of the properties to
respondents without an indemnity bond before the trial court. FBDC
argued that when respondents and Tirreno entered into the chattel
mortgage agreement on 9 November 2000, Tirreno no longer owned the
mortgaged properties as FBDC already enforced its lien on 29
September 2000.
In ruling on FBDCs motion for leave to intervene and to admit
complaint in intervention, the trial court stated the facts as follows:
Before this Court are two pending incidents, to wit: 1) [FBDCs]
Third-Party Claim over the properties of [Tirreno] which were seized and
delivered by the sheriff of this Court to [respondents]; and 2) FBDCs
Motion to Intervene and to Admit Complaint in Intervention.
Third party claimant, FBDC, anchors its claim over the subject
properties on Sections 20.2(i) and 22 of the Contract of Lease executed
by [FBDC] with Tirreno. Pursuant to said Contract of Lease, FBDC took
possession of the leased premises and proceeded to sell to third parties
the properties found therein and appropriated the proceeds thereof to
pay the unpaid lease rentals of [Tirreno].

Intervention.

FBDC, likewise filed a Motion to Admit its Complaint-in-

respondents instead of filing a motion to intervene.

quoted from Bayer as follows:

The trial court

In Opposition to the third-party claim and the motion to

intervene, [respondents] posit that the basis of [FBDCs] third party
claim being anchored on the aforesaid Contract [of] Lease is baseless.
[Respondents] contend that the stipulation of the contract of lease
partakes of a pledge which is void under Article 2088 of the Civil Code
for being pactum commissorium.

In other words, construing Section 17 of Rule 39 of the Revised Rules of

Court (now Section 16 of the 1997 Rules on Civil Procedure), the rights
of third-party claimants over certain properties levied upon by the
sheriff to satisfy the judgment may not be taken up in the case where
such claims are presented but in a separate and independent action
instituted by the claimants.[10]

xxx
By reason of the failure of [Tirreno] to pay its lease rental and
fees due in the amount of P5,027,337.91, after having notified [Tirreno]
of the termination of the lease, x x x FBDC took possession of
[Tirreno.s] properties found in the premises and sold those which were
not of use to it. Meanwhile, [respondents], as mortgagee of said
properties, filed an action for foreclosure of the chattel mortgage with
replevin and caused the seizure of the same properties which [FBDC]
took and appropriated in payment of [Tirrenos] unpaid lease rentals.[7]
The Ruling of the Trial Court
In its order dated 7 March 2003, the trial court stated that the
present case raises the questions of who has a better right over the
properties of Tirreno and whether FBDC has a right to intervene in
respondents complaint for foreclosure of chattel mortgage.
In deciding against FBDC, the trial court declared that Section
22 of the lease contract between FBDC and Tirreno is void under Article
2088 of the Civil Code.[8] The trial court stated that Section 22 of the
lease contract pledges the properties found in the leased premises as
security for the payment of the unpaid rentals. Moreover, Section 22
provides for the automatic appropriation of the properties owned by
Tirreno in the event of its default in the payment of monthly rentals to
FBDC. Since Section 22 is void, it cannot vest title of ownership over
the seized properties. Therefore, FBDC cannot assert that its right is
superior to respondents, who are the mortgagees of the disputed
properties.
The trial court quoted from Bayer Phils. v. Agana[9] to justify its
ruling that FBDC should have filed a separate complaint against

The dispositive portion of the trial courts decision reads:

WHEREFORE, premises considered, [FBDCs] Third Party Claim is
hereby DISMISSED.
Likewise, the Motion to Intervene and Admit
Complaint in Intervention is DENIED.[11]

FBDC filed a motion for reconsideration on 9 May 2003. The trial

court denied FBDCs motion for reconsideration in an order dated 3 July
2003. FBDC filed the present petition before this Court to review pure
questions of law.
The Issues
FBDC alleges that the trial court erred in the following:
1.
Dismissing FBDCs third party claim upon the trial courts
erroneous interpretation that FBDC has no right of ownership over the
subject properties because Section 22 of the contract of lease is void for
being a pledge and a pactum commissorium;
2.
Denying FBDC intervention on the ground that its proper remedy
as third party claimant over the subject properties is to file a separate
action; and
3.
Depriving FBDC of its properties without due process of law when
the trial court erroneously dismissed FBDCs third party claim, denied
FBDCs intervention, and did not require the posting of an indemnity
bond for FBDCs protection.[12]

The Ruling of the Court

The petition has merit.
Taking of Lessees Properties
without Judicial Intervention
We reproduce Section 22 of the Lease Contract below for easy
reference:
Section 22. Lien on the Properties of the Lessee
Upon the termination of this Contract or the expiration of the
Lease Period without the rentals, charges and/or damages, if any, being
fully paid or settled, the LESSOR shall have the right to retain
possession of the properties of the LESSEE used or situated in the
Leased Premises and the LESSEE hereby authorizes the LESSOR to
offset the prevailing value thereof as appraised by the LESSOR against
any unpaid rentals, charges and/or damages. If the LESSOR does not
want to use said properties, it may instead sell the same to third parties
and apply the proceeds thereof against any unpaid rentals, charges
and/or damages.
Respondents, as well as the trial court, contend that Section 22
constitutes a pactum commissorium, a void stipulation in a pledge
contract. FBDC, on the other hand, states that Section 22 is merely a
dacion en pago.
Articles 2085 and 2093 of the Civil Code enumerate the requisites
essential to a contract of pledge: (1) the pledge is constituted to secure
the fulfillment of a principal obligation; (2) the pledgor is the absolute
owner of the thing pledged; (3) the persons constituting the pledge
have the free disposal of their property or have legal authorization for
the purpose; and (4) the thing pledged is placed in the possession of
the creditor, or of a third person by common agreement. Article 2088 of
the Civil Code prohibits the creditor from appropriating or disposing the
things pledged, and any contrary stipulation is void.
On the other hand, Article 1245 of the Civil Code defines dacion
en pago, or dation in payment, as the alienation of property to the
creditor in satisfaction of a debt in money. Dacion en pago is governed

by the law on sales. Philippine National Bank v. Pineda[13] held that

dation in payment requires delivery and transmission of ownership of a
thing owned by the debtor to the creditor as an accepted equivalent of
the performance of the obligation. There is no dation in payment when
there is no transfer of ownership in the creditors favor, as when the
possession of the thing is merely given to the creditor by way of
security.
Section 22, as worded, gives FBDC a means to collect payment
from Tirreno in case of termination of the lease contract or the
expiration of the lease period and there are unpaid rentals, charges, or
damages. The existence of a contract of pledge, however, does not
arise just because FBDC has means of collecting past due rent from
Tirreno other than direct payment. The trial court concluded that
Section 22 constitutes a pledge because of the presence of the first
three requisites of a pledge: Tirrenos properties in the leased premises
secure Tirrenos lease payments; Tirreno is the absolute owner of the
said properties; and the persons representing Tirreno have legal
authority to constitute the pledge. However, the fourth requisite, that
the thing pledged is placed in the possession of the creditor, is absent.
There is non-compliance with the fourth requisite even if Tirrenos
personal properties are found in FBDCs real property.
Tirrenos
personal properties are in FBDCs real property because of the Contract
of Lease, which gives Tirreno possession of the personal properties.
Since Section 22 is not a contract of pledge, there is no pactum
commissorium.
FBDC admits that it took Tirrenos properties from the leased
premises without judicial intervention after terminating the Contract of
Lease in accordance with Section 20.2. FBDC further justifies its action
by stating that Section 22 is a forfeiture clause in the Contract of Lease
and that Section 22 gives FBDC a remedy against Tirrenos failure to
comply with its obligations. FBDC claims that Section 22 authorizes
FBDC to take whatever properties that Tirreno left to pay off Tirrenos
obligations.
We agree with FBDC.
A lease contract may be terminated without judicial intervention.
Consing v. Jamandre upheld the validity of a contractually-stipulated
termination clause:

5
This stipulation is in the nature of a resolutory condition, for
upon the exercise by the [lessor] of his right to take possession of the
leased property, the contract is deemed terminated. This kind of
contractual stipulation is not illegal, there being nothing in the law
proscribing such kind of agreement.
xxx
Judicial permission to cancel the agreement was not, therefore
necessary because of the express stipulation in the contract of [lease]
that the [lessor], in case of failure of the [lessee] to comply with the
terms and conditions thereof, can take-over the possession of the
leased premises, thereby cancelling the contract of sub-lease. Resort to
judicial action is necessary only in the absence of a special provision
granting the power of cancellation.[14]

morals, good customs, or public policy. Forfeiture of the properties is

the only security that FBDC may apply in case of Tirrenos default in its
obligations.
Intervention versus Separate Action
Respondents posit that the right to intervene, although
permissible, is not an absolute right. Respondents agree with the trial
courts ruling that FBDCs proper remedy is not intervention but the
filing of a separate action.
Moreover, respondents allege that FBDC
was accorded by the trial court of the opportunity to defend its claim of
ownership in court through pleadings and hearings set for the purpose.
FBDC, on the other hand, insists that a third party claimant may
vindicate his rights over properties taken in an action for replevin by
intervening in the replevin action itself.
We agree with FBDC.

A lease contract may contain a forfeiture clause. Country Bankers

Insurance Corp. v. Court of Appeals upheld the validity of a forfeiture
clause as follows:
A provision which calls for the forfeiture of the remaining deposit still in
the possession of the lessor, without prejudice to any other obligation
still owing, in the event of the termination or cancellation of the
agreement by reason of the lessees violation of any of the terms and
conditions of the agreement is a penal clause that may be validly
entered into. A penal clause is an accessory obligation which the
parties attach to a principal obligation for the purpose of insuring the
performance thereof by imposing on the debtor a special prestation
(generally consisting in the payment of a sum of money) in case the
obligation is not fulfilled or is irregularly or inadequately fulfilled.[15]
In Country Bankers, we allowed the forfeiture of the lessees advance
deposit of lease payment. Such a deposit may also be construed as a
guarantee of payment, and thus answerable for any unpaid rent or
charges still outstanding at any termination of the lease.
In the same manner, we allow FBDCs forfeiture of Tirrenos
properties in the leased premises. By agreement between FBDC and
Tirreno, the properties are answerable for any unpaid rent or charges at
any termination of the lease. Such agreement is not contrary to law,

Both the trial court and respondents relied on our ruling in Bayer
Phils. v. Agana[16] to justify their opposition to FBDCs intervention and
to insist on FBDCs filing of a separate action. In Bayer, we declared
that the rights of third party claimants over certain properties levied
upon by the sheriff to satisfy the judgment may not be taken up in the
case where such claims are presented, but in a separate and
independent action instituted by the claimants.
However, both
respondents and the trial court overlooked the circumstances behind
the ruling in Bayer, which makes the Bayer ruling inapplicable to the
present case. The third party in Bayer filed his claim during execution;
in the present case, FBDC filed for intervention during the trial.
The timing of the filing of the third party claim is important
because the timing determines the remedies that a third party is
allowed to file. A third party claimant under Section 16 of Rule 39
(Execution, Satisfaction and Effect of Judgments)[17] of the 1997 Rules
of Civil Procedure may vindicate his claim to the property in a separate
action, because intervention is no longer allowed as judgment has
already been rendered.
A third party claimant under Section 14 of
Rule 57 (Preliminary Attachment)[18] of the 1997 Rules of Civil
Procedure, on the other hand, may vindicate his claim to the property
by intervention because he has a legal interest in the matter in
litigation.[19]

6
We allow FBDCs intervention in the present case because FBDC
satisfied the requirements of Section 1, Rule 19 (Intervention) of the
1997 Rules of Civil Procedure, which reads as follows:
Section 1. Who may intervene. A person who has a 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 may, with leave of court, be allowed
to intervene in the action. The court shall consider whether or not the
intervention will unduly delay or prejudice the adjudication of the rights
of the original parties, and whether or not the intervenors rights may
be fully protected in a separate proceeding.

establish a valid justification for that action lies with the plaintiff [mortgagee]. An adverse possessor, who is not the mortgagor, cannot
just be deprived of his possession, let alone be bound by the terms of
the chattel mortgage contract, simply because the mortgagee brings up
an action for replevin.[20] (Emphasis added)
FBDC exercised its lien to Tirrenos properties even before
respondents and Tirreno executed their Deed of Chattel Mortgage.
FBDC is adversely affected by the disposition of the properties seized by
the sheriff. Moreover, FBDCs intervention in the present case will result
in a complete adjudication of the issues brought about by Tirrenos
creation of multiple liens on the same properties and subsequent
default in its obligations.
Sheriffs Indemnity Bond

Although intervention is not mandatory, nothing in the Rules proscribes

intervention. The trial courts objection against FBDCs intervention has
been set aside by our ruling that Section 22 of the lease contract is not
pactum commissorium.
Indeed, contrary to respondents contentions, we ruled in BA
Finance Corporation v. Court of Appeals that where the mortgagees
right to the possession of the specific property is evident, the action
need only be maintained against the possessor of the property.
However, where the mortgagees right to possession is put to great
doubt, as when a contending party might contest the legal bases for
mortgagees cause of action or an adverse and independent claim of
ownership or right of possession is raised by the contending party, it
could become essential to have other persons involved and accordingly
impleaded for a complete determination and resolution of the
controversy. Thus:
A chattel mortgagee, unlike a pledgee, need not be in, nor
entitled to, the possession of the property, unless and until the
mortgagor defaults and the mortgagee thereupon seeks to foreclose
thereon. Since the mortgagees right of possession is conditioned upon
the actual default which itself may be controverted, the inclusion of
other parties, like the debtor or the mortgagor himself, may be required
in order to allow a full and conclusive determination of the case. When
the mortgagee seeks a replevin in order to effect the eventual
foreclosure of the mortgage, it is not only the existence of, but also the
mortgagors default on, the chattel mortgage that, among other things,
can properly uphold the right to replevy the property. The burden to

FBDC laments the failure of the trial court to require respondents

to file an indemnity bond for FBDCs protection. The trial court, on the
other hand, did not mention the indemnity bond in its Orders dated 7
March 2003 and 3 July 2003.
Pursuant to Section 14 of Rule 57, the sheriff is not obligated to
turn over to respondents the properties subject of this case in view of
respondents failure to file a bond. The bond in Section 14 of Rule 57
(proceedings where property is claimed by third person) is different
from the bond in Section 3 of the same rule (affidavit and bond). Under
Section 14 of Rule 57, the purpose of the bond is to indemnify the
sheriff against any claim by the intervenor to the property seized or for
damages arising from such seizure, which the sheriff was making and
for which the sheriff was directly responsible to the third party. Section
3, Rule 57, on the other hand, refers to the attachment bond to assure
the return of defendants personal property or the payment of damages
to the defendant if the plaintiffs action to recover possession of the
same property fails, in order to protect the plaintiffs right of possession
of said property, or prevent the defendant from destroying the same
during the pendency of the suit.
Because of the absence of the indemnity bond in the present
case, FBDC may also hold the sheriff for damages for the taking or
keeping of the properties seized from FBDC.
WHEREFORE, we GRANT the petition. We SET ASIDE the Orders
dated 7 March 2003 and 3 July 2003 of Branch 59 of the Regional Trial

7
Court of Makati City in Civil Case No. 01-1452 dismissing Fort Bonifacio
Development Corporations Third Party Claim and denying Fort Bonifacio
Development Corporations Motion to Intervene and Admit Complaint in
Intervention. We REINSTATE Fort Bonifacio Development Corporations
Third Party Claim and GRANT its Motion to Intervene and Admit
Complaint in Intervention. Fort Bonifacio Development Corporation may
hold the Sheriff liable for the seizure and delivery of the properties
subject of this case because of the lack of an indemnity bond.
SO ORDERED.

G.R. No. 156132

February 6, 2007

CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS FINANCE
CORPORATION, doing business under the name and style of FNCB Finance,
Petitioners,
vs.
MODESTA R. SABENIANO, Respondent.
RESOLUTION
CHICO-NAZARIO, J.:
On 16 October 2006, this Court promulgated its Decision1 in the above-entitled
case, the dispositive portion of which reads
IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED. The
assailed Decision of the Court of Appeals in CA-G.R. No. 51930, dated 26 March
2002, as already modified by its Resolution, dated 20 November 2002, is hereby
AFFIRMED WITH MODIFICATION, as follows
1. PNs No. 23356 and 23357 are DECLARED subsisting and outstanding.
Petitioner Citibank is ORDERED to return to respondent the principal amounts of
the said PNs, amounting to Three Hundred Eighteen Thousand Eight Hundred
Ninety-Seven Pesos and Thirty-Four Centavos (P318,897.34) and Two Hundred
Three Thousand One Hundred Fifty Pesos (P203,150.00), respectively, plus the
stipulated interest of Fourteen and a half percent (14.5%) per annum, beginning
17 March 1977;
2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty Two
US Dollars and Ninety-Nine Cents (US$149,632.99) from respondents CitibankGeneva accounts to petitioner Citibank in Manila, and the application of the
same against respondents outstanding loans with the latter, is DECLARED
illegal, null and void. Petitioner Citibank is ORDERED to refund to respondent
the said amount, or its equivalent in Philippine currency using the exchange

8
rate at the time of payment, plus the stipulated interest for each of the fiduciary
placements and current accounts involved, beginning 26 October 1979;
3. Petitioner Citibank is ORDERED to pay respondent moral damages in the
amount of Three Hundred Thousand Pesos (P300,000.00); exemplary damages
in the amount of Two Hundred Fifty Thousand Pesos (P250,000.00); and
attorneys fees in the amount of Two Hundred Thousand Pesos (P200,000.00);
and
4. Respondent is ORDERED to pay petitioner Citibank the balance of her
outstanding loans, which, from the respective dates of their maturity to 5
September 1979, was computed to be in the sum of One Million Sixty-Nine
Thousand
Eight
Hundred
Forty-Seven
Pesos
and
Forty
Centavos
(P1,069,847.40), inclusive of interest. These outstanding loans shall continue to
earn interest, at the rates stipulated in the corresponding PNs, from 5
September 1979 until payment thereof.
Subsequent thereto, respondent Modesta R. Sabeniano filed an Urgent Motion to
Clarify and/or Confirm Decision with Notice of Judgment on 20 October 2006;
while, petitioners Citibank, N.A. and FNCB Finance2 filed their Motion for Partial
Reconsideration of the foregoing Decision on 6 November 2006.
The facts of the case, as determined by this Court in its Decision, may be
summarized as follows.
Respondent was a client of petitioners. She had several deposits and market
placements with petitioners, among which were her savings account with the
local branch of petitioner Citibank (Citibank-Manila3 ); money market
placements with petitioner FNCB Finance; and dollar accounts with the Geneva
branch of petitioner Citibank (Citibank-Geneva). At the same time, respondent
had outstanding loans with petitioner Citibank, incurred at Citibank-Manila, the
principal amounts aggregating to P1,920,000.00, all of which had become due
and demandable by May 1979. Despite repeated demands by petitioner
Citibank, respondent failed to pay her outstanding loans. Thus, petitioner
Citibank used respondents deposits and money market placements to off-set
and liquidate her outstanding obligations, as follows
Respondents outstanding obligation (principal and interest as of 26 October
1979) P 2,156,940.58
Less: Proceeds from respondents money market placements with petitioner
FNCB Finance (principal and interest as of 5 September 1979) (1,022,916.66)
Deposits in respondents bank accounts with petitioner Citibank
(31,079.14)
Proceeds of respondents money market placements and dollar
accounts with Citibank-Geneva (peso equivalent as of 26 October 1979)
(1,102,944.78)
Balance of respondents obligation

P 0.00
Respondent, however, denied having any outstanding loans with petitioner
Citibank. She likewise denied that she was duly informed of the off-setting or
compensation thereof made by petitioner Citibank using her deposits and
money market placements with petitioners. Hence, respondent sought to
recover her deposits and money market placements.
Respondent instituted a complaint for "Accounting, Sum of Money and
Damages" against petitioners, docketed as Civil Case No. 11336, before the
Regional Trial Court (RTC) of Makati City. After trial proper, which lasted for a
decade, the RTC rendered a Decision4 on 24 August 1995, the dispositive
portion of which reads
WHEREFORE, in view of all the foregoing, decision is hereby rendered as follows:
(1) Declaring as illegal, null and void the setoff effected by the defendant Bank
[petitioner Citibank] of plaintiffs [respondent Sabeniano] dollar deposit with
Citibank, Switzerland, in the amount of US$149,632.99, and ordering the said
defendant [petitioner Citibank] to refund the said amount to the plaintiff with
legal interest at the rate of twelve percent (12%) per annum, compounded
yearly, from 31 October 1979 until fully paid, or its peso equivalent at the time
of payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to the defendant
Bank [petitioner Citibank] in the amount of P1,069,847.40 as of 5 September
1979 and ordering the plaintiff [respondent Sabeniano] to pay said amount,
however, there shall be no interest and penalty charges from the time the illegal
setoff was effected on 31 October 1979;
(3) Dismissing all other claims and counterclaims interposed by the parties
against each other.
Costs against the defendant Bank.
All the parties appealed the afore-mentioned RTC Decision to the Court of
Appeals, docketed as CA-G.R. CV No. 51930. On 26 March 2002, the appellate
court promulgated its Decision,5 ruling entirely in favor of respondent, to wit
Wherefore, premises considered, the assailed 24 August 1995 Decision of the
court a quo is hereby AFFIRMED with MODIFICATION, as follows:
1. Declaring as illegal, null and void the set-off effected by the defendantappellant Bank of the plaintiff-appellants dollar deposit with Citibank,
Switzerland, in the amount of US$149,632.99, and ordering defendant-appellant
Citibank to refund the said amount to the plaintiff-appellant with legal interest
at the rate of twelve percent (12%) per annum, compounded yearly, from 31
October 1979 until fully paid, or its peso equivalent at the time of payment;

9
2. As defendant-appellant Citibank failed to establish by competent evidence
the alleged indebtedness of plaintiff-appellant, the set-off of P1,069,847.40 in
the account of Ms. Sabeniano is hereby declared as without legal and factual
basis;

under Rule 45 of the Revised Rules of Court. After giving due course to the
instant Petition, this Court promulgated on 16 October 2006 its Decision, now
subject of petitioners Motion for Partial Reconsideration.1awphi1.net

3. As defendants-appellants failed to account the following plaintiff-appellants

money market placements, savings account and current accounts, the former is
hereby ordered to return the same, in accordance with the terms and conditions
agreed upon by the contending parties as evidenced by the certificates of
investments, to wit:

Among the numerous grounds raised by petitioners in their Motion for Partial
Reconsideration, this Court shall address and discuss herein only particular
points that had not been considered or discussed in its Decision. Even in
consideration of these points though, this Court remains unconvinced that it
should modify or reverse in any way its disposition of the case in its earlier
Decision.

(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes NNPN No. 22526)
issued on 17 March 1977, P318,897.34 with 14.50% interest p.a.;

As to the off-setting or compensation of respondents outstanding loan balance

with her dollar deposits in Citibank-Geneva

(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes NNPN No. 22528)
issued on 17 March 1977, P203,150.00 with 14.50 interest p.a.;

Petitioners take exception to the following findings made by this Court in its
Decision, dated 16 October 2006, disallowing the off-setting or compensation of
the balance of respondents outstanding loans using her dollar deposits in
Citibank-Geneva

(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes NNPN No. 04952),
issued on 02 June 1977, P500,000.00 with 17% interest p.a.;
(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes NNPN No. 04962),
issued on 02 June 1977, P500,000.00 with 17% interest per annum;
(v) The Two Million (P2,000,000.00) money market placements of Ms. Sabeniano
with the Ayala Investment & Development Corporation (AIDC) with legal interest
at the rate of twelve percent (12%) per annum compounded yearly, from 30
September 1976 until fully paid;
4. Ordering defendants-appellants to jointly and severally pay the plaintiffappellant the sum of FIVE HUNDRED THOUSAND PESOS (P500,000.00) by way
of moral damages, FIVE HUNDRED THOUSAND PESOS (P500,000.00) as
exemplary damages, and ONE HUNDRED THOUSAND PESOS (P100,000.00) as
attorneys fees.
Acting on petitioners Motion for Partial Reconsideration, the Court of Appeals
issued a Resolution,6 dated 20 November 2002, modifying its earlier Decision,
thus
WHEREFORE, premises considered, the instant Motion for Reconsideration is
PARTIALLY GRANTED as Sub-paragraph (V) paragraph 3 of the assailed
Decisions dispositive portion is hereby ordered DELETED.
The challenged 26 March 2002 Decision of the Court is AFFIRMED with
MODIFICATION.
Since the Court of Appeals Decision, dated 26 March 2002, as modified by the
Resolution of the same court, dated 20 November 2002, was still principally in
favor of respondent, petitioners filed the instant Petition for Review on Certiorari

Without the Declaration of Pledge, petitioner Citibank had no authority to

demand the remittance of respondents dollar accounts with Citibank-Geneva
and to apply them to her outstanding loans. It cannot effect legal compensation
under Article 1278 of the Civil Code since, petitioner Citibank itself admitted
that Citibank-Geneva is a distinct and separate entity. As for the dollar
accounts, respondent was the creditor and Citibank-Geneva is the debtor; and
as for the outstanding loans, petitioner Citibank was the creditor and
respondent was the debtor. The parties in these transactions were evidently not
the principal creditor of each other.
Petitioners maintain that respondents Declaration of Pledge, by virtue of which
she supposedly assigned her dollar accounts with Citibank-Geneva as security
for her loans with petitioner Citibank, is authentic and, thus, valid and binding
upon respondent. Alternatively, petitioners aver that even without said
Declaration of Pledge, the off-setting or compensation made by petitioner
Citibank using respondents dollar accounts with Citibank-Geneva to liquidate
the balance of her outstanding loans with Citibank-Manila was expressly
authorized by respondent herself in the promissory notes (PNs) she signed for
her loans, as well as sanctioned by Articles 1278 to 1290 of the Civil Code. This
alternative argument is anchored on the premise that all branches of petitioner
Citibank in the Philippines and abroad are part of a single worldwide corporate
entity and share the same juridical personality. In connection therewith,
petitioners deny that they ever admitted that Citibank-Manila and CitibankGeneva are distinct and separate entities.
Petitioners call the attention of this Court to the following provision found in all
of the PNs7 executed by respondent for her loans

10
At or after the maturity of this note, or when same becomes due under any of
the provisions hereof, any money, stocks, bonds, or other property of any kind
whatsoever, on deposit or otherwise, to the credit of the undersigned on the
books of CITIBANK, N.A. in transit or in their possession, may without notice be
applied at the discretion of the said bank to the full or partial payment of this
note.
It is the petitioners contention that the term "Citibank, N.A." used therein
should be deemed to refer to all branches of petitioner Citibank in the
Philippines and abroad; thus, giving petitioner Citibank the authority to apply as
payment for the PNs even respondents dollar accounts with Citibank-Geneva.
Still proceeding from the premise that all branches of petitioner Citibank should
be considered as a single entity, then it should not matter that the respondent
obtained the loans from Citibank-Manila and her deposits were with CitibankGeneva. Respondent should be considered the debtor (for the loans) and
creditor (for her deposits) of the same entity, petitioner Citibank. Since
petitioner Citibank and respondent were principal creditors of each other, in
compliance with the requirements under Article 1279 of the Civil Code,8 then
the former could have very well used off-setting or compensation to extinguish
the parties obligations to one another. And even without the PNs, off-setting or
compensation was still authorized because according to Article 1286 of the Civil
Code, "Compensation takes place by operation of law, even though the debts
may be payable at different places, but there shall be an indemnity for
expenses of exchange or transportation to the place of payment."
Pertinent provisions of Republic Act No. 8791, otherwise known as the General
Banking Law of 2000, governing bank branches are reproduced below
SEC. 20. Bank Branches. Universal or commercial banks may open branches
or other offices within or outside the Philippines upon prior approval of the
Bangko Sentral.
Branching by all other banks shall be governed by pertinent laws.
A bank may, subject to prior approval of the Monetary Board, use any or all of
its branches as outlets for the presentation and/or sale of the financial products
of its allied undertaking or its investment house units.
A bank authorized to establish branches or other offices shall be responsible for
all business conducted in such branches and offices to the same extent and in
the same manner as though such business had all been conducted in the head
office. A bank and its branches and offices shall be treated as one unit.
xxxx
SEC. 72. Transacting Business in the Philippines. The entry of foreign banks in
the Philippines through the establishment of branches shall be governed by the
provisions of the Foreign Banks Liberalization Act.

The conduct of offshore banking business in the Philippines shall be governed

by the provisions of Presidential Decree No. 1034, otherwise known as the
"Offshore Banking System Decree."
xxxx
SEC. 74. Local Branches of Foreign Banks. In case of a foreign bank which has
more than one (1) branch in the Philippines, all such branches shall be treated
as one (1) unit for the purpose of this Act, and all references to the Philippine
branches of foreign banks shall be held to refer to such units.
SEC. 75. Head Office Guarantee. In order to provide effective protection of the
interests of the depositors and other creditors of Philippine branches of a foreign
bank, the head office of such branches shall fully guarantee the prompt
payment of all liabilities of its Philippine branch.
Residents and citizens of the Philippines who are creditors of a branch in the
Philippines of a foreign bank shall have preferential rights to the assets of such
branch in accordance with existing laws.
Republic Act No. 7721, otherwise known as the Foreign Banks Liberalization
Law, lays down the policies and regulations specifically concerning the
establishment and operation of local branches of foreign banks. Relevant
provisions of the said statute read
Sec. 2. Modes of Entry. - The Monetary Board may authorize foreign banks to
operate in the Philippine banking system through any of the following modes of
entry: (i) by acquiring, purchasing or owning up to sixty percent (60%) of the
voting stock of an existing bank; (ii) by investing in up to sixty percent (60%) of
the voting stock of a new banking subsidiary incorporated under the laws of the
Philippines; or (iii) by establishing branches with full banking authority:
Provided, That a foreign bank may avail itself of only one (1) mode of entry:
Provided, further, That a foreign bank or a Philippine corporation may own up to
a sixty percent (60%) of the voting stock of only one (1) domestic bank or new
banking subsidiary.
Sec. 5. Head Office Guarantee. - The head office of foreign bank branches shall
guarantee prompt payment of all liabilities of its Philippine branches.
It is true that the afore-quoted Section 20 of the General Banking Law of 2000
expressly states that the bank and its branches shall be treated as one unit. It
should be pointed out, however, that the said provision applies to a universal9
or commercial bank,10 duly established and organized as a Philippine
corporation in accordance with Section 8 of the same statute,11 and authorized
to establish branches within or outside the Philippines.

11
The General Banking Law of 2000, however, does not make the same
categorical statement as regards to foreign banks and their branches in the
Philippines. What Section 74 of the said law provides is that in case of a foreign
bank with several branches in the country, all such branches shall be treated as
one unit. As to the relations between the local branches of a foreign bank and
its head office, Section 75 of the General Banking Law of 2000 and Section 5 of
the Foreign Banks Liberalization Law provide for a "Home Office Guarantee," in
which the head office of the foreign bank shall guarantee prompt payment of all
liabilities of its Philippine branches. While the Home Office Guarantee is in
accord with the principle that these local branches, together with its head office,
constitute but one legal entity, it does not necessarily support the view that said
principle is true and applicable in all circumstances.
The Home Office Guarantee is included in Philippine statutes clearly for the
protection of the interests of the depositors and other creditors of the local
branches of a foreign bank.12 Since the head office of the bank is located in
another country or state, such a guarantee is necessary so as to bring the head
office within Philippine jurisdiction, and to hold the same answerable for the
liabilities of its Philippine branches. Hence, the principle of the singular identity
of that the local branches and the head office of a foreign bank are more often
invoked by the clients in order to establish the accountability of the head office
for the liabilities of its local branches. It is under such attendant circumstances
in which the American authorities and jurisprudence presented by petitioners in
their Motion for Partial Reconsideration were rendered.
Now the question that remains to be answered is whether the foreign bank can
use the principle for a reverse purpose, in order to extend the liability of a client
to the foreign banks Philippine branch to its head office, as well as to its
branches in other countries. Thus, if a client obtains a loan from the foreign
banks Philippine branch, does it absolutely and automatically make the client a
debtor, not just of the Philippine branch, but also of the head office and all other
branches of the foreign bank around the world? This Court rules in the negative.
There being a dearth of Philippine authorities and jurisprudence on the matter,
this Court, just as what petitioners have done, turns to American authorities and
jurisprudence. American authorities and jurisprudence are significant herein
considering that the head office of petitioner Citibank is located in New York,
United States of America (U.S.A.).
Unlike Philippine statutes, the American legislation explicitly defines the
relations among foreign branches of an American bank. Section 25 of the United
States Federal Reserve Act13 states that
Every national banking association operating foreign branches shall conduct the
accounts of each foreign branch independently of the accounts of other foreign
branches established by it and of its home office, and shall at the end of each
fiscal period transfer to its general ledger the profit or loss accrued at each
branch as a separate item.

Contrary to petitioners assertion that the accounts of Citibank-Manila and

Citibank-Geneva should be deemed as a single account under its head office,
the foregoing provision mandates that the accounts of foreign branches of an
American bank shall be conducted independently of each other. Since the head
office of petitioner Citibank is in the U.S.A., then it is bound to treat its foreign
branches in accordance with the said provision. It is only at the end of its fiscal
period that the bank is required to transfer to its general ledger the profit or loss
accrued at each branch, but still reporting it as a separate item. It is by virtue of
this provision that the Circuit Court of Appeals of New York declared in PanAmerican Bank and Trust Co. v. National City Bank of New York14 that a branch
is not merely a tellers window; it is a separate business entity.
The circumstances in the case of McGrath v. Agency of Chartered Bank of India,
Australia & China15 are closest to the one at bar. In said case, the Chartered
Bank had branches in several countries, including one in Hamburg, Germany
and another in New York, U.S.A., and yet another in London, United Kingdom.
The New York branch entered in its books credit in favor of four German firms.
Said credit represents collections made from bills of exchange delivered by the
four German firms. The same four German firms subsequently became indebted
to the Hamburg branch. The London branch then requested for the transfer of
the credit in the name of the German firms from the New York branch so as to
be applied or setoff against the indebtedness of the same firms to the Hamburg
branch. One of the question brought before the U.S. District Court of New York
was "whether or not the debts and the alleged setoffs thereto are mutual,"
which could be answered by determining first whether the New York and
Hamburg branches of Chartered Bank are individual business entities or are one
and the same entity. In denying the right of the Hamburg branch to setoff, the
U.S. District Court ratiocinated that
The structure of international banking houses such as Chartered bank defies
one rigorous description. Suffice it to say for present analysis, branches or
agencies of an international bank have been held to be independent entities for
a variety of purposes (a) deposits payable only at branch where made; Mutaugh
v. Yokohama Specie Bank, Ltd., 1933, 149 Misc. 693, 269 N.Y.S. 65; Bluebird
Undergarment Corp. v. Gomez, 1931, 139 Misc. 742, 249 N.Y.S. 319; (b) checks
need be honored only when drawn on branch where deposited; Chrzanowska v.
Corn Exchange Bank, 1916, 173 App. Div. 285, 159 N.Y.S. 385, affirmed 1919,
225 N.Y. 728, 122 N.E. 877; subpoena duces tecum on foreign banks record
barred; In re Harris, D.C.S.D.N.Y. 1939, 27 F. Supp. 480; (d) a foreign branch
separate for collection of forwarded paper; Pan-American Bank and Trust
Company v. National City Bank of New York, 2 Cir., 1925, 6 F. 2d 762, certiorari
denied 1925, 269 U.S. 554, 46 S. Ct. 18, 70 L. Ed. 408. Thus in law there is
nothing innately unitary about the organization of international banking
institutions.
Defendant, upon its oral argument and in its brief, relies heavily on Sokoloff v.
National City Bank of New York, 1928, 250 N.Y. 69, 164 N.E. 745, as authority for

12
the proposition that Chartered Bank, not the Hamburg or New York Agency, is
ultimately responsible for the amounts owing its German customers and,
conversely, it is to Chartered Bank that the German firms owe their obligations.
The Sokoloff case, aside from its violently different fact situation, is centered on
the legal problem of default of payment and consequent breach of contract by a
branch bank. It does not stand for the principle that in every instance an
international bank with branches is but one legal entity for all purposes. The
defendant concedes in its brief (p. 15) that there are purposes for which the
various agencies and branches of Chartered Bank may be treated in law as
separate entities. I fail to see the applicability of Sokoloff either as a guide to or
authority for the resolution of this problem. The facts before me and the cases
catalogued supra lend weight to the view that we are dealing here with
Agencies independent of one another.
xxxx
I hold that for instant purposes the Hamburg Agency and defendant were
independent business entities, and the attempted setoff may not be utilized by
defendant against its debt to the German firms obligated to the Hamburg
Agency.
Going back to the instant Petition, although this Court concedes that all the
Philippine branches of petitioner Citibank should be treated as one unit with its
head office, it cannot be persuaded to declare that these Philippine branches
are likewise a single unit with the Geneva branch. It would be stretching the
principle way beyond its intended purpose.
Therefore, this Court maintains its original position in the Decision that the offsetting or compensation of respondents loans with Citibank-Manila using her
dollar accounts with Citibank-Geneva cannot be effected. The parties cannot be
considered principal creditor of the other. As for the dollar accounts, respondent
was the creditor and Citibank-Geneva was the debtor; and as for the
outstanding loans, petitioner Citibank, particularly Citibank-Manila, was the
creditor and respondent was the debtor. Since legal compensation was not
possible, petitioner Citibank could only use respondents dollar accounts with
Citibank-Geneva to liquidate her loans if she had expressly authorized it to do
so by contract.
Respondent cannot be deemed to have authorized the use of her dollar deposits
with Citibank-Geneva to liquidate her loans with petitioner Citibank when she
signed the PNs16 for her loans which all contained the provision that
At or after the maturity of this note, or when same becomes due under any of
the provisions hereof, any money, stocks, bonds, or other property of any kind
whatsoever, on deposit or otherwise, to the credit of the undersigned on the
books of CITIBANK, N.A. in transit or in their possession, may without notice be
applied at the discretion of the said bank to the full or partial payment of this
note.

As has been established in the preceding discussion, "Citibank, N.A." can only
refer to the local branches of petitioner Citibank together with its head office.
Unless there is any showing that respondent understood and expressly agreed
to a more far-reaching interpretation, the reference to Citibank, N.A. cannot be
extended to all other branches of petitioner Citibank all over the world.
Although theoretically, books of the branches form part of the books of the head
office, operationally and practically, each branch maintains its own books which
shall only be later integrated and balanced with the books of the head office.
Thus, it is very possible to identify and segregate the books of the Philippine
branches of petitioner Citibank from those of Citibank-Geneva, and to limit the
authority granted for application as payment of the PNs to respondents
deposits in the books of the former.
Moreover, the PNs can be considered a contract of adhesion, the PNs being in
standard printed form prepared by petitioner Citibank. Generally, stipulations in
a contract come about after deliberate drafting by the parties thereto, there are
certain contracts almost all the provisions of which have been drafted only by
one party, usually a corporation. Such contracts are called contracts of
adhesion, because the only participation of the party is the affixing of his
signature or his "adhesion" thereto. This being the case, the terms of such
contract are to be construed strictly against the party which prepared it.17
As for the supposed Declaration of Pledge of respondents dollar accounts with
Citibank-Geneva as security for the loans, this Court stands firm on its ruling
that the non-production thereof is fatal to petitioners cause in light of
respondents claim that her signature on such document was a forgery. It bears
to note that the original of the Declaration of Pledge is with Citibank-Geneva, a
branch of petitioner Citibank. As between respondent and petitioner Citibank,
the latter has better access to the document. The constant excuse forwarded by
petitioner Citibank that Citibank-Geneva refused to return possession of the
original Declaration of Pledge to Citibank-Manila only supports this Courts
finding in the preceding paragraphs that the two branches are actually
operating separately and independently of each other.
Further, petitioners keep playing up the fact that respondent, at the beginning
of the trial, refused to give her specimen signatures to help establish whether
her signature on the Declaration of Pledge was indeed forged. Petitioners seem
to forget that subsequently, respondent, on advice of her new counsel, already
offered to cooperate in whatever manner so as to bring the original Declaration
of Pledge before the RTC for inspection. The exchange of the counsels for the
opposing sides during the hearing on 24 July 1991 before the RTC reveals the
apparent willingness of respondents counsel to undertake whatever course of
action necessary for the production of the contested document, and the
evasive, non-committal, and uncooperative attitude of petitioners counsel.18
Lastly, this Courts ruling striking down the Declaration of Pledge is not entirely
based on respondents allegation of forgery. In its Decision, this Court already

13
extensively discussed why it found the said Declaration of Pledge highly
suspicious and irregular, to wit

documentary credits and collections) which gives rise thereto, and including
principal, all contractual and penalty interest, commissions, charges, and costs.

First of all, it escapes this Court why petitioner Citibank took care to have the
Deeds of Assignment of the PNs notarized, yet left the Declaration of Pledge
unnotarized. This Court would think that petitioner Citibank would take greater
cautionary measures with the preparation and execution of the Declaration of
Pledge because it involved respondents "all present and future fiduciary
placements" with a Citibank branch in another country, specifically, in Geneva,
Switzerland. While there is no express legal requirement that the Declaration of
Pledge had to be notarized to be effective, even so, it could not enjoy the same
prima facie presumption of due execution that is extended to notarized
documents, and petitioner Citibank must discharge the burden of proving due
execution and authenticity of the Declaration of Pledge.

The pledge, therefore, made no sense, the pledgor and pledgee being the same
entity. Was a mistake made by whoever filled-out the form? Yes, it could be a
possibility. Nonetheless, considering the value of such a document, the mistake
as to a significant detail in the pledge could only be committed with gross
carelessness on the part of petitioner Citibank, and raised serious doubts as to
the authenticity and due execution of the same. The Declaration of Pledge had
passed through the hands of several bank officers in the country and abroad,
yet, surprisingly and implausibly, no one noticed such a glaring mistake.

Second, petitioner Citibank was unable to establish the date when the
Declaration of Pledge was actually executed. The photocopy of the Declaration
of Pledge submitted by petitioner Citibank before the RTC was undated. It
presented only a photocopy of the pledge because it already forwarded the
original copy thereof to Citibank-Geneva when it requested for the remittance of
respondents dollar accounts pursuant thereto. Respondent, on the other hand,
was able to secure a copy of the Declaration of Pledge, certified by an officer of
Citibank-Geneva, which bore the date 24 September 1979. Respondent,
however, presented her passport and plane tickets to prove that she was out of
the country on the said date and could not have signed the pledge. Petitioner
Citibank insisted that the pledge was signed before 24 September 1979, but
could not provide an explanation as to how and why the said date was written
on the pledge. Although Mr. Tan testified that the Declaration of Pledge was
signed by respondent personally before him, he could not give the exact date
when the said signing took place. It is important to note that the copy of the
Declaration of Pledge submitted by the respondent to the RTC was certified by
an officer of Citibank-Geneva, which had possession of the original copy of the
pledge. It is dated 24 September 1979, and this Court shall abide by the
presumption that the written document is truly dated. Since it is undeniable that
respondent was out of the country on 24 September 1979, then she could not
have executed the pledge on the said date.
Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a
standard printed form. It was constituted in favor of Citibank, N.A., otherwise
referred to therein as the Bank. It should be noted, however, that in the space
which should have named the pledgor, the name of petitioner Citibank was
typewritten, to wit
The pledge right herewith constituted shall secure all claims which the Bank
now has or in the future acquires against Citibank, N.A., Manila (full name and
address of the Debtor), regardless of the legal cause or the transaction (for
example current account, securities transactions, collections, credits, payments,

Lastly, respondent denied that it was her signature on the Declaration of

Pledge. She claimed that the signature was a forgery. When a document is
assailed on the basis of forgery, the best evidence rule applies
Basic is the rule of evidence that when the subject of inquiry is the contents of a
document, no evidence is admissible other than the original document itself
except in the instances mentioned in Section 3, Rule 130 of the Revised Rules of
Court. Mere photocopies of documents are inadmissible pursuant to the best
evidence rule. This is especially true when the issue is that of forgery.
As a rule, forgery cannot be presumed and must be proved by clear, positive
and convincing evidence and the burden of proof lies on the party alleging
forgery. The best evidence of a forged signature in an instrument is the
instrument itself reflecting the alleged forged signature. The fact of forgery can
only be established by a comparison between the alleged forged signature and
the authentic and genuine signature of the person whose signature is theorized
upon to have been forged. Without the original document containing the alleged
forged signature, one cannot make a definitive comparison which would
establish forgery. A comparison based on a mere xerox copy or reproduction of
the document under controversy cannot produce reliable results.
Respondent made several attempts to have the original copy of the pledge
produced before the RTC so as to have it examined by experts. Yet, despite
several Orders by the RTC, petitioner Citibank failed to comply with the
production of the original Declaration of Pledge. It is admitted that CitibankGeneva had possession of the original copy of the pledge. While petitioner
Citibank in Manila and its branch in Geneva may be separate and distinct
entities, they are still incontestably related, and between petitioner Citibank and
respondent, the former had more influence and resources to convince CitibankGeneva to return, albeit temporarily, the original Declaration of Pledge.
Petitioner Citibank did not present any evidence to convince this Court that it
had exerted diligent efforts to secure the original copy of the pledge, nor did it
proffer the reason why Citibank-Geneva obstinately refused to give it back,
when such document would have been very vital to the case of petitioner
Citibank. There is thus no justification to allow the presentation of a mere
photocopy of the Declaration of Pledge in lieu of the original, and the photocopy

14
of the pledge presented by petitioner Citibank has nil probative value. In
addition, even if this Court cannot make a categorical finding that respondents
signature on the original copy of the pledge was forged, it is persuaded that
petitioner Citibank willfully suppressed the presentation of the original
document, and takes into consideration the presumption that the evidence
willfully suppressed would be adverse to petitioner Citibank if produced.
As far as the Declaration of Pledge is concerned, petitioners failed to submit any
new evidence or argument that was not already considered by this Court when
it rendered its Decision.
As to the value of the dollar deposits in Citibank-Geneva ordered refunded to
respondent
In case petitioners are still ordered to refund to respondent the amount of her
dollar accounts with Citibank-Geneva, petitioners beseech this Court to adjust
the nominal values of respondents dollar accounts and/or her overdue peso
loans by using the values of the currencies stipulated at the time the obligations
were established in 1979, to address the alleged inequitable consequences
resulting from the extreme and extraordinary devaluation of the Philippine
currency that occurred in the course of the Asian crisis of 1997. Petitioners base
their request on Article 1250 of the Civil Code which reads, "In case an
extraordinary inflation or deflation of the currency stipulated should supervene,
the value of the currency at the time of the establishment of the obligation shall
be the basis of payment, unless there is an agreement to the contrary."
It is well-settled that Article 1250 of the Civil Code becomes applicable only
when there is extraordinary inflation or deflation of the currency. Inflation has
been defined as the sharp increase of money or credit or both without a
corresponding increase in business transaction. There is inflation when there is
an increase in the volume of money and credit relative to available goods
resulting in a substantial and continuing rise in the general price level.19 In
Singson v. Caltex (Philippines), Inc.,20 this Court already provided a discourse
as to what constitutes as extraordinary inflation or deflation of currency, thus
We have held extraordinary inflation to exist when there is a decrease or
increase in the purchasing power of the Philippine currency which is unusual or
beyond the common fluctuation in the value of said currency, and such increase
or decrease could not have been reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of the establishment of the
obligation.
An example of extraordinary inflation, as cited by the Court in Filipino Pipe and
Foundry Corporation vs. NAWASA, supra, is that which happened to the
deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced a case of hyperinflation. In
early 1921, the value of the German mark was 4.2 to the U.S. dollar. By May of

the same year, it had stumbled to 62 to the U.S. dollar. And as prices went up
rapidly, so that by October 1923, it had reached 4.2 trillion to the U.S. dollar!"
(Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third
Edition]).
As reported, "prices were going up every week, then every day, then every
hour. Women were paid several times a day so that they could rush out and
exchange their money for something of value before what little purchasing
power was left dissolved in their hands. Some workers tried to beat the
constantly rising prices by throwing their money out of the windows to their
waiting wives, who would rush to unload the nearly worthless paper. A postage
stamp cost millions of marks and a loaf of bread, billions." (Sidney Rutberg, "The
Money Balloon", New York: Simon and Schuster, 1975, p. 19, cited in
"Economics, An Introduction" by Villegas & Abola, 3rd ed.)
The supervening of extraordinary inflation is never assumed. The party alleging
it must lay down the factual basis for the application of Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous
records and statistics submitted by plaintiff-appellant proved that there has
been a decline in the purchasing power of the Philippine peso, but this
downward fall cannot be considered "extraordinary" but was simply a universal
trend that has not spared our country. Similarly, in Huibonhoa vs. Court of
Appeals, the Court dismissed plaintiff-appellant's unsubstantiated allegation
that the Aquino assassination in 1983 caused building and construction costs to
double during the period July 1983 to February 1984. In Serra vs. Court of
Appeals, the Court again did not consider the decline in the peso's purchasing
power from 1983 to 1985 to be so great as to result in an extraordinary
inflation.
Like the Serra and Huibonhoa cases, the instant case also raises as basis for the
application of Article 1250 the Philippine economic crisis in the early 1980s --when, based on petitioner's evidence, the inflation rate rose to 50.34% in 1984.
We hold that there is no legal or factual basis to support petitioner's allegation
of the existence of extraordinary inflation during this period, or, for that matter,
the entire time frame of 1968 to 1983, to merit the adjustment of the rentals in
the lease contract dated July 16, 1968. Although by petitioner's evidence there
was a decided decline in the purchasing power of the Philippine peso
throughout this period, we are hard put to treat this as an "extraordinary
inflation" within the meaning and intent of Article 1250.
Rather, we adopt with approval the following observations of the Court of
Appeals on petitioner's evidence, especially the NEDA certification of inflation
rates based on consumer price index:
xxx (a) from the period 1966 to 1986, the official inflation rate never exceeded
100% in any single year; (b) the highest official inflation rate recorded was in
1984 which reached only 50.34%; (c) over a twenty one (21) year period, the

15
Philippines experienced a single-digit inflation in ten (10) years (i.e., 1966,
1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and 1986); (d) in other years
(i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981, 1982, 1984 and 1989)
when the Philippines experienced double-digit inflation rates, the average of
those rates was only 20.88%; (e) while there was a decline in the purchasing
power of the Philippine currency from the period 1966 to 1986, such cannot be
considered as extraordinary; rather, it is a normal erosion of the value of the
Philippine peso which is a characteristic of most currencies.
"Erosion" is indeed an accurate description of the trend of decline in the value
of the peso in the past three to four decades. Unfortunate as this trend may be,
it is certainly distinct from the phenomenon contemplated by Article 1250.
Moreover, this Court has held that the effects of extraordinary inflation are not
to be applied without an official declaration thereof by competent authorities.
The burden of proving that there had been extraordinary inflation or deflation of
the currency is upon the party that alleges it. Such circumstance must be
proven by competent evidence, and it cannot be merely assumed. In this case,
petitioners presented no proof as to how much, for instance, the price index of
goods and services had risen during the intervening period.21 All the
information petitioners provided was the drop of the U.S. dollar-Philippine peso
exchange rate by 17 points from June 1997 to January 1998. While the said
figure was based on the statistics of the Bangko Sentral ng Pilipinas (BSP), it is
also significant to note that the BSP did not categorically declare that the same
constitute as an extraordinary inflation. The existence of extraordinary inflation
must be officially proclaimed by competent authorities, and the only competent
authority so far recognized by this Court to make such an official proclamation is
the BSP.22
Neither can this Court, by merely taking judicial notice of the Asian currency
crisis in 1997, already declare that there had been extraordinary inflation. It
should be recalled that the Philippines likewise experienced economic crisis in
the 1980s, yet this Court did not find that extraordinary inflation took place
during the said period so as to warrant the application of Article 1250 of the
Civil Code.
Furthermore, it is incontrovertible that Article 1250 of the Civil Code is based on
equitable considerations. Among the maxims of equity are (1) he who seeks
equity must do equity, and (2) he who comes into equity must come with clean
hands. The latter is a frequently stated maxim which is also expressed in the
principle that he who has done inequity shall not have equity.23 Petitioner
Citibank, hence, cannot invoke Article 1250 of the Civil Code because it does
not come to court with clean hands. The delay in the recovery24 by respondent
of her dollar accounts with Citibank-Geneva was due to the unlawful act of
petitioner Citibank in using the same to liquidate respondents loans. Petitioner
Citibank even attempted to justify the off-setting or compensation of
respondents loans using her dollar accounts with Citibank-Geneva by the

presentation of a highly suspicious and irregular, and even possibly forged,

Declaration of Pledge.
The damage caused to respondent of the deprivation of her dollar accounts for
more than two decades is unquestionably relatively more extensive and
devastating, as compared to whatever damage petitioner Citibank, an
international banking corporation with undoubtedly substantial capital, may
have suffered for respondents non-payment of her loans. It must also be
remembered that petitioner Citibank had already considered respondents loans
paid or liquidated by 26 October 1979 after it had fully effected compensation
thereof using respondents deposits and money market placements. All this
time, respondents dollar accounts are unlawfully in the possession of and are
being used by petitioner Citibank for its business transactions. In the meantime,
respondents businesses failed and her properties were foreclosed because she
was denied access to her funds when she needed them most. Taking these into
consideration, respondents dollar accounts with Citibank-Geneva must be
deemed to be subsisting and continuously deposited with petitioner Citibank all
this while, and will only be presently withdrawn by respondent. Therefore,
petitioner Citibank should refund to respondent the U.S. $149,632.99 taken
from her Citibank-Geneva accounts, or its equivalent in Philippine currency
using the exchange rate at the time of payment, plus the stipulated interest for
each of the fiduciary placements and current accounts involved, beginning 26
October 1979.
As to respondents Motion to Clarify and/or Confirm Decision with Notice of
Judgment
Respondent, in her Motion, is of the mistaken notion that the Court of Appeals
Decision, dated 26 March 2002, as modified by the Resolution of the same
court, dated 20 November 2002, would be implemented or executed together
with this Courts Decision.
This Court clarifies that its affirmation of the Decision of the Court of Appeals, as
modified, is only to the extent that it recognizes that petitioners had liabilities to
the respondent. However, this Courts Decision modified that of the appellate
courts by making its own determination of the specific liabilities of the
petitioners to respondent and the amounts thereof; as well as by recognizing
that respondent also had liabilities to petitioner Citibank and the amount
thereof.
Thus, for purposes of execution, the parties need only refer to the dispositive
portion of this Courts Decision, dated 16 October 2006, should it already
become final and executory, without any further modifications.
As the last point, there is no merit in respondents Motion for this Court to
already declare its Decision, dated 16 October 2006, final and executory. A
judgment becomes final and executory by operation of law and, accordingly, the
finality of the judgment becomes a fact upon the lapse of the reglementary

16
period without an appeal or a motion for new trial or reconsideration being
filed.25 This Court cannot arbitrarily disregard the reglementary period and
declare a judgment final and executory upon the mere motion of one party, for
to do so will be a culpable violation of the right of the other parties to due
process.
IN VIEW OF THE FOREGOING, petitioners Motion for Partial Reconsideration of
this Courts Decision, dated 16 October 2006, and respondents Motion for this
Court to declare the same Decision already final and executory, are both
DENIED for lack of merit.
SONDAYON VS PJ LHUILLER INC., GR NO. 153587

SO ORDERED.

DECISION
AZCUNA, J.:
This is a petition for review on certiorari[1] seeking the nullification of the Decision
rendered by the Court of Appeals (CA) on December 21, 2001, and its Resolution denying
reconsideration, dated May 14, 2002, in CA-G.R. CV No. 67514, entitled Gloria Sondayon
v. P.J. Lhuillier, Inc. and Ricardo Diago.
The facts are[2]:
Respondent P.J. Lhuillier, Inc. is a domestic corporation that owns and operates pawnshops
under the business name La Cebuana Pawnshop. Respondent Ricardo Diago acts as
manager in one of its pawnshops located at Maywood, President Avenue, B.F. Homes
Subdivision, Paraaque, Metro Manila.
Respondent company contracted the services of the Sultan Security Agency. The security
agency assigned Guimad Mantung to guard the La Cebuana Pawnshop in Maywood.
On June 6, 1996, petitioner Gloria Sondayon, a store manager of Shekinah Jewelry &
Boutique, secured a loan from La Cebuana and pledged her Patek Philippe solid gold
watch worth P250,000. The watch was given to her as part of her commission by the
owner of the shop where she works. She had pawned the watch to La Cebuana a few
times in the past and, each time, she was able to redeem it.
On August 10, 1996, Guimad Mantung, employing force and violence, robbed La Cebuana,
resulting in the deaths of respondent companys appraiser and vault custodian.
An information for Robbery with Homicide was filed against Mantung before the Regional
Trial Court (RTC) of Paraaque, docketed as Criminal Case No. 96-761. The information
alleged that Mantung divested the pawnshop of P62,000 in cash and several pieces of
jewelry amounting to P5,300,000.
On December 10, 1996, respondent company received a letter from petitioners counsel
demanding for the gold watch that she had pawned. Respondent company, however,
failed to comply with the demand letter because the watch was among the articles of
jewelry stolen by Mantung.

17

Petitioner filed a complaint with the RTC of Paraaque[3] for recovery of possession of
personal property with prayer for preliminary attachment against respondent company
and its Maywood branch manager, Ricardo Diago.
In their Answer, respondents averred that petitioner had no cause of action against them
because the incident was beyond their control.
On August 18, 1997, the RTC,[4] stating that the loss of the thing pledged was due to a
fortuitous event, rendered a Decision dismissing petitioners complaint as well as
respondents counterclaim. The pertinent portions of the Decision read:
Culled from the testimonies of all the witnesses presented as well as the pieces of
documentary evidence offered, this Court, after a thorough and careful evaluation and
deliberation thereof is of the honest and firm belief that plaintiff failed to establish a
sufficient cause of action against defendant as to warrant the recovery of the pledged
Patek Philippe Solid Gold Watch which was allegedly concealed, removed or disposed of
by the latter defendants as the facts and evidence proved otherwise as said watch was
lost on account of a robbery with double homicide that happened on August 10, 1996
perpetrated by one Guimad Mantung, the security guard of defendant employed by Sultan
Security Agency as found out by the Court (Exh. 7); thus, defendants were not negligent
in the safekeeping of the watch of plaintiff.

Not only that. The pledge bears the terms and conditions which the parties
should adhere being the law between them pursuant to Art. 1159 of the New Civil Code.
Paragraph 13 of Exhibits A and B specifically provides:
The pawnee shall not be liable for the loss or damage of the article pawned due to
fortuitous events or force majeure such as fire, robbery, theft, hold-ups and other similar
acts. When the loss is due to the fault and/or negligence of the pawnee, the amount of its
liability, if any, shall be limited to the appraised value appearing on the face hereof.
Said provision is not violative of law, customs, public policy or tradition, hence,
has the force of law between the plaintiff and defendants, and the incident that happened
which led to the loss of the thing pledged cannot be considered as negligence but more of
a fortuitous event which the defendants could not have foreseen or which though
foreseen, was inevitable. This finds support in Art. 1174 of the Civil Code.
The defendants, therefore, are not bound to return the thing pledged nor the Court
to fix its value. There was no unjustifiable refusal on the part of the defendants to
return the thing pledged because, as testified by plaintiff herself, she has pawned the
watch at least five (5) times to defendant corporation.[5]
Appeal was taken to the CA.
On December 21, 2001, the CA rendered a Decision affirming the ruling of the trial
court.[6] Petitioners motion for reconsideration was denied in the Resolution dated May
14, 2002.[7]

Petitioner contends that the CA erred:

1)
in considering the loss of the thing pledged a fortuitous event although the
robbery was caused by respondents own employees;
2)
in disregarding the legal principle that existing laws, rules and regulations in
relation to the operation and regulation of pawnshops are part and parcel of the contract
of pledge between petitioner and respondents;
3)
in affirming the ruling of the trial court that paragraph 13 of Exhibits A and
B binds the parties and the courts as to the limitation on the value of the thing pledged;
and
4)
in affirming the ruling of the trial court that paragraph 13 of Exhibits A and
B is not violative of laws, customs, public policy or tradition when it is clearly a contract
of adhesion.
Petitioner argues that respondents have not shown that the incident constitutes a
fortuitous event; that the security guard was an employee of respondent corporation
regardless of the existence of a contract of employment because the latter had
supervision and control over the former; that respondents were negligent because they
did not insure the articles of jewelry including petitioners watch against fire and burglary
as required under the Pawnshop Regulation Act; that the provision in the pawnshop ticket
limiting the value of the thing pledged is not binding on petitioner and the courts because
the appraised value was very low and was not reached voluntarily by the parties but was
merely imposed on the former; and that paragraph 13 of the pawnshop ticket limiting the
liability of respondents to the appraised value is a contract of adhesion, and thus, should
be declared void.
The Court will only resolve issues of law in this proceeding under Rule 45.
Accordingly, the existence or non-existence of an employer-employee relationship
between respondent company and the security guard is a factual issue on which the Court
defers to the findings of the CA. So, also, on the issue of the voluntariness of the
agreement on the valuation of the thing pledged, the Court is not wont to disturb the
finding of the appellate court.
However, on the issue of the legal effect of the failure of respondents to insure the article
pledged against burglary, the Court finds a reversible error in the appealed decision.
Said the CA:
Equally barren of merit is the Appellants claim that the Appellee should bear the loss of
the watch because of the failure of the Appellee to insure the watch by an insurance
company accredited by the Insurance Commission, as required by Section 17 of the Rules
and Regulations Implementing Presidential Decree No. 114, quoted, infra:

18
Sec. 17. Insurance of office building and pawns. The place of business of a pawnshop
and the pawns pledged to it must be insured against fire, and against burglary as well for
the latter, by an insurance company accredited by the Insurance Commission. (idem
supra)

A:

Yes, sir.

Q:
A:

As a result of the robbery?

Yes, sir.

Even if We assume, for the nonce, that, indeed, the Appellee failed to comply with the
aforequoted Rule & Regulation, nevertheless, the Appellant was burdened to prove the
causal connection between the violation, by the Appellee, of the aforequoted
Rule/Regulation and the heist-homicide committed by the security guard:

Q:
A:

Were those jewelry insured?

At the time we were self-insured, sir.

First of all, it has not been shown how the alleged negligence of the Cimarron driver
contributed to the collision between the vehicles. Indeed, petitioner has the burden of
showing a causal connection between the injury received and the violation of the Land
Transportation and Traffic Code. He must show that the violation of the statute was the
proximate or legal cause of the injury or that it substantially contributed thereto.
Negligence, consisting in whole or in part, of violation of law, like any other negligence, is
without legal consequence unless it is a contributing cause of the injury. Petitioner says
that driving an overloaded vehicle with only one functioning headlight during nighttime
certainly increases the risk of accident, that because the Cimarron had only one
headlight, there was decreased visibility, and that the fact that the vehicle was
overloaded and its front seat overcrowded decreased [its] maneuverability. However,
mere allegations such as these are no sufficient to discharge its burden of proving clearly
that such alleged negligence was the contributing cause of injury. (Sanitary Steam
Laundry, Inc. versus Court of Appeals, et al., 300 SCRA 20, at pages 27-28, supra)
The Appellant failed to discharge her burden. Indeed, the Appellant failed to allege, in her
Complaint, the causal connection of the loss of the watch and the violation by the
Appellee, of the aforequoted Rule/Regulation.
Additionally, the appellant never invoked the aforequoted Rule/Regulation as anchor for
her claim for damages against the Appellee. It was only, in the present recourse, in her
Brief, when the appellant invoked the aforequoted Rule/Regulation. The Appellant is,
thus, estopped from so doing. As our Supreme Court declared:
The issue of minority was first raised only on petitioners Motion for Reconsideration of
the Court of Appeals Decision; thus, it is as if it was never duly raised in that court at all.
Hence, this Court cannot now, for the first time on appeal, entertain this issue, for to do so
would plainly violate the basic rule of fair play, justice and due process. We take this
opportunity to reiterate and emphasize the well-settled rule that (a)n issue raised for the
first time on appeal and not raised timely in the proceedings in the lower court is barred
by estoppel. Questions raised on appeal must be within the issues framed by the parties
and, consequently, issues not raised in the trial court cannot be raised for the first time on
appeal. (Rolando Sanchez, et al. versus Court of Appeals, et al., 279 SCRA 647, at pages
678-679, supra)

Q:
I mean an independent Insurance Company accredited by the
Commission?
A:
At that time, sir I have no knowledge of any insurance sir.

Hence, petitioner correctly raised it in her brief in the CA.

As to the causal connection between respondent companys violation of the legal
obligation to insure the articles pledged and the heist-homicide committed by the security
guard, the answer is simple: had respondent company insured the articles pledged
against burglary, petitioner would have been compensated for the loss from the burglary.
Respondent companys failure to insure the article is, therefore, a contributory cause to
petitioners loss.
Considering, however, that petitioner agreed to a valuation of P15,000 for the
article pledged in case of a loss, the replacement value for failure to insure is likewise
limited to P15,000.
Nevertheless, this Court, taking into account all the circumstances of this case,
deems it fair and just to award exemplary damages against respondent company for its
failure to comply with the rule and regulation requiring it to insure the articles pledged
against fire and burglary, in the amount of Twenty Five Thousand (P25,000) Pesos.
This Decision is without prejudice to appropriate proceedings to recover any excess
value of the article pledged from amounts that may be or have been awarded payable by
third parties answerable for the loss arising from the robbery.
WHEREFORE, the petition is partly GRANTED and the Decision and Resolution of the
Court of Appeals dated December 21, 2001 and May 14, 2002 in CA-G.R. CV No. 67514
are MODIFIED in that respondent company is ordered to pay petitioner the sum of Fifteen
Thousand (P15,000) Pesos representing the agreed value of the watch pledged and
Twenty Five Thousand (P25,000) Pesos as, and by way of, exemplary damages.
No costs.
SO ORDERED.

The records show that the matter of the insurance of the article pledged was taken up
during the trial with no objection by respondents (Petition, p. 17, citing the testimony of
Mr. Anthony Erenea, Area Manager of respondent company, on September 8, 1999):
Q:

Now, you said, Mr. Witness, you said that there were items lost?

Insurance

G.R. No. 139436

January 25, 2006

19
ENRICO B. VILLANUEVA and EVER PAWNSHOP, Petitioners,
vs.
SPS. ALEJO SALVADOR and VIRGINIA SALVADOR, Respondents.

On August 7, 1992, Mr. Salvador tendered payment of the amount due on both loans, with a demand
for the return of the jewelry thus pledged. Ever Pawnshop, however, refused to accept the tender.

GARCIA, J.:

Such was the state of things when, on August 11, 1992, at the RTC-Pasig City, the Salvadors filed a
complaint for damages against Villanueva and Ever Pawnshop arising from the sale without notice of
the two (2) sets of jewelry pledged as security for both loans. The complaint, docketed as Civil Case
No. 62334, was eventually raffled to Branch 164 of the court.

Assailed and sought to be set aside in this petition for review on certiorari under Rule 45 of the Rules
of Court is the July 16, 1999 decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 49965, which
affirmed in toto an earlier decision2 of the Regional Trial Court (RTC) at Pasig in Civil Case No. 62334.

Barely two days after Villanueva et al., received summons, their counsel informed the Salvadors of his
clients willingness to accept payment heretofore tendered for the redemption of the jewelry pledged to
secure the first loan. The Salvadors, however, turned down this belated offer.

The pertinent facts:

Answering, Villanueva and Ever Pawnshop, as defendants a quo, averred, inter alia, that by letters
dated March 23, 1992 and May 5, 1992, Ever Pawnshop reminded the Salvadors of the maturity dates
and redemption period of their loans. Also alleged in the answer with counterclaim for damages was
the publication in the June 4, 1992 issue of the Manila Bulletin of the notice of public auction of all
unredeemed pledges from January 1 to 31, 1992.

DECISION

On December 20, 1991, herein respondents, the spouses Alejo Salvador and Virginia Salvador
(Salvadors, collectively), secured a loan of P7,650.00 from petitioner Ever Pawnshop owned and
managed by co-petitioner Enrico B. Villanueva (Villanueva). On January 23, 1992, the Salvadors took
out a second loan of P5,400.00 pledging, just like in the first loan transaction, jewelry items. Pawnshop
Ticket No. 29919, covering the first loan, indicated April 10, 1992 as the last day to redeem the
jewelries pawned, whereas the redemption period for the items given as security for the second loan
under Pawnshop Ticket No. 30792 fell on May 22, 1992.
The separate redemption periods came and went, but the Salvadors failed to redeem the pawned
pieces of jewelry. Nonetheless, on June 1, 1992, their son paid Ever Pawnshop P7,000.00, the amount
to be applied against the first loan of P7,650.00. On account of this development, Pawnshop Ticket No.
29919 was cancelled and replaced by Pawnshop Ticket No. 34932. Vis--vis the second loan, Ever
Pawnshop agreed to the extension of the maturity date to June 30, 1992, provided the Salvadors pay
20% of their second loan obligation on or before June 4, 1992, failing which the securing items shall be
auctioned as scheduled. Unlike in the first loan, however, a new pawn ticket was not issued for the
second loan.
In the meantime, Ever Pawnshop issued a notice announcing the public auction sale on June 4, 1992
of all January 1 to 31, 1992 unredeemed pledges. The notice appeared in the Classified Ads Section of
the Manila Bulletin on June 4, 1992, the very day of the auction itself.
On July 1, 1992, the Salvadors repaired to the pawnshop in a bid to renew the second loan by
tendering the aforesaid 20% of the amount due thereon, only to be informed that the pledged jewelry
had already been auctioned as scheduled on June 4, 1992. As found by the CA, however, pieces of
the pawned jewelry items were still in the shop, 3 indicating that Ever Pawnshop either bought some of
the unredeemed pledges or did not sell them.

Eventually, in a decision4 dated January 25, 1995, the trial court, on its finding that the set of jewelry
covered by the renewed first and second loans were sold without the necessary notice, rendered
judgment for the Salvadors, to wit:
WHEREFORE, the Court hereby renders judgment in favor of the plaintiffs [Salvadors] and against the
defendants [Villanueva and Ever Pawnshop]. Defendants are hereby ordered to pay to the plaintiffs:
1. The sum of P20,000.00 by way of moral damages;
2. The sum of P5,400.00 as the value of the jewelry sold under the second loan;
3. The sum of P5,000.00 as and for attorneys fees; and
4. The costs of suit.
Defendants are also ordered to restore to the possession of the [Salvadors] the jewelry that they
pawned under the first loan, covered by pawn ticket nos. 29919 and 34932, upon payment by the
plaintiffs of the redemption price due last 10 August 1992.
The counterclaim of the defendants is dismissed.
SO ORDERED. (Words in bracket added.)

A month after, Mrs. Salvador attempted to redeem the jewelry items pledged for the first loan, as
renewed, but all she got in response were unclear information as to their whereabouts.

Therefrom, petitioners went on appeal to the CA whereat their recourse was docketed as CA-G.R. CV
No. 49965.

20
As stated at the threshold hereof, the CA, in its decision of July 16, 1999, affirmed in toto that of the
trial court, the affirmance being predicated on the following main justifications:
As the trial court correctly pointed out, the May 5, 1992 "List of Notified Clients" (Exhs. 6, 6-A, 6-B ) . . .
including the names of the [respondents] and Ticket Nos. 29919 and 30792 is not proof that notices
were actually sent to [respondents]. While the list contains 132 names, only 98 [postage] stamps were
purchased, hence, it cannot be determined who among the 132 people were sent notices.
And as surmised by the trial court, the set of jewelry pledged to secure the first loan must have been
auctioned, as scheduled on May 7, 1992, but that by mistake the pledge was renewed (on June 1,
1992), that is why it was only after the [petitioners] received the summons in late August 1992 when
probably they recovered the pledged jewelry that they expressed willingness to accept the
[respondents] tender of payment for the redemption of said pledge jewelry securing the first (renewed)
loan.
Admittedly, the [respondents] did not pay their loans on maturity. But [petitioners] breached their
contractual and legal obligation to inform the [respondents] of the public auction of the jewelry securing
it.
Furthermore, [petitioners] failed to comply with the requirements . . . that the notice must be
published during the week preceding the sale in two daily newspapers of general circulation in the city
or municipality. The paid notice of public auction to be held on June 4, 1992 by Ever Pawnshop was
published only on even date, and only in one newspaper, the Manila Bulletin. And particularly with
respect to the second loan, why was the jewelry pledged to secure it included in the June 4, 1992
auction when plaintiffs had up to that date to pay 20% of the amount due thereunder as a condition to
its renewal?
xxx xxx xxx
Anent the questioned award of moral damages: Even assuming that [respondents] failure to pay their
obligation on maturity amounts to contributory negligence, that does not abate the award of moral
damages in their favor given the [petitioners] failure to comply with the contractual and statutory
requirements before the pledged jewelry was auctioned which failure amounts to misconduct
contemplated in Article 2220 of the New Civil Code basis of the award thereof (Laguna Tayabas Bus
Company v. Cornista 11 SCRA 181- 182 (Words in bracket added)
Hence, this petition on the following issues:
1. Whether the items of jewelry under the first loan were actually sold by the petitioners;
2. Whether valid notice of the sale of the pledged jewelry was effected;
3. Whether the award of P20,000.00 as moral damages and P5,000.00 as attorneys fees are
proper; and

4. Whether the trial and appellate courts erred in ordering both the petitioners to pay
damages.
Under the first issue, petitioners fault the CA in holding that the jewelry pledged under the first loan was
sold by them.
Doubtless, the first issue raised by petitioners relates to the correctness of the factual finding of the CA
confirmatory of that of the trial court on the disposition of the set of jewelry covered by Pawnshop
Ticket No. 34932. Such issue is beyond the province of the Court to review since it is not its function to
analyze or weigh all over again the evidence or premises supportive of such factual
determination.5 The Court has consistently held that the findings of the CA must be accorded great
weight and shall not be disturbed on appeal, save for the most compelling and cogent reasons,6 like
when manifest error has been committed.7
As nothing in the record indicates any of such exceptions, the factual conclusion of the CA that
petitioners indeed sold the jewelry items given to secure the first loan must be affirmed.
Indeed, petitioner pawnshop expressed willingness to accept tender of payment and to return the
pawned jewelry only after being served with summons. Apparently, Ever Pawnshop had found a way to
recover said jewelry by that time. If, as aptly observed by the CA, the jewelry had never been sold, as
petitioners so allege, but had been in their possession all along, they could have provided a plausible
explanation for the initial refusal to accept tender of payment and to return the jewelry. Petitioners
belated overture to accept payment after spurning the initial offer to pay can only be due to the fact
that, when respondents offered to pay the first time around, they (petitioners) no longer had
possession of the jewelry items in question, having previously disposed of them.
Moving on to the second issue, petitioners argue that the respondents were effectively put on notice of
the sale of the pledged jewelries, the maturity date and expiry date of redemption period of the two
loans being indicated on the face of each of the covering pawnshop tickets. Pressing the point,
petitioners invite attention to the caveatprinted on the dorsal side of the tickets stating that the pledged
items shall be auctioned off in the event they are not redeemed before the expiry date of the
redemption period.
We are not persuaded by petitioners faulty argument.
Section 13 of Presidential Decree (P.D.) 114, otherwise known as the Pawnshop Regulation Act, and
even the terms and conditions of the pledge itself, accord the pawner a 90-day grace period from the
date of maturity of the loan obligation within which to redeem the pawn. But even before the lapse of
the 90-day period, the same Decree requires the pawnbroker to notify the defaulting debtor of the
proposed auction sale. Section 14 thereof provides:
Section 14. Disposition of pawn on default of pawner.In the event the pawner fails to redeem the
pawn within ninety days from the date of maturity of the obligation . . ., the pawnbroker may sell . . .
any article taken or received by him in pawn: Provided, however, that the pawner shall be duly notified

21
of such sale on or before the termination of the ninety-day period, the notice particularly stating the
date, hour and place of the sale.
However, over and above the foregoing prescription is the mandatory requirement for the publication of
such notice once in at least two daily newspapers during the week preceding the date of the auction
sale.8
The CA cannot really be faulted for making short shrift of petitioners posture respecting their alleged
compliance with the notice requirement in question. As it were, petitioner Ever Pawnshop, as
determined by the CA, only caused publication of the auction in one newspaper, i.e., the Manila
Bulletin, and on the very day of the scheduled auction sale itself, instead of a week preceding the sale
as prescribed by Section 15 of P.D. 114. Verily, a notice of an auction sale made on the very scheduled
auction day itself defeats the purpose of the notice, which is to inform a pawner beforehand that a sale
is to occur so that he may have that last chance to redeem his pawned items.
This brings us to the issue of the award of moral damages which petitioners correctly tag as erroneous,
and, therefore, should be deleted.
While proof of pecuniary loss is unnecessary to justify an award of moral damages, the amount of
indemnity being left to the sound discretion of the court, it is, nevertheless, essential that the claimant
satisfactorily proves the existence of the factual basis of the damages9 and its causal connection to
defendants wrongful act or omission. This is so because moral damages, albeit incapable of pecuniary
estimation, are designed to compensate the claimant for actual injury suffered and not to impose a
penalty on the wrongdoer.10 There is thus merit on petitioners assertion that proof of moral suffering
must precede a moral damage award.11
The conditions required in awarding moral damages are: (1) there must be an injury, whether physical,
mental or psychological, clearly sustained by the claimant; (2) there must be a culpable act or omission
factually established; (3) the wrongful act or omission of the defendant must be the proximate cause of
the injury sustained by the claimant; and (4) the award of damages is predicated on any of the cases
stated in Article 2219 of the Civil Code.12
While there need not be a showing that the defendant acted in a wanton or malevolent manner, as this
is a requirement for an award of exemplary damages,13 there must still be proof of fraudulent action or
bad faith for a claim for moral damages to succeed.14 Then, too, moral damages are generally not
recoverable in culpa contractual except when bad faith supervenes and is proven.15

sometimes amount to bad faith.19 But what is before us is a matter of simple negligence only, it being
the trial courts categorical finding that the case came about owing to petitioners mistake in renewing
the loan when the sale of the article to secure the loan had already been effected. Wrote the trial court:
"What must have happened next was that the jewelry under the first loan was sold, as scheduled, on 7
May 1992.Due to an oversight, the defendants mistakenly renewed the first loan on 1 June 1992,
issuing pawn ticket number 34932 in the process."20 [Emphasis supplied]
The CAs reliance on Article 2220 of the Civil Code in affirming the award of moral damages is
misplaced. Said article provides:
Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad faith.
Clear it is from the above that before moral damages may be assessed thereunder, the defendants act
must be vitiated by bad faith or that there is willful intent to injure. Simply put, moral damages cannot
arise from simple negligence.
The award of attorneys fees should, likewise, be struck down, both the CA and trial court having failed
to explain respondents entitlement thereto. As a matter of sound practice, an award of attorneys fee
has always been regarded as the exception rather than the rule. Counsels fees are, to be sure, not
awarded every time a party prevails in a suit because of the policy that no premium should be placed
on the right to litigate. Attorneys fees, as part of damages, are assessed only in the instances
specified in Article 2208 of the Civil Code.21 And it is necessary for the trial court to make express
findings of fact and law that would bring the case within the exception. In short, the factual, legal or
equitable justification for the award must be set forth in the text of the decision.22 The matter of
attorneys fees cannot be touched only in the fallo of the decision, else the award should be thrown out
for being speculative and conjectural.23
Certainly not lost on the Court is the fact that petitioners, after being served with summons, made an
attempt to obviate litigation by offering to accept tender of payment and return the jewelry. This offer,
however belated, could have saved much expense on the part of both parties, as well as the precious
time of the court itself. The respondents chose to turn down this offer and pursue judicial recourse.
With this in mind, it hardly seems fair to award them attorneys fees at petitioners expense.

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of a wrong, a breach of known duty through some motive or
interest or ill-will that partakes of the nature of the fraud.16 And to the person claiming moral damages
rests the onus of proving by convincing evidence the existence of bad faith, for good faith is
presumed.17

The final issue relating to the question of whether or not both respondents are liable for damages has,
for all intent and purposes, been rendered moot and academic by the disposition just made. We need
not dwell on it any further. Besides, this particular issue has only made its debut in the present
recourse. And it is a well-entrenched rule that issues not raised below cannot be resolved on review in
higher courts.24 A question that was never raised in the court below cannot be allowed to be raised for
the first time on appeal without offending basic rules of fair play, justice and due process.25

As aptly pointed out by petitioners, the trial court concluded that the respondents "cause of action
arose merely from the negligence of the herein [petitioners]."18 It may be that gross negligence may

WHEREFORE, with the MODIFICATION that the awards of moral damages and attorneys fees are
deleted, the decision under review is hereby AFFIRMED.

22
No pronouncement as to cost.
SO ORDERED.